ESCO Technologies Inc.

Good day and welcome to ESCO's Q4 conference call. Today's call is being recorded. With this today are Vic Ritchie, 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 Lowry, Director of Investor Relations. Please go ahead.

Thank you. 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 in the investor center of ESCO's website at www.escotechnologies.com. During this call, the company may make forward-looking statements which are inherently subject to risk and uncertainty, including without limitation the impact and duration of the current COVID-19 pandemic, the company's response to these evolving circumstances, 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 statement, and 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 of any non-GAAP financial measures to their most comparable GAAP measures. Now I'll turn the call over to Vic.

Thanks, Kate. Before we get into the financial details for the year, I'll provide a brief update on how we're working through today's COVID environment. We have maintained our detailed monitoring of the situation as things seem to change on an 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. As I said in the last call, when we saw the first indication of COVID's potential economic impact on our business, we took decisive action. The action we've taken over the past seven or eight months were done with a clear and precise focus, which was to protect our strong financial condition, to deliver products and services, and to support our customers, all while keeping our employees safe and healthy. Our solid operating results in fiscal 20, coupled with our strong liquidity position at September 30th, demonstrated that the measures we've taken to date have allowed us to hold our own through this unprecedented time. I'm confident that these actions, coupled with the remaining items we were working through over the next few months, will benefit ESCO as things begin to return to a more normal state. I'm confident that our disciplined approach to operating the business will result in our continued success as we enter 2021. Just recapping fiscal 20. After a thorough evaluation earlier in the year, we took action across the organization 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, as in the end, we ultimately strengthened our core. We were fortunate to have very experienced leadership teams across the company who have demonstrated their ability to effectively manage costs to meet changing market demands. And the current situation is no different. We are actively addressing the challenges of today while continuing to direct our 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 of unique and highly technical products and solutions specifically designed to meet our customers' needs. This makes it difficult for our solutions to 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 remain strong, and our goal remains the same, to create long-term shareholder value. Our employees are our most important asset, and I want to say thank you to our manufacturing employees, leadership teams, and staff around the world for their hard work and dedication, as you've all demonstrated an extraordinary commitment to 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 Vic noted, when the pandemic hit, our number one financial priority became maintaining our liquidity position, because when challenging times pop up unexpectedly, cash is king. I'm 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 of .47. A 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 and are 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 at 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. This action 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 COVID-related cost reduction actions we implemented in our AMD and USG segments to align their operating cost structure with current demand requirements. For the year, these costs resulted in a $0.24 a share charge. I'll now briefly touch on a few comparative highlights, which are laid out in detail in the release. Adjusted EPS was $0.90 a share in Q4 and $2.76 a share for the year, which exceeded consensus estimates. Given the backdrop of today's operating environment, I'm most pleased to report that we were able to deliver fiscal 20 adjusted EBITDA of $137 million which is only 3 percent lower than 2019's 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&D segment, where we increased our Navy and space sales by $41 million, partially offset by lower commercial aerospace sales due to the COVID's impact on air travel. Commercial aerospace sales at PTI, Chris Air, and Mayday decreased approximately $18 million, or 11%, compared to prior year. The test business sales in fiscal 20 held up and were flat compared to 2019, despite some timing delays on certain installation projects due to COVID. Strong chamber sales and very solid project execution allowed the test business to deliver an all-time high EBIT margin of 14.6%. USG sales were down, consistent with our past commentary, As a result of the deferrals of various project deliverables, several utility customers, domestic and international, realigned their short-term maintenance and spending protocols to focus on uninterrupted power delivery. Maintenance deferrals also reflect various mandates restricting on-site personnel at substations, large transformers, and other customer locations. Q4 sales reflected a partial rebound as sales were $53 million, compared to a similar number, $54 million, in Q4 of 2019. USG's order bookings were $201 million and reflect an increase of additional cybersecurity-related orders, including Doble's Duck E solution, we're seeing strongly nulls, as well as new customer procurements. As mentioned earlier, We took decisive action when we saw the downturn in our outlook. And our SG&A reduction of $3 million in fiscal 20 is evidence of that agility. This reduction was achieved despite having Globe 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 DOD business, led by our participation on the Block 5 contract for additional Virginia-class submarines, drives this strength. I'll remind you as we move forward into fiscal 21, we will be delivering products on these large, multi-year programs, which will mathematically reduce the optics of our A&V book-to-bill in fiscal 21. On the liquidity side, we generated $109 million 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 47.47, 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, which makes it difficult to predict how our near-term operations will be affected using our normal forecasting methodologies. And as a result of 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 that point to a solid outlook for the back half of 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 more normal buying patterns. Given how strong the first half of fiscal 20 was pre-COVID, we expect the first half of fiscal 21 to be slightly down comparatively. The current outlook for the second half of 21 is expected to be favorable in comparison to the second half of fiscal 20, given the various elements of recovery that we are seeing and 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'll turn it back over to Vic.

So since fiscal 20 is behind us, and I think we're all grateful that it is, I won't spend much time recapping the year as my commentary and release captures my perspective. I will offer some qualitative comments about our end markets, and I will emphasize the situation continues to be very fluid. I want to provide you with a 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 COVID-19 across our various operating units. Starting with the Air A&D segment, while we're seeing signs of recovery in commercial aerospace, we expect some continued softness over the next four to six months. We're seeing some stabilization in OEM build rates and increasing airline passenger traffic and flight miles. There are several signs of recovery emerging as quite a few air carriers are bringing some idle fleet back into service, and the daily TSA passenger boarding numbers are increasing over a million per day. The defense portion of our A&D business is and will remain strong for the foreseeable future, given our backlog and the platforms on which we participate. We also see the current situation in the aerospace market as an opportunity for ESCO, as we did with the purchase of ATM in October. We will continue to look at suppliers or competitors who may be experiencing financial or operational stress, where we may be able to provide assistance via partnering or through an acquisition at a reasonable price. Our test business is expected to remain solid, given the strength of its served markets, including 5G and related communication technologies, and the increasing need for RF shielding in general. as more electronic and electromagnetic noise is created as a result of emerging technologies. We expect USG's customer spending softness to continue for the next few quarters before returning to more normal levels. Once a credible vaccine is in the market, we expect the USG market to come back online more quickly as they can relax from today's social distancing guidelines and utility service personnel can return to their normal site visit routines. Utilities do have money to spend, and I'm certain that spending on test equipment will return in the near future, as maintenance spending cannot be delayed indefinitely without creating significant risk to grid safety, efficiency, or 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 Doble. This has been accomplished through a lot of creative means and positions Doble for success when the previously mentioned restrictions are eased. COVID 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 the utility's aging infrastructure is not reduced by this pandemic. I'm really pleased with USG's pipeline of new products and solutions, especially related to cybersecurity and related asset-hardening solutions. We have several new solutions that have been introduced recently, and based on customer feedback, these products are being enthusiastically received. With regards to NRG and our renewable energy offerings, their end markets are recovering more quickly as investments in renewable energy are increasing 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, and 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 to our Chris Air operation. Advanced Technology Machining and its affiliate, TECC Grinding, which we collectively refer to as ATM, produces precision machine metal parts which are custom designed and are widely used on defense and commercial aircraft as well as on missile and tank programs. Our plan is to consolidate ATM into Chris Ayers' facility sometime within the next 12 months, which will further improve their contribution margin. So to wrap up, I think we delivered a solid 2020, and as we enter 21, our plan is to 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're well positioned for long-term success. I'll be glad to answer any questions you have.

Ladies and gentlemen, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, please press the pound key. Please stand by while we compile the Q&A roster. And our first question comes from the line of Tommy Mall with Stevens. Your line is now open.

Good afternoon, and thanks for taking my questions.

You're welcome.

I wanted to start with the directional commentary you gave for next year, particularly in the second half where it sounds like things, at least as you sit today, look like they ought to be up versus 2020. What end markets or businesses or segments could you call out as drivers of that, let's call it optimistic outlook, and what are some things you can point to that give you sufficient visibility to go ahead and make a call in the back half.

Okay. Yeah, I'll start with that, with the commentary, Tommy, on the numbers, and then Vic can add some qualitative comments. Let's start with the test business. That was the least impacted in 20, so therefore going into 21, we anticipate it will be the least impacted, so that one really isn't a contributing factor to the growth we see, so let's just set that one aside. On the AMD side, we see two things. One, you know, the daily passenger boardings, the stabilization of the build rates, When we were in the back half of 20, there was so much uncertainty. Boeing and Airbus were freezing lines, shutting things down, this and that. So it was a crapshoot trying to guess what build rates were and passenger miles were in the tank. And so now there's 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 a pretty good level or deep level of guidance on build rates, so that helps a portion of it. And then the anticipation of passenger miles, you know, 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 extrapolate it as we go forward. And that's consistent with a lot of the things that we see in the consulting literature, whether it's airline monitor and the TEAL report and things like that. But I'd say that on the utility side, one more thing on the defense side. So the orders that we booked into the Virginia class, You know, their percentage of completion where, you know, it's cost to cost. And as we ramp up in the first half on the Block 5, 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 predict, you know, within that scenario. So on A and D, 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 of going forward of TSA boardings. On the utility side, as we look at Q4, we almost fought to a tie. And so if you look sequentially from Q3 to Q4 in fiscal 20, you see a nice rebound. We're not declaring victory on that part, but we think that based on RFPs we have in front of us, based on things that Vic mentioned on new products, You know, those will be coming into the market sometime in February, March, so they'll benefit the back half of the year. And the most critical point on the service side is you can't defer this maintenance forever. You know, so they're pushing themselves around a compliance structure such that they have to get something done in the field or they're going to be out of compliance with some of the things and 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 mere fact that they have to spend money. You know, the utilities make money by spending money, and we're seeing that through the evidence of RFPs. The other thing that's important from an EPS side is these cost actions that we took, especially in the USG side, 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 fixed costs are gone and the variable costs are better aligned with the revenue. And so that's what gives us confidence. And then I think stylistically, you know, we tend to be reasonably conservative, so we're not stretching ourselves outside the realm of reasonableness. So that was a relatively short answer for you.

And all very helpful. Thanks, Gary. Maybe just a follow-up on the utility commentary you offered earlier. and really specific to your double business where there's been some 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, just any anecdotes you can offer about the disruptions.

Yeah, you know, it's really fascinating. If you look at the utilities across the country, I would say, and based on this on people that I've talked to and people I've talked to and one of our directors who retired recently from the utility industry, I'd say 95% of their employees are working from home still. And that makes it difficult. I mean, it's difficult because, you know, they're They're not able to work together to put RFPs together. They're not able to get out in the field. And so I would say that the conservative nature of the utilities, and the utilities are just conservative by nature, and that's good because you need to be conservative to generate electricity and deliver that. But I would say for all of our customers, they're 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 interfacing with those people in the field. And there's been very, very little of that that's happened. I mean, we've been able to be in some of the nuclear operations because obviously reliability is even more important there. We've had some limited site visits, but it's significantly different than what we've done before. As I mentioned in my prepared comments, just talking about our field service engineers, interfacing with the people. I mean, that really has been key. And we had already, prior to this, started doing like an online, you know, for a double university, if you will, and providing a lot of training and the type of thing to the customer. So we were well positioned to do that, and I think that's going to help us in the future. I think it's good. I personally think it's going to be a while before utilities really get back to normal. I mean, I have anecdotally talked to a few people here in town that work at a large utility here, and they're not sure they're ever going to go back into the office. Now, that's obviously not the whole business, but these specific individuals. So it has had a pretty significant impact on these customers. Having said that, as Gary said, you can only 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, just to add to the first question you asked, You know, we're making assumptions based on the information we have now. Could it move a couple months in one direction or another? Absolutely. And so we're going to have to keep a very close eye on that.

Thank you, Vic. That's all helpful. If I could pivot to M&A, which you referenced several times in the release and in your remarks this afternoon. It 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, yeah, really end markets that you're interested in currently. And then just on timing and execution of deals, I could think through some factors that might accelerate a 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 recent earnings power of a potential acquisition candidate, there could probably be some messiness 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 frame up timing would be helpful as well.

Yeah, it's very difficult, and 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 hitting the eject button quicker than they are. I mean, we've been involved in a couple of opportunities and still involved in them where we thought people would be, you know, more reasonable about getting things done more quickly and paying multiples that we thought were appropriate. And some of that's not happening. You know, a lot of these, as you know, the businesses we buy primarily are, privately owned businesses, and that's 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 the end of the year is difficult, just because we're heading into the holidays, and unless you're on the 90-yard line with something, it's probably not going to get done. I did think that people might be more concerned about this tax rate than what we're seeing, at least. But I feel good about the opportunities we have out there. We've just got to get them closed. And as I said initially, it's playing out a little bit differently than I thought it would. I thought there would be more people wanting to move more quickly to get this behind them.

Thank you both. I will turn it back. Thank you.

Thank you. And, again, ladies and gentlemen, if you would like to ask a question, that is star 1 on your touchtone telephone. And our next question comes from the line of John Tanwanting with CJ Securities. Your line is now open.

Hey, guys. Thank you for taking my question. Really nice quarter. I think you actually had a record quarter in A&D despite the COVID headwinds, which is really impressive. You've talked before about commercial being more stable and now being more stable than maybe most people would have expected. given where, you know, production rates are. Defense was great. I get that. Was there anything else in there that maybe helped the quarter, maybe share gain of parts you hadn't made before, which you've spoken about, or pull-ins from the next quarter?

Well, I'll address the last half of that, John. On the pull-in side, you know, it's the normal stuff. There's nothing extraordinary. I'd call it a rounding kind of number, you know, because, again, there's not a whole lot of, you know, Using Boeing and Airbus as an example, they weren't in any big hurry to take things, so it's really a challenge to try to pull things in out of the commercial side. I'd say on the Navy side in particular, there's some additional spending coming across in the way of Globe, for instance, in particular. There's three or four projects that are in the $200,000, $300,000, $400,000 range apiece that we had been negotiating RFPs on, and we thought they were going to be a little bit later in the year, and all of a sudden funding opened up and those came through. And the beauty of those is they were noncompetitive, so therefore you get a little better margin on it. So, you know, from our expectations going into Q4, you know, Globe exceeded their own numbers, you know, somewhere in the neighborhood of 10 or 15 percent on the top line, and it pulled through a really nice margin. So, you know, everything that helps there, but I'll concur with your assessment that Q4 out of the A&D group was extraordinary. I mean, relative to our own expectations, we beat the top line in the EBIT line and the cash line because not only when you're dealing with the Navy, they're paying literally day one when you send the invoice. So we hit on all three cylinders of that regard. But I wouldn't characterize anything as pull-ins. We had some past due things, obviously, earlier in the year when COVID hit. You can work from home if you're an engineer or a finance guy or woman, but you can't build Navy products in your basement, unless you shouldn't be. And so we had some delays and disruptions, if you will, from absence of staff. And obviously, for the most part, everybody's back at work on the production floor, so you had some cumulative catch-up that was previously deferred, if you will, because of a lack of people on the floor. But you know, that was backwards pulling forward instead of, you know, pulling things, you know, from the front. So that kind of, you know, kind of came together. So I would say that the catch-up on past due things from earlier in the year came to completion in Q4. And those kind of things also provide, you know, meaningful contribution margins as they come across.

Got it. And then, you know, looking forward, you've talked about, you know, passenger miles or TSAs. numbers still going up. Are you afraid that might come back down just given the amount of COVID cases here in the U.S. that are just ramping and also globally? Is there another shoe to drop on the commercial side as we go into the next quarter and into the January quarter as well?

Yeah, that's a possible question to answer, honestly. We've not baked that in. I mean, we're making the assumption that things are going to continue to improve slowly. I mean, they're only going up. you know, a couple of percentages a week. And so our assumption is that's going to happen. And so it's really hard to tell if that's going to happen or not. I mean, if the cases continue to go up, then obviously things could come back down. But it seems like people are, you know, the number of people that are out there trying to travel are doing so. And I think the airlines, I mean, for people who have been on an airplane like me, I mean, I Airlines are doing a great job. The airplanes have never been cleaner. I think they have really been strict about people wearing masks. So I think once people travel once, they're probably more comfortable traveling than they were the first time. So we've not baked that in. It's really hard to say what's going to happen. I mean, I was on a call this morning about it, and there is some concern about the holidays, about Thanksgiving and holidays in December and more people. always at risk of the numbers popping back up.

Okay, that makes sense. And it's nice to see the energy business continue to pick up. I was wondering how much better are the wind and solar businesses performing relative to where you thought they were going to be as you enter the year?

Well, as we enter the year, they're down just because of COVID. But I would say over the past two quarters, they have performed better than they thought they were going to and that we thought they were going to. So we obviously took a dip, but with COVID, and so we forecast everything, and they've outperformed over the past six months what their revised forecast was.

Got it, but not in line with their original forecast.

No, I mean, I think they're still somewhat below where they were going into the year, but it's better than what we anticipated in the second half.

Okay, got it. And then just a last one from me. Gary, you mentioned the restructuring actions. I was wondering, did you mention how much do you expect to save on a run rate basis going forward?

Yeah, I would say, you know, in the A&D segment, you know, it was primarily severance, okay? So 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 is going to go forward, and we're taking out a variable cost. So across the A&D segment, I'd say the savings benefit going forward is somewhere between $1.5 and $2 million. And then on the USG side, it was a lot more structural. So as you guys are building your model, it includes shutting down some product lines. So there's about $4 to $6 million of sales that happened in 2020 that will not go forward because we either divested the business or shut it down or realigned it, however you want to define it. And so the absence of that, you're going to get an inherent uptick because those businesses weren't very profitable. That's why we refocused. So I'd say the go-forward basis across the USG side is somewhere between $5 and $6 million on the cost side. But I want to caution that by saying we really stood on cost this year. And the discretionary cost, things like travel and trade shows and things like that. We know they're still going to be mitigated, but at a point in time, you're going to see increases in our SG&A compared to the back half of 20, because we do have to travel. We do have to continue to get out and do installations at ETS. So I'd say if you take that all together, it's somewhere between $7 and $9 million of savings, then offset by $3 or $4 million of additional costs that were stood on in 20, like travel, Obviously, discretionary spending, we deferred compensation for people into 21 so we could get through or whatever. So net-net, I'd put it in the $3 million to $5 million savings.

Got it. And just to squeeze on more, based on something you said there, you expect to attend conferences and do travel, but I know your double conference is a pretty big expense, and you kind of lose a week of sales every year when you do it. Are you planning to do that again this year, or is it going to be all virtual, and does that actually save you anything?

It will definitely be virtual, and, you know, as far as the savings, you know, we'll have a virtual conference, so there will be some costs associated with it, and we don't have our arms totally around what that savings is going to be, but certainly not running a hotel out and bringing all those people in. Having said that, I mean, we're still working with the hotel because it is a big cost, and see if that savings we're going to have for this year is something that will get pushed out to the end of the contract. So we're still working through that. Okay, fair enough. Thank you.

Thank you. And our next question comes from the line of John Sfransrup with Sidoti & 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 of 21 relative to the first half of 20, but really in relationship to how the September quarter finished. Because it sounds like to me, if I understand you properly, that the test business seems to come back and stabilize. You're looking at maybe utility relative to the September quarter to kind of bounce around, call it the $50 million threshold, which kind of suggests a sizable step down in A and D versus what you posted in September. And it didn't seem like there was a lot of pull forward from your earlier comments. So you kind of walked me through. How do you get such a sizeable drop down in the revenue profile? Or am I missing something that you're telling us?

Let me start with the submarine part of it. Again, just as those block five orders were booked in fiscal 20, as you start working on those programs, it's a percentage of completion revenue model. And so you're not getting a whole lot of revenue. at Globe, for instance, in a Q1 and a Q2 because you're just incurring the cost and you're not really crossing over milestones that trigger the appropriate revenue. Then when you get into mid-year and the momentum is going full bore there, you're crossing over the first milestone and the second and third milestones are a lot quicker than the first one. From an optics perspective, the manufacturing is going at the same level, but the revenue recognition on these milestones is more back half weighted. Obviously, from across that back half, it's meaningfully different. Meaningfully, a globe just the size of it is about $40, $44 million. We're not talking $50 million moving one way or another, but The concentration of their back half versus their first half makes a meaningful contribution. The same with VACO. 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, you know, 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 gap in the first half of the year as you wind down the development and then you wind up the production hardware. So there's a delta first half to second half at backhoe as well. And so those two things in particular steer or push a lot of the things to the back half. And then that's the stuff that I say is more predictable because we already have it in backlog. and we understand the cadence of the cost and the milestone thresholds. Then you take the aerospace stuff, it's going to look similar to the back half. We're not expecting a big uptick in Q1, so that's kind of stable in the first half, and then the momentum we talked about picks up a little bit. So when you take all of those elements, you get a meaningful delta in the back half versus versus the first half, compared to fiscal 20. And then on the utility side, it's very similar. You know, a lot of the things, when you look at these DUC-E, the cybersecurity or transient security things we have, there's a big chunk of software in there. So you might sell them the hardware, and some of these ruggedized laptops are thousands of dollars, not tens of thousands. But the software that drives those systems is where the value is at. And you really don't recognize the revenue on the software elements of that until you actually get the system put in or sold or subscribed at the customer. So that software element hits later in the year. The hardware piece is, like I said, $3,000, $4,000, $5,000 a piece. So that also skews the utility side to back cap weighting, plus the margin contribution on software is meaningfully higher than it is on hardware.

John, I think the simplest way to think about it, if you go back and look at our history, just go back to the last three years and look at first, second, third, fourth quarter, we always have a significant drop-off in the first quarter. We've been trying to figure it out for 15 years. It's always been that way. 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. I think the point we're really trying to make is, we were off to such a strong start in the first half of last year, so that when you compare that to the first half of this year, it's going to be not 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 seemed like you were suggesting a 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 December and or March quarter?

Yeah, it's still, if you go back and look at the segment, Dave, you're going to see the same thing. I mean, they still have a ramp, you know, from first quarter to fourth quarter. And I don't know if it's because it's, you know, all the holidays that happen in the first quarter is probably a good bit of it. You know, the customers aren't as accessible in the first quarter. But I would just encourage you to go back and look at that profile, and I think you'll find it to be very consistent.

Okay. All right. Fair enough. That's the call I was looking for, guys. Thank you.

Thank you. And this does conclude today's question and answer session. I would now like to turn the call back to Vic Ritchie for any closing remarks.

Okay. Well, thanks to everybody, and looking forward to talking to you in the next call. Thank you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect.