ESCO Technologies(ESE) - 2022 Q4 - Annual Report

Part I Business ESCO Technologies Inc. provides engineered products across Aerospace & Defense, Utility Solutions, and RF Shielding and Test segments - The company operates through three main segments: Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Shielding and Test (Test)[12][13][14] Revenue Contribution by Segment (FY2020-2022) | Segment | 2022 Revenue % | 2021 Revenue % | 2020 Revenue % | | :--- | :--- | :--- | :--- | | Aerospace & Defense (A&D) | 41% | 44% | 48% | | Utility Solutions Group (USG) | 32% | 28% | 26% | | RF Shielding and Test (Test) | 27% | 28% | 26% | - Sales to the U.S. Government, primarily from the A&D segment, accounted for approximately 27% of total revenue in 2022. International sales made up about 30% of total revenue in the same year[26][27] Total Company Backlog (as of Sep 30, in millions) | Metric | Sep 30, 2022 | Sep 30, 2021 | Change | | :--- | :--- | :--- | :--- | | Total Backlog | $695.0M | $592.0M | +17.4% | | A&D Backlog | $408.3M | $367.2M | | | USG Backlog | $128.1M | $91.6M | | | Test Backlog | $158.6M | $133.2M | | - As of September 30, 2022, the company employed 2,922 people, with 18% located in 17 foreign countries. The average tenure of the workforce was nine years[41][43] Risk Factors The company faces risks from COVID-19, government funding, international operations, supply chain, IT, and acquisitions - COVID-19 Risks: The pandemic continues to create economic and operational uncertainties, with potential for contract postponements, supply chain disruptions, and facility closures[60][61][62] - Government & Aerospace Risks: Sales to the U.S. Government accounted for 26% to 28% of revenues over the past three years, making the company susceptible to changes in government funding and program terminations[66] - International Risks: Approximately 30% of net sales in 2022 were to customers outside the U.S., exposing the company to currency fluctuations, tariffs, trade disputes, and geopolitical instability, such as the conflict in Ukraine[74][77][79] - Operational & Technology Risks: The company faces risks from IT security threats, reliance on a small number of third-party suppliers for critical components (e.g., Doble relies on one supplier for 23% of its products), and price inflation on raw materials like steel, copper, and titanium[85][86][91] - Strategic Risks: The growth strategy includes acquisitions, which carry integration risks. The company also faces challenges in retaining qualified key employees, particularly experienced engineers, due to a tight labor market[104][105][108] Unresolved Staff Comments The company reports that there are no unresolved staff comments - None[113] Properties The company's properties total approximately 1.62 million square feet, a mix of owned and leased facilities globally - The company's physical properties total approximately 1.62 million square feet, with a mix of owned (47%) and leased (53%) facilities[114] - Major facilities are located in California, Texas, Oklahoma, Massachusetts, Vermont, and Maryland, supporting all three operating segments and corporate functions[115] Legal Proceedings The company is involved in various legal proceedings, but management expects no material adverse effect on its financial condition - Management does not expect current legal proceedings to have a material adverse effect on the company's financial condition[117] Mine Safety Disclosures This item is not applicable to the company - Not applicable[117] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock (ESE) trades on the NYSE, with a performance graph comparing its 5-year return to key indices - The company's common stock (ticker: ESE) is listed on the New York Stock Exchange[120] 5-Year Cumulative Total Return Comparison | Index | 9/30/17 | 9/30/18 | 9/30/19 | 9/30/20 | 9/30/21 | 9/30/22 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | ESCO Technologies Inc. | $100.00 | $114.13 | $134.04 | $136.42 | $130.83 | $125.19 | | Russell 2000 Index | $100.00 | $115.24 | $104.99 | $105.40 | $155.66 | $119.08 | | S&P Small Cap 600 Industrials | $100.00 | $121.53 | $112.63 | $105.97 | $155.41 | $134.57 | Management's Discussion and Analysis of Financial Condition and Results of Operations The company achieved strong financial performance in FY2022, with significant sales growth, increased earnings, and robust cash flow FY 2022 Financial Highlights vs. FY 2021 (in millions) | Metric | FY 2022 | FY 2021 | | :--- | :--- | :--- | | Net Sales | $857.5M | $715.4M | | Net Earnings | $82.3M | $63.5M | | Diluted EPS (GAAP) | $3.16 | $2.42 | | Diluted EPS (As Adjusted) | $3.21 | $2.59 | | Net Cash from Operations | $135.3M | $123.1M | | Backlog | $695.0M | $592.0M | - The 19.9% increase in net sales was composed of $90 million in organic growth and approximately $52 million from recent acquisitions[148] - The company's critical accounting policies involve significant management estimates and judgments, particularly in revenue recognition for long-term contracts, income tax liabilities, and the annual impairment review of goodwill and other long-lived assets[183][184] Results of Operations Fiscal 2022 net sales increased 19.9% to $857.5 million, with all segments contributing to growth and EBIT rising 34.3% Net Sales by Segment (FY2022 vs. FY2021, in millions) | Segment | FY 2022 Sales | FY 2021 Sales | % Change | | :--- | :--- | :--- | :--- | | A&D | $351.4M | $314.8M | 11.6% | | USG | $278.4M | $202.9M | 37.2% | | Test | $227.7M | $197.7M | 15.2% | | Total | $857.5M | $715.4M | 19.9% | - New orders in 2022 were $960.5 million, resulting in a book-to-bill ratio of 1.12x, and backlog grew to $695.0 million[146][155] EBIT by Segment (FY2022 vs. FY2021, in millions) | Segment | FY 2022 EBIT | FY 2021 EBIT | % Change | | :--- | :--- | :--- | :--- | | A&D | $68.4M | $56.5M | 21.1% | | USG | $57.6M | $40.9M | 40.8% | | Test | $32.6M | $27.6M | 18.1% | | Corporate | ($47.3M) | ($42.1M) | (12.4)% | | Total | $111.3M | $82.9M | 34.3% | - The effective tax rate increased to 22.7% in 2022 from 21.3% in 2021, primarily due to higher state income tax expense and reduced research credit benefits[170] Capital Resources and Liquidity The company maintained a strong liquidity position in 2022, with net cash from operations at $135.3 million and a net debt of $55.3 million - Net cash provided by operating activities was $135.3 million in 2022, an increase from $123.1 million in 2021[175] - Net cash used in investing activities was $55.9 million, primarily for capital expenditures ($32.1 million) and capitalized software ($12.9 million). This was a significant decrease from $202.4 million in 2021, which included major acquisitions[175][177] - At September 30, 2022, the company had a net debt position of $55.3 million (total debt of $153.0 million less cash of $97.7 million)[146] - The company repurchased approximately 257,500 shares for $20.0 million and paid dividends of $0.32 per share, totaling $8.3 million in 2022[180][182] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks are interest rate and foreign currency fluctuations, managed through derivative financial instruments - Primary market risks are identified as changes in interest rates and foreign currency exchange rates[199] - The company selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks[199] Controls and Procedures Management and auditors concluded that the company's disclosure controls and internal control over financial reporting were effective - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[204] - Management concluded that the company maintained effective internal control over financial reporting as of September 30, 2022, based on the COSO framework[206] - No material changes to the company's internal control over financial reporting occurred during the fourth quarter of fiscal 2022[208] Part III Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[213] Executive Compensation Required information is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[215] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[216][217] Certain Relationships and Related Transactions, and Director Independence Required information is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[218] Principal Accountant Fees and Services Required information is incorporated by reference from the 2022 Proxy Statement - Required information is incorporated by reference from the 2022 Proxy Statement[219] Part IV Exhibits, Financial Statement Schedules This section lists the financial statements, schedules, and various exhibits filed as part of the Form 10-K report - The Consolidated Financial Statements and the Report of Independent Registered Public Accounting Firm are included in the report[222] - A comprehensive list of exhibits is provided, including the company's Restated Articles of Incorporation, Bylaws, Credit Agreement, and various employee and director compensation plans[223] Financial Information Reports of Independent Registered Public Accounting Firm Grant Thornton LLP issued unqualified opinions on FY2022 financial statements and internal controls, noting long-term contract cost estimation as a critical audit matter - Grant Thornton LLP issued an unqualified opinion on the FY2022 financial statements and the effectiveness of internal controls over financial reporting[239][240] - A critical audit matter for the FY2022 audit was the judgment required in estimating total costs at completion for long-term, fixed-price contracts in the Aerospace & Defense segment[244][246] - KPMG LLP served as the auditor from 1990 to 2021 and issued an unqualified opinion on the FY2021 and FY2020 financial statements[258][261] Consolidated Financial Statements The consolidated financial statements present the company's financial performance and position for FY2020-2022, highlighting strong FY2022 results Consolidated Statements of Operations (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net sales | $857,502 | $715,440 | $730,471 | | Earnings before income tax | $106,435 | $80,671 | $36,406 | | Net earnings from continuing operations | $82,320 | $63,496 | $22,896 | | Diluted EPS from continuing operations | $3.16 | $2.42 | $0.88 | Consolidated Balance Sheets (in thousands) | Metric | Sep 30, 2022 | Sep 30, 2021 | | :--- | :--- | :--- | | Total current assets | $572,622 | $466,154 | | Total Assets | $1,654,456 | $1,577,345 | | Total current liabilities | $318,129 | $274,995 | | Total Liabilities | $606,299 | $557,649 | | Total shareholders' equity | $1,048,157 | $1,019,696 | Consolidated Statements of Cash Flows (in thousands) | Metric | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $135,275 | $123,139 | $82,280 | | Net cash (used) by investing activities | ($55,919) | ($202,441) | $140,953 | | Net cash (used) provided by financing activities | ($32,122) | $81,473 | ($236,220) | | Net increase (decrease) in cash | $41,492 | $3,672 | ($9,248) | Notes to Consolidated Financial Statements The notes detail significant accounting policies, acquisitions, goodwill, debt, and share-based compensation, supplementing the financial statements - Revenue Recognition: Approximately 60% of A&D revenue and 75% of Test revenue is recognized over time, using cost-to-cost and milestone output methods, respectively. This requires significant judgment in estimating costs to completion[298][313] - Acquisitions: The company acquired NEco in FY2022 for $15.4 million, and Altanova and Phenix in FY2021 for approximately $115 million and $47.2 million, respectively. These acquisitions added significant goodwill and intangible assets, primarily in the USG segment[351][352][353] - Goodwill: As of September 30, 2022, goodwill totaled $492.7 million, with the largest portion ($348.7 million) allocated to the USG segment. No impairment was recorded in 2022[358][361] - Debt: The company has a $500 million revolving credit facility maturing in September 2024. As of September 30, 2022, total borrowings were $153.0 million, and the company was in compliance with all covenants[372][375] - Remaining Performance Obligations (Backlog): At September 30, 2022, the company had $695.0 million in remaining performance obligations, with approximately 80% expected to be recognized as revenue in the next twelve months[421]