eS Co t e c h n o l o g i e s I n c .
2 0 1 3 A n n uAl R e p oRt
eS Co A t A G l a n c e
utIlIt y S o l u tIo nS
In the electric power industry, Doble Engineering Com-
pany has been helping more than 5500 clients in 110
countries improve operations and optimize system per-
formance for nearly a century. This established com-
pany with a loyal customer base is evolving to meet
the changing needs of businesses and communities around the world. Doble is one of
a kind — differentiated in its market by a portfolio delivered through superb products,
consulting projects, laboratory services and the leading industry conferences.
R F S hIe l dInG & teSt
Many of the items used in daily life contain circuitry
which can be sensitive to electronic interference. To
ensure that they all operate as they were intended,
testing must be done to ensure compliance with regu-
latory standards and industry-defined performance
criteria. From microwave antennas to test chambers to full turnkey measurement
systems, ETS-Lindgren is the ESCO subsidiary that designs, manufactures and installs
the components and systems required to perform those demanding tests.
FIl tR A tIo n / F l uId F l o w
Within this segment Crissair Inc., PTI Technologies Inc.
and VACCO Industries are recognized as technology-
driven leaders providing highly engineered fluid con-
trol solutions for mission-critical systems. Their products
include micro-propulsion devices, valves, regulators,
actuators, reservoirs, manifolds, attenuators, pumps and filters. The companies serve
a diverse group of end markets including commercial aerospace, space and defense,
satellite communications and industrial.
t o ou r S h a r e h o l d e r s
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
2013 turned out to be quite an
interesting year for ESCO as
we made several significant decisions which
and on budget and we are seeing the margin
improvements that we expected.
We also shut down the Doble Lemke
will result in a much different ESCO going
operations in Germany due to its significant
forward. These actions were taken to position
under performance, and relocated their
ESCO for continued growth in the future, as
products and intellectual property to
well as to provide more predictability and
existing locations.
higher profitability. These were difficult
ESCO’s most significant strategic decision
decisions because they had a direct impact
was authorizing a sale process for the
on our most important asset, our employees,
divestiture of Aclara. Our board of directors,
but they were necessary to ensure our overall
working together with our executive
long-term success.
management team, determined that ESCO was
Our first major initiative was the con-
trading at a level which does not fully reflect
solidation of our domestic Test business,
the value of its underlying assets, especially
specifically the closure and relocation of a
given the high quality and performance of
manufacturing facility in Glendale Heights,
the Filtration, Test and Utility Solutions
Illinois. Our facility footprint was too large
businesses. The process is continuing and we
and was negatively impacting our operating
remain convinced this is the right decision
margins. We completed this move on time
for the company.
2 0 1 3 A n n uAl R e p oRt
1
t o ou r S h a r e h o l d e r s
On the acquisition front, we purchased three businesses
diverse management talent, engineering expertise, and
in 2013, one to supplement Doble, and two related to our
manufacturing capability necessary to innovate, adapt,
aerospace Filtration group. We are pleased with their early
and change. We work diligently with our customers to
contributions and expect profitable growth in 2014.
develop the innovative solutions they require which
All of these actions were taken with 2014 and beyond
continues to support our sales growth from new products
in mind. Our Filtration, Test and Doble businesses
and services.
remain well positioned for success as they have truly
Our growth and profitability will come from several
differentiated technology and market leading positions.
distinct sources:
These actions made us more cost efficient, and therefore,
▶ Filtration: PTI, VACCO and Crissair supply highly
more profitable.
engineered fluid control products for nearly every commer-
We often comment on the diversity of our products
cial aircraft flying today, as well as providing sole-source,
and end-markets as being one of our most recognizable
mission-critical products that allow our Space Program to
strengths — we firmly believe this remains true today.
flourish in its exploration endeavors. TEQ produces highly
While all businesses are regularly faced with uncertainty,
engineered thermoformed products and packaging materi-
fortunately for ESCO, our multi-segment platform continues
als for medical, retail, food and electronic applications.
to provide us with the resilience to withstand a multitude
▶ Utility Solutions Group: Doble serves a critical role in
of challenges.
enhancing the reliability of the electric grid worldwide
The fundamental growth drivers of our business
by providing test, diagnostic, asset quality, and risk
have not changed. We are a company with broad-based
mitigation solutions that allow utilities to proactively
G l o bAl R eA Ch
With operations in 27 locations around the world, the
businesses of ESCO Technologies served markets in
more than 80 countries on six continents in 2013.
Markets Served
ESCO Operations
North America
Cedar Park, TX
Durant, OK
Wood Dale, IL
Europe
Eura, Finland
Glasgow, Scotland
Guildford, England
Greenwood Village, CO
Luxembourg, Luxembourg
Huntley, IL
Minocqua, WI
Oxnard, CA
Palmdale, CA
Raleigh, NC
South El Monte, CA
St. Louis, MO
Valencia, CA
Watertown, MA
South America
São Paulo, Brazil
Stevenage, England
Taufkirchen, Germany
Trondheim, Norway
Africa
Pietermaritzburg,
South Africa
Asia
Bangalore, India
Beijing, China
Dubai, UAE
Tokyo, Japan
Australia
New South Wales, Australia
2
eS Co teCh n o l oG IeS I nC.
address grid management and power delivery issues.
maintain a strong and healthy balance sheet that gives us
Doble currently provides hardware, software, services
the flexibility to invest in this growth.
and solutions to nearly 95 percent of all domestic
We are confident we have the right strategies in place
electric utilities.
and we look forward to executing on them, while continu-
▶ RF Shielding/Test: Our Test and related Systems business
ing to create shareholder value for years to come.
supports the development of new products in dozens of
We’d like to sincerely thank the employees of ESCO for
industries worldwide. Our products assist in the advance-
their exceptional commitment, passion and innovation, as
ment of new technologies in the areas of wireless com-
well as extending our appreciation to our Board of Directors
munications, secure communications, medical imaging,
for its strategic guidance and effective corporate gover-
and asset protection.
nance. We also want to thank our shareholders for their
We remain extremely positive about our future. Our sales
ongoing support.
and earnings visibility over the next few years has become
more clearly defined, and as a result, we remain confident
that we have meaningful growth opportunities across all
three segments.
We continue to execute on our plan to position ESCO
for long-term success and value creation, both organically
and through acquisitions across all three platforms. We will
Vic Richey
Gary Muenster
Chairman, Chief Executive
Executive Vice President
Officer, & President
& Chief Financial Officer
remain prudent and disciplined in our approach, and will
November 27, 2013
2 0 1 3 A n n uAl R e p oRt
3
ut i l i t y S o l u t i o n s
Doble’s portfolio
includes world-class
diagnostic testing and
protection solutions,
as well as enterprise
asset management
systems and services.
Flagship products
include dobleARMS,
Protection Suite
and F6000 series
test equipment, and
M4100 and M7100
Doble Testers.
Doble Engineering Company develops,
manufactures, and delivers diagnostic
testing solutions for the electric power
grid. Comprised of electrical equipment and en-
There is a long-established market for the
Doble M4100, the “Doble Test” synonymous
with electric reliability and high maintenance
standards in North America. Now Doble is
terprise management systems, Doble’s solutions
revolutionizing the diagnostic tools that are
are designed to improve operations, minimize
the hallmark of its equipment testing solu-
risk, and optimize electrical power assets and
tions with the introduction of the M7100
system performance.
Doble Tester. With transformational, patent-
The Power of InnovaTIon: Doble flagship
pending technology, the M7100 Doble Tester
products include protection diagnostics with
will dramatically reduce testing time, allowing
the Doble Protection Suite and F6000 series
utilities to maximize their planned outage pe-
test equipment, the M4100 and M7100 Doble
riods by performing more maintenance during
Testers, as well as the dobleARMS™ solutions
the hours previously devoted to testing.
introduced just last year.
Doble’s Protection Suite and F6000 series
Doble has gained a solid competitive ad-
test equipment enable customers to optimize
vantage with the development and launch of
efficiency, maintain compliance and ensure the
a new breed of application: dobleARMS — the
delivery and availability of safe power.
industry’s first true asset risk management sys-
Knowledge CommunITIes: With more than
tem. DobleARMS leverages Doble’s database of
80 years of conference experience, Doble
electrical apparatus test data, which includes
hosts, produces and directs more than twenty
relevant data from as far back as the 1940s
profitable and unparalleled technical confer-
and now contains more than 30 million data
ences per year. Each conference has an es-
points. This innovative system provides action-
tablished following and serves as an exclusive
able intelligence through the combination of
promotional platform for the Doble portfolio.
real-time monitoring and event notification
ParTnerIng for exCellenCe: Committed
while sourcing historical comparative data and
to their partners, customers and the science
considering environmental risk factors. This in-
that shapes the electric power industry, Doble
formation empowers its users to make critical
engineers serve on nearly 100 international
financial and safety decisions about day-to-day
standards committees at the leading industry
and long-term operations of high value assets.
associations, including IEEE, IEC and CIGRE.
4
eS Co teCh n o l oG IeS I nC.
2 0 1 3 A n n uAl R e p oRt
5
R F S h i e l d i n g & t e s t
medICal marKeT: ETS-Lindgren is the leading
In our RF Shielding
novative products and systems to detect,
The ETS-Lindgren subsidiary provides in-
measure and manage electromagnetic,
magnetic and acoustic energy for test facilities,
provider of shielding, doors, and magnetic
active compensation systems for MRI rooms,
ensuring images are not degraded by RF inter-
MRI rooms, data centers and other applications.
ference from external sources. Better images
TesT soluTIons: With electronic circuitry now
enable faster and more accurate scans.
embedded in products ranging from parking
Patients and staff are also safeguarded from
& Test business,
we continue to
innovate with new
products such as
the AMS-7000
Test System, the
EMCenter, and
EMQuest software,
as well as expanding
meters to pilotless drones, the need to test
health and safety hazards with alarm systems.
into the newly-
electronics for compliance to specified perfor-
For example, our systems can detect ferromag-
created EMP market.
mance criteria and regulatory standards grows
netic objects before they enter an MRI room
daily. The requirement for better performing
and pose a risk to people or equipment; or
devices and the growing use of wireless com-
when ambient oxygen levels fall below safe
munication devices will drive an increasing
amounts required to sustain human life.
need for this type of testing.
In step with the healthcare industry’s goal
ETS-Lindgren is the leading provider of
of improving patient experience, ETS-Lindgren
systems and components for electromag-
has recently introduced graphic display and
netic compatibility (EMC), microwave, radio
ambient lighting systems. These systems cre-
frequency (RF), and wireless over-the-air (OTA)
ate a relaxing atmosphere and help patients
performance testing. New product additions
feel more comfortable during their procedure.
and software enhancements provide additional
new TeChnology: Threats to critical infra-
opportunities for capturing a larger market
structure, including power sources, trans-
share of integrated turnkey systems solutions
portation and data storage, from Intentional
in the EMC and wireless markets.
Electromagnetic Interference (IEMI) and
Acoustic testing, both audiometric and com-
Electromagnetic Pulse (EMP) are a reality in
mercial, is addressed with sound isolation and
today’s world. Our portfolio of products to
reverberation chamber solutions. Lab testing
combat these threats has expanded with the
services are offered for sound transmission and
launch of Red Edge™ technology — designed
noise emission to assist customers with their
for those with vulnerable assets, such as data
product R&D efforts as well as to determine
centers, communication centers, financial
pre-compliance with regulatory standards.
services institutions and electric utilities.
6
eS Co teCh n o l oG IeS I nC.
2 0 1 3 A n n uAl R e p oRt
7
F i l t r a t i o n / F l u i d F l o w
From HEPA cabin air
filters to actuators,
manifolds and
highly specialized
valves, our Filtration
companies continue
to develop innovative
new products for
their aerospace,
space and industrial
market customers.
With a focus on engineering, opera-
the Company’s Filtration/Fluid Flow
tional excellence and collaboration,
business continues to deliver innovation and
to Original Equipment Manufacturers and
line replaceable units, spares and overhaul
services to the after-market. A deep un-
derstanding of the aerospace, defense and
growth across all served markets. Inspired by
industrial markets has resulted in proprietary
a mutual vision, Crissair Inc. (Crissair), PTI
products that comprehensively address the
Technologies Inc. (PTI) and VACCO Industries
needs of the manufacturer and operator.
(VACCO) are committed to providing highly
VACCO’s vent relief valves (VRVs) — one of
engineered technology driven solutions to
many products VACCO is designing and build-
a diverse group of end markets including
ing for the Space Launch System (SLS) — are
commercial aerospace, space and defense,
helping create the largest rocket built in the
satellite communications and industrial.
history of space exploration. PTI and Crissair
CollaboraTIng for growTh: Drawing upon
continue development of advanced flow
a diverse background of solution-oriented
control products that improve performance,
technologies and innovative research, the
lengthen operational life and maintain opti-
Company’s Filtration/Fluid Flow businesses
mal fluid quality on today’s most advanced
collaborate to design, develop, manufacture
aircraft systems. In addition, their research
and distribute innovative, mission-critical
and development programs have resulted in
solutions that most comprehensively address
the introduction of advanced antimicrobial
the customer’s needs. Whether maintaining
cabin air and potable water filters to improve
existing long-term product relationships or
aircraft cabin quality.
strategically pursuing new markets, technical
PosITIoned for The fuTure: Crissair, PTI and
superiority, increased value and next genera-
VACCO are recognized as well established lead-
tion innovations are the keys to continued
ers in providing solution-oriented excellence.
growth and profitability.
Today, our products are essential components
buIlT on suCCess: The Filtration/Fluid Flow
of filtration and fluid flow control processes in
business is built upon successful integra-
numerous major industries. The addition of the
tion of technology, application knowledge
Canyon Engineering line of products and tech-
and engineering capability. The Company
nologies will further enhance the company’s
provides highly engineered products directly
future opportunities for growth.
8
eS Co teCh n o l oG IeS I nC.
2 0 1 3 A n n uAl R e p oRt
9
t eQ: th e r m o f o r m en g i n e e r e d Q u a l i t y
award-winning, innovative and sustain-
For nearly 30 years, TEQ has delivered
able design, engineering and manufactur-
ing solutions to the medical and commercial
take over production of diagnostic probe cov-
ers (a Class II medical device) for a leading
thermometer manufacturer, TEQ not only built
a fully-functional medical device facility within
markets for thermoformed packages and
months, but they also played a critical role in
specialty products.
re-examining the entire workflow process to
Thermoform: Formerly named Tek Packaging,
identify opportunities for increased efficien-
TEQ was one of the first thermoformers in the
cies. The result was a streamlined process they
U.S. to become registered as a medical device
use to produce, test and ship millions of covers
manufacturer. In addition to maintaining this
each day, with zero defects in the field.
preferred certification, TEQ’s relentless pursuit
The fuTure of TeQ: Through their commit-
of precision and dedication to quality and inno-
ment to continuous improvement and quality
vation, as well as their partnerships with some
assurance, TEQ is dedicated to becoming the
of the best names in the industry, has resulted
leading quality manufacturing company in
in several market leading solutions.
the thermoforming industry.
engIneered: TEQ’s recent development of
TEQethylene™, a 100% recyclable medical
packaging solution that uses a High Density
Polyethylene (HDPE) in combination with
adhesive coated TYVEK®, a breathable HDPE
thermoplastic lidding developed by DuPont,
was revolutionary. And going further, TEQ also
conducted a stability study to provide medical
packaging customers with the data and labora-
tory documents needed to meet FDA require-
ments and justify new packaging designs.
QualITy: With their solutions-focused ap-
proach, TEQ has also developed a core compe-
tency in designing and managing innovative
and sustainable supply chain workflows. In
fact, when TEQ was awarded a contract to
10
eS Co teCh n o l oG IeS I nC.
C o m m i t m e n t t o C o m m u n i t i e s
funded by donations from the company,
The ESCO Technologies Foundation is
our employees and outside donors. The
Foundation’s mission is to support charitable
Childhood Education Program which provides
quality affordable child care. With equal
emphasis on academics and play, children
develop the skills and knowledge they need to
organizations focusing on children and families
excel in kindergarten and beyond.
in communities where ESCO has operations. The
PIoneer CenTer for human servICes
organizations highlighted below are a few of
(McHenry, IL): Pioneer Center is a social service
over 30 core charities that we support annually.
provider whose mission is to empower individu-
neIghborhood houses (St. Louis, MO):
als to achieve their full potential. They provide
Neighborhood Houses operates programs that
a variety of programs including vocational
strive to provide a “home away from home”
services to individuals with intellectual and
for children and families in the St. Louis area.
developmental disabilities, support programs
This year our Foundation grant supported
and case management for those battling mental
their Caroline Mission program (featured in
illness, emergency and transitional housing and
pictures), a licensed and accredited Early
support services to help homeless individuals,
and therapy and support for victims of sexual
assault. Our Foundation has supported the
Pioneer Center since our inception in 2006.
sPeCIal olymPICs of venTura CounTy
(Los Angeles, CA): Special Olympics provides
year-round sports training and athletic com-
petition in a variety of Olympic-style sports
for individuals with intellectual disabilities.
The Special Olympics offers these athletes
and their families a chance to interact with
others who share similar life experiences.
Athletes who participate in these programs
have opportunities to develop physical fitness,
self confidence and social skills. This year our
Foundation grant supported transportation
costs to competitions.
2 0 1 3 A n n uAl R e p oRt
11
M a n a g e m e n t ’ s di s c u s s i o n a n d A n a l y s i s
The following discussion should be read in conjunction with
the Consolidated Financial Statements and Notes thereto and
refers to the Company’s results from continuing operations,
except where noted. In the third quarter of 2013, the
Company’s Board of Directors approved the initiation of a
process to sell that portion of the Utility Solutions Group
(USG) segment consisting of Aclara Technologies LLC (Aclara).
The Company is still in the midst of the sale process and
remains confident it will complete this divestiture. However,
the Company can give no assurances as to whether the
transaction will be successfully consummated.
Aclara is reflected as discontinued operations and/or assets/
liabilities held for sale in the financial statements and related
notes for all periods shown. Aclara’s pretax (loss) earnings
recorded in discontinued operations was $(62.1) million and
$19.5 million for the years ended September 30, 2013 and
2012, respectively. Aclara’s net sales were $184.5 million and
$209.7 million for the years ended September 30, 2013 and
2012, respectively. Aclara’s operations were included within
the Company’s USG segment prior to the classification as
discontinued operations. The decrease in Aclara sales volumes
in 2013 as compared to the prior year was mainly due to lower
AMI product deliveries to electric utility cooperatives, partially
offset by an increase in net sales to Southern California Gas Co
(SoCalGas). Aclara’s pretax loss in 2013 as compared to pretax
earnings in the prior year was due to the goodwill impairment
charge of $48 million recorded in the fourth quarter of 2013;
lower sales volumes; and changes in product mix (higher
shipments of lower margin gas products as compared to
higher margin electric products). See further discussion of the
goodwill impairment in the Critical Accounting Policies section
under “Goodwill and Other Long-Lived Assets.”
The years 2013, 2012 and 2011 refer to the fiscal years ended
September 30, 2013, 2012 and 2011, respectively, and are
used throughout the document.
Introduction
ESCO Technologies Inc. and its wholly owned subsidiaries
(the Company) are organized into three reportable operating
segments: Filtration/Fluid Flow (Filtration), RF Shielding and
Test (Test), and Utility Solutions Group (USG). The Company’s
business segments are comprised of the following primary
operating entities:
▶ Filtration: PTI Technologies Inc. (PTI), VACCO Industries
(VACCO), Crissair, Inc. (Crissair), Canyon Engineering
Products, Inc. (Canyon) and Thermoform Engineered
Quality LLC (TEQ),
▶ Test: ETS-Lindgren Inc. (ETS-Lindgren),
▶ USG: Doble Engineering Company (Doble).
Filtration: The companies within this segment primarily
design and manufacture specialty filtration products including
hydraulic filter elements and fluid control devices used in
commercial aerospace applications, unique filter mechanisms
used in micro-propulsion devices for satellites and custom
designed filters for manned aircraft and submarines.
Test: ETS-Lindgren is an industry leader in providing its
customers with the ability to identify, measure and contain
magnetic, electromagnetic and acoustic energy.
USG: 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.
The Company 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 2013 Continuing Operations
▶ Sales, net earnings from continuing operations and diluted
earnings per share from continuing operations were
$490.1 million, $31.3 million and $1.17 per share,
respectively, compared to sales, net earnings and diluted
earnings per share of $478.7 million, $34.8 million and
$1.29 per share in 2012.
▶ Diluted earnings per share from continuing operations on an
adjusted basis was $1.47 per share in 2013, which excludes
$0.30 per share of restructuring costs related to the Test
segment facility consolidation and the closure of the Doble
Lemke facility in Germany. These restructuring activities were
completed as of September 30, 2013. Management believes
EPS As Adjusted is more representative of the Company’s
2013 ongoing performance and allows shareholders better
visibility into the Company’s underlying operations.
▶ Net cash provided by operating activities from continuing
operations was approximately $37 million in 2013.
▶ At September 30, 2013, cash on hand was $42.9 million and
outstanding debt was $172 million, for a net debt position of
approximately $129 million. (Net debt position is defined as
total debt less net cash.)
12
ESCO TEChnOlOgiES inC.
M a n a g e m e n t ’ s di s c u s s i o n a n d A n a l y s i s
▶ 2013 entered orders from continuing operations were
$516.7 million resulting in a book-to-bill ratio of 1.05x.
Backlog from continuing operations at September 30,
2013, was $272.1 million compared to $245.6 million at
September 30, 2012.
▶ In June 2013, the Company acquired the stock of Canyon for
$9.2 million in cash, and additionally, purchased Canyon’s
70,000 square foot manufacturing facility located in Valencia,
California for $7 million. Canyon designs and manufactures
precision fluid control devices primarily for the aerospace
industry. The operating results for Canyon, since the date of
acquisition, are included as part of Crissair.
▶ The Company declared dividends of $0.32 per share, totaling
$8.5 million in payments during 2013.
Results of Continuing Operations
NET SALES
(Dollars in millions)
2013
2012
Fiscal year ended
Change
Change
2012
2013
2011 vs. 2012 vs. 2011
Filtration
Test
USG
Total
$214.1 194.8
166.7 175.9
109.3 108.0
167.6
176.5
106.7
9.9 % 16.2 %
(0.3)%
1.2 %
(5.2)%
1.2 %
$490.1 478.7
450.8
2.4 %
6.2 %
Net sales increased $11.4 million, or 2.4%, to $490.1 million
in 2013 from $478.7 million in 2012. The increase in net
sales in 2013 as compared to the prior year was due to: a
$19.3 million increase in the Filtration segment; a $1.3 million
increase in the USG segment; partially offset by a $9.2 million
decrease in the Test segment.
Filtration
The $19.3 million, or 9.9%, increase in net sales in 2013
as compared to the prior year was due to: a $16.2 million
increase in net sales from VACCO due to higher shipments of
its Space and defense products; a $6.7 million increase in
net sales at Crissair (the current year acquisition of Canyon
contributed $3.3 million of this increase); partially offset
by $3.2 million decrease in net sales at PTI driven by lower
shipments of aerospace elements and couplings, and a
$0.4 million decrease in net sales at TEQ.
The $27.2 million, or 16.2%, increase in net sales in 2012
as compared to 2011 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.
Test
The sales decrease of $9.2 million, or 5.2%, in 2013 as
compared to the prior year was due to: an $8 million decrease
in net sales from the segment’s European operations due to
timing of projects and softness in the European economy; a
$6.4 million decrease in net sales from the Company’s Asian
operations due to timing of chamber projects; partially offset
by a $5.2 million increase in net sales from the segment’s U.S.
operations due to an increase in projects in the EMP (electro-
magnetic pulse) market.
The net sales decrease of $0.6 million, or 0.3%, in 2012 as
compared to 2011 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;
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.
USG
The net sales increase of $1.3 million, or 1.2%, in 2013 as
compared to the prior year and $1.3 million, or 1.2%, in 2012
as compared to 2011 was driven by an increase in services
revenue at Doble.
ORDERS AND BACKLOG
New orders received from continuing operations in 2013
were $516.7 million as compared to $484.2 million in 2012,
resulting in order backlog of $272.1 million at September 30,
2013, as compared to order backlog of $245.6 million
at September 30, 2012. In 2013, the Company recorded
$232.1 million of orders related to Filtration products,
$177.7 million related to Test products, and $106.9 million
related to USG products. Orders are entered into backlog as
firm purchase order commitments are received.
In 2012, the Company recorded $203.6 million of orders
related to Filtration products, $168.5 million related to Test
products, and $112.1 million related to USG products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) were
$129.8 million, or 26.5% of net sales in 2013, $128.2 million,
or 26.8% of net sales in 2012, and $123.3 million, or 27.4% of
net sales in 2011.
The increase in SG&A expenses in 2013 as compared to the
prior year was mainly due to an increase in professional fees
and acquisition costs incurred at the Corporate level.
13
2013 AnnuAl RepoRt
M a n a g e m e n t ’ s di s c u s s i o n a n d A n a l y s i s
The increase in SG&A expenses in 2012 as compared to
2011 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 engineering head
count; a $1.9 million increase within the Test segment due to
the EMV acquisition (acquired February 28, 2011); partially
offset by a $0.5 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.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $6.2 million in 2013,
$5.7 million in 2012 and $5 million in 2011. Amortization
of intangible assets included $3.2 million, $3.8 million and
$3.9 million of amortization of acquired intangible assets
related to the Company’s acquisitions in 2013, 2012 and
2011, 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) expenses, net, was $5.9 million in 2013,
($4.4) million in 2012 and ($7.8) million in 2011, respectively.
The principal components in other (income) expenses, net, in
2013 included $4.1 million of restructuring costs related to the
closure of the Doble Lemke facility in Germany; $2.6 million
of restructuring costs within the Test segment as a result of
the closure of the Glendale Heights, Illinois facility; and a
$0.8 million gain on the sale of machinery and equipment
within the Filtration segment.
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. There
were no other individually significant items included in other
(income) expenses, net, in 2013, 2012 or 2011.
charges. EBIT, and EBIT margin on a consolidated basis and
EPS on an adjusted basis are not recognized in accordance
with U.S. generally accepted accounting principles (GAAP).
However, the Company believes that EBIT and EBIT margin
provide investors and Management with a valuable 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 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. The Company believes that the
presentation of EBIT, EBIT margin and EPS on an adjusted
basis provides important supplemental information to investors
by facilitating comparisons with other companies, many of
which use similar non-GAAP financial measures to supplement
their GAAP results. The use of non-GAAP financial measures
is not intended to replace any measures of performance
determined in accordance with GAAP.
EBIT
Fiscal year ended
(Dollars in millions)
2013
2012
2011
Filtration
% of net sales
$42.4
30.8
38.0
19.8% 19.5% 18.4%
Test
% of net sales
USG
% of net sales
16.3
9.8%
18.6
14.0
8.0% 10.5%
30.4
25.9
21.6
19.8% 24.0% 28.5%
Change Change
2012
vs. 2012 vs. 2011
2013
11.6%
23.4 %
16.4% (24.7) %
(16.6)% (14.8) %
Corporate
(28.0)
(23.2) (23.3)
(20.7)% 0.4 %
Total
% of net sales
$52.3
56.5
54.7
10.7% 11.4% 12.5%
(4.4)% (3.2) %
The reconciliation of EBIT from Continuing Operations to a
GAAP financial measure is as follows:
(Dollars in millions)
EBIT
Less: Interest expense
Less: Income taxes
2013
2012
2011
$52.3
(2.7)
(18.3)
54.7
(2.5)
(17.4)
56.5
(2.5)
(16.9)
Net earnings from continuing operations $31.3
34.8
37.1
EARNINGS BEFORE INTEREST AND TAXES (EBIT)
Filtration
The information reported herein includes the financial
measures EBIT, EBIT as a percentage of net sales (EBIT
margin), and EPS on an adjusted basis from continuing
operations. The Company defines EBIT as earnings before
interest and taxes from continuing operations, and defines
EPS on an adjusted basis from continuing operations as GAAP
EPS from continuing operations less defined restructuring
EBIT increased $4.4 million in 2013 as compared to the prior
year primarily due to the additional sales volumes at VACCO
and Crissair as noted earlier.
EBIT increased $7.2 million in 2012 as compared to 2011
mainly due to the additional sales volumes at all operating
units within the segment as noted earlier.
14
ESCO TEChnOlOgiES inC.
M a n a g e m e n t ’ s di s c u s s i o n a n d A n a l y s i s
Test
The $2.3 million increase in EBIT in 2013 as compared to
2012 was due to product price increases and the savings
being realized from the domestic facility consolidation.
The increase was partially offset by approximately $3.4 million
of restructuring costs consisting mainly of a facility lease
termination charge, severance and relocation expenses and
manufacturing inefficiencies resulting from the disruption,
which are now completed.
The $4.6 million decrease in EBIT in 2012 as compared to 2011
was due to: a $4 million decrease related to the segment’s
U.S. operations driven by lower sales volumes within the U.S.;
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.
USG
The $4.3 million decrease in EBIT in 2013 as compared to
the prior year was mainly due to $2.6 million of restructuring
costs related to the closure of the manufacturing operation
in Germany (Doble Lemke GmbH) and relocation of its partial
discharge products and intellectual property to its existing
lower cost locations in Europe. These shut-down costs
consisted of personnel costs, asset impairment charges, and
move related costs. In addition, a $4.5 million gain was
recorded in 2012 related to the revaluation of the earnout
liability related to the Xtensible acquisition.
The $4.5 million decrease in EBIT in 2012 as compared 2011
was primarily due to a $3.1 million decrease in EBIT related
to the revaluation of the earnout liability related to the
Xtensible acquisition.
Corporate
Corporate operating charges included in consolidated EBIT
increased to $28 million as compared to $23.2 million in 2012
mainly due to a $1.5 million pretax write-down of a Doble
Lemke trade name and an increase in professional fees and
acquisition costs.
The “Reconciliation to Consolidated Totals (Corporate)” in
Note 14 to the Consolidated Financial Statements represents
Corporate office operating charges.
INTEREST EXPENSE, NET
Interest expense was $2.7 million in 2013, compared to
$2.5 million in 2012 and 2011, respectively. The increase in
interest expense in 2013 as compared to the prior year was
due to higher average interest rates (1.6% vs. 1.2%) and
higher average outstanding borrowings ($171 million vs.
$126 million).
INCOME TAX EXPENSE
The effective tax rate from continuing operations for fiscal
years 2013, 2012 and 2011 was 37.0%, 33.4% and 31.3%,
respectively. The increase in the 2013 effective tax rate as
compared to the prior year was primarily due to: an adjustment
to the foreign valuation allowance which increased the 2013
effective tax rate by 3.3%; the extension of the research tax
credit as a result of the American Taxpayer Relief Act of 2012
which reduced the 2013 effective tax rate by 2.2%; a purchase
accounting charge which increased the 2012 effective tax
rate by 1.0%; and the release of accruals related to uncertain
tax positions as a result of the lapse of statute of limitations
which reduced the 2012 effective tax rate by 3.7%.
The increase in the 2012 effective tax rate as compared to
2011 was mainly due to: the December 31, 2011, expiration of
the research tax credit which increased the 2012 effective tax
rate by 1.0%; the repatriation of foreign subsidiary earnings
which increased the 2012 effective tax rate by 1.2%; releasing
a foreign valuation allowance which reduced the 2011 effective
tax rate by 1.9%; a purchase accounting charge increased the
2012 effective tax rate by 1.0%; and the release of accruals
related to uncertain tax positions as a result of the lapse of
statute of limitations which reduced the 2012 effective tax
rate by 3.0%.
The Company’s foreign subsidiaries have accumulated
unremitted earnings of $33.3 million and cash of $25.3 million
at September 30, 2013. No deferred taxes have been provided
on these 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
indefinitely reinvest these earnings in continuing international
operations. In the event these foreign entities’ earnings were
distributed, it is estimated that U.S. taxes, net of available
foreign tax credits, of approximately $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 $163.6 million at September 30, 2013, from
$139.2 million at September 30, 2012, mainly due to higher
accounts receivable and inventory balances. The $8.6 million
15
2013 AnnuAl RepoRt M a n a g e m e n t ’ s di s c u s s i o n a n d A n a l y s i s
increase in accounts receivable at September 30, 2013,
was mainly due to: a $5.8 million increase within the Test
segment and a $3 million increase in the USG segment due to
the increase of sales in the fourth quarter. The $8.2 million
increase in inventory at September 30, 2013, was mainly due
to an $8 million increase in the Filtration segment due to:
timing and volume of sales and accelerated material receipts
for various programs at VACCO and $2.4 million due to the
Canyon acquisition.
Net cash provided by operating activities was $47.2 million,
$53.2 million and $74.6 million in 2013, 2012 and 2011,
respectively. The decrease in 2013 as compared to the
prior year was due to a decrease in net earnings and higher
operating working capital requirements.
Capital expenditures from continuing operations were
$13.9 million, $10.8 million and $11.3 million in 2013,
2012 and 2011, respectively. The increase in 2013 as compared
to the prior year was mainly due to the purchase of the
ETS-Lindgren facility in Minocqua, Wisconsin for $1.2 million
and an increase in manufacturing equipment within the
Filtration segment of approximately $2 million mainly due
to the Felix Tool acquisition. There were no commitments
outstanding that were considered material for capital
expenditures at September 30, 2013. In addition, the Company
incurred expenditures for capitalized software of $8.4 million,
$5.3 million and $5.5 million in 2013, 2012 and 2011,
respectively. The increase in 2013 as compared to the prior
year was mainly attributable to the Test segment’s software
development.
The Company made required pension contributions of
$3.9 million, $4.8 million and $5.2 million in 2013, 2012 and
2011, respectively.
POTENTIAL SALE OF ACLARA
The Company anticipates that the cash proceeds of the
expected divestiture of Aclara will be used to accelerate
the Company’s repayment of existing debt, while providing
additional liquidity for acquisitions around its core businesses.
See Item 1A. Risk Factors in our Annual Report on Form 10-K.
ACQUISITIONS
2013
On June 26, 2013, the Company acquired the stock of Canyon
Engineering Products, Inc. (Canyon) for $9.2 million in
cash, and additionally, purchased Canyon’s 70,000 square
foot manufacturing facility located in Valencia, California
for $7 million. Canyon designs and manufactures precision
fluid control devices primarily for the aerospace industry
and Canyon’s products, technology and customers are very
similar to Crissair, Inc. The operating results for Canyon,
since the date of acquisition, are included as part of
Crissair, Inc. within the Company’s Filtration segment. The
Company recorded approximately $1.3 million of goodwill
related to the transaction and $1.7 million of amortizable
identifiable intangible assets consisting primarily of customer
relationships.
On December 31, 2012, the Company acquired the assets of
Metrum Technologies LLC (Metrum) for a purchase price of
$25 million in cash plus contingent consideration based on
future revenues over the next four years. Metrum is a leading
provider of wireless public network communications products
for electric utility customers and also offers communications
products and devices for distribution automation and
demand response applications. The Company recorded
approximately $25 million of goodwill, $11.2 million of
amortizable identifiable intangible assets consisting primarily
of customer relationships and patents / technology and
contingent consideration valued at approximately $13 million.
The operating results for the business, since the date of
acquisition, are included within Aclara which is included in
discontinued operations and/or assets/liabilities held for sale.
On December 21, 2012, the Company acquired the assets
of Felix Tool & Engineering, Inc. (Felix Tool) for a purchase
price of $1.2 million in cash. Felix Tool is engaged in the
design, manufacture and sale of customized perforated tubes
for filtration applications in the aerospace and fluid power
industry. The purchase price was allocated to property, plant
and equipment and inventory based on fair market value at
the date of acquisition and there were no intangible assets
recorded upon the transaction. The operating results for the
business, since the date of acquisition, are included within
PTI in the Filtration segment.
On December 10, 2012, the Company acquired the assets of
Finepoint Marketing, Inc. (Finepoint) for a purchase price of
$2.5 million. Finepoint is the electric power industry’s leading
conference provider focused on medium and high voltage
circuit breakers, as well as related substation and switchgear
topics. The operating results for the business, since the
date of acquisition, are included as part of Doble in the USG
segment. The Company recorded approximately $1.3 million
of goodwill as a result of the transaction and $1.2 million
of amortizable identifiable intangible assets consisting of
customer relationships.
16
ESCO TEChnOlOgiES inC. M a n a g e m e n t ’ s di s c u s s i o n a n d A n a l y s i s
2011
DIVIDENDS
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.
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, 2013, the Company had approximately
$265 million available to borrow under the credit facility, plus
a $250 million increase option, in addition to $42.9 million
cash on hand. The Company classified $50 million as the
current portion of long-term debt as of September 30, 2013,
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 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, 2013, 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.
During 2010, the Company initiated a quarterly cash dividend
payable at an annual rate of $0.32 per share. The Company
paid dividends of $8.5 million, $8.6 million and $8.5 million
in 2013, 2012 and 2011, respectively.
OUTLOOK — 2014
Management continues to see strong growth in 2014 across
the business. Management expects 2014 EPS from Continuing
Operations – As Adjusted in the range of $1.50 to $1.60 per
share, which excludes restructuring charges described below
with EPS from Continuing Operations in the range of $1.45 to
$1.55 per share. In addition, the 2014 effective tax rate from
continuing operations is projected to be approximately 35%.
On a quarterly basis, Management expects 2014 revenues and
EPS to be more slightly balanced but still more second-half
weighted. First quarter EPS from Continuing Operations – As
Adjusted is expected to be in the range of $0.24 to $0.29
per share. During 2014, the Company plans to complete the
exit and relocation of Crissair’s Palmdale, California operation
into the Canyon facility in Valencia, California. This move
is expected to be completed by September 30, 2014. The
restructuring costs are expected to be approximately $2 million,
or $0.05 per share.
CONTRACTUAL OBLIGATIONS
The following table shows the Company’s contractual
obligations as of September 30, 2013:
(Dollars in millions)
Payments due by period
Less
than
1 year
1 to 3 3 to 5
years
More
than
years 5 years
Total
$172.0
—
—
172.0
6.4
2.6
3.8
—
—
—
15.0
5.0
6.7
2.6
0.7
Contractual
Obligations
Long-Term Debt
Obligation
Estimated Interest
Payments(1)
Operating Lease
Obligations
Purchase
Obligations(2)
Total
$198.5
12.4
10.8
174.6
5.1
4.8
0.3
—
—
0.7
(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 and excludes the effect
of any Aclara sale consummation.
(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.
17
2013 AnnuAl RepoRt
M a n a g e m e n t ’ s di s c u s s i o n a n d A n a l y s i s
As of September 30, 2013, the Company had $2.2 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, 2013.
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. This program was extended by the
Company’s Board of Directors through September 30, 2014.
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. During 2013, the
Company repurchased $9.7 million or approximately 270,000
shares. During 2012, the Company repurchased $5.4 million or
approximately 150,000 shares. There were no stock repurchases
during 2011.
PENSION FUNDING REQUIREMENTS
The minimum cash funding requirements related to the
Company’s defined benefit pension plans are estimated to be
approximately $2.8 million in 2014, approximately $3.4 million
in 2015 and approximately $2.7 million in 2016.
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, intellectual property and general corporate 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. There were no outstanding
derivative instruments at September 30, 2013. 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, 2013.
The Company is also subject to foreign currency exchange
rate risk inherent in its sales commitments, anticipated sales,
anticipated purchases and assets and liabilities denominated
in currencies other than the U.S. dollar. The foreign currency
most significant to the Company’s operations is the Euro.
Net sales to customers outside of the United States were
$153.7 million, $162.1 million, and $132.2 million in 2013,
2012 and 2011, respectively. The Company occasionally 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 2013, 2012 and 2011).
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.
18
ESCO TEChnOlOgiES inC. M a n a g e m e n t ’ s di s c u s s i o n a n d A n a l y s i s
REVENUE RECOGNITION
Filtration Segment: Within the Filtration segment,
approximately 60% of segment revenues (approximately 26%
of consolidated revenues) are recognized when products are
delivered (when title and risk of ownership transfers) or when
services are performed for unaffiliated customers.
Approximately 40% of segment revenues (approximately 18%
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.
Test Segment: Within the Test segment, approximately 65%
of revenues (approximately 22% 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 and the application of the guidance requires judgment
as to whether the deliverables can be divided into more than
one unit of accounting and whether the separate units of
accounting have value to the customer on a stand-alone basis.
Changes to these elements could affect the timing of revenue
recognition. There have been no material changes to these
elements for the financial statement periods presented.
Approximately 35% of the segment’s revenues (approximately
12% 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.
USG Segment: Within the USG segment, approximately 100%
of the segment’s revenues (approximately 22% of consolidated
revenues) represent products and services 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.
Discontinued Operations (Aclara): Approximately 100% of
Aclara’s revenue arrangements contain software components
and/or multiple element arrangements. The application of
generally accepted accounting principles 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.
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
19
2013 AnnuAl RepoRt M a n a g e m e n t ’ s di s c u s s i o n a n d A n a l y s i s
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
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, 2013, the Company has determined that no
reporting units in continuing operations are at risk of material
goodwill impairment as the fair value of each reporting unit
substantially exceeded its carrying value.
At September 30, 2013, the Company completed its preliminary
annual goodwill impairment evaluation using the two-step
goodwill impairment test and determined that a portion of the
goodwill related to Aclara was impaired. In the first step of
20
ESCO TEChnOlOgiES inC. M a n a g e m e n t ’ s di s c u s s i o n a n d A n a l y s i s
the analysis, the Company compared the estimated fair value
of the Aclara reporting unit to its carrying value, including
goodwill. The fair value of the reporting unit was determined
based on a weighting of income and market approaches. Since
the carrying value of the Aclara reporting unit exceeded the
estimated fair value, the Company performed the second step
of the impairment analysis in order to determine the implied
fair value of the reporting unit over the fair value amounts
assigned to all of the assets and liabilities of the reporting
unit as if it were to be acquired in a business combination and
the current fair value of the reporting unit (as calculated in
the first step) was the purchase price. The implied fair value
of the reporting unit’s goodwill was then compared to the
carrying value of the goodwill and any excess of carrying value
over the implied fair value represents the non-cash impairment
charge. The impairment of Aclara’s goodwill was impacted by
Aclara’s expected operating results and the range of bids from
potential buyers. The results of the second step preliminary
analysis showed that the implied fair value of goodwill was
$58 million related to Aclara. Therefore, in the fourth quarter
of 2013, the Company recorded a goodwill impairment charge
of $48 million and is included within discontinued operations.
Intangible assets with estimable useful lives are amortized
over their respective estimated useful lives to their estimated
residual values, and are reviewed annually for impairment.
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
The Company is currently involved in various stages of
investigation and remediation relating to environmental
matters, intellectual property and general corporate 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.
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. There were no outstanding
derivative instruments at September 30, 2013. See further
discussion in “Management’s Discussion and Analysis —
Market Risk Analysis” regarding the Company’s market risks.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
CONTROLS AND PROCEDURES
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 2014,
the Company could be required to record a charge to other
comprehensive income/loss. In addition, if the discount
rate was decreased by 25 basis points from 4.75% to 4.5%,
the projected benefit obligation for the defined benefit plan
would increase by approximately $2.6 million and result
in an additional after-tax charge to other comprehensive
income/loss of approximately $1.6 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
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.
21
2013 AnnuAl RepoRt M a n a g e m e n t ’ s di s c u s s i o n a n d A n a l y s i s
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 did not 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 timing,
success and financial impact of the Aclara sale process, the
use of expected proceeds from any sale of Aclara, amount
and timing of 2014 revenues, growth, EPS from Continuing
Operations, and EPS from Continuing Operations – As Adjusted,
adequacy of the Company’s credit facilities and future cash
flows, the timing of and restructuring costs associated with
the closure and consolidation of the Crissair facility into
the Canyon facility, minimum cash funding required by or
a charge to equity connected with the Company’s defined
benefit plans and other postretirement benefit plans, expected
benefits payable from the Company’s defined benefit plans
and other postretirement benefit plans, outcome of current
litigation, claims and charges, material foreign currency risk,
the likelihood that materially different amounts would be
reported in connection with the Company’s application of
the accounting policies described herein, the likelihood that
revenue estimates used in the Test and Filtration segments’
contracts recorded under the percentage-of-completion method
will change materially, the amount of NOLs not realizable,
continued reinvestment of foreign earnings and the resulting
U.S. tax liability in the event such earnings are repatriated,
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, valuation of deferred tax assets, 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, 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 them except
as may be required by applicable laws or regulations. 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, 2013, and the following: the receipt
of acceptable offers, the ability to negotiate acceptable
terms and conditions, available financing and the receipt of
necessary government and customer approvals in connection
with the sale of Aclara; the impacts of natural disasters
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 and consolidation plans.
22
ESCO TEChnOlOgiES inC. C o n s o l i d a t e d S t a t e m e n t s o f op e r a t i o n s
(Dollars in thousands, except per share amounts)
Years ended September 30,
Net sales
Costs and expenses:
Cost of sales
Selling, general and administrative expenses
Amortization of intangible assets
Interest expense, net
Other (income) expenses, net
Total costs and expenses
Earnings before income tax
Income tax expense
Net earnings from continuing operations
(Loss) earnings from discontinued operations, net of tax (benefit) expense
of $(5,215), $7,397 and $7,535, in 2013, 2012 and 2011, respectively
Net (loss) earnings
Earnings (loss) per share:
Basic:
Continuing operations
Discontinued operations
Net (loss) earnings
Diluted:
Continuing operations
Discontinued operations
Net (loss) earnings
Average common shares outstanding (in thousands):
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
2013
2012
2011
$ 490,079
478,699
450,816
295,863
129,809
6,179
2,693
5,940
294,655
128,152
5,674
2,469
(4,433)
273,845
123,293
4,988
2,493
(7,808)
440,484
426,517
396,811
49,595
18,335
31,260
(56,863)
$ (25,603)
$ 1.18
(2.15)
$ (0.97)
$ 1.17
(2.13)
$ (0.96)
52,182
17,408
34,774
12,105
46,879
1.30
0.46
1.76
1.29
0.44
1.73
54,005
16,922
37,083
15,418
52,501
1.39
0.58
1.97
1.38
0.57
1.95
26,450
26,802
26,699
27,030
26,588
26,903
C o n s o l i d a t e d S t a t e m e n t s o f C o m p r e h e n s i v e I n c o m e (lo s s )
(Dollars in thousands)
Years ended September 30,
Net (loss) earnings
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments
Amortization of prior service costs and actuarial gains (losses)
Change in fair value of interest rate swap
Total other comprehensive income (loss), net of tax
2013
2012
$ (25,603)
46,879
644
8,078
—
8,722
(2,018)
(4,171)
2
(6,187)
2011
52,501
(333)
(4,354)
289
(4,398)
Comprehensive (loss) income
$ (16,881)
40,692
48,103
See accompanying Notes to Consolidated Financial Statements.
23
2013 AnnuAl RepoRt
2013
2012
$
42,850
30,215
91,980
83,414
20,717
90,228
23,349
15,930
108,867
14,567
82,063
22,313
12,940
97,932
393,921
343,444
7,178
54,316
74,948
3,426
4,984
47,624
69,293
3,039
139,868
124,940
(64,332)
(62,389)
75,536
62,551
180,217
282,949
9,469
150,236
176,486
279,640
9,638
161,994
$ 1,092,328
1,033,753
C o n s o l i d a t e d ba l a n c e S h e e t s
(Dollars in thousands)
Years ended September 30,
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of
$1,124 and $1,217 in 2013 and 2012, respectively
Costs and estimated earnings on long-term contracts, less progress
billings of $30,887 and $30,534 in 2013 and 2012, respectively
Inventories
Current portion of deferred tax assets
Other current assets
Assets held for sale – current
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
Assets held for sale - other
Total Assets
See accompanying Notes to Consolidated Financial Statements.
24
ESCO TEChnOlOgiES inC.
C o n s o l i d a t e d ba l a n c e S h e e t s
(Dollars in thousands)
Years ended September 30,
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt
Accounts payable
Advance payments on long-term contracts, less costs incurred
of $23,853 and $31,534 in 2013 and 2012, respectively
Accrued salaries
Current portion of deferred revenue
Accrued other expenses
Liabilities held for sale – current
Total current liabilities
Pension obligations
Deferred tax liabilities
Other liabilities
Long-term debt
Liabilities held for sale – other
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 30,147,504 and 30,044,486 shares in 2013 and 2012, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of tax
Less treasury stock, at cost (3,707,407 and 3,453,249 common shares in
2013 and 2012, respectively)
Total shareholders’ equity
Total Liabilities and Shareholders’ Equity
See accompanying Notes to Consolidated Financial Statements.
2013
2012
$
50,000
38,537
17,543
21,730
17,508
21,453
63,585
50,000
35,253
21,700
19,613
16,332
20,577
40,730
230,356
204,205
19,089
99,795
3,348
122,000
16,026
35,480
88,675
947
65,000
8,133
490,614
402,440
—
301
284,565
407,512
(16,656)
—
300
279,392
441,566
(25,378)
675,722
695,880
(74,008)
(64,567)
601,714
631,313
$ 1,092,328
1,033,753
25
2013 AnnuAl RepoRt
C o n s o l i d a t e d S t a t e m e n t s o f S h a r e h o l d e r s ’ eq u i t y
(In thousands)
Common Stock
Shares Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
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)
Cash dividends declared ($0.32 per share)
Stock options and stock compensation plans,
net of tax benefit of $(55)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
52,501
—
—
—
(8,534)
118
2
4,864
—
—
(333)
(4,354)
289
—
—
—
—
—
—
—
52,501
(333)
(4,354)
289
(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)
Cash dividends declared ($0.32 per share)
Stock options and stock compensation plans,
net of tax benefit of $(123)
Purchases into treasury
—
—
—
—
—
87
—
—
—
—
—
—
—
—
—
—
—
—
—
46,879
—
—
—
(8,554)
3,585
—
—
—
—
(2,018)
(4,171)
2
—
—
—
—
—
—
—
—
46,879
(2,018)
(4,171)
2
(8,554)
283
3,868
(5,403)
(5,403)
Balance, September 30, 2012
30,044
300
279,392
441,566
(25,378)
(64,567)
631,313
Comprehensive income (loss):
Net (loss) earnings
Translation adjustments
Net unrecognized actuarial gain,
net of tax of $(5,468)
Cash dividends declared ($0.32 per share)
Stock options and stock compensation plans,
net of tax benefit of $(84)
Purchases into treasury
—
—
—
—
104
—
—
—
—
—
1
—
—
—
—
—
(25,603)
—
—
(8,451)
5,173
—
—
—
—
644
8,078
—
—
—
—
—
—
—
(25,603)
644
8,078
(8,451)
262
5,436
(9,703)
(9,703)
Balance, September 30, 2013
30,148
$301
284,565
407,512
(16,656) (74,008) 601,714
See accompanying Notes to Consolidated Financial Statements.
26
ESCO TEChnOlOgiES inC.
C o n s o l i d a t e d S t a t e m e n t s o f C a s h F l o w s
(Dollars in thousands)
Years ended September 30,
Cash flows from operating activities:
Net (loss) earnings
Adjustments to reconcile net earnings to net cash provided by operating activities:
2013
2012
2011
$ (25,603)
46,879
52,501
Net loss (earnings) from discontinued operations, net of tax
Depreciation and amortization
Stock compensation expense
Changes in current assets and liabilities
Effect of deferred taxes on tax provision
Change in acquisition earnout obligation
Pension contributions
Change in deferred revenue and costs, net
Other
Net cash provided by operating activities – continuing operations
Net cash provided by discontinued operations
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 – continuing operations
Net cash used by investing activities – discontinued operations
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
Proceeds from exercise of stock options
Other
Net cash provided (used) by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Changes in current assets and liabilities:
Accounts receivable, net
Costs and estimated earnings on long-term contracts, net
Inventories
Other 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.
56,863
14,805
4,577
(19,031)
10,084
—
(3,900)
913
(1,626)
37,082
10,069
47,151
(19,452)
—
(13,862)
(8,408)
(41,722)
(35,031)
(76,753)
122,000
(65,000)
(8,451)
(9,703)
—
1,750
998
41,594
643
12,635
30,215
$ 42,850
$ (6,377)
(6,150)
(5,219)
(2,513)
3,120
(4,157)
2,265
$ (19,031)
(12,105)
14,495
4,356
(3,451)
1,086
(4,459)
(4,800)
2,373
1,694
46,068
7,096
53,164
—
1,367
(10,799)
(5,344)
(14,776)
(15,036)
(29,812)
192,455
(202,455)
(8,554)
(5,403)
(1,937)
(184)
801
(25,277)
(2,018)
(3,943)
34,158
30,215
8,881
(1,593)
(8,590)
4,186
(1,535)
(1,967)
(2,833)
(3,451)
(15,418)
13,476
4,470
(5,596)
3,551
(7,595)
(5,230)
(300)
2,007
41,866
32,750
74,616
(3,732)
1,361
(11,315)
(5,492)
(19,178)
(11,053)
(30,231)
49,370
(78,370)
(8,534)
—
—
762
370
(36,402)
(333)
7,650
26,508
34,158
(14,078)
(231)
(13,136)
(1,159)
325
17,977
4,706
(5,596)
$
2,573
11,680
1,588
16,544
1,959
21,895
27
2013 AnnuAl RepoRt
no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
1. Summary of Significant Accounting Policies
D. USE OF ESTIMATES
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, 2013, and 2012.
The assets of Aclara Technologies LLC (Aclara) are classified as
held for sale and are accounted for as discontinued operations
in accordance with accounting principles generally accepted
in the United States of America (GAAP). Prior period amounts
have been reclassified to conform to the current period
presentation. See Note 2.
C. NATURE OF CONTINUING OPERATIONS
The Company has three reportable segments: Filtration/Fluid
Flow (Filtration), RF Shielding and Test (Test), and Utility
Solutions Group (USG).
Filtration: The companies within this segment primarily
design and manufacture specialty filtration products including
hydraulic filter elements and fluid control devices used in
commercial aerospace applications, unique filter mechanisms
used in micro-propulsion devices for satellites and custom
designed filters for manned aircraft and submarines.
Test: ETS-Lindgren Inc. (ETS-Lindgren) is an industry leader in
providing its customers with the ability to identify, measure
and contain magnetic, electromagnetic and acoustic energy.
USG: Doble Engineering Company (Doble) provides high-end,
intelligent, diagnostic test solutions for the electric power
delivery industry.
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
Filtration Segment: Within the Filtration segment,
approximately 60% of revenues (approximately 26% of
consolidated revenues) are recognized when products are
delivered (when title and risk of ownership transfers) or when
services are performed for unaffiliated customers.
Approximately 40% of segment revenues (approximately 18%
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.
Test Segment: Within the Test segment, approximately 65%
of revenues (approximately 22% 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
28
ESCO TEChnOlOgiES inC. no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
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 35% of the segment’s revenues (approximately
12% 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 5% 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.
USG Segment: Within the USG segment, approximately 100%
of segment revenues (approximately 22% 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.
Discontinued Operations (Aclara): Approximately 100% of
Aclara’s revenue arrangements 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 revenue
arrangements 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 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
29
2013 AnnuAl RepoRt no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
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.
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. See Note 2.
Other intangible assets represent costs allocated to identifiable
intangible assets, principally capitalized software, patents,
trademarks, and technology rights. See Note 4 regarding
goodwill and other intangible assets activity.
L. CAPITALIZED SOFTWARE
The costs incurred for the development of computer software
that will be sold, leased, or otherwise marketed are charged
to expense when incurred as research and development
until technological feasibility has been established for the
product. Technological feasibility is typically established
upon completion of a detailed program design. Costs incurred
after this point are capitalized on a project-by-project basis.
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
30
ESCO TEChnOlOgiES inC. no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
is calculated on a project-by-project basis as the greater of
(1) the ratio of current gross revenues for a product to the
total of current and anticipated future gross revenues for the
product or (2) the straight-line method over the estimated
economic life of the product. The Company generally amortizes
the software development costs over a three-to-seven year
period based upon the estimated future economic life of the
product. Factors considered in determining the estimated
future economic life of the product include anticipated
future revenues, and changes in software and hardware
technologies. Management annually reviews the carrying values
of capitalized costs for impairment or whenever events or
changes in circumstances indicate the carrying amount may
not be recoverable. If expected cash flows are insufficient to
recover the carrying amount of the asset, then an impairment
loss is recognized to state the asset at its net realizable value.
M. INCOME TAXES
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or
settled. Deferred tax assets may be reduced by a valuation
allowance if it is more likely than not that some portion or
all of the deferred tax assets will not be realized. The effect
on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the
enactment date. The Company regularly reviews its deferred
tax assets for recoverability and establishes a valuation
allowance when Management believes it is more likely than not
such assets will not be recovered, taking into consideration
historical operating results, expectations of future earnings,
tax planning strategies, and the expected timing of the
reversals of existing temporary differences.
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 TRANSLATION
The financial statements of the Company’s foreign operations
are translated into U.S. dollars in accordance with FASB ASC
Topic 830, Foreign Currency Matters. The resulting translation
adjustments are recorded as a separate component of
accumulated other comprehensive income.
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)
2013
2012
2011
Weighted Average Shares
Outstanding — Basic
Dilutive Options and Performance-
Accelerated Restricted Stock
26,450
26,699
26,588
352
331
315
Shares — Diluted
26,802
27,030
26,903
Options to purchase 78,166 shares at prices ranging from
$36.70-$37.98 were outstanding during the year ended
September 30, 2013, 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 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
31
2013 AnnuAl RepoRt no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
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 156,000, 175,000 and 173,000 restricted shares
were outstanding but unearned at September 30, 2013, 2012
and 2011, 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 $(16.7) million
at September 30, 2013, consisted of $(20.6) million related
to the pension net actuarial loss; and $3.9 million related
to currency translation adjustments. 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
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
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 did not have a material impact on the Company’s
financial statements.
2. Assets Held for Sale
As previously disclosed, during the third quarter of 2013,
the Company’s Board of Directors approved the initiation
of a process to sell that portion of the Company’s USG
segment represented by its subsidiary Aclara Technologies
LLC (Aclara). Aclara is a 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 assets and liabilities constitute
a disposal group to be classified as held for sale and Aclara
constitutes a component of the Company with operations and
cash flows that are clearly distinguishable, operationally and
for financial reporting purposes, from the rest of the entity.
The results of operations of a component of an entity that
either has been disposed of or is classified as held for sale
shall be reported in discontinued operations. Accordingly,
Aclara is reflected as discontinued operations and/or assets/
liabilities held for sale in the consolidated financial statements
and related notes for all periods presented.
Aclara’s pretax (loss) earnings recorded in discontinued
operations was $(62.1) million, $19.5 million, and
$22.9 million for the years ended September 30, 2013, 2012
and 2011, respectively. The 2013 pretax loss was due to
the $48 million goodwill impairment charge recorded in the
fourth quarter of 2013; lower sales volumes; and changes in
product mix (higher shipments of lower margin gas products
as compared to higher margin electric products). Aclara’s net
32
ESCO TEChnOlOgiES inC. no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
sales were $184.5 million, $209.7 million, and $242.9 million
for the years ended September 30, 2013, 2012 and 2011,
respectively. Aclara’s operations were included within
the Company’s USG segment prior to the classification as
discontinued operations.
The major classes of Aclara assets and liabilities held for sale
included in the Consolidated Balance Sheets at September 30,
2013 and 2012 are shown below:
goodwill was impacted by Aclara’s expected operating results
and the range of bids from potential buyers. The results of the
second step preliminary analysis showed that the implied fair
value of goodwill was $58 million for the Aclara unit. Therefore,
in the fourth quarter of 2013, the Company recorded a goodwill
impairment charge of $48 million included within Discontinued
Operations.
3. Acquisitions
(Dollars in millions)
Assets:
Accounts receivable, net
Inventories
Other current assets
Current assets
Net property, plant & equipment
Intangible assets, net
Goodwill
Other assets
2013
2012
2013
$ 55.5
34.9
18.5
108.9
14.5
66.0
57.9
11.8
67.6
26.0
4.3
97.9
13.3
55.0
81.6
12.1
Total assets
259.1
259.9
Liabilities:
Accounts payable
Accrued expenses and other current liabilities
Current liabilities
Other liabilities
Total liabilities
22.2
41.4
63.6
16.0
$ 79.6
18.8
21.9
40.7
8.1
48.8
The Company completed its preliminary annual goodwill
impairment evaluation using the two-step goodwill impairment
test and determined that a portion of the goodwill related
to Aclara was impaired. In the first step of the analysis, the
Company compared the estimated fair value of the Aclara
reporting unit to its carrying value, including goodwill. The
fair value of the reporting unit was determined based on a
weighting of income and market approaches. Since the carrying
value of the Aclara reporting unit exceeded the fair value, the
Company performed the second step of the impairment analysis
in order to determine the implied fair value of the reporting
unit over the fair value amounts assigned to all of the assets
and liabilities of the reporting unit as if it were to be acquired
in a business combination and the current fair value of the
reporting unit (as calculated in the first step) was the purchase
price. The implied fair value of the reporting units’ goodwill was
then compared to the carrying value of the goodwill and any
excess of carrying value over the implied fair value represents
the non-cash impairment charge. The impairment of Aclara’s
On June 26, 2013, the Company acquired the stock of Canyon
Engineering Products, Inc. (Canyon) for $9.2 million in
cash, and additionally, purchased Canyon’s 70,000 square
foot manufacturing facility located in Valencia, California,
for $7 million. Canyon designs and manufactures precision
fluid control devices primarily for the aerospace industry and
Canyon’s products, technology and customers are very similar
to Crissair, Inc. The operating results for Canyon, since the
date of acquisition, are included as part of Crissair, Inc. within
ESCO’s Filtration segment. The Company recorded approximately
$1.3 million of goodwill related to the transaction and
$1.7 million of amortizable identifiable intangible assets
consisting primarily of customer relationships.
On December 31, 2012, the Company acquired the assets of
Metrum Technologies LLC (Metrum) for a purchase price of
$25 million in cash plus contingent consideration based on
future revenues over the next four years. Metrum is a leading
provider of wireless public network communications products
for electric utility customers and also offers communications
products and devices for distribution automation and
demand response applications. The Company recorded
approximately $25 million of goodwill, $11.2 million of
amortizable identifiable intangible assets consisting primarily
of customer relationships and patents/technology and
contingent consideration valued at approximately $13 million.
The operating results for the business, since the date of
acquisition, are included within Aclara which is included in
discontinued operations and/or assets held for sale.
On December 21, 2012, the Company acquired the assets
of Felix Tool & Engineering, Inc. (Felix Tool) for a purchase
price of $1.2 million in cash. Felix Tool is engaged in the
33
2013 AnnuAl RepoRt
no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
design, manufacture and sale of customized perforated tubes
for filtration applications in the aerospace and fluid power
industry. The purchase price was allocated to property, plant
and equipment and inventory based on fair market value at
the date of acquisition and there were no intangible assets
recorded upon the transaction. The operating results for the
business, since the date of acquisition, are included within PTI
Technologies Inc. in the Filtration segment.
On December 10, 2012, the Company acquired the assets of
Finepoint Marketing, Inc. (Finepoint) for a purchase price
of $2.5 million. Finepoint is the electric power industry’s
leading conference provider focused on medium and high
voltage circuit breakers, as well as related substation and
switchgear topics. The operating results for the business,
since the date of acquisition, are included as a part of Doble
in the USG segment. The Company recorded approximately
$1.3 million of goodwill as a result of the transaction and
$1.2 million of amortizable identifiable intangible assets
consisting of customer relationships.
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.
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.
4. Goodwill and Other Intangible Assets
Included on the Company’s Consolidated Balance Sheets at
September 30, 2013, and 2012 are the following intangible
assets gross carrying amounts and accumulated amortization:
(Dollars in millions)
Goodwill
2013
$ 282.9
2012
279.6
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
$ 0.9
0.6
$ 0.3
$ 32.1
15.3
$ 16.8
$ 64.1
17.9
$ 46.2
$ 0.4
0.2
$ 0.2
0.8
0.6
0.2
23.0
11.7
11.3
61.4
14.7
46.7
0.2
0.2
—
Intangible assets with indefinite lives:
Trade names
$ 116.7
118.2
The Company performed its annual evaluation of goodwill and
intangible assets for impairment during the fourth quarter
of fiscal 2013 and concluded no impairment existed at
September 30, 2013, related to continuing operations.
The changes in the carrying amount of goodwill attributable
to each business segment for the years ended September 30,
2013, and 2012 are as follows:
(Dollars in millions)
USG
Test Filtration
Total
Balance as of
September 30, 2011
Acquisitions/adjustments
Balance as of
September 30, 2012
Acquisitions/adjustments
Balance as of
September 30, 2013
$ 216.1 34.8
(0.5) (0.1)
29.3 280.2
(0.6)
—
215.6 34.7
0.3
1.7
29.3 279.6
3.3
1.3
$ 217.3 35.0
30.6 282.9
34
ESCO TEChnOlOgiES inC.
no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
Amortization expense related to intangible assets with
determinable lives was $6.2 million, $5.7 million and
$5 million in 2013, 2012 and 2011, 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 2014 through
2018 is estimated at approximately $7 million per year.
5. Accounts Receivable
remaining noncancelable lease terms in excess of one year as
of September 30, 2013, are:
(Dollars in thousands)
Years ending September 30:
2014
2015
2016
2017
2018 and thereafter
Total
$ 4,994
4,219
2,519
1,472
1,749
$14,953
Accounts receivable, net of the allowance for doubtful accounts,
consist of the following at September 30, 2013, and 2012:
8. Income Tax Expense
(Dollars in thousands)
Commercial
U.S. Government and prime contractors
Total
6. Inventories
2013
$88,938
3,042
$91,980
2012
80,048
3,366
83,414
Inventories consist of the following at September 30, 2013,
and 2012:
(Dollars in thousands)
Finished goods
Work in process — including
long-term contracts
Raw materials
Total
2013
2012
$20,925
19,753
30,884
38,419
$90,228
27,217
35,093
82,063
7. Property, Plant and Equipment
Depreciation expense of property, plant and equipment for
the years ended September 30, 2013, 2012 and 2011 was
$8.6 million, $8.1 million and $7.8 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, 2013, 2012 and 2011 was $5 million, $5 million
and $8.1 million, respectively. Future aggregate minimum
lease payments under operating leases that have initial or
Total income tax expense (benefit) for the years ended
September 30, 2013, 2012 and 2011 was allocated to income
tax expense as follows:
(Dollars in thousands)
2013
2012
2011
Income tax expense
from Continuing Operations
Income tax (benefit) expense
$18,335
17,408
16,922
from Discontinued Operations
(5,215)
7,397
7,535
Total income tax expense
$13,120
24,805
24,457
The components of income from continuing operations before
income taxes consisted of the following for the years ended
September 30:
(Dollars in thousands)
2013
2012
2011
United States
Foreign
$43,159
6,436
46,883
5,299
49,702
4,303
Total income before income taxes $49,595
52,182
54,005
The principal components of income tax expense (benefit) from
continuing operations for the years ended September 30, 2013,
2012 and 2011 consist of:
(Dollars in thousands)
2013
2012
2011
Federal
Current
Deferred
State and local:
Current
Deferred
Foreign:
Current
Deferred
Total
$10,723
2,942
11,144
2,954
9,667
4,672
896
642
1,372
309
1,801
464
2,033
1,099
1,863
(234)
3,049
(2,731)
$18,335
17,408
16,922
35
2013 AnnuAl RepoRt
no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
The actual income tax expense (benefit) from continuing
operations for the years ended September 30, 2013, 2012 and
2011 differs from the expected tax expense for those years
(computed by applying the U.S. Federal corporate statutory
rate) as follows:
2013
2012
2011
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
Executive compensation
Valuation allowance
Other, net
35.0%
2.7
(1.9)
(2.5)
(2.5)
0.1
—
1.8
4.0
0.3
35.0%
3.3
(0.7)
(0.3)
(2.4)
(3.6)
1.0
0.6
0.2
0.3
35.0%
3.7
(2.3)
(1.3)
(2.2)
(0.5)
—
0.5
(1.7)
0.1
Effective income tax rate
37.0%
33.4%
31.3%
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
September 30, 2013, and 2012 are presented below:
(Dollars in thousands)
Deferred tax assets:
2013
2012
Inventories, long-term contract accounting,
contract cost reserves and other
$ 6,825
Pension and other postretirement benefits
Net operating loss carryforward — domestic
Net operating loss carryforward — foreign
Capital loss carryforward
Other compensation-related costs
7,417
848
3,955
240
7,819
13,437
562
3,841
240
and other cost accruals
State credit carryforward
Total deferred tax assets
Deferred tax liabilities:
Goodwill
Acquisition assets
Depreciation, software amortization
Net deferred tax liabilities before
valuation allowance
Less valuation allowance
19,325
1,099
17,589
997
39,709
44,485
(14,576) (12,783)
(61,403) (63,323)
(36,396) (33,799)
(72,666) (65,420)
(942)
(3,780)
state research and other credit carryforwards of $1.1 million
of which $1 million expires between 2023 and 2028. The
remaining $0.1 million does not have an expiration date.
At September 30, 2013, the Company has established a
valuation allowance of $0.4 million against state credit
carryforwards and $0.4 million against state net operating
loss (NOL) carryforwards that are not expected to be realized
in future periods. In addition, the Company has established
a valuation allowance of $0.2 million at September 30, 2013
and 2012, respectively, against the capital loss carryforward
generated in 2008, as such loss carryforward may not be
realized in future periods. Lastly, the Company has established
a valuation allowance against certain NOL carryforwards in
foreign jurisdictions which may not be realized in future
periods. The valuation allowance established against the
foreign NOL carryforwards was $2.8 million and $0.7 million
at September 30, 2013, and 2012, respectively. The Company
classifies its valuation allowance related to deferred taxes on a
pro rata basis by taxing jurisdiction.
The Company’s foreign subsidiaries have accumulated
unremitted earnings of $33.3 million and cash of $25.3 million
at September 30, 2013. No deferred taxes have been provided
on these 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
indefinitely reinvest these earnings in continuing international
operations. In the event these foreign entities’ earnings were
distributed, it is estimated that U.S. taxes, net of available
foreign tax credits, of approximately $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, 2013, the Company had $2.2 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, 2013, and 2012 is presented in
the table below:
Net deferred tax liabilities
$ (76,446) (66,362)
(Dollars in millions)
The Company has a foreign net operating loss carryforward
of $14 million at September 30, 2013, which reflects tax loss
carryforwards in Brazil, Germany, India, Japan and the United
Kingdom. $12.7 million of the tax loss carryforwards have no
expiration date while the remaining $1.3 million will expire
between 2020 and 2022. The Company has state net operating
loss carryforwards of $9.9 million at September 30, 2013 which
expire between 2018 and 2033. The Company also has net
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
Decreases related to settlements with
taxing authorities
Lapse of statute of limitations
Balance as of September 30,
2013
2012
$ 1.8
0.5
—
0.2
3.6
—
(0.3)
0.1
(0.1) —
(1.6)
(0.2)
$ 2.2
1.8
36
ESCO TEChnOlOgiES inC.
no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
The Company anticipates a $1.1 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, 2013, 2012 and 2011, the
Company had accrued interest related to uncertain tax positions
of $0.1 million, $0.1 million and $0.2 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,
2010, and forward remain subject to income tax examination.
Various state tax years for the periods ended September 30,
2009, and forward remain subject to income tax examinations.
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.
9. Debt
Debt consists of the following at September 30, 2013, and
2012:
(Dollars in thousands)
Revolving credit facility,
including current portion
2013
2012
$172,000
115,000
Current portion of long-term debt
(50,000)
(50,000)
Total long-term debt,
less current portion
$ 122,000
65,000
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, 2013, the Company had approximately
$265 million available to borrow under the Credit Facility, plus
a $250 million increase option, in addition to $42.9 million
cash on hand. The Company classified $50 million as the
current portion of long-term debt as of September 30, 2013,
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 credit facility requires, as determined by certain financial
ratios, a facility fee ranging from 17.5 to 35 basis points per
annum on the unused portion. The terms of the facility provide
that interest on borrowings may be calculated at a spread
over the London Interbank Offered Rate (LIBOR) or based
on the prime rate, at the Company’s election. The facility is
secured by the unlimited guaranty of the Company’s material
domestic subsidiaries and a 65% pledge of the material
foreign subsidiaries’ share equity. The financial covenants of
the Credit Facility include a leverage ratio and an interest
coverage ratio. During 2013 and 2012, the maximum aggregate
short-term borrowings at any month-end were $191 million
and $141 million, respectively; the average aggregate short-
term borrowings outstanding based on month-end balances
were $171 million and $126 million, respectively; and the
weighted average interest rates were 1.55%, 1.20%, and
1.40% for 2013, 2012 and 2011, respectively. The letters of
credit issued and outstanding under the Credit Facility totaled
$13 million and $15.3 million at September 30, 2013, and
2012, respectively.
10. Capital Stock
The 30,147,504 and 30,044,486 common shares as presented
in the accompanying Consolidated Balance Sheets at
September 30, 2013, and 2012 represent the actual number
of shares issued at the respective dates. The Company held
3,707,407 and 3,453,249 common shares in treasury at
September 30, 2013, and 2012, respectively.
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 ended
September 30, 2013. This program was extended by the
Company’s Board of Directors through September 30, 2014.
The total value authorized was 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 Company
repurchased approximately 270,000 shares in 2013 and
150,000 shares during 2012. There were no stock repurchases
in 2011.
37
2013 AnnuAl RepoRt
no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
11. Share-Based Compensation
The Company provides compensation benefits to certain
key employees under several share-based plans providing
for employee stock options and/or performance-accelerated
restricted shares (restricted shares), and to non-employee
directors under a non-employee directors compensation plan.
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.
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 2013, 2012 or 2011.
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
FY2013
FY2012
FY2011
Estimated
Weighted
Shares Avg. Price
125,816
$36.29
—
—
(51,116)
$34.70
(7,350)
$37.30
67,350
$37.39
Estimated
Weighted
Shares Avg. Price
435,054
—
(100,872)
(208,366)
125,816
$35.58
—
$14.98
$45.18
$36.29
Estimated
Weighted
Shares Avg. Price
761,931
—
(104,912)
(221,965)
435,054
$35.15
—
$13.18
$44.67
$35.58
500,000
67,350
$37.39
1,301,090
125,149
$36.31
1,115,776
397,073
$35.42
The aggregate intrinsic value of options exercised during 2013,
2012 and 2011 was $0.3 million, $2 million and $2.4 million,
respectively. The aggregate intrinsic value of stock options
outstanding and exercisable at September 30, 2013, was
zero. The weighted-average fair value of stock options per
share granted in 2013, 2012 and 2011 and 2010 was zero
respectively.
Summary information regarding stock options outstanding at
September 30, 2013, is presented below:
Range of
Exercise Prices
$32.55
$37.54
Exercisable Options Outstanding
Number
Exercisable at
Sept. 30, 2013
2,000
65,350
67,350
Weighted
Average
Exercise
Price
$ 32.55
$ 37.54
$ 37.39
Options Outstanding
Weighted-
Number Remaining
Outstanding at Contractual
Life
Sept. 30, 2013
Average Weighted
Average
Exercise
Price
2,000
1.3 years
$ 32.55
65,350
.02 years
$ 37.54
67,350
.06 years
$ 37.39
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
Range of
Exercise Prices
$32.55
$37.54
38
ESCO TEChnOlOgiES inC.
no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
12. Retirement and Other Benefit Plans
Substantially all domestic employees were 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. 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 were 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 $0.7 million and
$0.8 million at September 30, 2013, and 2012, 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 outstanding restricted share awards is being recognized
over the shorter performance period as it is probable the
performance condition will be met. The restricted share award
grants were valued at the stock price on the date of grant.
Pretax compensation expense related to the restricted share
awards for continuing operations was $4 million, $3.8 million
and $3.4 million for the fiscal years ended September 30,
2013, 2012 and 2011, respectively.
The following summary presents information regarding
outstanding restricted share awards as of September 30, 2013,
and changes during the period then ended:
Nonvested at October 1, 2012
Granted
Vested
Cancelled
Weighted
Shares Avg. Price
404,448
111,131
(81,834)
(8,500)
$32.65
$38.76
$37.39
$34.48
Nonvested at September 30, 2013
425,245
$33.29
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
$0.6 million for the years ended September 30, 2013, 2012
and 2011, respectively.
Total Share-Based Compensation
The total share-based compensation cost that has been
recognized in results of operations and included within SG&A
from continuing operations was $4.6 million, $4.4 million
and $4.5 million for the years ended September 30,
2013, 2012 and 2011, respectively. The total income tax
benefit recognized in results of operations for share-based
compensation arrangements was $1.3 million, $1.6 million and
$1.8 million for the years ended September 30, 2013, 2012
and 2011, 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, 2013, there
was $5.6 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 1.4 years.
39
2013 AnnuAl RepoRt
no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
The following table provides the components of net periodic
benefit cost for the plans for the years ended September 30,
2013, 2012 and 2011:
(Dollars in millions)
2013
2012
2011
Service cost
Interest cost
Expected return on plan assets
Net actuarial loss
Settlement gain
Net periodic benefit cost
Defined contribution plans
Total
$ 0.1
3.6
0.1
3.8
(4.1)
1.5
2.1
(0.1) —
(4.4)
1.3
4.6
$ 5.9
1.3
4.5
5.8
0.1
3.9
(4.2)
1.1
—
0.9
3.7
4.6
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
2013
2012
2011
3.75%
4.50%
5.00%
N/A
N/A
N/A
7.50%
7.50%
8.00%
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
2013
2012
4.75%
3.75%
N/A
N/A
The following tables provide a reconciliation of the changes in
the pension plans and fair value of assets over the two-year
period ended September 30, 2013, and a statement of the
funded status as of September 30, 2013, and 2012:
(Dollars in millions)
2013
2012
Reconciliation of benefit obligation
Net benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Settlements
Gross benefits paid
$ 97.1
0.1
3.6
(9.7)
(0.3)
(3.6)
83.2
0.1
3.8
13.4
—
(3.4)
Net benefit obligation at end of year
$ 87.2
97.1
(Dollars in millions)
2013
2012
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
$ 61.1
6.2
4.5
(3.9)
—
50.5
9.0
5.0
(3.4)
—
Fair value of plan assets at end of year
$ 67.9
61.1
(Dollars in millions)
2013
2012
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
$ (19.3)
—
—
(36.0)
—
—
(19.3)
(36.0)
—
(0.3)
(19.0)
—
(0.5)
(35.5)
34.8
48.3
34.8
—
48.2
0.1
48.3
Accumulated Other Comprehensive (Income)/Loss $ 34.8
40
ESCO TEChnOlOgiES inC.
no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
The assumed rate of increase in compensation levels is not
applicable in 2013, 2012 and 2011 as the plan was frozen in
earlier years.
The fair values of the Company’s defined benefit plan
investments as of September 30, 2013, by asset category, are
as follows:
(Dollars in millions)
Level 1 Level 2 Level 3 Total
The asset allocation for the Company’s pension plans at the
end of 2013 and 2012, the Company’s acceptable range and
the target allocation for 2014, by asset category, follows:
Allocation
Target Acceptable Percentage of Plan
Range Assets at Year-end
2012
2013
2014
Asset Category
Equity securities
Fixed income
Cash/cash equivalents
38%
62%
0%
34-42%
58-66%
0-5%
34%
65%
1%
59%
39%
2%
International funds
Fixed Income Funds
Real Estate Investments
Investments at Fair Value:
Cash and Cash Equivalents
Common and Preferred Stock Funds:
Domestic large capitalization
Domestic small/mid capitalization
$ 0.9
—
—
0.9
4.8
6.5
9.7
43.8
2.2
—
—
—
—
—
—
—
—
—
4.8
6.5
9.7
— 43.8
2.2
—
— 67.9
Total Investments at Fair Value
$ 67.9
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
funds which invest in 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.
FAIR VALUE OF FINANCIAL MEASUREMENTS
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.
The Company is required to separately disclose assets and
liabilities measured at fair value on a recurring basis, from
those measured at fair value on a nonrecurring basis.
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.
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), 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.
41
2013 AnnuAl RepoRt
no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
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).
EXPECTED CASH FLOWS
Information about the expected cash flows for the pension and
other postretirement benefit plans follows:
(Dollars in millions)
Pension
Benefits
Other
Benefits
Expected Employer Contributions — 2014
$ 3.1
Expected Benefit Payments
2014
2015
2016
2017
2018
2019-2023
13. Other Financial Data
4.3
4.4
4.9
4.9
5.0
$ 28.1
0.1
0.1
0.1
0.1
—
0.1
0.4
Items charged to continuing operations during the years ended
September 30, 2013, 2012 and 2011 included the following:
(Dollars in thousands)
2013
2012
2011
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
$ 151,805 138,192 129,572
3,568
4,368
4,248
12,704
15,014
27,718
7,715
14,293
9,171
23,464
12,217
14,936
8,527
23,463
7,406
$ 35,433
35,681
30,869
As a % of net sales
7.2%
7.5%
6.8%
A reconciliation of the changes in accrued product warranty
liability for the years ended September 30, 2013, 2012 and
2011 is as follows:
(Dollars in thousands)
2013
2012
2011
Balance as of October 1,
$ 1,536
2,120
1,967
Additions charged to expense
Deductions
1,048
(704)
197
(781)
770
(617)
Balance as of September 30,
$ 1,880
1,536
2,120
42
14. Business Segment Information
The Company is organized based on the products and services
it offers. Under this organizational structure, the Company has
three reporting segments: Filtration/Fluid Flow (Filtration),
RF Shielding and Test (Test), and Utility Solutions Group (USG).
The Filtration segment’s operations consist of: PTI
Technologies Inc., VACCO Industries, Crissair, Inc., Canyon
Engineering Products, Inc. and Thermoform Engineered
Quality LLC. The companies within this segment design and
manufacture specialty filtration products including hydraulic
filter elements and fluid control devices used in commercial
aerospace applications, unique filter mechanisms used in
micro-propulsion devices for satellites and custom designed
filters for manned aircraft and submarines.
Test segment operations consist of ETS-Lindgren Inc.
(ETS-Lindgren). ETS-Lindgren is an industry leader in
providing its customers with the ability to identify, measure
and contain magnetic, electromagnetic and acoustic energy.
ETS-Lindgren 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 USG segment’s operations consist of Doble Engineering
Company (Doble). 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. Previously, USG also
included Aclara Technologies LLC. See Note 2.
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.
ESCO TEChnOlOgiES inC.
no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
NET SALES
(Dollars in millions)
Year ended September 30,
2013
2012
Filtration
Test
USG
Consolidated totals
$214.1
166.7
109.3
194.8
175.9
108.0
$ 490.1
478.7
2011
167.6
176.5
106.7
450.8
No customers exceeded 10% of sales in 2013, 2012 or 2011.
EBIT
(Dollars in millions)
Year ended September 30,
2013
2012
2011
Filtration
Test
USG
Reconciliation to consolidated
$ 42.4
16.3
21.6
38.0
14.0
25.9
30.8
18.6
30.4
totals (Corporate)
(28.0)
(23.2)
(23.3)
Consolidated EBIT
Less: interest expense
52.3
(2.7)
Earnings before income tax
$ 49.6
54.7
(2.5)
52.2
56.5
(2.5)
54.0
IDENTIFIABLE ASSETS
(Dollars in millions)
Year ended September 30,
2013
2012
Filtration
$ 122.9
102.4
Test
72.3
USG
Corporate (includes assets held for sale) 794.7
98.4
92.8
66.6
776.0
Consolidated totals
$ 1,092.3 1,033.8
Corporate assets consist primarily of goodwill, deferred taxes,
acquired intangible assets, cash balances and assets held for sale.
CAPITAL EXPENDITURES
(Dollars in millions)
Year ended September 30,
2013
2012
2011
Filtration
Test
USG
Corporate
$ 6.6
3.2
3.9
0.2
4.4
2.2
3.6
0.6
3.3
1.5
6.5
—
Consolidated totals
$ 13.9
10.8
11.3
In addition to the above amounts, the Company incurred ex-
penditures for capitalized software of $8.4 million, $5.3 million
and $5.5 million in 2013, 2012 and 2011, respectively.
DEPRECIATION AND AMORTIZATION
(Dollars in millions)
Year ended September 30,
2013
2012
2011
$ 4.2
2.5
4.6
3.5
$14.8
3.9
2.5
3.4
4.7
3.3
2.2
3.1
4.9
14.5
13.5
Filtration
Test
USG
Corporate
Consolidated totals
GEOGRAPHIC INFORMATION
Net sales
(Dollars in millions)
2011
318.6
45.9
56.9
14.1
—
15.3
450.8
Year ended September 30,
2013
2012
United States
Asia
Europe
Canada
India
Other
$336.4
59.5
51.5
14.3
10.2
18.2
316.6
66.3
61.7
12.6
7.5
14.0
Consolidated totals
$490.1
478.7
Long-lived assets
(Dollars in millions)
Year ended September 30,
2013
2012
United States
Europe
Other
Consolidated totals
$72.8
2.2
0.5
$75.5
59.2
2.6
0.8
62.6
Net sales are attributed to countries based on location of
customer. Long-lived assets are attributed to countries based
on location of the asset.
15. Commitments and Contingencies
At September 30, 2013, the Company had $13 million in
letters of credit outstanding as guarantees of contract
performance. The Company is currently involved in various
stages of investigation and remediation relating to
environmental matters, intellectual property and general
corporate 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.
43
2013 AnnuAl RepoRt
no t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
16. Quarterly Financial Information (Unaudited)
(Dollars in thousands, except per share amounts)
2013
Net sales
Net earnings from continuing operations
Net (loss) earnings from discontinued operations
First
Quarter
Second
Third
Quarter Quarter
Fourth
Quarter
Fiscal
Year
$ 110,518 118,039 116,922 144,600 490,079
5,343
31,260
6,514
(5,097) (3,964) (1,617) (46,185) (56,863)
13,880
5,523
Net (loss) earnings
246
1,559
4,897 (32,305) (25,603)
Basic earnings (loss) per share:
Net earnings from continuing operations
Net (loss) earnings from discontinued operations
Net (loss) earnings
Diluted earnings (loss) per share:
Net earnings from continuing operations
Net (loss) earnings from discontinued operations
Net (loss) earnings
0.20
(0.19)
0.21
(0.15)
0.25
(0.06)
0.52
(1.75)
1.18
(2.15)
0.01
0.06
0.19
(1.23)
(0.97)
0.20
(0.19)
0.21
(0.15)
0.24
(0.06)
0.52
(1.73)
1.17
(2.13)
0.01
0.06
0.18
(1.21)
(0.96)
Dividends declared per common share
$
0.08
0.08
0.08
0.08
0.32
2012
Net sales
Net earnings from continuing operations
Net earnings (loss) from discontinued operations
Net earnings
Basic earnings (loss) per share:
Net earnings from continuing operations
Net earnings (loss) from discontinued operations
Net earnings
Diluted earnings (loss) per share:
Net earnings from continuing operations
Net earnings (loss) from discontinued operations
Net earnings
$ 111,480
125,237
118,432
123,550
478,699
6,191
(984)
7,575
2,627
11,540
2,251
9,468
8,211
34,774
12,105
5,207
10,202
13,791
17,679
46,879
0.24
(0.04)
0.20
0.23
(0.04)
0.19
0.28
0.10
0.38
0.28
0.10
0.38
0.08
0.43
0.09
0.52
0.43
0.08
0.51
0.08
0.35
0.31
0.66
0.35
0.30
0.65
0.08
1.30
0.46
1.76
1.29
0.44
1.73
0.32
Dividends declared per common share
$
0.08
See Notes 2 and 3 of Notes to Consolidated Financial Statements for discussion of divestiture and acquisition activity. Beginning in
the third quarter of 2013, Aclara was classified as discontinued operations and assets/liabilities held for sale. Prior period amounts
have been reclassified to conform to the current period presentation.
44
ESCO TEChnOlOgiES inC.
M a n a g e m e n t ’ s S t a t e m e n t o f F i n a n c i a l R e s p o n s i b i l i t y
The Company’s Management is responsible for the fair
presentation of the Company’s financial statements in
accordance with accounting principles generally accepted in the
United States of America, and for their integrity and accuracy.
Management is confident that its financial and business
processes provide accurate information on a timely basis.
Management, with the oversight of ESCO’s Board of Directors,
has established and maintains a strong ethical climate in
which the Company’s affairs are conducted. Management
also has established an effective system of internal controls
that provide reasonable assurance as to the integrity and
accuracy of the financial statements, and responsibility for
the Company’s assets. KPMG LLP, the Company’s independent
registered public accounting firm, reports directly to the Audit
and Finance Committee of the Board of Directors. The Audit
and Finance Committee has established policies consistent
with 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 in-
terest 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
45
2013 AnnuAl RepoRt M a n a g e m e n t ’ s R e p o r t o n I n t e r n a l C o n t r o l ov e r F i n a n c i a l R e p o r t i n g
The Company’s Management is responsible for establishing and
maintaining adequate internal control over financial reporting
(as defined in Rule 13a-15(f) under the Securities Exchange
Act of 1934). Our internal control over financial reporting
is designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles in the United States
of America.
Because of its inherent limitations, any system of internal
control over financial reporting, no matter how well designed,
may not prevent or detect misstatements due to the possibility
that a control can be circumvented or overridden or that
misstatements due to error or fraud may occur that are not
detected. Also, because of changes in conditions, internal
control effectiveness may vary over time.
Management assessed the effectiveness of the Company’s
internal control over financial reporting as of September 30,
2013, 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, 2013,
based on these criteria.
Our internal control over financial reporting as of September 30,
2013, 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
46
ESCO TEChnOlOgiES inC. R e p o r t o f I n d e p e n d e n t R e g i s t e r e d pu b l i c A c c o u n t i n g F i r m
The Board of Directors and Shareholders
ESCO Technologies Inc.:
We have audited the accompanying Consolidated Balance
Sheets of ESCO Technologies Inc. and subsidiaries as of
September 30, 2013, and 2012, and the related Consolidated
Statements of Operations, Comprehensive Income (Loss),
Shareholders’ Equity, and Cash Flows for each of the years
in the three-year period ended September 30, 2013. We
also have audited ESCO Technologies Inc.’s internal control
over financial reporting as of September 30, 2013, 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, 2013, and 2012, and the results of their
operations and their cash flows for each of the years in the
three-year period ended September 30, 2013, 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, 2013, based on criteria
established in Internal Control — Integrated Framework,
issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
St. Louis, Missouri
November 27, 2013
47
2013 AnnuAl RepoRt F i v e -y e a r F i n a n c i a l S u m m a r y
(Dollars in millions, except per share amounts)
2013
2012
2011
2010
2009
For years ended September 30:
Net sales
Net earnings from continuing operations
Net (loss) earnings from discontinued operations
Net (loss) earnings
Earnings (loss) per share:
Basic:
Continuing operations
Discontinued operations
Net (loss) earnings
Diluted:
Continuing operations
Discontinued operations
Net (loss) earnings
As of September 30:
Working capital
Total assets
Total debt
Shareholders’ equity
$490.1
478.7
450.8
350.0
329.2
31.3
(56.9)
(25.6)
$1.18
(2.15)
$(0.97)
$ 1.17
(2.13)
$(0.96)
34.8
12.1
46.9
1.30
0.46
1.76
1.29
0.44
1.73
37.1
15.4
52.5
1.39
0.58
1.97
1.38
0.57
1.95
163.6
1,092.3
172.0
601.7
139.2
1,033.8
115.0
631.3
122.5
1,011.8
125.0
600.7
17.5
27.3
44.8
0.66
1.04
1.70
0.65
1.03
1.68
109.4
974.3
154.0
556.0
0.32
21.2
28.2
49.4
0.81
1.07
1.88
0.80
1.06
1.86
116.2
923.7
180.5
517.3
—
Cash dividends declared per common share
$0.32
0.32
0.32
See Notes 2 and 3 of Notes to Consolidated Financial Statements for discussion of divestiture and acquisition activity. Beginning in
the third quarter of 2013, Aclara was classified as discontinued operations and assets/liabilities held for sale. Prior period amounts
have been reclassified to conform to the current period presentation.
C o m m o n S t o c k M a r k e t pr i c 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 2013 and 2012.
2013
2012
High
$39.31
42.42
41.31
35.70
Low
34.00
37.85
31.20
30.25
High
$31.97
38.37
36.90
39.50
Low
23.75
28.48
32.98
33.05
Quarter
First
Second
Third
Fourth
48
ESCO TEChnOlOgiES inC.
M a r k e t pe r f o r m a n c 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
“2013 Peer Group”). The Company is not a component of the
2013 Peer Group, but it is a component of the Russell 2000
Index. The measurement period begins on September 30, 2008
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, 2008.
ESCO Technologies Inc.
Russell 2000 Index
2013 Peer Group
The 2013 Peer Group is comprised of seven companies that
correspond to the Company’s three industry segments as
follows: Utility Solutions Group segment (22% of the Company’s
2013 total revenue) — Badger Meter Inc., Itron Inc., Echelon
Corporation and Roper Industries Inc.; Test segment (34% of the
Company’s 2013 total revenue) — Aeroflex Holding Corporation;
and Filtration/Fluid Flow segment (44% of the Company’s 2013
total revenue) — Pall Corporation and Clarcor Inc.
ESCO Technologies Inc.
Russell 2000 Index
2013 Peer Group
$200
175
150
125
100
75
50
25
9/08
9/09
9/10
9/11
9/12
9/13
9/08
9/09
9/10
9/11
9/12
9/13
100.00
81.79
69.59
53.83
82.85
71.48
100.00
90.45
102.53
98.91
130.47
169.68
100.00
93.29
107.59
107.53
129.69
154.57
In calculating the composite return of the 2013 Peer Group,
the return of each company comprising the 2013 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 2013 total revenue
represented by its corresponding Company industry segment.
For purposes of these calculations, 2013 total revenue excludes
discontinued operations. The Company anticipates that the
composition of the Peer Group may change in future years to
reflect changes in the Utility Solutions segment resulting from
the anticipated sale of Aclara.
49
2013 AnnuAl RepoRt
S h a r e h o l d e r s ’ S u m m a r y
SHAREHOLDERS’ ANNUAL MEETING
INVESTOR RELATIONS
The Annual Meeting of Shareholders of ESCO Technologies Inc.
will be held at 9:30 a.m. Central Time on Wednesday,
February 5, 2014, at the Company’s Corporate Headquarters,
9900A Clayton Road, St. Louis, Missouri 63124. You may access
this Annual Report as well as the Notice of the meeting and the
Proxy Statement on the Company’s Annual Meeting 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 15, 2013 and February 22, 2012, 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, 2013 and September 30, 2012.
10-K REPORT
A copy of the Company’s 2013 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 2,251 holders of record of shares of common
stock at November 8, 2013.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
10 South Broadway, Suite 900
St. Louis, Missouri 63102
50
ESCO TEChnOlOgiES inC. BO A R D O F DI R E C T O R S
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
M a n a g e m e n t a n d bo a r d o f di r e c t o r s
EX E C U T I V E OF F I C E R S
Victor L. Richey
Chairman, Chief Executive
Officer, & President
Gary E. Muenster
Executive Vice President &
Chief Financial Officer
Alyson S. Barclay
Senior Vice President,
Secretary & General Counsel
CO R P O R A T E ST A F F
OP E R A T I N G EX E C U T I V E S
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
Michele A. Marren
Vice President & Corporate
Controller
David B. Zabetakis
President
Doble Engineering Company
Sam R. Chapetta
Filtration Group Vice President &
President, PTI Technologies Inc.
Antonio E. Gonzalez
President
VACCO Industries
Mike Alfred
President
Crissair, Inc.
Randall K. Loga
President
Thermoform Engineered
Quality LLC
Bruce E. Butler
President
ETS-Lindgren LP
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
This annual report is printed with soy-based process inks on recycled paper with 10% post-consumer waste.
m
o
c
.
c
n
i
g
n
i
l
d
n
a
w
.
w
w
w
O
M
,
s
i
u
o
L
.
t
S
.
c
n
I
s
e
t
a
i
c
o
s
s
A
&
g
n
i
l
d
n
a
W
:
n
g
i
s
e
D
ESCO Technologies Inc.
9900A Clayton Road
St. Louis, MO 63124
www.escotechnologies.com