ESCO Technologies Inc. (ESE) Q4 2020 Earnings Report, Transcript and Summary

Good day and welcome to ESCO’s Q4 Conference Call. Today’s call is being recorded. With us today are Vic Richey, Chairman and CEO; Gary Muenster, Vice President and CFO. Now, to present the forward-looking statement, I would like to turn the call over to Kate Lowrey, Director of Investor Relations. Please go ahead.

Thank you. We 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 Investors center of ESCO’s website at www.escotechnologies.com. During this call, the company may make forward-looking statements, which are inherently subject to risks and uncertainties, 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 statements 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 a reconciliation of any non-GAAP financial measures to their most comparable GAAP measures. Now, I will turn the call over to Vic.

Thanks, Katie. Before beginning with financial details for the year, I will provide a brief update on how we are working through today’s COVID environment. We have maintained a detailed monitoring of the situation sensing the change on almost daily basis. And our goal was 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, we saw the first indication of COVID’s potential economic impact on our business, we took decisive action. The actions we have taken over the past 7 or 8 months were down to clear and precise focus, which is to protect our strong financial condition to deliver products and services and support our customers all while keep our employees safe and healthy. Our solid operating results in fiscal ‘20 coupled with our strong liquidity position at September 30 demonstrated that the measures that we have taken today have allowed us to hold on our own through this unprecedented time. I am confident these actions coupled with the remaining items we are working through over the next few months will benefit us though as things begin to return to a more normal state. I am confident that our disciplined approach to operating the business will result in our continued success as we enter 2021. Just recapping fiscal ‘20, after 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 present, they needed to be done, because in the end, we ultimately shrink at our core. We are fortunate to have very experienced leadership teams across the company where we have demonstrated our ability to effectively manage cost 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 than that. 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 we replaced by alternative sources. We continue to focus on our future by continuing our investment in new products across all three segments. The fundamentals of our portfolio remains strong and our goal remains the same to create long-term shareholder value. Our employees are 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 have all demonstrated an extraordinary commitment to success to ESCO.

Thanks, Vic. I will 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 and I am extremely pleased with the record same cash flows we generated throughout the year. And I am 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 0.47. Our 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 and an impressive valuation and generated gross cash proceeds of $191 million, which resulted in an after-tax gain of $2.93 a share. The second item relates to the successful completion of our termination of the pension plan. This action removes all equity market risk and interest rate volatility. It reduces ongoing costs and eliminates future variable cash payments, which 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 will 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 am most pleased to report that we were able to deliver fiscal ‘20 adjusted EBITDA of $137 million, which is only 3% lower in 2019’s adjusted EBITDA of $141 million. We were nearly able to maintain our profitability levels despite the noted sales declines at Doble’s 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 AMD segment where we increased our navy and space sales by $41 billion partially offset by lower commercial aerospace sales due to the COVID’s impact on air travel. Commercial aerospace sales of PTI, Crissair and Mayday decreased approximately $18 million or 11% compared to prior year. The test business sales in fiscal ‘20 held up and were quite – 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 as several utility customers domestic and international realign their short-term maintenance and spending protocols to focus on uninterrupted power delivery. Maintenance deferrals also reflect various mandates restricting onsite personnel at substations, large transformers in other customer locations. USG 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 DUCe solution we are seeing strong renewals roles 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 growth included for the entire year and despite our continued spending on R&D and new product development. Entered orders were solid in fiscal ‘20 as we booked nearly $800 million of 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 V contract for additional Virginia Class submarines, drives the strength. I will remind you as we move forward into fiscal ‘21 we will be delivering products on these large multiyear programs, which will mathematically reduce the optics of our A&D 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 modest leverage ratio of 0.47 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 their 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 will turn it back over to Vic.

So since fiscal ‘20 is behind us, I think we are obvious that it is [indiscernible] in the year as my commentary and release are actually from my perspective. I will offer some qualitative comments about our end markets and I will emphasize that the situation continues to be very fluid. Let me provide you with a sense of our thinking and playing for ‘21. In September, we completed a thorough review of individual businesses to update our current expectations and the near-term impact of COVID-19 across our various operating vehicles. Starting with our A&D segment, we are receiving signs of recovery in the commercial aerospace. We expect some continued softness over the next 4 to 6 months. We are seeing some stabilization in build rates, increasing airline passenger traffic and flight miles. There are several signs of recovery emerging as quite a few air carriers are bringing some of their idle fleet back in service and the daily TSA passenger boarding numbers are increasing over 1 million per day. The defense portion of our A&D business is and will remain strong for the foreseeable future given our backlog in the platforms in which we participate. We also see the current situation in aerospace market as an opportunity for ESCO as we did with persons of ATM in October. We will continue to look at suppliers or competitors who maybe experiencing financial or operational stress, where we maybe 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 the 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 USG market to come back online both quickly as they can relax in the today’s social distancing guidelines and utility service personnel can return to their normal site visit routines. Utilities have money to spend, and I am 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 key differentiator for Doble. This will be accomplished to the live creative means and positions Doble for success. We have previously mentioned restrictions are eased. COVID-19 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 am 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 consumer feedback these products have been 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 the subsequent events section of the release in October, we acquired our small nicely profitable aerospace and defense supplier located in Valencia, California very close to our Crissair operation. The advanced technology machining and its affiliate, TECC Grinding, which we collectively refer to as ATM produces precision machined 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 and Crissair’s 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 as we enter ‘21. Our plan is to continue to focus on the fundamentals and look for opportunities to leverage our infrastructure through M&A, create additional operating efficiencies and ensure we are well positioned for long-term success. I will be glad to answer any questions you have.

[Operator Instructions] And our first question comes from a line of Tommy [indiscernible] with Stephens. Your line is now open.

Good afternoon and thanks for taking my question.

You are 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 said 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 the sufficient visibility to go ahead and make a call in the back half?

Okay. Yes, I will start with that – with the commentary, Tommy, on the numbers and then Vic can add some qualitative comments. So I will start the test that was the least impacted in ‘20. So therefore going into ‘21, we anticipate that 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 A&D side, we see two things, one, the daily passenger boardings, the stabilization of the build rates, when we are at 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 is a lot more visibility, because obviously for them to maintain a supply chain with some level of substance, they have to give some guidance. So, we have pretty good level or deep level of guidance on build rates, so that helps a portion of it. And then the anticipation of passenger miles, we just kind of form an opinion based on the trends that we have seen over the last 6 to 8 weeks and kind of extrapolated 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 TL report and things like that. And on the utility side, one more thing on the defense side, so the orders that we have booked into the Virginia Class, the percentage of completion or its cost across and as we ramp up in the first half, on the Block V, 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 as a lot more Navy business that’s really easy to predict within that scenario. So on A&D, I’d say the 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 looked at Q4, it almost bought to a tie and so if you look sequentially from Q3 to Q4 in fiscal ‘20, you see a nice rebound. We are 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 that new products, those will be coming into the market sometime in February and March. So they will benefit the back half of the year. And the most critical part of the service side is you can’t defer this maintenance forever, so they are pushing themselves around compliance structure such that they have to get something done in the field or they are going to be out of compliance with some of the things in their 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, their utilities make money by spending money. And we are 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 I think stylistically, we tend to be reasonably conservative. So we are 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 and really specific to your Doble business where there has been some softness and it sounds like you have 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 take this anecdote you can offer about the disruption?

Yes, yes. It’s truly fascinating, if you look at the utilities across the country I would say and based in us on people that I have talked to and Doble people talk to and one of our directors who retired recently from 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 they are not able to work together to put RFPs together. They are 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 it for all of our customers they are probably the ones that are working from the home the most. And again, as Gary mentioned, lot of our work is really getting out and interfacing with those people in the field. And there has been very, very little of that as this happened. I mean, we have been able to be in some of the nuclear operations, because obviously, reliability is even more important there. We have had some limited site visits, but it’s significantly different than what we have done before. As I mentioned in my prepared comments, just talking about our full 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 Doble university, if you will, and provided a lot of training and this type of thing to the customer. So we are well positioned to do that. And I think that’s going to help us in the future, because I think it’s what I personally think is going to be a while before the utilities really get back to normal. I mean, I have anecdotally talked to a few people here in town, but I know they work at large utility here and they are not sure they are ever going to go back into the office. So that’s obviously not the whole business for these specific individuals. So, it has had a pretty significant impact in these customers. Having said that, as Gary said, you kind of do that for so long. I mean, 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 as rule-making assumptions based on the information we have now, could it move a couple of months in one direction or another? Absolutely. And so we are going to have to keep a very close eye on that.

Thank you, Vic. That’s all helpful. I would like to pivot to M&A you made which you referenced several times in the release and in your remarks this afternoon. It sounds like the pipeline is pretty robust, if my questions would be any indications you would be willing to share on end-markets or again really end-markets that you are interested in currently and then just on timing and execution of deals, I could think there are some factors that might accelerate a close just year end, potential change in the tax regime with the outcome of the election. On the flipside, if you are 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 sell well. But anything you could do to help us frame up timing would be helpful as well?

Yes, it’s very difficult. I mean, obviously, it’s played out differently than I thought it was going to, honestly. I mean, I really thought that a lot of people would be hitting the eject button quicker than they are. I mean, we have been involved in a couple of opportunities and still involved and we thought people would be more reasonable about getting things done more quickly and pay in multiples that we thought were appropriate. And some of this not happened and even one of these, as you know, the business will be perhaps primarily or probably on 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 are getting into the holidays and unless you are on the 90 yard line with something, it’s probably not going to get done. I do think that people might be more concerned about tax rate and what we are seeing at least. But I feel good about the opportunities we have out there we just got to get them closed. And as I said initially, it’s playing out 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. [Operator Instructions] And our next question comes from the line of Jon Tanwanteng with CJS Securities. Your line is now open.

Hey, guys. Thank you for taking my question and really nice quarter. I think you actually had a record quarter in A&D despite the COVID headwinds, which is really impressive. You have talked before about commercial being more stable and now that being more stable than maybe most people would have expected, given where production rates are, defense is 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 have spoken about or pull-ins from the next quarter?

Well, I would just say that, Jon, on the COVID side, it’s the normal stuff, there is nothing extraordinary and I’d call it a rounding kind of number, because again there is not a whole lot of using Boeing and Airbus an example, they weren’t in any big hurry to take things. So, it’s really a challenge to try to pull things in and out of the commercial side. I would say, on the Navy side, in particular, there is some additional spending coming across in the world globe, for instance, in particular, there is three or four projects that are in the $200,000, $300,000, $400,000 range apiece that we have been negotiating RFPs on and we thought they are going to be a little bit later in the year and all of a sudden funding opened up when those came through and the beauty of those is they were non-competitive, so therefore, you get a little better margin on. So, from our expectations going into Q4, they all have exceeded their own numbers, somewhere in the neighborhood of 10% or 15% on the top line and they pulled through a very nice margin. So, everything that helps there, but I will take forward 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 that EBIT line and the cash line, because not only when you deal with the Navy, they are paying literally Day 1 when you send the invoice. So we hit on all three cylinders that we brought, 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 are 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 is back at work on the production floor. So, you had some cumulative catch-up that was previously deferred if you will, because of lack of people on the floor, but that was backwards, pulling forward instead of pulling things from the front. So, that kind of – all 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 meaningful contribution margins when they come across.

Got it. And then looking forward, you have talked about passenger miles, or TSA numbers still going up, but 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 customers as we go into the next quarter and into the January quarter as well?

Yes, that’s a possible question to answer honestly. Just we would not bake that in, I mean, we are making the assumption that things are going to continue to improve slowly. I mean, they are only going up 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 and obviously things could come back down, but it seems like people are – the number of people that are out there trying to travel or doing so, I think the airlines, that means with people [indiscernible] airplane like me, I mean, airlines are doing a great job, airlines – the airplanes have never been cleaner. I think they are really been strict about people wearing mask. And so I think once people travel once, you are probably more comfortable traveling than they were the first time. And so we have not baked that in. And it’s really hard to say what’s going to happen. I mean, I was in the call this morning about it and there is some concern about the holidays, about Thanksgiving and holidays in December and more people are probably getting together. And so there is always that risk of the numbers popping back up.

Okay, that makes sense. And it’s nice to see the NRG 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?

Yes, as we enter the year, they are down just because of COVID, but obviously, over the past two quarters, they have performed better than they thought they were going to and then we thought they were going to. So we obviously took a dip, but with COVID. And so we forecast everything and they have outperformed over the past 6 months what their revised forecast was.

Got it. But not in line with their original forecast?

No, I mean, I think they are 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 last one for me, Gary you mentioned the restructuring actually does want to get – did you mention how much do you expect to save on a run-rate basis going forward?

Yes, I would say in the A&D segment, it was primarily severance, okay, so we have some structural things, we didn’t close the facility or anything like that. And so – and that aspect of it, it’s an immediate savings, because the volume is going to go forward. And it’s we are taking out of variable costs. So across the A&D segment, I’d say that the savings benefit going forward is somewhere between $1.5 million 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 line. So, there is about $4 million 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 are going to get an inherent uptick, because there was a – that was making – those businesses weren’t very profitable. That’s why we focused. So I would say the go forward basis, across the USG side is somewhere between $5 million and $6 million on the cost – $5 million and $6 million on the cost side, but I want to caution that by saying, we really stood on cost this year in the discretionary costs, things like travel and trade shows and things like that, we know they are still going to be mitigated, but at a point in time, you are 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 new installations of ETS. So I’d say if you take that all together, it’s somewhere between $7 million and $9 million of savings and then offset by $3 million 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 can get through whatever. So net-net, I would put it in the $3 million to $5 million savings.

Got it. And just to squeeze one more bit, but based on something you said that you expect the [indiscernible] conferences into travel, but I know your Doble 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, is it going to be all virtual, and does that actually save you anything?

It will definitely be virtual. And as far as the savings, we will have a virtual conference, there will be some cost associated with it. And we don’t have our arms all around what that say it was going to be, but certainly not many hotel and bring those people. And having said that, I mean, we are still working with the hotel that is big cost and see if that’s statements were out for this year or something that will get pushed out to the end of the contract. So we are still working through that.

Okay, fair enough. Thank you.

You bet.

Thank you. And our next question comes from the line of John Franzreb with Sidoti & Company. Your line is now open.

Good afternoon, gentlemen. Thanks for taking my question. I would actually like to go back to the guidance in the first half of ‘21 relative to the first half of ‘20, but really in relationship of 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 will be looking at maybe utility relative to the September quarter to kind of bounce around, to call it the $50 million threshold, which kind of suggests a sizable step down in A&D. That’s where you posted in September and it didn’t seem like there is a lot of pull forward from your earlier comments, so you kind of walk me through how you get such a sizable dropdown in the revenue profile or I am missing something that you are telling us?

No, let me start with the submarine part of it, again, just as those Block V orders were booked in fiscal ‘20, as you started working on those programs, it’s a percentage of completion revenue model. And so you are not getting a whole lot of revenue at globe, for instance, in Q1 and Q2, because you are just incurring the cost and you are not really crossing over milestones that trigger the appropriate revenue, then when you get into midyear and you are kind of the momentum is going forward there, you are crossing over the first milestone, then the second and third milestones are a lot quicker than the first one. So, just from a optics perspective, the manufacturing is growing with the same level, but the revenue recognition on these milestones is more back half weighted. And obviously, across that back half, it’s meaningfully different meaningfully grow just the size that it’s about the $40 million, $44 million. So we are not talking $50 million moving one way or another, but the concentration in the back half versus the first half makes a meaningful contribution in the segment, VACCO, there is two pieces there, we work on the submarines there, but we also have space programs. And we are kind of at a transition point on the biggest program we have which is called the SLS, the Space Launch System, the large [indiscernible] vehicle. And so we are transitioning from a development phase into a hardware production phase. And so there is 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 is a delta first half to second half at VACCO as well. And so those two things in particular, steer, of course, a lot of the things to the back half and then that’s the stuff what I say is more predictable, because we already have it in backlog and we understand the cadence of the cost in the milestone threshold, then you take the aerospace stuff, it’s going to look similar to the back half, we are not expecting this 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 the first half compared to fiscal ‘20. And then on the utility side, it’s very similar. A lot of the things when you look at these DUCe, the cybersecurity or transient security things we have, there is a big chunk of software in there. So, you might sell them the hardware in some of these ruggedized laptops are thousands of dollars, not tens of thousands, but the software that drives those systems is really values that 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 to customers. So, that software element gets later in the year and the hardware piece is like I said $3,000, $4,000, $5,000 apiece. So that also skews the utility side to back half weighting plus the margin contribution with 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 and you just go back to the last 3 years and look at first, second, third, fourth quarter, we always have a significant drop-off in the first quarter. And it’s just we’ve been trying to figure it out for 15 years. So it’s been always that way. So, if you go back and look at the profile for the last couple of years, I think it would be very consistent with what you are seeing here. And I think the point we are really trying to make is, we are off to such a strong start in the first half of last year. So when we compare that to the first half of this year, it’s going to be a not a good comparison, but that we think we will return to more normal in the second half.

What about your thoughts about the test segment, because it seemed like you were suggesting sustainable revenue profile there. Is that the case or is there something that would cause a sizable step down in that business also in December and/or March quarter?

Yes, it’s still, if you go back and look at the segment data you are going to see the same thing. I mean, they still have a ramp from first quarter to fourth quarter. And I don’t know if it’s because it’s all the holidays that happened in the first quarter, it’s probably a good bit of it. The customers are accessible and accessible in the first quarter. But I would just encourage you go back and look at that profile. And I think you will find it to be very consistent.

Okay, fair enough. So that’s the color 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 Richey for any closing remarks.

Okay. Well, thanks to everybody and look forward to talking to you in our next call. Thank you.

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