Q4 2021 ESCO Technologies Inc Earnings Call

November 18, 2021

Good day and welcome to the Q4 2021 ask about Technologies, Inc. Earnings Conference call. Today's call is being recorded yesterday, our victory cheese, Chairman and CEO, Chris Tucker Senior Vice President and CFO and now to present the forward looking statements I would like to turn the call over to Kate Lowrey.

Director of Investor Relations. Please go ahead.

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 impact of Covid and Covid variance and recovery expected as a result of Covid vaccine.

Covered in commercial aerospace impacts of supply chain issues and cost inflation.

Adjusted EPS adjusted EBITDA cash shareholder value timing block five deliveries.

SaaS and completing additional acquisitions and successfully integrating acquired businesses. The result of cost reduction efforts and other statements, which are not strictly historical are forward looking statements.

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 can 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 and reconciliation of these measures. The most comparable GAAP measures can be found in our press release issued today and found on the company's website at Www Dot ESCO technologies Dot com under the link Investor Relations now I will turn the call over to Vic.

Thanks, Jay and thanks, everybody for joining today's call.

Jonathan the details this quarter and just like to thank our employees across the company.

I'm going to ask for some items of business.

It continues to be a lot of challenges to overcome on a regular basis, we're seeing some supply chain issues with delivering cost inflation as well as the ongoing challenges from Covid. In spite of that we continue to see great efforts and contributions from everybody across company.

I am very appreciative.

Since the beginning of the pandemic. Our primary goal has been to say to provide safe working environment and protect the health of our employees will continue to do that now and we appreciate everybody's efforts to create a safe and collaborative environment of our facilities worldwide.

Well, we're very happy with how we finished fiscal 2021, the fourth quarter showed some stabilization in our overall business with sales growth of two to three business platforms and good margin improvement compared to our third quarter results cash generation was also strong as we continue to see benefits from our ongoing focus on working capital.

Chris will get into some financial deals the details in a few minutes, but I wanted to start off with some top level commentary.

On a segment perspective, there were several positives to report.

Within A&D, we're seeing signs of recovery in commercial aerospace, especially rewarding continues to solidify.

More importantly, we are starting to see some order momentum from this set of businesses that you saw in the press release, we had nearly 30% order growth compared to the prior year fourth quarter.

All of our businesses that sell into commercial aerospace sector saw a nice order improvement in the quarter. We're also seeing good order strength in the military side of the business sales to our commercial aerospace customers will still be down in the fourth quarter with the rate of decline was improved compared to what we saw in the first half of the year overall, our navy and space.

Businesses remained strong and while funding the sales there were a little weaker in the quarter, which was mostly a function of a very strong fourth quarter last year Barbasco subsidiary.

Our test business has seen a nice pickup it's overall piece of business, we had double digit sales growth. There in Q4, we also saw order growth of over 30% some exciting numbers.

In the U S. We have seen some sizable order growth from the power line filter business. These are used in data centers to ensure a clean power supply and we've seen a lot of government activity driving the order increases. We also had a strong quarter in Asia from a top line perspective and are excited about the prospects there as we move forward.

Sure.

We did experience a little margin pressure test in Q4 definitely seeing some impacts of inflation. We're all very aware of these days.

The team at test is very focused on managing our overall cost profile and also price execution. So we see margin trends turn around in fiscal 2022.

USG business had an exciting quarter with the closing of two acquisitions by now you've all heard a lot about often over in Phoenix that were very excited to get these deals closed these businesses will strengthen USG for the long term and we're very excited to have these teams on board with us scale the business.

Is it going through the hard work of integration now to a full product and channel assessment to gain proper alignment of the businesses on a global basis the.

The acquisitions gave the USG business a bit of a topline boost in the quarter and we look forward to more of that next year, the underlying business did deliver growth.

Q4.

And that was good to see the core business Cordoba business was a bit up bit up and down in fiscal 'twenty. One we're really finished the year strong.

The energy business grew 25% for the full year in the fourth quarter was consistent with that as well.

Margins were a big part of our <unk> 'twenty one story.

We took actions late last year to reduce cost and we really saw good flow through from that throughout the year indefinitely solid fourth quarter as well.

Overall, the fundamentals of our portfolio remains strong and we're excited about the outlook for 'twenty. Two you saw in our press release that we guided adjusted EPS that would give us about 20% growth next year, we feel good about that and are ready for the return of growth. After two tough years in a COVID-19 environment.

Now I'll turn it over to Chris.

Thank you Vic I'll start briefly by touching on a few comparative highlights.

Sales in the fourth quarter were flat to prior year Q4, with AMD down, 16% USG was up 16% and test grew 11%.

So we did see growth from two of the three businesses, but we do continue to find some headwinds in the A&D group.

Adjusted EBIT margins were 13, 7% in the quarter compared to 13, 9% in the prior year quarter.

The margin decline was driven primarily by deleverage within the A&D group given the sizable revenue drop there.

Below the EBIT line, we saw interest expense of approximately 800000 in the quarter compared to nearly $1 5 million in the prior year Q4.

Additionally, we saw tax rate favorability compared to prior year Q4, all of these items delivered adjusted EPS of <unk> 85 per share above prior year's 80 cents per share.

Segment highlights from the quarter are as follows.

Indeed did see sales weakness in the quarter as previously mentioned the group was down 16%.

In the quarter, we saw declines in all major markets with commercial aerospace down 15% space down 10% in the Navy business down 27% with.

The space and Navy reductions are a function of timing and comparisons as our vacco subsidiary was very strong in the prior year quarter.

We did see very strong order growth by the A&D group in Q4.

Orders were up over 25% as we saw the commercial aerospace driven businesses pick up nicely during the quarter.

Chris There and made a led the order growth for Q4, a nice indicator as we head into fiscal 'twenty two.

USG saw sales growth of 16% in the quarter. If you exclude the impact of the Q4 acquisitions the growth was approximately 8%.

Core utility business from Doble was up approximately 4% in the quarter the renewables business at NRG delivered 29% growth in the quarter capping off a very successful 2021.

The margins from USG were very good in the quarter with adjusted EBIT up to 24, 3% in the quarter compared to 18, 8% last year.

We continue to get good flow through from prior cost reductions and we also had favorable mix on instrument contract and service sales.

We saw good orders for USG in Q4, and including the recent acquisitions, we move into fiscal 'twenty, two with a record backlog position of 92 million. This compares to $51 million at the end of last year.

The test business also saw strong growth in the quarter.

With revenues, increasing by 11% compared to prior year Q4. This growth was led by strength in China, which was up over 30%.

The Americas also experienced solid growth driven by the power filter business Vic mentioned previously.

We did see margin pressure pressure in this business during the quarter as adjusted EBIT margins went from 16, 8% in the prior year to $15 three in the current quarter.

The business is experiencing experiencing inflation driven by materials and labor as they manage increasing demand. We are very focused on driving cost containment productivity and price increases to offset these impacts as we move forward.

On the orders front, we saw continued strength in the pace of business for test orders were a record 74 million in the quarter, which is an increase of over 35% compared to last year's Q4.

Now a few comments on the full year performance first by segment. The A&D group had a full year sales decline of 11%. The main driver of the sales drop was commercial aerospace, which was down 29% for the year. This was somewhat offset by a 4% increase from the Navy business.

<unk> had a full year sales increase of 6%, excluding the fourth quarter acquisitions. The growth was 4% and this was driven by 29% growth at NRG.

Test grew by 6% during fiscal 'twenty, one and.

And for the full year consolidated adjusted EBITDA was 131 million or 18, 3% compared to $133 million and 18, 3% in the prior year, we were able to hold EBITDA margins on reduced sales.

Adjusted earnings per share finished the year at $2 59, compared to $2 67 in the prior year.

Overall, a 3% reduction of earnings per share, which is consistent with the underlying sales decline that we experienced.

Orders for the year were $767 million before considering the impact of fourth quarter acquisitions.

<unk> orders were $798 million, but included very large navy orders received by globe during 2020.

Backlog ended September 'twenty, one is at $592 million compared to $511 million at the end of September 2020.

Year to date operating cash flow achieved a record of $123 million in 'twenty one.

Going back to fiscal 2018, we have seen steady improvement with operating cash flow increasing at a double digit double digit compound annual growth rate.

We continue to see great results from our focus on driving balance sheet improvements operating capital turnover continues to improve and we see overall balance sheet and cash flow management is a long term value lever for ESCO. We are a focused program with each subsidiary and we will continue driving for long term improvement of our returns on capital.

Overall, while we continue to see some challenging conditions in a few of our end markets. We were still able to deliver solid results in 2021 or.

Our balance sheet remains strong and gives us great flexibility moving forward.

Our overall net debt position and leverage ratios leave us with the strength to invest in our core business and to expand via acquisition.

Continue to aggressively look for new companies that can be added to our portfolio. You saw on the press release today that we have added network electronics company or Niko in Q1. This was a small acquisition in the A&D group, but we see nice complementary revenue streams and a clear path to synergy with our existing business. We will continue to aggressively pursue additional.

Deals in 2022 as.

As we told you last quarter, our number one focus remains the same.

Increasing in maximizing our liquidity to position us for future M&A growth and continued investment in new products and solutions.

Still have ample capacity for further acquisitions and we obviously continue to invest in the core business to enhance the organic growth profile.

Our significant cash generation. This year is a testament to this focus on liquidity, we delivered free cash flow conversion at 129% of net earnings in 'twenty, one and will continue to build on the momentum achieved achieved from our working capital initiatives.

In the release, we provided earnings per share guidance for fiscal 'twenty. Two we have seen some good trends developing with orders and are excited to issue guidance that calls for earnings per share in the range of $3 10 to $3 20 or growth of $20 to 24% in fiscal 'twenty two.

This earnings per share range assumes 22 sales in the range of eight to $810 million to $830 million or growth of 13% to 16%. We expect AMD to grow sales in the range of 10% to 12% USG to grow in the range of 28% to 32%.

Test to grow 3% to 5%.

Backlog positions for all three businesses have solidified nicely during the fourth quarter and are supportive of these growth ranges.

We do have some headwinds next year with increased interest expense to $4 million and our projected tax rate of 23% to 24%, but the plan still deliver strong EPS in spite of these items.

We're not breaking out guidance by quarter for 'twenty, two but we do expect the Q1 results to be lower than Q2 to Q4.

The core utility based business has been up and down over the last year and we see Q1, a little weaker there and while the test backlogs are strong right now we don't see that growth kicking in until after Q1.

So that's the financial summary, I will turn it back over to Vic any stress.

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 feel good about the year. We just finished and are excited for 2022 and a return to growth.

Great about our end market exposure and a diverse portfolio allows us to manage through periods like we've just experienced over the last few years.

We've been able to continue investing in our core business and we don't have core to driving organic growth is and these programs are key to achieving that.

Because of this across our portfolio, including F 8000 series of power system simulators lost by Doble in 2021, and a red edge Palo <unk> filters that are driving growth for test.

We've also been able to strengthen our portfolio with ATM acquisition earlier in 2021, Austin and Phoenix in the fourth quarter and then Niko in the first quarter of 2022.

These acquisitions, all bring unique value to the ESCO SaaS go and we're committed to delivering value to shareholders with these transactions. We spent the last two days with our board for our year end meetings, we had a great set of meetings and covered a lot of important topics I would like to thank our board for their ongoing support and guidance and lastly.

Again, thank all of our employees for their dedication through a really tough 2021. We appreciate all your hard work and are counting on yet as we go into 2022.

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

Thank you ladies and gentlemen, if you have a question at this time. Please press Star then the number one key on it does still telephone if a question has been answered arguable stream move itself from the queue. Please press the package again, Doug will be Star then the number one our telephone keypad.

Your first question comes from the line of Tommy Moll from Stephens. Your line is open.

Good afternoon, and thanks for taking my questions.

I wanted to start on gross margins today it looks like.

Companywide you were up over 100 basis points year over year in the quarter and up roughly 50 for the full year you called out some cost reduction actions.

The first time, you had mentioned those but I wonder if you could talk more about these.

What some of the components are embedded in your outlook for 2022.

What what is left to chop on the gross margin side.

So I'll mention a few things and then you want to jump that I'd say the biggest area really was the things we did at commercial aerospace kind of rightsize the business.

From a driving force.

Specter of an overhead perspective, and then doble, we saw really nice.

Pick up in the margin in the fourth quarter and Thats really because we didn't take a lot of cost out. Unfortunately, we had to do that.

Went into the year.

And it's not only for scout reduction that we did.

To shut down one facility small facility, we acquired and moved all of that production into a contract manufacturer. So all of those things and then you had some normal things like.

Travel is still being down we really had thought travel that we picked up more by now but some of those SG&A costs remain remained lower which helps our margins as well.

Yes, I think I think those are the main things with with kind of the contract manufacturing under Doble we had.

The ATM acquisition earlier, we were able to.

It takes some cost out there as we move that into our existing facilities. So that helped us sequentially as we move through the year.

We've also as part of the overall working capital programs. Tommy We're also doing some cost.

Cost focused activities as part of that group as well.

Ben.

Doing things there that impact GP for sure.

Renegotiating freight contracts.

Looking at some common purchasing of kind of common MRO type supplies and materials. So we've seen some good results on that kind of activity as well so theres been.

Pretty pretty broad activity I think across the spectrum there.

Sticking on the gross margin topic, but shifting more to a price cost kind of conversation in terms of just any inputs, where youre seeing inflationary pressures.

Is there is there any business or or units, where you feel like Youre ahead of us.

Things here in terms of pricing actions, you've taken and then at the other end of the spectrum are there any components of your backlog, where there is some risk there with maybe a fixed price contract or a delayed pricing reopener.

Where there may be a headwind at least for some period of time.

So as you know we made a lot of our contracts are fairly quick turn and so we do have an opportunity in most cases not all cases in most cases to be able to kind of reset the price as we go forward I think we've done a lot more aggressive on price increases and maybe we have in the past because the reality is people and product.

And you know we're kind of in the same position. Unfortunately, if we had to pay a premium and if our customers have to pay premiums on time and to be able to get product price that price increases are sticking in the lab.

Historically, if you will not I'm just trying to think I don't think that we've had.

And our backlog that we're concerned about we have some longer term product projects.

In the test business, but this year, we didn't really have any really really big projects. So even there.

I think that's going to be fairly muted.

Don't mistake me I mean, we're fighting every day.

It is really an issue across the economy.

We are continually looking for.

Pull things in.

Look for new vendors, because it's really tough out there right now.

I appreciate it.

Sorry, it's Chris I would just add a little more I think.

We did kind of mentioned specifically test a little bit in Q4, where the as they execute their backlogs.

Kind of real time, we saw a little pressure there with inflation.

But we've worked very hard there with that team to try to get the pricing going.

So I think that.

That's a place where we've got to kind of keep focusing on it and again. The team is working to do a lot of great stuff. So we know we will get it as kind of a timing thing, it's a little bit transitory as you kind of work through the backlogs here over a couple of quarter period.

But we feel good about where we're heading there I think doble is another place where.

We've been we've been out in front with price increases in Q4.

To kind of keep us in front of the curve there on price cost.

So overall we.

Definitely a thing that were.

Talking to all the subs about and working very hard because we know it's a huge deal as we move through 2022, because as Vic said.

You're seeing it on the material side and certainly on the labor side and other areas. So pricing is going to be an important lever there and we really are driving it in all parts of the company.

Thank you Chris Thank you Vivek I'll turn it back.

Thanks Tommy.

Thank you. Our next question comes from the line of John <unk> from Sidoti. Your line is open.

Good afternoon, everyone.

Got a quick question on the commercial aerospace side of the business given the uptick in orders you saw in AMD does that suggest your customers are getting closer to unwinding their excess inventory levels any kind of update on what you're seeing in commercial would be great.

Yes.

Obviously as they are increasing their orders that is because youre getting some of this behind them.

And the flight rates are picking up some so.

Encouraging to see this kind of order pickup in the fourth quarter.

Dissipation is.

Should continue to have some level of improvement as we've talked about on calls before a good bit of our products goes on go onto <unk>.

Aircrafts as well and so now that the travel restrictions between U S and a lot of other places.

Eased up we hope that thats not going to start to kick it off with some of those.

Bodies like we've seen on the narrow bodies.

To date.

Okay and in test was there any impact from either your company or your customers.

On the chips.

Lack of chip supply or any other product supply that might hurt you and test the particular.

No. That's that's one area, where we haven't seen a lot of that a lot of what we do.

As more structural type work, so we're making the chambers were making the film absorber.

The amount of electronics, we do are really pretty pretty small so it's just not something that would impact us as far as our customers I mean, it seems like the consumer products are.

We've done a better job of getting the chips and maybe some of the cars and some of the other places like that so we have not seen any impact you saw from our orders our orders were really strong.

In 2020 in 2021, and I think we're off to a good start initiatives as well. So if there is an impact it's not it's not showing up in the order rates for sure.

Okay.

And then the utility side of the business I know some of the increasingly orders was acquired orders but.

Could you talk a little bit about even if you pull that out looks like there's still good quarter as far as the OTA side, how doble is doing.

This is playing out compared to your expectations what are your thoughts about how that.

Lays out in 2022 at Doble in particular.

Sure.

We did have growth I mean, just setting the acquisitions side, we did have growth in the core business had a really really strong September.

So the question how is that is that a trend or an anomaly and I'm, hoping for a trial honestly.

It seems like.

The business, we thought it was going to recover a little faster than it did.

But as we go into this next year I think some things.

Acquisitions will be delayed for so long and so we are looking for some growth at doble and that core business set aside the acquisitions, we're looking for growth in our core business this year as well.

Okay. Thanks, I'll get into queue. Thank you.

Thanks, Sean.

Thank you your next up we have John Wang from CJS Securities. Your line is open.

Hi, everyone. Thanks for taking my question.

Wanted to dig into the doble commentary a little bit more than just the U S segment in particular.

The organic growth rate that you highlighted in the press release, the 3% to 5% I would've thought the utilities will be picking up the spending.

A little bit more next year, especially if the infrastructure.

Creating renewable money coming in.

The timing of that's a little bit off but you mentioned price increases as well I was just wondering what are the other components of the underlying growth expectation going in there.

Just a couple of general comments about the utility industry and one of our directors is.

Recently retired senior executive at a large utility so communities still maintains contact with a lot of people in his insight into into the industry I think at a pretty low level.

We're seeing it is making a little more difficult and utilities are still very conservative their work from home.

Probably a higher level than a lot of places.

We're limiting travel they are limiting people coming in to their facilities and so I think thats.

Kind of muted what we would expect it to be a little more robust growth as well.

I think they are going to be good and obviously a lot of infrastructure money now the infrastructure money won't be spent directly on our products.

Not really infrastructure, but as a improved infrastructure expanding infrastructure that will.

Require additional testing so we think that there may be some delay on that but we think that it will benefit the business over the longer term, but just as we look into 2022.

We think we're going to get some organic growth and then the other thing, which I think we're trying to take a measured approach on is what we're going to see from these acquisitions and synergies may we may.

Realized net cost synergies the ability to be able to sell some of the doble products more novel products internationally and vice versa. So we've not baked a lot of that into our core forecast, but I think theres an opportunity there that we should be able to exploit and that integration has gone exceptionally well I would say so.

If we're going to get to get that I think we're well positioned to execute on it.

Yes, John This is Chris a few things I would add I mean, I think if you think about the 'twenty two and the organic growth profile there.

Last year in Q1.

Had a decent quarter for doble they saw some year end money released that.

That kind of gave them a little bit of a tailwind a year ago were not really seeing that happen right now and thats kind of why I mentioned some of the Q1 guidance of a little bit lighter in Q1 for doble.

We've just kind of seen.

Kind of one one up quarter, one down quarter kind of a trend there.

And so.

So we feel good about the market's long term, but we're just not seeing.

Great guns ahead, if you will on kind of the steady growth. So a little softer Q1, but then Q2 last year was quite weak. So we would expect pretty good performance relative to that.

And then it kind of <unk>.

Latins out a little bit in the back half of the year. So that's kind of how we see it right now and in the infrastructure as Vic mentioned, we think that's a great long term, but we don't really see that as a 22 impact we see that a little longer term.

Got it that's helpful color and then.

I was just wondering.

You've done three acquisitions in the last quarter or so.

They're not quite as big as some of the other ones you've done but I was just wondering you mentioned that your programs in each of the segments to look for more.

Asset, but I was just wondering what your actual appetite bandwidth.

In the near term for something in kind of if you could go too quickly or is it going to take on a calendar year company.

I think.

We will work and some things I think it will be next calendar year before we get anything else done as far as the bandwidth I mean, obviously the financial bandwidth is not an issue I think that people bandwidth.

It's pretty solid.

Fortunately with the businesses we bought.

Two in the utility space may come with really strong management teams and so it's not like we're trying to go and fix anything we're trying to take advantage of that strong management team and the products that they have in and so that integration has gone very well I was.

In Italy by month, or so ago on visit both facilities quite impressed with what's really the.

Wood products facilities people and management team and so I think that's going to be a pretty easy acquisition I think everybody gets it. They understand why this was a good thing for for the acquired companies and they're going to play a big role in the future of the business.

Last one you mentioned is relatively small business.

It's going to be.

Part of <unk> longer term longer term and so that's going to be appreciated for the integration again.

The two senior people there really strong in.

Prepared to really help us pull those business together.

Got it thanks, Mike.

Yes.

Thank you once again in order to ask a question. Please press Star then the number one on your telephone keypad.

You have a follow up question from John <unk> on Wednesday from CJS Securities. Your line is open.

Hi, guys just one follow up for me I don't know if you said this earlier in the call, but Chris just in that 320 of EPS.

The margin guidance for next year.

How much inflation are you baking into that is it just over the next.

Two quarters, or so and then a recovery or is it the full year I'm just trying to get a sense of how conservative we're trying to be and what's your expectations for the actual environment.

Yes, I would say that we see.

Seen that inflation kick in pretty hard here in the second half of the year, we expect it to be pretty hot and heavy for the first half of the year, then you kind of start to anniversary some of that.

And then your price increases kind of hang in for the back half of the year, where you can get a little more favorable on that price cost ratio. So.

That's kind of kind of how we have it dialed in right now.

Okay, Great and then are there any parts of your business, where you can't take up price to match. The inflation is there like a percentage of revenue that you can raise it on our cameras on the way to think of it.

I mean, I think I would say that we don't feel like we can't get price anywhere. We've worked again with all of the subs as we went through the financial plans for 'twenty. Two I mean that was kind of a key topic of whats the inflation expectation and what are the levers we have to offset that.

And so.

Again, you do have some longer term contracts that you can't open up in the short term windows.

I don't have that quantified off the top of my head, but I would say it's not.

It's not.

Huge part of the business in general, we're able to get price as we as we operate yes, I'd say the one place maybe the one exception is with our globe business.

A long term contract we have.

So if a cell treatments.

Both deal, having said that we've kind of locked into material price and silver materials is not going to be an issue.

If we have any issues, we just be.

People availability.

Got it.

Just had a labor.

Really heavily labor intensive business. It is more for the materials business I mean, obviously the the manufacturing piece of it is very very important but its really material derivative business, we've kind of got that locked down.

Got it thank you guys.

Yeah.

Thank you again, Doug will restart and the number one for a question.

Okay, I think thats it for the questions. So we will end the call now and thank you everybody for dialing in and I look forward to talking to you on it.

Next call.

Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may now disconnect.

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Yes.

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Good day and welcome to the Q4 2021 ask out Technologies, Inc. Earnings Conference call. Today's call is being recorded yesterday, our Vic Richey, Chairman and CEO, Chris Tucker Senior 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.

Thank you Steve.

That's made during this call regarding the timing of recovery and growth of our end markets the amounts and timing of 2021 and beyond revenues and <unk>.

Patch of Covid, and Covid variance and recovery expected as a result of Covid vaccine.

Coverage in commercial aerospace impacts of supply chain issues and cost inflation.

And EPS adjusted EBITDA cash shareholder value timing of block five deliveries.

Faster in completing additional acquisitions and successfully integrating acquired businesses. The result of cost reduction efforts and other statements, which are not strictly historical are forward looking statements.

Which will be included as an exhibit to the company's form 8-K can 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 and a reconciliation of these measures. The most comparable GAAP measures can be found in the press release issued today and found on the company's website at Www Dot ESCO technologies Dot com under the link Investor Relations now I will turn the call over to Vic.

Thanks, Jay and thanks, everybody for joining today's call.

The details of this quarter and just like to thank our employees across the company.

Ongoing efforts to manage the business.

<unk> continues to be a lot of challenges to overcome on a regular basis, we're seeing some supply chain issues with delivering cost inflation as well as the ongoing challenges from Covid. In spite of that we continue to see great efforts and contributions from everybody across the company and for that I am very appreciative.

Overall, we're very happy with how we finished fiscal 2021, the fourth quarter showed some stabilization in our overall business with sales growth in two to three business platforms and good margin improvement compared to our third quarter results cash generation was also strong as we continue to see benefits from our ongoing focus on working capital improvement.

Chris will get into some of the financial deals the details in a few minutes, but I wanted to start off with some top level commentary.

From a segment perspective, there are several positives to report within A&D, we're seeing signs of recovery in commercial aerospace, especially rewarding continue to solidify.

More importantly, we are starting to see some order momentum from this set of businesses as you saw in the press release, we had nearly 30% order growth compared to the prior year fourth quarter.

All of our business as a seller in commercial aerospace sector. Some nice order improvement in the quarter. We're also seeing good order strength in the military side of the business. They also have commercial aerospace customers will still be down in the fourth quarter, but the rate of decline was improved compared to what we saw in the first half of the year overall, our navy and space.

<unk> remained strong and while funded but sales there were a little weaker in the quarter, which was mostly a function of a very strong fourth quarter last year Barbasco subsidiary.

Our test business has seen a nice pick up and its overall pace of business, we had double digit sales growth there in Q4.

So saw order growth of over 30% some exciting numbers and.

The U S. We have seen some sizable order growth from the power line filter business. These are used in data centers to ensure a clean power supply and we've seen a lot of government activity driving the order increases. We also had a strong quarter in Asia from a top line perspective and are excited about the prospects there as we move forward.

Sure.

We did experience a little margin pressure test in Q4 definitely seeing some impacts of inflation. We're all very aware of these days.

The team at test is very focused on managing our overall cost profile and also price execution. So we see margin trends turn around in fiscal 2022.

Do you guys view business had an exciting quarter with the closing of two acquisitions.

<unk> all heard a lot about often over in Phoenix that were very excited to get these deals closed these businesses will strengthen USG for the long term and we're very excited to have these teams on board with that scale.

The businesses are going through the hard work of integration now.

Product and channel assessment to gain proper alignment of the businesses on a global basis.

The acquisitions gave the USG business a bit of a topline boost in the quarter and we look forward to more of that next year, the underlying business did deliver growth.

In Q4.

And that was good to see the core business core doble business was a bit up bit up and down in fiscal 'twenty. One they were really finished the year strong.

The energy business grew 25% for the full year in the fourth quarter was consistent with that as well.

<unk> margins were a big part of our 'twenty one story.

We took actions late last year to reduce cost and we really saw a good flow through from that throughout the year and definitely saw it.

Fourth quarter as well.

Overall, the fundamentals of our portfolio remains strong and we're excited about the outlook for 'twenty. Two you saw in our press release and we'd guided adjusted EPS that would get us around 20% growth ex year, we feel good about that and are ready for the return of growth. After two tough years in a COVID-19 environment.

Now I'll turn it over to Chris.

Thank you Vic I'll start briefly by touching on a few comparative highlights.

Sales in the fourth quarter were flat to prior year Q4, with AMD down 16%.

<unk> was up 16% and test grew 11%.

So we did see growth from two of the three businesses, but we do continue to find some headwinds in the A&D group adjusted.

Adjusted EBIT margins were 13, 7% in the quarter compared to 13, 9% in the prior year quarter the.

The margin decline was driven primarily by deleverage within the A&D group given the sizable revenue drop there.

Below the EBIT line, we saw interest expense of approximately 800000 in the quarter compared to nearly $1 5 million in the prior year Q4 <unk>.

Additionally, we saw tax rate favorability compared to prior year Q4, all of these items delivered adjusted EPS of <unk> 85 per share above prior year's <unk> 80 per share.

Segment highlights from the quarter are as follows.

A&D did see sales weakness in the quarter as previously mentioned the group was down 16%.

In the quarter, we saw declines in all major markets with commercial aerospace down 15% space down 10% in the Navy business down 27%.

The space and Navy reductions are a function of timing and comparisons as our vacco subsidiary was very strong in the prior year quarter.

We did see very strong order growth by the A&D group in Q4.

Orders were up over 25% as we saw the commercial aerospace driven businesses pick up nicely during the quarter.

PCI, Chris there and made a led the order growth for Q4, a nice indicator as we head into fiscal 'twenty two.

USG saw sales growth of 16% in the quarter. If you exclude the impact of the Q4 acquisitions the growth was approximately 8%.

Core utility business from Doble was up approximately 4% in the quarter the renewables business at NRG delivered 29% growth in the quarter capping off a very successful 2021.

The margins from USG were very good in the quarter with adjusted EBIT up to 24, 3% in the quarter compared to 18, 8% last year.

We continue to get good flow through from prior cost reductions and we also had favorable mix on instrument contract and service sales.

The test business also saw strong growth in the quarter with revenues, increasing by 11% compared to prior year Q4. This growth was led by strength in China, which was up over 30%.

The Americas also experienced solid growth driven by the power filter business Vic mentioned previously.

We did see margin pressure in this business during the quarter as adjusted EBIT margins went from 16, 8% in the prior year to $15 three in the current quarter.

On the orders front, we saw continued strength in the pace of business for test orders were a record $74 million in the quarter, which is an increase of over 35% compared to last year's Q4.

Now a few comments on our full year performance first by segment. The A&D group had a full year sales decline of 11%. The main driver of the sales drop was commercial aerospace, which was down 29% for the year. This was somewhat offset by a 4% increase from the Navy business.

<unk> had a full year sales increase of 6%, excluding the fourth quarter acquisitions. The growth was 4% and this was driven by 29% growth at NRG.

<unk> grew by 6% during fiscal 'twenty, one and for the full year consolidated adjusted EBITDA was 131 million or 18, 3% compared to $133 million and 18, 3% in the prior year, we were able to hold EBITDA margins on reduced sales.

Adjusted earnings per share finished the year at $2 59, compared to $2 67 in the prior year overall, 3% reduction of earnings per share, which is consistent with the underlying sales decline that we experienced.

Orders for the year were $767 million before considering the impact of fourth quarter acquisitions last.

Last year's orders were $798 million, but included very large Navy orders received by globe during 2020.

Backlog ended September 'twenty, one is at $592 million compared to $511 million at the end of September 2020.

Year to date operating cash flow achieved a record $123 million in 'twenty one going.

Going back to fiscal 2018, we have seen steady improvement with operating cash flow increasing at a double digit double digit compound annual growth rate.

Overall, while we continue to see some challenging conditions in a few of our end markets. We were still able to deliver solid results in 2021.

Our balance sheet remains strong and gives us great flexibility moving forward.

Our overall net debt position and leverage ratios leave us with the strength to invest in our core business and to expand via acquisition.

We continue to aggressively look for new companies that can be added to our portfolio. You saw on the press release today that we have added network electronics company or Niko in Q1. This was a small acquisition in the A&D group, but we see nice complementary revenue streams and a clear path to synergy with our existing business. We will continue to aggressively pursue addition.

Deals in 2022 as.

As we told you last quarter, our number one focus remains the same.

Increasing in maximizing our liquidity to position us for future M&A growth and continued investment in new products and solutions, we still have ample capacity for further acquisitions and we obviously continue to invest in the core business to enhance the organic growth profile.

In the release, we provided earnings per share guidance for fiscal 'twenty two.

We have seen some good trends developing with orders and are excited to issue guidance that calls for earnings per share in the range of 310 to $3 20 or growth of 20% to 24% in fiscal 'twenty two.

This earnings per share range assumes 22 sales in the range of eight $810 million to $830 million or growth of 13% to 16%. We expect AMD to grow sales in the range of 10% to 12% USG to grow in the range of 28% to 32% and test to grow 3% to 5%.

Backlog positions for all three businesses have solidified nicely during the fourth quarter and are supportive of these growth ranges.

We do have some headwinds next year with increased interest expense to $4 million and our projected tax rate is 23% to 24%, but the plan is still deliver strong EPS in spite of these items.

We are now breaking out guidance by quarter for 'twenty, two but we do expect the Q1 results to be lower than Q2 to Q4.

So that's the financial summary, I will turn it back over to Vic any growth since that 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 feel good about the year. We just finished and are excited for 2022 and a return to growth we feel great about our end market exposure.

And a diverse portfolio allows us to manage through periods like we've just experienced over the last few years.

We've been able to continue investing in our core business and we don't have poured in driving organic growth is and these programs are key to achieving that.

Examples of this cross our portfolio include the F 8000 series of power system Stimulators launched by Doble in 2021, and <unk> edge <unk> filters that are driving growth for test.

We've also been able to strengthen our portfolio with ATM acquisition earlier in 2021 alternate over in Phoenix in the fourth quarter and then Niko in the first quarter of 2022.

These acquisitions, all bring unique value to the ESCO SaaS go and we're committed to delivering value to shareholders with these transactions. We spent the last few days with our board for our year end meetings, we had a great set of meetings and covered a lot of important topics I'd like to thank our board for their ongoing support and guidance and lastly, Ed.

Like to again, thank all of our employees for their dedication through a really tough 2021. We appreciate all your hard work and are counting on you as we go into 2022.

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

Thank you, ladies and gentlemen, if I have a question at this time. Please press Star then the number one key on your does stone telephone. If a question has been answered or you wish to remove yourself from the queue. Please press Apache again, Doug will be Star then the number one on the telephone keypad.

Your first question comes from the line of Tommy Moll from Stephens. Your line is open.

Good afternoon, and thanks for taking my questions.

I wanted to start on gross margins today it looks like.

Companywide you were up over 100 basis points year over year in the quarter and up roughly 50 for the full year you called out some cost reduction actions.

Wasn't the first time, you had mentioned those but I wonder if you could talk more about these.

What some of the components are embedded in your outlook for 2022.

What what is left to chop on the gross margin side.

So I'll mention a few things and then Chris may want to jump in I'd say the biggest area really was the things. We did is commercial aerospace kind of rightsize the business.

From a drive for scale.

<unk>, an overhead perspective, and then doble, we saw really nice.

Up in the margin in the fourth quarter and Thats really because we didn't take a lot of cost out. Unfortunately, we had to do that as we went into the year.

And it's not only for scar reduction, but we did shut down one facility small facility, we acquired and moved all of that production into a contract manufacturer. So all of those things and then you had some normal things like <unk>.

Travel is still being down we really had thought travel dollars picked up more by now but some of those SG&A costs remain remained lower which helps our margins as well.

Yes, I think I think those are the main things with with kind of the contract manufacturing under Doble, We had the ATM acquisition earlier, we were able to.

Take some some costs out there as we move that into our existing facilities. So that helped us sequentially as we move through the year.

We've also as part of the overall working capital programs. Tommy We're also doing some cost.

Cost focused activities as part of that group as well.

We've been doing things there that impact GP for sure Rina.

Renegotiating freight contracts looking at some common purchasing of kind of common MRO type supplies and materials. So we've seen some good results on that kind of activity as well so theres been.

Pretty broad activity I think across the spectrum there.

Sticking on the gross margin topic, but shifting more to a price cost kind of conversation in terms of just any inputs, where youre seeing inflationary pressures.

Is there is there any business or or units, where you feel like you're ahead of things here in terms of pricing actions you've taken and then at the other end of the spectrum are there any components of your backlog.

Where there is some risk there with maybe a fixed price contract or a delayed pricing reopener.

There may be a headwind at least for some period of time.

So as you know it made a lot of our contracts are fairly quick turn and so we do have an opportunity in most cases not all cases in most cases to be able to kind of reset the price as we go forward I think we've been a lot more aggressive on price increases and maybe we have in the past because the reality is people have brought.

Right and then you were kind of the <unk>.

Same position. Unfortunately, if we had to pay a premium and if our customers have to pay premiums on time and to be able to get product price that price increases are sticking to lap maybe add.

Historically, if you will not have I'm, just trying to think I don't think that we've got.

Much of our backlog that we're concerned about we have some longer term private projects.

<unk> business, but this year, we didn't really have any really really big projects. So even there I.

I think there's going to be fairly muted.

Don't mistake me I mean, we're fighting every day.

It is really an issue across the economy.

We are continually looking for.

Pull things in.

Look for new vendors, because it's really tough out there right now.

I appreciate it.

Alright got it sorry, Chris I would just add a little more I think.

We did kind of mentioned specifically test a little bit in Q4, where the as they execute their backlogs.

Kind of real time, we saw a little pressure there with inflation.

We've worked very hard there with that team to try to get the pricing going.

So I think that.

And that's a place where we've got to kind of keep focusing on it and again. The team is working to do a lot of great stuff. So we know we will get it as kind of a timing thing, it's a little bit transitory as you kind of work through the backlogs here, where a couple of quarter period.

But we feel good about where we're heading there I think doble is another place where.

We've been we've been out in front with price increases in Q4.

To kind of keep us in front of the curve there on price cost.

So overall.

It's definitely a thing that were.

Talking to all of the subs about and working very hard because we know it's a huge deal as we move through 2022, because as Vic said.

You're seeing it on the material side and certainly on the labor side and other areas. So pricing is going to be an important lever there and we really are driving it in all parts of the company.

Thank you Chris Thank you Vic I'll turn it back.

Thanks Tommy.

And our next question comes from the line of John <unk> from Sidoti Your line is open.

Good afternoon, everyone.

A quick question on the commercial aerospace side of the business given the uptick in orders you saw in A&D does that suggest your customers are getting closer to unwinding their excess inventory levels any kind of update on what you're seeing in commercial would be great.

Yes.

Obviously as they are increasing their orders that is because youre getting some of this behind them.

And the flight rates youre picking up some so.

Very encouraging to see this kind of order pickup in the fourth quarter, our anticipation is.

Should continue to have some level of improvement as we've talked about on calls before a good bit of our products goes on go onto <unk>.

Aircrafts as well and so now that the travel restrictions between U S and a lot of other places.

Eased up we hope that that's now going to start to kick it off with some of those are wide bodies like we've seen on the narrow bodies.

To date.

Okay and in test was there any impact either your company or your customers.

On the chips.

Lack of chip supply or any other product supply that might have hurt you and test the particular.

No. That's that's one area, where we haven't seen a lot of that a lot of what we do.

As more structural type work, so we're making the chambers were making the film absorber.

The amount of electronics, we do are really pretty pretty small so it's not something that would impact us as far as are the customers I mean, it seems like the consumer products are.

Done a better job of getting the chips and maybe some of the cars and some of the other places like that so we have not seen any impact as you saw from our orders our orders were really strong.

In 2020 in 2021, and they were off to a good start in this year as well. So if there is an impact it's not it's not showing up in the order rates for sure.

Okay, and then the utility side of the business I know some of the increase in orders was acquired orders but.

Can you talk a little bit about even if you pull that out it looks like there's still good quarter as far as the OTA side, how doble is doing.

This is playing out compared to your expectations what are your thoughts about how that.

Plays out in 2022 at Doble in particular.

Sure.

We did have growth I mean, just set in the acquisition side, we did have growth in the core business and it had a really really strong September.

So the question how is that is that a trend or an anomaly and I'm, hoping FERC <unk> honestly.

It seems like.

The business, we thought it was going to recover a little faster than it did.

But as we go into this next year and I think some of these acquisitions.

Okay. Thanks, I'll get into queue. Thank you.

Thanks, Sean.

Thank you and next up we have Jonathan Wang Cheng from CJS Securities. Your line is open.

Hi, everyone. Thanks for taking my question.

Wanted to dig into the doble commentary, a little bit more and just the USC segment in particular.

The organic growth rate that you highlighted in the press release, the 3% to 5% I would've thought the utilities will be picking up the spending a little bit more next year, especially if there is infrastructure.

Creating renewable money coming in.

The timing of that's a little bit off but you mentioned price increases as well I was just wondering what are the other components of the underlying growth expectation going in there.

Just a couple of general comments about the utility industry and one of our directors.

Recently retired senior executive at a large utility so communities still maintains contact with a lot of people in his insight into the into the industry I think at a pretty high level.

We're seeing that is making it a little more difficult the utilities are still very conservative their work from home.

Probably a higher level than a lot of places.

There are limits in travel, they're limiting people coming in to their facilities and so I think thats.

Kind of muted what we would expect it to be a little more robust growth as well now.

I think they are going to be getting obviously, a lot of infrastructure money the infrastructure money won't be spent directly on our products.

Really infrastructure, but as they improved infrastructure expanding infrastructure that will.

Require additional testing so we think that there may be some delay on that.

We think that it will benefit the business over the longer term, but just as we look into 2022, we think we're going to get some organic growth and then the other thing, which I think we're trying to take a measured approach on is what we can see from these acquisitions and synergies may we may.

Realized net cost synergies the ability to be able to sell some of the doble products more novel product internationally and vice versa. So was that baked a lot of that into our core forecast, but I think there's an opportunity there that we should be able to exploit and that integration has gone exceptionally well I would say so.

We're going to get hit that I think we're well positioned to execute on it.

Yes, John This is Chris a few things I would add I mean, I think if you think about the 'twenty two and the organic growth profile. There I mean last year in Q1, we had a decent quarter for doble. They saw some year end money is released.

That kind of gave them a little bit of a tailwind a year ago were not really seeing that happen right now thats kind of why I mentioned some of the Q1 guidance of a little bit lighter in Q1 for doble.

We've just kind of seen.

Kind of one one up quarter, one down quarter kind of a trend there.

And so.

So we feel good about the market's long term, but we're just not seeing.

Great guns ahead, if you will on kind of the steady growth. So a little softer Q1, but then Q2 last year was quite weak. So we would expect pretty good performance relative to that.

And then it kind of <unk>.

Latins out a little bit in the back half of the year. So that's kind of how we see it right now and in the infrastructure as Vic mentioned, we think that's great long term, but we don't really see that as a 22 impact we see that a little longer term.

Got it that's helpful color and then.

I was just wondering.

You've done three.

Acquisitions in the last quarter or so.

They are not quite as big as some of the other ones you've done but I was just wondering you mentioned that your programs in each of the segments to look for more.

Asset, but I was just wondering what your actual appetite bandwidth.

In the near term for something in kind of if you can close them quickly or is it going to take on a calendar year.

Yeah I think.

We're working on some things I think it will be next calendar year before we get anything else done as far as the bandwidth I mean, obviously the financial bandwidth is not an issue I think that people bandwidth.

It's pretty solid.

Fortunately with the businesses we bought.

In Italy by month, or so ago and visited both facilities quite impressed with what's really the.

Products facilities the people the management team and so I think thats going to be a pretty easy acquisition I think everybody gets it they understand why this was a good thing for for the acquired companies and they're going to play a big role in the future of the business.

Last one you mentioned is relatively small business in.

It's going to be.

Part of <unk> longer term longer term and so that's going to be appreciate forward integration again.

The two senior people there really strong in.

We are prepared to really help us pull those businesses together.

Got it thanks, Mike.

Yes.

Thank you once again in order to ask a question. Please press Star then the number one on your telephone keypad.

Do you have a follow up question from John <unk> on Wednesday from CJS Securities. Your line is open.

Yes, just one follow up for me I don't know if you said this earlier in the call, but Chris just in that $3 20 of EPS.

The margin guidance for next year.

How much inflation are you baking into that is that just over the next.

Two quarters, or so and then a recovery or is it the full year I'm just trying to get a sense of how conservative we're trying to be and what's your expectations for the national environment.

Yes, I mean, I would say that we have.

Seeing that inflation kick in pretty hard here in the second half of the year, we expect it to be pretty hot and heavy for the first half of the year, then you kind of start to anniversary and some of that.

And then your price increases kind of hang in for the back half of the year, where you can get a little more favorable on that price cost ratio. So.

That's kind of kind of how we have it dialed in right now.

Okay, Great and then are there any parts of your business, where you can take a price to match inflation.

As a percentage of revenue that you can raise it on our camera is not in any way to think of it.

What's the inflation expectation and what are the levers we have to offset that.

So.

Again, you do have some longer term contracts that you can't open up in the short term windows.

I don't have that quantified off the top of my head, but I would say it's not.

It's not.

Huge part of the business in general, we're able to get price as we as we operate yes, I'd say the one place maybe the one exception is with our globe business.

As a long term contract we have.

For surface all treatments.

Both deal, having said that we've kind of locked into material price and so the material is not going to be an issue.

If we have any issues.

People availability.

I mean.

Just had a labor.

Heavily heavily labor intensive business. It is more of the materials business I mean, obviously the manufacturing piece of it is very very important, but it's really immaterial derivative business, we kind of got that locked down.

Got it thank you guys.

Yes.

Thank you again, Doug will restart and the number one for our questions.

Okay, I think thats it for the questions. So we will end the call now and thank you everybody for dialing in and I look forward to talking to you on that.

Our next call.

Thank you presenters, ladies and gentlemen. This concludes today's conference call. Thank you all for joining you may now disconnect.

Q4 2021 ESCO Technologies Inc Earnings Call

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