ESCO
Annual Report 2015

Plain-text annual report

E S C O T E C H N O L O G I E S I N C . 2 0 1 5 A N N U A L R E P O R T HIGHLY ENGINEERED PRODUCTS ESCO TECHNOLOGIES DEFINED: SUSTAINABLE COMPETITIVE ADVANTAGES INCREASING SHAREHOLDER VALUE MARKET LEADERSHIP POSITIONS 2015 ANNUAL REPORT DIVERSIFICATION TO LOWER RISK IS A CORE STRATEGY Our multi-segment strategy continues to provide the resilience to withstand market challenges by maintaining lower risk through diversification of both products and end-markets. 2015 SALES: $537.3M FILTRATION/FLUID FLOW: $236.1M 44% RF SHIELDING & TEST: $177.6M 33% UTILITY SOLUTIONS: $123.6M 23% 2015 EBIT: $85.7M* FILTRATION/FLUID FLOW: $46.6M 54% RF SHIELDING & TEST: $9.5M 11% UTILITY SOLUTIONS: $29.6M 35% *Excludes $23.4 million of Corporate Costs. ESCO IS A DIVERSIFIED MANUFACTURER ESCO TECHNOLOGIES AT A GLANCE ESCO Technologies manufactures highly engineered filtration products for the aviation, space and process markets worldwide and is the industry leader in RF shielding and EMC test products. We also provide diagnostic instruments, services and the premier library of statistically significant apparatus test results in support of the electric power grid. OF HIGHLY ENGINEERED PRODUCTS SERVING A NUMBER OF END MARKETS, BUSINESS SEGMENT OVERVIEW FILTRATION/FLUID FLOW Our Filtration/Fluid Flow companies provide innovative solutions essential to the aerospace, space, defense and industrial markets. The combined technical capabilities and resources of Crissair, Inc., PTI Technologies Inc. and VACCO Industries enable us to provide highly engineered fluid control solutions for mission critical systems. WE HOLD MARKET LEADING POSITIONS RF SHIELDING & TEST UTILITY SOLUTIONS ETS Lindgen Inc. provides a broad and global customer base with highly engineered components, chambers and test and measurement systems that allow customers to perform sophisticated tests to ensure their products operate as intended and don’t interfere with other electronic devices while complying with regulatory and industry-defined standards. Doble Engineering Company is a global market leader in the electric power industry, offering solutions and services to minimize risk, improve operations and optimize electric power infrastructure performance. Doble provides a comprehensive portfolio that includes industry-leading diagnostic equipment, intelligent software, advanced services, comprehensive support and professional training. productsOF HIGHLY ENGINEERED PRODUCTS SERVING A NUMBER OF END MARKETS, MAJOR BRANDS PRODUCTS/SERVICES MAJOR END MARKETS • Aerospace • Space • Navy • Industrial • Healthcare • Healthcare • Consumer Electronics • Wireless • Automotive • Aerospace • Government/Security • Acoustics • Domestic and International Electric Utilities • Manifolds/Reservoirs • Filters/Modules • Valves/Regulators • Actuators/Indicators • Micro-Propulsion Systems • Satellite Components • Refueling Mechanisms • Thermoformed Products • Large Test Chambers/Systems • Test Enclosures • Shielded Rooms • Absorber • Antennas/Accessories • EMP/HEMP/IEMI Shielding • Amplifiers • Asset Diagnostic Testing Equipment & Software • On-Line Monitoring & Analysis • Grid Intelligence Applications • Predictive Failure Assessment • Knowledgebase Resource Library • Independent Consulting & Testing Services • Forensic/Failure Analysis • Laboratory Services • Technical Conferences & Training marketsproductsNEW PLATFORM WINS IN COMMERCIAL AEROSPACE LIFT FILTRATION PROSPECTS Future growth in the Filtration/Fluid Flow segment has been enhanced through a number of significant new program wins across the commercial and military aerospace, space launch, commercial satellite and Navy defense markets. See page 7. EXPANDING INTERNATIONAL MARKET OPPORTUNITIES Building upon the success of recent large Doble services contract awards in the Middle East, additional international opportunities exist as the demand for utilities to develop or enhance their asset management initiatives grows. See page 8. WITH STRONG GROWTH PROSPECTS AND NEW SOLUTIONS With a significant expansion of its product portfolio, Doble is now offering advanced monitoring and testing diagnostic solutions through its asset risk management systems and field force automation solutions. PROLIFERATION OF WIRELESS DEVICES From the Internet of Things to autonomous vehicles, wireless connectivity is becoming increasingly important worldwide. ETS-Lindgren provides global turnkey solutions that allow wireless device manufacturers and service providers to test any type of wireless device to ensure inter-operability. 1 growthprospectsNEW ORDERS IN MILLIONS ENDING BACKLOG IN MILLIONS $561.9 $327.5 ORDERS AND BACKLOG Backlog has grown approximately 40% $457.4 2015 BOOK-TO-BILL RATIO 1.05x over the past 5 years, consistently driven by an annual book-to-bill greater than 1.0. Significant 2015 orders included additional power grid reliability services in the Middle East, commercial aerospace (A-350) platform content, and a large automotive test chamber in China. $242.7 15 14 13 12 11 15 14 13 12 11 INTERNATIONALLY RECURRING REVENUES % OF TOTAL SALES PROPRIETARY PRODUCTS % OF TOTAL SALES RECURRING BY BUSINESS SEGMENT PROPRIETARY 76% FILTRATION/FLUID FLOW 63% 45% 5% RF SHIELDING & TEST 25% 47% OTHER COMPETITIVE 45% UTILITY SOLUTIONS 49% The proprietary nature of our highly engineered, technology driven products and services results in sustainable market leading positions across a diverse group of end markets. New platform wins in aerospace and Doble’s proven products and services continue to result in significant recurring revenue. 2 advantagessustainableSUSTAINABLE COMPETITIVE ADVANTAGES, GLOBAL FOOTPRINT With operations in 27 locations around the world, ESCO serves markets in more than 80 countries on six continents. ESCO OPERATIONS AN ABILTY TO EXPAND INTERNATIONALLY GEOGRAPHIC NET SALES % OF TOTAL SALES 72% UNITED STATES 14% ASIA 9% EUROPE 5% ROW In 2015, international sales were 28% of total revenue ($152 million) with significant end-market content in the United Kingdom, Saudi Arabia, China, Japan and South Korea. 3 28% International sales in 2015 Total revenue from international sales in 2015 $152M global9.0% CAGR $537.3 9.9% CAGR $85.7 $350.0 $53.6 AND A HISTORY OF PROFITABLE GROWTH. 2011 2010 NET SALES IN MILLIONS 2015 2014 2013 2012 2015 2014 2013 2012 2011 2010 EBIT* IN MILLIONS *Excludes Corporate Costs IDENTIFIABLE AND TANGIBLE SOURCES OF FUTURE EBITDA EXPANSION Defined opportunities exist to expand operating margins across all three business segments. New platforms in Filtration related to the growth cycle in the global aerospace industry; momentum at Doble in its international markets as well as with new products and services; facility consolidation actions at Test; and, the continued pursuit of strategically significant acquisitions have us well positioned to achieve profitable and sustainable long-term growth. 4 profitableLETTER TO SHAREHOLDERS BUT THAT’S ONLY PART OF OUR STORY. DEAR SHAREHOLDERS: Our corporate strategy is centered on a multi-segment approach designed to enhance the sustainability of sales and earnings growth by mitigating risk through end-market diversification. Since our inception 25 years ago, we have remained focused on generating consistent and predictable growth though the continued innovation of our highly engineered products and solutions, and the expansion of our global footprint. We operate in healthy, diverse and growing end-markets that include the aerospace, space, healthcare, wireless and electric utility industries. Essentially debt free, we continue to pursue selective acquisitions to supplement organic growth. We remain confident that we are well positioned to execute on our clearly defined strategies and to deliver profitable long-term growth. 5 LETTER TO SHAREHOLDERS C O NTI N U ED FINANCIAL RESULTS 2015 was a year of solid financial performance despite FILTRATION/FLUID FLOW PTI, VACCO and Crissair supply highly engineered fluid control the softness we experienced in the shielding market within products to the aerospace, space, Navy and industrial markets. Test. Sales, EBIT and EBIT margins increased in both the TEQ produces custom thermoformed products and packaging Filtration/Fluid Flow and Utility Solutions segments, driven materials for high-end medical, retail and electronic applications. by the current aerospace upcycle and initial production ramp EBIT margins in Filtration increased to 20 percent in on recent new platform wins, combined with Doble’s new 2015 driven by the increase in commercial aerospace sales product offerings and international growth. and the favorable operating leverage resulting from Crissair’s We recently announced several significant and facility consolidation in 2014. aggressive cost reduction actions in Test intended to In addition to the A350, several other recent contract meaningfully enhance our ability to achieve our previously wins are supporting our future growth. As the new awards stated goals. These specific and sustainable measures move into production, we will be expanding our hydraulic were initiated to increase operational efficiency, improve systems, components and valve assemblies delivered profitability, and increase our returns in 2016 and beyond. on numerous aircraft platforms covering a full range of Strong orders and solid cash flow were again a commercial, regional and business jets. These programs are bright spot during 2015, as our ending backlog increased the result of the industry’s need for improved fuel efficiency, $25 million, or 8 percent, supporting our current growth appropriate aircraft utilization and overall fleet modernization. outlook. Generating $65 million in cash from operating As these programs reach full production over the next few activities in 2015, along with minimal debt, supports our years, they will continue to drive revenue and earnings growth. ability to pursue acquisitions and return cash to shareholders VACCO achieved several significant developments in in support of our stated capital allocation plan. 2015 including the delivery of the first of many critical BUSINESS SEGMENTS ESCO is comprised of three business segments — Filtration/ flight components for NASA’s Space Launch System (SLS) program. Additionally, they captured new program wins for a next-generation European satellite platform, and the first interplanetary satellite propulsion system supporting the Fluid Flow (Filtration), RF Shielding & Test (Test) and Utility exploration of Mars. Solutions (USG, or Doble). Each segment provides highly TEQ’s performance in 2015 was at a record level and engineered products, stable market-leading positions, with a included the cumulative milestone of five billion thermometer clear focus on generating profitable and sustainable growth. probe covers delivered to date defect-free. MANAGEMENT INTERESTS ALIGNED WITH SHAREHOLDERS From left to right: Alyson S. Barclay, Senior Vice President, Secretary and General Counsel; Victor L. Richey, Chairman, Chief Executive Officer and President; and Gary E. Muenster, Executive Vice President and Chief Financial Officer. 6 NEW AEROSPACE PLATFORM WINS LIFT FILTRATION PROSPECTS AND VALIDATE OUR STRATEGY From multi-component manifolds and complex valves to highly engineered fluid control systems, our products are utilized across the aerospace, space launch, commercial satellite and Navy defense markets. As production increases on new programs, Crissair, PTI and VACCO have solidified their future growth. By continuing to build upon diverse solution-oriented technologies, our Filtration/ Fluid Flow segment is fully entrenched with a pioneering footprint in the new wave of industry advancements and is well positioned as an essential component provider well into the future. ABOVE INDUSTRY- AVERAGE TOP LINE GROWTH PROSPECTS IN FILTRATION/FLUID FLOW 7 INTERNATIONAL EXPANSION OPPORTUNITIES: FOCUSING ON LARGE NATIONAL UTILITIES IN SAUDI ARABIA, MEXICO AND SOUTH AFRICA National utilities, such as those in Saudi Arabia, Mexico and South Africa, have the immense responsibility of providing reliable electricity to their entire country. Consulting and testing services are gaining momentum with these large- scale organizations as they need to understand the condition of their aging assets, focus maintenance resources where they are needed, plan for strategic spares, and continue to expand their power grids. These customers turn to Doble for its unique offering of diagnostic products, services and SAUDI ARABIA SOUTH AFRICA technical training. Doble’s depth and breadth of expertise allows companies to invest in these practical solutions that impact MEXICO daily decisions and long-term asset management initiatives. WE ARE COMMITTED TO INVESTMENT IN NEW PRODUCTS, SERVICES AND SOLUTIONS. 8 m o k s E f o y s e t r u o C LETTER TO SHAREHOLDERS C O NTI N U ED RF SHIELDING & TEST This purchase of test sets and accompanying software is a Test’s products are utilized in a variety of electronic significant step towards establishing a stronger foothold in applications to help improve the performance of wireless and the European market. other electronic devices, to ensure products meet regulatory Doble’s consulting and testing services continue to gain standards, and to protect sensitive equipment and data from momentum in the Middle East, evidenced by the renewal of interference by providing innovative test and measurement its transformer asset health review contract with National products, solutions and shielded enclosures to a diverse Grid Saudi Arabia. group of end-markets worldwide. Approximately 50 percent As organizations implement asset management of Test’s 2015 sales were to international customers, initiatives globally, Doble is positioned to provide the training, primarily in Asia and Europe. analytical support and diagnostic products that define a Test was negatively impacted by the overall softness in the comprehensive asset health and risk assessment program. global shielding markets and adjustments recorded throughout the year to write-down certain inventories. In response to these challenges, specific restructuring actions were implemented which are intended to create a more efficient, less complex, lower INCREASING SHAREHOLDER VALUE Our stated goals are to achieve annual sales growth of 10 cost operating structure yielding significantly higher margins. percent and EPS growth of 15 percent, with 80 percent UTILITY SOLUTIONS GROUP being organic. The current outlook, supplemented by our defined cost reductions and ongoing share repurchases, Doble has been supporting the electric power industry provide significant momentum toward achieving our goals. for nearly a century by providing diagnostic instruments, With the strength of our balance sheet, we have the ability consulting and testing services, and solutions that provide to selectively pursue acquisitions, with the targets ideally actionable intelligence to help ensure asset health offering highly-engineered, technology-driven products and and reliability. services with strong competitive positions in niche markets. Doble’s growth is driven by the introduction of new We remain committed to our capital allocation strategy products, solutions and services, combined with the extension which includes returning cash to shareholders through of its geographic reach and the addition of ENOSERV. dividends and opportunistic share repurchases. In 2015, Doble recently delivered its first field-force automation we returned $27 million to shareholders, which included program which combines rugged controllers, testing software, repurchasing 520,000 shares of stock. cloud-technology, custom engineering and data management We are well positioned to deliver meaningful revenue processes intended to help customers simplify testing, growth and margin expansion through our multi-segment automate data processes, improve efficiency and streamline approach which continues to mitigate risk through business practices from the field to the office. diversification. We are confident in our ability to execute Supporting the industry’s move towards data our strategy and deliver profitable long-term growth. consolidation, intelligent analytics and condition-based On behalf of our management team and our Board of maintenance programs, Doble secured its first contract for its dobleARMS™ asset risk management program in 2015. Doble also expanded its core product line with the M7100 High Voltage Asset Analyzer which is an industry- changing diagnostic instrument automating a number of complex tests that previously required multiple instruments, Directors, we would like to sincerely thank our shareholders and employees for their continuing support. thereby allowing companies to reduce safety risk and to Vic Richey Gary Muenster complete the required testing in one third of the time. Chairman, Chief Executive Executive Vice President Doble’s industry standard M4100 insulation analyzer Officer & President & Chief Financial Officer was selected by a major transmission company in France as a cornerstone of its transformer fleet maintenance program. November 30, 2015 9 FIVE-YEAR FINANCIAL SUMMARY (Dollars in millions, except per share amounts) 2015 2014 2013 2012 2011 For years ended September 30: Net sales Net earnings from continuing operations Net (loss) earnings from discontinued operations Net earnings (loss) Earnings (loss) per share: Basic: Continuing operations Discontinued operations Net earnings (loss) Diluted: Continuing operations Discontinued operations Net earnings (loss) As of September 30: Working capital Total assets Total debt Shareholders’ equity Cash dividends declared per common share $537.3 531.1 490.1 478.7 450.8 41.7 0.8 42.5 $ 1.60 .03 $ 1.63 $ 1.59 .03 $ 1.62 155.0 864.2 50.0 584.2 $ 0.32 42.6 (42.2) 0.4 1.61 (1.60) 0.01 1.60 (1.58) 0.02 148.9 845.9 40.0 580.2 0.32 31.3 (56.9) (25.6) 1.18 (2.15) (0.97) 1.17 (2.13) (0.96) 34.8 12.1 46.9 1.30 0.46 1.76 1.29 0.44 1.73 37.1 15.4 52.5 1.39 0.58 1.97 1.38 0.57 1.95 163.6 1,092.3 172.0 601.7 139.2 1,033.8 115.0 631.3 122.5 1,011.8 125.0 600.7 0.32 0.32 0.32 See Note 2 to the Consolidated Financial Statements for discussion of divestiture activity. 10 ESCO TECHNOLOGIES, INC. 2015 FORM 10-K fiscal year2015SHAREHOLDERS’ SUMMARY MANAGEMENT AND BOARD OF DIRECTORS INVESTOR RELATIONS Additional investor-related information may be obtained by contacting the Director of Investor Relations at (314) 213-7277 or toll free at (888) 622-3726. Information is also available through the Company’s website at www.escotechnologies.com or via e-mail to klowrey@ escotechnologies.com. TRANSFER AGENT AND REGISTRAR Shareholder inquiries concerning lost certificates, transfer of shares or address changes should be directed to: Computershare Shareholder Services P.O. Box 30170 College Station, TX 77842-3170 (800) 368-5948 www.computershare.com/investor CAPITAL STOCK INFORMATION ESCO Technologies Inc. common stock shares (symbol ESE) are listed on the New York Stock Exchange. There were approximately 1,915 holders of record of shares of common stock at November 2, 2015. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM KPMG LLP 10 South Broadway, Suite 900 St. Louis, MO 63102 EXECUTIVE OFFICERS Victor L. Richey Chairman, Chief Executive Officer & President CORPORATE STAFF Deborah J. Boniske Vice President Human Resources Mark S. Dunger Vice President Planning & Development Gary E. Muenster Executive Vice President & Chief Financial Officer Alyson S. Barclay Senior Vice President, Secretary & General Counsel Richard A. Garretson Vice President Tax Michele A. Marren Vice President & Corporate Controller Charles J. Kretschmer Vice President David M. Schatz Vice President & Intellectual Property Counsel OPERATING EXECUTIVES Mike Alfred President Crissair, Inc. Bruce E. Butler President ETS-Lindgren LP Sam R. Chapetta Filtration Group Vice President & President PTI Technologies Inc. Randall K. Loga President Thermoform Engineered Quality LLC Antonio E. Gonzalez President VACCO Industries David B. Zabetakis President Doble Engineering Company BOARD OF DIRECTORS Vinod M. Khilnani 2 Retired Executive Chairman CTS Corporation Robert J. Phillippy 2 President & Chief Executive Officer Newport Corp. James M. Stolze 2,3 Retired Vice President & Chief Financial Officer Stereotaxis, Inc. Gary E. Muenster Executive Vice President & Chief Financial Officer Victor L. Richey 1 Chairman, Chief Executive Officer & President Leon J. Olivier 4 EVP of Enterprise Energy Strategy & Business Development Northeast Utilities Larry W. Solley 3,4 Retired Executive Vice President Emerson Electric Co. Donald C. Trauscht 1,2,3,4 (Lead Director) Chairman BW Capital Corp. SHAREHOLDERS’ ANNUAL MEETING The Annual Meeting of Shareholders of ESCO Technologies Inc. will be held at 10:30 a.m. Central Time on Thursday, February 4, 2016, at ETS Lindgren Inc., 1301 Arrow Point Drive, Cedar Park, TX 78613. You may access this Annual Report as well as the Notice of the meeting and the Proxy Statement on the Company’s Annual Meeting website at www.envisionreports.com/ese. CERTIFICATIONS Pursuant to New York Stock Exchange (NYSE) requirements, the Company submitted to the NYSE the annual certifications by the Company’s chief executive officer dated February 11, 2015 and March 11, 2014, that he was not aware of any violations by the Company of NYSE’s corporate governance listing standards. In addition, the Company filed with the Securities and Exchange Commission the certifications by the Company’s chief executive officer and chief financial officer required under Section 302 of the Sarbanes-Oxley Act of 2002 as exhibits to the Company’s Forms 10-K for its fiscal years ended September 30, 2015 and September 30, 2014. 10-K REPORT The Company’s 2015 Annual Report on Form 10-K as filed with the Securities and Exchange Commission is included in this Annual Report to Shareholders. The Form 10-K is also available on the Company’s website at www.escotechnologies.com, or a copy will be provided to shareholders without charge upon written request to Kate Lowrey, Director of Investor Relations, ESCO Technologies Inc., 9900A Clayton Road, St. Louis, MO 63124. 1 Executive Committee 2 Audit and Finance Committee 3 Human Resources and Compensation Committee 4 Nominating and Corporate Governance Committee This annual report is printed on recycled paper, made in the USA, with 10% post-consumer waste. marketsE S C O T E C H N O L O G I E S I N C . 2 0 1 5 A N N U A L R E P O R T ESCO TECHNOLOGIES INC. • 9900A Clayton Road • St. Louis, MO 63124 • www.escotechnologies.com 

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