ESCO Annual Report 2009 | Quarterlytics

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FY2009 Annual Report · ESCO

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E S C O T E C h n O l O g i E S i n C .

U T i l i T y

R F S h i E l d i n g

F i l T R a T i O n /

S O l U T i O n S

& T E S T

F l U i d F l O w

2 0 0 9 A n n u A l R e p o R t

E S C O T E C h n O l O g i E S i n C .

a T a g l a n C E

Utility Solutions

RF Shielding & Test

Filtration/Fluid Flow

Within this segment,
the Aclara brand rep-
resents the industry’s
leading Intelligent
Infrastructure™ tech-
nologies for providing
device networking,
data-value manage-
ment and customer
communications to
water, gas, and elec-

The RF Shielding and
Test business is oper-
ated by ETS-Lindgren,
the industry leader in
providing customers
with innovative sys-
tems and components
for the detection,
measurement and
management of elec-
tromagnetic, mag-

As part of the
Filtration/Fluid Flow
segment, PTI Tech-
nologies and VACCO
Industries design and
manufacture highly
engineered filtra-
tion and fluid flow
products for custom-
ers participating in
the aerospace, space,

tric utilities globally.
In addition, Doble
Engineering’s world-
class fully automated
intelligent instru-
mentation provides
diagnostics, testing
and monitoring ca-
pabilities. The Utility
Solutions Group deliv-
ers utilities advanced
and proven solutions.

netic and acoustic
energy. ETS-Lindgren
serves the testing
needs of hundreds of
corporations world-
wide with solutions
that meet the highest
quality standards of
its customers, and
is well positioned to
meet new customer
demand as well.

defense and various
industrial markets.
Products include
micro-propulsion
devices, modules,
valves and regulators
for satellites; filter
elements and assem-
blies for commercial
and military aircraft,
mobile and station-
ary equipment.

T O O U R S h a R E h O l d E R S

we are pleased to report that in spite of 2009

being a year of extraordinary global economic
challenges, ESCO was able to deliver solid financial
results for our shareholders. We made significant im-
provements operationally, and showed meaningful
progress in several end-markets across the Company.
We believe ESCO’s growth and profitability over the
last several years validates our belief that we are
pursuing the right core strategies to deliver on our
steadfast commitment of increasing long-term share-
holder value.

During 2009, we recognized numerous successes

throughout the Company, including:
▶ Aclara RF sales in excess of $150 million, reflecting a

47 percent increase from 2008;

▶ Since contract inception, AMI orders for Aclara RF gas
products with PG&E totaled 3.5 million units worth
$200 million, making this project the largest gas AMI
deployment in North America;

▶ Cumulative AMI orders for Aclara RF water products
with New York City were nearly 500,000 units worth
$39 million, representing the largest water AMI proj-
ect in the United States;

▶ Continued strength in the COOP/Muni markets with
Aclara AMI orders over $100 million to these customers;
▶ Significant inroads made in the international AMI
market with continued successes demonstrated by
several additional pilot projects in Central and South
America, along with increased technology evaluation
activity in Asia where the number of metering end-
points are substantial;

▶ Several large, multi-year orders recorded in Filtra-
tion, including products for the Navy’s Virginia Class
submarine, and Thermoscan® ear thermometer probe
covers; and

▶ Completion of a $25 million aircraft test chamber in
Korea for the Boeing Corporation and substantial prog-
ress on a large automotive test chamber in India.

Generating $78 million of cash from operating ac-
tivities; paying down net debt by 34 percent; increas-
ing sales and EPS; and ending the year with a record

backlog of $300 million was a very satisfying way to
wrap up 2009.

Our financial strength, coupled with our confidence
in our long-term growth opportunities, allowed us to
initiate a cash dividend. We are pleased to return a
portion of our profits to shareholders, while main-
taining our emphasis on investing in new products to
support our growth, meeting our anticipated capital
requirements, and paying down our remaining debt.

2009 operating margins in Filtration and Test were
strong despite decreased revenues. Filtration maintained
margin percentages in the high teens and made progress
on several key projects benefiting the future, including
the A-350 aircraft hydraulic filtration system for Airbus,
and Project Constellation, which is NASA’s planned Space
Shuttle replacement vehicle. Test was able to increase
its margin on lower sales during 2009 due to its superior
product and technology platforms, global presence, and
attention to managing operating costs.

The Utility Solutions Group continued to make sig-
nificant cash and profit contributions during 2009.
While Doble faced a challenging capital spending envi-
ronment within the global electric utility market, it was
able to generate a significant amount of cash and pro-
duce operating margins in the mid-20s. Aclara reported
sales growth along with a 15 percent operating margin.
Our ongoing investments in new products and advanced
technologies during 2009 further solidified Aclara’s
market position in the fast-growing Smart Grid area.

Our recently introduced Aclara Smart Communica-
tions Network solution, which is a revolutionary, high-
bandwidth, high-speed, wide-area network for utility
customers, is further evidence of our commitment to
expand our position as a leading provider of next gen-
eration technologies for the Smart Grid. We continue
to expand our market presence by offering a compre-
hensive suite of proven and tailored solutions to man-
age utility communications and information today, and
well into the future.

Summarizing 2009: Despite the economic challeng-
es we faced, ESCO’s multi-segment, diverse end-market

T O O U R S h a R E h O l d E R S

global operating platform showed resiliency, and most
importantly, positioned us for sustainable growth in
the years to come.

Regarding our outlook for 2010 and beyond, we re-
main very positive about our future. We will experience
a slightly down year in 2010 as the PG&E gas deployment
begins to wind down and our tax rate normalizes. The
PG&E gas project has been a rewarding experience and
evidence that our product is scalable to multimillion end
points. However, the delta in sales is significant from
2009 ($98 million) to 2010 (approximately $40 million)
as we near completion. Additionally, due to the excel-
lent strategic focus of the tax department our tax rate
in 2009 was 22% and we anticipate that it will return to
approximately 38% in 2010. These two items combined
make the challenge of year-over-year improvement dif-
ficult. Fortunately, we were
able to grow the underlying
business but not enough to
bridge the gap resulting from
these two items.

We feel confident that af-
ter 2010 we will be able to re-
turn to a growth mode. This
confidence comes from the
current strong positions we
have in the majority of our product lines and the in-
vestments we continue to make in new product devel-
opment. We have the leadership position in RF fixed
network gas and water markets. This is evidenced by
our wins at such key customers as PG&E, New York
City Water, San Francisco Water and many others. As
the shift from drive-by systems to fixed-network sys-
tems continue, we are well positioned to benefit and
grow in both of these important markets. We maintain
our leadership position in the Cooperative market and
continue to enhance our product offering to ensure its
viability long-term. Our Aclara Software business is
thriving and we have won a number of Meter Data Man-
agement System projects that position us well in this

developing area. Our focus on the international AMI
market is beginning to gain traction and we antici-
pate growth in 2011 and beyond primarily in Central
and South America. We continue to invest significant
resources to ensure we have the products to success-
fully compete in all segments of the AMI market both
domestically and internationally.

The other two segments of ESCO: Filtration and
RF Shielding and Test play a key role in the future of
the business as well. We have enjoyed great success
in both segments as a result of superior technol-
ogy, customer service and a focus on operational ex-
cellence. The variety of products, end markets and
customers provides a level of stability to the entire
Company and both are well-positioned to expand
their contribution going forward.

Our financial strength and
flexibility remain an advan-
tage as we grow the busi-
ness. Our relatively low level
of debt and ready access to
additional capital provide us
with the capability to fund
the organic growth of ESCO
while allowing us to pursue
acquisitions as they become
available. We see our financial strength as a differentia-
tor as customers look for long-term stable partners.

In closing, we think we have all the ingredients —
products, employees, management teams and Board in-
volvement necessary to achieve long-term growth and
provide a significant return to our shareholders.

Vic Richey
Chairman, Chief Executive Executive Vice President
Officer, & President
& Chief Financial Officer

Gary Muenster

November 30, 2009

Gary E. Muenster,
Executive Vice
President and Chief
Financial Officer
(left); Alyson S.
Barclay, Senior Vice
President, Secretary,
and General Counsel;
and Victor L. Richey,
Chairman, Chief
Executive Officer,
and President

E S C O T E C h n O l O g i E S i n C .

h O w w E O p E R a T E

Lean. The manage-
ment team of ESCO
Technologies focuses
on the Company’s cost
and competitive posi-
tion through rigorous
ongoing performance
improvement plans
and actions. This lean
way of operating has
always been a part of
the Company’s make-

Green. An impor-
tant part of how
ESCO Technologies
operates its busi-
nesses is its focus
on the environment.
The Company meets
or exceeds environ-
mental standards at
its operating units
and continues to
look for opportuni-

Global. ESCO Tech-
nologies sells products
and services incorpo-
rating its proven tech-
nologies to customers
worldwide. Non-U.S.
sales were approxi-
mately 18 percent
of 2009 total ESCO
sales with the largest
contribution provided
by sales to the Far

up and has resulted in
improved profit mar-
gins despite adverse
macro-economic con-
ditions. Our employ-
ees strive to provide
innovative solutions
at the lowest cost
while still maintaining
the highest quality
products and services
for our customers.

ties to improve its
plants and processes
to become more
green. Our dedicated
employees are key in
this effort as they
bring forward ideas
to ensure that ESCO
achieves its goal of
always operating as
an environmentally
safe company.

East. With continued
emphasis on new
product development
and deliberate pursuit
of selective acquisi-
tions, the Company is
committed to improv-
ing existing products
and introducing new
products to further its
global presence across
all three segments.

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U t i l i t y S o l U t i o n S

Aclara. Choosing the
right company to help
develop an Intelligent

Infrastructure™ is critical for
gas, water, and electric utilities
seeking to be lean, green, and
global. Aclara’s leadership in
deploying a full range of utility
communications systems empow-
ers utilities to offer customers
the tools they need to make
smart decisions about how they
use resources. What’s more,

Aclara provides utilities with
the industry-leading tech-
nologies that allow development
of device networking, data-value
management, and customer
communications. More than 500
utilities in nine countries rely
on proven Aclara solutions to
connect with their customers.
Aclara is the first utility
communications company with
end-to-end meter-data capture,
transfer, and processing capabili-
ties. Aclara’s technologies are

The STAR Network
system allows water
utilities to reduce
costs, improve
billing, and manage
resources.

When demand for
energy is high, the
Aclara DRU reduces
peak-power costs
without affecting
customer service.

advanced and innovative—and
just as important—proven and
reliable. Its technologies give
consumers access to more us-
age and rate information. They
fine-tune demand on a house-
by-house basis and give utilities
unprecedented visibility, insight,
and control of their performance.
Aclara’s value-added solutions
also efficiently manage the
information collected from other
smart applications that are part
of the utility’s ecosystem.

Aclara’s comprehensive ap-

proach to utility networking
communications is unique in the
industry. Aclara recognizes that
with the introduction of smart
devices throughout the utility
ecosystem, networking require-
ments are evolving. A truly Intel-
ligent Infrastructure is needed
to handle the Smart Grid require-
ments of electric utilities as well

Aclara’s new Solon, OH technol-
ogy center uses Lean Manufacturing
practices to increase earnings by
maximizing value to customers, boost-
ing production, and reducing costs.

Aclara is committed to
better serving its customers
through implementation of Lean
Manufacturing processes, al-
lowing it to efficiently produce
high-quality solutions. Its newly
designed manufacturing facil-
ity in Solon, OH, for example,
employs the most up-to-date
methods on its production and
testing lines to ensure consis-
tent quality and reliability.

g l o b a l R e a c h

With operations in 31

locations around the

world, the businesses of

ESCO Technologies serve

markets in 83 countries

on six continents.

ESCO Operations

Markets Served

as the smart-device networks
that are emerging at gas and
water utilities.

As a result, Aclara transforms
and invigorates its STAR Network
system, TWACS technology,
and Aclara Software applica-
tions to meet the ever-changing
needs of utilities. Plus, Aclara
is committed to developing new
technologies that will take an
even more comprehensive and
standards-based approach to
utility networking.

Leading the way in the
design, development,
and deployment of
total utility com-
munications systems.
Continuously advanc-

ing utility and network
performance and reli-
ability. Keeping ahead
of requirements for
cost management and
resource generation.

Doble’s new PD-Guard
provides on-line, con-
tinuous Partial Discharge
monitoring of high volt-
age apparatus.

and expert consulting division
are actively involved with clients’
development of new wind farms
throughout North America. As
the needs of the power industry
continue to grow and evolve,
power engineers will share criti-
cal knowledge and learn new best
practices from their colleagues
worldwide — facilitated by Doble
through technical conferences
and online resources.

Doble. In today’s global land-
scape, economic and environ-
mental concerns are taking
center stage. Doble has taken
steps to increase the efficiency
and productivity of its diag-
nostic instrument production
by incorporating new “Lean
Manufacturing” strategies. These
products, along with Doble’s
knowledge services, are ideally
suited to support the world’s
growing interest in renewable
energy. The Doble laboratories

Doble is serving
clients around
the globe 24/7 to
improve the reli-
ability of electric
power genera-
tion, transmission
and delivery.

ETS-Lindgren is the
preferred supplier of
systems that mea-
sure over-the-air
performance of
wireless devices to
manufacturers, ser-
vice providers and
test laboratories.

Using the latest
antenna design
tools, ETS-Lindgren
creates innova-
tive solutions for a
variety of markets
and applications.

R F S h i e l d i n g & t e S t

ETS-Lindgren, with
offices throughout
North America, Europe,

and Asia, provides the electro-
magnetic compatibility (EMC),
microwave, wireless, acoustic,
and magnetic resonance imaging
(MRI) markets with a variety
of high-quality testing and
shielding solutions. ETS-Lindgren
opened its newest office this
year in Bangalore, India. While
the office was initially opened to
support existing EMC custom-
ers, opportunities are now being
identified in the wireless, acous-
tic and medical (MRI) markets.
The company’s global

presence places ETS-
Lindgren closer to its
customers, and allows best

practices to be shared throughout
the organization. ETS-Lindgren’s
implementation of continuous
improvement at all levels of the
organization has increased its
efficiency and responsiveness.
The company maintains its
position as a global leader by
actively participating in the
industry standards committees.
This activity not only ensures
product compliance with cur-
rent international and national
regulatory requirements, but
enables the company to
successfully address
future regulatory
requirements for the

markets it serves.

F i lt R at i o n / F l U i d F l o w

PTI Technologies and
VACCO Industries.
These two compa-

nies comprise ESCO’s Filtration/
Fluid Flow segment, and they
are key international suppli-
ers of engineered filtration
and fluid control components.
From support of healthcare to
spacecraft industries, a strategic
and diverse product portfolio has
ensured continued success in a
competitive global marketplace.
PTI and VACCO are commit-
ted to growth and profitability
through effective implementa-
tion of lean engineering and
manufacturing processes. While
embracing a philosophy of
continuous improvement, the
companies pride themselves in
the development of new products
through innovative engineering
and responsive marketing. Today,
VACCO is working closely with
NASA and industry on advanced

propulsion systems, en-
abling the research of

the universe, while PTI
continues to advance filtration
technology to support next gen-
eration commercial aircraft.

From the voluntary registra-
tion with the California Climate
Action Registry to assess
greenhouse gas emission at PTI,
to the extensive use of a water
treatment facility at VACCO,
ESCO continues to be environ-
mentally conscious to optimize
processes and minimize waste.

PTI’s Liquid Cool-
ing System filters
(above) are part of
Boeing’s innova-
tive 787 fuel-saving
no-bleed system
architecture; while
VACCO has been
selected to provide
multiple fluid com-
ponents aboard
NASA’s Project
Constellation.

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U t i l i t y S o l U t i o n S

Aclara. Choosing the
right company to help
develop an Intelligent

The STAR Network
system allows water
utilities to reduce
costs, improve
billing, and manage
resources.

When demand for
energy is high, the
Aclara DRU reduces
peak-power costs
without affecting
customer service.

Aclara’s comprehensive ap-

Aclara’s new Solon, OH technol-
ogy center uses Lean Manufacturing
practices to increase earnings by
maximizing value to customers, boost-
ing production, and reducing costs.

g l o b a l R e a c h

With operations in 31

locations around the

world, the businesses of

ESCO Technologies serve

markets in 83 countries

on six continents.

ESCO Operations

Markets Served

as the smart-device networks
that are emerging at gas and
water utilities.

Leading the way in the
design, development,
and deployment of
total utility com-
munications systems.
Continuously advanc-

ing utility and network
performance and reli-
ability. Keeping ahead
of requirements for
cost management and
resource generation.

Doble’s new PD-Guard
provides on-line, con-
tinuous Partial Discharge
monitoring of high volt-
age apparatus.

Doble is serving
clients around
the globe 24/7 to
improve the reli-
ability of electric
power genera-
tion, transmission
and delivery.

ETS-Lindgren is the
preferred supplier of
systems that mea-
sure over-the-air
performance of
wireless devices to
manufacturers, ser-
vice providers and
test laboratories.

Using the latest
antenna design
tools, ETS-Lindgren
creates innova-
tive solutions for a
variety of markets
and applications.

R F S h i e l d i n g & t e S t

ETS-Lindgren, with
offices throughout
North America, Europe,

presence places ETS-
Lindgren closer to its
customers, and allows best

markets it serves.

F i lt R at i o n / F l U i d F l o w

PTI Technologies and
VACCO Industries.
These two compa-

propulsion systems, en-
abling the research of

the universe, while PTI
continues to advance filtration
technology to support next gen-
eration commercial aircraft.

C O m m i T m E n T T O C O m m U n i T i E S

The ESCO Technologies Foundation was able to ex-

pand its reach by providing grants to more than
20 organizations this past year. With the economic
downturn, came the need for assistance by more chil-
dren and families and yet, the number of contributors,
particularly employees of ESCO Technologies Inc., in-
creased over prior years. The generosity of these con-
tributors helped the Foundation fulfill grant requests
from organizations throughout the U.S. in locations
where the Company has operations. Some of the orga-
nizations are featured here.

Texas: The Any Baby Can (ABC) organization pro-
vides assistance to some of Austin’s neediest children
and their families. Many of the children suffer from
chronic and/or critical illnesses such as cancer, while
others are victims of abuse and/or neglect. Parents of
these children struggle with the challenges of being par-
ents and look to ABC for edu-
cation and guidance. In 2009,
the Foundation provided a
grant to ABC for its Family Lit-
eracy Program which provides
basic reading, math, parent-
ing and other skills to parents
participating in the program.

Ohio: About 10 years ago,
The Littlest Heroes (TLH) or-
ganization was founded to improve the lives of North-
east Ohio children living with cancer. Our Foundation’s
grant to TLH this year supported the Art for Children’s
Sake Program that included more than 100 families. In
this program, children with cancer created original art-
work that was professionally reprinted for their families
and others, sometimes becoming a family’s most trea-
sured keepsake. The Foundation’s grant also supported
an on-line gallery that featured the artwork and offered
it to the general public for sale in order to generate ad-
ditional income for programs at TLH.

Missouri: This year for the first time, the Founda-
tion made a grant to the Special Education Founda-
tion (SEF), an organization that assists children with
disabilities in the St. Louis area. One of SEF’s current
projects is to provide digital hearing aids to children

whose parents cannot afford them. With the Founda-
tion’s grant, SEF was able to purchase three digital
hearing aids.

Another organization receiving a grant from the
Foundation for the first time in 2009 was HavenHouse
St. Louis. HavenHouse provides a home away from
home to families who travel to St. Louis for medical
care. Many families whose children are in the hospi-
tal for an extended period of time are financially un-
able to stay in a hotel or other facility. Families at
HavenHouse are charged a small fee and are provided
lodging, home-cooked meals, shuttle service to local
hospitals, and other assistance during their stay. The
Foundation’s grant will cover the cost of 100 nights at
HavenHouse for families in need.

Illinois: Kenneth Young Center (KYC) serves the
needs of children, families and seniors in the Elk Grove,
Illinois community. Through its
Mentoring Program, KYC pro-
vides mentoring skills to par-
ents who need help in dealing
with some of the challenges
of raising a child. This year’s
grant from the Foundation en-
abled KYC to add a bilingual
parent mentor to better serve
the Spanish-speaking famil-

ies in the community.

California: For individuals with disabilities, Spe-
cial Olympics Ventura County of Southern California
continues to provide year-round sports training and
athletic competition in a variety of Olympic-type
sports. There are more than 750 Ventura County Special
Olympic athletes and this year the Foundation’s grant
covered the cost of transportation and uniforms for
athletes who participated. For many of these athletes,
it is the only opportunity they have to interact with
others sharing similar disabilities and experiences.

To make a tax-deductible contribution or to learn more
about the Foundation, please call 314-213-7277 or visit
the web site at www.escotechnologiesfoundation.org.

Pictured: Participants
at Camp Cheerful,
a summer camp
in Ohio sponsored
by Achievement
Centers for Children
for youngsters with
disabilities. The
Foundation’s grant
provided for seven
children to attend the
camp in 2009.

E S C O T E C h n O l O g i E S i n C .

F i n a n C i a l S E C T i O n

Management’s Discussion and Analysis

Consolidated Statements of Operations

Consolidated Balance Sheets

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

Management’s Statement of Financial Responsibility

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Five-Year Financial Summary

Market Performance

Shareholders’ Summary

Management and Board of Directors

M a n a g E M E n T ’ S D i S C u S S i O n a n D a n a l y S i S

The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto. The years
2009, 2008 and 2007 represent the fiscal years ended Septem-
ber 30, 2009, 2008 and 2007, respectively, and are used throughout
the document.

introduction

ESCO Technologies Inc. and its wholly owned subsidiaries (ESCO, the
Company) are organized into three reportable operating segments:
Utility Solutions Group (USG), RF Shielding and Test (Test), and
Filtration/Fluid Flow (Filtration). The Company’s business segments
are comprised of the following primary operating entities:

▶ USG: Aclara Power-Line Systems Inc. (Aclara PLS), Aclara RF

Systems Inc. (Aclara RF), Aclara Software Inc. (Aclara Software),
and Doble Engineering Company (Doble),

▶ Test: EMC Group companies consisting primarily of ETS-Lindgren
L.P. (ETS) and Lindgren R.F. Enclosures, Inc. (Lindgren), and

▶ Filtration: PTI Technologies Inc. (PTI), VACCO Industries (VACCO),

and TekPackaging L.L.C. (TekPack).

USG: The Aclara Group is a proven supplier of special purpose
fixed-network communications systems for electric, gas and water
utilities, including hardware and software to support advanced
metering applications. Aclara’s STAR® Network system and TWACS®
technology provide advanced radio-frequency (RF) and power-
line (PLS) based fixed-network technologies proven to meet
the wide-ranging data communications requirements of utilities
worldwide. Aclara Software applications add value across the
utility enterprise, addressing meter and energy data management,
distribution planning and operations, customer service and revenue
management. Doble provides high-end, intelligent diagnostic test
solutions for the electric power delivery industry and is a leading
supplier of partial discharge testing instruments used to assess the
integrity of high voltage power delivery equipment.

Test: The EMC Group is an industry leader in providing its customers
with the ability to identify, measure and contain magnetic,
electromagnetic and acoustic energy.

Filtration: The companies within this segment design and
manufacture specialty filtration products including hydraulic filter
elements used in commercial aerospace applications, unique filter
mechanisms used in micro propulsion devices for satellites and
custom designed filters for manned and unmanned aircraft.

ESCO continues to operate with meaningful growth prospects in
its primary served markets and with considerable financial
flexibility. The Company continues to focus on new products
that incorporate proprietary design and process technologies.
Management is committed to delivering shareholder value through
internal growth, ongoing performance improvement initiatives,
and selective acquisitions.

highlights of 2009 Continuing operations

▶ Sales, net earnings and diluted earnings per share were

$619.1 million, $49.3 million and $1.86 per share, respectively.

▶ Net cash provided by operating activities was $77.5 million.

▶ At September 30, 2009, cash on hand was $44.6 million;

outstanding debt was $180.5 million, for a net debt position
of $130.6 million (including acquisition escrow).

▶ Favorable settlement of uncertain tax positions in the fourth

quarter positively affected EPS for the quarter and the full year
by $0.19, related to the disposition of a portion of the MicroSep
business in 2004.

▶ The Company received $80.0 million of orders in 2009 and

recorded $106.2 million in sales to Pacific Gas & Electric Company
(PG&E) related to its AMI deployment.

▶ The Company received $37.4 million in orders and recorded
$18.2 million in sales to New York City related to their fixed-
network water AMI project.

▶ The Company received $12.4 million in orders and recorded

$10.6 million in sales to Idaho Power Company for its Aclara PLS
TWACS® AMI deployment.

▶ In September 2009, the Company acquired a minority equity

interest in Firetide, Inc. and its technology will be used in Aclara’s
Smart Communications Network solution.

Dividends

Subsequent to September 30, 2009, the Company announced it
will initiate a quarterly cash dividend payable at an annual rate
of $0.32 per share. The first quarterly dividend of $0.08 per share
will be paid on January 19, 2010 to stockholders of record as of
January 4, 2010.

Results of Continuing operations

net SAleS

(Dollars in millions)

2009

2008

Fiscal year ended

Change Change
2008
2009
2007 vs. 2008 vs. 2007

USG

Test

Filtration

Total

uSg

$374.0

352.7

190.3

6.0%

85.3%

138.4

144.8

141.5

(4.4)%

106.7

116.1

105.6

(8.1)%

2.3%

9.9%

$619.1

613.6

437.4

0.9%

40.3%

The 6.0% or $21.3 million increase in net sales in 2009 as
compared to the prior year was due to: a $48.8 million increase
in net sales from Aclara RF primarily due to higher gas product

e S C o t e C h n o l o g i e S i n C .

2 0 0 9 A n n u A l R e p o R t

M a n a g E M E n T ’ S D i S C u S S i O n a n D a n a l y S i S

AMI deliveries at PG&E and the shipment of water AMI products
for the New York City water project; a $9.9 million increase in net
sales from Doble reflecting the impact of a full twelve months
of operations versus ten months in the prior year; a $3.9 million
increase in net sales at Aclara Software; partially offset by a
$41.3 million decrease in net sales at Aclara PLS.

The $41.3 million decrease in Aclara PLS’s net sales in 2009
compared to 2008 was mainly due to: a $31.9 million decrease in
sales to PG&E for the electric AMI deployment (2008 sales included
$31.3 million of revenue recognized that had been deferred from
prior year periods), and an $11.6 million decrease in sales to the
Puerto Rico Electric Power Authority (PREPA), partially offset by a
$10.2 million increase in sales to Idaho Power Company.

The Company’s total sales to PG&E were $106.2 million in 2009
(representing approximately 17% of the Company’s consolidated
net sales) and $110.2 million in 2008 (representing approximately
18% of the Company’s consolidated net sales).

The 85.3% or $162.4 million increase in net sales in 2008 as
compared to 2007 was due to: the acquisition of Doble with sales
of $74.3 million; a $55.4 million increase in sales from Aclara RF
primarily due to higher gas and electric AMI deliveries at PG&E;
and a $31.7 million increase in sales from Aclara PLS.

The $31.7 million increase in Aclara PLS’s net sales in 2008
compared to 2007 was mainly due to: a $34.0 million increase
in sales to PG&E for the electric AMI deployment (due to the
recognition of previously deferred revenue from the hardware,
program management and software provided to PG&E), a
$16.8 million increase in sales to PREPA, partially offset by a
$18.4 million decrease in sales to other investor owned utilities
(IOU) customers, such as Duke Energy and Oncor Electric.

test

The net sales decrease of $6.4 million or 4.4% in 2009 as compared
to the prior year was mainly due to: a $7.2 million decrease in
net sales from the segment’s European operations due to the
timing of large chamber deliveries to the international wireless
and electronics end-markets, a decrease in component shipments
and unfavorable foreign currency impacts; and a $3.2 million
decrease in net sales from the segment’s Asian operations due to a
decrease in large chamber deliveries to the international wireless
and electronics end-markets. This decrease was partially offset
by a $4.0 million increase in net sales from the segment’s U.S.
operations driven by the timing of domestic chamber deliveries.

The net sales increase of $3.3 million or 2.3% in 2008 as compared
to 2007 was mainly due to the timing of test chamber sales and
sales of components resulting in: a $5.2 million increase in net
sales from the segment’s European operations; a $2.7 million
increase in net sales from the segment’s Asian operations; partially
offset by a $4.6 million decrease in net sales from the segment’s
U.S. operations.

Filtration

Net sales in 2009 decreased $9.4 million or 8.1% compared to the
prior year primarily due to: a $12.4 million decrease in net sales at
PTI due to lower commercial aerospace shipments; a $2.1 million
decrease in net sales at TekPack due to lower sales to commercial
customers; partially offset by a $5.1 million increase in net sales at
VACCO driven by higher military/defense aircraft product shipments.

Net sales in 2008 increased $10.5 million or 9.9% compared to the
prior year primarily due to a $5.5 million increase in commercial
aerospace shipments at PTI and a $3.5 million increase in net sales
at VACCO driven by higher space product shipments.

pACiFiC gAS & eleCtRiC

In November 2005, Aclara RF entered into a contract (the “Aclara RF
Contract”) to provide equipment, software and services to PG&E in
support of the gas utility portion of PG&E’s AMI project. The total
anticipated contract revenue from the gas portion of the Aclara RF
Contract from commencement through the five-year full deploy-
ment is expected to be up to approximately $225 million of which
$190 million has been recorded to date through September 30,
2009. The current outlook for 2010 PG&E gas product sales is ex-
pected to be approximately $40 million as compared to $98 million
in 2009. Equipment is purchased only upon issuance of purchase
orders and release authorizations, and PG&E continues to have the
right to purchase products or services from other suppliers.

The Aclara RF Contract also provided PG&E the right to purchase
an RF fixed-network electric product from Aclara RF. The Company
has received $11 million of orders to date through September 30,
2009 related to the electric portion of the Aclara RF Contract.
During 2009, PG&E completed its evaluation and selection of a
competing electric product and notified Aclara RF that no further
electric product orders would be received. PG&E and Aclara RF are
in the final stages of a settlement of certain claims raised by PG&E
connected with delivery of the electric product. The Company
does not expect the settlement will have an impact to the
Company’s earnings.

oRDeRS AnD BACKlog

New orders received in 2009 were $634.0 million, resulting in order
backlog of $299.4 million at September 30, 2009 as compared
to order backlog of $284.5 million at September 30, 2008. In
2009, the Company recorded $363.2 million of new orders related
to USG products, $122.8 million related to Test products, and
$148.0 million related to Filtration products.

In 2008, the Company recorded $365.3 million of new orders related
to USG products (including $7.0 million of Doble acquired backlog),
$154.5 million related to Test products, and $113.2 million related
to Filtration products.

e S C o t e C h n o l o g i e S i n C .

2 0 0 9 A n n u A l R e p o R t

M a n a g E M E n T ’ S D i S C u S S i O n a n D a n a l y S i S

The Company received orders for gas and electric AMI products
totaling $80.0 million, $111.8 million and $49.1 million from PG&E
during 2009, 2008 and 2007, respectively. Cumulative-to-date
orders from PG&E for the gas AMI deployment total 3.5 million
units and $199 million through September 30, 2009.

2009

Aclara RF received $37.4 million in entered orders from the City
of New York for its fixed-network AMI water project during 2009.
Cumulative-to-date orders total 493,000 units and $39.1 million
through September 30, 2009.

In August 2009, VACCO received $32.2 million in multi-year fluid
flow product orders for the Navy’s Virginia Class submarine.

In August 2009, TekPackaging LLC was awarded a five-year
production contract with an initial purchase order received for
$11.7 million. The total value of purchase orders anticipated under
this contract is between $40 million to $50 million.

Aclara PLS recorded $12.4 million in entered orders from Idaho
Power Company during 2009.

Aclara PLS recorded $10.2 million and $22.4 million in entered
orders from PREPA during 2009 and 2008, respectively.

In March 2009, Aclara Software received an order for approximately
$5.0 million from the City of Tallahassee, Florida for a system-wide
implementation of its Meter Data Management System (MDMS) and
ENERGYprism® AMI software applications.

2008

In July 2008, ETS-Lindgren signed a $16.7 million contract with
the National Automotive Testing and R&D Infrastructure Project
(NATRIP) in India to provide two automotive chambers.

In July 2008, Aclara RF was selected by the City of New York to
provide its fixed-network AMI solution for the city’s entire water
service territory. The total value of purchase orders anticipated to
be issued under this contract is $68.3 million.

In July 2008, Aclara PLS’s TWACS® AMI product was selected by
Idaho Power Company for its entire electric service territory. The
total value of purchase orders anticipated to be issued under this
contract is $25 million.

In December 2007, Aclara PLS signed a contract with PREPA for
a total value of $35 million for the purchase of Aclara PLS TWACS
AMI products.

Selling, geneRAl AnD ADMiniStRAtiVe eXpenSeS

Selling, general and administrative expenses (SG&A) were
$152.4 million, or 24.6% of net sales in 2009, $147.3 million,
or 24.0% of net sales in 2008, and $108.2 million, or 24.7% of
net sales in 2007.

The increase in SG&A expenses in 2009 as compared to the prior
year was primarily due to a $5.0 million increase related to Doble,
reflecting a full year versus ten months in the prior year.

The increase in SG&A expenses in 2008 as compared to 2007 was
primarily due to: $24.8 million of SG&A expenses related to Doble
and an approximately $12.0 million increase in SG&A expenses
related to Aclara mainly due to an increase in sales, marketing,
and engineering head count.

AMoRtiZAtion oF intAngiBle ASSetS

Amortization of intangible assets was $19.2 million in 2009,
$17.0 million in 2008 and $10.2 million in 2007. The Company
recorded $12.2 million and $11.0 million in 2009 and 2008,
respectively, related to Aclara PLS’s TWACS NG capitalized software.
Amortization of intangible assets included $4.7 million and
$4.2 million of amortization of acquired intangible assets related
to the Company’s acquisitions in 2009 and 2008, respectively.
The amortization of acquired intangible assets related to the
Company’s acquisitions is included in the Corporate operating
segment’s results. The remaining amortization expenses consist
of other identifiable intangible assets (primarily software,
patents and licenses). Effective in fiscal year 2010, the Company
has re-evaluated the economic useful life of its TWACS NG
capitalized software as a result of the successful acceptance in the
international markets and concluded the remaining TWACS NG asset
value of $44 million has an expected remaining useful life of ten
years (compared to its previous useful life of seven years).

otheR eXpenSeS, net

Other expenses, net, were $4.5 million, $0.2 million and
$2.8 million in 2009, 2008 and 2007, respectively. The principal
item included in other expenses, net, in 2009 consisted of
$2.3 million of facility exit/relocation charges incurred in
connection with the move of the Aclara RF facility consisting
of leasehold improvement write-offs, lease contract termination
costs and physical move costs. There were no other individually
significant items included in other expenses, net, in 2009 or 2008.
Other expenses, net, in 2007 consisted primarily of: $2.6 million of
expenses within the Test segment related to an adverse arbitration
award related to the delivery and installation contract completed
in 2005 for a shielded communication room in an international
location; partially offset by $0.6 million of royalty income.

eARningS BeFoRe inteReSt AnD tAXeS (eBit)

The Company evaluates the performance of its operating segments
based on EBIT, which the Company defines as earnings before
interest and taxes.

EBIT is not a defined GAAP measure. However, the Company believes
that EBIT provides investors and Management with a valuable and
alternative method for assessing the Company’s operating results.

e S C o t e C h n o l o g i e S i n C .

2 0 0 9 A n n u A l R e p o R t

M a n a g E M E n T ’ S D i S C u S S i O n a n D a n a l y S i S

Management evaluates the performance of its operating segments
based on EBIT and believes that EBIT is useful to investors to
demonstrate the operational profitability of the Company’s business
segments by excluding interest and taxes, which are generally
accounted for across the entire company on a consolidated basis.
EBIT is also one of the measures Management uses to determine
resource allocations and incentive compensation.

eBit

(Dollars in millions)

2009

2008

Fiscal year ended

Change Change
2008
2009
2007 vs. 2008 vs. 2007

USG
% of net sales

Test
% of net sales

Filtration
% of net sales

$62.5

66.6
16.7% 18.9% 11.9%

22.6

(6.2) % 194.7 %
(2.2) % 7.0 %

14.1
10.2%

13.9

14.4

9.6% 10.2%

1.4 %
0.6 %

(3.5) %
(0.6) %

21.2
18.1
17.0% 18.3% 17.4%

18.4

(14.6) % 15.2 %
(1.3) % 0.8 %

Corporate

(24.1)

(20.6)

(17.4)

17.0 % 18.4 %

Total
% of net sales

$70.6

81.1

38.0

11.4% 13.2%

8.7%

(12.9) % 113.4 %
(1.8) % 4.5 %

The reconciliation of EBIT to a GAAP financial measure is as follows:

(Dollars in millions)

2009

2008

2007

EBIT

Less: Interest expense

Add: Interest income

Less: Income taxes

Net earnings from

$70.6

(7.4)

—

81.1

(9.8)

—

38.0

—

0.7

(13.9)

(23.7)

(7.9)

non-recurring costs associated with the facility consolidation in
Austin, Texas that was completed in January 2008; partially offset
by a $1.2 million increase in EBIT from the Company’s European and
Asian operations related to the increased sales volumes.

Filtration

EBIT decreased $3.1 million in 2009 as compared to 2008 due to:
lower commercial aerospace shipments at PTI; and an increase in
research and development costs and higher bid and proposal costs
incurred in the pursuit of a significant number of Space related
projects at VACCO.

EBIT increased $2.8 million in 2008 as compared to 2007 mainly
due to: higher commercial aerospace shipments at PTI; and an
increase at TekPack due to higher commercial product shipments.

Corporate

Corporate operating charges included in consolidated EBIT increased
by $3.5 million in 2009 as compared to 2008 primarily due to: a
$0.9 million increase in share-based compensation expense; and a
$0.5 million increase in amortization of acquired intangible assets.

Corporate operating charges included in consolidated EBIT increased
by $3.2 million in 2008 as compared to 2007 mainly due to: a
$2.1 million increase in amortization of acquired intangible assets
primarily due to the 2008 acquisition of Doble and a $0.6 million
decrease in royalty income.

The “Reconciliation to Consolidated Totals (Corporate)” in Note 15
to the Consolidated Financial Statements represents Corporate office
operating charges.

continuing operations

$49.3

47.6

30.8

inteReSt eXpenSe (inCoMe), net

uSg

The $4.1 million decrease in EBIT in 2009 as compared to 2008
was due to: a decrease in EBIT from the Aclara Group due to lower
margins on product sales, a $2.3 million charge related to the
Aclara RF facility relocation, mentioned in other expenses, net,
above and an increase in amortization for the TWACS NG capitalized
software. Additionally, 2008 included $15.0 million of EBIT
associated with the PG&E/Aclara PLS deferred revenue recognized
in 2008.

The $44.0 million increase in EBIT in 2008 as compared to 2007
was due to: the EBIT contribution from Doble; and an increase in
EBIT from Aclara related to the increased sales volumes.

test

The $0.2 million increase in EBIT in 2009 as compared to the prior
year was due to a reduction of the segment’s SG&A expenses.

The $0.5 million decrease in EBIT in 2008 as compared to the prior
year was mainly due to: a decrease in EBIT from the Company’s
U.S. operations due to changes in product mix and $0.9 million of

Interest expense was $7.4 million in 2009 compared to interest
expense of $9.8 million in 2008 and interest income of $0.7 million
in 2007, respectively. The decrease in interest expense in 2009 as
compared to 2008 was due to favorable interest rates and lower
outstanding borrowings under the revolving credit facility. The
increase in interest expense in 2008 as compared to 2007 was due
to the outstanding borrowings under the revolving credit facility
related to the Doble acquisition.

inCoMe tAX eXpenSe

The 2009 effective tax rate from continuing operations was 22.0%
compared to 33.3% in 2008 and 20.3% in 2007. The decrease in
the 2009 effective tax rate as compared to the prior year was due
primarily to the decrease in uncertain tax positions (tax liabilities)
for the fiscal years 2003 through 2007, of which $3.5 million
or 5.5% is the result of the closing of a U.S. taxing authority’s
examination of the Company’s research credit claims; and $5.0
million or 7.9% is the result of the confirmation of the Company’s
tax position for the deduction of losses realized on the disposition

e S C o t e C h n o l o g i e S i n C .

2 0 0 9 A n n u A l R e p o R t

M a n a g E M E n T ’ S D i S C u S S i O n a n D a n a l y S i S

of a portion of the MicroSep business in 2004. The overall decrease
in uncertain tax positions reduced 2009 income tax expense by
$8.6 million and the effective tax rate by 13.6%; the impact of an
export incentive reduced 2008 income tax expense by $1.6 million
and the effective tax rate by 2.2%.

the financial statements and related notes for all periods presented.
Comtrak’s operations were previously included within the Company’s
Utility Solutions Group segment. A pretax loss of $1.2 million
related to the sale and its 2009 results of operations are reflected
in the Company’s fiscal 2009 results in discontinued operations.

The increase in the 2008 effective tax rate as compared to 2007 was
due to lower tax credits in 2008 as compared to 2007. The research
tax credit reduced 2008 income tax expense by $1.0 million and
the effective tax rate by 1.4%; the impact of an export incentive
reduced 2008 income tax expense by $1.6 million and the effective
tax rate by 2.2%; the impact of the domestic production deduction
reduced 2008 income tax expense by $0.8 million and the effective
tax rate by 1.1%. The research tax credit reduced 2007 income tax
expense by $4.4 million and the 2007 effective tax rate by 11.4%
as a result of the cumulative effect of research credits for years
2006 and 2007 being realized.

On November 25, 2007, the Company completed the sale of the
filtration portion of Filtertek Inc. (Filtertek) to Illinois Tool Works
Inc. for $74.4 million, net. The TekPack division of Filtertek was not
included in the transaction. The Filtertek businesses are accounted
for as discontinued operations in the financial statements and
related notes for all periods presented. A pretax loss of $0.2 million
related to Filtertek is reflected in the Company’s fiscal 2008 results
in discontinued operations. Filtertek’s operations were included
within the Company’s Filtration segment prior to divestiture. The
operations of the TekPack business are reflected in continuing
operations and continue to be included in the Filtration segment.

Capital Resources and liquidity

Working capital from continuing operations (current assets less
current liabilities) increased to $116.2 million at September 30,
2009 from $100.6 million at September 30, 2008.

The $26.1 million decrease in accounts receivable at September 30,
2009 is mainly due to: approximately $13.0 million related to the
Test segment and approximately $9.0 million related to the USG
segment, both driven by timing and volume of sales and increased
cash collections. The $17.0 million increase in inventories at
September 30, 2009 is mainly due to an increase of $15.0 million in
the USG segment inventories to shorten lead times.

Net cash provided by operating activities from continuing
operations was $77.5 million, $77.1 million and $45.2 million
in 2009, 2008 and 2007, respectively. The increase in 2008 as
compared to 2007 is related to an increase in pretax earnings and
improvements in operating working capital requirements.

Capital expenditures from continuing operations were $9.3 million,
$16.7 million and $12.4 million in 2009, 2008 and 2007,
respectively. The decrease in 2009 as compared to 2008 was
primarily due to the ETS Austin, TX facility expansion that occurred
during 2008 within the Test segment and a decrease in facility
expansion costs at Aclara PLS. There were no commitments
outstanding that were considered material for capital expenditures
at September 30, 2009.

DiVeStituReS

On March 13, 2009, the Company completed the sale of the
business and most of the assets of Comtrak for $3.1 million, net,
of cash. This business is reflected as a discontinued operation in

ACQuiSitionS

2009

On September 21, 2009, the Company acquired a minority interest
in Firetide, Inc. for $4 million in cash. Firetide, Inc. is a provider
of wireless infrastructure mesh network management systems which
will enable communications with other Smart Grid assets and this
technology will be used in Aclara’s Smart Communications Network
solution. This investment is accounted for under the cost method
and is classified as a long-term other asset on the Company’s
consolidated balance sheet as of September 30, 2009.

On July 2, 2009, the Company acquired certain assets of Complus
Systems Pvt Ltd. (Complus) in India for approximately $1.2 million
in cash and formed a new Indian entity. The entity will operate as
ETS-India and its operating results, since the date of acquisition,
are included within the Test segment.

2008

On November 30, 2007, the Company acquired the capital stock of
Doble for a purchase price of approximately $328 million, net of
cash acquired. Doble, headquartered in Watertown, Massachusetts,
is a worldwide leader in providing high-end intelligent diagnostic
test solutions for the electric utility industry. The acquisition aligns
with the Company’s long-term growth strategy of expanding its
products and services in the utility industry. The operating results
for Doble, since the date of acquisition, are included within the
USG segment.

e S C o t e C h n o l o g i e S i n C .

2 0 0 9 A n n u A l R e p o R t

M a n a g E M E n T ’ S D i S C u S S i O n a n D a n a l y S i S

discharge diagnostic testing instruments and systems serving the
international electric utility industry. The operating results for LDIC,
since the date of acquisition, are included within Doble in the
USG segment.

All of the Company’s acquisitions have been accounted for using
the purchase method of accounting, and accordingly, the respective
purchase prices were allocated to the assets (including intangible
assets) acquired and liabilities assumed based on estimated
fair values at the date of acquisition. The financial results from
these acquisitions have been included in the Company’s financial
statements from the date of acquisition.

BAnK CReDit FACilitY

At September 30, 2009, the Company had approximately
$193 million available to borrow comprised of: approximately
$143 million available under its credit facility, plus a $50 million
increase option, in addition to $44.6 million cash on hand. At
September 30, 2009, the Company had outstanding borrowings of
$180.5 million, and outstanding letters of credit of $7.2 million.
The Company classified $50 million as the current portion on
long-term debt as of September 30, 2009, as the Company intends
to repay this amount within the next twelve months; however,
the Company has no contractual obligation to repay such amount
during the next twelve months. As of September 30, 2009, the
Company was in compliance with all bank covenants. Cash flow
from operations and borrowings under the bank credit facility
are expected to provide adequate resources to meet the
Company’s capital requirements and operational needs for
the foreseeable future.

outlooK — 2010

During 2010, the Company anticipates gas AMI product deliveries
to PG&E will be significantly lower than the quantities delivered in
2009 as the contract is entering the latter stages of deployment.
The current outlook for 2010 PG&E gas product sales is expected to
be approximately $40 million as compared to $98 million in 2009.
As a result, Management expects 2010 consolidated revenues to
decrease approximately three to five percent and EBIT to decline
marginally compared to 2009. In addition, the 2010 effective tax

rate is projected to be approximately 38%. Given the PG&E project
wind-down and higher effective tax rate, Management expects EPS
to be lower in 2010 as compared to 2009. On a quarterly basis,
the Company expects 2010 revenues and EPS to be heavily “second
half” weighted as they were in 2009 and 2008.

ContRACtuAl oBligAtionS

The following table shows the Company’s contractual obligations as
of September 30, 2009:

(Dollars in millions)

Payments due by period

Less
than
1 year

1 to 3
years

More
3 to 5
than
years 5 years

Total

$ 180.5

50.0

—

130.5

5.6

2.7

2.9

—

29.6

7.4

11.8

5.2

Contractual
Obligations

Long-Term Debt
Obligation

Estimated Interest
Payments(1)

Operating Lease
Obligations

Purchase
Obligations(2)

—

Total

$ 215.7

60.1

14.7

135.7

—

5.2

(1) Estimated interest payments for the Company’s debt obligations were calculated
based on Management’s determination of the estimated applicable interest rates

and payment dates.

(2) A purchase obligation is defined as a legally binding and enforceable agreement
to purchase goods and services that specifies all significant terms. Since the

Company’s purchase orders can be cancelled, they are not included in the

table above.

As of September 30, 2009, the Company had $3.3 million of
liabilities for uncertain tax positions. The unrecognized tax benefits
have been excluded from the table above due to uncertainty as to
the amounts and timing of settlement with taxing authorities.

The Company has no off balance sheet arrangements outstanding at
September 30, 2009.

ShARe RepuRChASeS

In August 2009, the Company’s Board of Directors extended its
previously authorized open market common stock repurchase
program of the Company’s shares at a value not to exceed
$30 million, subject to market conditions and other factors which
covers the period through September 30, 2010. There were no
stock repurchases during 2009 or 2008. The Company repurchased
$10 million or 265,000 shares in 2007 under a previously
authorized program.

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M a n a g E M E n T ’ S D i S C u S S i O n a n D a n a l y S i S

penSion FunDing ReQuiReMentS

The minimum cash funding requirements related to the Company’s
defined benefit pension plans are approximately $1.3 million
in 2010, approximately $3.0 million in 2011 and approximately
$3.5 million in 2012.

otheR

Management believes that, for the periods presented, inflation has
not had a material effect on the Company’s results of operations.

The Company is currently involved in various stages of investigation
and remediation relating to environmental matters. Based on
current information available, Management does not believe the
aggregate costs involved in the resolution of these matters will
have a material adverse effect on the Company’s operating results,
capital expenditures or competitive position.

Market Risk Analysis

MARKet RiSK eXpoSuRe

Market risks relating to the Company’s operations result primarily
from changes in interest rates and changes in foreign currency
exchange rates. The Company is exposed to market risk related to
changes in interest rates and selectively uses derivative financial
instruments, including forward contracts and swaps, to manage
these risks. During 2009, the Company entered into two $40 million
one-year forward interest rate swaps effective October 5, 2009, to
hedge some of its exposure to variability in future LIBOR-based
interest payments on variable rate debt. In addition, during 2008,
the Company entered into a two-year amortizing interest rate swap
to hedge some of its exposure to variability in future LIBOR-based
interest payments on variable rate debt. The swap notional amount
for the first year was $175 million amortizing to $100 million in the
second year. All derivative instruments are reported on the balance
sheet at fair value. The derivative instrument is designated as a
cash flow hedge and the gain or loss on the derivative is deferred
in accumulated other comprehensive income until recognized in
earnings with the underlying hedged item. Based on the interest
rate swaps outstanding, the interest rates on approximately 50%
of the Company’s total borrowings were effectively fixed as of
September 30, 2009. The following is a summary of the notional
transaction amounts and fair values for the Company’s outstanding
derivative financial instruments by risk category and instrument
type, as of September 30, 2009.

(Dollars in thousands)

Notional
Average
Average
Amount Rec Rate Pay Rate

Fair
Value

Interest rate swap

$100,000

0.31%

3.99%

$(685)

Interest rate swaps*

$ 80,000

N/A

1.52%

$(778)

* These swaps represent forward-starting swaps and will be effective in

October 2009.

The Company is also subject to foreign currency exchange rate risk
inherent in its sales commitments, anticipated sales, anticipated
purchases and assets and liabilities denominated in currencies other
than the U.S. dollar. The foreign currency most significant to the
Company’s operations is the Euro. Net sales to customers outside
of the United States were $110.7 million, $130.9 million, and
$85.5 million in 2009, 2008 and 2007, respectively. The Company
hedges certain foreign currency commitments by purchasing foreign
currency forward contracts. The estimated fair value of open forward
contracts at September 30, 2009 was not material.

Critical Accounting policies

The preparation of financial statements in conformity with GAAP
requires Management to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying
Consolidated Financial Statements. In preparing these financial
statements, Management has made its best estimates and
judgments of certain amounts included in the Consolidated
Financial Statements, giving due consideration to materiality. The
Company does not believe there is a great likelihood that materially
different amounts would be reported under different conditions
or using different assumptions related to the accounting policies
described below. However, application of these accounting policies
involves the exercise of judgment and use of assumptions as to
future uncertainties and, as a result, actual results could differ
from these estimates. The Company’s senior Management discusses
the critical accounting policies described below with the Audit
and Finance Committee of the Company’s Board of Directors on a
periodic basis.

The following discussion of critical accounting policies is intended
to bring to the attention of readers those accounting policies which
Management believes are critical to the Consolidated Financial
Statements and other financial disclosure. It is not intended to
be a comprehensive list of all significant accounting policies
that are more fully described in Note 1 of Notes to Consolidated
Financial Statements.

ReVenue ReCognition

e S C o t e C h n o l o g i e S i n C .

2 0 0 9 A n n u A l R e p o R t

M a n a g E M E n T ’ S D i S C u S S i O n a n D a n a l y S i S

been no material changes to these estimates for the financial
statement periods presented and the Company believes that these
estimates generally should not be subject to significant variation
in the future. The remaining 4% of the segment’s revenues represent
products sold under a single element arrangement and are recognized
when services are performed for unaffiliated customers or when
products are delivered (when title and risk of ownership transfers).

Test Segment: Within the Test segment, approximately 40%
of revenues (approximately 10% of consolidated revenues) are
recognized when products are delivered (when title and risk of
ownership transfers) or when services are performed for unaffiliated
customers. Certain arrangements contain multiple elements which
are accounted for under the provisions of FASB ASC Subtopic
605-25, Revenue Recognition: Multiple-Element Arrangements. The
application of the applicable guidance requires judgment as to
whether the deliverables can be divided into more than one unit
of accounting and whether the separate units of accounting have
value to the customer on a stand-alone basis. Changes to these
elements could affect the timing of revenue recognition. There
have been no material changes to these elements for the financial
statement periods presented.

Approximately 60% of the segment’s revenues (approximately
15% of consolidated revenues) are recorded under the percentage-
of-completion provisions of FASB ASC Subtopic 605-35, Revenue
Recognition: Construction-Type and Production-Type Contracts due
to the complex nature of the enclosures that are designed and
produced under these contracts. As discussed above, this method
of accounting involves the use of various estimating techniques
to project costs at completion, which are based on Management’s
judgment and the Company’s substantial experience in developing
these types of estimates. Changes in underlying assumptions/
estimates may adversely or positively affect financial performance.
Due to the nature of these contracts and the operating unit’s cost
estimating process, the Company believes that these estimates
generally should not be subject to significant variation in the
future. There have been no material changes to these estimates for
the financial statement periods presented. The Company regularly
reviews its contract estimates to assess revisions in contract values
and estimated costs at completion.

Filtration Segment: Within the Filtration segment, approximately
60% of segment revenues (approximately 10% of consolidated
revenues) are recognized when products are delivered (when title
and risk of ownership transfers) or when services are performed for
unaffiliated customers.

because the Company manufactures complex products for aerospace
and military customers under production contracts. The percentage-
of-completion method of accounting involves the use of various
estimating techniques to project costs at completion. These
estimates involve various assumptions and projections relative
to the outcome of future events over a period of several years,
including future labor productivity and availability, the nature and
complexity of the work to be performed, availability of materials,
the impact of delayed performance, and the timing of product
deliveries. These estimates are based on Management’s judgment
and the Company’s substantial experience in developing these
types of estimates. Changes in underlying assumptions/estimates
may adversely affect financial performance if they increase
estimated project costs at completion, or positively affect financial
performance if they decrease estimated project costs at completion.
Due to the nature of these contracts and the operating unit’s cost
estimating process, the Company believes that these estimates
generally should not be subject to significant variation in the
future. There have been no material changes to these estimates for
the financial statement periods presented. The Company regularly
reviews its estimates to assess revisions in contract values and
estimated costs at completion.

inVentoRY

Inventories are valued at the lower of cost (first-in, first-out) or
market value. Management regularly reviews inventories on hand
compared to historical usage and estimated future usage and
sales. Inventories under long-term contracts reflect accumulated
production costs, factory overhead, initial tooling and other related
costs less the portion of such costs charged to cost of sales and
any unliquidated progress payments. In accordance with industry
practice, costs incurred on contracts in progress include amounts
relating to programs having production cycles longer than one year,
and a portion thereof may not be realized within one year.

inCoMe tAXeS

The Company operates in numerous taxing jurisdictions and is
subject to examination by various U.S. Federal, state and foreign
jurisdictions for various tax periods. Additionally, the Company has
retained tax liabilities and the rights to tax refunds in connection
with various divestitures of businesses in prior years. The Company’s
income tax positions are based on research and interpretations
of the income tax laws and rulings in each of the jurisdictions
in which the Company does business. Due to the subjectivity
of interpretations of laws and rulings in each jurisdiction, the
differences and interplay in tax laws between those jurisdictions, as
well as the inherent uncertainty in estimating the final resolution of
complex tax audit matters, Management’s estimates of income tax
liabilities may differ from actual payments or assessments.

e S C o t e C h n o l o g i e S i n C .

2 0 0 9 A n n u A l R e p o R t

M a n a g E M E n T ’ S D i S C u S S i O n a n D a n a l y S i S

Management regularly assesses the Company’s position with regard
to tax exposures and records liabilities for these uncertain tax
positions and related interest and penalties, if any, according to
the principles of FASB ASC Topic 740, Income Taxes (ASC 740).
The Company has recorded an accrual that reflects the recognition
and measurement process for the financial statement recognition
and measurement of a tax position taken or expected to be taken
on a tax return based upon ASC 740. Additional future income
tax expense or benefit may be recognized once the positions
are effectively settled. It is the Company’s policy to follow FASB
ASC 740-10-45-20 and record the tax effects of changes in the
opening balance of unrecognized tax benefits in net earnings from
continuing operations.

At the end of each interim reporting period, Management estimates
the effective tax rate expected to apply to the full fiscal year. The
estimated effective tax rate contemplates the expected jurisdiction
where income is earned, as well as tax planning strategies. Current
and projected growth in income in higher tax jurisdictions may
result in an increasing effective tax rate over time. If the actual
results differ from Management’s estimates, Management may
have to adjust the effective tax rate in the interim period if such
determination is made.

Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Deferred tax assets may
be reduced by a valuation allowance if it is more likely than not
that some portion of the deferred tax assets will not be realized.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance when
Management believes it is more likely than not such assets will not
be recovered, taking into consideration historical operating results,
expectations of future earnings, tax planning strategies, and the
expected timing of the reversals of existing temporary differences.

gooDWill AnD otheR long-liVeD ASSetS

In accordance with FASB ASC Topic 350, Intangibles — Goodwill and
Other (ASC 350), Management annually reviews goodwill and other
long-lived assets with indefinite useful lives for impairment or
whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. If the Company determines that
the carrying value of the long-lived asset may not be recoverable,

a permanent impairment charge is recorded for the amount by which
the carrying value of the long-lived asset exceeds its fair value. Fair
value is measured based on a discounted cash flow method using
a discount rate determined by Management to be commensurate
with the risk inherent in the Company’s current business model. The
estimates of cash flows and discount rate are subject to change due
to the economic environment, including such factors as interest
rates, expected market returns and volatility of markets served.
Management believes that the estimates of future cash flows and
fair value are reasonable; however, changes in estimates could
result in impairment charges. At September 30, 2009, the Company
has determined that no reporting units are at risk of material
goodwill impairment. Intangible assets with estimable useful lives
are amortized over their respective estimated useful lives to their
estimated residual values, and reviewed annually for impairment.

penSion plAnS AnD otheR poStRetiReMent BeneFit plAnS

The measurement of liabilities related to pension plans and
other post-retirement benefit plans is based on Management’s
assumptions related to future events including interest rates,
return on pension plan assets, rate of compensation increases, and
health care cost trend rates. Actual pension plan asset performance
will either decrease or increase unamortized pension losses that
will affect net earnings in future years. Depending upon the
performance of the equity and bond markets in 2010, the Company
could be required to record a charge to equity. In addition, if
the discount rate was decreased by 25 basis points from 5.5% to
5.25%, the projected benefit obligation for the defined benefit
plan would increase by approximately $2.1 million and result in an
additional after-tax charge to shareholders’ equity of approximately
$1.3 million. The discount rate used in measuring the Company’s
pension and postretirement welfare obligations was developed by
matching yields of actual high-quality corporate bonds to expected
future pension plan cash flows (benefit payments). Over 400 Aa-
rated, non-callable bonds with a wide range of maturities were
used in the analysis. After using the bond yields to determine the
present value of the plan cash flows, a single representative rate
that resulted in the same present value was developed.

other Matters

ContingenCieS

As a normal incident of the businesses in which the Company is
engaged, various claims, charges and litigation are asserted or
commenced against the Company. In the opinion of Management,
final judgments, if any, which might be rendered against the
Company are adequately reserved, covered by insurance, or
otherwise are not likely to have a material adverse effect on
its financial condition or results of operation.

e S C o t e C h n o l o g i e S i n C .

2 0 0 9 A n n u A l R e p o R t

M a n a g E M E n T ’ S D i S C u S S i O n a n D a n a l y S i S

QuAntitAtiVe AnD QuAlitAtiVe DiSCloSuReS ABout MARKet RiSK

new Accounting pronouncements

Market risks relating to the Company’s operations result primarily
from changes in interest rates and changes in foreign currency
exchange rates. The Company is exposed to market risk related to
changes in interest rates and selectively uses derivative financial
instruments, including forward contracts and swaps, to manage
these risks. During 2009, the Company entered into two $40 million
one-year forward interest rate swaps effective October 5, 2009, to
hedge some of its exposure to variability in future LIBOR-based
interest payments on variable rate debt. In addition, during 2008,
the Company entered into a two-year amortizing interest rate swap
to hedge some of its exposure to variability in future LIBOR-based
interest payments on variable rate debt. The swap notional amount
for the first year was $175 million amortizing to $100 million in the
second year. All derivative instruments are reported on the balance
sheet at fair value. The derivative instrument is designated as a
cash flow hedge and the gain or loss on the derivative is deferred
in accumulated other comprehensive income until recognized in
earnings with the underlying hedged item. See further discussion
in “Management’s Discussion and Analysis — Market Risk Analysis”
regarding the Company’s market risks.

ContRolS AnD pRoCeDuReS

The Company carried out an evaluation under the supervision
of and with the participation of Management, including the
Company’s Chief Executive Officer and Chief Financial Officer, of
the effectiveness of the design and operation of the Company’s
disclosure controls and procedures as of the end of the period
covered by this report. Based upon that evaluation, the Company’s
Chief Executive Officer and Chief Financial Officer concluded that
the Company’s disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and procedures that
are designed to ensure that information required to be disclosed in
Company reports filed or submitted under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within
time periods specified in the Securities and Exchange Commission’s
rules and forms. There have been no significant changes in the
Company’s internal controls or in other factors during the period
covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company’s internal control
over financial reporting.

In October 2009, the Financial Accounting Standards Board
(FASB) issued Update No. 2009-13, Multiple-Deliverable Revenue
Arrangements (ASU 2009-13) and Update No. 2009-14, Certain
Revenue Arrangements That Include Software Elements (ASU
2009-14) — consensuses of the FASB Emerging Issues Task Force.
ASU 2009-13 applies to multiple-deliverable revenue arrangements
that are currently within the scope of Subtopic 605-25 and provides
two significant changes: (i) requires an entity to allocate revenue
in an arrangement using estimated selling prices of deliverables if
a vendor does not have vendor-specific objective evidence or
third-party evidence of selling price and (ii) eliminates the residual
method to allocate the arrangement consideration. The consensus
also expands the disclosure requirements for multiple-deliverable
revenue arrangements. ASU 2009-14 removes tangible products from
the scope of the software revenue guidance and provides guidance
on determining whether software deliverables in an arrangement
that includes a tangible product are within the scope of the
software revenue guidance. These consensuses should be applied
on a prospective basis for revenue arrangements entered into in
fiscal years beginning on or after June 15, 2010 with earlier
application permitted. The Company is currently assessing the
impact of this new guidance on its Consolidated Financial
Statements and related disclosures.

On July 1, 2009, the Company adopted FASB ASC 105-10
(ASC 105-10) which established the FASB Accounting Standards
Codification (the “Codification”) as the source of authoritative
accounting principles recognized by the FASB to be applied in
the preparation of financial statements in conformity with GAAP.
Rules and interpretive releases of the SEC under authority of
Federal securities laws are also sources of authoritative GAAP
for nongovernmental entities. The adoption of this Statement
did not have a material impact on the Company’s Consolidated
Financial Statements.

Effective April 1, 2009, the Company adopted the new accounting
guidance for subsequent events as codified in FASB ASC 855,
Subsequent Events. The new guidance establishes general standards
of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. This new guidance was effective for
interim and annual financial periods ending after June 15, 2009.
The Company has evaluated subsequent events or transactions that
occurred after the balance sheet date of September 30, 2009 up
through November 30, 2009, which is the date the accompanying
Consolidated Financial Statements were issued.

e S C o t e C h n o l o g i e S i n C .

2 0 0 9 A n n u A l R e p o R t

M a n a g E M E n T ’ S D i S C u S S i O n a n D a n a l y S i S

Forward-looking information

Statements regarding future events and the Company’s future results
that are based on current expectations, estimates, forecasts and
projections about the Company’s performance and the industries in
which the Company operates, 2010 revenues, EBIT, EPS, adequacy
of the Company’s credit facilities and future cash flows, estimates
of anticipated contract costs and revenues, the anticipated total
value of the Aclara RF Contract with PG&E and with the City of
New York, the anticipated total value of Aclara PLS’s contract with
Idaho Power Company, the anticipated total value of TekPackaging’s
recently received five year production contract, the outcome of
current litigation, claims and charges, the anticipated timing and
amount of lost deferred tax assets, continued reinvestment of
foreign earnings, the timing, total value and period of performance
of contracts awarded to the Company, the accuracy of the
Company’s estimates utilized in software revenue recognition, the
accuracy of the Company’s estimates utilized to project costs at
completion in the Test segment and Filtration segment, income
tax liabilities, the effective tax rate, the amount, timing and
ability to use net research tax credits, the timing and amount of
the reduction of unrecognized tax benefits, repayment of debt
within the next twelve months, the recognition of costs related to
share-based compensation arrangements, future costs relating to
environmental matters, share repurchases, investments, sustained
performance improvement, performance improvement initiatives,
growth opportunities, new product development, the Company’s
ability to increase shareholder value, acquisitions, and the beliefs
and assumptions of Management contained in the letter To Our
Shareholders (pages 1-2), and Management’s Discussion and

Analysis and other statements contained herein which are not
strictly historical are considered “forward-looking statements”
within the meaning of the safe harbor provisions of the Federal
securities laws. Words such as expects, anticipates, targets,
goals, projects, intends, plans, believes, estimates, variations
of such words, and similar expressions are intended to identify
such forward-looking statements. Investors are cautioned that
such statements are only predictions, speak only as of the date
of this report, and the Company undertakes no duty to update.
The Company’s actual results in the future may differ materially
from those projected in the forward-looking statements due to
risks and uncertainties that exist in the Company’s operations and
business environment including, but not limited to those described
under “Item 1A. Risk Factors” in the Company’s Annual Report
on Form 10-K for the fiscal year ended September 30, 2009 and
the following: the timing and content of purchase order releases
under the PG&E contract; termination for convenience of customer
contracts; timing and magnitude of future contract awards;
weakening of economic conditions in served markets; the success
of the Company’s competitors; changes in customer demands or
customer insolvencies; competition; intellectual property rights;
technical difficulties; the availability of selected acquisitions;
delivery delays or defaults by customers; performance issues with
key customers, suppliers and subcontractors; material changes
in the costs of certain raw materials; labor disputes; changes
in laws and regulations including but not limited to changes in
accounting standards and taxation requirements; costs relating to
environmental matters; litigation uncertainty; and the Company’s
successful execution of internal operating plans.

e S C o t e C h n o l o g i e S i n C .

2 0

2 0 0 9 A n n u A l R e p o R t

C O n S O l i D a T E D S T a T E M E n T S O F O p E r a T i O n S

(Dollars in thousands, except per share amounts)
Years ended September 30,

Net sales

Costs and expenses:
Cost of sales
Selling, general and administrative expenses
Amortization of intangible assets
Interest expense (income), net

Other expenses, net

Total costs and expenses

Earnings before income tax
Income tax expense

Net earnings from continuing operations

Earnings (loss) from discontinued operations, net of tax of
$568 in 2009, $229 in 2008 and $1,161 in 2007
Loss on sale of discontinued operations, net of tax of $905 in 2009, $157 in 2008

Net earnings (loss) from discontinued operations

2009

2008

2007

$ 619,064

613,566

437,375

372,351
152,397
19,214
7,450
4,480

367,951
147,324
17,044
9,808
161

278,108
108,207
10,243
(677)
2,834

555,892

542,288

398,715

63,172
13,867

$ 49,305

135
(32)

103

71,278
23,709

47,569

(282)
(576)

(858)

38,660
7,854

30,806

2,907
—

2,907

Net earnings

$ 49,408

46,711

33,713

Earnings (loss) per share:

Basic:

Continuing operations
Discontinued operations

Net earnings

Diluted:

Continuing operations
Discontinued operations

Net earnings

Average common shares outstanding (in thousands):

Basic

Diluted

See accompanying Notes to Consolidated Financial Statements.

1.88
—

1.88

1.86
—

1.86

1.84
(0.04)

1.80

1.81
(0.03)

1.78

1.19
0.11

1.30

1.17
0.11

1.28

26,216

26,560

25,909

26,315

25,865

26,387

e S C o t e C h n o l o g i e S i n C .

2 0 0 9 A n n u A l R e p o R t

C O n S O l i D a T E D B a l a n C E S h E E T S

(Dollars in thousands)
Years ended September 30,

ASSetS

Current assets:

Cash and cash equivalents

Accounts receivable, less allowance for doubtful accounts of
$1,457 and $1,050 in 2009 and 2008, respectively

Costs and estimated earnings on long-term contracts, less progress
billings of $19,861 and $34,978 in 2009 and 2008, respectively

Inventories

Current portion of deferred tax assets

Other current assets

Current assets from discontinued operations

Total current assets

property, plant and equipment:

Land and land improvements

Buildings and leasehold improvements

Machinery and equipment

Construction in progress

Less accumulated depreciation and amortization

Net property, plant and equipment

Goodwill

Intangible assets, net

Other assets

Other assets from discontinued operations

See accompanying Notes to Consolidated Financial Statements.

2009

2008

$ 44,630

28,667

108,620

134,710

10,758

82,020

20,417

13,750

—

9,095

65,019

15,368

14,888

2,889

280,195

270,636

4,996

49,181

71,773

2,290

5,342

47,829

63,995

2,344

128,240

119,510

58,697

69,543

330,719

221,600

21,630

—

$ 923,687

47,157

72,353

328,878

236,192

17,665

2,349

928,073

e S C o t e C h n o l o g i e S i n C .

2 2

2 0 0 9 A n n u A l R e p o R t

C O n S O l i D a T E D B a l a n C E S h E E T S

(Dollars in thousands)
Years ended September 30,

liABilitieS AnD ShAReholDeRS’ eQuitY

Current liabilities:

Current maturities of long-term debt

Accounts payable

Advance payments on long-term contracts, less costs incurred
of $17,484 and $7,880 in 2009 and 2008, respectively

Accrued salaries

Current portion of deferred revenue

Accrued other expenses

Current liabilities from discontinued operations

Total current liabilities

Pension obligations

Deferred tax liabilities

Other liabilities

Long-term debt

Total liabilities

Shareholders’ equity:

Preferred stock, par value $.01 per share, authorized 10,000,000 shares

Common stock, par value $.01 per share, authorized 50,000,000 shares;

Issued 29,771,103 and 29,465,154 shares in 2009 and 2008, respectively

Additional paid-in capital

Retained earnings

Accumulated other comprehensive (loss) income, net of tax

Less treasury stock, at cost (3,357,046 and 3,375,106 common shares in

2009 and 2008, respectively)

Total shareholders’ equity

See accompanying Notes to Consolidated Financial Statements.

2009

2008

$ 50,000

47,218

2,840

20,465

20,215

23,247

—

50,000

48,982

7,467

20,409

18,226

22,058

1,541

163,985

168,683

27,483

78,471

5,941

130,467

406,347

—

298

265,794

322,878

(11,598)

12,172

83,515

11,816

183,650

459,836

—

295

254,240

273,470

556

577,372

528,561

(60,032)

(60,324)

517,340

$ 923,687

468,237

928,073

e S C o t e C h n o l o g i e S i n C .

2 3

2 0 0 9 A n n u A l R e p o R t

C O n S O l i D a T E D S T a T E M E n T S O F S h a r E h O l D E r S ’ E q u i T y

(In thousands)

Common Stock
Amount
Shares

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total

Balance, September 30, 2006

29,031

$290

236,390

193,046

(2,070)

(51,222) 376,434

Comprehensive income:

Net earnings

Translation adjustments

Minimum pension liability,
net of tax of $(1,622)

Comprehensive income

SFAS 158 adjustment, net of tax of $(358)

Stock options and stock compensation
plans, net of tax benefit of $(828)

Purchases into treasury

—

129

—

6,741

—

33,713

—

4,252

—

33,713

4,252

3,558

—

3,558

41,523

563

—

563

—

227

6,970

(10,007)

Balance, September 30, 2007

29,160

292

243,131

226,759

6,303

(61,002) 415,483

Comprehensive income:

Net earnings

Translation adjustments

Net unrecognized actuarial loss,

net of tax of $2,506

Interest rate swap, net of tax of $512

Comprehensive income

Stock options and stock compensation
plans, net of tax benefit of $(845)

—

46,711

—

(869)

(4,043)

(835)

—

46,711

(869)

—

(4,043)

(835)

40,964

305

11,109

—

678

11,790

Balance, September 30, 2008

29,465

295

254,240

273,470

556

(60,324) 468,237

Comprehensive income:

Net earnings

Translation adjustments

Net unrecognized actuarial loss,

net of tax of $7,488

Interest rate swap, net of tax of $62

Comprehensive income

Stock options and stock compensation
plans, net of tax benefit of $(325)

—

49,408

—

(707)

(11,393)

(54)

—

49,408

(707)

(11,393)

(54)

37,254

306

11,554

—

292

11,849

Balance, September 30, 2009

29,771

$298

265,794

322,878

(11,598)

(60,032) 517,340

See accompanying Notes to Consolidated Financial Statements.

e S C o t e C h n o l o g i e S i n C .

2 0 0 9 A n n u A l R e p o R t

C O n S O l i D a T E D S T a T E M E n T S O F C a S h F l O w S

(Dollars in thousands)
Years ended September 30,

Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:

2009

2008

2007

$ 49,408

46,711

33,713

Net (earnings) loss from discontinued operations, net of tax
Depreciation and amortization
Stock compensation expense
Changes in current assets and liabilities
Effect of deferred taxes on tax provision
Change in deferred revenue and costs, net
Pension contributions
Change in uncertain tax positions
Other

Net cash provided by operating activities — continuing operations

Net earnings (loss) from discontinued operations, net of tax
Net cash provided (used) by discontinued operations

Net cash provided (used) by operating activities — discontinued operations

Net cash provided by operating activities

Cash flows from investing activities:
Acquisition of businesses, net of cash acquired
Proceeds from sale of marketable securities
Change in restricted cash (acquisition escrow)
Capital expenditures
Additions to capitalized software

(103)
30,267
4,866
1,566
(2,543)
1,781
(1,997)
(5,700)
(71)

77,474

103
39

142

858
27,067
3,990
(12,154)
12,349
(3,284)
(531)
2,335
(270)

77,071

(858)
673

(185)

77,616

76,886

(6,442)
—
2,189
(9,255)
(5,004)

(345,395)
4,966
(6,841)
(16,669)
(10,488)

Net cash used by investing activities — continuing operations

(18,512)

(374,427)

Capital expenditures — discontinued operations
Proceeds from divestiture of business, net — discontinued operations

Net cash provided (used) by investing activities — discontinued operations

—
3,100

3,100

(1,140)
74,370

73,230

(2,907)
16,308
4,834
(26,384)
13,759
9,339
—
(1,281)
(2,158)

45,223

2,907
(5,564)

(2,657)

42,566

(8,250)
—
—
(12,408)
(28,555)

(49,213)

(7,095)
—

(7,095)

Net cash used by investing activities

(15,412)

(301,197)

(56,308)

Cash flows from financing activities:
Proceeds from long-term debt
Principal payments on long-term debt
Debt issuance costs
Net (decrease) increase in short-term borrowings — discontinued operations
Purchases of common stock into treasury
Excess tax benefit from stock options exercised
Proceeds from exercise of stock options
Other

Net cash (used) provided by financing activities

Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year

Cash and cash equivalents at end of year

Changes in current assets and liabilities:
Accounts receivable, net
Costs and estimated earnings on long-term contracts, net

Inventories

Other current assets
Accounts payable
Advance payments on long-term contracts, net
Accrued expenses

Supplemental cash flow information:

Interest paid
Income taxes paid (including state, foreign & AMT)

See accompanying Notes to Consolidated Financial Statements.

32,000
(85,183)
—
—
—
782
6,621
247

(45,533)

(708)
15,963
28,667

$ 44,630

$ 26,090
(1,663)
(17,001)
(714)
(1,764)
(4,627)
1,245

1,566

304,157
(71,197)
(2,965)
(2,844)
—
737
6,384
338

234,610

(270)
10,029
18,638

28,667

(32,688)
2,425
443
4,777
1,163
3,716
8,010

(12,154)

7,425
22,144

9,233
7,004

—
—
—
2,844
(10,007)
73
1,843
(173)

(5,420)

981
(18,181)
36,819

18,638

(15,424)
(10,175)
(12,007)
(4,926)
13,050
(3,959)
7,057

(26,384)

109
3,731

e S C o t e C h n o l o g i e S i n C .

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n O T E S T O C O n S O l i D a T E D F i n a n C i a l S T a T E M E n T S

1. Summary of Significant Accounting policies

A. pRinCipleS oF ConSoliDAtion

The Consolidated Financial Statements include the accounts of
ESCO Technologies Inc. (ESCO) and its wholly owned subsidiaries
(the Company). All significant intercompany transactions and
accounts have been eliminated in consolidation.

B. BASiS oF pReSentAtion

Fair values of the Company’s financial instruments are estimated
by reference to quoted prices from market sources and financial
institutions, as well as other valuation techniques. The estimated
fair value of each class of financial instruments approximated the
related carrying value at September 30, 2009 and 2008.

The business and most of the assets of Comtrak Technologies, LLC
(Comtrak) were sold during the second quarter of fiscal 2009. In
addition, the Filtertek businesses (excluding TekPackaging LLC) were
sold during fiscal 2008. Comtrak and Filtertek are accounted for as
discontinued operations in accordance with accounting principles
generally accepted in the United States of America (GAAP).

C. nAtuRe oF opeRAtionS

The Company has three reportable segments: Utility Solutions
Group (USG), RF Shielding and Test (Test), and Filtration/Fluid Flow
(Filtration).

USG: The Aclara Group is a proven supplier of special purpose
fixed-network communications systems for electric, gas and water
utilities, including hardware and software to support advanced
metering applications. Doble provides high-end, intelligent,
diagnostic test solutions for the electric power delivery industry.

Test: The EMC Group is an industry leader in providing its customers
with the ability to identify, measure and contain magnetic,
electromagnetic and acoustic energy.

D. uSe oF eStiMAteS

The preparation of financial statements in conformity with GAAP
requires Management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting periods. The Company regularly evaluates the
estimates and assumptions related to the allowance for doubtful

trade receivables, inventory obsolescence, warranty reserves, value
of equity-based awards, goodwill and purchased intangible asset
valuations, asset impairments, employee benefit plan liabilities,
income tax liabilities and assets and related valuation allowances,
uncertain tax positions, and litigation and other loss contingencies.
Actual results could differ from those estimates.

e. ReVenue ReCognition

USG Segment: Within the USG segment, approximately 96%
of the segment’s revenue arrangements (approximately 60% of
consolidated revenues) contain software components. Revenue
under these arrangements is recognized in accordance with FASB
ASC Subtopic 985-605, Software — Revenue Recognition. The
segment’s software revenue arrangements within the Aclara Group
generally include multiple products and services, or “elements”
consisting of meter and substation hardware, meter reading system
software, program management support during the deployment
period and software support (post-contract customer support,
“PCS”). These arrangements typically require the Company to
deliver software at the inception of the arrangement while the
hardware and program management support are delivered over
the contractual deployment period. Software support is provided
during deployment and subsequent thereto. The software element
included in such arrangements is essential to the functionality
of the hardware and, therefore, the hardware is considered to be
software-related. Hardware is considered a specified element in the
software arrangement and vendor-specific objective evidence of
fair value (“VSOE”) has been established for this element. VSOE for
the hardware element is determined based on the price when sold
separately to customers. These revenue arrangements are divided
into separate units of accounting if the delivered item(s) has
value to the customer on a stand-alone basis, there is objective
and reliable evidence of the fair value of the undelivered item(s)
and delivery/performance of the undelivered item(s) is probable.
For multiple element arrangements, revenue is allocated to the
individual elements based on VSOE of the individual elements.

The application of these principles requires judgment, including the
determination of whether a software arrangement includes multiple
elements and estimates of the fair value of the elements. The VSOE
of the fair value of undelivered elements is determined based on
the historical evidence of stand-alone sales of these elements to
customers. Hardware revenues are generally recognized at the time
of shipment or receipt by customer depending upon contract terms.
VSOE generally does not exist for the software element; therefore,
the Company uses the residual method to recognize revenue when
VSOE exists for all other undelivered elements. Under the residual
method, the fair value of the undelivered elements is deferred
and the remaining portion of the arrangement fee is recognized
as revenue.

e S C o t e C h n o l o g i e S i n C .

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n O T E S T O C O n S O l i D a T E D F i n a n C i a l S T a T E M E n T S

The applicable guidance requires the seller of software that
includes post-contract customer support (PCS) to establish VSOE
of the undelivered element of the contract in order to account
separately for the PCS revenue. The Company determines VSOE by
a consistent pricing of PCS and PCS renewals as a percentage of
the software license fees or by reference to contractual renewals,
when the renewal terms are substantive. Revenues for PCS are
recognized ratably over the maintenance term specified in the
contract (generally in 12 monthly increments). Revenues for
program management support are recognized when services have
been provided. The Company determines VSOE for program
management support based on hourly rates when services are
performed separately.

Approximately 4% of segment revenues are recognized when
services are performed for unaffiliated customers or when products
are delivered (when title and risk of ownership transfers).

Test Segment: Within the Test segment, approximately 40%
of revenues (approximately 10% of consolidated revenues) are
recognized when products are delivered (when title and risk of
ownership transfers) or when services are performed for unaffiliated
customers. Certain arrangements contain multiple elements which
are accounted for under the provisions of FASB ASC Subtopic
605-25, Revenue Recognition: Multiple-Element Arrangements. The
multiple elements generally consist of materials and installation
services used in the construction and installation of standard
shielded enclosures to measure and contain magnetic and
electromagnetic energy. The installation process does not involve
changes to the features or capabilities of the equipment and does
not require proprietary information about the equipment in order
for the installed equipment to perform to specifications. There is
objective and reliable evidence of fair value for each of the units
of accounting, and as a result, the arrangement revenue is allocated
to the separate units of accounting based on their relative fair
values. Typically, fair value is the price of the deliverable when
it is regularly sold on a stand-alone basis.

Approximately 60% of the segment’s revenues (approximately
15% of consolidated revenues) are recorded under the percentage-
of-completion provisions of FASB ASC Subtopic 605-35, Revenue
Recognition: Construction-Type and Production-Type Contracts due
to the complex nature of the enclosures that are designed and
produced under these contracts. Products accounted for under this
Subtopic include the construction and installation of complex test
chambers to a buyer’s specifications that provide its customers
with the ability to measure and contain magnetic, electromagnetic
and acoustic energy. As discussed above, for arrangements that are
accounted for under this Subtopic, the Company estimates profit as
the difference between total estimated revenue and total estimated
cost of a contract and recognizes these revenues and costs based
on either (a) units delivered or (b) contract milestones.

If a reliable measure of output cannot be established (which applies
in less than 10% of Test segment revenues or 2% of consolidated
revenues), input measures (e.g., costs incurred) are used to
recognize revenue. Given the nature of the Company’s operations
related to these contracts, costs incurred represent an appropriate
measure of progress towards completion.

The percentage-of-completion method of accounting involves the
use of various techniques to estimate expected costs at completion.
These estimates are based on Management’s judgment and the
Company’s substantial experience in developing these types
of estimates.

Filtration Segment: Within the Filtration segment, approximately
60% of revenues (approximately 10% of consolidated revenues)
are recognized when products are delivered (when title and risk
of ownership transfers) or when services are performed for
unaffiliated customers.

Approximately 40% of segment revenues (approximately 5% of
consolidated revenues) are recorded under the percentage-of-
completion provisions of FASB ASC Subtopic 605-35, Revenue
Recognition: Construction-Type and Production-Type Contracts.
Products accounted for under this Subtopic include the design,
development and manufacture of complex fluid control products,
quiet valves, manifolds and systems primarily for the aerospace
and military markets. For arrangements that are accounted for
under this Subtopic, the Company estimates profit as the difference
between total estimated revenue and total estimated cost of a
contract and recognizes these revenues and costs based on units
delivered. The percentage-of-completion method of accounting
involves the use of various techniques to estimate expected costs
at completion.

F. CASh AnD CASh eQuiVAlentS

Cash equivalents include temporary investments that are readily
convertible into cash, such as money market funds.

g. ACCountS ReCeiVABle

Accounts receivable have been reduced by an allowance for
amounts that the Company estimates are uncollectible in the
future. This estimated allowance is based on Management’s
evaluation of the financial condition of the customer and historical
write-off experience.

h. CoStS AnD eStiMAteD eARningS on long-teRM ContRACtS

Costs and estimated earnings on long-term contracts represent
unbilled revenues, including accrued profits, accounted for under
the percentage-of-completion method, net of progress billings.

e S C o t e C h n o l o g i e S i n C .

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n O T E S T O C O n S O l i D a T E D F i n a n C i a l S T a T E M E n T S

i. inVentoRieS

Inventories are valued at the lower of cost (first-in, first-out)
or market value. Inventories under long-term contracts reflect
accumulated production costs, factory overhead, initial tooling and
other related costs less the portion of such costs charged to cost of
sales and any unliquidated progress payments. In accordance with
industry practice, costs incurred on contracts in progress include
amounts relating to programs having production cycles longer than
one year, and a portion thereof will not be realized within one year.

J. pRopeRtY, plAnt AnD eQuipMent

Property, plant and equipment are recorded at cost. Depreciation
and amortization are computed primarily on a straight-line
basis over the estimated useful lives of the assets: buildings,
10-40 years; machinery and equipment, 3-10 years; and office
furniture and equipment, 3-10 years. Leasehold improvements are
amortized over the remaining term of the applicable lease or their
estimated useful lives, whichever is shorter.

K. gooDWill AnD otheR long-liVeD ASSetS

Goodwill represents the excess of purchase costs over the fair
value of net identifiable assets acquired in business acquisitions.
The Company accounts for goodwill as required by FASB ASC Topic
350, Intangibles — Goodwill & Other. Management annually reviews
goodwill and other long-lived assets with indefinite useful lives
for impairment or whenever events or changes in circumstances
indicate the carrying amount may not be recoverable. If the
Company determines that the carrying value of the long-lived asset
may not be recoverable, a permanent impairment charge is recorded
for the amount by which the carrying value of the long-lived asset
exceeds its fair value.

Fair value is measured based on a discounted cash flow
method using a discount rate determined by Management to be
commensurate with the risk inherent in the Company’s current
business model. Other intangible assets represent costs allocated
to identifiable intangible assets, principally capitalized software,
patents, trademarks, and technology rights. See Note 4 regarding
goodwill and other intangible assets activity.

l. CApitAliZeD SoFtWARe

The costs incurred for the development of computer software
that will be sold, leased, or otherwise marketed are charged
to expense when incurred as research and development until
technological feasibility has been established for the product.
Technological feasibility is typically established upon completion
of a detailed program design. Costs incurred after this point are
capitalized on a project-by-project basis in accordance with FASB
ASC Topic 985, Software. Capitalized costs primarily consist of

external development costs. Upon general release of the product
to customers, the Company ceases capitalization and begins
amortization, which is calculated on a project-by-project basis
as the greater of (1) the ratio of current gross revenues for a
product to the total of current and anticipated future gross
revenues for the product or (2) the straight-line method over the
estimated economic life of the product. The Company generally
amortizes the software development costs over a three-to-seven
year period based upon the estimated future economic life of the
product. Factors considered in determining the estimated future
economic life of the product include anticipated future revenues,
and changes in software and hardware technologies. Management
annually reviews the carrying values of capitalized costs for
impairment or whenever events or changes in circumstances
indicate the carrying amount may not be recoverable. If expected
cash flows are insufficient to recover the carrying amount of the
asset, then an impairment loss is recognized to state the asset at
its net realizable value.

M. iMpAiRMent oF long-liVeD ASSetS AnD long-liVeD ASSetS

to Be DiSpoSeD oF

Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future cash flows
expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the
fair value of the assets. Assets to be disposed of are reported at the
lower of the carrying amount or fair value less costs to dispose.

n. inCoMe tAXeS

Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences
are expected to be recovered or settled. Deferred tax assets may be
reduced by a valuation allowance if it is more likely than not that
some portion or all of the deferred tax assets will not be realized.
The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance when
Management believes it is more likely than not such assets will not
be recovered, taking into consideration historical operating results,
expectations of future earnings, tax planning strategies, and the
expected timing of the reversals of existing temporary differences.

e S C o t e C h n o l o g i e S i n C .

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n O T E S T O C O n S O l i D a T E D F i n a n C i a l S T a T E M E n T S

o. ReSeARCh AnD DeVelopMent CoStS

Company-sponsored research and development costs include
research and development and bid and proposal efforts related to
the Company’s products and services. Company-sponsored product
development costs are charged to expense when incurred. Customer-
sponsored research and development costs incurred pursuant
to contracts are accounted for similar to other program costs.
Customer-sponsored research and development costs refer to certain
situations whereby customers provide funding to support specific
contractually defined research and development costs.

p. FoReign CuRRenCY tRAnSlAtion

The financial statements of the Company’s foreign operations are
translated into U.S. dollars in accordance with FASB ASC Topic 830,
Foreign Currency Matters. The resulting translation adjustments
are recorded as a separate component of accumulated other
comprehensive income.

Q. eARningS peR ShARe

Basic earnings per share is calculated using the weighted average
number of common shares outstanding during the period. Diluted
earnings per share is calculated using the weighted average number
of common shares outstanding during the period plus shares
issuable upon the assumed exercise of dilutive common share
options and vesting of performance-accelerated restricted shares
using the treasury stock method.

The number of shares used in the calculation of earnings per share
for each year presented is as follows:

(In thousands)

2009

2008

2007

Weighted Average Shares
Outstanding — Basic

Dilutive Options and Performance-
Accelerated Restricted Stock

26,216

25,909

25,865

the common shares. These options expire in various periods through
2013. Approximately 180,000, 140,000 and 76,000 restricted shares
were outstanding but unearned at September 30, 2009, 2008 and
2007, respectively, and, therefore, were not included in the respec-
tive years’ computations of diluted EPS.

R. ShARe-BASeD CoMpenSAtion

S. CoMpRehenSiVe inCoMe (loSS)

Accumulated other comprehensive loss of $(11.6) million at
September 30, 2009 as shown on the consolidated balance sheet,
net of tax, consisted of $(17.9) million related to a pension
net actuarial loss; $7.2 million related to currency translation
adjustments; and $(0.9) million related to interest rate swaps.
Accumulated other comprehensive income of $0.6 million at
September 30, 2008 consisted of $7.9 million related to currency
translation adjustments; $(6.5) million related to the pension net
actuarial loss; and $(0.8) million related to interest rate swaps.

t. DeFeRReD ReVenue AnD CoStS

Deferred revenue and costs are recorded for products or services
that have not been provided but have been invoiced under
contractual agreements or paid for by a customer, or when products
or services have been provided but the criteria for revenue
recognition have not been met. If there is a customer acceptance
provision or there is uncertainty about customer acceptance,
revenue and costs are deferred until the customer has accepted the
product or service.

344

406

522

u. DeRiVAtiVe FinAnCiAl inStRuMentS

Adjusted Shares — Diluted

26,560

26,315

26,387

Options to purchase 605,186 shares at prices ranging from
$35.69-$54.88 were outstanding during the year ended
September 30, 2009, but were not included in the respective
computation of diluted EPS because the options’ exercise price
was greater than the average market price of the common shares.
Options to purchase 542,689 shares at prices ranging from $35.69-
$54.88 were outstanding during the year ended September 30,
2008, but were not included in the respective computation of
diluted EPS because the options’ exercise price was greater than the
average market price of the common shares. Options to purchase
602,731 shares at prices ranging from $36.07-$54.88 were out-
standing during the year ended September 30, 2007, but were not
included in the respective computation of diluted EPS because the
options’ exercise price was greater than the average market price of

All derivative financial instruments are reported on the balance
sheet at fair value. The accounting for changes in fair value of a
derivative instrument depends on whether it has been designated
and qualifies as a hedge and on the type of hedge. For each
derivative instrument designated as a cash flow hedge, the
effective portion of the gain or loss on the derivative is deferred
in accumulated other comprehensive income until recognized in
earnings with the underlying hedged item. For each derivative
instrument designated as a fair value hedge, the gain or loss on
the derivative and the offsetting gain or loss on the hedged item
are recognized immediately in earnings. Regardless of type, a
fully effective hedge will result in no net earnings impact while
the derivative is outstanding. To the extent that any hedge is
ineffective at offsetting cash flow or fair value changes in the
underlying hedged item, there could be a net earnings impact.

e S C o t e C h n o l o g i e S i n C .

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n O T E S T O C O n S O l i D a T E D F i n a n C i a l S T a T E M E n T S

V. neW ACCounting StAnDARDS

2. Divestitures

In October 2009, the Financial Accounting Standards Board
(FASB) issued Update No. 2009-13, Multiple-Deliverable Revenue
Arrangements (ASU 2009-13) and Update No. 2009-14, Certain
Revenue Arrangements That Include Software Elements (ASU 2009-
14) — consensuses of the FASB Emerging Issues Task Force. ASU
2009-13 applies to multiple-deliverable revenue arrangements that
are currently within the scope of Subtopic 605-25 and provides
two significant changes: (i) requires an entity to allocate revenue
in an arrangement using estimated selling prices of deliverables
if a vendor does not have vendor-specific objective evidence or
third-party evidence of selling price and (ii) eliminates the residual
method to allocate the arrangement consideration. The consensus
also expands the disclosure requirements for multiple-deliverable
revenue arrangements. ASU 2009-14 removes tangible products from
the scope of the software revenue guidance and provides guidance
on determining whether software deliverables in an arrangement
that includes a tangible product are within the scope of the
software revenue guidance. These consensuses should be applied
on a prospective basis for revenue arrangements entered into
in fiscal years beginning on or after June 15, 2010 with earlier
application permitted. The Company is currently assessing
the impact of this new guidance on its Consolidated Financial
Statements and related disclosures.

On March 13, 2009, the Company completed the sale of the
business and most of the assets of Comtrak Technologies, LLC
(Comtrak) for $3.1 million, net, of cash (referred to as the “Comtrak
sale”). This business is reflected as a discontinued operation
in the financial statements and related notes for all periods
presented. Comtrak’s operations were previously included within
the Company’s Utility Solutions Group segment. A pretax loss of
$1.2 million related to the sale and its 2009 results of operations
are reflected in the Company’s fiscal 2009 results in discontinued
operations. Comtrak’s net sales were $3.4 million, $10.3 million,
and $7.3 million for the years ended September 30, 2009, 2008 and
2007, respectively. The pretax loss from Comtrak’s operations was
$0.3 million and $0.6 million for the years ended September 30,
2008 and 2007, respectively.

On November 25, 2007, the Company completed the sale of the
filtration portion of Filtertek Inc. (Filtertek) to Illinois Tool Works
Inc. for $74.4 million, net. The TekPack division of Filtertek was not
included in the transaction. Accordingly, the Filtertek businesses
are reflected as discontinued operations in the financial statements
and related notes for all periods presented. A pretax loss of
$0.2 million related to Filtertek is reflected in the Company’s fiscal
2008 results in discontinued operations. Filtertek’s net sales were
$13.7 million for the two-month period ended November 25, 2007.
Filtertek’s net sales and pretax earnings were $82.8 million and
$4.7 million, respectively, for the year ended September 30, 2007.
Filtertek’s operations were included within the Company’s Filtration
segment prior to divestiture. The operations of the TekPack business
are reflected in continuing operations and continue to be included
in the Filtration segment.

3. Acquisitions

2009

On September 21, 2009, the Company acquired a minority equity
interest in Firetide, Inc. for $4 million in cash. Firetide, Inc. is
a provider of wireless infrastructure mesh network management
systems which will enable communications with other Smart
Grid assets and this technology will be used in Aclara’s Smart
Communications Network solution. This investment is accounted
for under the cost method and is classified as a long-term other
asset on the Company’s consolidated balance sheet as of
September 30, 2009.

e S C o t e C h n o l o g i e S i n C .

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n O T E S T O C O n S O l i D a T E D F i n a n C i a l S T a T E M E n T S

2008

The purchase price allocation was as follows:

(In thousands)

Net tangible assets
Identifiable intangible assets:
Trade names
Customer relationships
Software and databases

Total identifiable intangible assets
Goodwill
Long-term deferred tax liabilities

Total cash consideration

Reconciliation of purchase price:
Total cash consideration
Less: cash acquired

Purchase price

$ 44,498

112,290
52,510
3,790

168,590
192,203
(67,830)

$ 337,461

$ 337,461
(9,639)

$ 327,822

The identifiable intangible assets consisting of customer
relationships will be amortized on a straight-line basis over twenty
years and the software and databases will be amortized on a
straight-line basis over five years. The identifiable intangible asset
consisting of trade names has an indefinite life and is not subject
to amortization.

pro Forma Results

The following pro forma financial information for the years ended
September 30, 2008 and 2007 presents the combined results of
operations of ESCO and Doble as if the acquisition had occurred
on October 1, 2006. The pro forma financial information for the
periods presented excludes the Comtrak business which was sold in
March 2009 and the Filtertek business which was sold in November
2007. The combined results of operations have been adjusted
for the impact of certain acquisition-related items, including
additional amortization of identifiable intangible assets, additional
financing expenses and other direct costs. The impact of pro forma
adjustments are tax-effected at the expected future consolidated
corporate tax rate.

The unaudited pro forma financial information is not intended to
represent, or be indicative of, the Company’s consolidated results
of operations or financial condition that would have been reported

had the acquisition been completed as of the beginning of each of
the periods presented. This information is provided for illustrative
purposes only and is not necessarily indicative of the Company’s
future consolidated results of operations or financial condition.

(In millions, except per share data)
(Unaudited)

Pro Forma Results

Net sales
Net earnings from continuing operations

Net earnings per share
Basic
Diluted

FY 2008

FY 2007

$ 629.8
$ 47.1

516.9
34.8

$ 1.82
$ 1.79

1.34
1.31

On July 31, 2008, the Company acquired the capital stock of
LDIC GmbH and LDIC AG (collectively “LDIC”) for a purchase price
of approximately $13 million, net of cash acquired. LDIC, with
operations in Germany and Switzerland, is a manufacturer of partial
discharge diagnostic testing instruments and systems serving the
international electric utility industry. The operating results for
LDIC since the date of acquisition are included within Doble in
the USG segment. The Company recorded approximately $8 million
of goodwill as a result of the transaction, $2.5 million of trade
names and $1.5 million of amortizable identifiable intangible assets
consisting of customer relationships which are being amortized
on a straight-line basis over seven years. In connection with the
acquisition, the Company has $5.2 million of cash in an escrow
account to be earned by the sellers if the future target revenues
are achieved. The $5.2 million is classified as restricted cash and
is included in Other assets on the Company’s consolidated balance
sheet at September 30, 2009.

2007

On August 10, 2007, the Company acquired the assets and certain
liabilities of Wintec, LLC (Wintec) for a purchase price of $6 million
and recorded approximately $5 million of goodwill in connection
with the transaction. The operating results for Wintec, since
the date of acquisition, are included within VACCO in the
Filtration segment.

All of the Company’s acquisitions have been accounted for using
the purchase method of accounting and accordingly, the respective
purchase prices were allocated to the assets (including intangible
assets) acquired and liabilities assumed based on estimated
fair values at the date of acquisition. The financial results from
these acquisitions have been included in the Company’s financial
statements from the date of acquisition. Pro forma financial
information related to the Company’s acquisitions, excluding Doble,
was not presented as it was not significant to the Company’s
results of operations. None of the goodwill recorded as part of the
acquisitions mentioned above is expected to be deductible for U.S.
Federal or state income tax purposes.

e S C o t e C h n o l o g i e S i n C .

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4. goodwill and other intangible Assets

Included on the Company’s Consolidated Balance Sheets at
September 30, 2009 and 2008 are the following intangible assets
gross carrying amounts and accumulated amortization:

(Dollars in millions)

Goodwill

2009

2008

$ 330.7

328.9

Intangible assets with determinable lives:
Patents

Gross carrying amount
Less: accumulated amortization

Net

Capitalized software

Gross carrying amount
Less: accumulated amortization

Net

Customer Relationships

Gross carrying amount
Less: accumulated amortization

Net

Other

Gross carrying amount
Less: accumulated amortization

Net

$ 13.6
13.1

$ 0.5

$ 93.7
41.9

$ 51.8

$ 54.0
5.0

$ 49.0

$ 10.2
7.5

$ 2.7

13.6
12.8

0.8

88.6
26.8

61.8

54.0
2.2

51.8

10.0
6.5

3.5

Amortization expense related to intangible assets with determinable
lives was $19.2 million, $17.0 million and $10.2 million in
2009, 2008 and 2007, respectively. The increase in amortization
expense in 2009 as compared to the prior years was mainly
due to the Company’s TWACS NG software and the purchase
accounting intangible assets. The Company recorded $12.2 million,
$11.0 million and $6.2 million of amortization expense related
to Aclara PLS’s TWACS NG software in 2009, 2008 and 2007,
respectively. Patents are amortized over the life of the patents,
generally 17 years. Capitalized software is amortized over the
estimated useful life of the software, generally three to seven years.
Intangible asset amortization for fiscal years 2010 through 2014 is
estimated at approximately $11 million declining to $9.5 million
per year. The decrease in expected intangible asset amortization in
2010 as compared to 2009 is related to the TWACS NG software.

5. Accounts Receivable

Accounts receivable, net of the allowance for doubtful accounts,
consist of the following at September 30, 2009 and 2008:

(Dollars in thousands)

Commercial

2009

2008

$104,409

126,134

U.S. Government and prime contractors

4,211

8,576

Total

$108,620

134,710

6. inventories

Intangible assets with indeterminable lives:
Trade names

$ 117.6

118.3

Inventories consist of the following at September 30, 2009
and 2008:

The Company performed its annual evaluation of goodwill and
intangible assets for impairment during the fourth quarter of fiscal
2009 and concluded no impairment existed at September 30, 2009.

The changes in the carrying amount of goodwill attributable to each
business segment for the years ended September 30, 2009 and 2008
are as follows:

(Dollars in millions)

USG

Test

Filtration

Total

(Dollars in thousands)

Finished goods

Work in process — including

long-term contracts

Raw materials

Total

2009

2008

$38,153

19,865

16,433

27,434

15,736

29,418

$82,020

65,019

Balance as of
September 30, 2007

Divestiture
Acquisitions

Balance as of
September 30, 2008

Acquisitions

Balance as of
September 30, 2009

$ 75.4
—
203.7

279.1

0.8

29.1
—
0.4

29.5

1.0

45.0
(24.7)
—

149.5
(24.7)
204.1

20.3

328.9

—

1.8

$ 279.9

30.5

20.3

330.7

7. property, plant and equipment

Depreciation expense of property, plant and equipment from
continuing operations for the years ended September 30, 2009,
2008 and 2007 was $11.1 million, $10.0 million and $6.3 million,
respectively.

The Company leases certain real property, equipment and machinery
under noncancelable operating leases. Rental expense under these
operating leases for the years ended September 30, 2009, 2008 and
2007 was $8.0 million, $7.8 million and $6.6 million, respectively.

e S C o t e C h n o l o g i e S i n C .

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Future aggregate minimum lease payments under operating leases
that have initial or remaining noncancelable lease terms in excess
of one year as of September 30, 2009 are:

(Dollars in thousands)
Years ending September 30:

2010

2011

2012

2013

2014 and thereafter

Total

8. income tax expense

$ 7,401

6,179

5,580

3,239

7,168

$29,567

Total income tax expense for the years ended September 30, 2009,
2008 and 2007 was allocated as follows:

(Dollars in thousands)

2009

2008

2007

Income tax expense from
continuing operations
Discontinued operations

$13,867
(1,473)

23,709
386

Total income tax expense

$12,394

24,095

7,854
1,161

9,015

The components of income from continuing operations before
income taxes consisted of the following for the years ended
September 30:

(Dollars in thousands)

2009

2008

2007

United States
Foreign

$60,477
2,695

66,723
4,555

34,543
4,117

Total income before income taxes $63,172

71,278

38,660

The principal components of income tax expense from continuing
operations for the years ended September 30, 2009, 2008 and 2007
consist of:

(Dollars in thousands)

2009

2008

2007

Federal

Current (including Alternative

Minimum Tax)

$ 10,425

463

(5,820)

Deferred

State and local:

Current

Deferred

Foreign:

Current

Deferred

Total

(1,666)

16,820

9,831

4,683

(421)

2,788

2,139

992

1,916

1,179

1,234

1,106

(333)

265

(171)

$ 13,867

23,709

7,854

The actual income tax expense from continuing operations for the
years ended September 30, 2009, 2008 and 2007 differs from the
expected tax expense for those years (computed by applying the
U.S. Federal corporate statutory rate) as follows:

2009

2008

2007

Federal corporate statutory rate

35.0%

State and local, net of Federal benefits

4.4

Foreign

Research credit

Export Incentive

Domestic production deduction

Share-based compensation

Change in tax contingencies

(0.2)

(7.5)

—

(1.8)

0.4

—

2.5

(0.3)

(1.4)

(2.2)

(1.1)

0.7

—

Change in uncertain tax positions

(7.9)

(0.3)

Release of valuation allowance

Other, net

—

(0.4)

—

0.4

2.8

(1.3)

(11.4)

—

3.6

(5.8)

—

(2.0)

(0.6)

Effective income tax rate

22.0%

33.3%

20.3%

The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30,
2009 and 2008 are presented below.

(Dollars in thousands)

Deferred tax assets:

2009

2008

Inventories, long-term contract accounting,

contract cost reserves and others

4,017

Pension and other postretirement benefits

11,421

Net operating loss carryforward — domestic

Net operating loss carryforward — foreign

Capital loss carryforward

Other compensation-related costs

and other cost accruals

Research credit carryforward

Total deferred tax assets

Deferred tax liabilities:

1,964

4,393

1,429

3,950

8,297

1,516

1,468

254

11,761

10,830

5,843

10,020

36,280

40,883

Plant and equipment, depreciation methods,
acquisition asset allocations, and other

(92,708)

(96,783)

Net deferred tax liabilities before
valuation allowance

Less valuation allowance

(56,428)

(55,900)

(1,626)

(12,247)

Net deferred tax liabilities

$ (58,054)

(68,147)

e S C o t e C h n o l o g i e S i n C .

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At September 30, 2009, the Company has established a valuation
allowance of $0.3 million against the capital loss carryforward
generated in 2008, as such loss carryforward may not be realized
in future periods. The Company reduced the valuation allowance
by $7.3 million in fiscal 2009 as a result of the expiration of a
capital loss carryforward. In addition, the Company has established
a valuation allowance against certain net operating loss (NOL)
carryforwards in foreign jurisdictions which may not be realized
in future periods. The valuation allowance established against
the foreign NOL carryforwards was $1.4 million and $3.9 million
at September 30, 2009 and 2008, respectively. The decrease is
mainly a result of the legal dissolution of foreign entities with
NOL carryforwards. The Company classifies its valuation allowance
related to deferred taxes on a pro rata basis.

The Company expects the net research tax credits related to fiscal
year 2009 to be approximately $0.7 million. The expiration of
the research credits is between 2026 and 2029. The Company
anticipates being able to utilize the research credits to reduce
future Federal income tax cash payments. Research credits of
$3.5 million were included in the fiscal 2009 provision as a result
of a decrease in the Company’s tax positions for the fiscal years
2000 through 2007.

No deferred taxes have been provided on the accumulated
unremitted earnings of $29.5 million for the Company’s foreign
subsidiaries as of September 30, 2009. The Company’s intention is
to reinvest these earnings indefinitely. In the event these foreign
entities’ earnings were distributed, it is estimated that U.S. taxes,
net of available foreign tax credits, of approximately $5.1 million
would be due, which would correspondingly reduce the Company’s
net earnings.

As of September 30, 2009, the Company had $3.3 million of
unrecognized benefits (see table below), of which $3.2 million,
net of Federal benefit, if recognized, would affect the Company’s
effective tax rate.

A reconciliation of the Company’s unrecognized tax benefits for the
year ended September 30, 2009 is presented in the table below:

(Dollars in millions)

Balance as of October 1, 2008

Increases related to prior year tax positions

Decreases related to prior year tax positions

Increases related to current year tax positions

Decreases related to settlements with taxing authorities

Lapse of statute of limitations

Balance as of September 30, 2009

$ 13.0

0.2

(10.0)

0.9

(0.7)

(0.1)

$ 3.3

The $10.0 million decrease related to prior year tax positions was
primarily the result of the closing of a U.S. taxing authority’s
examination of the Company’s research credit claims and the
confirmation of the Company’s tax position for the deduction of
losses realized on the disposition of a portion of the MicroSep
business in 2004. It is the Company’s policy to record the tax
effects of changes in the opening balance of unrecognized tax
benefits in net earnings from continuing operations.

The Company anticipates a $0.2 million reduction in the amount of
unrecognized tax benefits in the next twelve months as a result of a
lapse of the applicable statute of limitations. The Company’s policy
is to include interest related to unrecognized tax benefits in income
tax expense and penalties in operating expense. As of September 30,
2009, the Company had accrued interest related to uncertain tax
positions of $0.1 million, net of Federal income tax benefit, on its
consolidated balance sheet. No penalties have been accrued.

The principal jurisdictions for which the Company files income tax
returns are U.S. Federal and the various city, state, and interna-
tional locations where the Company has operations. Due to the
timing of the utilization of the Company’s net operating loss,
the 1994 through 2008 U.S. Federal tax years remain subject to
income tax examination. In the fourth quarter of 2009, the Internal
Revenue Service (IRS) completed its examination of the Company’s
U.S. income tax returns for the periods ended September 30, 2003
through September 30, 2007; and the Company and the IRS reached
mutual agreement of the adjustments to those returns. Various
state tax years from 2004 through 2008 remain subject to income
tax examinations. The Company is subject to income tax in many
jurisdictions outside the United States, none of which is individu-
ally material to the Company’s financial position, statements of
cash flows, or results of operations.

9. Debt

Debt consists of the following at September 30, 2009 and 2008:

(Dollars in thousands)

2009

2008

Revolving credit facility,

including current portion

$180,467

233,650

Current portion of long-term debt

(50,000)

Total long-term debt,
less current portion

$130,467

183,650

e S C o t e C h n o l o g i e S i n C .

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At September 30, 2009, the Company had approximately
$193 million available to borrow comprised of: approximately
$143 million available under the credit facility, plus a $50 million
increase option, in addition to $44.6 million cash on hand. The
Company classified $50 million as the current portion on long-
term debt as of September 30, 2009, as the Company intends to
repay this amount within the next twelve months; however, the
Company has no contractual obligation to repay such amount during
the next twelve months. The credit facility has a maturity date of
November 30, 2012.

The credit facility requires, as determined by certain financial
ratios, a facility fee ranging from 15 to 25 basis points per annum
on the unused portion. The terms of the facility provide that
interest on borrowings may be calculated at a spread over the
London Interbank Offered Rate (LIBOR) or based on the prime rate,
at the Company’s election. The facility is secured by the unlimited
guaranty of the Company’s material domestic subsidiaries and
a 65% pledge of the material foreign subsidiaries’ share equity.
The financial covenants of the credit facility include a leverage
ratio and an interest coverage ratio. During 2009 and 2008, the
maximum aggregate short-term borrowings at any month-end
were $225.7 million and $274.7 million, respectively; the average
aggregate short-term borrowings outstanding based on month-end
balances were $210.8 million and $249.8 million, respectively; and
the weighted average interest rates were 3.26%, 4.75%, and 6.24%
for 2009, 2008 and 2007, respectively. The letters of credit issued
and outstanding under the credit facility totaled $7.2 million and
$6.6 million at September 30, 2009, and 2008, respectively.

10. Capital Stock

The 29,771,103 and 29,465,154 common shares as presented
in the accompanying Consolidated Balance Sheets at
September 30, 2009 and 2008 represent the actual number of
shares issued at the respective dates. The Company held 3,357,046
and 3,375,106 common shares in treasury at September 30, 2009
and 2008, respectively.

In August 2009, the Company’s Board of Directors authorized an
open market common stock repurchase program of the Company’s
shares at a value not to exceed $30 million, subject to market
conditions and other factors which covers the period through
September 30, 2010. There were no stock repurchases during 2009
or 2008. The Company repurchased $10 million or 265,000 shares
during 2007.

11. Share-Based Compensation

The Company provides compensation benefits to certain key
employees under several share-based plans providing for employee
stock options and/or performance-accelerated restricted shares
(restricted shares), and to non-employee directors under a non-
employee directors compensation plan. During fiscal 2004, the
Board of Directors authorized and the shareholders approved, the
2004 Incentive Compensation Plan, which states, in part, that on
February 5, 2004, there shall be 2,000,000 shares added to the
authorized shares allocated for the grant of stock options, stock
appreciation rights, performance-accelerated restricted stock,
or other full value awards. Of these, shares up to 600,000 may
be utilized for performance-accelerated restricted stock or other
full value awards. At September 30, 2009, the maximum number
of full value shares available for issue under the 2004 Incentive
Compensation Plan and the 2001 Stock Incentive Plan was 600,000
and 89,708 shares, respectively.

Stock option plans

The Company’s stock option awards are generally subject to graded
vesting over a three-year service period. All outstanding options
were granted at prices equal to fair market value at the date of
grant. The options granted prior to September 30, 2003 have a
ten-year contractual life from date of issuance, expiring in various
periods through 2013. Beginning in fiscal 2004, the options
granted have a five-year contractual life from date of issuance.
The Company recognizes compensation cost on a straight-line basis
over the requisite service period for the entire award.

The fair value of each option award is estimated as of the date of
grant using the Black-Scholes option pricing model. The weighted
average assumptions for the periods indicated are noted below.
Expected volatility is based on historical volatility of ESCO’s stock
calculated over the expected term of the option. For fiscal years
2009 and 2008, the Company utilized historical company data to
develop its expected term assumption. For fiscal year 2007, the
expected term was calculated using the simplified method for
“plain-vanilla” options. The risk-free rate for the expected term of
the option is based on the U.S. Treasury yield curve in effect at
the date of grant. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for grants
in 2009, 2008 and 2007, respectively: expected dividend yield of
0% in all periods; expected volatility of 39.3%, 34.8% and 27.3%;
risk-free interest rate of 1.9%, 2.9% and 4.6%; and expected term
of 3.8 years, 3.8 years and 3.5 years.

e S C o t e C h n o l o g i e S i n C .

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Information regarding stock options awarded under the option plans is as follows:

FY2009

FY2008

FY2007

estimated
Weighted
Avg. price

$30.40

$37.42

$22.85

$45.03

1,139,201

129,300

(336,876)

(39,799)

Estimated
Weighted
Avg. Price

$ 30.35

$ 35.82

$ 24.83

$ 42.22

1,558,941

16,000

(295,339)

(140,401)

Estimated
Weighted
Avg. Price

$ 26.60

$ 45.71

$ 21.56

$ 40.59

1,387,348

296,280

(101,683)

(23,004)

891,826

$33.63

1,139,201

$ 30.40

1,558,941

$ 30.35

October 1,

Granted

Exercised

Cancelled

September 30,

At September 30,

Reserved for future grant

Exercisable

935,345

683,192

1,010,014

$31.61

884,812

$ 26.25

878,238

951,066

$ 21.99

The aggregate intrinsic value of options exercised during 2009,
2008 and 2007 was $5.2 million, $5.5 million and $2.4 million,
respectively. The aggregate intrinsic value of stock options
outstanding and exercisable at September 30, 2009 was $7.9
million. The weighted-average contractual life of stock options
outstanding at September 30, 2009 was 2.1 years. The weighted-
average fair value of stock options per share granted in 2009, 2008,
and 2007 was $12.11, $10.98, and $12.25, respectively.

Summary information regarding stock options outstanding at
September 30, 2009 is presented below:

Range of
Exercise Prices

$ 7.09 - $13.64

$14.52 - $32.32

$35.18 - $42.99

$43.83 - $54.88

Range of
Exercise Prices

$ 7.09 - $13.64

$14.52 - $32.32

$35.18 - $42.99

$43.83 - $54.88

Options Outstanding

Number
Outstanding at
Sept. 30, 2009

Weighted-

Average Weighted
Average
Exercise
Price

Remaining
Contractual
Life

143,492

137,158

349,661

261,515

1.6 years

2.9 years

2.2 years

2.0 years

$ 11.08

$15.01

$40.26

$46.91

891,826

2.1 years

$33.63

Exercisable Options Outstanding

Number
Exercisable at
Sept. 30, 2009

143,492

135,608

215,458

188,634

683,192

Weighted
Average
Exercise
Price

$ 11.08

$14.86

$42.04

$47.35

$31.61

performance-accelerated Restricted Share Awards

The performance-accelerated restricted shares (restricted
shares) have a five-year term with accelerated vesting if
certain performance targets are achieved. In these cases, if it
is probable that the performance condition will be met, the
Company recognizes compensation cost on a straight-line basis
over the shorter performance period; otherwise, it will recognize
compensation cost over the longer service period. Compensation
cost for the majority of the outstanding restricted share awards is
being recognized over the longer performance period as it is not
probable the performance condition will be met. The restricted
share award grants were valued at the stock price on the date of
grant. Pretax compensation expense related to the restricted share
awards was $2.8 million, $1.2 million and $1.5 million for fiscal
years ended September 30, 2009, 2008 and 2007, respectively.

The following summary presents information regarding outstanding
restricted share awards as of September 30, 2009 and changes
during the period then ended:

Nonvested at October 1, 2008

Granted

Cancelled

Weighted
Shares Avg. Price

202,895

$41.15

98,459

$37.35

(1,000)

$30.39

Nonvested at September 30, 2009

300,354

$39.94

non-employee Directors plan

The non-employee directors compensation plan provides to each
non-employee director a retainer of 800 common shares per quarter.
Compensation expense related to the non-employee director grants
was $0.7 million, $0.7 million and $0.8 million for the years ended
September 30, 2009, 2008 and 2007, respectively.

e S C o t e C h n o l o g i e S i n C .

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The total share-based compensation cost that has been recognized
in results of operations and included within SG&A (continuing
operations) was $4.9 million, $4.0 million and $4.8 million for the
years ended September 30, 2009, 2008 and 2007, respectively.
The total income tax benefit recognized in results of operations
for share-based compensation arrangements was $1.7 million,
$1.1 million and $1.2 million for the years ended September 30,
2009, 2008 and 2007, respectively. The Company has elected to
use tax law ordering rules when calculating the income tax benefit
associated with its share-based payment arrangements. In addition,
the Company elected to use the simplified method of calculating
the pool of excess tax benefits available to absorb tax deficiencies
recognized. As of September 30, 2009, there was $7.9 million
of total unrecognized compensation cost related to share-based
compensation arrangements. That cost is expected to be recognized
over a weighted-average period of 2.4 years.

12. Retirement and other Benefit plans

Substantially all domestic employees are covered by a defined
contribution pension plan maintained by the Company. Effective
December 31, 2003, the Company’s defined benefit plan was frozen
and no additional benefits will be accrued after that date. As a
result, the accumulated benefit obligation and projected benefit
obligation are equal. These frozen retirement income benefits are
provided to employees under defined benefit pay-related and flat-
dollar plans, which are noncontributory. In conjunction with the
acquisition of Doble, the Company assumed responsibility for their
defined benefit plan and has frozen the plan effective December
31, 2008 and no additional benefits will be accrued after that date.
The annual contributions to the defined benefit retirement plans
equal or exceed the minimum funding requirements of the Employee
Retirement Income Security Act or applicable local regulations.
In addition to providing retirement income benefits, the Company
provides unfunded postretirement health and life insurance benefits
to certain retirees. To qualify, an employee must retire at age 55
or later and the employee’s age plus service must equal or exceed
75. Retiree contributions are defined as a percentage of medical
premiums. Consequently, retiree contributions increase with
increases in the medical premiums. The life insurance plans are
noncontributory and provide coverage of a flat dollar amount for
qualifying retired employees. Effective December 31, 2004, no new
retirees are eligible for life insurance benefits.

The Company adopted Statement of Financial Accounting Standards
No. 158, “Employers’ Accounting for Defined Benefit Pension and Other
Postretirement Plans” (now codified as ASC 715, Compensation —
Retirement Benefits), as of September 30, 2007. As a result of
adopting this Standard, the Company recorded a pretax credit of
$0.9 million to accumulated other comprehensive income in equity
as of September 30, 2007.

The Company uses a measurement date of September 30 for its
pension and other postretirement benefit plans. The Company has
an accrued benefit liability of $0.7 million and $0.6 million at
September 30, 2009 and 2008, respectively, related to its other

postretirement benefit obligations. All other information related to
its postretirement benefit plans is not considered material to the
Company’s results of operations or financial condition.

The following tables provide a reconciliation of the changes in the
pension plans and fair value of assets over the two-year period
ended September 30, 2009, and a statement of the funded status
as of September 30, 2009 and 2008:

(Dollars in millions)

Reconciliation of benefit obligation

Pension Benefits

2009

2008

Net benefit obligation at beginning of year

$ 59.7

Service cost

Interest cost

Actuarial (gain) loss

Acquisitions

Settlements

Gross benefits paid

0.4

4.2

13.9

—

(0.3)

(3.0)

Net benefit obligation at end of year

$ 74.9

46.2

0.6

3.8

(7.1)

18.8

—

(2.6)

59.7

(Dollars in millions)

Pension Benefits

2009

2008

Reconciliation of fair value of plan assets

Fair value of plan assets at beginning of year

$ 48.0

Actual return on plan assets

Employer contributions

Gross benefits paid

Acquisitions

Settlements

(0.8)

2.6

(3.0)

—

(0.3)

Fair value of plan assets at end of year

$ 46.5

38.2

(9.6)

0.8

(2.6)

21.2

—

48.0

(Dollars in millions)

Funded Status

Pension Benefits

2009

2008

Funded status at end of year

$(28.4)

(11.7)

Unrecognized prior service cost

Unrecognized net actuarial (gain) loss

Accrued benefit cost

Amounts recognized in the Balance Sheet

consist of:

Noncurrent asset

Current liability

Noncurrent liability

—

(28.4)

(11.7)

—

(1.0)

1.6

(1.3)

(27.4)

(11.9)

Accumulated other comprehensive income

(before tax effect)

30.5

11.7

Amounts recognized in Accumulated Other
Comprehensive Income consist of:

Net actuarial loss

Prior service cost

30.4

0.1

Accumulated Other Comprehensive Income

$30.5

11.6

0.1

11.7

e S C o t e C h n o l o g i e S i n C .

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The following table provides the components of net periodic benefit
cost for the plans for the years ended September 30, 2009, 2008
and 2007:

Pension Benefits

(Dollars in millions)

2009

2008

2007

Service cost

Interest cost

$ 0.4

4.2

0.6

3.8

—

2.7

Expected return on plan assets

(4.3)

(2.8)

Net actuarial loss

Net periodic benefit cost

Defined contribution plans

Total

0.2

0.5

4.4

$ 4.9

0.2

0.3

4.2

4.5

0.4

0.3

3.6

3.9

The discount rate used in measuring the Company’s pension
obligations was developed by matching yields of actual high-
quality corporate bonds to expected future pension plan cash flows
(benefit payments). Over 400 Aa-rated, non-callable bonds with
a wide range of maturities were used in the analysis. After using
the bond yields to determine the present value of the plan cash
flows, a single representative rate that resulted in the same present
value was developed. The expected long-term rate of return on
plan assets assumption was determined by reviewing the actual
investment return of the plans since inception and evaluating
those returns in relation to expectations of various investment
organizations to determine whether long-term future returns are
expected to differ significantly from the past.

The following weighted-average assumptions were used to
determine the net periodic benefit cost for the pension plans:

The assumed rate of increase in compensation levels is not
applicable in 2009, 2008 and 2007 as the plan was frozen.

The asset allocation for the Company’s pension plans at the end
of 2009 and 2008, the Company’s acceptable range and the target
allocation for 2010, by asset category, follows:

Target Acceptable Percentage of Plan
Assets at Year-end

Range

Allocation

Asset Category

Equity securities

Fixed income

Cash/cash equivalents

2010

60%

40%

2009

2008

50-70%

30-50%

0-5%

61%

36%

62%

36%

The Company’s pension plan assets are managed by outside
investment managers and assets are rebalanced when the target
ranges are exceeded. Pension plan assets consist principally
of marketable securities including common stocks, bonds, and
interest-bearing deposits. The Company’s investment strategy
with respect to pension assets is to achieve a total rate of return
(income and capital appreciation) that is sufficient to accomplish
the purpose of providing retirement benefits to all eligible and
future retirees of the pension plan. The Company regularly monitors
performance and compliance with investment guidelines.

eXpeCteD CASh FloWS

Information about the expected cash flows for the pension and
other postretirement benefit plans follows:

(Dollars in millions)

Pension
Benefits

Other
Benefits

Expected Employer Contributions — 2010

$ 3.5

0.1

2009

2008

2007

Expected Benefit Payments

Discount rate

Rate of increase in

compensation levels

Expected long-term rate of

7.25%

6.25%

5.75%

n/A

N/A

return on assets

8.25%

The following weighted-average assumptions were used to
determine the net periodic benefit obligations for the pension plans:

2010

2011

2012

2013

2014

2015-2020

4.2

3.4

3.5

3.8

3.6

$22.9

0.1

0.4

Discount rate

Rate of increase in

compensation levels

2009

2008

5.5%

7.25%

n/A

N/A

13. Derivative Financial instruments

e S C o t e C h n o l o g i e S i n C .

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these risks. During 2009, the Company entered into two $40 million
one-year forward interest rate swaps effective October 5, 2009, to
hedge some of its exposure to variability in future LIBOR-based
interest payments on variable rate debt. In addition during 2008,
the Company entered into a two-year amortizing interest rate swap
to hedge some of its exposure to variability in future LIBOR-based
interest payments on variable rate debt. The swap notional amount
for the first year was $175 million amortizing to $100 million in the
second year. All derivative instruments are reported on the balance
sheet at fair value. The derivative instrument is designated as a
cash flow hedge and the gain or loss on the derivative is deferred
in accumulated other comprehensive income until recognized in
earnings with the underlying hedged item. Including the impact of
interest rate swaps outstanding, the interest rates on approximately
50% of the Company’s total borrowings were effectively fixed as of
September 30, 2009. The following is a summary of the notional
transaction amounts and fair values for the Company’s outstanding
derivative financial instruments by risk category and instrument
type, as of September 30, 2009.

(Dollars in thousands)

Notional
Average
Average
Amount Rec Rate Pay Rate

Fair
Value

Level 2: Inputs to the valuation methodology include quoted prices
for similar assets and liabilities in active markets, and inputs that
are observable for the asset or liability, either directly or indirectly,
for substantially the full term of the financial instrument.

Level 3: Inputs to the valuation methodology are unobservable and
significant to the fair value measurement.

The Company’s interest rate swaps are valued using a present value
calculation based on an implied forward LIBOR curve (adjusted for
the Company’s credit risk) and are classified within Level 2 of the
valuation hierarchy, as presented below as of September 30, 2009:

(Dollars in thousands)

Level 1

Level 2

Level 3

Total

Liabilities

Interest rate swaps

$ —

$1,463

$ —

$1,463

14. other Financial Data

Items charged to operations during the years ended September 30,
2009, 2008 and 2007 included the following:

(Dollars in thousands)

2009

2008

2007

Interest rate swap

$100,000

0.31%

3.99%

$(685)

Interest rate swaps*

$ 80,000

N/A

1.52%

$(778)

Salaries and wages

(including fringes)

$153,416

144,199

111,746

Maintenance and repairs

3,807

3,356

3,019

* These swaps represent forward-starting swaps and will be effective in

October 2009.

Research and development

(R&D) costs:

FAiR VAlue oF FinAnCiAl inStRuMentS

Effective in fiscal 2009, the Company adopted the guidance in
SFAS 157, now codified as FASB ASC 825, Financial Instruments,
which defines fair value in generally accepted accounting principles
and expands disclosures about fair value measurements.

At September 30, 2009, the Company’s financial statements
included a liability of $1.5 million classified within accrued other
expenses on the Company’s consolidated balance sheet, and
accumulated other comprehensive loss of $(0.9) million (net of
deferred income tax effects of $0.6 million) relating to the fair
value of the interest rate swaps.

FASB ASC 825 establishes a three-level hierarchy for disclosure of
fair value measurements, based upon the transparency of inputs to
the valuation of an asset or liability as of the measurement date,
as follows:

Level 1: Inputs to the valuation methodology are quoted prices
(unadjusted) for identical assets or liabilities in active markets.

Company-sponsored

31,974

32,955

23,471

Customer-sponsored

2,937

5,293

3,718

Total R&D

$ 34,911

38,248

27,189

Other engineering costs

14,370

8,644

7,764

Total R&D and other
engineering costs

$ 49,281

46,892

34,953

As a % of net sales

8.0%

7.6%

8.0%

A reconciliation of the changes in accrued product warranty
liability for the years ended September 30, 2009, 2008, and 2007
is as follows:

(Dollars in thousands)

2009

2008

Balance as of October 1

$2,788

1,445

Additions charged to expense

4,086

3,387

2007

1,390

1,769

Deductions

(2,504)

(2,044)

(1,714)

Balance as of September 30

$4,370

2,788

1,445

e S C o t e C h n o l o g i e S i n C .

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15. Business Segment information

The Company is organized based on the products and services it
offers. Under this organizational structure, the Company has three
reporting segments: Utility Solutions Group (USG), RF Shielding and
Test (Test) and Filtration/Fluid Flow (Filtration).

The USG segment’s operations consist of: Aclara Power-Line
Systems Inc. (Aclara PLS); Aclara RF Systems Inc. (Aclara RF);
Aclara Software Inc. (Aclara Software) and Doble Engineering
Company (Doble). The Aclara Group is a proven supplier of special
purpose fixed-network communications systems for electric, gas
and water utilities, including hardware and software to support
advanced metering applications. Aclara’s STAR® Network system
and TWACS® technology provide advanced radio-frequency (RF) and
power-line (PLS) based fixed-network technologies proven to meet
the wide-ranging data communications requirements of utilities
worldwide. Aclara Software applications add value across the
utility enterprise, addressing meter and energy data management,
distribution planning and operations, customer service and revenue
management. Doble provides high-end, intelligent diagnostic test
solutions for the electric power delivery industry and is a leading
supplier of partial discharge testing instruments used to assess the
integrity of high voltage power delivery equipment.

Test segment operations represent the EMC Group, consisting
primarily of ETS-Lindgren L.P. (ETS) and Lindgren R.F. Enclosures,
Inc. (Lindgren). The EMC Group is an industry leader in providing
its customers with the ability to identify, measure and contain
magnetic, electromagnetic and acoustic energy. The EMC Group
also manufactures radio frequency (RF) shielding products and
components used by manufacturers of medical equipment,
communications systems, electronic products, and shielded rooms
for high security data processing and secure communication.

The Filtration segment’s operations consist of: PTI Technologies
Inc., VACCO Industries and TekPackaging LLC. The companies within
this segment design and manufacture specialty filtration products
including hydraulic filter elements used in commercial aerospace
applications, unique filter mechanisms used in micro propulsion
devices for satellites and custom designed filters for manned and
unmanned aircraft.

Accounting policies of the segments are the same as those
described in the summary of significant accounting policies in
Note 1 to the Consolidated Financial Statements. The operating
units within each reporting segment have been aggregated because
of similar economic characteristics and meet the other aggregation
criteria of FASB ASC 280.

The Company evaluates the performance of its operating units based
on EBIT, which is defined as: Earnings Before Interest and Taxes.
Intersegment sales and transfers are not significant. Segment assets
consist primarily of customer receivables, inventories, capitalized
software and fixed assets directly associated with the production
processes of the segment. Segment depreciation and amortization is
based upon the direct assets listed above. Information in the tables
below is presented on a Continuing Operations basis and excludes
Discontinued Operations.

net SAleS

(Dollars in millions)

Year ended September 30,

2009

2008

2007

Utility Solutions

Test

Filtration

$374.0

138.4

106.7

352.7

144.8

116.1

Consolidated totals

$619.1

613.6

190.3

141.5

105.6

437.4

One customer (PG&E) exceeded 10% of sales in 2009 with sales of
$106.2 million and in 2008 with sales of $110.2 million.
No customers exceeded 10% of net sales in 2007.

eBit

(Dollars in millions)

Year ended September 30,

2009

2008

2007

Utility Solutions

Test

Filtration

$ 62.5

14.1

18.1

66.6

13.9

21.2

22.6

14.4

18.4

Reconciliation to consolidated

totals (Corporate)

(24.1)

(20.6)

(17.4)

Consolidated EBIT

Less: interest expense

Add: interest income

70.6

(7.4)

—

Earnings before income tax

$ 63.2

81.1

(9.8)

—

71.3

38.0

—

0.7

38.7

e S C o t e C h n o l o g i e S i n C .

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iDentiFiABle ASSetS

(Dollars in millions)

geogRAphiC inFoRMAtion

net sales

Year ended September 30,

2009

2008

2007

(Dollars in millions)

Utility Solutions

$193.2

198.3

143.5

Year ended September 30,

2009

2008

2007

Test

Filtration

Corporate

69.4

61.7

84.2

59.7

599.4

585.9

Consolidated totals

$ 923.7

928.1

72.0

56.2

304.4

576.1

Corporate assets consist primarily of goodwill, deferred taxes,
acquired intangible assets and cash balances.

CApitAl eXpenDituReS

(Dollars in millions)

Year ended September 30,

2009

2008

2007

Utility Solutions

Test

Filtration

Corporate

$ 6.2

1.5

1.6

—

9.0

5.9

1.6

0.2

7.0

4.0

1.4

—

Consolidated totals

$ 9.3

16.7

12.4

In addition to the above amounts, the Company incurred
expenditures for capitalized software of $5.0 million, $10.5 million
and $28.6 million in 2009, 2008 and 2007, respectively.

DepReCiAtion AnD AMoRtiZAtion

(Dollars in millions)

Year ended September 30,

Utility Solutions

Test

Filtration

Corporate

2009

$20.5

2.2

2.7

4.9

2008

18.0

1.8

2.8

4.5

2007

10.1

1.3

2.8

2.1

Consolidated totals

$30.3

27.1

16.3

United States

$508.4

482.7

351.9

Far East

Europe

Other

48.4

28.2

34.1

55.5

34.4

41.0

38.0

21.1

26.4

Consolidated totals

$619.1

613.6

437.4

long-lived assets

(Dollars in millions)

Year ended September 30,

United States

Europe

Other

2009

$62.3

3.2

4.0

2008

66.2

3.5

2.7

2007

46.0

2.0

1.9

Consolidated totals

$69.5

72.4

49.9

Net sales are attributed to countries based on location of customer.
Long-lived assets are attributed to countries based on location of
the asset.

16. Commitments and Contingencies

At September 30, 2009, the Company had $7.2 million in letters
of credit outstanding as guarantees of contract performance. As
a normal incidence of the businesses in which the Company is
engaged, various claims, charges and litigation are asserted or
commenced against the Company. With respect to claims and
litigation asserted or commenced against the Company, it is the
opinion of Management that final judgments, if any, which might be
rendered against the Company are adequately reserved, covered by
insurance, or are not likely to have a material adverse effect on its
financial condition or results of operation.

e S C o t e C h n o l o g i e S i n C .

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17. Quarterly Financial information (unaudited)

(Dollars in thousands, except per share amounts)

First
Quarter

Second
Quarter

third
Quarter

Fourth
Quarter

Fiscal
Year

2009

Net sales

Net earnings from continuing operations
Net earnings (loss) from discontinued operations

Net earnings

Basic earnings (loss) per share:
Net earnings from continuing operations
Net earnings (loss) from discontinued operations

Net earnings

Diluted earnings (loss) per share:
Net earnings from continuing operations
Net earnings (loss) from discontinued operations

Net earnings

2008

Net sales

Net earnings from continuing operations
Net earnings (loss) from discontinued operations

Net earnings

Basic earnings (loss) per share:
Net earnings from continuing operations
Net earnings (loss) from discontinued operations

Net earnings

Diluted earnings (loss) per share:
Net earnings from continuing operations
Net earnings (loss) from discontinued operations

Net earnings

$ 147,357

154,156

148,102

169,449

619,064

5,840
(20)

10,605
(209)

11,093
332

21,767
—

49,305
103

5,820

10,396

11,425

21,767

49,408

0.22
—

0.22

0.22
—

0.41
(0.01)

0.40

0.40
(0.01)

0.22

0.39

0.42
0.02

0.44

0.42
0.01

0.43

0.83
—

0.83

0.82
—

0.82

1.88
—

1.88

1.86
—

1.86

$ 135,272

134,400

151,351

192,543

613,566

8,734
(5,918)

6,561
(479)

12,401
907

19,873
4,632

47,569
(858)

2,816

6,082

13,308

24,505

46,711

0.34
(0.24)

0.25
(0.01)

0.10

0.24

0.33
(0.22)

0.25
(0.02)

0.11

0.23

0.48
0.03

0.51

0.47
0.03

0.50

0.76
0.18

0.94

0.75
0.18

0.93

1.84
(0.04)

1.80

1.81
(0.03)

1.78

See Notes 2 and 3 of Notes to Consolidated Financial Statements for discussion of divestiture and acquisition activity.

See Note 8 of Notes to Consolidated Financial Statements for discussion of the favorable settlement of uncertain tax positions in the 2009
fourth quarter that positively affected EPS by $0.19 related to the disposition of a portion of the MicroSep business in 2004.

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M a n a g E M E n T ’ S S T a T E M E n T O F F i n a n C i a l r E S p O n S i B i l i T y

The Company has a strong financial team, from its executive
leadership to each of its individual contributors. Management
monitors compliance with its financial policies and practices over
critical areas including internal controls, financial accounting and
reporting, accountability, and safeguarding of its corporate assets.
The internal audit control function maintains oversight over the
key areas of the business and financial processes and controls,
and reports directly to the Audit and Finance Committee.
Additionally, all employees are required to adhere to the ESCO
Code of Business Conduct and Ethics, which is monitored by the
Corporate Ethics Committee.

Management is dedicated to ensuring that the standards of financial
accounting and reporting that are established are maintained. The
Company’s culture demands integrity and a commitment to strong
internal practices and policies.

The Consolidated Financial Statements have been audited by KPMG
LLP, whose report is included herein.

Victor L. Richey
Chairman, Chief Executive Officer
and President

Gary E. Muenster
Executive Vice President,
and Chief Financial Officer

The Company’s Management is responsible for the fair presentation
of the Company’s financial statements in accordance with
accounting principles generally accepted in the United States
of America, and for their integrity and accuracy. Management is
confident that its financial and business processes provide accurate
information on a timely basis.

Management, with the oversight of ESCO’s Board of Directors, has
established and maintains a strong ethical climate in which the
Company’s affairs are conducted. Management also has established
an effective system of internal controls that provide reasonable
assurance as to the integrity and accuracy of the financial
statements, and responsibility for the Company’s assets. KPMG
LLP, the Company’s independent registered public accounting firm,
reports directly to the Audit and Finance Committee of the Board of
Directors. The Audit and Finance Committee has established policies
consistent with newly enacted corporate reform laws for auditor
independence. In accordance with corporate governance listing
requirements of the New York Stock Exchange:

▶ A majority of Board members are independent of the Company

and its Management.

▶ All members of the key Board committees — the Audit and
Finance, the Human Resources and Compensation and the
Nominating and Corporate Governance Committees —
are independent.

▶ The independent members of the Board meet regularly without

the presence of Management.

▶ The Company has a clear code of ethics and a conflict of interest

policy to ensure that key corporate decisions are made by
individuals who do not have a financial interest in the outcome,
separate from their interest as Company officials.

▶ The charters of the Board committees clearly establish their

respective roles and responsibilities.

▶ The Company has a Corporate Ethics Committee, ethics officers at
each operating location and an ombudsman hot line available to
all domestic employees and all foreign employees have local ethics
officers and access to the Company’s ombudsman.

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M a n a g E M E n T ’ S r E p O r T O n i n T E r n a l C O n T r O l O v E r F i n a n C i a l r E p O r T i n g

The Company’s Management is responsible for establishing and
maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) under the Securities Exchange Act of
1934). Our internal control over financial reporting is designed to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting
principles in the United States of America.

Because of its inherent limitations, any system of internal control
over financial reporting, no matter how well designed, may not
prevent or detect misstatements due to the possibility that a
control can be circumvented or overridden or that misstatements
due to error or fraud may occur that are not detected. Also, because
of changes in conditions, internal control effectiveness may vary
over time.

Management assessed the effectiveness of the Company’s internal
control over financial reporting as of September 30, 2009 using

criteria established in Internal Control — Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and concluded that the Company
maintained effective internal control over financial reporting as
of September 30, 2009 based on these criteria.

Our internal control over financial reporting as of September 30, 2009,
has been audited by KPMG LLP, an independent registered public
accounting firm, as stated in their report which is included herein.

Victor L. Richey
Chairman, Chief Executive Officer
and President

Gary E. Muenster
Executive Vice President,
and Chief Financial Officer

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r E p O r T O F i n D E p E n D E n T r E g i S T E r E D p u B l i C a C C O u n T i n g F i r M

The Board of Directors and Shareholders
ESCO Technologies Inc.:

We have audited the accompanying consolidated balance sheets
of ESCO Technologies Inc. and subsidiaries (the Company) as
of September 30, 2009 and 2008, and the related consolidated
statements of operations, shareholders’ equity and cash flows for
each of the years in the three-year period ended September 30,
2009. We also have audited ESCO Technologies Inc.’s internal
control over financial reporting as of September 30, 2009,
based on criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). ESCO Technologies Inc.’s
management is responsible for these Consolidated Financial
Statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal
control over financial reporting, included in the accompanying
Management’s Report on Internal Control Over Financial Reporting.
Our responsibility is to express an opinion on these Consolidated
Financial Statements and an opinion on ESCO Technologies Inc.’s
internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are
free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects.
Our audits of the Consolidated Financial Statements included
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. Our audit
of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing
the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other
procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.

external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements
in accordance with generally accepted accounting principles, and
that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use,
or disposition of the company’s assets that could have a material
effect on the financial statements.

Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, the Consolidated Financial Statements referred to
above present fairly, in all material respects, the financial position
of ESCO Technologies Inc. and subsidiaries as of September 30, 2009
and 2008, and the results of their operations and their cash flows
for each of the years in the three-year period ended September 30,
2009, in conformity with U.S. generally accepted accounting prin-
ciples. Also in our opinion, ESCO Technologies Inc. maintained, in all
material respects, effective internal control over financial reporting
as of September 30, 2009, based on criteria established in Internal
Control — Integrated Framework issued by the Committee of Spon-
soring Organizations of the Treadway Commission.

As discussed in Note 12 to the Consolidated Financial Statements, the
Company adopted Statement of Financial Accounting Standards 158,
“Employers’ Accounting for Defined Benefit Pension and Other Postre-
tirement Plans” (now codified as ASC 715, Compensation — Retirement
Benefits), as of September 30, 2007.

A company’s internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for

St. Louis, Missouri
November 30, 2009

e S C o t e C h n o l o g i e S i n C .

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2 0 0 9 A n n u A l R e p o R t

F i v E - y E a r F i n a n C i a l S u M M a r y

(Dollars in millions, except per share amounts)

2009

2008

2007

2006

2005

For years ended September 30:

Net sales

Net earnings from continuing operations

Net earnings (loss) from discontinued operations

Net earnings

Earnings (loss) per share:

Basic:

Continuing operations

Discontinued operations

Net earnings

Diluted:

Continuing operations

Discontinued operations

Net earnings

As of September 30:

Working capital from continuing operations

Total assets

Total debt

Shareholders’ equity

$619.1

613.6

49.3

0.1

49.4

$1.88

—

$1.88

$1.86

—

$1.86

116.2

923.7

180.5

$517.3

47.6

(0.9)

46.7

1.84

(0.04)

1.80

1.81

(0.03)

1.78

100.6

928.1

233.7

468.2

437.4

30.8

2.9

33.7

1.19

0.11

1.30

1.17

0.11

1.28

118.2

576.1

—

415.5

374.8

29.4

1.9

31.3

1.14

0.08

1.22

1.11

0.08

1.19

108.6

488.7

—

376.4

334.3

36.1

7.3

43.5

1.42

0.29

1.71

1.37

0.29

1.66

180.9

423.8

—

331.0

See Notes 2 and 3 of Notes to Consolidated Financial Statements for discussion of divestiture and acquisition activity.

C O M M O n S T O C k M a r k E T p r i C E

ESCO’s common stock and associated preferred stock purchase rights (subsequently referred to as common stock) are listed on the New York
Stock Exchange under the symbol “ESE.” The following table summarizes the high and low prices of the common stock for each quarter of
fiscal 2009 and 2008.

Quarter

First

Second

Third

Fourth

2009

2008

high

$49.20

42.87

45.99

46.87

low

24.84

29.04

36.70

35.44

High

$41.86

43.56

52.11

54.06

Low

32.64

32.65

38.72

38.85

e S C o t e C h n o l o g i e S i n C .

4 6

2 0 0 9 A n n u A l R e p o R t

M a r k E T p E r F O r M a n C E

Peer Group

Russell 2000®

ESCO Technologies Inc.

The adjacent graph presents a comparison of the cumulative total
shareholder return on the Company’s common stock as measured
against the Russell 2000 Index and a peer group (the “2009 Peer
Group”). The Company is not a component of the 2009 Peer Group, but
it is a component of the Russell 2000 Index. The measurement period
begins on September 30, 2004 and measures at each September 30
thereafter. These figures assume that all dividends, if any, paid over
the measurement period were reinvested, and the starting value of
each index and the investments in the Company’s common stock were
$100 at the close of trading on September 30, 2004.

$225

200

175

150

125

100

ESCO Technologies Inc.

Russell 2000 Index

2009 Peer Group

9/04

9/05

9/06

9/07

9/08

9/09

9/04

9/05

9/06

9/07

9/08

9/09

100.00

147.79

135.89

98.11

142.18

116.29

100.00

117.95

129.66

145.65

124.56

112.67

100.00

131.58

146.26

204.98

175.91

151.44

In calculating the composite return of the 2009 Peer Group,
the return of each company comprising the 2009 Peer Group
is weighted by (a) its market capitalization in relation to the
other companies in its corresponding Company industry segment,
and (b) the percentage of the Company’s 2009 total revenue
represented by its corresponding Company industry segment.

eSCo technologies inc.

Russell 2000 Index

2009 Peer Group

The 2009 Peer Group is the same peer group included in the
performance graph in last year’s Annual Report designated the
“2008 Peer Group”. The 2009 Peer Group is comprised of eight
companies, which correspond to the Company’s three industry
segments as follows: Utility Solutions Group segment (60% of
the Company’s 2009 total revenue) — Badger Meter Inc., Itron
Inc., Comverge, Inc., Echelon Corporation and Roper Industries
Inc.; Test segment (23% of the Company’s 2009 total revenue) —
LeCroy Corporation; and Filtration/Fluid Flow segment (17% of the
Company’s 2009 total revenue) — Pall Corporation and Clarcor Inc.

e S C o t e C h n o l o g i e S i n C .

2 0 0 9 A n n u A l R e p o R t

S h a r E h O l D E r S ’ S u M M a r y

ShAReholDeRS’ AnnuAl Meeting

inVeStoR RelAtionS

The Annual Meeting of the Shareholders of ESCO Technologies
Inc. will be held at 9:30 a.m. Thursday, February 4, 2010, at the
Company’s Corporate Headquarters, 9900A Clayton Road, St. Louis,
Missouri 63124. You may access this Annual Report as well as the
Notice of the meeting and the Proxy Statement on the Company’s
Annual Meeting web site at http://www.cfpproxy.com/5157.

CeRtiFiCAtionS

Pursuant to New York Stock Exchange (NYSE) requirements, the
Company submitted to the NYSE the annual certifications, dated
February 17, 2009 and February 29, 2008, by the Company’s chief
executive officer 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, 2009 and
September 30, 2008.

10-K RepoRt

A copy of the Company’s 2009 Annual Report on Form 10-K
filed with the Securities and exchange Commission is available
to shareholders without charge. Direct your written request
to patricia K. Moore, Director of investor Relations, eSCo
technologies inc., 9900A Clayton Road, St. louis, Missouri 63124.

the Form 10-K is also available on the Company’s web site at
www.escotechnologies.com.

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 web site at www.escotechnologies.com or via e-mail
to pmoore@escotechnologies.com.

tRAnSFeR Agent AnD RegiStRAR

Shareholder inquiries concerning lost certificates, transfer of shares
or address changes should be directed to:

Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
1 (800) 368-5948
E-mail: info@rtco.com

CApitAl StoCK inFoRMAtion

ESCO Technologies Inc. common stock shares (symbol ESE)
are listed on the New York Stock Exchange. There were
approximately 2,400 holders of record of shares of common stock
at November 6, 2009.

inDepenDent RegiSteReD puBliC ACCounting FiRM

KPMG LLP
10 South Broadway, Suite 900
St. Louis, Missouri 63102

e S C o t e C h n o l o g i e S i n C .

4 8

2 0 0 9 A n n u A l R e p o R t

M a n a g E M E n t a n d B O a r d O f d i r E c t O r s

E x E c u t i v E O f f i c E r s

O p E r a t i n g E x E c u t i v E s

B O a r d O f d i r E c t O r s

Victor L. Richey
Chairman, Chief Executive
Officer, & President

Gary E. Muenster
Executive Vice President &
Chief Financial Officer

Alyson S. Barclay
Senior Vice President,
Secretary & General Counsel

c O r p O r a t E s t a f f

Mark S. Dunger
Vice President
Planning & Development

Richard A. Garretson
Vice President
Tax

Deborah J. Hanlon
Vice President
Human Resources

Charles J. Kretschmer
Vice President

Matthew J. Mainer
Vice President & Treasurer

Bruce E. Butler
President
ETS-Lindgren LP

Sam R. Chapetta
Filtration Group Vice President &
President
PTI Technologies Inc.

William M. Giacone
Vice President &
General Manager — Lindgren
ETS-Lindgren LP

Antonio E. Gonzalez
President
VACCO Industries

Randall K. Loga
President
TekPackaging LLC

Gary L. Moore
President
Aclara RF Systems Inc.

Bruce A. Phillips
Group President
Aclara Companies
President
Aclara Power-Line Systems Inc.

Bryan Sayler
Senior Vice President &
General Manager — ETS
ETS-Lindgren LP

David B. Zabetakis
President
Doble Engineering Company

James M. McConnell 2,4
Retired President &
Chief Executive Officer
Instron Corp.

Victor L. Richey 1
Chairman, Chief Executive
Officer, & President

Larry W. Solley 3,4
Retired
Executive Vice President
Emerson Electric Co.

James M. Stolze 2
Vice President &
Chief Financial Officer
Stereotaxis, Inc.

Donald C. Trauscht 1,2,3,4
(Lead Director)
Chairman
BW Capital Corp.

James D. Woods 3
Chairman Emeritus &
Retired Chief Executive Officer
Baker Hughes Inc.

Committee Membership

1 Executive Committee

2 Audit and Finance Committee

3 Human Resources and

Compensation Committee

4 Nominating and Corporate

Governance

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This annual report is printed with soy-based process inks on recycled paper with 10% post-consumer waste.

4 9

ESCO Technologies Inc.
9900A Clayton Road
St. Louis, MO 63124