Q4 2020 ESCO Technologies Inc Earnings Call
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Good day, and welcome to Escos Q for conference call.
Today's call is being recorded.
Today are Vic Richey, chairman and CEO.
Gary Munster Vice President and CFO.
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.
Thank you we.
We issued a press release earlier today that will be referenced during the prepared remarks on this call you can find a copy of our press release and our Safe Harbor statement regarding forward looking statements made during this call from Investor Center of ESCO website at Www Dot ESCO technologies Dotcom. During this call. The company May make forward looking statements, which are inherently subject to.
Risk and uncertainties, including without limitation, the impact and duration of the current COVID-19 pandemic. The company's response to these evolving circumstances feature.
Future results of the company investments acquisitions, and the recovery and strength of markets, which we serve actual results may differ materially from those projected in the forward looking statements from the company does not assume any duty to update forward looking statements. Please refer to the company's press release for risk factors, which may impact any forward looking statements and for the reconciliation.
In of any non-GAAP financial measures to their most comparable GAAP measures now I'll turn the call over to Vic. Thanks, Jade before we get to the financial details for the year I'll provide a brief update and now we're working through today's Colgate environment.
We have maintained our detailed monitoring that situation sales seem to change on almost daily basis, and our goal is to stay ahead of the curve to provide a safe working environment and protect the health of our employees. So since the last call. When we saw the first indication of Kogas potential economic impact on our business, we took decisive action.
The actions we've taken over the past seven or eight months, we're done with the clearing for size focus which is to protect our strong financial condition to deliver products and services and support our customers all while keeping our employees safe and healthy.
Our solid operating results in fiscal 20, coupled with our strong liquidity position as at September Thirtyth demonstrated that the measures. We've taken to date have allowed us to hold our own to this unprecedented.
Im confident these actions coupled with the remaining items, we are working through over the next few months will benefit ESCO as things begin to return to a more normal state.
Confidence that our disciplined.
Our approach to operating the business will result in our continued success as we enter 2021.
Just recap in fiscal 20.
For a thorough evaluation earlier in the year, we took action across the organization to.
To adjust our cost structure to better fit our near term sales outlook, while still supporting our long term strategy for profitable growth.
While these decisions were not pleasant they needed to be done is in the end, we ultimately strength that our core.
We're fortunate to have very experienced leadership teams across the company demonstrated their ability to effectively manage cost to meet changing market demands and.
In the current situation is no different.
We're actively addressing the challenges of today, while continuing director efforts to come out of this even stronger tomorrow.
ESCO will continue to benefit from our leading positions in various niche markets, where we deliver a unique set for unique and highly technical products and solutions, specifically designed to meet our customers needs.
This makes it difficult for our solutions be replaced by alternative sources.
We continue to focus on our future by continuing our investment in new products across all three segments. The fundamentals of our portfolio remains strong and our goal and our goal remains the same.
Create long term shareholder value.
Our employees your most important assets and I want to say, thank you for manufacturer employees leadership teams and staff around the world for their hard work and dedication is you have all demonstrated extraordinary growth.
The success of ESCO.
Now I'll turn it over to Gary.
Thanks, Vic I'll briefly touch on the financial results laid out in the press release as Vik noted the pandemic hit our number one financial priority became maintaining our liquidity position because in challenging times popped up unexpectedly cash is king from.
Im extremely pleased with the record setting cash flows we generated throughout the year and I'm proud of where we stand today, having nearly $730 million of dry powder at our disposal between cash on hand, and available credit capacity, while carrying a modest leverage ratio point for seven on.
For liquidity outlook, partially drove our earlier decision to fund terminate and Annuitize, our previously frozen non strategic pension liability.
In the release, we called out three discrete items, which are described in detail in our excluded from the calculation of adjusted EBITDA and adjusted EPS.
The discrete items include the results of our technical packaging business, which we sold in Q1 and an impressive valuation and generated gross cash proceeds of $191 million.
Which resulted in an after tax gain of $2.93 a share.
The second item relates to the successful completion of our termination of the pension plan, let's start from removes all equity market risk and interest rate volatility it reduces ongoing costs and eliminates future variable cash payments. This resulted in a non cash charge of $1.55 a share.
The third item represents cobot related cost reduction actions, we implemented in our AMC and U.S.G. segments to align their operating cost structure with current demand requirements for the year. These costs resulted in a 24 cents a share charge I'll now briefly touch on a few comparative highlight on.
Few comparative highlights which are laid out from detailing the release.
Adjusted EPS was 90 cents a share in Q4 and $2.76 a share for the year, which exceeded consensus estimates give.
Given the backdrop of today's operating environment Im most pleased to report that we were able to deliver fiscal 20, adjusted EBITDA of $137 million, which is only 3% lower than 29 teams adjusted EBITDA of $141 million.
We were nearly able to maintain our profitability levels. Despite the noted sales declines at doble and within our commercial Aerospace group.
Which are our most profitable operating units historically.
Sales increased $7 million to $733 million compared to 726 million in 2019.
The sales growth was led by our a and B segment, where we increased our navy and space sales by $41 million, partially offset by lower commercial aerospace sales due to the covance impact on air travel.
Commercial aerospace sales of PPI, Crissair and May day deep.
Decreased approximately $18 million or 11% compared to prior year.
The test business sales in fiscal 20 held up and we're quite and were flat compared to 2019, despite some timing delays on certain installation projects due to co bid strong.
Strong chamber sales and very solid project execution allowed the test business to deliver an all time high EBIT margin of 14.6%.
USBC sales were down consistent with our past commentary as a result for the deferrals of various project deliverables as several utility customers domestic and international realign their short term maintenance and spending protocols to focus on and uninterrupted power delivery.
Maintenance deferrals also reflect various mandates restricting on site personnel at sub stations large transformers and other customer locations.
US GE Q4 sales reflected a partial rebound as sales were $53 million compared to a similar number $54 million in Q4 of 2019.
You SGS order bookings were $201 million and reflect an increase of additional cyber security related orders, including Dobles Duck E solutions, we are seeing strongly Nols as well as new customer procurements as mentioned earlier, we took decisive action when we saw the downturn in our outlook.
And our SGN a reduction of $3 million in fiscal 20 is evidence of that agility.
This reduction was achieved despite having growth included for the entire year and despite our continued spending on R&D and new product development.
Entered orders were solid in fiscal 20, as we booked nearly $800 million in new business and ended the year with a backlog of $517 million, which is up $66 million or 15% from the start of the year, our DSD business led by our participation on the block five.
Contract for additional Virginia class submarines drives the strength.
I'll remind you as we move forward into fiscal 2001, we will be delivering products on these large multi year programs, which will mathematically reduced the optics of our and the book to Bill in fiscal 21.
On the liquidity side, we generated a 109 millions and millions of dollars million dollars of cash from continuing operations or $135 million, ignoring the $26 million voluntary pension contribution we made.
This resulted in the modest leverage ratio of 47 point 47, as I mentioned.
As we enter fiscal 21, the COVID-19 backdrop continues to bring along some uncertainty around the extent and duration of today's economic circumstances would make which makes it difficult to predict our how our near term operations will be effected using our normal forecasting methodologies.
And as a result for this uncertainty we will not be providing finite EPS guidance for fiscal 21 at this time.
From a directional perspective, we can point to several areas, where we see positive momentum as we enter fiscal 21, our commercial aerospace and utility end markets are showing some degree of customer stabilization as well as notable pockets of recovery.
We are seeing signs of recovery in the second half of fiscal 21, but point to a solid outlook for the back half for the year.
The near term prospects of a viable COVID-19 vaccine will certainly benefit and accelerate the anticipated recovery in commercial air travel and with utility spending as customers begin resuming for normal buying patterns.
Given how strong the first half for fiscal 20 was pre coated we expect the first half of fiscal 21 to be slightly down comparatively.
The current outlook for the second half from 21 is expected to be favorable in comparison to the second half for fiscal 20, given the various elements recovery that we are seeing in anticipating.
So to summarize all of this we currently expect to show growth in sales adjusted EBITDA and adjusted EPS compared to fiscal 20, with adjusted EBITDA and adjusted EPS coming in reasonably consistent with fiscal 2019.
Obviously, if we complete any additional acquisitions during the year.
It is expected that they would contribute to these expectations.
So now I will turn it back over to Victor.
So since fiscal 2000 is behind Us and I think we're all very for what it is and we'll spend much time recapping the year as my commentary in the release captured my perspective. They were all for some qualitative comments about our end markets and I'll emphasize is and I will emphasize situation continues to be very fluid.
We'll provide you with the sense of our thinking and planning for 21.
In September we completed a thorough review of our individual businesses to update our current expectations in the near term impact of Covidien 18 across our various operating units.
Starting with area in these segment, we're seeing signs of recovery in commercial aerospace we expect from continued softness over the next four to six months, we're seeing some stabilization in the OEM build rates increasing airline passenger traffic in flight models for several signs of emerges recovery emerging as quite a few air carrier.
Errors are bringing some of their head of fleet back into service in the daily TSH passenger boarding numbers are increasing over a million per day.
Theres interest portion of our HIV business is and will remain strong for the foreseeable future given our backlog and a platform from which we participate.
We also see the current situation in aerospace market is an opportunity for ESCO as we did with the purchase of ATM. In October we will continue to look at suppliers are competitors, who may be experiencing financial or operational stress, the where we may be able to provide assistance by a partnering or through an acquisition at a reasonable price.
Yes.
Our test business is expected to remain solid given the strength of its served markets, including Fiveg and related communication technologies and the increasing need for RF shielding in general has more electronic and electro magnetic noise is created as a result of emerging technologies.
We expect us to use customer spending softness to continue for the next few quarters before returning to more normal levels once.
Once a credible vaccine is in a market, we expect us to market to come back on line for quickly as they can relax some of todays social districts and guidelines and utility service personnel can return to their normal site visit refundings until.
Until these do have money to spend and I'm certain that spin on test equipment will return in the near future as maintenance spending cannot be delayed indefinitely without creating significant risks to grid safety efficiency regulatory compliance.
We have worked hard to communicate with and support our customers remotely our client service engineers and their relationships with their utility counterparts are a key differentiator for Dover.
This has been accomplished a lot of creative means and positions us well for success when a previously mentioned restrictions or east.
Colby does not change the fundamentals of the global utility industry as society needs reliable safe and secure power.
The critical need to maintain repair and improve utilities aging infrastructure is not reduced this pandemic.
I'm really pleased with us east pipeline of new products and solutions, especially related to several other cyber security related asset hardening solutions. We have several new solutions that have been introduced recently and based on customer feedback these products for via enthusiastically received.
With regards to NRG and our renewal renewable energy offerings. Their end markets are recovering more quickly due to investments in renewable energy or increase in both wind and solar and we expect that growth to continue.
Moving on to M&A, we continue to have several opportunities under consideration, we will continue taking a prudent and deliberate approach we expect to take action on certain opportunities to grow our business as we have in the past.
Our board is supportive of our M&A strategy and our current balance sheet, obviously provides us with plenty of liquidity, which will allow us to add to our portfolio.
As described in a subsequent event section of the release in October we acquired a small nicely profitable aerospace and defense supplier located in Valencia, California, very close our Chris here operations.
Vance technology machine and its affiliate PE cc grinding, which we collectively refer to as ATM produces precision machine metal parts, which are custom designed are widely use on defense and commercial aircraft as well as on missile and tank programs.
Our plan is to consolidate ATM and Chris airs facility sometime within the next 12 months, which will further improve their contribution margin so to wrap up.
We delivered a solid 2020 and as we enter 21. Our plan is continue to focus on the fundamentals and to look for opportunities to leverage our infrastructure through M&A to create additional operating efficiencies and ensure we are well positioned for long term success.
Yes, I'll be glad to answer any questions you have.
Ladies and gentlemen to ask a question we need to press star one of your total.
To withdraw your question. Please press the pound key.
Justin Bowers 20 rosters.
And our first question comes from the line of Tommy Mall with Stephens. Your line is now open GAAP.
Good afternoon, and thanks for taking my question.
Yes look.
I wanted to start with the directional commentary you gave for next year, particularly in the second half for it sounds like things.
At least as you sit today look like they they ought to be up versus 2020.
What end markets or businesses or segments could you call out is dry.
Drivers of that let's call it optimistic outlook and though.
What what are some things you can point to that could you give.
Give you sufficient visibility to two.
Go ahead make a call.
In the back half okay.
Okay, I'll start with that the commentary Tommy on the numbers and Vic can add some qualitative comments, let's start with the test business that that was the least impacted in 20. So therefore going into 21 did we anticipate there would be the least impact so that one really isn't a contributing factor to the growth receivable set that one aside.
On the R&D side, we see two things one the daily passenger boardings the stabilization of the build rates.
When we are in the back half of 20, there was so much uncertainty Boeing and Airbus were freezing line shutting things down this and that so it was a crapshoot trying to guess what build rates for passenger miles from the tank and so now there is a lot more visibility because obviously for them to maintain a supply chain with.
Some level of substance they have to give some guidance. So we have pretty.
Good level or deep level of guidance on build rates, so that helps us a portion of it.
And then the anticipation of.
Passenger miles, we just kind of form an opinion based on the trends that we've seen over the last six to eight weeks and kind of extrapolated as we go forward and Thats consistent with a lot of other things that we see in the.
Consulting literature, whether its airline monitor and in the total reported and things like that but I'd say the from utility side, one more thing on the defense side. So the orders that we booked into the Virginia class.
Their percentage of completion, where you know its cost to cost and as we ramp up in the first half on the block five you really gain all the momentum in the second half of the year. So the correlation of the back half compared to the front half of 21 has a lot more navy business, that's really easy to per.
Predict within that scenarios on Andy I'd say that most visible is the submarine business next is the stabilization of the build rates and third is a reasonably conservative extrapolation going forward of TSH boardings on the utility side as as we look at Q4, we almost.
Swapped to a tie in so if you look sequentially from Q3 to Q4 in fiscal 20, you'll see a nice rebound, we're not declaring victory on that part, but we think that based on RF piece, we have in front of US based on things that Vik mentioned on new products those will be coming into the market sometime in February or March.
So they'll benefit the back half for the year and the most critical point on the service side is you can't defer this maintenance forever. So they are pushing themselves are on a compliance structure such that they have to get something done in the field are there going to be out of compliance with some other things in the risk factors increase of outages.
And things like that so the visibility across the utility side is coming from new products.
Site visits increasing and the the mere fact that they have to spend money for utilities make money by spending money and we're seeing that through the evidence of RFP and the other thing that's important from an EPS side is these cost actions that we took especially in the in the U.S.G.
I had to restructure the footprint if you will we unfortunately had to take some people out.
That will benefit the bottom line faster than the top line because those those fixed costs are gone into variable costs are better aligned with the revenue.
So thats what gives us confidence in I think stylistically, we tend to be reasonably conservative. So we're not stretching ourselves outside the realm of reasonableness. So.
Those are relatively short answer for you.
Yes.
All very helpful. Thanks, Gary.
Maybe just a follow up on the utility commentary you offered and really specific to your double business, where there has been from softness and it sounds like.
You've got an outlook for some continued softness in coming quarters, what kind of anecdotes can you share about how disruptive the pandemic has been for your customer base, there and you kind of already touched on how that can't go on forever, but it can be helpful. I think.
Anecdotes you can offer about about the disruption.
Yes.
Is it truly fascinating if you look at the utilities across the country I would say in basin as on people that I've talked to enter and Doble people talk to and one of our directors who retired recently for utility industry.
95% of their employees to work from home still.
And that makes it difficult I mean, it's difficult because there.
Not not able to work together to put RFP together they are not able to.
Moving on field, and so I would say that the conservative nature of utilities utilities are just conservative by nature and it's that's good because you need to be conservative generate electricity and deliver that but I would say it is for all of our customers. They are probably the ones that are working from the home the most and again.
As Gary mentioned, a lot of our work is really getting out and interface and with those people in the field and there has been very very little of that that does happen I mean, we've been able to be in.
Some of the nuclear operations, because obviously your liabilities is even more important there we've had some limited site visits but its significantly different.
From what we've done for it as I mentioned in my.
Prepared comments, just talking about our field service engineers interface and the people moving that really has been key and we had already prior to this started doing I come on line.
For Doble University, if you will and providing a lot of training and the type of thing to the customers. So we were well positioned to do that and I think thats going to help us for future because I think it's good I personally think it's going to be a while before utilities really get back to normal.
Anecdotally talked a few people here in town done other work at large utility here and I'm not sure they're ever going to go back to the office. That's obviously not the whole business for these specific individuals. So it is at a pretty significant impact from these customers, having said that as Gary said you want to do that for so long you have to do this testing.
Whether it be just for reliability or compliance so it's going to get back to normal I would say is that.
Add to the first question you asked where make an assumption is based on information we have now could it move a couple of months in one direction or the other absolutely and so we're going to have to keep a very close out on that.
Thank you Vic Thats all helpful.
Pivot to M&A, you made which for your reference several times in the release.
In your remarks this afternoon.
Sounds like the pipeline is pretty robust I guess my questions would be any indications.
You'd be willing to share on end markets or or.
Yeah really end markets that you're you're interested in currently and then just on timing and execution of deals.
I can think through some factors that might accelerate the.
Close just year end.
Potential change in the tax regime with the outcome of the election.
On the flip side.
If you're looking at trailing or or recent earnings power or the potential acquisition candidate.
There could probably be some messing as in those numbers and maybe you want to wait a little bit and see kind of where things settle out but anything you could do to help us from a timing would be helpful as well.
Yeah, it's very difficult I mean, obviously.
It's played out differently than I thought it was going to honestly I mean, I really thought that a lot of people would be any adjusted.
Hitting eject button quicker than they are we've been involved in a couple of opportunities and still involved in where we thought people would be more.
More reasonable about getting things done more quickly and.
Dan multiples that we thought were appropriate and some of those not happen either line. These is you know the business that we bought primarily are privately owned businesses and Thats just a whole different deal I mean, you have personalities there and they have their own way of doing things I think at this point getting anything done before then year difficult just because you know we are.
Heading into the holidays.
Sure on the 90 yard line with something that is probably not going to get done.
I did think that people might be more concerned about stacks rate than than what we're seeing at least.
But I feel good about the opportunities we have out there we just got to get them closed and as said initially is playing out a little bit differently than I thought it would but.
There will be.
More people wanting to move more quickly.
This behind us.
Thank you both I will turn it back.
Okay. Thank you.
Thank you.
And again, ladies and gentlemen, if you would like to ask a question that is star one of your Touchtone telephone.
Our next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is now open.
Hey, guys. Thank you for taking my question and really nice quarter.
Yes, I think you actually had a record quarter Andy despite the current headwinds which is really impressive.
You've talked before about commercial.
Being more stable and now that being more stable than maybe most people would have expected given where you know.
Production rates are deferred.
Defense of credit that was there anything else in there that maybe.
Helped the quarter, maybe share gain of price you had in may before we shift you've spoken about or pull ins from the next quarter.
Well I'll address the last of the John on the Poland side, it's the normal stuff. There is nothing extraordinary I'd call. It a rounding tunnel number will.
Because again, there's not a whole lot of.
Using Boeing and Airbus. An example, they weren't in any big hurry to take things. So it's really a challenge trying to pull things in on the commercial side.
I'd say on the on the Navy side in particular.
There is some additional spending coming across and in the way of Globe for instance in particular, there's three or four projects that are in the two three $400000 range a piece that we have been negotiating RFP zone, and we thought they're going to be a little bit later in the year and also some funding opened up in those.
Came through and the beauty of those as they were non competitive. So therefore, you get a little better margin on that so from our expectations going into Q4.
Globe exceeded their own numbers somewhere in the neighborhood of 10 or 15% on the top line and it pull through a really nice margins. So.
Everything that helps there, but I would concur with your assessment that that Q4 out of the group was extraordinary eminent relative to our own expectations would be for top line in them and not either.
EBIT line and the cash line because normally when you deal with the Navy.
They are paying literally day, one when you're sitting in for so we hit on all three cylinders growth, but I wouldn't I wouldn't characterize anything as Poland's.
We had some past few things obviously earlier in the year when cobot hit.
You can work from home, if you're an engineer or finance Guy for women, but you can't Bill maybe products in your basement and as you shouldnt be and so we had some delays and disruptions. If you will from absence of staff and obviously for the most part everybody is back to work in the production flow. So you had some cumulative.
Catch up that was previously deferred if you will because of the lack of people on the floor, but that was backwards pulling forward instead of pulling things from the from so that's kind of kind of came together. So I would say that the catch up on past do things from earlier in the year.
Came to completion in Q4 in in.
Those kind of things also provide.
Provide meaningful contribution margins have come across.
Got it.
And then looking forward you've talked about passenger miles or TSH number still going up are you afraid that might come back down just given the amount of cover cases here in the U.S. that are just ramping and also globally.
Is there another shoe to drop on the commercial credit as we go into the next quarter and into the January quarter as well.
Yes, that's you know that for possible question to answer honestly.
We've got baked that in I mean, we're making the assumption that Asia and a continued improve slowly EMEA, they're only going up.
A couple of percentage as a week and so our assumption is thats going to happen. So.
It's really hard to tell if thats going to happen or not I mean, if the cases continue to go up then obviously things could come back down to that it seems like people are for.
Yes.
Number of people that are out there trying to traveler doing so I think the airlines need for people been an airplane like me I mean.
Airlines are doing a great job airlines the airplane that never been cleaner I think they are really been strict about people wear masks. So I think once people travel once you're probably more comfortable traveling the day.
Then they were the first time and so we have not baked that in and it's really hard to say, what's going to happen I mean I was.
On the call. This morning about it and there is some concern about the holidays Thanksgiving.
Holidays in December more people will probably get together and so there's always that risk of the numbers for backup.
Okay that makes sense.
And that's nice to see the NRG business continue to pick up I was wondering how much better are the the wind and solar business is performing relative to where you thought they were going to be has he went for the year.
Well as reported year, they're down just because kobe, but obviously over the past two quarters. They have performed better than they did and they thought they were going through and that we thought they were going to so we obviously took a dip but the cove it and so we re for forecast everything and day, they've outperformed over the past six months what there.
For revised forecast for us.
Got it but not not in line with their original forecast.
So.
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Yes, I mean, I think are still somewhat below where they were going into the year, but it's better than what we anticipated second half.
Okay got it.
And then just last one from me Gary you mentioned the restructuring actions I was wondering did did you mentioned how much do you expect to save on a run rate basis going forward.
Yes, I would say in the SMB segment.
It was primarily severance based it wasn't structural things, we didn't close the facility or anything like that and so in that aspect of it.
It's an immediate savings because the volume is going to go forward and it's we're taking out of variable costs. So across the Mds segment I'd say the savings benefit going forward is somewhere between one and a half and $2 million.
And then on the.
As GE side. It was a lot more structural so as you guys are building your model. It includes shutting down some proud product line. So there's about $4 million to $6 million of sales that happen in 2020 that will not go forward because we either.
Divested the business or shut it down a real line. However, you want to define it.
And so the absence of that you're going to get an inherent uptick as a result, they weren't making those businesses weren't very profitable thats why we refocused sudsy. The go forward basis across the U.S.G. side is somewhere between five and six on the call with five and $6 million on the cost side, but I want to caution that by saying you know.
We really stood on costs this year and discretionary costs things like travel and trade shows and things like that we know there's still going to be mitigated, but at a point in time, you're going to see increases in our SGN a compared to the back half of 2000, because we do have to travel we do have to confirm.
Continue to get the get out.
New installations in EPS. So I'd say, if you take that altogether, it's somewhere between seven to 9 million of savings than offset by three or $4 million of additional costs that were stood on in 2008 like travel obviously discretionary spending we deferred compensation for for people into 21.
So we could get through whatever so net net I'd put it in the three to 5 million savings.
Got it and just to squeeze one more bit based on something you said that you expect to attend conferences and through travel, but I know your total conference is a pretty big expense and you kind of lose a week of sales every day. When you do it are you planning to do that again this year than we all virtual and then does that actually save you anything.
It will definitely be virtual and as far as the savings will have a virtual card for so there'll be some costs associated with that and we don't have our arms color around what.
Sales is going to be but certainly not running hotel out and bringing sales people and having said that I mean, we're still working with though is that as a big cost and see if that's saving draft for this year or something they get pushed out to the end of the contracts. So we're still working through that.
Okay fair enough. Thank you.
That.
Thank you and.
Our next question comes from the line of Zone surprise Rep with Sidoti and company. Your line is now open.
Good afternoon, gentlemen, thanks for taking my question.
I'd actually like to go back to the guidance and the first half was 21 relative.
Relative to the first half of 20.
But really in relationship for how the September quarter finished.
Because it sounds like to me if I understand you proper that the test business seems to come back and stabilize.
Looking at maybe utility.
Relative to the September quarter to kind of bounce around quarter picking that threshold.
Kind of suggest a sizable step down in Andy.
What you posted in September and Didnt seem like there was a lot of pull forward from your earlier comments you kind of walk me through how you get such a sizable dropdown and other revenue profile for I'm missing something that you're telling us.
Let me start with the submarine part of it again just.
As as block five orders were booked in fiscal 20 as you start working on those programs.
So it's a percentage of completion.
Revenue model and so you're not getting a whole lot of revenue.
At Globe for instance, in Q1 into Q2, because you're you're just incurring the cost and you're not really crossing over milestones that trigger that trigger the appropriate revenue that when you get into mid year and you are kind of the momentum is going full bore there you are crossing over the first milestone in the second.
Third milestones or a lot quicker than the first one so just from a from a optics perspective, the manufacturing is going at the same level, but the revenue recognition on these milestones is more back half weighted and obviously from.
Across that back half its.
It's meaningfully different meaningfully globe just the size is about 40 $44 million. So we're not talking 50 million moving on where and other but the concentration of their back half brother versus the first half makes a meaningful contribution to same the vacco. There's two pieces there we work on the submarines there but.
We also have space programs.
And we're kind of in a transition point on the biggest program, we have which is called the SLS the space launch system the large.
Vertical lift vehicle and so we're transitioning from a development phase into a hardware production phase and so there's a little bit of a timing GAAP in the first half for the year as your line down the development and then your wind up the.
The production hardware, so there's a delta for step the second half at Balco as well and so those two items in particular stood.
Steer a push a lot of the things for the back half and then that's the stuff that I see is more predictable because we already have it in backlog and we understand the cadence of the cost and the milestones threshold then you take the aerospace stuff. It's it's.
It's going to look for Sim.
Similar to the back half, we're not expecting this big uptick in Q1.
So thats kind of stable in the first half and the momentum we talked about picks up a little bit. So when you take all of those elements.
Get a meaningful delta in the back half.
Versus the.
Versus the for sale.
Compared to.
Total 20, and then on the utility side, it's very similar you know a lot of other things when you look at these ducky, the cyber security or trends in security things we have.
Theres, a big chunk of software in there so you might sell them the hardware and some of these ruggedized laptops or thousands of dollars not tens of thousands but the software that drives those systems is where the values that and you really don't recognize the revenue on the software elements of that until you actually get the system put in are sold or are subscribed to come.
From our so Thats software element hits later in the year and the hardware pieces that make us three four or 5000 a piece.
So that also skews the utility side.
Back half weighted plus the the margin contribution on software is meaningfully higher than it is on hardware.
John I think is simple way to think about it if you go back and look at our history. Just could you just go back to last for years and look at for second third fourth quarter, we always have a.
Significant drop off from the first quarter net just we've been trying to figure it out for you.
15 years, why that gave for the total spend that way. So if you go back and look at the profile for the last couple of years I think it would be very consistent with what you're seeing here.
For the point, we're really trying to make is we're off to such a strong start in the first half of last year. So that when you compare that for the first half of this year, it's going to be non a good comparison, but that we think will return to more normal in the second half.
What about your thoughts about the test segment because it seems like you are suggesting is sustainable revenue profile. There is that not the case or is this something that would cause a sizable step down in that business also in the <unk> and December and March quarter.
Yes, it's still a few back and look at the segment data you're going to see the same thing I mean, they they still have a ramp.
From first quarter to fourth quarter, and I don't know if it's because it's other holidays that happen in the first quarter is probably a bit of it in other customers are accessible as accessible in a first quarter, but I would just encourage you go back and look at that profile, then I think you'll find it to be very consistent.
Okay, all right fair.
Fair enough Thats for kind of looking for guys. Thank you.
That.
Thank you.
And this does conclude today's question and answer session I would now like to turn the call back for Vic Richey for any closing remarks.
Okay, well, thanks to everybody and look forward to talking to you in index, though.
Thank you ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
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