ESCO Annual Report 2012 | Quarterlytics

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FY2012 Annual Report · ESCO

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E S C O TE Ch nOl

Og iE S inC

I n n o v at Io n - I n s pI r e d

t e c h n o l o g y - dr I v e n

re s u lt s - o rIe n t e d

A n n uAl

R e p oRt

2012

W h a T i S E S C O al l abOuT?

at ESCO Technologies, there is a common thread that runs through

our corporate culture and each of our divisions. We are proud that

the products and services we offer our customers are consistently
I n n o v at Io n - I n s pI r e d

, from aclara’s award-

winning STaR ® ZoneScan® leak Detection System for water utilities to

the image clarity and patient comfort achieved with ETS-lindgren’s

unsurpassed RF-shielded MRi enclosures for health care facilities.

While innovation is key to creating highly valued products and services,
t e c h n o l o g y - dr I v e n

our vast experience as a

enterprise is also a crucial component of our success. Whether it is PTi’s

and Crissair’s precision-engineered filtration and fluid control products

for boeing & airbus, V aCCO’s latch valves for the Mars Science laboratory,

or Doble’s rugged diagnostic test instruments for electric utilities, there

are thousands of reasons why the word “Technologies” is part of our name!

and while our top priority is to stay pinpoint focused on robust

customer solutions, we keep an equally sharp eye on the bottom

line. it is with our long-term, three-segment business strategy and
re s u lt s - o rIe n t e d

management approach

that we are able to continue to build shareholder value during

these challenging times for the u .S. and global economies.

E S C O TE Ch nOlOg iE S inC.

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

T o ou r S h a r e h o l d e rS

e often comment on the diversity of our products and end-markets as

being one of our most recognizable strengths — we believe this year was no

exception. While there is a lot of uncertainty in the global economy, fortu-

nately for eSCo, our multi-segment platform continues to provide us with

the resilience to withstand these challenges. The fundamental drivers of our

business have not changed over the past few years as a result.

We supply fluid control products for nearly every com-

diagnostic, asset quality, and risk mitigation solutions

mercial aircraft flying today, as well as providing highly-

that allow utilities to proactively address grid manage-

engineered, mission critical products that allow our

ment and power delivery issues. Doble currently provides

Space Program to flourish in its exploration endeavors.

hardware, software, services and solutions to nearly

VACCO provided several critical components to the high-

95 percent of all domestic electric utilities.

ly successful Mars Rover Program, as well as numerous

Our Test and its related Systems business supports

sole-source products on the launch and delivery vehicles

the development of new products in dozens of industries

that got it there.

worldwide. Our products assist in the advancement of

We are partnered with SoCalGas on the largest domestic

new technologies in the areas of wireless communica-

AMI deployment in history, and when completed, the util-

tions, secure communications, medical imaging, and

ity’s six million customers will have their gas meters read

asset protection.

remotely and accurately, while having nearly real-time ac-

We could talk tirelessly about the breadth and reach

cess to usage patterns and conservation alternatives.

of our products, services, and solutions, but to put it

We also serve a critical role in enhancing the reli-

simply: We are a Company with the management tal-

ability of the electric grid worldwide as we provide test,

ent, engineering expertise, marketing creativity, and

2 0 1 2 A n n u Al R e p oRt

T o ou r S h a r e h o l d e rS

manufacturing capability necessary to innovate, adapt,

business, led by USG with $380 million in orders and

and change — promoting success today, and enhancing

$62 million in backlog growth. The strength of our over-

it over the long term. We recognize the changing land-

all orders and the resulting backlog growth certainly

scape and trends in our served markets, work closely

bode well for the future.

with our customers, and adapt quickly to develop the

Regarding our outlook for 2013 and beyond, we re-

innovative solutions our customers require.

main extremely positive about our future. The largest

2012 was a challenging year as we transitioned from

portion of our 2013 growth will come from SoCalGas,

the completion of two large AMI projects with PG&E and

which will also provide a solid revenue base through

New York City, into the initial launch of the SoCalGas

2016. Our sales and earnings visibility over the next few

project. While we missed our original earnings expec-

years has become more clearly defined, and as a result,

tations in 2012, we maintained solid profitability with

we remain confident that we have meaningful growth

strong operational performance and solid cash flow

opportunities across all three segments.

across the business.

With regard to non-organic growth, we continue to

We recognized several significant accomplishments

explore and evaluate acquisitions across all three plat-

during the year, led by the largest amount of orders re-

forms, with our primary focus on USG. We will remain

corded in our history. We added $752 million in new

prudent and disciplined in our approach, and will main-

Glo bAl ReA ch

With operations in 27 locations around the world,
the businesses of ESCO Technologies serve markets
in more than 80 countries on six continents.

Markets Served

eSco operations

north America
Cedar Park, TX

Durant, OK

europe
Dresden, Germany

Eura, Finland

Glendale Heights, IL

Guildford, England

Greenwood Village, CO

Luxembourg, Luxembourg

Huntley, IL

Minocqua, WI

Oxnard, CA

Palmdale, CA

Raleigh, NC

Solon, OH

South El Monte, CA

St. Louis, MO

Watertown, MA

Wellesley, MA

South America
São Paulo, Brazil

Stevenage, England

Taufkirchen, Germany

Trondheim, Norway

Africa
Pietermaritzburg,
South Africa

Asia
Bangalore, India

Beijing, China

Tokyo, Japan

Australia
New South Wales,
Australia

eSc o te c h n o l oGi eS in c .

tain a strong and healthy balance sheet that gives us

appreciation to our Board of Directors for its strategic

the flexibility to invest in growth, regardless of eco-

guidance and effective corporate governance, and we

nomic cycles.

also want to thank our shareholders for their support.

We will continue our focus on costs and competitive

As we look to the future, we are confident we have

positioning to ensure we effectively execute our busi-

the right strategies in place, coupled with multiple op-

ness plans. The Test business restructuring was under-

portunities for growth across our operating platforms.

taken to enhance our overall efficiency and to improve

We look forward to executing our growth strategies and

our operating margins. We continue to examine several

continuing to create shareholder value for years to come.

other opportunities across the Company to scale our

cost structure to further leverage our growth, thereby

increasing shareholder returns.

Our employees remain key contributors to our suc-

cess, as our team is talented, passionate, and innova-

Vic Richey

Gary Muenster

tive. This letter would not be complete without express-

Chairman, Chief Executive

Executive Vice President

ing a sincere thank you to all of the employees of ESCO

Officer, & President

& Chief Financial Officer

for their exceptional commitment. We also extend our

November 29, 2012

2 0 1 2 A n n u Al R e p oRt

u Ti l iTy S o l uTi o nS

In the UtIlIty SolUtIonS GroUp, AclArA IS the IndUStry leAder In AdvAnced meterInG In-

frAStrUctUre Sol UtIonS And AnAlytIcS for GAS, w Ater And electrIc UtIlItIeS. USInG oUr

prodUctS, UtIlItIeS collect, Store, And AnAlyze SmArt-meter dAtA And USe It to Inform

And enGAGe theIr conSUmerS. doble IS A UnIqUe p Artner to electrIc UtIlItIeS everywhere,

provIdInG more thAn 5,500 comp AnIeS wIth dIAGnoStIc teSt InStrUmentS, conSUltInG And

teStInG ServIceS, And the world'S lArGeSt dA tAbASe of InfrAStrUctUre ASSet teSt reSUltS.

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continually seek to do more with less. Aclara deliv-

ers targeted and innovative solutions to help utili-

ties and their customers be better stewards of our

J a c k s o n S t N E

natural resources and the environment.

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G r a n d S t N E

G r a n d S t N E
In conjunction with Gutermann's leak-detection technology,
Aclara's award-winning STAR® ZoneScan® system automates
the collection and analysis of acoustic signatures to identify
the presence and location of water main leaks, saving
substantial time and money for water utilities everywhere.

N
E

international
utility Market

53% Asia

20% Europe

13% N. America

7% S. America

5% Africa/
Middle East

2% Other

LEADING THE WAY: STAR® ZoneScan® is an award-

winning correlated, acoustic fixed-network leak de-

tection product that enables utilities to find hidden

water leaks in underground infrastructure without

disruptive digging or antiquated manual logging.

Similarly, Aclara leads the charge to bring advanced

analytics to all utilities for data-rich applications

such as demand response, distribution automation

and asset analysis. Our approach provides cost-

effective, high-value solutions that satisfy the var-

ied demands of utilities ranging in size from a few

thousand customers to several million.

ENAbLING TEcHNoLoGIEs: The TWACS® and STAR®

networks are industry-leading, fixed-network AMI

systems that collect, store and analyze meter data

eSc o te c h n o l oGi eS in c .

that electric, gas and water utilities use to make

better operational and planning decisions. Aclara’s

technologies have solved some of the most daunt-

ing problems in the industry, including demonstrat-

ed 20-year battery life and the ability to reach the

“last mile” customer—without costly infrastructure

changes. Our consumer engagement products use

all communications channels, from paper reports

to the very latest in mobile and web technology.

They enable utilities to target their consumers with

tremendous precision, exchange information with

them and amplify the value of engaged consumers.

The STAR Network
Series 3000 Meter
Transmission Units for
gas utilities provide
accurate and timely
meter data to virtually
eliminate estimated
revenue management
and reduce customer
service calls.

ProvEN LEGAcY: Our fixed-network AMI communi-

ing information. Utilities depend on these commu-

cations technologies form the back-bone of utility

nication networks to collect critical performance

meter data infrastructure by providing accurate bill-

metrics, monitor the health of installed assets and

380

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Water
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Total
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north American
Market opportunity
by utility type

Millions of Meters

Available

Automated
(AMR/AMI)

S o l u t i o nS

Aclara’s integrated AMI solutions
provide the hardware, software,
advanced networks and services
to support electric, water and gas
utilities of any size, in any combi-
nation with any service territory.

optimize the performance of their entire system.

Because of Aclara’s proven legacy of reliability, scal-

ability, and dependable performance, we continue

to win significant projects with leading gas, water

and electric utilities.

Aclara's Universal
Metering Transponder
for residential meters
sends highly reliable
interval meter readings
to electric utilities,
enabling advanced
rate programs such as
peak-demand
billing.

FORM 2S CL200 240V 3W 60Hz TA=30 Kh 7.2

KWH/KW

*NXE01172963816019*
11 729 638

2 0 1 2 A n n u Al R e p oRt

u Ti l iTy S o l uTi o nS

Doble’s Asset Risk
Management System
(dobleARMSTM)
brings decades of
knowledge and
experience with
diagnostics and data
analysis to the areas
of online monitor-
ing, condition
assessment and the
strategic manage-
ment of assets.

doble

For nearly a century, Doble Engineering

management system, along with a comprehensive

Company has partnered with electric power indus-

suite of on-line monitoring solutions. In addi-

try clients to minimize risk, improve operations

tion, Doble continues to enhance the advanced

and optimize system performance. Doble provides

off-line testing tools that are trusted around the

enterprise level solutions, engineering expertise,

globe for reliability and ruggedness.

on-line and off-line diagnostic instruments, con-

ENGINEErING ExPErTIsE: Customers continually

sulting and testing services, educational seminars

rely on Doble because of the strength and exper-

and the world’s premier library of electrical appa-

tise of the Doble team. Doble’s engineers are an

ratus test data for the benefit of the global power

invaluable resource for technical support, train-

industry. Doble has a reputation for excellence,

ing and consultation. Members of the Doble team

Doble clients

95% Doble

5% Other

95% of all U.S.
investor-owned
electric utilities are
Doble clients.

earned through the experience of our engineers

and the quality of our products and services.

soLuTIoNs for A NEW ErA: Today’s power in-

dustry faces a series of complex changes — an

aging workforce, new compliance and security

concerns, as well as a shift towards on-line moni-

toring. Doble is evolving with the industry, and

has developed dobleARMS ,TM an enterprise asset

eSc o te c h n o l oGi eS in c .

Advanced testing
is performed inside
Doble’s High Voltage
Laboratory including
endurance testing,
research on dielec-
tric behavior, failure
analysis and partial
discharge detection.

All Power Transformers — Overall Test

4000

3500

3000

2500

2000

1500

1000

500

This year Doble intro-
duced the F6150sv,
an advanced protec-
tion test set with
enhanced features for
wireless communica-
tion and IEC61850
compliance for smart
grid applications.

A Doble engineer performs
on-site testing using
Electromagnetic Interference
DiagnosticsSM, an on-line
survey that detects both
electrical and mechanical
defects in generators,
motors, isolated
phase bus ducts and
transformers.

Doble engineers
perform advanced
and routine
testing, and also
support clients with
analysis of test
results, training,
consultation and
technical support.

serve on international standards committees such

as the Institute of Electrical and Electronics En-

gineers (IEEE), the International Electrotechnical

Commission (IEC) and the International Council

on Large Electric Systems (CIGRE) to ensure the

voices of clients are being represented. Doble’s en-

gineers and chemists are industry leaders, honored

for their dedication and service, and respected for

their knowledge and unbiased opinions.

with analysis and recommendations enabling com-

KNoWLEDGE Is PoWEr: Doble is the custodian

panies to make informed financial decisions about

of the industry’s largest database of test results,

the health of their electrical assets.

service advisories, technical papers and presen-

THE fuTurE of DobLE: Evolution is key. Doble con-

tations. Doble’s First Response Analytics Knowl-

tinues to invest in new technology and grow inter-

edgebaseTM or FRANKTM is an artificial intelligence

nationally, while staying true to our core

engine that leverages the data to provide clients

foundation of providing quality prod-

ucts, services and knowledge to the

electric power industry.

Chemists in Doble’s
Materials Laboratories
develop cost-effective
testing programs for
condition assessment
and perform a variety
of tests to help
identify and solve
apparatus problems.

2 0 1 2 A n n u Al R e p oRt

F i l Tr a Ti o n / F l u i d F l oW

bUIldInG on A herItAGe of InnovAtIon-InSpIred flUId control SolUtIonS, the compAnIeS In

oUr fIltrAtIon/flUId flow SeGment—crISSAIr Inc. (crISSAIr), ptI technoloGIeS Inc. (ptI) And

vAcco IndUStrIeS (vAcco)—contInUe to delIver hIGhly enGIneered fl UId control SolUtIonS

for mISSIon crItIcAl SyStemS. AS technoloGy-drIven leAderS, the comp AnIeS Are commItted

to SAtISfyInG cUStomerS In A dIverSe GroUp of end mArketS, Incl UdInG commercIAl Aero-

SpAce, SpAce And defenSe, SAtellIte commUnIcAtIonS, medIcAl, IndUStrIAl And AUtomotIve.

proprietary products

73% Proprietary

27% Competitive

Seventy-three percent
of our Filtration seg-
ment contracts are
for products for which
ESCO has been selected
as the sole provider.

HErITAGE: The Company’s Filtration/Fluid Flow busi-

ness is built upon successful integration of tech-

nology, application knowledge and engineering

capability while embracing mutual commitment

and collaboration with our customers. This tradi-

tion has positioned the company to address com-

plex fluid control challenges and opportunities

by providing highly engineered products directly

to Original Equipment Manufacturers and line re-

placeable units and spares to the after-market.

A deep understanding of the aerospace, defense

and industrial markets has resulted in proprietary

products that comprehensively address the needs

of the manufacturer and operator.

INNovATIoN: Our core competence in the area of

fluid flow control equipment design has produced

hundreds of products with a broad range of com-

plexity. The companies are technology-centered and

committed to satisfying customer needs through

innovative research and development programs.

VACCO’s advanced propulsion products helped the

PTI provides the complete set of hydraulic filter manifolds for
the Airbus A350 XWB program, ensuring cleaner operation,
optimum efficiency and better economy.

eSc o te c h n o l oGi eS in c .

In advancing industry
standards, VACCO has
designed new tech-
nologies that provide
entire subsystem
critical components
in micro-manifolds,
reducing size, weight
and risk to space
programs.

Our comprehensive
filtration and fluid
control solutions
enhance our
customers’ equip-
ment performance,
improve reliability,
keep people safe
and protect the
environment.

Mars Science Laboratory Mission, one of NASA's

most difficult, high-risk missions ever, successfully

land the Curiosity rover on Mars. PTI and Crissair

continue development of advanced flow control

products that improve performance, lengthen opera-

tional life and maintain optimal fluid quality on to-

day’s most advanced aircraft systems, including the

Airbus A350 XWB, the Boeing 787 and the Lockheed

Martin Joint Strike Fighter.

succEss: Crissair, PTI and VACCO are recognized

as well established leaders at providing solution-

oriented excellence. Whether maintaining an ex-

isting product position or strategically pursuing

new markets, technical superiority and next gen-

eration innovations are key to continued growth

and profitability. Today, our products are essential

components of the filtration and fluid flow control

process in nearly every major industry.

Crissair is an industry
leader in the supply
of aerospace fluid
control check valves.
From basic designs to
custom applications,
our valves set the
industry standard.

VACCO provides
critical components
to the Mars Science
Laboratory program,
including Latch
Valves, Pressure
Regulators, Etched
Disc & Metal Mesh
Filters, and Fill &
Drain Valves.

2 0 1 2 A n n u Al R e p oRt

rF S h i e l d i n g & T eS T

eSco'S etS-lIndGren SUbSIdIAry IS the world’S leAdInG SUpplIer of electromAGnetIc com -

pAtIbIlIty ( emc) And rAdIo freqUency (rf) teSt f AcIlItIeS, AS well AS ShIelded encloSUreS

for medIcAl And SecUrIty ApplIcA tIonS. oUr worldwIde preSence enAbleS US to Serve A

GlobAl cUStomer bASe And t Ake Adv AntAGe of Growth In developInG mArketS. wIth An

emphASIS on UnIqUely enGIneered Sol UtIonS, we Are Able to qUIckly AddreSS new And

developInG technoloGIeS AS well AS contInUAlly chAnGInG cUStomer reqUIrementS.

ETS-Lindgren supplies fully integrated solutions

that allow customers to identify, measure and con-

tain radiated energy. The company’s products are

used in a variety of applications, including the

testing of electronics to meet regulatory standards,

the testing of wireless devices to improve product

performance and the protection of sensitive equip-

ment and data. With offices throughout the world,

we can service our global customer base with local-

ized support.

TEsT soLuTIoNs: ETS-Lindgren is the worldwide

leading supplier of EMC and wireless test systems.

Product innovation
is critical to ETS-
Lindgren’s success
and its ability to help
its customers address
the unique testing
challenges associated
with their products.

Test system ease of
use and overall test
time are critical to
anyone designing
wireless communica-
tion devices. Users
also appreciate our
aesthetically pleasing
work environments.

State-of-the-art MRI facilities require both high-quality
shielding as well as first-class workmanship to meet the
requirements of a demanding customer base.

eSc o te c h n o l oGi eS in c .

With the rapid development of new wireless tech-

nologies, such as LTE, ETS-Lindgren’s engineering

expertise allows customers to test devices accu-

rately and get products to market quickly. Our fully

integrated EMC test solutions offer customers the

2.20

2.00

1.75

1.50

greatest flexibility of any solution on the market

magnetics improves, ETS-Lindgren engineers work

and allows them to test products ranging from PC

with leading suppliers in the industry to develop

boards to airplanes.

the next generation of products.

MEDIcAL MArKET: The shielding of Magnetic Reso-

sEcurITY APPLIcATIoNs: ETS-Lindgren has long been

nance Imaging (MRI) suites is becoming increasing-

a leading supplier in the field of secure communi-

ly important as the demand for better image qual-

cation. With the development of new electromag-

ity and faster patient throughput increases. As

netic weapons, a new threat has emerged. We are

new technologies emerge, and the performance of

applying our 70 years of experience in designing

2012

2013

2014

2015

projected Global
Wireless lAn
product Shipments

In Billions

Global shipments of
electronic products
with wireless capability
are expected to grow
dramatically over the
next few years.

and installing shielding systems to protect critical

equipment and command/control centers from Elec-

tromagnetic Pulse (EMP), High Altitude Electromag-

netic Pulse (HEMP) and Intentional Electromagnetic

Interference (IEMI).

Large vehicles offer
unique challenges
when it comes to
testing. ETS-Lindgren
is able to use its
expertise to help
customers successfully
meet all their testing
requirements.

2 0 1 2 A n n u Al R e p oRt

C o m m iTm e nT To C o m m u n iTi eS

the eSco technoloGIeS foUndA tIon IS A pUblIc chArIty fUnded by donA tIonS from

eSco, eSco employeeS And oUtSIde donorS. the foUndA tIon’S mISSIon IS to SUpport

chArItAble orGAnIzAtIonS focUSInG on chIldren And fAmIlIeS In commUnItIeS where

eSco technoloGIeS hAS operAtIonS. the orGAnIzAtIonS hIGhlIGhted below Are A few

of more thAn 25 core chArItIeS the foUndA tIon SUpportS AnnUAlly.

roNALD McDoNALD HousE cHArITIEs (RMHC) (St.

vention and treatment, mental health therapy and

Louis, MO) RMHC of Metro St. Louis was established

counseling, parent education and support, school

in 1981 and has grown from an eight-bedroom facil-

readiness, and other vital initiatives.

ity to now include three houses and eight extended-

PEoPLE’s rEsourcE cENTEr (DuPage County, IL) is

stay apartments. With the addition of their newest

a multi-faceted social services organization com-

house (pictured here), they are now able to serve

mitted to helping the community through its food

up to 59 families at a time. RMHC provides a warm,

pantry, distribution of gently used clothing, job

home-like atmosphere that allows families to stay

search mentoring, emergency rent and mortgage

close to their hospitalized child and gives them a

assistance, computer skills training, and literacy

The third St. Louis Ronald
McDonald House and
the 300th in the world
was officially opened in
2010. The newest Ronald
McDonald House is located
on the campus of Mercy
Children’s Hospital and is
a 20-bedroom, three-story
house encompassing
18,188 square feet.

programs. Our Foundation grant helps support their

English as a Second Language literacy program for

parents of Head Start students.

fIELDsToNE fArM THErAPEuTIc rIDING cENTEr

(Cleveland, OH) provides equestrian programs to

people with disabilities. Fieldstone Farm serves more

than 800 students annually from all over Northeast

place to eat, sleep, relax and spend time with other

Ohio. Riders with cognitive impairments, physical

families facing similar situations. In recent years

disabilities, psychosocial disorders including behav-

the Foundation’s grants have gone to support the

ioral issues and sensory impairments, learn riding

cost to provide lodging to families as well as to

skills while they improve their balance, strengthen

refresh and update one of the local RMHC homes.

muscles, work on educational goals, learn commu-

fooTHILL fAMILY sErvIcE (San Gabriel Valley, CA)

nication skills, increase their self-esteem and gain

is a mental health and social service agency com-

confidence. The Foundation provides support to its

mitted to building brighter futures by encouraging

Academic Enrichment Program that provides “rider-

children and families to overcome challenges and

ships” for children with disabilities.

achieve success in relationships, school and work.

Our Foundation grant helps support their programs

focusing on domestic violence and child abuse pre-

to make a tax-deductible contribution or to learn more
about the Foundation, please call 314-213-7277 or visit

our website at www.escotechnologiesfoundation.org.

eSc o te c h n o l oGi eS in c .

E S C O TE Ch nOl

Og iE S 2 0 1 2 F i n a nCi a lS

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

Inside Back Cover

2 0 1 2 A n n u Al R e p oRt

M a n a gE M EnT ’S D iS CuS SiOn a nD an a l ySiS

The following discussion should be read in conjunction with
the Consolidated Financial Statements and Notes thereto. The
years 2012, 2011 and 2010 refer to the fiscal years ended
September 30, 2012, 2011 and 2010, respectively, and are
used throughout the document.

Introduction

ESCO Technologies Inc. and its wholly owned subsidiaries
(ESCO, the Company) are organized into three reportable oper-
ating 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 Technologies LLC (Aclara), and Doble Engineering

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 acquisitions.

Highlights of 2012 operations

▶ Sales, net earnings and diluted earnings per share were

$688.4 million, $46.9 million and $1.73 per share,
respectively, compared to sales, net earnings and diluted
earnings per share of $693.7 million, $52.5 million and $1.95
per share in 2011.

Company (Doble),

▶ Net cash provided by operating activities was approximately

▶ Test: EMC Group companies consisting primarily of ETS-Lindgren
L.P. and Lindgren R.F. Enclosures, Inc., (On October 1, 2012,
these entities were merged together and renamed ETS-
Lindgren Inc.) and,

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

(VACCO), Crissair, Inc. (Crissair) and Thermoform Engineered
Quality LLC (TEQ).

USG: Aclara 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 and
power-line 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, revenue management and integration solutions. Doble
provides high-end, intelligent diagnostic test solutions for the
electric power delivery industry and is a leading supplier of
power factor and 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 primarily
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 aircraft and submarines.

$53 million in 2012.

▶ At September 30, 2012, cash on hand was $30.2 million and
outstanding debt was $115 million, for a net debt position of
approximately $85 million. (Net debt position is defined as
total debt less net cash.)

▶ 2012 entered orders were $752.2 million resulting in a book-
to-bill ratio of approximately 1.1x. Backlog at September 30,
2012, was $406.9 million compared to $343.1 million at
September 30, 2011.

▶ The Company received $74.6 million in orders and recorded
$13 million in sales during 2012 related to the Company’s
agreement with Southern California Gas Co. (SoCalGas).
SoCalGas’ project includes deployment of Aclara’s integrated
hardware, software and network architecture solution to over
six million customers throughout its service territory. As of
September 30, 2012, total orders received from SoCalGas were
$94.5 million. Subsequent to fiscal year-end, the Company
received $41 million in orders in October 2012 from SoCalGas.

▶ The Company acquired a minority interest in Calico Energy,

Inc. (Calico) for $3.3 million in 2012. Calico is a provider of
demand response software used in smart grid deployments
and will be offered in connection with Aclara’s Smart
Communications Network solution.

▶ The Company declared dividends of $0.32 per share, totaling

$8.6 million in payments during 2012.

▶ During the fourth quarter of 2012, the Company spent

$5.4 million to repurchase approximately 150,000 shares
of its common stock. Subsequent to fiscal year-end, the
Company spent an additional $9.7 million to repurchase
approximately 270,000 shares.

ESCO TEChnOlOgiES inC.M a n a gE M EnT ’S D iS CuS SiOn a nD an a l ySiS

Results of Continuing operations

net SAleS

(Dollars in millions)

2012

2011

Fiscal year ended

Change
Change
2011
2012
2010 vs. 2011 vs. 2010

USG
Test
Filtration

Total

$317.7 349.6
175.9 176.5
194.8 167.6

(9.1)%
348.3
138.4
(0.3)%
120.8 16.2 %

0.4 %
27.5 %
38.7 %

$688.4 693.7

607.5

(0.8)%

14.2 %

Net sales decreased $5.3 million, or 0.8%, to $688.4 million in
2012 from $693.7 million in 2011. The decrease in net sales in
2012 as compared to the prior year was due to: a $31.9 million
decrease in the USG segment; a $0.6 million decrease in the
Test segment; partially offset by a $27.2 million increase in
the Filtration segment.

uSG

The net sales decrease of $31.9 million, or 9.1%, in 2012
as compared to the prior year was primarily due to: a
$34.6 mil lion decrease in net sales from Aclara due to lower
deliveries of Advanced Metering Infrastructure (AMI) products
for the New York City water project ($17.4 million), the Pacific
Gas & Electric Company (PG&E) gas project ($18.4 million)
and the Federal Commission of Electricity (CFE) electric
project in Mexico ($29.6 million) as these projects near
completion. Partially offsetting this sales decrease, sales to
electric utility cooperatives increased $19 million and sales
to SoCalGas increased $11.7 million in 2012 as compared to
the prior year. Net sales from Doble increased $2.7 million
in 2012 as compared to the prior year driven by an increase
in service revenues.

The net sales increase of $1.3 million, or 0.4%, in 2011 as
compared to 2010 was due to: a $21.8 million increase in
net sales of Aclara’s TWACS® products primarily due to higher
shipments to CFE; an $11.7 million increase in net sales from
Doble driven by higher product shipments; a $3.3 million
increase in net sales from Aclara’s software products mainly
due to the Xtensible acquisition (acquired September 3, 2010);
partially offset by a $32 million decrease in net sales from
Aclara’s STAR® products related to the PG&E gas project and a
$10 million decrease for the New York City water project.

test

The net sales decrease of $0.6 million, or 0.3%, in 2012 as
compared to the prior year was due to: a $6 million decrease
in net sales from the segment’s U.S. operations primarily
driven by lower shipments of shielding for a NASA project

in Florida as the project nears completion; a $1.3 million
decrease in net sales from the segment’s European operations;
partially offset by a $7 million increase in net sales from the
segment’s Asian operations due to several chamber projects
in China.

The net sales increase of $38.1 million, or 27.5%, in 2011 as
compared to 2010 was due to: a $15.5 million increase in net
sales from the segment’s U.S. operations mainly driven by a
large project for NASA in Florida; a $17.3 million increase in
net sales from the segment’s European operations mainly due
to the EMV acquisition that contributed $11 million; and a
$5.4 million increase in net sales from the segment’s Asian
operations due to several large chamber projects in Japan.

Filtration

The 16.2%, or $27.2 million increase in net sales in 2012
as compared to the prior year was due to: an $8.6 million
increase in net sales from VACCO due to higher shipments of
its Space products; a $6.6 million increase in net sales at TEQ
mainly due to higher shipments to commercial customers;
a $6.5 million increase in net sales at PTI driven by higher
shipments of aerospace assemblies, elements and couplings;
and a $5.5 million increase at Crissair mainly due to higher
product shipments and price increases on its products.

The 38.7%, or $46.8 million increase in net sales in 2011
as compared to 2010 was due to: a $22.9 million increase
in net sales from Crissair (which was acquired effective
July 31, 2010); a $12.7 million increase at TEQ due to higher
shipments of its ear thermometer probe cover product; an
$8.2 million increase in net sales from VACCO due to higher
shipments of Virginia Class submarine products and defense
spares shipments; and a $3 million increase at PTI driven by
higher shipments of aerospace assemblies and elements.

oRDeRS AnD BACKloG

New orders received in 2012 were $752.2 million as compared
to $676.1 million in 2011, resulting in order backlog of
$406.9 million at September 30, 2012, as compared to order
backlog of $343.1 million at September 30, 2011. In 2012,
the Company recorded $380.1 million of orders related to
USG products, $168.5 million related to Test products, and
$203.6 million related to Filtration products. Orders are
entered into backlog as firm purchase order commitments
are received.

In 2011, the Company recorded $321.4 million of orders
related to USG products, $189.1 million related to Test
products, and $165.6 million related to Filtration products.

2012 AnnuAl RepoRt

M a n a gE M EnT ’S D iS CuS SiOn a nD an a l ySiS

Aclara received $74.6 million in orders and recorded
$13 million in sales during 2012 related to the Company’s
agreement with SoCalGas. SoCalGas’ project includes
deployment of Aclara’s integrated hardware, software and
network architecture solution to over six million customers
throughout its service territory. Most of the equipment will
be ordered by placement of formal purchase orders under the
agreement. As of September 30, 2012, total orders received
from SoCalGas for AMI gas products were $94.5 million.
Subsequent to September 30, 2012, the Company received
$41 million in orders in October 2012 from SoCalGas.

Aclara received orders from PG&E for AMI products of
$11.4 million, $17 million and $54 million during 2012,
2011 and 2010, respectively. Cumulative-to-date orders from
PG&E for the gas AMI deployment total 4.9 million units and
$280 million through September 30, 2012, as the contract
nears completion.

2011

Aclara received an additional $21 million order to supply
products to Mexico’s electric utility, CFE, related to its electric
AMI deployment.

Aclara also received approximately $20 million of orders in
2011 from SoCalGas related to its gas AMI deployment.

The Test segment received a $6.5 million order for an
anechoic test chamber in South America used to test
telecommunications satellites, and a $5.4 million order
in Turkey for a chamber used to identify electromagnetic
interference for a variety of large motorized vehicles.

SellInG, GeneRAl AnD ADMInIStRAtIVe eXpenSeS

Selling, general and administrative expenses (SG&A) were
$186.1 million, or 27% of net sales in 2012, $182.5 million,
or 26.3% of net sales in 2011, and $157.3 million, or 26% of
net sales in 2010.

The increase in SG&A expenses in 2012 as compared to the
prior year was mainly due to: a $3.5 million increase within the
Filtration segment due to new product development costs for
additional Space product applications, additional content on
Airbus platforms, and an increase in head count; a $1.9 million
increase within the Test segment due to the EMV acquisition
(acquired February 28, 2011); partially offset by a $1.7 million
decrease within the USG segment primarily due to lower new
product development costs as projects were completed and the
related products were introduced to the market.

The increase in SG&A expenses in 2011 as compared to 2010
was due to: an $11.4 million increase within the USG segment
due to new product development, marketing and engineering
expenses; a $7.7 million increase within the Test segment
primarily due to the 2011 acquisition of EMV and SG&A to
support the international marketplace expansion; and a
$6.1 million increase within the Filtration segment mainly due
to a full year of costs from Crissair (versus two months in 2010).

AMoRtIZAtIon oF IntAnGIBle ASSetS

Amortization of intangible assets was $13.3 million in
2012, $12 million in 2011 and $11.6 million in 2010. The
Company recorded $4.7 million, $4.7 million and $4.5 million
in 2012, 2011 and 2010, respectively, related to Aclara’s
TWACS NG capitalized software. Amortization of intangible
assets included $4.5 million, $4.6 million and $4.8 million
of amortization of acquired intangible assets related to the
Company’s acquisitions in 2012, 2011 and 2010, 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) and are included in the respective
segment’s operating results.

otHeR (InCoMe) eXpenSeS, net

Other (income), net, was ($3.9) million in 2012 and ($5.1) mil-
lion in 2011 compared to other expenses, net, of $2.9 million
in 2010, respectively. The principal component in other
(income) expenses, net, in 2012 and 2011 was ($4.5) million
and ($7.6) million, respectively, of income representing a
revaluation of the earnout liability related to the Xtensible
acquisition. The principal item included in other expenses, net,
in 2010 was $1.5 million of severance expenses. There were no
other individually significant items included in other (income)
expenses, net, in 2012, 2011 or 2010.

eARnInGS BeFoRe InteReSt AnD t AXeS (eBIt)

The Company evaluates the performance of its operating
segments based on EBIT, which the Company defines as
earnings before interest and taxes. EBIT on a consolidated
basis is a non-GAAP financial measure. However, the Company
believes that EBIT provides investors and Management with a
valuable and alternative method for assessing the Company’s
operating results. Management evaluates the performance of
its operating segments based on EBIT and believes that EBIT is
useful to investors to demonstrate the operational profitability

ESCO TEChnOlOgiES inC.M a n a gE M EnT ’S D iS CuS SiOn a nD an a l ySiS

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

Fiscal year ended

(Dollars in millions)

2012

2011

2010

USG
% of net sales

$46.2

54.3
67.4
14.5% 15.5% 19.4%

Test
% of net sales

Filtration
% of net sales

14.0

18.6

8.0% 10.5%

12.2
8.8%

19.5
30.8
38.0
19.5% 18.4% 16.1%

Change Change
2011
vs. 2011 vs. 2010

2012

(14.9)% (19.4) %

(24.7)% 52.5 %

23.4 % 57.9 %

Corporate

(24.2)

(24.2) (25.5)

— %

(5.1) %

Total
% of net sales

$74.0

79.5
73.6
10.8% 11.5% 12.1%

(6.9)%

8.0 %

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

(Dollars in millions)

EBIT
Less: Interest expense
Less: Income taxes

Net earnings

uSG

2012

2011

2010

$74.0
(2.3)
(24.8)

79.5
(2.5)
(24.5)

73.6
(4.0)
(24.8)

$46.9

52.5

44.8

The $8.1 million decrease in EBIT in 2012 as compared to
the prior year was due to Aclara’s decrease in net sales due
to the wind-down of certain projects, such as the CFE electric
project, New York City water project and the PG&E gas project
as mentioned above. EBIT was favorably impacted by a
$4.5 million gain related to the revaluation of the earnout
liability related to the Xtensible acquisition.

The $13.1 million decrease in EBIT in 2011 as compared to
2010 was due to: lower sales volumes of Aclara’s STAR products
at the PG&E gas project and New York City water project;
partially offset by increases in EBIT due to increased sales
volumes of Aclara’s TWACS products and Doble’s increase in
sales. EBIT was negatively impacted by $6.5 million in charges
related to the write-down of certain Aclara inventory which was
determined to be obsolete as next generation AMI products are
currently being offered for sale. EBIT was favorably impacted
by a $7.6 million gain related to the revaluation of the earnout
liability related to the Xtensible acquisition.

test

The $4.6 million decrease in EBIT in 2012 as compared to
the prior year was due to: a $4 million decrease related to
the segment’s U.S. operations driven by lower sales volumes;
a $2.2 million decrease related to the segment’s European
operations driven by project delays and unexpected turnover
of key employees in Germany, and additional investments
in SG&A; partially offset by a $1.5 million increase from the
segment’s Asian operations due to higher sales volumes.

The $6.4 million increase in EBIT in 2011 as compared to
2010 was due to: an increase of $4.8 million related to the
segment’s U.S. operations driven by the higher sales volumes;
and a $1.6 million increase related to the segment’s European
and Asian operations also driven by additional sales volumes
as mentioned earlier.

Filtration

EBIT increased $7.2 million in 2012 as compared to the
prior year mainly due to the additional sales volumes at all
operating units within the segment as mentioned above.

EBIT increased $11.3 million in 2011 as compared to 2010
mainly due to the additional sales volumes at VACCO, TEQ and
PTI mentioned above as well as the full-year EBIT contribution
from Crissair.

Corporate

Corporate operating charges included in consolidated EBIT
remained consistent at $24.2 million in 2012 as compared to
the prior year.

Corporate operating charges included in consolidated EBIT
decreased $1.3 million in 2011 as compared to 2010 mainly
due to a decrease in transaction costs related to acquisition
activity and lower professional fees.

The “Reconciliation to Consolidated Totals (Corporate)” in
Note 13 to the Consolidated Financial Statements represents
Corporate office operating charges.

InteReSt eXpenSe, net

Interest expense was $2.3 million in 2012, $2.5 million
in 2011 compared to $4 million in 2010, respectively.
The decrease in interest expense in 2012 as compared to
the prior year was due to: lower average interest rates
(1.2% vs. 1.4%) and lower average outstanding borrowings
($126 million vs. $143 million), partially offset by a
$0.4 million increase due to the write-off of deferred
financing costs related to the previous credit facility. The

2012 AnnuAl RepoRt

M a n a gE M EnT ’S D iS CuS SiOn a nD an a l ySiS

decrease in interest expense in 2011 as compared to 2010
was due to lower average interest rates (1.4% vs. 1.9%)
and lower average outstanding borrowings ($143 million vs.
$171 million) under the revolving credit facility.

InCoMe tAX eXpenSe

The effective tax rate for fiscal years 2012, 2011 and 2010
was 34.6%, 31.8% and 35.6%, respectively. The increase in
the 2012 effective tax rate as compared to the prior year was
primarily due to: the December 31, 2011, expiration of the
research tax credit which increased the 2012 effective tax rate
by 1.6%; the repatriation of foreign subsidiary earnings which
increased the 2012 effective tax rate by 0.9%; releasing a
foreign valuation allowance which reduced the 2011 effective
tax rate by 1.3%; a purchase accounting correction increased
the 2012 effective tax rate by 0.7%; and the release of
uncertain tax positions as a result of the lapse of statute of
limitations reduced the 2012 effective tax rate by 2.5% and
the 2011 effective tax rate by 0.5%.

The decrease in the 2011 effective tax rate as compared to
2010 was mainly due to: the extension of the research tax
credit which reduced the 2011 effective tax rate by 2%; the
release of uncertain tax positions as a result of the lapse of
statute of limitations reduced the 2011 effective tax rate by
0.5%; and the beneficial effect of foreign tax rates reduced the
2011 effective tax rate by 0.7%.

The Company’s foreign subsidiaries have accumulated
unremitted earnings of $34 million and cash of $20.9 million
at September 30, 2012. No deferred taxes have been provided
on the accumulated unremitted earnings because these funds
are not needed to meet the liquidity requirements of the
Company’s U.S. operations and it is the Company’s intention 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
$5.6 million would be due, which would correspondingly
reduce the Company’s net earnings. No significant portion of
the Company’s foreign subsidiaries’ earnings was taxed at a
very low tax rate.

Capital Resources and liquidity

The Company’s overall financial position and liquidity are
strong. Working capital (current assets less current liabilities)
increased to $139.2 million at September 30, 2012, from
$122.5 million at September 30, 2011, due to higher accounts
receivable and inventory balances.

The $7 million increase in accounts receivable at Sep tember 30,
2012, was mainly due to: a $15.7 million increase within
the USG segment due to the timing of sales partially offset
by an $8.1 million decrease in the Test segment due to
timing of collections. The $11.1 million increase in inventory
at September 30, 2012, was mainly due to: a $7.8 million
increase in the Filtration segment due to timing of sales and
accelerated material receipts for various programs at VACCO;
and a $4.2 million increase in the USG segment.

Net cash provided by operating activities was $53.2 million,
$75.9 million and $67 million in 2012, 2011 and 2010,
respectively. The decrease in 2012 as compared to the
prior year was due to a decrease in net earnings and higher
operating working capital requirements.

Capital expenditures were $14.8 million, $13.7 million
and $13.4 million in 2012, 2011 and 2010, respectively.
The increase in 2012 as compared to 2011 was due to a
$1.1 million increase for manufacturing equipment within the
Filtration segment. There were no commitments outstanding
that were considered material for capital expenditures at
September 30, 2012. In addition, the Company incurred
expenditures for capitalized software of $13.1 million,
$14.2 million and $8.8 million in 2012, 2011 and 2010,
respectively. The decrease in 2012 as compared to 2011 was
mainly attributable to the Filtration segment’s purchase of new
ERP software. The increase in 2011 as compared to the prior
years was primarily due to a $3 million increase within the USG
segment related to software development for new products.

The Company made required pension contributions of
$4.8 million, $5.2 million and $1.4 million in 2012, 2011
and 2010, respectively.

ACQuISItIonS

2012

During 2012, the Company acquired a minority interest in
Calico Energy, Inc. (Calico) for $3.3 million in cash. Calico,
headquartered in Seattle, Washington is a provider of demand
response software used in smart grid deployments and will
be offered in connection with 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 at September 30, 2012.

2011

On February 28, 2011, the Company acquired the capital stock
of EMV Elektronische Messgerate Vertriebs - GmbH, together

ESCO TEChnOlOgiES inC.M a n a gE M EnT ’S D iS CuS SiOn a nD an a l ySiS

with its subsidiary EMSCREEN Electromagnetic Screening GmbH
(collectively, EMV) for a purchase price of approximately
$5 million, inclusive of cash acquired. EMV, with operations in
Taufkirchen, Germany, provides turnkey systems and shielded
environments for research, development and quality assurance
testing of electronic equipment. EMV’s operating results, since
the date of acquisition, are included within the Test segment
and the Company recorded approximately $4.8 million of
goodwill as a result of the transaction.

2010

Effective July 31, 2010, the Company acquired the capital
stock of Crissair, Inc. (Crissair) for a purchase price of
approximately $27 million, net of cash acquired. Crissair,
headquartered in Palmdale, California, is a manufacturer of
high-quality hydraulic, fuel and pneumatic system components
for the aerospace industry. The operating results for Crissair,
since the date of acquisition, are included within the Filtration
segment. The Company recorded approximately $9 million of
goodwill as a result of the transaction, $4.3 million of trade
names and $7.4 million of amortizable identifiable intangible
assets consisting of customer relationships.

On September 3, 2010, the Company acquired the capital
stock of Xtensible Solutions, Inc. (Xtensible) for a purchase
price of approximately $4 million in cash plus contingent
consideration. Xtensible is a provider of information
management and integration solutions to the utility industry
worldwide and its operating results, since the date of
acquisition until September 30, 2012, were included within
Aclara in the USG segment. As of October 1, 2012, Xtensible’s
operating results will be included within Doble in the USG
segment. The agreement includes contingent consideration
based on target revenues to be paid out over the next three
and one-half years from the date of acquisition. The Company
recorded approximately $15 million of goodwill as a result
of the transaction. During 2012, the Company revalued the
earnout obligation based on current forecasted revenues and
recorded a $4.5 million gain in Other (income) expenses, net.

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, 2012, the Company had approximately
$320 million available to borrow under the credit facility, plus
a $250 million increase option, in addition to $30.2 million
cash on hand, for a total of approximately $600 million. The
Company classified $50 million as the current portion of long-
term debt as of September 30, 2012, as the Company intends
to repay this amount within the next 12 months; however,
the Company has no contractual obligation to repay such
amount during the next twelve months. The Company’s ability
to access the additional $250 million increase option of the
credit facility is subject to acceptance by participating or
other outside banks.

The credit facility requires, as determined by certain financial
ratios, a facility fee ranging from 17.5 to 35.0 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.
As of September 30, 2012, 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.

DIVIDenDS

During 2010, the Company initiated a quarterly cash dividend
payable at an annual rate of $0.32 per share. The Company
paid dividends of $8.6 million, $8.5 million and $6.3 million in
2012, 2011 and 2010, respectively.

outlooK — 2013

Management continues to see strong growth in 2013 across the
business. Based on projected revenue growth of approximately
10 percent, Management expects 2013 operational EPS in
the range of $2.30 to $2.50 per share, which excludes non-
recurring restructuring charges described below. In addition,
the 2013 effective tax rate is projected to be approximately
35%. On a quarterly basis, Management expects 2013 revenues
and EPS to be more second-half weighted, with first quarter
EPS being less than $0.10 per share. The Company plans to

2012 AnnuAl RepoRtM a n a gE M EnT ’S D iS CuS SiOn a nD an a l ySiS

consolidate the Test segment’s four domestic manufacturing
facilities into three domestic locations, resulting in the closure
of the Glendale Heights, Illinois, facility. The non-recurring
restructuring costs are expected to be approximately $3 million
and will be expensed over the first six months of 2013.

During the fourth quarter of 2012, the Company repurchased
$5.4 million or approximately 150,000 shares. Subsequent to
fiscal year-end, the Company spent an additional $9.7 million
to repurchase approximately 270,000 shares. There were no
stock repurchases during 2011 or 2010.

ContRACtuAl oBlIGAtIonS

penSIon FunDInG ReQuIReMentS

The following table shows the Company’s contractual
obligations as of September 30, 2012:

(Dollars in millions)

Payments due by period

Less
than
1 year

1 to 3 3 to 5
years

More
than
years 5 years

Total

$115.0

—

115.0

3.8

1.8

2.0

—

24.0

7.6

10.9

5.0

0.5

Contractual
Obligations

Long-Term Debt
Obligation

Estimated Interest
Payments(1)

Operating Lease
Obligations

Purchase
Obligations(2)

Total

$156.0

22.5

13.0

120.0

13.2

13.1

0.1

—

0.5

(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 majority of the Company’s purchase
orders can be cancelled, they are not included in the table above.

As of September 30, 2012, the Company had $1.8 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, 2012.

SHARe RepuRCHASeS

In August 2012, the Company’s Board of Directors authorized
an expanded stock repurchase program whereby Management
may repurchase shares of its outstanding common stock in
the open market and otherwise throughout the period ending
September 30, 2013. The total value authorized is the lesser of
$100 million, or the dollar limitation imposed by Section 6.07
of the Company’s Credit Agreement dated May 14, 2012. The
previous authorization was set to expire September 30, 2012.

The minimum cash funding requirements related to the
Company’s defined benefit pension plans are estimated to be
approximately $2.5 million in 2013, approximately $3.5 million
in 2014 and approximately $3 million in 2015.

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. 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. There were no outstanding
derivative instruments at September 30, 2012. The Company
has determined that the market risk related to interest
rates with respect to its variable debt is not material. The
Company estimates that if market interest rates averaged one
percentage point higher, the effect would have been less than
2% of net earnings for the year ended September 30, 2012.

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

ESCO TEChnOlOgiES inC.

M a n a gE M EnT ’S D iS CuS SiOn a nD an a l ySiS

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
$186.5 million, $181.3 million, and $141.4 million in 2012,
2011 and 2010, respectively. The Company hedges certain
foreign currency commitments by purchasing foreign currency
forward contracts. The Company does not have material foreign
currency market risk (e.g. net foreign currency transaction
gain/loss was less than 2% of net earnings for fiscal years
2012, 2011 and 2010).

Critical Accounting policies

The preparation of financial statements in conformity
with U.S. generally accepted accounting principles (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

USG Segment: Within the USG segment, approximately 65%
of the segment’s revenue arrangements (approximately 30% of
consolidated revenues) contain software components and/or
multiple element arrangements. The application of these
standards requires judgment, including the determination
of whether an arrangement includes multiple elements and

estimates of the fair value of the elements, using vendor-
specific objective evidence of fair value (VSOE), if it exists,
otherwise third-party evidence (TPE) or estimated selling
price (ESP). Changes to the elements in an arrangement, and
the ability to identify fair value for those elements could
materially impact the amount of earned and/or deferred
revenue. There have 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 35% of the segment’s revenues (approximately 15%
of consolidated revenues) represent products sold under a
single element arrangement and are recognized when products
are delivered (when title and risk of ownership transfers),
when services are performed for unaffiliated customers or on a
straight-line basis over the lease term.

Approximately 60% of the segment’s revenues (approximately
15% of consolidated revenues) are recorded under the
percentage-of-completion method 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 in a period. 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.

2012 AnnuAl RepoRtM a n a gE M EnT ’S D iS CuS SiOn a nD an a l ySiS

Filtration Segment: Within the Filtration segment,
approximately 65% of segment revenues (approximately 20%
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 35% of segment revenues (approximately 10%
of consolidated revenues) are recorded under the percentage-
of-completion provisions 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.

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 Financial Accounting Standards Board
(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

ESCO TEChnOlOgiES inC.M a n a gE M EnT ’S D iS CuS SiOn a nD an a l ySiS

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

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, 2012,
the Company has determined that no reporting units are
at risk of material goodwill impairment as the fair value of
each reporting unit substantially exceeded its carrying value.
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 postretirement benefit plans is based on Management’s
assumptions related to future events including interest rates,
return on pension plan assets, and health care cost trend rates.
Actual pension plan asset performance will either decrease

or increase unamortized pension losses/gains that will affect
net earnings in future years. Depending upon the performance
of the equity and bond markets in 2013, the Company could
be required to record a charge to equity. In addition, if the
discount rate was decreased by 25 basis points from 3.75%
to 3.5%, the projected benefit obligation for the defined
benefit plan would increase by approximately $3 million and
result in an additional after-tax charge to shareholders’ equity
of approximately $1.9 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 course of business 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
or covered by insurance, or are not likely to have a material
adverse effect on its financial condition or results of operation.

QuAntItAtIVe AnD QuAlItAtIVe DISCloSuReS ABout MARKet RISK

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. 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. There were no outstanding derivative
instruments at September 30, 2012. See further discussion
in “Management’s Discussion and Analysis — Market Risk
Analysis” regarding the Company’s market risks.

2012 AnnuAl RepoRtM a n a gE M EnT ’S D iS CuS SiOn a nD an a l ySiS

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 the 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.

new Accounting pronouncements

In July 2012, the FASB issued Accounting Standards Update
No. 2012-02, Intangibles - Goodwill and Other (Topic 350):
Testing Indefinite-Lived Intangible Assets for Impairment
(ASU 2012-02). This ASU updates the rules on testing
indefinite-lived intangible assets other than goodwill for
impairment and permits the option to perform a qualitative
assessment of the fair value of indefinite-lived intangible
assets. This update is effective for fiscal years, and interim
periods within those years, beginning after September 15,
2012, and is not expected to have a material impact on the
Company’s financial statements.

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, the
amount and timing of 2013 revenues and EPS, adequacy of
the Company’s credit facilities and future cash flows, the
anticipated size of SoCalGas’ deployment, the outcome of
current litigation, claims and charges, the anticipated timing
and amount of lost deferred tax assets, continued reinvestment
of foreign earnings, 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 timing and amount of
the reduction of unrecognized tax benefits, repayment of
debt within the next 12 months, the recognition of costs
related to share-based compensation arrangements, future
costs relating to environmental matters, share repurchases,
investments, sustained performance improvement, market
risk related to interest rates, the impact of FASB Update
No. 2012-02, 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 1-3), 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, 2012, and the following:
changes in requirements or financial constraints impacting
SoCalGas; the impacts of natural disasters such as hurricanes
on the Company’s operations and those of the Company’s
customers and suppliers; the timing and content of future
customer orders; 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 restructuring plans.

ESCO TEChnOlOgiES inC.COnS Ol iDa

T E D ST a T E M EnT S O F O pEr a

TiOnS

(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, net
Other (income) expenses, net

Total costs and expenses

Earnings before income tax
Income tax expense

Net earnings

Earnings per share:

Basic:

Net earnings

Diluted:

Net earnings

Average common shares outstanding (in thousands):

Basic

Diluted

See accompanying Notes to Consolidated Financial Statements.

2012

2011

2010

$ 688,403

693,711

607,493

418,879
186,079
13,322
2,340
(3,901)

424,846
182,530
11,982
2,493
(5,098)

616,719

616,753

71,684
24,805

46,879

76,958
24,457

52,501

361,942
157,348
11,633
3,977
2,928

537,828

69,665
24,819

44,846

$ 1.76

1.97

1.73

1.95

1.70

1.68

26,699

27,030

26,588

26,903

26,450

26,738

2012 AnnuAl RepoRt

2012

2011

30,215

34,158

151,051

144,083

14,567

108,061

22,313

17,237

12,974
96,986
20,630
19,523

343,444

328,354

4,984

53,278

93,663

5,135

4,986
52,648
85,440
2,779

157,060

145,853

81,184

75,876

72,786

73,067

231,473

361,280

21,680

231,848
361,864
16,704

$ 1,033,753

1,011,837

COnS Ol iDa

T E D B a l a nC E S hE 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
$1,927 and $2,044 in 2012 and 2011, respectively
Costs and estimated earnings on long-term contracts, less progress
billings of $30,534 and $11,416 in 2012 and 2011, respectively
Inventories
Current portion of deferred tax assets
Other current assets

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

Intangible assets, net
Goodwill
Other assets

Total Assets

See accompanying Notes to Consolidated Financial Statements.

ESCO TEChnOlOgiES inC.

COnS Ol iDa

T E D B a l a nC E S hE 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 $31,534 and $30,925 in 2012 and 2011, respectively
Accrued salaries
Current portion of deferred revenue
Accrued other expenses

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 30,044,486 and 29,956,904 shares in 2012 and 2011, respectively

Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of tax

Less treasury stock, at cost (3,453,249 and 3,320,926 common shares in

2012 and 2011, respectively)

Total shareholders’ equity

Total Liabilities and Shareholders’ Equity

See accompanying Notes to Consolidated Financial Statements.

2012

2011

50,000

54,049

21,700

25,717

24,920

27,819

50,000
54,037

23,667
26,040
24,499
27,594

204,205

205,837

35,480

88,675

9,080

65,000

33,439
85,313
11,538
75,000

402,440

411,127

—

300

279,392

441,566

(25,378)

—

300
275,807
403,241
(19,191)

695,880

660,157

(64,567)

(59,447)

631,313

600,710

$ 1,033,753

1,011,837

2012 AnnuAl RepoRt

COnS Ol iDa

T E D ST a T E M EnT S O F S h a rEhOlD ErS’ E q u iTy

(In thousands)

Common Stock
Shares Amount

Additional
Paid-In
Capital

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Treasury
Stock

Total

Balance, September 30, 2009

29,771

$298

265,794

322,878

(11,598)

(60,032)

517,340

Comprehensive income:
Net earnings
Translation adjustments
Net unrecognized actuarial loss,

net of tax of $1,422

Interest rate swap, net of tax of $(385)

Comprehensive income

Cash dividends declared ($0.32 per share)

Stock options and stock compensation plans,
net of tax benefit of $(105)

—
—

—

—
—

—

—
—

44,846
—

—
—

—

(8,450)

—

5,149

—

—
(1,557)

(2,234)
596

—
—

44,846
(1,557)

(2,234)
596

41,651

—

(8,450)

292

5,441

Balance, September 30, 2010

29,839

298

270,943

359,274

(14,793)

(59,740)

555,982

Comprehensive income:
Net earnings
Translation adjustments
Net unrecognized actuarial loss,

net of tax of $2,689

Interest rate swap, net of tax of $(187)

Comprehensive income

—
—

52,501
—

—
—

—
(333)

(4,354)
289

—
—

52,501
(333)

(4,354)
289

48,103

Cash dividends declared ($0.32 per share)

—

(8,534)

Stock options and stock compensation plans,
net of tax benefit of $(55)

118

4,864

—

(8,534)

293

5,159

Balance, September 30, 2011

29,957

300

275,807

403,241

(19,191)

(59,447)

600,710

Comprehensive income:
Net earnings
Translation adjustments
Net unrecognized actuarial loss,

net of tax of $2,769

Interest rate swap, net of tax of $(1)

Comprehensive income

Cash dividends declared ($0.32 per share)

Stock options and stock compensation plans,
net of tax benefit of $(123)

Purchases into treasury

—

46,879

—

(8,554)

3,585

—

(2,018)

(4,171)

—

46,879

(2,018)

(4,171)

40,692

—

(8,554)

283

3,868

(5,403)

Balance, September 30, 2012

30,044

$300

279,392

441,566

(25,378)

(64,567) 631,313

See accompanying Notes to Consolidated Financial Statements.

ESCO TEChnOlOgiES inC.

COnS Ol iDa

T E D ST a T E M EnT S O F C aSh F l

OwS

(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:

Depreciation and amortization
Stock compensation expense
Changes in current assets and liabilities
Effect of deferred taxes on tax provision
Change in acquisition earnout obligation
Pension contributions
Change in deferred revenue and costs, net
Amortization of prepaid debt fees
Change in uncertain tax positions
Other

Net cash provided by operating activities

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

Net cash used by investing activities

Cash flows from financing activities:
Proceeds from long-term debt
Principal payments on long-term debt
Dividends paid
Purchases of shares into treasury
Deferred financing costs
Other

Net cash used by financing activities

Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase 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 assets
Accounts payable
Advance payments on long-term contracts, net
Accrued expenses

Supplemental cash flow information:
Interest paid
Income taxes paid (including state & foreign)

See accompanying Notes to Consolidated Financial Statements.

2012

2011

2010

$ 46,879

52,501

44,846

24,782

4,602

(17,614)

4,381

(4,459)

(4,800)

549

1,030

(1,738)

(448)

53,164

(3,345)

1,367

(14,754)

(13,080)

23,521
4,670
(1,542)
3,551
(7,595)
(5,230)
2,565
772
294
2,359

75,866

(4,982)
1,361
(13,709)
(14,151)

22,137
4,558
(9,615)
4,059
—
(1,368)
329
257
765
1,055

67,023

(32,316)
2,041
(13,438)
(8,827)

(29,812)

(31,481)

(52,540)

192,455

(202,455)

(8,554)

(5,403)

(1,937)

617

49,370
(78,370)
(8,534)
—
—
1,132

40,000
(66,467)
(6,335)
—
—
1,755

(25,277)

(36,402)

(31,047)

(2,018)

(3,943)

34,158

$ 30,215

$ (6,968)

(1,593)

(11,075)

4,075

(1,967)

(98)

(333)
7,650
26,508

34,158

(1,786)
(231)
(12,459)
35
(6,118)
17,938
1,079

(1,558)
(18,122)
44,630

26,508

(27,960)
(1,985)
5,926
(2,397)
10,597
2,889
3,315

$ (17,614)

(1,542)

(9,615)

1,588

16,544

1,959
21,895

3,536
21,378

2012 AnnuAl RepoRt

n O T E S T O COnS Ol iDa

T E D F i n a nCi a l ST a T E M EnT 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, 2012, and 2011.

C. nAtuRe oF opeRAtIonS

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

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, estimates on long-term contracts, and
litigation and other loss contingencies. Actual results could
differ from those estimates.

e. ReVenue ReCoGnItIon

USG Segment: Within the USG segment, approximately 65%
of the segment’s revenue arrangements (approximately 30% of
consolidated revenues) contain software components and/or
multiple element arrangements. 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. The segment’s revenue
arrangements within Aclara 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 or
“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 Company allocates consideration to each deliverable
in an arrangement based on its relative selling price. When
arrangements have both software and non-software elements,
the Company allocates consideration to each element using
vendor-specific objective evidence (VSOE), if it exists,
otherwise third-party evidence (TPE) is utilized. If neither
VSOE nor TPE of selling price exists for a unit of accounting,
the Company uses estimated selling price (ESP). 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 or, if applicable, the stated renewal rate in the
agreement. TPE is determined by the prices charged by the
Company’s competitors for a similar deliverable when sold
separately. The objective of ESP is to determine the price at
which the Company would transact if the product or service
were sold on a stand-alone basis. The application of these

ESCO TEChnOlOgiES inC.n O T E S T O COnS Ol iDa

T E D F i n a nCi a l ST a T E M EnT S

principles requires judgment, including the determination of
whether a software arrangement includes multiple elements
and estimates of the fair value of the elements.

Hardware is considered a specified element in the software
arrangement and VSOE has been established for this element.
VSOE for the hardware element is determined based on the
price when sold separately 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 TPE or ESP based on the number of endpoints.
The Company has established VSOE for the PCS element 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 35%
of segment revenues (approximately 15% of consolidated
revenues) are recognized when products are delivered (when
title and risk of ownership transfers), when services are
performed for unaffiliated customers or on a straight-line basis
over the lease term.

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 generally consisting 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 method due to the complex nature
of the enclosures that are designed and produced under these
contracts. Products accounted for under this guidance 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 guidance, 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, approx-
imately 65% of revenues (approximately 20% 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 35% of segment revenues (approximately 10%
of consolidated revenues) are recorded under the percentage-
of-completion method. Products accounted for under this
guidance 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
guidance, 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.

2012 AnnuAl RepoRtn O T E S T O COnS Ol iDa

T E D F i n a nCi a l ST a T E M EnT S

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.

I. InVentoRIeS

Inventories are valued at the lower of cost (first-in, first-
out) or market value. Inventories are regularly reviewed for
excess quantities and obsolescence based upon historical
experience, specific identification of discontinued items,
future demand, and market conditions. 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.

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. Long-lived tangible assets are reviewed
for impairment whenever events or changes in business
circumstances indicate the carrying value of the assets may
not be recoverable. Impairment losses are recognized based
on fair value.

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. 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 3 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 consist of internal and 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-ten 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. 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

ESCO TEChnOlOgiES inC.n O T E S T O COnS Ol iDa

T E D F i n a nCi a l ST a T E M EnT S

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.

n. 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 similarly
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.

o. FoReIGn CuRRenCY tRAnSlA tIon

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.

p. 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)

2012

2011

2010

Weighted Average Shares
Outstanding — Basic

Dilutive Options and Performance-
Accelerated Restricted Stock

26,699

26,588

26,450

331

315

288

Shares — Diluted

27,030

26,903

26,738

Options to purchase 126,787 shares at prices ranging from
$35.69-$45.81 were outstanding during the year ended
September 30, 2012, 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 372,653 shares at prices ranging
from $32.55-$54.88 were outstanding during the year ended
September 30, 2011, 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 569,363 shares at prices ranging
from $32.55-$54.88 were outstanding during the year ended
September 30, 2010, 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. These options expire in various periods through 2014.

Approximately 175,000, 173,000 and 214,000 restricted shares
were outstanding but unearned at September 30, 2012, 2011
and 2010, respectively, and, therefore, were not included in
the respective years’ computations of diluted EPS.

Q. 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.
Share-based payment expense is measured at the grant date
based on the fair value of the award and is recognized on a
straight-line basis over the requisite service period (generally
the vesting period of the award).

R. ACCuMulAteD otHeR CoMpReHenSIVe loSS

Accumulated other comprehensive loss of $(25.4) million at
September 30, 2012, consisted of $(28.7) million related to the
pension net actuarial loss; and $3.3 million related to currency

2012 AnnuAl RepoRtn O T E S T O COnS Ol iDa

T E D F i n a nCi a l ST a T E M EnT S

translation adjustments. Accumulated other comprehensive
loss of $(19.2) million at September 30, 2011, consisted of
$(24.5) million related to the pension net actuarial loss; and
$5.3 million related to currency translation adjustments.

S. DeFeRReD ReVenue AnD CoStS

Deferred revenue and costs are recorded 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.

t. DeRIVAtIVe FInAnCIAl InStRuMentS

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.

u. neW ACCountInG StAnDARDS

2. Acquisitions

2012

During 2012, the Company acquired a minority interest in
Calico Energy, Inc. (Calico) for $3.3 million in cash. Calico,
headquartered in Seattle, Washington, is a provider of demand
response software used in smart grid deployments and will
be offered in connection with 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 at September 30, 2012.

2011

On February 28, 2011, the Company acquired the capital stock
of EMV Elektronische Messgerate Vertriebs - GmbH, together
with its subsidiary EMSCREEN Electromagnetic Screening GmbH
(collectively, EMV) for a purchase price of approximately
$5 million, inclusive of cash acquired. EMV, with operations in
Taufkirchen, Germany, provides turnkey systems and shielded
environments for research, development and quality assurance
testing of electronic equipment. EMV’s operating results, since
the date of acquisition, are included within the Test segment
and the Company recorded approximately $4.8 million of
goodwill as a result of the transaction.

2010

On September 3, 2010, the Company acquired the capital stock
of Xtensible Solutions, Inc. (Xtensible) for a purchase price of
approximately $4 million in cash plus contingent consideration.
Xtensible is a provider of information management and
integration solutions to the utility industry worldwide and its
operating results, since the date of acquisition, are included
within the USG segment (as part of Aclara through 2012).
The agreement includes contingent consideration based on
target revenues to be earned and paid out over the three and
a half year period from the date of acquisition. The Company
recorded approximately $15 million of goodwill as a result of

ESCO TEChnOlOgiES inC.n O T E S T O COnS Ol iDa

T E D F i n a nCi a l ST a T E M EnT S

the transaction. The Company revalued the earnout obligation
based on current forecasted revenues and recorded income of
$4.5 million and $7.6 million in Other (income) expenses, net
in 2012 and 2011, respectively.

The Company performed its annual evaluation of goodwill and
intangible assets for impairment during the fourth quarter
of fiscal 2012 and concluded no impairment existed at
September 30, 2012.

The changes in the carrying amount of goodwill attributable
to each business segment for the years ended September 30,
2012, and 2011 are as follows:

(Dollars in millions)

USG

Test Filtration

Total

Balance as of
September 30, 2010

Acquisitions/adjustments

Balance as of
September 30, 2011

Acquisitions/adjustments

Balance as of
September 30, 2012

$ 296.1 30.5
4.3

1.7

29.1 355.7
6.2
0.2

297.8 34.8
(0.5) (0.1)

29.3 361.9
(0.6)

—

$ 297.3 34.7

29.3 361.3

Amortization expense related to intangible assets with
determinable lives was $13.3 million, $12 million and
$11.6 million in 2012, 2011 and 2010, respectively. The
Company recorded $4.7 million, $4.7 million and $4.5 million
of amortization expense related to Aclara PLS’s TWACS NG
software in 2012, 2011 and 2010, 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. Customer
relationships are generally amortized over twenty years.
Intangible asset amortization for fiscal years 2013 through
2017 is estimated at approximately $12 million per year.

4. Accounts Receivable

Accounts receivable, net of the allowance for doubtful accounts,
consist of the following at September 30, 2012, and 2011:

(Dollars in thousands)

2012

2011

Commercial
U.S. Government and prime contractors

$147,685

3,366

137,498
6,585

Total

$151,051

144,083

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 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 except for the goodwill recorded in connection
with the Xtensible acquisition.

3. Goodwill and other Intangible Assets

Included on the Company’s Consolidated Balance Sheets at
September 30, 2012, and 2011 are the following intangible
assets gross carrying amounts and accumulated amortization:

(Dollars in millions)

Goodwill

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

2012

$ 361.3

2011

361.9

$ 13.5
13.3

$ 0.2

13.5
13.3

0.2

$ 129.8
67.0

$ 62.8

116.7
57.4

59.3

$ 61.4
14.7

$ 46.7

$ 10.3
10.3

$ —

61.4
11.6

49.8

10.3
9.6

0.7

Intangible assets with indefinite lives:
Trade names

$ 121.7

121.8

2012 AnnuAl RepoRt

n O T E S T O COnS Ol iDa

T E D F i n a nCi a l ST a T E M EnT S

5. Inventories

Inventories consist of the following at September 30, 2012,
and 2011:

(Dollars in thousands)

Finished goods
Work in process — including

long-term contracts

Raw materials

Total

2012

2011

$30,250

30,192

30,372

47,439

$108,061

23,139
43,655

96,986

6. property, plant and equipment

Depreciation expense of property, plant and equipment for
the years ended September 30, 2012, 2011 and 2010 was
$11.4 million, $11.5 million and $10.5 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, 2012, 2011 and 2010 was $8.3 million,
$8.1 million and $7.7 million, respectively. 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, 2012, are:

(Dollars in thousands)
Years ending September 30:

2013
2014
2015
2016
2017 and thereafter

Total

7. Income tax expense

$ 7,585
6,096
4,811
3,291
2,251

$24,034

Total income tax expense (benefit) for the years ended
September 30, 2012, 2011 and 2010 was allocated to income
tax expense from continuing operations.

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

(Dollars in thousands)

2012

2011

2010

United States
Foreign

$67,297
4,387

73,275
3,683

66,639
3,026

Total income before income taxes $71,684

76,958

69,665

The principal components of income tax expense (benefit) for
the years ended September 30, 2012, 2011 and 2010 consist
of:

(Dollars in thousands)

2012

2011

2010

Federal
Current
Deferred

State and local:
Current
Deferred

Foreign:
Current
Deferred

Total

$16,868

4,084

15,708
5,578

17,585
4,199

1,659

531

2,218
580

2,193
230

1,897

(234)

3,104
(2,731)

1,130
(518)

$24,805

24,457

24,819

The actual income tax expense (benefit) for the years ended
September 30, 2012, 2011 and 2010 differs from the expected
tax expense for those years (computed by applying the U.S.
Federal corporate statutory rate) as follows:

2012

2011

2010

Federal corporate statutory rate
State and local, net of Federal benefits
Foreign
Research credit
Domestic production deduction
Change in uncertain tax positions
Purchase accounting adjustment
Other, net

35.0%

3.3

0.1

(0.4)

(2.4)

(2.6)

0.7

0.9

35.0%
3.6
(2.2)
(2.0)
(2.5)
(0.5)
—
0.4

35.0%
3.1
(1.5)
0.3
(1.9)
0.1
—
0.5

Effective income tax rate

34.6%

31.8%

35.6%

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The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
September 30, 2012, and 2011 are presented below.

(Dollars in thousands)

Deferred tax assets:

2012

2011

Inventories, long-term contract accounting,
contract cost reserves and other

$ 7,819

Pension and other postretirement benefits
Net operating loss carryforward — domestic
Net operating loss carryforward — foreign
Capital loss carryforward
Other compensation-related costs

13,437

562

3,841

240

6,029
11,341
687
3,419
240

and other cost accruals
State credit carryforward

Total deferred tax assets

17,589

997

17,316
1,240

44,485

40,272

Deferred tax liabilities:
Plant and equipment, depreciation methods,
acquisition asset allocations, and other

(109,905) (104,082)

Net deferred tax liabilities before
valuation allowance
Less valuation allowance

Net deferred tax liabilities

(65,420) (63,810)
(873)

(942)

$ (66,362) (64,683)

The Company has a foreign net operating loss carryforward of
$12.5 million at September 30, 2012, which reflects tax loss
carryforwards in Brazil, Germany and the United Kingdom.
These losses have no expiration date. The Company also has
net state research and other credit carryforwards of $1 million
of which $0.6 million expires between 2022 and 2027. The
remaining $0.4 million does not have an expiration date.

At September 30, 2012, the Company has established a
valuation allowance of $0.2 million against the capital loss
carryforward generated in 2008, as such loss carryforward may
not be realized in future periods. 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 $0.7 million at September 30, 2012, and 2011,
respectively. The Company classifies its valuation allowance
related to deferred taxes on a pro rata basis.

The Company’s foreign subsidiaries have accumulated
unremitted earnings of $34 million and cash of $20.9 million
at September 30, 2012. No deferred taxes have been provided

on the accumulated unremitted earnings because these funds
are not needed to meet the liquidity requirements of the
Company’s U.S. operations and it is the Company’s intention 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
$5.6 million would be due, which would correspondingly
reduce the Company’s net earnings. No significant portion of
the Company’s foreign subsidiaries’ earnings was taxed at a
very low tax rate.

As of September 30, 2012, the Company had $1.8 million
of unrecognized benefits (see table below), which, 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 years ended September 30, 2012, and 2011 is presented in
the table below:

(Dollars in millions)

2012

2011

Balance as of October 1,
Increases related to prior year tax positions
Decreases related to prior year tax positions
Increases related to current year tax positions
Lapse of statute of limitations

$ 3.6

—

3.2
0.7
(0.3) —
0.2
(0.5)

(1.6)

0.1

Balance as of September 30,

$ 1.8

3.6

The Company anticipates a $0.2 million reduction in the
amount of unrecognized tax benefits in the next 12 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, 2012,
2011 and 2010, the Company had accrued interest related
to uncertain tax positions of $0.1 million, $0.2 million and
$0.1 million, respectively, net of Federal income tax benefit,
on its Consolidated Balance Sheet. No significant 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
international locations where the Company has operations. The
U.S. Federal tax years for the periods ended September 30,
2009, and forward remain subject to income tax examination.
Various state tax years for the periods ended September 30,
2008, and forward remain subject to income tax examinations.

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The Company is subject to income tax in many jurisdictions
outside the United States, none of which is individually
material to the Company’s financial position, statements of
cash flows, or results of operations.

8. Debt

Debt consists of the following at September 30, 2012, and
2011:

(Dollars in thousands)

Revolving credit facility,

including current portion

2012

2011

$115,000

125,000

Current portion of long-term debt

(50,000)

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 2012 and 2011, the
maximum aggregate short-term borrowings at any month-
end were $141 million and $159 million, respectively; the
average aggregate short-term borrowings outstanding based
on month-end balances were $126 million and $143 million,
respectively; and the weighted average interest rates
were 1.20%, 1.40%, and 1.87% for 2012, 2011 and 2010,
respectively. The letters of credit issued and outstanding
under the Credit Facility totaled $15.3 million and $15 million
at September 30, 2012, and 2011, respectively.

Total long-term debt,
less current portion

$ 65,000

75,000

9. Capital Stock

On May 14, 2012, the Company entered into a new
$450 million five-year revolving credit facility with JPMorgan
Chase Bank, N.A., as administrative agent, PNC Bank, N.A., as
syndication agent, and eight other participating lenders (the
“Credit Facility”). The Credit Facility replaced the Company’s
$330 million revolving credit facility that would otherwise
have matured in November, 2012. Through a credit facility
expansion option, the Company may elect to increase the size
of the Credit Facility by entering into incremental term loans,
in any agreed currency, at a minimum of $25 million each up
to a maximum of $250 million aggregate.

At September 30, 2012, the Company had approximately
$320 million available to borrow under the Credit Facility, plus
a $250 million increase option, in addition to $30.2 million
cash on hand. The Company classified $50 million as the
current portion of long-term debt as of September 30, 2012,
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 Company’s ability to access the additional
$250 million increase option of the Credit Facility is subject to
acceptance by participating or other outside banks.

The 30,044,486 and 29,956,904 common shares as presented
in the accompanying Consolidated Balance Sheets at
September 30, 2012, and 2011 represent the actual number
of shares issued at the respective dates. The Company held
3,453,249 and 3,320,926 common shares in treasury at
September 30, 2012, and 2011, respectively.

10. Share-Based Compensation

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 10-year contractual life from
date of issuance, expiring in various periods through 2013.

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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. The Company utilizes historical company data to

develop its expected term assumption. 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. There were no stock
option grants during 2012 or 2011. 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 2010: expected
dividend yield of 0.9%; expected volatility of 48.1%; risk-free
interest rate of 1.9%; and expected term of 3.9 years.

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

October 1,
Granted
Exercised
Cancelled

September 30,

At September 30,
Reserved for future grant
Exercisable

FY2012

FY2011

FY2010

estimated
Weighted
Shares Avg. price

435,054

—

(100,872)

(208,366)

$35.58
—
$14.98
$45.18

125,816

$36.29

Estimated
Weighted
Shares Avg. Price

761,931
—
(104,912)
(221,965)

435,054

$35.15
—
$13.18
$44.67

$35.58

Estimated
Weighted
Shares Avg. Price

891,826
2,000
(73,765)
(58,130)

761,931

$33.63
$32.55
$12.03
$41.17

$35.15

1,301,090

125,149

$36.31

1,115,776
397,073

$35.42

949,062
677,538

$34.88

The aggregate intrinsic value of options exercised during
2012, 2011 and 2010 was $2 million, $2.4 million and
$1.3 million, respectively. The aggregate intrinsic value of
stock options outstanding and exercisable at September 30,
2012, was $0.3 million. The weighted-average contractual
life of stock options outstanding at September 30, 2012, was
0.9 years. The weighted-average fair value of stock options
per share granted in 2012, 2011 and 2010 was zero, zero,
and $11.90, respectively.

Summary information regarding stock options outstanding at
September 30, 2012, is presented below:

options outstanding

Weighted-

number Remaining
outstanding at Contractual
life
Sept. 30, 2012

Average Weighted
Average
exercise
price

8,000

0.8 years

15,000

0.2 years

102,816

1.0 years

$21.11

$35.82

$37.54

125,816

0.9 years

$36.29

Range of
Exercise Prices

$17.29 - $32.55
$35.69 - $36.70
$37.54 - $37.98

Range of
Exercise Prices

$17.29 - $32.55
$35.69 - $36.70
$37.54 - $37.98

exercisable options outstanding

number
exercisable at
Sept. 30, 2012

7,333

15,000

102,816

125,149

Weighted
Average
exercise
price

$20.06

$35.82

$37.54

$36.31

performance-accelerated Restricted Share Awards

The performance-accelerated restricted shares (restricted
shares) have a five-year term with accelerated vesting if certain
targets based on market conditions 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

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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 $4 million, $3.6 million and $3.6 million for the fiscal
years ended September 30, 2012, 2011 and 2010, respectively.

The following summary presents information regarding
outstanding restricted share awards as of September 30, 2012,
and changes during the period then ended:

Nonvested at October 1, 2011
Granted
Vested
Cancelled

Weighted
Shares Avg. Price

486,908
—
(81,835)
(625)

$33.41
$ —
$37.14
$38.09

Nonvested at September 30, 2012

404,448

$32.65

non-employee Directors plan

The non-employee directors compensation plan provides to
each non-employee director a retainer of 900 common shares
per quarter. Compensation expense related to the non-
employee director grants was $0.6 million, $0.6 million and
$0.5 million for the years ended September 30, 2012, 2011
and 2010, respectively.

total Share-Based Compensation

The total share-based compensation cost that has been
recognized in results of operations and included within SG&A
was $4.6 million, $4.7 million and $4.6 million for the years
ended September 30, 2012, 2011 and 2010, respectively.
The total income tax benefit recognized in results of
operations for share-based compensation arrangements was
$1.6 million, $1.8 million and $1.8 million for the years
ended September 30, 2012, 2011 and 2010, 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, 2012, there was $5.9 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 1.6 years.

11. 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 have been
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 its defined
benefit plan and has frozen the plan effective December 31,
2008, and no additional benefits have been accrued after
that date. Effective October 1, 2009, the Company’s defined
benefit plan and Doble’s benefit plan were merged into
one plan. 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 uses a measurement date of September 30
for its pension and other postretirement benefit plans. The
Company has an accrued benefit liability of $0.8 million
at September 30, 2012, and 2011, 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

ESCO TEChnOlOgiES inC.

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period ended September 30, 2012, and a statement of the
funded status as of September 30, 2012, and 2011:

(Dollars in millions)

2012

2011

Reconciliation of benefit obligation

Net benefit obligation at beginning of year
Service cost
Interest cost
Actuarial loss
Settlements
Gross benefits paid

$83.2

0.1

3.8

13.4

—

(3.4)

79.4
0.1
3.9
4.8
(1.8)
(3.2)

Net benefit obligation at end of year

$97.1

83.2

(Dollars in millions)

2012

2011

Reconciliation of fair value of plan assets

Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Gross benefits paid
Settlements

$50.5

9.0

5.0

(3.4)

—

49.2
0.8
5.5
(3.2)
(1.8)

Fair value of plan assets at end of year

$61.1

50.5

(Dollars in millions)

2012

2011

Funded Status
Funded status at end of year
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
Accumulated other comprehensive (income)/loss

(before tax effect)

Amounts recognized in Accumulated Other
Comprehensive (Income)/Loss consist of:
Net actuarial loss
Prior service cost

$(36.0)

—

(32.7)
—
—

(36.0)

(32.7)

—

(0.5)

(35.5)

—
(0.2)
(32.5)

48.3

41.3

48.2

0.1

Accumulated Other Comprehensive (Income)/Loss $ 48.3

The following table provides the components of net periodic
benefit cost for the plans for the years ended September 30,
2012, 2011 and 2010:

(Dollars in millions)

2012

2011

2010

Service cost
Interest cost
Expected return on plan assets
Net actuarial loss
Settlement gain

Net periodic benefit cost
Defined contribution plans

Total

$ 0.1

3.8

(4.1)

1.5

—

1.3

4.5

$ 5.8

0.1
3.9
(4.2)
1.1
—

0.9
3.7

4.6

0.2
4.0
(4.1)
0.9
(0.5)

0.5
4.3

4.8

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:

Discount rate
Rate of increase in
compensation levels
Expected long-term rate of

return on assets

2012

2011

2010

4.50%

5.00%

5.50%

n/A

N/A

7.5%

8.00%

41.2
0.1

41.3

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FAIR VAlue oF FInAnCIAl MeASuReMentS

The fair values of the Company’s defined benefit plan
investments as of September 30, 2012, by asset category, are
as follows:

(Dollars in millions)

Level 1 Level 2 Level 3 Total

Investments at Fair Value:
Cash and Cash Equivalents

Common and Preferred Stock Funds:
Domestic large capitalization
Domestic small/mid capitalization

International funds

Fixed Income Funds
Real Estate Investments

Total Investments at Fair Value

$34.7

$0.8

—

0.8

9.3
9.3
9.3

3.1
2.9

0.5
0.5
0.5

24.8
0.1

26.4

—
—
—

9.8
9.8
9.8

— 27.9
3.0
—

— 61.1

For assets that are measured using quoted prices in active
markets, the total fair value is the published market price
per unit multiplied by the number of units held without
consideration of transaction costs, which have been
determined to be immaterial. Assets that are measured using
significant other observable inputs are primarily valued by
reference to quoted prices of markets that are not active. The
following methods and assumptions were used to estimate the
fair value of each class of financial instrument:

Cash and cash equivalents: The carrying value of cash
represents fair value as it consists of actual currency, and is
classified as Level 1.

Common and preferred stock funds: The plans’ common
and preferred stock funds primarily consist of investments
in listed U.S. and international companies’ stocks. The
stock investments are valued using quoted prices from the
various public markets. Most equity securities trade on formal
exchanges, both domestic and foreign (e.g. NYSE, NASDAQ,
LSE), and can be accurately described as active markets.
The observable valuation inputs are unadjusted quoted prices
that represent active market trades and are classified as
Level 1 or Level 2.

Fixed income funds: Fixed income funds consist of
investments in U.S. and foreign corporate credit, U.S. and
foreign government issues (including agencies and mortgages),

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

Discount rate
Rate of increase in
compensation levels

2012

2011

3.75%

4.5%

n/A

N/A

The assumed rate of increase in compensation levels is not
applicable in 2012, 2011 and 2010 as the plan was frozen in
earlier years.

The asset allocation for the Company’s pension plans at the
end of 2012 and 2011, the Company’s acceptable range and
the target allocation for 2013, by asset category, follows:

Asset Category

Equity securities
Fixed income
Cash/cash equivalents

Allocation

Target Acceptable Percentage of Plan
Range Assets at Year-end
2011

2012

2013

60%
40%
0%

50-70%
30-50%
0-5%

59%
39%
2%

56%
43%
1%

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.

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U.S. Treasuries, U.S. state and municipal securities and asset-
backed securities. These investments are generally priced by
institutional bids, which reflect estimated values based on
underlying model frameworks at various dealers and vendors,
or are formally listed on exchanges, where dealers exchange
bid and ask offers to arrive at most executed transaction
prices. These investments are classified as Level 1 or Level 2.

Real estate investments: The plan invests in U.S. real estate
through indirect ownership entities, which are structured as
limited partnerships or private real estate investment trusts
(REITs). These real estate investments are classified as Level 1
or Level 2.

FASB ASC 825, Financial Instruments, 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.

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.

12. other Financial Data

Items charged to operations during the years ended
September 30, 2012, 2011 and 2010 included the following:

(Dollars in thousands)

2012

2011

2010

Salaries and wages

(including fringes)
Maintenance and repairs

Research and development

(R&D) costs:

Company-sponsored
Customer-sponsored

Total R&D
Other engineering costs

Total R&D and other
engineering costs

As a % of net sales

$ 197,642 187,214 160,780
3,440

5,389

4,530

30,067

9,171

$ 39,238

17,646

33,574
8,527

42,101
11,490

32,199
4,035

36,234
13,250

$ 56,884

53,591

49,484

8.3%

7.7%

8.1%

A reconciliation of the changes in accrued product warranty
liability for the years ended September 30, 2012, 2011 and
2010 is as follows:

(Dollars in thousands)

2012

2011

2010

Balance as of October 1,

$ 3,834

3,877

4,370

Additions charged to expense
Deductions

2,357

(2,711)

3,275
(3,318)

1,813
(2,306)

Balance as of September 30,

$ 3,480

3,834

3,877

eXpeCteD CASH FloWS

13. Business Segment Information

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 — 2013

$ 4.6

Expected Benefit Payments
2013
2014
2015
2016
2017
2018-2022

4.2
4.1
4.2
4.7
4.6
$ 26.2

0.1

0.1
0.1
—
—
0.1
0.3

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 Technologies
LLC (Aclara) and Doble Engineering Company (Doble).
Aclara 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®

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technology provide advanced radio-frequency and power-
line 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, revenue management and integration solutions. Doble
provides high-end, intelligent diagnostic test solutions for the
electric power delivery industry and is a leading supplier of
power factor and 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. and Lindgren R.F. Enclosures,
Inc. 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 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, Crissair, Inc. and
Thermoform Engineered Quality 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 aircraft and submarines.

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.

net SAleS

(Dollars in millions)

Year ended September 30,

2012

2011

Utility Solutions
Test
Filtration

Consolidated totals

$ 317.7

175.9

194.8

$ 688.4

349.6
176.5
167.6

693.7

2010

348.3
138.4
120.8

607.5

No customers exceeded 10% of sales in 2012, 2011 or 2010.

eBIt

(Dollars in millions)

Year ended September 30,

2012

2011

2010

Utility Solutions
Test
Filtration
Reconciliation to consolidated

$ 46.2

14.0

38.0

54.3
18.6
30.8

67.4
12.2
19.5

totals (Corporate)

(24.2)

(25.5)

Consolidated EBIT
Less: interest expense

74.0
(2.3)

Earnings before income tax

$ 71.7

79.5
(2.5)

77.0

73.6
(3.9)

69.7

ESCO TEChnOlOgiES inC.
n O T E S T O COnS Ol iDa

T E D F i n a nCi a l ST a T E M EnT S

IDentIFIABle ASSetS

(Dollars in millions)

Year ended September 30,

2012

2011

Utility Solutions
Test
Filtration
Corporate

$ 234.8

92.8

98.4

607.8

203.6
100.6
88.6
619.0

Consolidated totals

$ 1,033.8 1,011.8

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

GeoGRApHIC InFoRMAtIon

net sales

(Dollars in millions)

Year ended September 30,

2012

2011

United States
Asia
Europe
Canada
Mexico
Other

$501.9

67.4

61.7

22.0

6.4
29.0

512.4
45.9
57.1
19.6
38.0
20.7

Consolidated totals

$688.4

693.7

2010

466.1
54.2
36.7
13.6
9.5
27.4

607.5

CApItAl eXpenDItuReS

(Dollars in millions)

long-lived assets

(Dollars in millions)

Year ended September 30,

2012

2011

2010

Year ended September 30,

2012

2011

Utility Solutions
Test
Filtration
Corporate

$ 7.6

2.2

4.4

0.6

8.9
1.5
3.3
—

5.3
1.9
6.2
—

United States
Europe
Other

Consolidated totals

$70.3

2.6
3.0

$75.9

67.3
3.4
2.4

73.1

Consolidated totals

$ 14.8

13.7

13.4

In addition to the above amounts, the Company incurred ex-
penditures for capitalized software of $13.1 million, $14.2 mil-
lion and $8.8 million in 2012, 2011 and 2010, respectively.

DepReCIAtIon AnD AMoRtIZAtIon

(Dollars in millions)

Year ended September 30,

2012

2011

2010

Utility Solutions
Test
Filtration
Corporate

Consolidated totals

$13.7

2.5

3.9

4.7

$24.8

13.1
2.2
3.3
4.9

23.5

12.2
2.3
2.7
4.9

22.1

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

14. Commitments and Contingencies

At September 30, 2012, the Company had $15.3 million
in letters of credit outstanding as guarantees of contract
performance. As a normal course of business 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.

2012 AnnuAl RepoRt

n O T E S T O COnS Ol iDa

T E D F i n a nCi a l ST a T E M EnT S

15. Quarterly Financial Information (unaudited)

(Dollars in thousands, except per share amounts)

First
Quarter

Second
third
Quarter Quarter

Fourth
Quarter

Fiscal
Year

2012

Net sales

Net earnings

Basic earnings per share:
Net earnings

Diluted earnings per share:
Net earnings

$ 152,925 173,863 169,449 192,166 688,403

5,207

10,202

13,791

17,679

46,879

0.20

0.38

0.52

0.66

1.76

Dividends declared per common share

0.08

0.19

0.38

0.51

0.65

1.73

0.32

2011

Net sales

Net earnings

Basic earnings per share:
Net earnings

Diluted earnings per share:
Net earnings

Dividends declared per common share

$ 159,936

166,748

176,326

190,701

693,711

10,813

13,227

13,078

15,383

52,501

0.41

0.50

0.49

0.58

1.97

0.40

0.08

0.49

0.08

0.49

0.08

0.57

0.08

1.95

0.32

See Note 2 of Notes to Consolidated Financial Statements for discussion of acquisition activity.

During the fourth quarter of 2011, the Company recorded a $6.5 million charge related to the write-down of certain Aclara
inventory which was determined to be obsolete as next generation AMI products are currently being offered for sale and a
$6.6 million gain representing the revaluation of a contingent consideration liability related to a previous acquisition.

ESCO TEChnOlOgiES inC.

M a n a gE M EnT ’S ST a T E M EnT O F F i n a nCi a l r E SpOnSiBi l iTy

The Company’s Management is responsible for the fair presen-
tation 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 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.

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, Executive Vice President,
and Chief Financial Officer
and President

Gary E. Muenster

2012 AnnuAl RepoRtM a n a gE M EnT ’S r EpOrT On inT Er n a l COnTrOl O vEr F i n a nCi a l r EpOrTi 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,
2012, 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, 2012,
based on these criteria.

Our internal control over financial reporting as of Septem ber 30,
2012, has been audited by KPMG LLP, an independent
registered public accounting firm, as stated in its report which
is included herein.

Victor L. Richey
Chairman, Chief Executive Officer, Executive Vice President,
and Chief Financial Officer
and President

Gary E. Muenster

ESCO TEChnOlOgiES inC.r EpOrT O F inD EpEnD EnT r Eg iS T ErE D puBl iC a C C Ou nTi n g F i rM

The Board of Directors and Shareholders
ESCO Technologies Inc.:

We have audited the accompanying Consolidated Balance
Sheets of ESCO Technologies Inc. and subsidiaries as of
September 30, 2012, and 2011, 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, 2012. We also have audited ESCO Technologies Inc.’s
internal control over financial reporting as of September 30,
2012, 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.

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 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, 2012, and 2011, and the results of their
operations and their cash flows for each of the years in the
three-year period ended September 30, 2012, in conformity
with U.S. generally accepted accounting principles. Also
in our opinion, ESCO Technologies Inc. maintained, in all
material respects, effective internal control over financial
reporting as of September 30, 2012, based on criteria
established in Internal Control — Integrated Framework,
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.

St. Louis, Missouri
November 29, 2012

2012 AnnuAl RepoRtF i vE-y Ea r F i n a nCi a l S uM Ma r y

(Dollars in millions, except per share amounts)

2012

2011

2010

2009

2008

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

Cash dividends declared per common share

$688.4

46.9

—

46.9

$1.76

—

$1.76

$1.73

—

$1.73

139.2

1,033.8

115.0
631.3

$0.32

693.7
52.5
—
52.5

1.97
—

1.97

1.95
—

1.95

122.5
1,011.8
125.0
600.7

0.32

607.5
44.8
—
44.8

1.70
—

1.70

1.68
—

1.68

109.4
974.3
154.0
556.0

0.32

619.1
49.3
0.1
49.4

1.88
—

1.88

1.86
—

1.86

116.2
923.7
180.5
517.3

—

613.6
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

—

See Note 2 of Notes to Consolidated Financial Statements for discussion of acquisition activity.

CO M M On ST O Ck M a r kE T pr iC E

ESCO’s common stock is 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 2012 and 2011.

2012

2011

High

$31.97

38.37

36.90

39.50

low

23.75
28.48
32.98
33.05

High

$38.83
40.53
38.14
38.04

Low

31.54
35.00
33.40
25.50

Quarter

First
Second
Third
Fourth

ESCO TEChnOlOgiES inC.

M a r kE T p ErF OrMa nC E

performance Graph

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
“2012 Peer Group”). The Company is not a component of the
2012 Peer Group, but it is a component of the Russell 2000
Index. The measurement period begins on September 30, 2007
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, 2007.

eSCo technologies Inc.

Russell 2000 Index

2012 Peer Group

The 2012 Peer Group is comprised of seven companies that
correspond to the Company’s three industry segments as
follows: Utility Solutions Group segment (46% of the Company’s
2012 total revenue) — Badger Meter Inc., Itron Inc., Echelon
Corporation and Roper Industries Inc.; Test segment (26% of the
Company’s 2012 total revenue) — Aeroflex Holding Corporation;
and Filtration/Fluid Flow segment (28% of the Company’s 2012
total revenue) — Pall Corporation and Clarcor Inc.

ESCO Technologies Inc.
Russell 2000 Index
2012 Peer Group

$160

140

120

100

9/07

9/08

9/09

9/10

9/11

9/12

9/07

9/08

9/09

9/10

9/11

9/12

100.00

144.92

118.53

100.85

78.01

120.06

100.00

85.52

77.35

87.68

84.58

111.57

100.00

93.02

85.07

96.73

93.64

117.84

In calculating the composite return of the 2012 Peer Group,
the return of each company comprising the 2012 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 2012 total revenue
represented by its corresponding Company industry segment.

2012 AnnuAl RepoRt
S h a rEhOlD ErS’ S uM Ma r y

SHAReHolDeRS’ AnnuAl MeetInG

InVeStoR RelAtIonS

The Annual Meeting of Shareholders of ESCO Technologies Inc.
will be held at 9:30 a.m. Pacific Time on Wednesday, February 6,
2013, at the headquarters of PTI Technologies Inc., a subsidiary
of the Company, located at 501 Del Norte Blvd., Oxnard, CA
93030. You may access this Annual Report as well as the Notice
of the meeting and the Proxy Statement on the Company’s
Annual Meeting website at 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 22, 2012 and February 24, 2011, 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, 2012 and September 30, 2011.

10-K RepoRt

A copy of the Company’s 2012 Annual Report on Form 10-K
filed with the Securities and exchange Commission is
available to shareholders without charge. Direct your written
request to Kate lowrey, 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 website
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
website at www.escotechnologies.com or via e-mail to
klowrey@escotechnologies.com.

tRAnSFeR AGent AnD ReGIStRAR

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

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 2,358 holders of record of shares of common
stock at November 9, 2012.

InDepenDent ReGISteReD puBlIC A CCountInG FIRM

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

ESCO TEChnOlOgiES inC.M a n a g eMe n t a n d B o a r d o f di r e c t o r s

E xEc u t i vE O f f i cEr 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 Or pOrA tE st Af f

O pErA t i nG E xEc u t i vEs

Deborah J. Boniske
Vice President
Human Resources

Mark s. Dunger
Vice President
Planning & Development

richard A. Garretson
Vice President
Tax

charles J. Kretschmer
Vice President

Matthew J. Mainer
Vice President & Treasurer

Michele A. Marren
Vice President & Corporate
Controller

Brad Kitterman
President
Aclara

David B. Zabetakis
President
Doble Engineering Company

sam r. chapetta
Filtration Group Vice President &
President, PTI Technologies Inc.

Bruce E. Butler
President
ETS-Lindgren LP

Antonio E. Gonzalez
President
VACCO Industries

Mike Alfred
President
Crissair, Inc.

randall K. Loga
President
Thermoform Engineered
Quality LLC

William M. Giacone
Senior Vice President &
General Manager, Americas
ETS-Lindgren LP

Mark Mawdsley
Senior Vice President &
Managing Director, Asia
ETS-Lindgren LP

Bryan sayler
Senior Vice President,
Test Solutions
ETS-Lindgren LP

BO ArD Of D i rEc t

Or s

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

Gary E. Muenster
Executive Vice President &
Chief Financial Officer

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
Retired 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 Committee

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

2 0 1 2 A n n u A L r EpOr t

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ESCO Technologies Inc.

9900A Clayton Road

St. Louis, MO 63124