ESCO Technologies Inc.
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Growing forward
2018 ANNUAL REPORT
ABOUT ESCO TECHNOLOGIES
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ESCO Technologies is a global provider
of highly-engineered products and
solutions delivering sustainable
growth across diverse and expanding
end-markets. The company consists
of four technology-driven business
segments – Filtration/Fluid Flow,
RF Shielding & Test, Utility Solutions
Group, and Technical Packaging.
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A Solid Business Model
ESCO’s corporate strategy remains focused on
generating consistent and profitable growth across our
multi-segment operating structure through continued
innovation and expansion of our highly-engineered
products and solutions.
Our successful integration of recent acquisitions continues to broaden our product offerings
and provide new growth opportunities across diverse end-markets. We remain focused on cost
reduction and margin enhancement opportunities and took several actions in 2018 that are
expected to improve operating efficiencies across our global platform.
In 2018, we delivered solid operating results that exceeded our guidance for the year and our
stated long-term goals of 10 percent revenue growth and 15 percent EPS growth.
2018 Sales
DOLLARS IN MILLIONS
11%
2018 EBIT – As Adjusted(1)
DOLLARS IN MILLIONS
6%
37%
43%
28%
$772M
34%
$137M
24%
17%
Filtration/Fluid Flow: $286.8
RF Shielding & Test: 182.9
Utility Solutions: 214.0
Technical Packaging: 87.9
Filtration/Fluid Flow: $59.5
RF Shielding & Test: 23.8
Utility Solutions: 46.1
Technical Packaging: 8.1
(1) Excludes $35.9 million of Corporate Costs and $4.8 million of charges incurred related to restructuring actions.
1
COMPANY PORTFOLIO: AT A GLANCE
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Filtration/Fluid Flow
RF Shielding & Test
Filtration/Fluid Flow (Filtration) provides innovative
solutions essential to the aerospace, space, defense,
and industrial markets. The combined technical
capabilities and resources of Crissair, Mayday
Manufacturing (Mayday), PTI Technologies (PTI),
Westland Technologies (Westland), and VACCO
Industries (Vacco) enable us to provide highly-
engineered products for mission critical systems.
ETS-Lindgren (Test) provides a broad and global
customer base with highly-engineered components,
chambers, and test and measurement systems. Our
comprehensive solutions enable customers to perform
sophisticated tests ensuring their products operate
as intended and don’t interfere with other electronic
devices while complying with regulatory and industry-
defined standards.
Major End Markets
Major End Markets
+ Aerospace
+ Navy
+ Space
+ Industrial
+ Wireless
+ Consumer Electronics
+ Healthcare
+ Automotive
+ Aerospace
+ Acoustics
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Utility Solutions
Technical Packaging
The Utility Solutions Group (USG) offers industry-
leading diagnostic equipment and services vital for grid
reliability. USG is powered by the combined offerings
of Doble Engineering (Doble), Morgan Schaffer, and
NRG Systems (NRG). From dissolved gas analysis and
robust protection testing to renewable energy options,
USG offers a complete range of diagnostic solutions
that efficiently measure asset health and ensure the
reliable, safe, and secure delivery of power.
Technical Packaging provides innovative solutions
to the medical, pharmaceutical, and commercial
markets for thermoformed thin-gauge plastic and
pulp-based packaging. Both Thermoform Engineered
Quality (TEQ) in the U.S., and Plastique Limited
(Plastique) in Europe, are focused on developing
solutions for high precision applications as well as
meeting the evolving need for enhanced sustainability.
Major End Markets
+ Global Electric Utilities
+ Renewable Energy
+ Power Generation
+ Industrial
Major End Markets
+ Medical/Pharmaceutical
+ Retail/Consumer
+ Medical Device
+ Electronic/Food/Other
3
FINANCIAL HIGHLIGHTS
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Net sales
Net earnings
Earnings per share – GAAP
Earnings per share – As adjusted(1)
CAPITAL PERFORMANCE (AS OF SEPTEMBER 30)
Net debt
Leverage ratio
Cash from operating activities
2018
$771.6
92.1
3.54
2.77
$ 190
1.72
93
2017
685.7
53.7
2.07
2.22
229
2.20
67
2016
571.5
45.9
1.77
2.03
56
1.05
74
Net Sales
IN MILLIONS
EBIT – As Adjusted (2)
IN MILLIONS
$772
$686
$102
$91
$571
$78
Earnings Per Share
– As Adjusted(1)
$2.77
$2.22
$2.03
2016
2017
2018
2016
2017
2018
2016
2017
2018
Sustainable Competitive Advantages
40%
Proprietary Products
% OF TOTAL SALES
51%
Recurring Revenues
% OF TOTAL SALES
(1) EPS – As Adjusted excludes $.17 per share related to restructuring charges and ($.94) per share net tax benefit resulting from the
implementation of U.S. Tax Reform in 2018, $.15 per share of purchase accounting inventory step-up charges and acquisition
costs in 2017, and $.26 per share of restructuring charges in 2016.
(2) Excludes $4.8 million of restructuring charges in 2018, $6.1 million of purchase accounting inventory step-up charges and
acquisition costs in 2017, and $7.8 million of restructuring charges in 2016.
4
Letter to Shareholders
2018 was a year of continued profitable growth fueled
by solid operating performance, supplemented by
continued innovation, expanded product offerings,
successful M&A integration, and a continuing focus
on cost reduction.
Cash Flow
from Operations
IN MILLIONS
4
7
$
7
6
$
3
9
$
2016 2017 2018
Orders
IN MILLIONS
0
7
5
$
7
3
7
$
7
7
7
$
2016 2017 2018
Across ESCO, 2018 was filled with many positives: In Filtration, Mayday’s
revenue grew by $12 million (20 percent organic growth) and Crissair delivered
a 34 percent EBIT margin; Order strength in Test drove a 14 percent increase
in revenue and a 22 percent increase in EBIT; Recent acquisitions drove a
32 percent increase in revenue in USG and a 22 percent Adjusted EBIT margin;
and, Technical Packaging added a class 7 clean room which increases our
capacity to serve the medical thermoforming market in Europe.
Financial Results
Highlights from 2018 include double digit growth in sales, earnings, and cash
flow from operations.
Sales increased 13 percent to $772 Million, led by strong organic growth in
Test and commercial aerospace, and supplemented by a full year of revenue
contribution from 2017’s M&A activities.
Adjusted EBITDA increased 13 percent to $139 million and Adjusted EPS
increased 25 percent to $2.77 per share. Our earnings growth was driven by
strong performances in Test, Filtration and USG.
2018 GAAP EPS of $3.54 per share reflects the favorable impact of the 2017
“Tax Cuts and Jobs Act”, partially offset by cost reduction and restructuring
charges incurred throughout the year.
Generating $93 million in cash from operating activities funded internal
investments in capital expenditures and R&D, and allowed us to reduce debt
by $39 million, resulting in a leverage ratio of 1.72x. Continued cash flow
generation and substantial credit capacity have us well-positioned to continue
to evaluate future acquisition opportunities to supplement organic growth.
5
LETTER TO SHAREHOLDERS | Continued
COURTESY NAVY.MIL
Filtration/Fluid Flow
Crissair, Mayday, PTI, VACCO, and Westland provide innovative
products and solutions to the aerospace, space, navy, and
industrial markets.
Filtration sales increased $7 million (3 percent) to $287 million in 2018, driven by
commercial aerospace growth at Mayday and Crissair, partially offset by lower sales
at PTI related to exiting a low margin automotive market. Adjusted EBIT increased
$5 million (10 percent) to $59 million resulting in an Adjusted EBIT margin of
21 percent. Filtration’s earnings growth was primarily driven by the strength of our
aerospace business.
Crissair, Mayday and PTI remain well-positioned for the future as build rates continue
to grow on several major aerospace programs. Production on the Airbus A350,
Embraer E2, Boeing 737 MAX, and Joint Strike Fighter (JSF) platforms are all projected
to increase in 2019. In addition to increased OEM sales, as more of these planes are
placed in service, our recurring aftermarket revenue will increase. In 2018, we also
won new content on the 777X, T-X Trainer, Next-Generation Land-Attack Missile, and
AH-64 Apache. Our proprietary content on this broad range of aerospace platforms will
continue to drive the potential for significant revenue growth for the next decade.
Mayday’s revenue grew to $52 million (20 percent organic growth) in large part driven
by new contracts for additional content on the JSF, A350, 737, and 787 platforms.
In addition, Mayday entered the MRO market supplying bushings for landing gear on
several aircraft platform overhauls.
Vacco and Westland continued to win new content to supply advanced technology
protecting U.S. naval vessels. Vacco was selected for the Reverse Osmosis Valve and the
Feed Water Valve Quiet Disc Stack redesign on the Columbia-class submarine. Westland
began receiving Virginia-class Block V production contracts in 2018.
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Sales
IN MILLIONS
8
0
2
$
0
8
2
$
7
8
2
$
2016 2017 2018
EBIT – As Adjusted*
IN MILLIONS
5
4
$
4
5
$
9
5
$
2016 2017 2018
Revenue by Company
21%
18%
8%
18%
35%
PTI
CRISSAIR
MAYDAY
VACCO
WESTLAND
* Excludes $0.8 million
in restructuring charges in
2018 and $1.9 million
in inventory step-up
charges in 2017.
Sales
IN MILLIONS
2
6
1
$
1
6
1
$
3
8
1
$
2016 2017 2018
EBIT – As Adjusted*
IN MILLIONS
9
1
$
9
1
$
4
2
$
2016 2017 2018
* Excludes $5.1 million
in restructuring charges
in 2016.
RF Shielding & Test
ETS-Lindgren is an innovative supplier of test and measurement
systems that identify, measure and contain magnetic,
electromagnetic and acoustic energy for the wireless,
consumer electronics, healthcare, automotive, aerospace and
acoustics markets.
Test’s revenue increased 14 percent to $183 million in 2018 due to continued strength
in our large chamber business. With over $190 million in orders (book-to-bill of 1.04)
in 2018, Test’s year-end backlog grew to $122 million, which supports our outlook
for continued revenue strength. Higher revenue coupled with past cost reduction
efforts resulted in a $4 million increase in EBIT and a third consecutive year of margin
expansion (13 percent EBIT).
Over the past two years Test has received a number of large chamber orders related to
new product development testing for defense satellites, automotive, electric vehicle, and
5G development. ETS-Lindgren has been successful in winning several large projects
for the defense industry specifically for testing satellites and high-powered radar
equipment. We have also experienced an increase in automotive opportunities requiring
EMC testing, with specific strength in electric vehicle motors in China. In addition, as
5G becomes the next phase of wireless communication, ETS-Lindgren is focusing their
efforts on continuing to expand our leadership position within the Over-the-Air (OTA)
market by providing customized test systems to the early adopters. These large projects
allow for multi-year revenue streams driving growth above and beyond ETS-Lindgren’s
recurring base business.
To support this growth and to drive the continuation of key process improvements, we
recently completed a 12,000 square foot addition to Test’s main operating facility in
Cedar Park, Texas which consolidates warehouse space and improves our manufacturing
product flow.
7
LETTER TO SHAREHOLDERS | Continued
Sales
IN MILLIONS
8
2
1
$
2
6
1
$
4
1
2
$
2016 2017 2018
EBIT – As Adjusted*
IN MILLIONS
3
3
$
8
3
$
6
4
$
2016 2017 2018
* Excludes $3 million in
restructuring charges
in 2018, $1.9 million in
inventory step-up charges
in 2017, and $2.2 million in
restructuring charges in 2016.
Utility Solutions Group
USG provides industry-leading diagnostic equipment, software,
and services to efficiently assess asset health, minimize risk, and
optimize infrastructure performance for the electric utility and
renewable energy industries.
USG sales increased $51 million (32 percent) in 2018, in large part driven by contribu-
tions from recent M&A activity. Successful integration of these new businesses resulted
in an Adjusted EBIT margin of 22 percent. With the consolidation of our extensive
distribution channels, we expect improved efficiency, productivity, and an expanded
geographic reach for our combined product offerings. In addition, our cost reduction
actions will reduce operating costs and support future growth at enhanced margins.
Another benefit of recent acquisitions is the ability of our products to work together.
Doble now integrates Morgan Schaffer’s Calisto online DGA into its doblePRIME™
bushing monitoring system. The program is tied to a support service integrating Doble’s
unique client service business model. Manta Test Systems expands our protection
testing portfolio by adding a relay testing solution capable of operating stand-alone or in
tandem with our ENOSERV software. Managing data related to the testing of protection
relays and compliance with NERC/CIP requirements remains a primary objective for
utilities and is expected to drive future growth.
At NRG, we expanded partnerships with tower and installation companies globally to
support the expected future growth of renewable energy. In addition, the acquisition of
Pentalum’s Lidar technology enables NRG to be at the forefront in using remote sensing
for the wind industry. These actions combined with NRG’s established international
sales and service operations provide customers with an expanded suite of solutions for
their ongoing operations and development initiatives.
Globally, utilities are responding to a complex environment as demand for sustainability
and resiliency of electrical supply increases while requirements for reliability and
security remain. This creates a unique and exciting growth opportunity for USG as
our products and services support the evolving grid requirements.
8
Sales
IN MILLIONS
4
7
$
3
8
$
8
8
$
2016 2017 2018
EBIT
IN MILLIONS
0
1
$
8
$
8
$
2016 2017 2018
Technical Packaging
TEQ and Plastique provide innovative thermoformed and
pulp-based packaging solutions and specialty products to
the medical, pharmaceutical, and commercial markets.
Technical Packaging sales increased $5 million (6 percent) driven by revenue growth
at both TEQ and Plastique. 2018 was a record year for medical device revenue
($21 million) and was primarily generated from contracts to produce thermometer
probe covers and operating room light handle and camera covers. In addition, we
experienced significantly increased revenue related to blood collection kits and
medical imaging film cassette trays and were awarded two multi-year contracts
with new medical customers which will support the future growth of our technical
packaging segment globally.
With the completion of recent investments expanding our capabilities and
manufacturing capacity at Plastique, we expect margin improvement and attractive
sales growth going forward. These projects included the completion of a building
expansion at our facility in Poland, which supports future growth in both thin-gauge
plastic and pulp-based fiber packaging manufacturing, as well as providing
warehouse space which will reduce future logistics costs. In addition, a new state-of-
the-art thermoformer was purchased and installed in Poland to increase production
capacity and achieve global equipment standardization. In the United Kingdom, our
new clean room was approved by several medical OEMs for the supply of medical
device packaging.
9
LETTER TO SHAREHOLDERS | Continued
Victor L. Richey (center) Chairman,
Chief Executive Officer and President /
Gary E. Muenster (left) Executive Vice
President and Chief Financial Officer
/ Alyson S. Barclay (right) Senior Vice
President, Secretary and General Counsel
Our Focus Continues
2018 was a strong year reflecting extraordinary growth across the company. Over the
past three years we have delivered compound annual growth rates of 13 percent in
revenue and 20 percent in Adjusted EPS. Both are in excess of our stated long-term
goals of 10 percent revenue growth and 15 percent EPS growth. We continue to
see meaningful potential for sales and earnings growth across each of our business
segments and anticipate continued solid operating performance and profitable growth
as we enter 2019.
Our focus continues to be on broadening our product portfolio, reducing costs and
increasing cash flow in accordance with our belief that these are key drivers of share
price appreciation. With the contributions from recent acquisitions and anticipated
organic growth, supplemented by the favorable earnings and cash flow impact from tax
reform, I continue to believe we remain well-positioned to deliver sustained profitable
growth and long-term shareholder value creation.
On behalf of our employees, management team and Board of Directors, I would like to
thank our shareholders for their continuing interest and support.
Vic Richey
Chairman, Chief Executive Officer
& President
Gary Muenster
Executive Vice President &
Chief Financial Officer
November 29, 2018
10
2018 Form 10-k
ESCO TECHNOLOGIES, INC.
FISCAL YEAR 2018
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 2018
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____ to_____
Commission file number: 1-10596
_______________________
ESCO Technologies Inc.
(Exact name of registrant as specified in its charter)
Missouri
(State or other jurisdiction
of incorporation or organization)
9900A Clayton Road
St. Louis, Missouri
(Address of principal executive offices)
43-1554045
(I.R.S. Employer
Identification No.)
63124-1186
(Zip Code)
Registrant’s telephone number, including area code:
(314) 213-7200
Securities registered pursuant to section 12(b) of the Act:
Title of each class
Common Stock, par value $0.01 per share
Name of each exchange
on which registered
New York Stock Exchange
Securities registered pursuant to section 12(g) of the Act:
None
_______________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form l0-K or any amendment to this Form l0-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,
“accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
No
Aggregate market value of the Common Stock held by non-affiliates of the registrant as of the close of trading on
March 30, 2018, the last business day of the registrant’s most recently completed second fiscal quarter: approximately
$1,481,211,000.*
* Based on the New York Stock Exchange closing price on March 29, 2018, the last previous trading
day. For purpose of this calculation only, without determining whether the following are affiliates of
the registrant, the registrant has assumed that (i) its directors and executive officers are affiliates, and
(ii) no party who has filed a Schedule 13D or 13G is an affiliate.
Number of shares of Common Stock outstanding at November 12, 2018: 25,910,828
_______________________
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Report incorporates by reference certain portions of the registrant’s definitive Proxy Statement for its
2019 Annual Meeting of Shareholders, which the registrant currently anticipates first sending to shareholders on or
about December 12, 2018 (hereinafter, the “2018 Proxy Statement”).
INDEX TO ANNUAL REPORT ON FORM 10-K
FORWARD-LOOKING INFORMATION
PART I
1.
Business
The Company
Products
Marketing and Sales
Intellectual Property
Backlog
Purchased Components and Raw Materials
Competition
Research and Development
Environmental Matters
Government Contracts
Employees
Financing
Additional Information
Executive Officers of the Registrant
1A. Risk Factors
1B. Unresolved Staff Comments
Properties
2.
3.
Legal Proceedings
4. Mine Safety Disclosures
PART II
5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Selected Financial Data
6.
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A. Quantitative and Qualitative Disclosures About Market Risk
8.
9.
9A. Controls and Procedures
9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
10. Directors, Executive Officers and Corporate Governance
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13. Certain Relationships and Related Transactions, and Director Independence
14. Principal Accounting Fees and Services
PART IV
15. Exhibits, Financial Statement Schedules
SIGNATURES
FINANCIAL INFORMATION
EXHIBITS
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F-1
FORWARD-LOOKING INFORMATION
Statements contained in this Form 10-K 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 are considered “forward-looking statements” within the meaning of the safe harbor
provisions of the Federal securities laws. These include, without limitation, statements about: the adequacy of the
Company’s buildings, machinery and equipment; the adequacy of the Company’s credit facilities and future cash
flows; the outcome of litigation, claims and charges; future costs relating to environmental matters; continued
reinvestment of foreign earnings and the resulting U.S. tax liability in the event such earnings are repatriated;
repayment of debt within the next twelve months; the outlook for 2019 and beyond, including amounts, timing and
sources of 2019 sales, revenues, sales growth, EBIT, Adjusted EBIT, EBITDA, Adjusted EBITDA, EBIT margins,
EPS and EPS – As Adjusted; interest on Company debt obligations; the ability of expected hedging gains or losses to
be offset by losses or gains on related underlying exposures; the Company’s ability to increase shareholder value;
acquisitions; income tax expense and the Company’s expected effective tax rate; minimum cash funding required by,
expected benefits payable from, and Management’s assumptions about future events which could affect liability
under, the Company’s defined benefit plans and other postretirement benefit plans; the recognition of unrecognized
compensation costs related to share-based compensation arrangements; the Company’s exposure to market risk
related to interest rates and to foreign currency exchange risk; the likelihood of future variations in the Company’s
assumptions or estimates used in recording contracts and expected costs at completion under the percentage of
completion method; the Company’s estimates and assumptions used in the preparation of its financial statements;
cost and estimated earnings on long-term contracts; valuation of inventories; estimates of uncollectible accounts
receivable; the risk of goodwill impairment; the Company’s estimates utilized in software revenue recognition, non-
cash depreciation and the amortization of intangible assets; the valuation of deferred tax assets; estimates of future
cash flows and fair values in connection with the risk of goodwill impairment; amounts of NOL not realizable and
the timing and amount of the reduction of unrecognized tax benefits; the effects of implementing recently issued
accounting pronouncements; and any other statements contained herein which are not strictly historical. 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 and speak only as of the date of this Form 10-K, and
the Company undertakes no duty to update the information in this Form 10-K 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 herein under “Item 1A, Risk Factors,” and the following:
the impacts of labor disputes, civil disorder, wars, elections, political changes, terrorist activities or natural disasters
on the Company’s operations and those of the Company’s customers and suppliers; the timing and content of future
customer orders; the appropriation and allocation of government funds; the termination for convenience of
government and other customer contracts; the 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; material changes in the cost of credit; 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 other plans.
ii
PART I
Item 1. Business
The Company
The Registrant, ESCO Technologies Inc. (ESCO), is a global provider of highly engineered products and solutions to
diverse and growing end-markets that include the commercial and military aerospace, space, healthcare, wireless,
consumer electronics, electric utility and renewable energy industries. ESCO is focused on generating predictable and
profitable long-term growth through continued innovation and expansion of its product offerings across each of its
business segments. ESCO conducts its business through a number of wholly-owned direct and indirect subsidiaries.
ESCO and its subsidiaries are referred to in this Report as “the Company.”
ESCO was incorporated in Missouri in August 1990 as a wholly owned subsidiary of Emerson Electric Co. (Emerson)
to be the indirect holding company for several Emerson subsidiaries, which were primarily in the defense business.
Ownership of the Company was spun off by Emerson to its shareholders on October 19, 1990, through a special
distribution. Since that time, through a series of acquisitions and divestitures, the Company has shifted its primary
focus from defense contracting to the production and supply of engineered products and systems marketed to utility,
industrial, aerospace and commercial users. ESCO’s corporate strategy is centered on a multi-segment approach
designed to enhance the strength and sustainability of sales and earnings growth by providing lower risk through
diversification. Its stock is listed on the New York Stock Exchange, where its ticker symbol is “ESE”.
The Company’s fiscal year ends September 30. Throughout this document, unless the context indicates otherwise,
references to a year (for example 2018) refer to the Company’s fiscal year ending on September 30 of that year.
The Company is organized based on the products and services it offers, and classifies its business operations in
segments for financial reporting purposes. As a result of the acquisitions of Plastique and Fremont discussed in Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” beginning in the second
quarter of 2016 Management expanded the presentation of its reporting segments to include a fourth segment,
Technical Packaging. Prior period segment amounts have been reclassified to conform to the current period
presentation.
The Company’s four segments, together with the significant domestic and foreign operating subsidiaries within each
segment during 2018, are as follows:
Filtration/Fluid Flow (Filtration):
PTI Technologies Inc. (PTI)
VACCO Industries (VACCO)
Crissair, Inc. (Crissair)
Westland Technologies, Inc. (Westland)
Mayday Manufacturing Co. and Hi-Tech Metals, Inc. (together, Mayday)
RF Shielding and Test (Test):
ETS-Lindgren Inc.
Except as the context otherwise indicates, the term “ETS-Lindgren” as used herein includes ETS-Lindgren
Inc. and the Company’s other Test segment subsidiaries.
Utility Solutions Group (USG):
Doble Engineering Company
Morgan Schaffer Ltd. (Morgan Schaffer)
NRG Systems, Inc. (NRG)
Except as the context otherwise indicates, the term “Doble” as used herein includes Doble Engineering
Company and the Company’s other USG subsidiaries except Morgan Schaffer and NRG.
Technical Packaging:
Thermoform Engineered Quality LLC (TEQ)
Plastique Limited
Plastique Sp. z o.o.
Plastique Limited and Plastique Sp. z o.o. are referred to together herein as “Plastique.”
The Company’s operating subsidiaries are engaged primarily in the research, development, manufacture, sale and
support of the products and systems described below. Their respective businesses are subject to a number of risks and
uncertainties, including without limitation those discussed in Item 1A, “Risk Factors.” See also Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Forward-Looking
Information.”
ESCO is continually seeking ways to reduce costs, streamline its business processes and enhance the branding of its
products and services. In October 2015 the Company announced several restructuring and realignment actions
involving the Test and USG segments which were completed during 2016, including closing ETS-Lindgren’s
operating subsidiaries in Germany and the United Kingdom and consolidating their operations into other existing Test
facilities; eliminating certain underperforming product line offerings in Test primarily related to lower margin
international shielding end markets; reducing headcount in Test’s U.S. business; and closing Doble’s Brazil operating
office and consolidating Doble’s South American sales and support activities.
During 2018 the Company undertook several restructuring actions involving the closure of Doble’s sales offices in
Norway, China, Mexico and Dubai as part of its consolidation of the global distribution channels of Doble and
Morgan Schaffer. Since the end of fiscal 2018, Doble has sold its headquarters facility in Watertown, Massachusetts
and plans to consolidate its headquarters operations into a single, more cost-efficient facility in Marlborough,
Massachusetts over the next 12 to 15 months. Also during fiscal 2019, Plastique intends to reduce its operating costs
and gain efficiencies through a restructuring that involves closing its administrative and product development center in
Tunbridge Wells, UK and integrating those activities into its existing manufacturing locations in Nottingham, UK and
Poznan, Poland.
ESCO is also continually seeking opportunities to supplement its growth by making strategic acquisitions. During
2017, the Company acquired Mayday, a leading manufacturer of mission-critical bushings, pins, sleeves and
precision-tolerance machined components for landing gear, rotor heads, engine mounts, flight controls, and actuation
systems for the aerospace and defense industries; Hi-Tech, a full-service metal processor offering aerospace original
equipment manufacturers (“OEMs”) and Tier 1 suppliers a large portfolio of processing services including anodizing,
cadmium and zinc-nickel plating, organic coatings, non-destructive testing, and heat treatment; NRG, a global market
leader in the design and manufacture of decision support tools for the renewable energy industry, primarily wind; and
the assets of Morgan Schaffer Inc., which designs, develops, manufactures and markets an integrated offering of
dissolved gas analysis, oil testing, and data management solutions which enhance the ability of electric utilities to
accurately monitor the health of critical power transformers. In August 2017, the Company acquired the assets of
Vanguard Instruments Company (Vanguard Instruments), a test equipment provider serving the global electric utility
market. In March 2018, the Company acquired the assets of Manta Test Systems Ltd., a manufacturer of self-
contained protective relay test systems for use by electric utilities and their service companies. More information
about these 2017 and 2018 acquisitions as well as the Company’s acquisition activity during 2016 is provided in Note
2 to the Consolidated Financial Statements included herein.
Products
The Company’s principal products are described below. See Note 13 to the Consolidated Financial Statements
included herein for financial information regarding business segments and 10% customers.
Filtration
The Filtration segment accounted for approximately 37%, 41% and 36% of the Company’s total revenue in 2018,
2017 and 2016, respectively.
PTI is a leading supplier of filtration and fluid control products serving the commercial aerospace, military aerospace
and various industrial markets. Products include filter elements, manifolds, assemblies, modules, indicators and other
related components, all of which must meet stringent qualification requirements and withstand severe operating
conditions. Product applications include hydraulic, fuel, cooling and air filtration systems for fixed wing and rotary
aircraft, mobile transportation and construction equipment, aircraft engines and stationary plant equipment. PTI
supplies products worldwide to OEMs and the U.S. government under long term contracts, and to the commercial and
military aftermarket through distribution channels.
VACCO supplies filtration and fluid control products including valves, manifolds, filters, regulators and various other
components for use in the space, military aerospace, defense missile systems, U.S. Navy and commercial industries.
Applications include aircraft fuel and de-icing systems, missiles, satellite propulsion systems, satellite launch vehicles
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and other space transportation systems such as the Space Launch System. VACCO also utilizes its multi-fab
technology and capabilities to produce products for use in space and U.S. Navy applications.
Crissair supplies a wide variety of custom and standard valves, actuators, manifolds and other various components to
the aerospace, defense, automotive and commercial industries. Product applications include hydraulic, fuel and air
filtration systems for commercial and military fixed wing and rotary aircraft, defense missile systems and commercial
engines. Crissair supplies products worldwide to OEMs and to the U.S. Government under long term contracts and to
the commercial aftermarket through distribution channels.
Westland is a leading designer and manufacturer of elastomeric-based signature reduction solutions to enhance U.S.
Navy maritime survivability. Westland’s products include complex tiles and other shock and vibration dampening
systems that reduce passive acoustic signatures and/or modify signal (radar, infrared, acoustical, sonar) emission and
reflection to reduce or obscure a vessel’s signature. Westland’s products are used on the majority of the U.S. Naval
fleet including submarines, surface ships and aircraft carriers.
Mayday is a manufacturer of mission-critical bushings, pins, sleeves and precision-tolerance machined components
for landing gear, rotor heads, engine mounts, flight controls, and actuation systems for the aerospace and defense
industry.
Hi-Tech is a full-service metal processor offering aerospace OEM’s and Tier 1 suppliers a large portfolio of
processing services including anodizing, cadmium and zinc-nickel plating, organic coatings, non-destructive testing,
and heat treatment. Its portfolio includes over 100 OEM processing approvals.
Test
The Test segment accounted for approximately 24%, 23% and 28% of the Company’s total revenue in 2018, 2017 and
2016, respectively.
ETS-Lindgren designs and manufactures products to measure and contain magnetic, electromagnetic and acoustic
energy. It supplies customers with a broad range of isolated environments and turnkey systems, including RF test
facilities, acoustic test enclosures, RF and magnetically shielded rooms, secure communication facilities, RF
measurement systems and broadcast and recording studios. Many of these facilities include proprietary features such
as shielded doors and windows. ETS-Lindgren also provides the design, program management, installation and
integration services required to successfully complete these types of facilities.
ETS-Lindgren also supplies customers with a broad range of components including RF absorptive materials, RF
filters, active compensation systems, antennas, antenna masts, turntables and electric and magnetic probes, RF test
cells, proprietary measurement software and other test accessories required to perform a variety of tests.
ETS-Lindgren offers a variety of services including calibration for antennas and field probes, chamber certification,
field surveys, customer training and a variety of product tests. ETS-Lindgren’s test labs are accredited by the
following organizations: American Association for Laboratory Accreditation, National Voluntary Laboratory
Accreditation Program and CTIA-The Wireless Association Accredited Test Lab. ETS-Lindgren serves the acoustics,
medical, health and safety, electronics, wireless communications, automotive and defense markets. ETS-Lindgren has
four offices in the United States and nine international offices.
USG
The USG segment accounted for approximately 28%, 24% and 23% of the Company’s total revenue in 2018, 2017
and 2016, respectively.
Doble develops, manufactures, and delivers diagnostic testing solutions for electrical equipment comprising the
electric power grid, and enterprise management systems, that are designed to optimize electrical power assets and
system performance, minimize risk and improve operations. It combines three core elements for customers –
diagnostic test and monitoring instruments, expert consulting, and testing services – and provides access to its large
reserve of related empirical knowledge. Doble flagship solutions include protection diagnostics with the Doble
Protection Suite, RTS, Manta MTS-5100 and F6000 series, the M4100 and new transformational patent-pending
technology of the M7100 Doble Tester, the dobleARMS® asset risk management system, and the Enoserv
PowerBase® and DUC™ compliance tools for the North American Electric Reliability Corporation Critical
Infrastructure Protection plan (NERC CIP), a set of requirements designed to secure the assets required for operating
North America’s bulk electric system. Vanguard Instruments provides instrumentation for diagnostic testing of circuit
breakers, current transformers and other substation apparatus.
Doble has seven offices in the United States and five international offices.
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Morgan Schaffer designs, develops, manufactures and markets an integrated offering of dissolved gas analysis, oil
testing, and data management solutions that enhance the ability of electric utilities to accurately monitor the health of
critical power transformers. These solutions have been combined with doblePrime™ to create a comprehensive online
monitoring solution including bushing monitoring, DGA and partial discharge.
NRG, located in Vermont, is a global market leader in the design and manufacture of decision support tools for the
renewable energy industry, primarily wind.
Technical Packaging
The Technical Packaging segment accounted for approximately 11%, 12% and 13% of the Company’s total revenue
in 2018, 2017 and 2016, respectively. Prior to the second quarter of 2016 the Technical Packaging business was
included in the Filtration segment.
TEQ produces highly engineered thermoformed products and packaging materials for medical, pharmaceutical, retail,
food and electronic applications. Through its alliance partner program, TEQ also provides its clients with a total
packaging solution including engineering services and testing, sealing equipment and tooling, contract manufacturing,
and packing.
Plastique, with locations in the UK and Poland, designs and manufactures plastic and pulp fibre packaging for
customers in the personal care, household products, pharmaceutical, food and broader retail markets. Through its
Fibrepak brand, Plastique became the first European manufacturer of smooth-surfaced press-to-dry pulp packaging, a
sustainable alternative to plastic packaging.
Marketing and Sales
The Company’s products generally are distributed to customers through a domestic and foreign network of
distributors, sales representatives, direct sales teams and in-house sales personnel.
The Company’s sales to international customers accounted for approximately 30%, 27% and 29% of the Company’s
total revenue in 2018, 2017 and 2016, respectively. See Note 13 to the Consolidated Financial Statements included
herein for financial information by geographic area. See also Item 1A, “Risk Factors,” for a discussion of risks of the
Company’s international operations.
Some of the Company’s products are sold directly or indirectly to the U.S. Government under contracts with the
Army, Navy and Air Force and subcontracts with prime contractors of such entities. Direct and indirect sales to the
U.S. Government, primarily related to the Filtration segment, accounted for approximately 20%, 20% and 14% of the
Company’s total revenue in 2018, 2017 and 2016, respectively.
Intellectual Property
The Company owns or has other rights in various forms of intellectual property (i.e., patents, trademarks, service
marks, copyrights, mask works, trade secrets and other items). As a major supplier of engineered products to industrial
and commercial markets, the Company emphasizes developing intellectual property and protecting its rights therein.
However, the scope of protection afforded by intellectual property rights, including those of the Company, is often
uncertain and involves complex legal and factual issues. Some intellectual property rights, such as patents, have only a
limited term. Also, there can be no assurance that third parties will not infringe or design around the Company’s
intellectual property. Policing unauthorized use of intellectual property is difficult, and infringement and
misappropriation are persistent problems for many companies, particularly in some international markets. In addition,
the Company may not elect to pursue an unauthorized user due to the high costs and uncertainties associated with
litigation. Further, there can be no assurance that courts will ultimately hold issued patents or other intellectual
property valid and enforceable. See Item 1A, “Risk Factors.”
A number of products in the Filtration segment are based on patented or otherwise proprietary technology that sets
them apart from the competition, such as VACCO’s proprietary quieting technology and Westland’s signature
reduction solutions.
In the Test segment, patent protection has been sought for significant inventions. Examples of such inventions include
novel designs for window and door assemblies used in shielded enclosures and anechoic chambers, improved acoustic
techniques for sound isolation and a variety of unique antennas. In addition, the Test segment holds a number of
patents, and has patents pending, on products used to perform wireless device testing.
4
In the USG segment, the segment policy is to seek patent and/or other forms of intellectual property protection on new
and improved products, components of products and methods of operation for its businesses, as such developments
are made. Doble is pursuing patent protection on improvements to its line of diagnostic equipment and NERC CIP
compliance tools. Doble also holds an extensive library of apparatus performance information useful to Doble
employees and to entities that generate, distribute or consume electric energy. Doble makes part of this library
available to registered users via an Internet portal. NRG is pursuing patent protection on its upcoming line of bat
deterrent systems, which are expected to reduce bat mortality at windfarms. In 2018, NRG acquired patented direct
detect LIDAR technology from Pentalum Technologies Ltd. with uses in wind resource assessment, wind farm
operation, forecasting and research.
The Technical Packaging segment emphasizes advanced manufacturing technology and methods. For example, the
TEQ 3-in-1 tooling system, with an added stacking tool, provides a competitive edge over traditional thermoform
tooling; and Plastique’s “Cure-In-The-Mold” technology produces high-quality, smooth-surface, thin-wall packaging
products which may be made from sustainable virgin crop fibers or virgin pulp. The segment’s intellectual property
consists chiefly of trade secrets and proprietary technology embodied in products for which the Company is the only
approved source, such as the TEQconnexTM and TEQethelyeneTM single polymer sterile barrier medical packaging
systems for which TEQ owns the validation studies required to register the package with the FDA.
The Company considers its patents and other intellectual property to be of significant value in each of its segments.
Backlog
Total Company backlog of firm orders at September 30, 2018 was $382.8 million, representing an increase of $5.7
million (1.5%) from the backlog of $377.1 million on September 30, 2017. The backlog at September 30, 2018 and
September 30, 2017, respectively, by segment, was $204.2 million and $203.1 million for Filtration; $122.3 million
and $114.8 million for Test; $40.7 million and $35.6 million for USG; and $15.5 million and $23.6 million for
Technical Packaging. The Company estimates that as of September 30, 2018 domestic customers accounted for
approximately 71% of the Company’s total firm orders and international customers accounted for approximately 29%.
Of the total Company backlog at September 30, 2018, approximately 83% is expected to be completed in the fiscal
year ending September 30, 2019.
Purchased Components and Raw Materials
The Company’s products require a wide variety of components and materials. Although the Company has multiple
sources of supply for most of its materials requirements, certain components and raw materials are supplied by sole
source vendors, and the Company’s ability to perform certain contracts depends on their performance. In the past,
these required raw materials and various purchased components generally have been available in sufficient quantities.
However, the Company does have some risk of shortages of materials or components due to reliance on sole or
limited sources of supply. See Item 1A, “Risk Factors.”
The Filtration segment purchases supplies from a wide array of vendors. In most instances, multiple vendors of raw
materials are screened during a qualification process to ensure that there will not be an interruption of supply should
one of them underperform or discontinue operations. Nonetheless, in some situations, there is a risk of shortages due
to reliance on a limited number of suppliers or because of price fluctuations due to the nature of the raw materials. For
example, aerospace-grade titanium and gaseous helium, important raw materials for our Filtration segment
subsidiaries, may at times be in short supply.
The Test segment is a vertically integrated supplier of electro-magnetic (EM) shielding and RF absorbing products,
producing most of its critical RF components. This segment purchases significant quantities of raw materials such as
polyurethane foam, polystyrene beads, steel, aluminum, copper, nickel and wood. Accordingly, it is subject to price
fluctuations in the worldwide raw materials markets. While ETS-Lindgren has long-term contracts with a number of
its suppliers, it is vulnerable to changes in trade policies.
The USG segment manufactures electronic instrumentation through a network of regional contract manufacturers
under long term contracts. In general, USG purchases the same kinds of component parts as do other electronic
products manufacturers, and it purchases only a limited amount of raw materials.
The Technical Packaging segment selects suppliers initially on the basis of their ability to meet requirements, and then
conducts ongoing evaluations and ratings of the supplier’s performance based on a documented evaluation process.
The segment purchases raw materials according to a documented and controlled process assuring that purchased
materials meet defined specifications. Thermoplastics represent the largest percentage of raw material spend, with
5
purchase prices subject to fluctuation depending on petrochemical industry pricing and capacity in the plastic resin
market.
Competition
Competition in the Company’s major markets is broadly based and global in scope. Competition can be particularly
intense during periods of economic slowdown, and this has been experienced in some of the Company’s markets.
Although the Company is a leading supplier in several of the markets it serves, it maintains a relatively small share of
the business in many of the other markets it serves. Individual competitors range in size from annual revenues of less
than $1 million to billion-dollar enterprises. Because of the specialized nature of the Company’s products, its
competitive position with respect to its products cannot be precisely stated. In the Company’s major served markets,
competition is driven primarily by quality, technology, price and delivery performance. See also Item 1A, “Risk
Factors.”
Primary competitors of the Filtration segment include Pall Corporation, Moog, Inc., Sofrance, CLARCOR Inc.,
PneuDraulics, Marotta Controls, and Parker Hannifin.
The Test segment is a global leader in EM shielding. Significant competitors in this market include Rohde & Schwarz
GMBH, Microwave Vision SA (MVG), TDK RF Solutions Inc., Albatross GmbH, IMEDCO AG, and Universal
Shielding Corp..
Significant competitors of the USG segment include OMICRON electronics Corp., Megger Group Limited, Vaisala,
and Qualitrol Company LLC (a subsidiary of Danaher Corporation).
Significant Competitors of the Technical Packaging segment include Nelipak Corporation, Prent Corporation, Placon
Corporation, Poli Marian Holz, and Sonoco/Alloyd.
Research and Development
Research and development and the Company’s technological expertise are important factors in the Company’s
business. Research and development programs are designed to develop technology for new products or to extend or
upgrade the capability of existing products, and to enhance their commercial potential. The Company performs
research and development at its own expense, and also engages in research and development funded by customers.
See Note 1 to the Consolidated Financial Statements included herein for financial information about the Company’s
research and development expenditures.
Environmental Matters
The Company is involved in various stages of investigation and cleanup relating to environmental matters. It is
difficult to estimate the potential costs of such matters and the possible impact of these costs on the Company at this
time due in part to: the uncertainty regarding the extent of pollution; the complexity and changing nature of
Government laws and regulations and their interpretations; the varying costs and effectiveness of alternative cleanup
technologies and methods; the uncertain level of insurance or other types of cost recovery; the uncertain level of the
Company’s responsibility for any contamination; the possibility of joint and several liability with other contributors
under applicable law; and the ability of other contributors to make required contributions toward cleanup costs. Based
on information currently available, the Company does not believe that the aggregate costs involved in the resolution of
any of its environmental matters will have a material adverse effect on the Company’s financial condition or results of
operations.
Government Contracts
The Company contracts with the U.S. Government and subcontracts with prime contractors of the U.S. Government.
Although VACCO and Westland have a number of “cost-plus” Government contracts, the Company’s Government
contracts also include firm fixed-price contracts under which work is performed and paid for at a fixed amount
without adjustment for the actual costs experienced in connection with the contracts. All Government prime contracts
and virtually all of the Company’s Government subcontracts provide that they may be terminated at the convenience
of the Government or the customer. Upon such termination, the Company is entitled to receive equitable
compensation from the customer. See “Marketing and Sales” in this Item 1, and Item 1A, “Risk Factors,” for
additional information regarding Government contracts and related risks.
6
Employees
As of September 30, 2018, the Company employed 3,117 persons, including 2,954 full time employees. Of the
Company’s full-time employees, 2,313 were located in the United States and 641 were located in 16 foreign countries.
Financing
For information about the Company’s credit facility, see Note 8 to the Consolidated Financial Statements included
herein, which is incorporated into this Item by reference.
Additional Information
The information set forth in Item 1A, “Risk Factors,” is incorporated in this Item by reference.
The Company makes available free of charge on or through its website, www.escotechnologies.com, its annual report
on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as
reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange
Commission. Information contained on the Company’s website is not incorporated into this Report.
Executive Officers of the Registrant
The following sets forth certain information as of November 1, 2018 with respect to the Company’s executive
officers. These officers are elected annually to terms which expire at the first meeting of the Board of Directors after
the next Annual Meeting of Stockholders.
Name
Victor L. Richey
Gary E. Muenster
Alyson S. Barclay
____________
Age
61
58
59
Position(s)
Chairman of the Board of Directors and Chief Executive Officer since April 2003;
President since October 2006 *
Executive Vice President and Chief Financial Officer since February 2008; Director
since February 2011
Senior Vice President, Secretary and General Counsel since November 2008
* Mr. Richey also serves as Chairman of the Executive Committee of the Board of Directors.
There are no family relationships among any of the executive officers and directors.
Item 1A. Risk Factors
This Form 10-K, including Item 1, “Business,” Item 2, “Properties,” Item 3, “Legal Proceedings,” Item 7,
“Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 7A,
“Quantitative and Qualitative Disclosures About Market Risk,” contains “forward-looking statements” within the
meaning of the safe harbor provisions of the federal securities laws, as described under “Forward-Looking
Statements” above.
In addition to the risks and uncertainties discussed in that section and elsewhere in this Form 10-K, the following
important risk factors could cause actual results and events to differ materially from those contained in any forward-
looking statements, or could otherwise adversely affect the Company’s business, operating results or financial
condition:
Our sales of products to the Government depend upon continued Government funding.
Sales to the U.S. Government and its prime contractors and subcontractors represent a significant portion of our
business. Over the past three fiscal years, from 14% to 20% of our revenues have been generated from sales to the
U.S. Government or its contractors, primarily within our Filtration segment. These sales are dependent on government
funding of the underlying programs, which is generally subject to annual Congressional appropriations. There could
be reductions or terminations of, or delays in, the government funding on programs which apply to us or our
customers. These funding effects could adversely affect our sales and profit, and could bring about a restructuring of
our operations, which could result in an adverse effect on our financial condition or results of operations. A significant
7
portion of VACCO’s and Westland’s sales involve major U.S. Government programs such as NASA’s Space Launch
System (SLS) and U.S. Navy submarines. A reduction or delay in Government spending on these programs could
have a significant adverse impact on our financial results which could extend for more than a single year.
Negative worldwide economic conditions and related credit shortages could result in a decrease in our sales
and an increase in our operating costs, which could adversely affect our business and operating results.
If there is a worsening of global and U.S. economic and financial market conditions and additional tightening of
global credit markets, many of our customers may further delay or reduce their purchases of our products.
Uncertainties in the global economy may cause the utility industry and commercial market customers to experience
shortages in available credit, which could limit capital spending. To the extent this problem affects our customers, our
sales and profits could be adversely affected. Likewise, if our suppliers face challenges in obtaining credit, they may
have to increase their prices or become unable to continue to offer the products and services we use to manufacture
our products, which could have an adverse effect on our business, results of operations and financial condition.
Our quarterly results may fluctuate substantially.
We have experienced variability in quarterly results and believe our quarterly results will continue to fluctuate as a
result of many factors, including the size and timing of customer orders, governmental approvals and funding levels,
changes in existing taxation rules or practices, the gain or loss of significant customers, timing and levels of new
product developments, shifts in product or sales channel mix, increased competition and pricing pressure, and general
economic conditions.
A significant part of our manufacturing operations depends on a small number of third-party suppliers.
A significant part of our manufacturing operations relies on a small number of third-party manufacturers to supply
component parts or products. For example, Doble has arrangements with four manufacturers which produce and
supply substantially all of its end-products, and one of these suppliers produces approximately 50% of Doble’s
products from a single location within the United States. As another example, PTI has a single supplier of critical
electronic components for a significant aircraft production program, and if this supplier were to discontinue producing
these components the need to secure another source could pose a risk to the production program. A significant
disruption in the supply of those products or others provided by a small number of suppliers could negatively affect
the timely delivery of products to customers as well as future sales, which could increase costs and reduce margins.
Certain of our other businesses are dependent upon sole source or a limited number of third-party manufacturers of
parts and components. Many of these suppliers are small businesses. Since alternative supply sources are limited,
there is an increased risk of adverse impacts on our production schedules and profits if our suppliers were to default in
fulfilling their price, quality or delivery obligations. In addition, some of our customers or potential customers may
prefer to purchase from a supplier which does not have such a limited number of sources of supply.
Increases in prices of raw material and components, and decreased availability of such items, could adversely
affect our business.
The cost of raw materials and product components is a major element of the total cost of many of our products. For
example, our Test segment’s critical components rely on purchases of raw materials from third parties. Increases in
the prices of raw materials (such as steel, copper, nickel, zinc, wood and petrochemical products) could have an
adverse impact on our business by, among other things, increasing costs and reducing margins. Aerospace-grade
titanium and gaseous helium, important raw materials for our Filtration segment, may at times be in short supply.
Further, many of Doble’s items of equipment which are provided to its customers for their use are in the maturity of
their life cycles, which creates the risk that replacement components may be unavailable or available only at increased
costs.
In addition, our reliance on sole or limited sources of supply of raw materials and components in each of our segments
could adversely affect our business, as described in the preceding Risk Factor. Weather-created disruptions in supply,
in addition to affecting costs, could impact our ability to procure an adequate supply of these raw materials and
components, and delay or prevent deliveries of products to our customers.
Increases in tariffs resulting from changes in trade policies could adversely affect our ability to compete.
In addition to the effects of increases in market prices, increases in tariffs resulting from changes in domestic or
foreign trade policies could increase the prices to us of our foreign-sourced raw materials and product components and
8
thereby require us to either increase our selling prices or accept reduced margins. In addition, increases in foreign-
country tariffs applicable to our products could increase the effective prices of our products to our customers in those
countries unless we were able to offset the tariffs by reducing our selling prices. Any or all of these factors could
decrease the demand for our products, reduce our profitability, and/or make our products less competitive than those
of other manufacturers that are not subject to the same tariffs. For example, during 2018 increased tariffs on US origin
goods in China adversely affected sales of NRG’s products in China.
Our international operations expose us to fluctuations in currency exchange rates that could adversely affect
our results of operations and cash flows.
We have significant manufacturing and sales activities in foreign countries, and our domestic operations have sales to
foreign customers. Our financial results may be affected by fluctuations in foreign currencies and by the translation of
the financial statements of our foreign subsidiaries from local currencies into U.S. dollars, and we may not be able to
adequately or successfully hedge against these risks. In addition, a rise in the dollar against foreign currencies could
make our products more expensive for foreign customers and cause them to reduce the volume of their purchases.
Economic, political and other risks of our international operations, including tariffs and terrorist activities,
could adversely affect our business.
In 2018, approximately 30% of our net sales were to customers outside the United States. Increases in international
tariffs resulting from changes in domestic or foreign trade policies could increase the costs of the raw materials used
in our products and/or the costs of our products. In addition, an economic downturn or an adverse change in the
political situation in certain foreign countries in which we do business could cause a decline in revenues and adversely
affect our financial condition. For example, our Test segment does significant business in Asia, and changes in the
Asian political climate or political changes in specific Asian countries could negatively affect our business; several of
our subsidiaries are based in Europe and could be negatively impacted by weakness in the European economy;
Doble’s and Plastique’s UK-based businesses could be adversely affected by Brexit; and Doble’s future business in
Saudi Arabia as well as elsewhere in the Middle East could be adversely affected by government austerity programs,
continuing political unrest, wars and terrorism in the region.
Our international sales are also subject to other risks inherent in foreign commerce, including currency fluctuations
and devaluations, differences in foreign laws, uncertainties as to enforcement of contract rights, and difficulties in
negotiating and resolving disputes with our foreign customers.
Our governmental sales and our international and export operations are subject to special U.S. and foreign
government laws and regulations which may impose significant compliance costs, create reputational and
legal risk, and impair our ability to compete in international markets.
The international scope of our operations subjects us to a complex system of commercial and trade regulations around
the world, and our foreign operations are governed by laws and business practices that often differ from those of the
U.S. In addition, laws such as the U.S. Foreign Corrupt Practices Act and similar laws in other countries increase the
need for us to manage the risks of improper conduct not only by our own employees but by distributors and
contractors who may not be within our direct control. Many of our exports are of products which are subject to U.S.
Government regulations and controls such as the U.S. International Traffic in Arms Regulations (ITAR), which
impose certain restrictions on the U.S. export of defense articles and services, and these restrictions are subject to
change from time to time, including changes in the countries into which our products may lawfully be sold.
If we were to fail to comply with these laws and regulations, we could be subject to significant fines, penalties and
other sanctions including the inability to continue to export our products or to sell our products to the U.S.
Government or to certain other customers. In addition, some of these regulations may be viewed as too restrictive by
our international customers, who may elect to develop their own domestic products or procure products from other
international suppliers which are not subject to comparable export restrictions; and the laws, regulations or policies of
certain other countries may also favor their own domestic suppliers over foreign suppliers such as the Company.
Failure or delay in new product development could reduce our future sales.
Much of our business is dependent on the continuous development of new products and technologies to meet the
changing needs of our markets on a cost-effective basis. Many of these markets are highly technical from an
engineering standpoint, and the relevant technologies are subject to rapid change. If we fail to timely enhance existing
products or develop new products as needed to meet market or competitive demands, we could lose sales
opportunities, which would adversely affect our business. In addition, in some existing contracts with customers, we
9
have made commitments to develop and deliver new products. If we fail to meet these commitments, the default could
result in the imposition on us of contractual penalties including termination. Our inability to enhance existing products
in a timely manner could make our products less competitive, while our inability to successfully develop new products
may limit our growth opportunities. Development of new products and product enhancements may also require us to
make greater investments in research and development than we now do, and the increased costs associated with new
product development and product enhancements could adversely affect our operating results. In addition, our costs of
new product development may not be recoverable if demand for our products is not as great as we anticipate it to be.
Changes in testing standards could adversely impact our Test and USG segments’ sales.
A significant portion of the business of our Test and USG segments involves sales to technology customers who need
to have a third party verify that their products meet specific international and domestic test standards. If regulatory
agencies were to eliminate or reduce certain domestic or international test standards, or if demand for product testing
from these customers were to decrease for some other reason, our sales could be adversely affected. For example, if
Wi-Fi technology in mobile phones were to be superseded by a new communications technology, then there might be
no need for certain testing on mobile phones; or if a regulatory authority were to relax the test standards for certain
electronic devices because they were determined not to interfere with the broadcast spectrum, our sales of certain
testing products could be significantly reduced.
The end of customer product life cycles could negatively affect our Filtration segment’s results.
Many of our Filtration segment products are sold to be components in our customers’ end-products. If a customer
discontinues a certain end-product line, our ability to continue to sell those components will be reduced or eliminated.
The result could be a significant decrease in our sales. For example, a substantial portion of PTI’s revenue is generated
from commercial aviation aftermarket sales. As certain aircraft are retired and replaced by newer aircraft, there could
be a corresponding decrease in sales associated with our current products. Such a decrease could adversely affect our
operating results.
Product defects could result in costly fixes, litigation and damages.
Our business exposes us to potential product liability risks that are inherent in the design, manufacture and sale of our
products and the products of third-party vendors which we use or resell. If there are claims related to defective
products (under warranty or otherwise), particularly in a product recall situation, we could be faced with significant
expenses in replacing or repairing the product. For example, the Filtration segment obtains raw materials, machined
parts and other product components from suppliers who provide certifications of quality which we rely on. Should
these product components be defective and pass undetected into finished products, or should a finished product
contain a defect, we could incur significant costs for repairs, re-work and/or removal and replacement of the defective
product. In addition, if a dispute over product claims cannot be settled, arbitration or litigation may result, requiring us
to incur attorneys’ fees and exposing us to the potential of damage awards against us.
We may not be able to identify suitable acquisition candidates or complete acquisitions successfully, which
may inhibit our rate of growth.
As part of our growth strategy, we plan to continue to pursue acquisitions of other companies, assets and product lines
that either complement or expand our existing business. However, we may be unable to implement this strategy if we
are unable to identify suitable acquisition candidates or consummate future acquisitions at acceptable prices and
terms. We expect to face competition for acquisition candidates which may limit the number of acquisition
opportunities available to us and may result in higher acquisition prices. As a result, we may be limited in the number
of acquisitions which we are able to complete and we may face difficulties in achieving the profitability or cash flows
needed to justify our investment in them.
Our acquisitions of other companies carry risk.
Acquisitions of other companies involve numerous risks, including difficulties in the integration of the operations,
technologies and products of the acquired companies, the potential exposure to unanticipated and undisclosed
liabilities, the potential that expected benefits or synergies are not realized and that operating costs increase, the
potential loss of key personnel, suppliers or customers of acquired businesses and the diversion of Management’s time
and attention from other business concerns. Although we attempt to identify and evaluate the risks inherent in any
acquisition, we may not properly ascertain or mitigate all such risks, and our failure to do so could have a material
adverse effect on our business.
10
We may incur significant costs, experience short-term inefficiencies, or be unable to realize expected long-
term savings from facility consolidations and other business reorganizations.
We periodically assess the cost and operational structure of our facilities in order to manufacture and sell our products
in the most efficient manner, and based on these assessments, we may from time to time reorganize, relocate or
consolidate certain of our facilities. These actions may require us to incur significant costs and may result in short
term business inefficiencies as we consolidate and close facilities and transition our employees; and in addition, we
may not achieve the expected long-term benefits. Any or all of these factors could result in an adverse impact on our
operating results, cash flows and financial condition.
The trading price of our common stock continues to be volatile and may result in investors selling shares of
our common stock at a loss.
The trading price of our common stock is volatile and subject to wide fluctuations in price in response to various
factors, many of which are beyond our control, including those described in this section and including but not limited
to actual or anticipated variations in our quarterly operating results, changes in financial estimates by securities
analysts that cover our stock or our failure to meet those estimates, substantial sales of our common stock by our
existing shareholders, and general stock market conditions. In recent years, the stock markets in general have
experienced dramatic price and volume fluctuations, which may continue indefinitely, and changes in industry,
general economic or market conditions could harm the price of our stock regardless of our operating performance.
We may not realize as revenue the full amounts reflected in our backlog.
As of September 30, 2018 our twelve-month backlog was approximately $317.0 million, which represents confirmed
orders we believe will be recognized as revenue within the next twelve months. There can be no assurance that our
customers will purchase all the orders represented in our backlog, particularly as to contracts which are subject to the
U.S. Government’s ability to modify or terminate major programs or contracts, and if and to the extent that this
occurs, our future revenues could be materially reduced.
The Company has guaranteed certain Aclara contracts.
During 2014, the Company sold that portion of the Company’s USG segment represented by Aclara Technologies
LLC and two related entities (together, Aclara), a leading supplier of data communications systems and related
software used by electric, gas and water utilities in support of their advanced metering infrastructure (AMI)
deployments, typically encompassing the utility’s entire service area. Aclara’s largest contracts, such as those with
Pacific Gas & Electric Company and Southern California Gas Co. (SoCal Gas), each involve several million end
points. In the normal course of business during the time that Aclara was our subsidiary, we agreed to provide
guarantees of Aclara’s performance under certain real property leases, certain vendor contacts, and certain large, long-
term customer contracts for the delivery, deployment and performance of AMI systems. In connection with the sale of
Aclara, we agreed to remain a guarantor of Aclara’s performance of these contracts. Although the Company, Aclara
and Aclara’s parent company Hubbell Inc. are working together to obtain the release of the Company under these
guarantees and have obtained some releases, including from SoCal Gas¸ other guarantees have not yet been released
and still remain in effect. If Aclara were to fail to perform any of the remaining guaranteed contracts, the other party
to the contract could seek damages from us resulting from the non-performance, and if we were determined to be
liable for these damages they could have a material adverse effect on our business, operating results or financial
condition. Although we would be entitled to seek indemnification from Aclara for these damages, our ability to
recover would be subject to Aclara’s financial position at that time.
Despite our efforts, we may be unable to adequately protect our intellectual property.
Much of our business success depends on our ability to protect and freely utilize our various intellectual properties,
including both patents and trade secrets. Despite our efforts to protect our intellectual property, unauthorized parties or
competitors may copy or otherwise obtain and use our products and technology, particularly in foreign countries such
as China where the laws may not protect our proprietary rights as fully as in the United States. Our current and future
actions to enforce our proprietary rights may ultimately not be successful; or in some cases we may not elect to pursue
an unauthorized user due to the high costs and uncertainties associated with litigation. We may also face exposure to
claims by others challenging our intellectual property rights. Any or all of these actions may divert our resources and
cause us to incur substantial costs.
11
Disputes with contractors could adversely affect our Test segment’s results.
A major portion of our Test segment’s business involves working in conjunction with general contractors to produce
complex building components constructed on-site, such as electronic test chambers, secure communication rooms and
MRI facilities. If there are performance problems caused by either us or a contractor, they could result in cost overruns
and may lead to a dispute as to which party is responsible. The resolution of such disputes can involve arbitration or
litigation, and can cause us to incur significant expense including attorneys’ fees. In addition, these disputes could
result in a reduction in revenue, a loss on a particular project, or even a significant damages award against us.
Environmental or regulatory requirements could increase our expenses and adversely affect our profitability.
Our operations and properties are subject to U.S. and foreign environmental laws and regulations governing, among
other things, the generation, storage, emission, discharge, transportation, treatment and disposal of hazardous
materials and the clean-up of contaminated properties. These regulations, and changes to them, could increase our cost
of compliance, and our failure to comply could result in the imposition of significant fines, suspension of production,
alteration of product processes, cessation of operations or other actions which could materially and adversely affect
our business, financial condition and results of operations.
We are currently involved as a responsible party in several ongoing investigations and remediations of contaminated
third-party owned properties. In addition, environmental contamination may be discovered in the future on properties
which we formerly owned or operated and for which we could be legally responsible. Future costs associated with
these situations, including ones which may be currently unknown to us, are difficult to quantify but could have a
significant effect on our financial condition. See Item 1, “Business – Environmental Matters” for a discussion of these
factors.
We are or may become subject to legal proceedings that could adversely impact our operating results.
We are, and will likely be in the future, a party to a number of legal proceedings and claims involving a variety of
matters, including environmental matters such as those described in the preceding risk factor and disputes over the
ownership or use of intellectual property. Given the uncertainties inherent in litigation, including but not limited to the
possible discovery of facts adverse to our position, adverse rulings by a court or adverse decisions by a jury, it is
possible that such proceedings could result in a liability that we may have not adequately reserved for, that may not be
adequately covered by insurance, or that may otherwise have a material adverse effect on our financial condition or
results of operations.
The loss of specialized key employees could affect our performance and revenues.
There is a risk of our losing key employees having engineering and technical expertise. For example, our USG
segment relies heavily on engineers with significant experience and reputation in the utility industry to furnish expert
consulting services and support to customers. There is a current trend of a shortage of these qualified engineers
because of hiring competition from other companies in the industry. Loss of these employees to other employers or for
other reasons could reduce the segment’s ability to provide services and negatively affect our revenues.
Our decentralized organizational structure presents certain risks.
We are a relatively decentralized company in comparison with some of our peers. This decentralization necessarily
places significant control and decision-making powers in the hands of local management, which present various risks,
including the risk that we may be slower or less able to identify or react to problems affecting a key business than we
would in a more centralized management environment. We may also be slower to detect or react to compliance related
problems (such as an employee undertaking activities prohibited by applicable law or by our internal policies), and
Company-wide business initiatives may be more challenging and costly to implement, and the risks of noncompliance
or failures higher, than they would be under a more centralized management structure. Depending on the nature of the
problem or initiative in question, such noncompliance or failure could have a material adverse effect on our business,
financial condition or result of operations.
Provisions in our articles of incorporation, bylaws and Missouri law could make it more difficult for a third
party to acquire us and could discourage acquisition bids or a change of control, and could adversely affect
the market price of our common stock.
Our articles of incorporation and bylaws contain certain provisions which could discourage potential hostile takeover
attempts, including: a limitation on the shareholders’ ability to call special meetings of shareholders; advance notice
requirements to nominate candidates for election as directors or to propose matters for action at a meeting of
12
shareholders; a classified board of directors, which means that approximately one-third of our directors are elected
each year; and the authority of our board of directors to issue, without shareholder approval, preferred stock with such
terms as the board may determine. In addition, the laws of Missouri, in which we are incorporated, require a two-
thirds vote of outstanding shares to approve mergers or certain other major corporate transactions, rather than a simple
majority as in some other states such as Delaware. These provisions could impede a merger or other change of control
not approved by our board of directors, which could discourage takeover attempts and in some circumstances reduce
the market price of our common stock.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The Company believes its buildings, machinery and equipment have been generally well maintained, are in good
operating condition and are adequate for the Company’s current production requirements and other needs.
The Company’s principal manufacturing facilities and other materially important properties, including those described
in the table below, comprise approximately 1,710,000 square feet of floor space, of which approximately 890,000
square feet are owned and approximately 820,000 square feet are leased. Leased facilities of less than 10,000 square
feet are not included in the table. See also Notes 14 and 15 to the Consolidated Financial Statements included herein.
13
Location
Modesto, CA
Denton, TX
Approx.
Sq. Ft.
181,500
145,000
Owned / Leased (with
Expiration Date)
Leased (9/30/2023)
Leased (9/30/2029, plus
options)
Principal Use(s)
Manufacturing, Engineering, Office Filtration
Filtration
Manufacturing, Office, Warehouse
Operating
Segment
Cedar Park, TX
130,000
Owned
Manufacturing, Engineering, Office,
Test
Warehouse
Oxnard, CA
127,400
Owned
Manufacturing, Engineering, Office,
Filtration
Warehouse
South El Monte, CA
100,100
Owned
Manufacturing, Engineering, Office,
Filtration
Warehouse
Durant, OK
Watertown, MA
100,000
88,700
Owned
Leased (10/2/2019,
Manufacturing, Office, Warehouse
Test
Manufacturing, Engineering, Office USG
plus option)*
Huntley, IL
86,000
Owned
Manufacturing, Engineering, Office,
Technical
Warehouse
Packaging
Valencia, CA
Hinesburg, VT
79,300
77,000
Owned
Leased (5/31/2029)
Manufacturing, Engineering, Office Filtration
Manufacturing, Engineering, Office,
USG
Warehouse
South El Monte, CA
64,200
Leased (6/30/2019
Manufacturing, Warehouse, Office
Filtration
Eura, Finland
Fremont, IN
Tianjin, China
Minocqua, WI
Dabrowa, Poland
& 6/30/2022)
41,500
39,800
Owned
Owned
Manufacturing, Warehouse, Office
Manufacturing, Engineering, Office,
Test
Technical
38,100
35,400
34,000
Leased (11/19/2027)
Owned
Owned
Warehouse
Manufacturing
Test
Manufacturing, Engineering, Office Test
Manufacturing, Engineering, Office,
Technical
Packaging
Beijing, China
LaSalle (Montreal), Quebec
33,300
32,100
Leased (indefinite) **
Leased (8/31/2021)
Warehouse
Manufacturing
Manufacturing, Engineering, Office,
Packaging
Test
USG
Warehouse
Poznan, Poland
32,000
Owned
Manufacturing, Engineering, Office,
Technical
Warehouse
Packaging
Ontario, CA
26,900
Leased(8/29/2020)
Manufacturing, Engineering, Office,
USG
Warehouse
Nottingham, England
23,900
Leased (7/8/2019)
Manufacturing, Engineering, Office,
Technical
Warehouse
Packaging
St. Louis, MO
21,500
Leased (8/31/2020 plus
ESCO Corporate Office
Corporate
options)
Mississauga, Ontario
15,200
Leased (12/31/2018)
Manufacturing, Engineering, Office,
USG
Tunbridge Wells, England
14,400
Leased (7/8/2019)
Manufacturing, Office
Warehouse
Morrisville, NC
Huntley, IL
Marlborough, MA
Wood Dale, IL
11,600
11,500
Leased (8/31/2019)
Leased (12/31/2018)
Office
Manufacturing
11,200
10,700
Leased (6/30/2020)
Leased (3/31/2019)
Engineering, Office
Office
* Formerly owned; property was sold in October 2018 and leased back pending relocation plans.
** Original lease term ended 11/15/2018; the Company is in the process of vacating this property.
Technical
Packaging
USG
Technical
Packaging
USG
Test
14
Item 3. Legal Proceedings
As a normal incident of the businesses in which the Company is engaged, various claims, charges and litigation are
asserted or commenced from time to time against the Company. With respect to claims and litigation currently
asserted or commenced against the Company, it is the opinion of Management that final judgments, if any, which
might be rendered against the Company are adequately reserved for, are covered by insurance, or are not likely to
have a material adverse effect on the Company’s financial condition or results of operations. Nevertheless, given the
uncertainties of litigation, it is possible that such claims, charges and litigation could have a material adverse impact
on the Company; see Item 1A, “Risk Factors.”
Item 4. Mine Safety Disclosures
Not applicable.
15
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Holders of Record. As of October 31, 2018 there were approximately 1,844 holders of record of the Company’s
common stock.
Price Range of Common Stock and Dividends. For information about the price range of the common stock and
dividends paid on the common stock in the last two fiscal years, please refer to Note 16 to the Company’s
Consolidated Financial Statements included herein.
Company Purchases of Equity Securities. The Company did not repurchase any shares of its common stock during
the fourth quarter of fiscal 2018.
Performance Graph. The graph and table on the following page present a comparison of the cumulative total
shareholder return on the Company’s common stock as measured against the Russell 2000 index and a customized
peer group whose individual component companies are listed below. The composition of the peer group for 2018 is
identical to that used for 2017. The Company is not a component of the 2018 peer group, but it is a component of the
Russell 2000 Index. The measurement period begins on September 30, 2013 and measures at each September 30
thereafter. These figures assume that all dividends, if any, paid over the measurement period were reinvested, and that
the starting values of each index and the investments in the Company’s common stock were $100 at the close of
trading on September 30, 2013.
16
$250
$200
$150
$100
$50
$0
9/13
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among ESCO Technologies Inc., the Russell 2000 Index
and the 2018 Peer Group
9/14
9/15
9/16
9/17
9/18
ESCO Technologies Inc.
Russell 2000
Peer Group
Copyright© 2018 Russell Investment Group. All rights reserved.
ESCO Technologies Inc.
Russell 2000
2018 Peer Group
9/30/13
$100.00
100.00
100.00
9/30/14
$105.89
103.93
105.49
9/30/15
$110.24
105.23
81.16
9/30/16
$143.68
121.50
94.57
9/30/17
$186.33
146.70
108.00
9/30/18
$212.65
169.06
139.22
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
The 2018 peer group was composed of ten companies that corresponded to the Company’s four industry segments
used for financial reporting purposes during 2018, as follows: Filtration/Fluid Flow segment (37% of the Company’s
2018 total revenue): CIRCOR International, Inc., Donaldson Company, Inc. and Moog Inc.; Test segment (24% of
the Company’s 2018 total revenue): EXFO Inc. and FARO Technologies, Inc.; USG segment (28% of the Company’s
2018 total revenue): Aegion Corporation, Ameresco, Inc. and Thermon Group Holdings, Inc.; and Technical
Packaging Segment (11% of the Company’s 2018 total revenue): AptarGroup, Inc. and Bemis Company, Inc.
In calculating the composite return of the 2018 peer group, the return of each company comprising the peer group was
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 total revenue represented by its corresponding Company industry
segment.
17
Item 6. Selected Financial Data
The following selected consolidated financial data of the Company and its subsidiaries should be read in conjunction
with the Company’s Consolidated Financial Statements, the Notes thereto, and Management’s Discussion and
Analysis of Financial Condition and Results of Operations, as of the respective dates indicated and for the respective
periods ended thereon.
(Dollars in millions, except per share amounts)
2018
2017
2016
2015
2014
For years ended September 30:
Net sales
$
771.6
685.7
571.5
537.3
531.1
Net earnings from continuing operations
Net earnings (loss) from discontinued operations
Net earnings (loss)
92.1
-
92.1
53.7
-
53.7
45.9
-
45.9
41.7
0.8
42.5
Earnings (loss) per share:
Basic:
Continuing operations
Discontinued operations
Net earnings (loss)
Diluted:
Continuing operations
Discontinued operations
Net earnings (loss)
As of September 30:
Working capital
Total assets
Total debt
Shareholders’ equity
$
$
$
$
$
3.56
-
3.56
3.54
-
3.54
2.08
-
2.08
2.07
-
2.07
1.78
-
1.78
1.77
-
1.77
1.60
0.03
1.63
1.59
0.03
1.62
195.5
1,265.1
220.0
759.4
197.8
1,260.4
275.0
671.9
165.4
978.4
110.0
615.1
155.0
864.2
50.0
584.2
42.6
(42.2 )
0.4
1.61
(1.60 )
0.01
1.60
(1.58 )
0.02
148.9
845.9
40.0
580.2
Cash dividends declared per common share
__________
$
0.32
0.32
0.32
0.32
0.32
See also Note 2 to the Consolidated Financial Statements included herein for discussion of acquisition activity.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The following discussion should be read in conjunction with the Consolidated Financial Statements included herein
and Notes thereto and refers to the Company’s results from continuing operations, except where noted.
Introduction
ESCO Technologies Inc. and its wholly owned subsidiaries (the Company) are organized into four operating segments
for financial reporting purposes: Filtration/Fluid Flow (Filtration), RF Shielding and Test (Test), Utility Solutions
Group (USG), and Technical Packaging. The Company’s business segments are comprised of the following primary
operating entities:
Filtration: PTI Technologies Inc. (PTI); VACCO Industries (VACCO); Crissair, Inc. (Crissair); Westland
Technologies, Inc. (Westland); and Mayday Manufacturing Co. (Mayday) and its affiliate Hi-Tech Metals, Inc.
(Hi-Tech).
Test: ETS-Lindgren Inc. (ETS-Lindgren).
USG: Doble Engineering Company (Doble); Morgan Schaffer Ltd. (Morgan Schaffer); and NRG Systems, Inc.
(NRG).
Technical Packaging: Thermoform Engineered Quality LLC (TEQ); Plastique Limited and Plastique Sp. z o.o.
(together, Plastique).
18
Filtration. PTI, VACCO and Crissair 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. Westland designs, develops and manufactures elastomeric-based signature reduction solutions for U.S.
naval vessels. Mayday designs and manufactures mission-critical bushings, pins, sleeves and precision-tolerance
machined components for landing gear, rotor heads, engine mounts, flight controls, and actuation systems for the
aerospace and defense industries. Hi-Tech is a full-service metal processor serving aerospace suppliers.
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. Morgan Schaffer provides an integrated offering of dissolved gas analysis, oil testing, and
data management solutions which enhance the ability of electric utilities to accurately monitor the health of critical
power transformers. NRG designs and manufactures decision support tools for the renewable energy industry,
primarily wind.
Technical Packaging. The companies within this segment provide innovative solutions to the medical and
commercial markets for thermoformed and precision molded pulp fiber packages and specialty products using a wide
variety of thin gauge plastics and pulp.
Selected financial information for each of the Company’s business segments is provided in the discussion below
and in Note 13 to the Company’s Consolidated Financial Statements beginning on page F-1 of this Annual Report.
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 organic growth,
ongoing performance improvement initiatives, and acquisitions.
Highlights of 2018 Operations
Sales, net earnings and diluted earnings per share in 2018 were $771.6 million, $92.1 million and $3.54 per share,
respectively, compared to sales, net earnings and diluted earnings per share in 2017 of $685.7 million, $53.7
million and $2.07 per share, respectively.
Diluted EPS – As Adjusted for 2018 was $2.77 and excludes $4.8 million of pretax charges (or $0.17 per share
after tax) consisting primarily of charges related to closing the Doble offices in Norway, China, Dubai and
Mexico, consisting of employee severance and compensation benefits, professional fees, and asset impairment
charges; and restructuring charges at PTI related to the exit of the low margin industrial/automotive market. Also
excluded was a $24.4 million (or $0.94 per share) of net tax benefit recorded resulting from the implementation of
U.S. Tax Reform in 2018. Diluted EPS – As Adjusted for 2017 was $2.22 and excludes $6.1 million of pretax
charges (or $0.15 per share after tax) of non-cash purchase accounting inventory step-up charges and costs
incurred to complete the Company’s 2017 acquisitions.
Net cash provided by operating activities was approximately $93.2 million in 2018 compared to $67.3 million in
2017, mainly due to the increase in net earnings.
At September 30, 2018, cash on hand was $30.5 million and outstanding debt was $220.0 million, for a net debt
position (total debt less net cash) of approximately $189.5 million.
Entered orders for 2018 were $777.2 million resulting in a book-to-bill ratio of 1.01x. Backlog at September 30,
2018 was $382.8 million compared to $377.1 million at September 30, 2017.
In March 2018, the Company acquired the assets of Manta Test Systems Ltd. (Manta), a North American utility
solutions provider located in Mississauga, Ontario, for a purchase price of $9.5 million in cash. Since the date of
acquisition, the operating results for Manta have been included as a product line of Doble within the Company’s
USG segment.
The Company declared dividends of $0.32 per share during 2018, totaling $8.3 million in dividend payments.
19
Results of Operations
Net Sales
(Dollars in millions)
Filtration
Test
USG
Technical Packaging
Total
Fiscal year ended
2017
279.5
160.9
162.4
82.9
685.7
2018
286.8
182.9
214.0
87.9
771.6
$
$
Change
2018
vs. 2017
Change
2017
vs. 2016
2.6 %
13.7 %
31.8 %
6.0 %
12.5 %
34.5 %
(0.4 )%
27.1 %
11.4 %
20.0 %
2016
207.8
161.5
127.8
74.4
571.5
Net sales increased $85.9 million, or 12.5%, to $771.6 million in 2018 from $685.7 million in 2017. The increase in
net sales in 2018 as compared to 2017 was due to a $51.6 million increase in the USG segment, a $22.0 million
increase in the Test segment, a $7.3 million increase in the Filtration segment, and a $5.0 million increase in the
Technical Packaging segment.
Net sales increased $114.2 million, or 20.0%, to $685.7 million in 2017 from $571.5 million in 2016. The increase in
net sales in 2017 as compared to 2016 was due to a $71.7 million increase in the Filtration segment, a $34.6 million
increase in the USG segment and an $8.5 million increase in the Technical Packaging segment, partially offset by a
$0.6 million decrease in the Test segment.
Filtration.
The $7.3 million, 2.6% increase in net sales in 2018 as compared to 2017 was mainly due to a $12.1 million increase
in net sales at Mayday (acquired in November 2016) and a $3.3 million increase in net sales at Crissair both due to
higher aerospace shipments, partially offset by a $7.4 million decrease in net sales at PTI due to lower aerospace
assembly and industrial/automotive shipments.
The $71.7 million, or 34.5% increase in net sales in 2017 as compared to 2016 was primarily driven by the
Company’s acquisitions of Westland and Mayday, which contributed $21.0 million and $40.0 million, respectively;
and a $12.4 million increase at VACCO due to higher shipments of its defense products including Navy spares,
partially offset by a $2.4 million decrease in sales at Crissair due to lower aerospace shipments.
Test.
The net sales increase of $22.0 million, or 13.7% in 2018 as compared to 2017 was mainly due a $17.0 million
increase in net sales from the segment’s U.S. operations and a $3.8 million increase in net sales from the segment’s
Asian operations both due to increased shipments of test and measurement chamber projects.
The net sales decrease of $0.6 million in 2017 as compared to 2016 was mainly due to a $6.4 million decrease in net
sales from the segment’s European operations due to the 2016 restructuring activities to close the Test business
operating facilities in Germany and England, offset by a $7.5 million increase in net sales from its U.S. operations
related to higher sales volumes of chamber projects.
USG.
The net sales increase of $51.6 million, or 31.8% in 2018 as compared to 2017 was mainly due to the Company’s
acquisitions of NRG, Morgan Schaffer, and Vanguard Instruments, which contributed $21.2 million, $19.7 million
and $11.9 million, respectively.
The net sales increase of $34.6 million, or 27.1% in 2017 as compared to 2016 was mainly driven by the Company’s
acquisitions of NRG and Morgan Schaffer, which contributed $16.2 million and $6.5 million, respectively; and an
$11.9 million increase in net sales at Doble from new products and software solutions.
Technical Packaging.
The $5.0 million, or 6.0%, increase in net sales in 2018 as compared to 2017 was mainly due to the $2.7 million
increase in sales from Plastique driven by fluctuations in currency and a $2.3 million increase in net sales from TEQ
due to higher shipments to medical customers.
The $8.5 million, or 11.4%, increase in net sales in 2017 as compared to 2016 was mainly due to the $9.3 million
increase in sales contribution from Plastique which was acquired in January 2016 partially offset by a $0.8 million
decrease in net sales from TEQ due to lower shipments to medical customers.
20
Orders and Backlog
New orders received in 2018 were $777.2 million as compared to $736.6 million in 2017, resulting in order backlog
of $382.8 million at September 30, 2018 as compared to order backlog of $377.1 million at September 30, 2017.
Orders are entered into backlog as firm purchase order commitments are received.
In 2018, the Company recorded $287.9 million of orders related to Filtration products, $190.4 million of orders
related to Test products, $219.1 million of orders related to USG products and $79.8 million of orders related to
Technical Packaging products. In 2017, the Company recorded $286.8 million of orders related to Filtration
products, $198.6 million of orders related to Test products, $164.3 million of orders related to USG products and
$86.9 million of orders related to Technical Packaging products.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses were $162.4 million, or 21.0% of net sales, in 2018; $148.4
million, or 21.6% of net sales, in 2017; and $131.5 million, or 23.0% of net sales, in 2016.
The increase in SG&A expenses in 2018 as compared to 2017 was mainly due to an increase in SG&A expenses
within the USG segment due to the Company’s recent acquisitions (NRG, Morgan Schaffer, Vanguard Instruments
and Manta) as well as additional sales and marketing expenses at Doble, and higher professional fees and headcount
expenses at Corporate.
The increase in SG&A expenses in 2017 as compared to 2016 was mainly due to an increase in SG&A expenses both
within the Filtration segment (due to the acquisitions of Mayday and Westland, which contributed $9.3 million to the
increase) and the USG segment (due to the acquisitions of NRG and Morgan Schaffer, which contributed $6.9 million
to the increase, as well as additional sales and marketing expenses at Doble), partially offset by a decrease in SG&A
expenses in the Test segment (as a result of the 2016 restructuring activities).
Amortization of Intangible Assets
Amortization of intangible assets was $18.3 million in 2018, $16.3 million in 2017 and $11.6 million in 2016.
Amortization of intangible assets included $10.9 million, $8.6 million and $4.9 million of amortization of acquired
intangible assets in 2018, 2017 and 2016, respectively, related to the Company’s acquisitions. 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 relate to other identifiable intangible assets (primarily software, patents
and licenses), which are included in the respective segment’s operating results. The increase in amortization expense
in 2018 as compared to 2017 was mainly due to an increase in amortization of intangibles related to the Company’s
recent acquisitions. The increase in amortization expense in 2017 as compared to 2016 was mainly due to the
amortization of intangibles related to the Company’s acquisitions and an increase in software amortization.
Other Expenses or Income, Net
Other expenses, net, were $3.7 million in 2018, compared to other income, net, of $0.7 million in 2017 and other
expenses, net, of $7.8 million in 2016. The principal components of other expenses, net, in 2018 included $3.0
million of charges related to the USG segment restructuring activities, including the Doble facility consolidations in
Norway, China, Dubai and Mexico; and $0.8 million of charges within the Filtration segment due to the exit of the
low margin industrial/automotive market. The principal components of other income, net, in 2017 included $0.6
million from the sale of certain intellectual property and $0.4 million related to death benefit insurance proceeds
from a former subsidiary. The principal components of other expenses, net, in 2016 included $4.9 million of
restructuring costs related to the Test segment facility consolidation and $2.2 million of costs related to the USG
segment restructuring activities. The restructuring costs mainly related to severance and compensation benefits,
professional fees and asset impairment charges related to abandoned assets. There were no other individually
significant items included in other expenses (income), net, in 2018, 2017 or 2016.
Non-GAAP Financial Measures
The information reported herein includes the financial measures EPS – As Adjusted, which the Company defines as
EPS excluding per-share restructuring charges related to the Company’s restructuring actions in 2018 and the net
recorded per-share tax benefit resulting from the implementation of U.S. Tax Reform in 2018, defined purchase
accounting inventory step-up charges and acquisition costs in 2017 and the restructuring charges related to the Test
and Doble restructuring actions in 2016; EBIT, which the Company defines as earnings before interest and taxes,
without adjustment for the defined purchase accounting inventory step-up charges, acquisition costs and restructuring
charges; and EBIT margin, which the Company defines as EBIT expressed as a percentage of net sales. EPS – As
Adjusted, EBIT on a consolidated basis, and EBIT margin on a consolidated basis are not recognized in accordance
21
with U.S. generally accepted accounting principles (GAAP). However, the Company believes that EBIT and EBIT
margin provide investors and Management with valuable information 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 – As Adjusted 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
(Dollars in millions)
Filtration
% of net sales
Test
% of net sales
USG
% of net sales
Technical Packaging
% of net sales
Corporate
Total
% of net sales
Fiscal year ended
$
$
2018
58.7
20.5 %
23.8
13.0 %
43.2
20.2 %
8.1
9.2 %
(37.0 )
96.8
12.5 %
2017
52.2
18.7 %
19.5
12.1 %
36.6
22.5 %
8.5
10.3 %
(32.1 )
84.7
12.4 %
2016
45.2
21.8 %
13.9
8.6 %
31.1
24.3 %
9.6
12.9 %
(30.1 )
69.7
12.2 %
Change
2018
vs. 2017
12.5 %
22.1 %
18.0 %
Change
2017
vs. 2016
15.5 %
40.3 %
17.7 %
(4.7 )%
(11.5 )%
15.3 %
14.3 %
6.6 %
21.5 %
The reconciliation of EBIT to a GAAP financial measure is as follows:
(Dollars in millions)
Net earnings from continuing operations
Add: Interest expense
(Less) Add: Income taxes
EBIT
Filtration
2018
92.1
8.8
(4.1 )
96.8
$
$
2017
53.7
4.6
26.4
84.7
2016
45.9
1.3
22.5
69.7
EBIT increased $6.5 million in 2018 as compared to 2017 primarily due to the EBIT contribution from Mayday and
Crissair due to increased sales volumes, partially offset by a decrease at PTI due to the decrease in sales volumes and
the 2018 restructuring charges related to the exit of the low margin industrial/automotive market consisting primarily
of severance and compensation benefits and asset impairment charges.
EBIT increased $7.0 million in 2017 as compared to 2016 mainly due to the EBIT contribution from the Westland and
Mayday acquisitions and an increase at VACCO and PTI due to increased sales volumes. EBIT as a percent of net
sales decreased in 2017 compared to 2016 mainly due to the purchase accounting inventory step-up charge at Mayday
of $1.9 million in 2017 and engineering and development cost growth on certain fixed price development contracts at
VACCO.
Test
The $4.3 million increase in EBIT in 2018 as compared to 2017 was primarily due to the increased sales volumes
mainly from the segment’s U.S. operations.
The $5.6 million increase in EBIT in 2017 as compared to 2016 was primarily due to the $5.1 million of restructuring
charges incurred in 2016 related to closing the Test business operating facilities in Germany and England, consisting
mainly of employee severance and compensation benefits, professional fees, and asset impairment charges.
USG
The $6.6 million increase in EBIT in 2018 as compared to 2017 was mainly due to the higher sales volumes as well as
the EBIT contribution from the acquisitions of NRG, Morgan Schaffer and Vanguard Instruments. EBIT in 2018 was
22
negatively impacted by $3 million of charges recorded related to closing the Doble facilities in Norway, China, Dubai
and Mexico, consisting mainly of employee severance and compensation benefits, professional fees, and asset
impairment charges.
The $5.5 million increase in EBIT in 2017 as compared to 2016 was primarily due to higher sales volumes and
additional contribution from new products and software solutions, as well as the EBIT contribution from the 2017
acquisitions of NRG, Morgan Schaffer and Vanguard Instruments. EBIT as a percent of net sales decreased in 2017
compared to 2016 mainly due to the purchase accounting inventory step-up charges at NRG, Morgan Schaffer and
Vanguard Instruments totaling $1.9 million.
Technical Packaging
EBIT decreased $0.4 million in 2018 as compared to 2017 mainly due to product mix at TEQ and Plastique including
lower margin projects and higher material prices.
EBIT decreased $1.1 million in 2017 as compared to 2016 mainly due to higher SG&A expenses at Plastique due to
the full year being included in 2017.
Corporate
Corporate operating charges included in 2018 consolidated EBIT increased to $37.0 million as compared to $32.1
million in 2017 due to an increase in professional fees and increased amortization of intangible assets on acquisitions.
Corporate operating charges included in 2017 consolidated EBIT increased to $32.1 million as compared to $30.1
million in 2016 due to an increase in acquisition related expenses, mainly from increased amortization of intangible
assets on acquisitions.
The “Reconciliation to Consolidated Totals (Corporate)” in Note 13 to the Consolidated Financial Statements
included herein represents Corporate office operating charges.
Interest Expense, Net
Interest expense was $8.8 million in 2018, $4.6 million in 2017 and $1.3 million in 2016. The increase in interest
expense in 2018 as compared to 2017 was due to higher average outstanding borrowings ($258.8 million compared
to $211.3 million) and higher average interest rates (3.0% vs. 2.1%) as a result of the additional borrowings to fund
the Company’s recent acquisitions. The increase in interest expense in 2017 as compared to 2016 was due to higher
average outstanding borrowings ($211.3 million compared to $89.2 million) and higher average interest rates (2.1%
vs. 1.6%) as a result of the additional borrowings to fund the Company’s 2017 acquisitions (Mayday, Morgan
Schaffer, NRG and Vanguard Instruments).
Income Tax Expense
On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the Tax Cut
and Jobs Act (the “TCJA”). The TCJA includes broad and complex changes to the U.S. tax code that impacted the
Company’s accounting and reporting for income taxes in 2018. These impacts primarily resulted from a reduction in
the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018; a remeasurement of U.S.
deferred tax assets and liabilities; and a one-time mandatory deemed repatriation tax on unremitted foreign earnings
(the “Transition Tax”), which may be paid over an eight-year period. The Company also established a liability
related to foreign withholding taxes in connection with the reversal of our indefinite reinvestment assertion related to
foreign earnings subject to the Transition Tax.
See Note 7, Income Taxes, to the Consolidated Financial Statements of the Company included in the Financial
Information section of this Annual Report for further discussion related to the TCJA.
The effective tax rates for 2018, 2017 and 2016 were (4.7)%, 33.0% and 32.9%, respectively. The decrease in the
2018 effective tax rate as compared to 2017 was primarily due to the enactment of the TCJA, which was signed into
law on December 22, 2017. The total impact of the TCJA in 2018 was a net benefit of $24.4 million. The specific
impacts of the TCJA were primarily as follows:
The Company’s 2018 federal statutory rate decreased from 35.0% to 24.5% which required an
adjustment to the value of its deferred tax assets and liabilities. This adjustment of $30.6 million
(complete as of September 30, 2018) favorably impacted the 2018 effective tax rate by 34.8%.
The TCJA subjected the Company’s cumulative foreign earnings to $3.7 million (provisional amount,
refer to Note 7 to the Company’s Consolidated Financial Statement included in this Report) of federal
23
income tax which unfavorably impacted the 2018 effective tax rate by 4.2%. In addition to the impacts
from the TCJA, the Company recorded $2.4 million (complete as of September 30, 2018) for the
income tax effects of the current and future repatriation of the cumulative earnings of its foreign
subsidiaries which unfavorably impacted the 2018 effective tax rate by 2.8%.
The Company approved an additional $7.5 million pension contribution for the 2017 plan year during
the second quarter of 2018 resulting in a favorable adjustment to the 2018 effective tax rate of 0.9%.
An accounting method change was filed with the 2017 tax return which resulted in a favorable
adjustment to the 2018 effective tax rate of 0.7%.
The increase in the 2017 effective tax rate as compared to 2016 was primarily due to normal tax fluctuations within
the ordinary course of business.
The Company’s foreign subsidiaries had accumulated unremitted earnings of $3.5 million at September 30, 2018. 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 approximately $0.3 million of foreign tax withholding would be paid. The Company
does not expect that these taxes would be creditable against U.S. income tax, so they would correspondingly reduce
the Company’s net earnings. No significant portion of the Company’s foreign subsidiaries’ earnings was taxed at a
rate significantly less than the U.S. statutory tax rate.
Capital Resources and Liquidity
The Company’s overall financial position and liquidity are strong. Working capital (current assets less current
liabilities) decreased to $195.5 million at September 30, 2018 from $197.8 million at September 30, 2017, mainly
due to higher accounts payable balances. The $8.2 million increase in accounts payable at September 30, 2018 was
mainly due to a $4.9 million increase within the Test segment and a $4.0 million increase within the Technical
Packaging segment both due to the timing of payments. The $10.9 million increase in inventory at September 30,
2018 was mainly due to a $7.0 million increase in the Filtration segment and a $4.0 million increase in the USG
segment due to the timing of receipt of raw materials to meet increased sales volumes and the acquisition of Manta.
Net cash provided by operating activities was $93.3 million, $67.3 million and $73.9 million in 2018, 2017 and
2016, respectively; the changes were mainly due to changes in working capital and an increase in net earnings in
2018.
Net cash used in investing activities was $41.6 million, $233.9 million and $104.6 million in 2018, 2017, and 2016,
respectively. The decrease in net cash used in investing activities in 2018 as compared to 2017 was due to the
Company’s 2017 acquisitions of Mayday, NRG, Morgan Schaffer and Vanguard Instruments. The increase in net
cash used in investing activities in 2017 as compared to 2016 was due to those acquisitions. Capital expenditures
were $20.6 million, $29.7 million and $13.8 million in 2018, 2017 and 2016, respectively. The decrease in capital
expenditures in 2018 as compared to 2017 was mainly due to higher levels of capital expenditures in 2017 including
machinery and equipment at VACCO and a facility expansion at Plastique. The increase in capital expenditures in
2017 as compared to 2016 was mainly due to an increase in machinery and equipment at VACCO, a facility
expansion at Plastique and the capital expenditures specific to the Company’s recently acquired entities. There were
no commitments outstanding that were considered material for capital expenditures at September 30, 2018. In
addition, the Company incurred expenditures for capitalized software of $9.5 million, $9.0 million and $8.7 million
in 2018, 2017 and 2016, respectively.
The Company made pension contributions of $10.0 million (including the additional $7.5 million contribution for
2017 described above), $2.7 million and $0 in 2018, 2017 and 2016, respectively.
Net cash used by financing activities was $66.4 million in 2018, compared to net cash provided by financing
activities of $156.8 million and $46.2 million in 2017 and 2016, respectively. The change in 2018 as compared to
2017 was primarily due to the Company’s repayment of outstanding debt of $55 million in 2018 under its Credit
Facility. The increase in 2017 compared to 2016 was mainly due to an increase in borrowings related to the
Company’s acquisitions.
24
Acquisitions
Information regarding the Company’s acquisitions during 2018, 2017 and 2016 is set forth in Note 2 to the
Company’s Consolidated Financial Statements beginning on Page F-1 of this Annual Report, which Note is
incorporated by reference herein.
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.
Subsequent Event
In October 2018, the Company sold its Doble headquarters facility in Watertown, Massachusetts, and plans to
consolidate its headquarters operations into a single, more cost-efficient facility in Marlborough, Massachusetts over
the next twelve to fifteen months.
Bank Credit Facility
A description of the Company’s credit facility (the “Credit Facility”) is set forth in Note 8 to the Company’s
Consolidated Financial Statements beginning on Page F-1 of this Annual Report, which Note is incorporated by
reference herein.
Cash flow from operations and borrowings under the Credit Facility is expected to provide adequate resources to meet
the Company’s capital requirements and operational needs for the foreseeable future.
Dividends
Since 2010 the Company has paid a regular quarterly cash dividend at an annual rate of $0.32 per share. The
Company paid dividends of $8.3 million, $8.3 million and $8.2 million in 2018, 2017 and 2016, respectively.
Contractual Obligations
The following table shows the Company’s contractual obligations as of September 30, 2018:
(Dollars in millions)
Long-Term Debt Obligation
Estimated Interest Payments (1)
Operating Lease Obligations
Purchase Obligations (2)
Total
Payments due by period
Less than
1 year
-
7.7
6.7
21.0
35.4
Total
220.0
23.2
22.0
23.2
288.4
$
$
1 to 3
years
220.0
12.0
9.0
2.2
243.2
3 to 5 More than
5 years
years
-
-
-
3.5
1.2
5.1
-
-
1.2
8.6
(1) Estimated interest payments for the Company’s debt obligations were calculated based on Management’s
determination of the estimated applicable interest rates and payment dates.
(2) A purchase obligation is defined as a legally binding and enforceable agreement to purchase goods and
services that specifies all significant terms. Since the majority of the Company’s purchase orders can be
cancelled, they are not included in the table above.
As of September 30, 2018, the Company had $0.1 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 had no off-balance-sheet arrangements outstanding at September 30, 2018.
Share Repurchases
In August 2012, the Company’s Board of Directors authorized a common stock repurchase program under which the
Company may repurchase shares of its stock from time to time in its discretion, in the open market or otherwise, up to
a maximum total repurchase amount of $100 million (or such lesser amount as may be permitted under the
Company’s bank credit agreements). This program has been twice extended by the Company’s Board of Directors and
is currently scheduled to expire September 30, 2019. There were no share repurchases in 2017 or 2018. The Company
repurchased approximately 120,000 shares for $4.3 million in 2016. At September 30, 2018, approximately $50.4
million remained available for repurchases under the program.
25
Pension Funding Requirements
The minimum cash funding requirements related to the Company’s defined benefit pension plans are estimated to be
approximately $0.8 million in 2019, $1.3 million in 2020, and $1.9 million in 2021.
Other
As a normal incident of the business in which the Company is engaged, various claims, charges and litigation are
asserted or commenced from time to time against the Company. Additionally, the Company is currently involved in
various stages of investigation and remediation relating to environmental matters. It is the opinion of Management
that the aggregate costs involved in the resolution of these matters, and final judgments, if any, which might be
rendered against the Company are adequately reserved for, are covered by insurance or are not likely to have a
material adverse effect on the Company’s results of operations, capital expenditures or competitive position.
Outlook
Management continues to see meaningful organic sales, Adjusted EBIT and Adjusted EBITDA growth across each of
the Company’s business segments, and anticipates that growth rates in 2019 and beyond will generally exceed the
broader industrial market. The details of management’s growth expectations for 2019 compared to 2018 are as
follows:
Organic sales are expected to increase in the mid-single digits on a consolidated basis, with Filtration and
Technical Packaging growing four to six percent each, USG growing five to seven percent (partially muted
by slower growth in the renewable energy space at NRG), and Test growing three to five percent;
Interest expense is expected to be similar to 2018 despite the lower debt levels as the Company is projecting
higher interest rates over the next twelve months;
Non-cash depreciation and amortization of intangibles is expected to increase approximately $3.7 million (or
$0.11 per share after-tax) related to previous acquisitions and capital spending;
Income tax expense is expected to increase as management is projecting a 24 percent effective tax rate
calculated on higher pretax earnings;
In summary, management projects 2019 Adjusted EPS to be in the range of $2.95 to $3.05 reflecting
meaningful organic sales growth offset by the additional depreciation and amortization charges and
incremental tax expense noted above. In making this projection management is excluding the following
expected adjustments to 2019 GAAP EPS:
– A pre-tax gain of approximately $7 million from the October 2018 sale of Doble’s headquarters building
in Watertown, Massachusetts; and
– Pre-tax costs aggregating approximately $4.5 million related to the relocation of Doble’s headquarters,
the closure of Plastique’s headquarters in Tunbridge Wells, UK and the consolidation of its product
design and administrative functions into its facilities in Nottingham, UK and Poznan, Poland, the
consolidation of VACCO’s aircraft/aerospace business into PTI’s aerospace facility in Oxnard,
California, and the completion of other restructuring activities begun in 2018.
On a quarterly basis and consistent with prior years, management expects 2019 revenues and Adjusted EPS to be more
second-half weighted. Management expects Q1 2019 Adjusted EPS to be in the range of $0.40 to $0.45 per share.
Market Risk Exposure
Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in
foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and
selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks.
During 2016, the Company entered into forward contracts to purchase pounds sterling (GBP) to hedge two deferred
payments due in connection with the acquisition of Plastique. During 2018, the Company entered into three interest
rate swaps with a notional amount of $150 million to hedge some of its exposure to variability in future LIBOR-
based interest payments on variable rate debt. In addition, the Company’s Canadian subsidiary Morgan Schaffer
entered into foreign exchange contracts to manage foreign currency risk, as a portion of their revenue is denominated
in U.S. dollars. All derivative instruments are reported on the balance sheet at fair value. For derivative instruments
designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive
26
income until recognized in earnings with the underlying hedged item. The interest rate swaps entered into during
2018 were not designated as cash flow hedges and therefore the gain or loss on the derivative is reflected in earnings
each period.
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
currencies most significant to the Company’s operations are the Canadian Dollar and the Euro. The Company
occasionally hedges certain foreign currency commitments by purchasing foreign currency forward contracts. The
Company does not have material foreign currency market risk; net foreign currency transaction gain/loss was less than
2% of net earnings for 2018, 2017 and 2016.
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 3% of net earnings for the year ended September 30, 2018.
For more information about the Company’s derivative financial instruments, see Note 12 to the Company’s
Consolidated Financial Statements beginning on page F-1 of this Annual Report.
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 to the Consolidated Financial Statements included herein.
Revenue Recognition
Information regarding the recognition of revenue by the entities in each of the Company’s business segments is set
forth in Note 1.E to the Company’s Consolidated Financial Statements beginning on page F-1 of this Annual Report,
which Note is incorporated by reference herein.
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. 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.
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. 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.
On December 22, 2017, the U.S. government enacted the TCJA, which, among other things, lowered the U.S.
corporate statutory income tax rate and established a modified territorial system requiring a mandatory deemed
repatriation on undistributed earnings of foreign subsidiaries.
In accordance with Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin 118, as of September 30,
2018, the Company recorded certain TCJA related provisional charges using available information and estimates.
27
Adjustments to the provisional charges will be recorded in the period in which those adjustments become reasonably
estimable and/or the accounting is complete. Such adjustments may result from, among other things, future guidance,
interpretations and regulatory changes from the U.S. Internal Revenue Service, the SEC, the Financial Accounting
Standards Board and/or various state and local tax jurisdictions. The Company will complete this analysis no later
than December 22, 2018.
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, 2018, the
Company has determined that no reporting units are at risk of goodwill impairment as the fair value of each reporting
unit substantially exceeded its carrying value.
Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their
estimated residual values, and are reviewed for impairment whenever events or changes in business circumstances
indicate the carrying value of the assets may not be recoverable.
Other Matters
Contingencies
As a normal incident of the businesses in which the Company is engaged, various claims, charges and litigation are
asserted or commenced from time to time against the Company. Additionally, the Company is currently involved in
various stages of investigation and remediation relating to environmental matters. It is the opinion of Management
that the aggregate costs involved in the resolution of these matters, and final judgments, if any, which might be
rendered against the Company are adequately accrued, are covered by insurance or are not likely to have a material
adverse effect on the Company’s results from continuing operations, 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.
During 2016 the Company entered into several forward contracts to purchase pounds sterling (GBP) to hedge two
deferred payments due in connection with the acquisition of Plastique. During 2018, the Company entered into three
interest rate swaps with a notional amount of $150 million to hedge some of its exposure to variability in future
LIBOR-based interest payments on variable rate debt. In addition, the Company’s Canadian subsidiary Morgan
Schaffer has entered into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is
denominated in U.S. dollars. All derivative instruments are reported on the balance sheet at fair value. For derivative
instruments designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other
comprehensive income until recognized in earnings with the underlying hedged item. See further discussion
regarding the Company’s market risks in “Market Risk Analysis,” above.
28
Controls and Procedures
For a description of the Company’s evaluation of its disclosure controls and procedures, see Item 9A, “Controls and
Procedures.”
New Accounting Pronouncements
Information regarding new and updated accounting standards which affect the content and/or presentation of the
Company’s financial information is set forth in Note 1.W to the Company’s Consolidated Financial Statements
beginning on page F-1 of this Annual Report, which Note is incorporated by reference herein.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
See “Market Risk Analysis” and “Other Matters – Quantitative And Qualitative Disclosures About Market Risk” in
Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are
incorporated into this Item by reference.
Item 8. Financial Statements and Supplementary Data
The information required by this Item is incorporated by reference to the Consolidated Financial Statements of the
Company, the Notes thereto, and the related “Report of Independent Registered Public Accounting Firm” of KPMG
LLP, as set forth in the Financial Information section beginning on page F-1 of this Annual Report; an Index is
provided on page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Not Applicable.
Item 9A. Controls and Procedures
For 2018, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act). The evaluation was conducted under the supervision and with the participation
of the Company’s Management, including the Company’s Chief Executive Officer and Chief Financial Officer, using
the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Disclosure controls and procedures are designed to ensure that information required
to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and
forms. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that
the Company’s disclosure controls and procedures were not effective as of September 30, 2018, as a result of a
material weakness in the Company’s internal control over financial reporting related to the ineffective design and
operation of controls impacting the deferred revenue general ledger account, as described in Management’s Report on
Internal Control over Financial Reporting.
Notwithstanding the material weakness impacting the deferred revenue general ledger account, Management has
concluded that the Consolidated Financial Statements included in this Form 10-K fairly present, in all material
respects, the financial position of the Company as of September 30, 2018 and 2017 and the consolidated results of
operations and cash flows for each of the three years in the period ended September 30, 2018, in conformity with U.S.
generally accepted accounting principles.
For additional information required by this item, see “Management’s Report on Internal Control over Financial
Reporting” in the Financial Information section beginning on page F-1 of this Annual Report, which is incorporated
into this Item by reference.
Other than identifying the specific deficiencies related to the material weakness disclosed, there were no changes in
the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during
the fiscal quarter ended September 30, 2018 that have materially affected, or are reasonably likely to materially affect,
the Company’s internal control over financial reporting.
29
The Company is in the process of remediating the material weakness and has taken the following actions: enhanced
our policies and procedures related to the deferred revenue reconciliation and review and provided additional training
to certain personnel in our finance department. We believe these measures will remediate the control deficiencies and
strengthen our internal control over financial reporting. We will test the operating effectiveness of the revised and new
controls subsequent to full implementation, and will consider the material weakness remediated after the applicable
controls have operated effectively for a sufficient period of time.
Item 9B. Other Information
None.
30
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding nominees and directors, the Company’s Code of Ethics, its Audit and Finance Committee, and
compliance with Section 16(a) of the Securities Exchange Act of 1934 is hereby incorporated by reference to the
sections captioned “Proposal 1: Election of Directors,” “Board of Directors – Governance Policies and Management
Oversight,” “Committees” and “Securities Ownership – Section 16(a) Beneficial Ownership Reporting
Compliance” in the 2018 Proxy Statement.
Information regarding the Company’s executive officers is set forth in Item 1, “Business – Executive Officers of the
Registrant,” above.
Item 11. Executive Compensation
Information regarding the Company’s compensation committee and director and executive officer compensation is
hereby incorporated by reference to the sections captioned “Committees – Compensation Committee Interlocks and
Insider Participation,” “Director Compensation” and “Executive Compensation Information” in the 2018 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information regarding the beneficial ownership of shares of the Company’s common stock by nominees and directors,
by executive officers, by directors and executive officers as a group and by any known five percent stockholders is
hereby incorporated by reference to the section captioned “Securities Ownership” in the 2018 Proxy Statement.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information regarding transactions with related parties and the independence of the Company’s directors, nominees
for directors and members of the committees of the board of directors is hereby incorporated by reference to the
sections captioned “Board of Directors” and “Committees” in the 2018 Proxy Statement.
Item 14. Principal Accounting Fees and Services
Information regarding the Company’s independent registered public accounting firm, its fees and services, and the
Company’s Audit and Finance Committee’s pre-approval policies and procedures regarding such fees and services, is
hereby incorporated by reference to the section captioned “Audit-Related Matters” in the 2018 Proxy Statement.
31
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as a part of this Report:
(1) Financial Statements. The Consolidated Financial Statements of the Company, and the Report of
Independent Registered Public Accounting Firm thereon of KPMG LLP, are included in this Report
beginning on page F-1; an Index thereto is set forth on page F-1.
(2) Financial Statement Schedules. Financial Statement Schedules are omitted because either they are not
applicable or the required information is included in the Consolidated Financial Statements or the Notes
thereto.
(3) Exhibits. The following exhibits are filed with this Report or incorporated herein by reference to the
document location indicated:
Exhibit No.
Description
Document Location
3.1(a)
Restated Articles of Incorporation
3.1(b)
Amended Certificate of Designation, Preferences and
Rights of Series A Participating Cumulative Preferred
Stock
Exhibit 3(a) to the Company’s Form 10-K for the
fiscal year ended September 30, 1999
Exhibit 4(e) to the Company’s Form 10-Q for the
fiscal quarter ended March 31, 2000
3.1(c)
Articles of Merger, effective July 10, 2000
Exhibit 3(c) to the Company’s Form 10-Q for the
fiscal quarter ended June 30, 2000
3.1(d)
Amendment to Articles of Incorporation, effective
Exhibit 3.1 to the Company’s Form 8-K filed
3.2
4.1
4.2
4.3
4.4
10.1
February 5, 2018
Bylaws
February 7, 2018
Exhibit 3.2 to the Company’s Form 8-K filed
February 7, 2018
Specimen revised Common Stock Certificate
Exhibit 4.1 to the Company’s Form 10-Q for the
fiscal quarter ended March 31, 2010
Exhibit 4.1 to the Company’s Form 8-K filed
December 23, 2015
Amended and Restated Credit Agreement dated as of
December 21, 2015 among the Registrant, the Foreign
Subsidiary Borrowers from time to time party thereto,
the Lenders from time to time party thereto, JP Morgan
Chase Bank, N.A. as Administrative Agent, and Bank of
America, N.A., BMO Harris Bank, N.A., SunTrust Bank
and Wells Fargo Bank, National Association as Co-
Documentation Agents
Amendment No. 1 to Credit Agreement dated as of
December 21, 2015, effective September 30, 2016
Exhibit 4.4 to the Company’s Form 10-K filed
November 29, 2016
Amendment No. 2 to Credit Agreement dated as of
Exhibit 4.4 to the Company’s Form 10-Q filed
December 21, 2015, effective May 15, 2017
August 8, 2017
Securities Purchase Agreement dated March 14, 2014
between ESCO Technologies Holding LLC and Meter
Readings Holding LLC
Exhibit 10.1 to the Company’s Form 8-K filed
March 28, 2014
10.2
Form of Indemnification Agreement with each of
Exhibit 10.1 to the Company’s Form 10-K for the
ESCO’s non-employee directors
fiscal year ended September 30, 2012
10.3(a)
* First Amendment to the ESCO Electronics Corporation
Supplemental Executive Retirement Plan, effective
August 2, 1993 (comprising restatement of entire Plan)
Exhibit 10.2(a) to the Company’s Form 10-K for the
fiscal year ended September 30, 2012
32
Exhibit No.
Description
Document Location
10.3(b)
* Second Amendment to Supplemental Executive
Exhibit 10.4 to the Company’s Form 10-K for the
Retirement Plan, effective May 1, 2001
fiscal year ended September 30, 2001
10.3(c)
* Form of Supplemental Executive Retirement Plan
Exhibit 10.28 to the Company’s Form 10-K for the
Agreement
fiscal year ended September 30, 2002
10.4(a)
* Directors’ Extended Compensation Plan, adopted
Exhibit 10.3(a) to the Company’s Form 10-K for the
effective October 11, 1993
fiscal year ended September 30, 2012
10.4(b)
* First Amendment to Directors’ Extended Compensation
Exhibit 10.11 to the Company’s Form 10-K for the
Plan effective January 1, 2000
fiscal year ended September 30, 2000
10.4(c)
* Second Amendment to Directors’ Extended
Compensation Plan, effective April 1, 2001
Exhibit 10.7 to the Company’s Form 10-K for the
fiscal year ended September 30, 2001
10.4(d)
* Third Amendment to Directors’ Extended
Exhibit 10.43 to the Company’s Form 10-K for the
Compensation Plan, effective October 3, 2007
fiscal year ended September 30, 2007
10.4(e)
* Fourth Amendment to Directors’ Extended
Exhibit 10.3(e) to the Company’s Form 10-K for the
Compensation Plan, effective August 7, 2013
fiscal year ended September 30, 2013
10.5(a)
* Compensation Plan For Non-Employee Directors, as
restated to reflect all amendments through May 29,
2014
Exhibit 10.1 to the Company’s Form 8-K filed
October 2, 2014
10.5(b)
* Compensation Plan For Non-Employee Directors, as
Exhibit 10.3 to the Company’s Form 8-K filed
amended and restated November 8, 2017
November 14, 2017
10.6(a)
* 2013 Incentive Compensation Plan
Appendix A to the Company’s Schedule 14A Proxy
10.6(b)
* Form of Notice of Award (2013-14) – Performance-
Accelerated Restricted Stock (2013 Incentive
Compensation Plan)
Statement filed December 19, 2012
Exhibit 10.7(b) to the Company’s Form 10-K for the
fiscal year ended September 30, 2013
10.6(c)
* Form of Award Agreement under 2013 Incentive
Exhibit 10.1 to the Company’s Form 8-K filed
Compensation Plan, effective November 11, 2015
November 12, 2015
10.6(d)
* Form of Amendment to 2012-2014 Awards under 2004
and 2013 Incentive Compensation Plans, effective
November 11, 2015
Exhibit 10.2 to the Company’s Form 8-K filed
November 12, 2015
10.6(e)
* 2018 Omnibus Incentive Plan
Exhibit 10.1 to the Company’s Form 8-K filed
February 6, 2018
10.6(f)
* Form of Award Agreement for Performance-
Filed herewith
Accelerated Restricted Shares under 2018 Omnibus
Incentive Plan (Omnibus Form, last revised August 29,
2018)
10.7
* Eighth Amendment and Restatement of Employee
Filed herewith
Stock Purchase Plan, effective as of August 2, 2018
10.8
* Performance Compensation Plan for Corporate,
Exhibit 10.1 to the Company’s Form 8-K filed
Subsidiary and Division Officers and Key Managers,
adopted August 2, 1993, as amended and restated
through November 9, 2017
November 14, 2017
10.9
*
Incentive Compensation Plan for Executive Officers,
adopted November 9, 2005, as amended and restated
through August 8, 2012
Exhibit 10.10 to the Company’s Form 10-K for the
fiscal year ended September 30, 2012
10.10
* Compensation Recovery Policy, adopted effective
Exhibit 10.6 to the Company’s Form 8-K filed
February 4, 2010
February 10, 2010
33
Exhibit No.
Description
Document Location
10.11
Severance Plan adopted as of August 10, 1995, as
Exhibit 10.1 to the Company’s Form 8-K/A filed
Amended and Restated November 11, 2015
November 30, 2015
10.12(a)
* Employment Agreement with Victor L. Richey, effective
Exhibit 10(bb) to the Company’s Form 10-K for the
November 3, 1999
fiscal year ended September 30, 1999
(Note: Agreement with Victor L. Richey is
substantially identical to the referenced Exhibit and
is therefore omitted as a separate exhibit pursuant
to Rule 12b-31)
10.12(b)
* Second Amendment to Employment Agreement with
Exhibit 10.1 to the Company’s Form 10-Q for the
Victor L. Richey, effective May 5, 2004
fiscal quarter ended June 30, 2004
10.12(c)
* Third Amendment to Employment Agreement with
Victor L. Richey, effective December 31, 2007
Exhibit 10.1 to the Company’s Form 8-K filed
January 7, 2008
10.13(a)
* Employment Agreement with Gary E. Muenster,
Exhibit 10(bb) to the Company’s Form 10-K for the
effective November 3, 1999
fiscal year ended September 30, 1999
(Note: Agreement with Gary E. Muenster is
substantially identical to the referenced Exhibit
except that it provides a minimum base salary of
$108,000, and is therefore omitted as a separate
exhibit pursuant to Rule 12b-31)
10.13(b)
* Second Amendment to Employment Agreement with
Exhibit 10.2 to the Company’s Form 10-Q for the
Gary E. Muenster, effective May 5, 2004
fiscal quarter ended June 30, 2004
10.13(c)
* Third Amendment to Employment Agreement with Gary
Exhibit 10.1 to the Company’s Form 8-K filed
E. Muenster, effective December 31, 2007
January 7, 2008
(Note: Third Amendment with Gary E. Muenster is
substantially identical to the referenced Exhibit
except that (i) the termination amounts payable
under Paragraph 9.a(1) are equal to base salary
for 12 months and (ii) under Paragraph 9.a(1)(B),
such termination amounts may be paid in biweekly
installments equal to 1/26th of such amounts, and
is therefore omitted as a separate exhibit pursuant
to Rule 12b-31)
10.13(d)
* Fourth Amendment to Employment Agreement with
Exhibit 10.1 to the Company’s Form 8-K filed
Gary E. Muenster, effective February 6, 2008
February 12, 2008
10.14(a)
* Employment Agreement with Alyson S. Barclay,
Exhibit 10(bb) to the Company’s Form 10-K for the
effective November 3, 1999
fiscal year ended September 30, 1999
10.14(b)
* Second Amendment to Employment Agreement with
Exhibit 10.2 to the Company’s Form 10-Q for the
Alyson S. Barclay, effective May 5, 2004
fiscal quarter ended June 30, 2004
(Note: Agreement with Alyson S. Barclay is
substantially identical to the referenced Exhibit
except that it provides a minimum base salary of
$94,000, and is therefore omitted as a separate
exhibit pursuant to Rule 12b-31)
(Note: Second Amendment with Alyson S. Barclay
is substantially identical to the referenced Exhibit,
and is therefore omitted as a separate exhibit
pursuant to Rule 12b-31)
34
Exhibit No.
Description
Document Location
10.14(c)
* Third Amendment to Employment Agreement with
Alyson S. Barclay, effective December 31, 2007
Exhibit 10.1 to the Company’s Form 8-K filed
January 7, 2008
(Note: Third Amendment with Alyson S. Barclay is
substantially identical to the referenced Exhibit
except that (i) the termination amounts payable
under Paragraph 9.a(1) are equal to base salary
for 12 months and (ii) under Paragraph 9.a(1)(B),
such termination amounts may be paid in biweekly
installments equal to 1/26th of such amounts, and
is therefore omitted as a separate exhibit pursuant
to Rule 12b-31)
10.14(d)
* Fourth Amendment to Employment Agreement with
Exhibit 10.1 to the Company’s Form 8-K filed
Alyson S. Barclay, effective July 29, 2010
Subsidiaries of the Company
August 3, 2010
Filed herewith
Consent of Independent Registered Public Accounting
Filed herewith
Firm
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Filed herewith
Filed herewith
** Certification of Chief Executive Officer and Chief
Filed herewith
21
23
31.1
31.2
32
Financial Officer
101.INS
*** XBRL Instance Document
101.SCH
*** XBRL Schema Document
101.CAL
*** XBRL Calculation Linkbase Document
101.LAB
*** XBRL Label Linkbase Document
101.PRE
*** XBRL Presentation Linkbase Document
101.DEF
*** XBRL Definition Linkbase Document
-----------
Submitted herewith
Submitted herewith
Submitted herewith
Submitted herewith
Submitted herewith
Submitted herewith
*
Indicates a management contract or compensatory plan or arrangement.
** Furnished (and not filed) with the Commission pursuant to Item 601(b)(32)(ii) of Regulation S-K.
*** Exhibit 101 to this report consists of documents formatted in XBRL (Extensible Business Reporting Language).
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ESCO TECHNOLOGIES INC.
By: /s/ Victor L. Richey
Victor L. Richey
President and Chief Executive Officer
Date: November 29, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Victor L. Richey
Victor L. Richey
Chairman, President, Chief Executive
November 29, 2018
Officer and Director
/s/ Gary E. Muenster
Gary E. Muenster
/s/ Patrick M. Dewar
Patrick M. Dewar
/s/ Vinod M. Khilnani
Vinod M. Khilnani
/s/ Leon J. Olivier
Leon J. Olivier
/s/ Robert J. Phillippy
Robert J. Phillippy
/s/ Larry W. Solley
Larry W. Solley
/s/ James M. Stolze
James M. Stolze
Executive Vice President, Chief Financial
Officer (Principal Accounting Officer)
and Director
November 29, 2018
November 29, 2018
November 29, 2018
November 29, 2018
November 29, 2018
November 29, 2018
November 29, 2018
Director
Director
Director
Director
Director
Director
36
FINANCIAL INFORMATION
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Balance Sheets
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Management’s Statement of Financial Responsibility
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
F-2
F-3
F-3
F-4
F-6
F-7
F-8
F-29
F-30
F-31
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
ESCO Technologies Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of ESCO Technologies Inc. and subsidiaries (the
Company) as of September 30, 2018 and 2017, 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,
2018, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company as of September 30,
2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended
September 30, 2018, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2018, based on criteria
established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission, and our report dated November 29, 2018 expressed an adverse opinion on the
effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 1990.
St. Louis, Missouri
November 29, 2018
F-2
CONSOLIDATED STATEMENTS OF OPERATIONS
(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 expenses (income), net
Total costs and expenses
Earnings before income tax
Income tax (benefit) expense
Net earnings
Earnings per share:
Basic:
Net earnings
Diluted:
Net earnings
Average common shares outstanding (in thousands):
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
2018
771,582
2017
685,740
$
490,397
162,431
18,328
8,748
3,655
683,559
88,023
(4,113 )
92,136
436,918
148,433
16,338
4,578
(680 )
605,587
80,153
26,450
53,703
2016
571,459
350,807
131,493
11,630
1,308
7,801
503,039
68,420
22,538
45,882
3.56
2.08
3.54
2.07
1.78
1.77
25,874
26,058
25,774
25,995
25,762
25,968
$
$
$
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
Years ended September 30,
Net earnings
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments
Amortization of prior service costs and actuarial (losses) gains
Net unrealized gain (loss) on derivative instruments
Total other comprehensive (loss) income, net of tax
Comprehensive income
See accompanying Notes to Consolidated Financial Statements.
2018
92,136
2017
53,703
$
(2,254 )
(2,003 )
37
(4,220 )
$
87,916
6,383
5,573
19
11,975
65,678
2016
45,882
(1,462 )
(5,250 )
(33 )
(6,745 )
39,137
F-3
2018
2017
30,477
45,516
163,740
160,580
53,034
135,416
13,356
396,023
9,944
92,418
141,711
6,609
250,682
(115,728 )
134,954
345,353
381,652
7,140
47,286
124,515
14,895
392,792
9,964
88,469
129,366
4,599
232,398
(99,650 )
132,748
351,134
377,879
5,891
$ 1,265,122
1,260,444
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
As of September 30,
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $1,683 and $2,030 in 2018 and
$
2017, respectively
Costs and estimated earnings on long-term contracts, less progress billings of $27,636 and
$64,099 in 2018 and 2017, respectively
Inventories, net
Other current assets
Total current assets
Property, plant and equipment:
Land and land improvements
Buildings and leasehold improvements
Machinery and equipment
Construction in progress
Less accumulated depreciation and amortization
Net property, plant and equipment
Intangible assets, net
Goodwill
Other assets
Total Assets
See accompanying Notes to Consolidated Financial Statements.
F-4
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
As of 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 $26,693 and $59,772
$
in 2018 and 2017, respectively
Accrued salaries
Current portion of deferred revenue
Accrued other expenses
Total current liabilities
Pension obligations
Deferred tax liabilities
Other liabilities
Long-term debt
Total liabilities
Shareholders’ equity:
Preferred stock, par value $.01 per share, authorized 10,000,000 shares
Common stock, par value $.01 per share, authorized 50,000,000 shares; issued
30,534,786 and 30,468,824 shares in 2018 and 2017, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of tax
Less treasury stock, at cost (4,623,958 and 4,635,622 common shares in 2018 and 2017,
respectively)
Total shareholders’ equity
2018
2017
20,000
63,033
19,467
29,379
29,568
39,083
200,530
16,286
64,794
24,102
200,000
505,712
20,000
54,789
22,451
32,259
28,583
36,887
194,969
30,223
86,378
21,956
255,000
588,526
305
291,190
606,837
(31,528 )
866,804
305
289,785
516,718
(27,308 )
779,500
(107,394 )
759,410
(107,582 )
671,918
Total Liabilities and Shareholders’ Equity
$
1,265,122
1,260,444
See accompanying Notes to Consolidated Financial Statements.
F-5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Total
Balance, September 30, 2015
30,359 $
304 286,485 433,632
(32,538 ) (103,701 )
584,182
Comprehensive income (loss):
Net earnings
Translation adjustments, net of tax of $383
Net unrecognized actuarial loss, net of tax
of $3,059
Forward exchange contract, net of tax of $95
Cash dividends declared
($0.32 per share)
Stock options and stock compensation plans,
net of tax of $18
Purchases into treasury
Balance, September 30, 2016
Comprehensive income (loss):
Net earnings
Translation adjustments, net of tax of $0
Net unrecognized actuarial gain, net of tax
of $(2,938)
Forward exchange contracts, net of tax of
$(66)
Cash dividends declared
($0.32 per share)
Stock options and stock compensation plans,
—
—
—
—
—
5
—
—
—
—
—
— 45,882
—
—
—
—
—
—
—
(1,462 )
(5,250 )
(33 )
—
—
—
—
45,882
(1,462 )
(5,250 )
(33 )
—
—
(8,242 )
—
—
(8,242 )
—
4,103
—
—
232
4,335
—
—
304 290,588 471,272
—
—
(4,303 )
(39,283 ) (107,772 )
(4,303 )
615,109
30,364 $
—
—
—
—
—
—
—
—
—
— 53,703
—
—
—
6,383
—
—
53,703
6,383
—
—
—
—
5,573
—
5,573
19
—
19
—
—
(8,257 )
—
—
(8,257 )
net of tax of $0
105
1
(803 )
—
—
190
(612 )
Balance, September 30, 2017
30,469 $
305 289,785 516,718
(27,308 ) (107,582 )
671,918
Comprehensive income (loss):
Net earnings
Translation adjustments, net of tax of $0
Net unrecognized actuarial loss, net of tax
of $(1,326)
Forward exchange contracts, net of tax of
$(41)
Cash dividends declared
($0.32 per share)
Reclassification from accumulated other
comprehensive loss as a result of the
adoption of a new accounting standard
Stock options and stock compensation plans,
—
—
—
—
—
—
—
—
—
— 92,136
—
—
—
(2,254 )
—
—
92,136
(2,254 )
—
—
—
—
(2,003 )
—
(2,003 )
37
—
37
—
—
(8,278 )
—
—
(8,278 )
6,261
6,261
net of tax of $0
66
––
1,405
—
—
188
1,593
Balance, September 30, 2018
30,535 $
305 291,190 606,837
(31,528 ) (107,394 )
759,410
See accompanying Notes to Consolidated Financial Statements.
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended September 30,
Cash flows from operating activities:
2018
2017
2016
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating
$
92,136
53,703
45,882
activities:
Depreciation and amortization
Stock compensation expense
Changes in assets and liabilities
Effect of deferred taxes on tax provision
Pension contributions
Other
Net cash provided by operating activities
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired
Capital expenditures
Additions to capitalized software
Proceeds from sale of land
Proceeds from life insurance
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
Debt issuance costs
Other
Net cash (used) provided by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Changes in assets and liabilities:
Accounts receivable, net
Costs and estimated earnings on long-term contracts, net
Inventories
Other assets and liabilities
Accounts payable
Advance payments on long-term contracts, net
Accrued expenses
Deferred revenue and costs, net
Supplemental cash flow information:
Interest paid
Income taxes paid (including state & foreign)
See accompanying Notes to Consolidated Financial Statements.
37,755
5,218
(10,315 )
(21,584 )
(9,951 )
—
93,259
(11,445 )
(20,589 )
(9,573 )
—
—
(41,607 )
55,000
(110,000 )
(8,278 )
—
—
(3,078 )
(66,356 )
(335 )
(15,039 )
45,516
30,477
(2,789 )
(5,748 )
(9,830 )
(695 )
9,442
(2,984 )
771
1,518
(10,315 )
8,540
8,789
$
$
$
$
32,229
5,444
(17,889 )
1,360
(2,677 )
(4,830 )
67,340
(198,628 )
(29,728 )
(9,002 )
1,184
2,307
(233,867 )
257,000
(92,000 )
(8,257 )
—
—
20
156,763
1,455
(8,309 )
53,825
45,516
(23,587 )
(18,540 )
3,959
(2,014 )
8,735
6,264
5,644
1,650
(17,889 )
3,731
25,674
23,568
4,704
1,746
(2,993 )
—
952
73,859
(82,062 )
(13,843 )
(8,665 )
—
—
(104,570 )
140,000
(80,000 )
(8,248 )
(4,303 )
(1,097 )
(128 )
46,224
(1,099 )
14,414
39,411
53,825
(9,088 )
(359 )
1,101
4,982
(1,953 )
(2,439 )
4,042
5,460
1,746
1,361
22,631
F-7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
A. Principles of Consolidation
The Consolidated Financial Statements include the accounts of ESCO Technologies Inc. (ESCO) and its wholly
owned subsidiaries (the Company). All significant intercompany transactions and accounts have been eliminated in
consolidation.
B. Basis of Presentation
The Company’s fiscal year ends September 30. Throughout these Consolidated Financial Statements, unless the
context indicates otherwise, references to a year (for example 2018) refer to the Company’s fiscal year ending on
September 30 of that year.
The Company accounts for shipping and handling costs on a gross basis and they are included in net sales. The
Company accounts for taxes collected from customers and remitted to governmental authorities on a net basis and
they are excluded from net sales.
C. Nature of Operations
The Company is organized based on the products and services it offers, and classifies its business operations in
segments for financial reporting purposes. Under the current organization structure, the Company has four segments
for financial reporting purposes: Filtration/Fluid Flow (Filtration), RF Shielding and Test (Test), Utility Solutions
Group (USG) and Technical Packaging.
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, custom designed filters for manned aircraft and
submarines, elastomeric-based signature reduction solutions to enhance U.S. Navy maritime survivability, precision-
tolerance machined components for the aerospace and defense industry, and metal processing services.
Test: ETS-Lindgren Inc. provides its customers with the ability to identify, measure and contain magnetic,
electromagnetic and acoustic energy.
USG: The companies within this segment provide high-end, intelligent, diagnostic test and data management
solutions for the electric power delivery industry, and decision support tools for the renewable energy industry,
primarily wind.
Technical Packaging: The companies within this segment provide innovative solutions to the medical and
commercial markets for thermoformed and precision molded pulp fiber packages and specialty products using a wide
variety of thin gauge plastics and pulp.
D. Use of Estimates
The preparation of financial statements in conformity with GAAP requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates.
E. Revenue Recognition
Filtration: Within the Filtration segment, approximately 85% of revenues (approximately 31% 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 15% of the segment’s revenues (approximately 6% of consolidated revenues) are recorded under the
percentage-of-completion method. The majority of these contracts are cost-reimbursable contracts which provide for
the payment of allowable costs incurred during the performance of the contract plus an incentive fee. The remainder
of the contracts are fixed-price contracts. 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 fixed-price contracts 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
F-8
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.
Test: Within the Test segment, approximately 25% of revenues (approximately 6% 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 75% of the segment’s revenues (approximately 18% 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 revenue and total estimated cost of a contract and
recognizes these revenues and costs based primarily on contract milestones. 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: Within the USG segment, approximately 75% of revenues (approximately 21% 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 17% of the segment’s revenues (approximately 5% of consolidated
revenues) are recognized on a straight-line basis over the term. Approximately 8% of the segment’s revenues
(approximately 2% of consolidated revenues) are recognized based on the terms of the software contract.
Technical Packaging: Within the Technical Packaging segment, 100% of revenues (approximately 11% of
consolidated revenues) are recognized when products are delivered (when title and risk of ownership transfers) or
when services are performed for unaffiliated customers.
See the further discussion of the Company’s revenue recognition in Note 1.W, below.
F. Cash and Cash Equivalents
Cash equivalents include temporary investments that are readily convertible into cash, such as money market funds,
with original maturities of three months or less.
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.
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.
F-9
K. Leases
Lease agreements are evaluated to determine whether they are capital or operating leases in accordance with ASC
840, Leases (ASC 840). When any one of the four test criteria in ASC 840 is met, the lease then qualifies as a capital
lease. Capital leases are capitalized at the lower of the net present value of the total amount payable under the leasing
agreement (excluding finance charges) or the fair market value of the leased asset. Capital lease assets are depreciated
on a straight-line basis, over a period consistent with the Company’s normal depreciation policy for tangible fixed
assets. The Company allocates each lease payment between a reduction of the lease obligation and interest expense
using the effective interest method. Rent expense for operating leases, which may include free rent or fixed escalation
amounts in addition to minimum lease payments, is recognized on a straight-line basis over the duration of the lease
term. Capital lease obligations are included within other long-term liabilities (long-term portion) and accrued other
expenses (current portion).
L. Goodwill and Other Long-Lived Assets
Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in business
acquisitions. Management annually reviews goodwill and other long-lived assets with indefinite useful lives for
impairment or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If
the Company determines that the carrying value of the long-lived asset may not be recoverable, a permanent
impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair
value. Fair value is measured based on a discounted cash flow method using a discount rate determined by
Management to be commensurate with the risk inherent in the Company’s current business model.
Other intangible assets represent costs allocated to identifiable intangible assets, principally customer relationships,
capitalized software, patents, trademarks, and technology rights. Intangible assets with estimable useful lives are
amortized over their respective estimated useful lives to their estimated residual values, and are reviewed for
impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be
recoverable. See Note 3 regarding goodwill and other intangible assets activity.
M. 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 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.
N. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. Deferred tax assets may be reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date. The Company regularly
reviews its deferred tax assets for recoverability and establishes a valuation allowance when Management believes it
is more likely than not such assets will not be recovered, taking into consideration historical operating results,
expectations of future earnings, tax planning strategies, and the expected timing of the reversals of existing temporary
differences.
F-10
O. Research and Development Costs
Company-sponsored research and development costs include research and development and bid and proposal efforts
related to the Company’s products and services. Company-sponsored product development costs are charged to
expense when incurred. Customer-sponsored research and development costs incurred pursuant to contracts are
accounted for 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. Total Company and customer-sponsored research and development expenses were approximately $13.1 million,
$14.0 million and $12.2 million for 2018, 2017 and 2016, respectively. These expense amounts exclude certain
engineering costs primarily associated with product line extensions, modifications and maintenance, which amounted
to approximately $13.1 million, $10.4 million and $8.2 million for 2018, 2017 and 2016, respectively.
P. Foreign Currency Translation
The financial statements of the Company’s foreign operations are translated into U.S. dollars in accordance with
FASB ASC Topic 830, Foreign Currency Matters. The resulting translation adjustments are recorded as a separate
component of accumulated other comprehensive income.
Q. Earnings Per Share
Basic earnings per share is calculated using the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated using the weighted average number of common shares outstanding
during the period plus shares issuable upon the assumed exercise of dilutive common share options and vesting of
performance-accelerated restricted shares using the treasury stock method. There are no anti-dilutive shares.
The number of shares used in the calculation of earnings per share for each year presented is as follows:
(in thousands)
Weighted Average Shares Outstanding — Basic
Performance- Accelerated Restricted Stock
Shares — Diluted
R. Share-Based Compensation
2018
25,874
184
26,058
2017
25,774
221
25,995
2016
25,762
206
25,968
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).
S. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss of $(31.5) million at September 30, 2018 consisted of $(30.9) million related
to the pension net actuarial loss; $(0.5) million related to currency translation adjustments; and $(0.1) million related
to forward exchange contracts. Accumulated other comprehensive loss of $(27.3) million at September 30, 2017
consisted of $(28.9) million related to the pension net actuarial loss; $1.7 million related to currency translation
adjustments; and $(0.1) million related to forward exchange contracts.
T. Deferred Revenue and Costs
Deferred revenue and costs are recorded when products or services have been provided or cash has been received 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.
U. 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
F-11
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.
V. Fair Value Measurements
Fair value is defined as the price at which an asset could be exchanged in a current transaction between
knowledgeable, willing parties or the amount that would be paid to transfer a liability to a new obligor, not the
amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable
market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not
available, valuation models are applied. These valuation techniques involve some level of Management estimation
and judgment, the degree of which is dependent on the price transparency for the instruments or market and the
instruments’ complexity.
The accounting guidance 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.
Financial Assets and Liabilities
The Company has estimated the fair value of its financial instruments as of September 30, 2018 using available
market information or other appropriate valuation methodologies. The carrying amounts of cash and cash
equivalents, receivables, inventories, payables and other current assets and liabilities approximate fair value because
of the short maturity of those instruments. The carrying amounts due under the revolving credit facility approximate
fair value as the interest on outstanding borrowings is calculated at a spread over the London Interbank Offered Rate
(LIBOR) or based on the prime rate, at the Company’s election.
Nonfinancial Assets and Liabilities
The Company’s nonfinancial assets such as property, plant and equipment, and other intangible assets are not
measured at fair value on a recurring basis; however they are subject to fair value adjustments in certain
circumstances, such as when there is evidence that an impairment may exist. No impairments were recorded during
2018.
W. New Accounting Standards
Revenue Recognition
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity
to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to
customers. This guidance has been further clarified and amended. This new standard became effective for the
Company as of October 1, 2018, and will be adopted using the modified retrospective transition method. Under this
method, the Company will record the cumulative effect of adopting the new standard in the first quarter of 2019.
Because the new standard impacts the Company’s business processes, systems and controls, it developed a project
plan to guide the implementation. This project plan included analyzing the standard’s impact on the Company’s
contract portfolio, comparing the Company’s historical accounting policies and practices to the requirements of the
new standard, and identifying differences from applying the requirements of the new standard to the Company’s
contracts. The Company developed internal controls to ensure that it adequately evaluated its portfolio of contracts
under the five-step model to ensure proper assessment of the Company’s operating results under ASU 2014-09.
Management reported on the progress of the implementation to the Company’s Audit Committee and the Board of
Directors on a regular basis during the project’s duration. The primary impact of the adoption of ASU 2014-09 on
the Company’s portfolio of contracts and its Consolidated Financial Statements is that more of the Company’s
contracts within the Filtration and Technical Packaging segments will recognize revenue and earnings over time as
the work progresses versus at a single point of time.
F-12
Based on review and analysis of the Company’s contracts, the standard primarily impacts the Filtration and
Technical Packaging segments, which have long-term production contracts with the U.S. Government and other
commercial customers. Revenue for certain of the contracts within the Filtration segment, and the majority of
contracts within the Technical Packaging segment will be recognized over time primarily as: (i) services performed
or products installed by the Company are for the enhancement of assets owned and controlled by the customer, (ii)
customized products and services performed do not have an alternative use to the Company; and (iii) there is
continuous transfer of control to the customer.
Prior to adoption of the new standard, revenue was generally recognized for these contracts as units were delivered,
while under the new standard, revenue will be recognized over time, principally as costs are incurred. This change
will generally result in an acceleration of revenue for these contracts. The Company determined that revenues in the
Test and USG segments are expected to follow a revenue recognition pattern under the new guidance consistent with
the Company’s current practice. The Company identified required changes under the new guidance for the
recognition of capitalization of commissions on contracts within the Company’s Test segment; however, based on
the review of contracts within the Test segment, changes related to this item are expected to have an inconsequential
impact on the timing or amount of liabilities accrued as compared to current business practices.
At the adoption date, the impact of recognizing these revenues under the new standard for historical periods ending
prior to September 30, 2018 is expected to result in a cumulative pretax transition adjustment to increase retained
earnings by approximately $5 million, related to the Filtration and Technical Packaging segments. In addition, the
transition adjustment will establish contract assets of approximately $35 million, with corresponding decreases in
inventory of approximately $30 million and in contract liabilities (deferred revenue and customer deposits) and
accounts receivables, primarily reflecting the conversion of contracts to the cost-to-cost method. This change is not
expected to have a significant impact on the Company’s future operating results as the revenue on contracts that
would have been recognized under the units-of-delivery method in future years will essentially be replaced by the
acceleration of revenue on contracts into earlier periods using the cost-to-cost method. The new standard will have
no impact on cash flows and does not affect the economics of the underlying customer contracts.
The Company implemented changes to its financial reporting processes, systems and controls to comply with the
disclosure requirements of the new guidance including: (i) changes to balances in contract assets and contract
liabilities; and (ii) disaggregation of revenues. The Company expects to change the presentation of certain financial
statement accounts to align with the new standard. The most notable change will be presenting costs and estimated
earnings in excess of billings as contract assets and billings in excess of costs and estimated earnings as contract
liabilities. The Company will report contract balances as a net contract asset or liability position on a contract-by-
contract basis at the end of each reporting period.
Other Standards
In January 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic
220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which gives entities
the option to reclassify to retained earnings the tax effects resulting from the Act related to items in accumulated
other comprehensive income (loss) (AOCI) that the FASB refers to as having been stranded in AOCI. This new
standard is effective for annual periods beginning after December 15, 2018. The Company adopted this ASU in the
fourth quarter of 2018 and, as a result of adopting this standard, the Company reclassified $6.3 million from AOCI
to retained earnings.
In March 2017, the FASB issued ASU 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net
Periodic Postretirement Benefit Cost, which updates ASC 715, Compensation – Retirement Benefits. This update
permits only the service cost component of net periodic pension and postretirement expense to be reported with other
compensation costs, while all other components are required to be reported separately in other deductions, outside
any subtotal of operating income. These updates are effective for fiscal years beginning after December 15, 2017,
with early adoption permitted, and must be adopted on a retrospective basis. The updates change presentation only
and will not impact the Company’s results of operations.
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedge Activities, which
updates ASC 815, Derivatives and Hedging. This update is intended to amend the hedge accounting model to enable
entities to better align the economics of risk management activities and financial reporting. The updates eliminate the
requirement to separately measure and report hedge ineffectiveness and simplify hedge documentation and
effectiveness assessment requirements. These updates are effective for fiscal years beginning after December 15,
2018, with early adoption permitted, and must be adopted using a modified retrospective approach. These updates
are not expected to materially impact the Company’s results of operations.
F-13
In January 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-04, Simplifying the Test for
Goodwill Impairment (ASU 2017-04), which eliminates Step 2 from the goodwill impairment test. Under the
amendments in this update, an entity should recognize an impairment charge for the amount by which the carrying
amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of
goodwill allocated to that reporting unit. The new standard is effective for fiscal years beginning after December 15,
2019. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after
January 1, 2017. The Company adopted this standard in the fourth quarter of 2017 with its annual goodwill
impairment tests. The adoption of ASU 2017-04 did not have an impact on the Company’s consolidated financial
statements.
In March 2016, the FASB issued ASU No. 2016-09, Improvements to Employee Share-Based Payment Accounting,
which simplified the income tax consequences, accounting for forfeitures and classification on the Statements of
Consolidated Cash Flows. The Company adopted this standard in 2017 resulting in the income tax expense in the
third quarter and fiscal year 2017 being favorably impacted by additional tax benefits on share-based compensation
that vested during the third quarter of 2017 decreasing the effective tax rate by 5.1% and 1.1%, respectively.
In February 2016, the FASB issued ASU No. 2016-062, Leases (Topic 842), which, among other things, requires an
entity to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing
arrangements. This standard will increase an entity’s reported assets and liabilities. The new standard is effective for
fiscal years beginning after December 15, 2018 and mandates a modified retrospective transition period for all
entities. The Company is currently assessing the impact of this new standard on its consolidated financial statements
and related disclosures.
2. Acquisitions
2018
On March 14, 2018, the Company acquired the assets of Manta Test Systems Inc. (Manta), a North American utility
solutions provider located in Mississauga, Ontario, Canada, for a purchase price of $9.5 million in cash. Manta has
annualized sales of approximately $8 million. Since the date of acquisition, the operating results for Manta have been
included as a product line of Doble Engineering Company within the Company’s USG segment. Based on the
purchase price allocation, the Company recorded approximately $0.4 million of accounts receivable, $1.1 million of
inventory, $0.2 million of property, plant and equipment, $0.4 million of accounts payable and accrued expenses, $3.5
million of goodwill, $1.2 million of tradenames and $3.5 million of amortizable intangible assets consisting of
customer relationships with a weighted average life of 13 years.
2017
On August 30, 2017, the Company acquired the assets of Vanguard Instruments Company (Vanguard Instruments), a
test equipment provider serving the global electric utility market, located in Ontario, California, for a purchase price
of $36.0 million in cash. Vanguard Instruments has annualized sales of approximately $14 million. Since the date of
acquisition, the operating results for Vanguard Instruments have been included as a product line of Doble within the
Company’s USG segment. Based on the purchase price allocation, the Company recorded approximately $1.8 million
of accounts receivable, $2.1 million of inventory, $0.3 million of property, plant and equipment, $0.2 million of
accounts payable and accrued expenses, $10.7 million of goodwill, $3.2 million of tradenames and $18.0 million of
amortizable intangible assets consisting of customer relationships with a weighted average life of 15 years.
On May 25, 2017, the Company acquired the assets of Morgan Schaffer Inc. (Morgan Schaffer), a global utilities
provider located in Montreal, Quebec, Canada, for a purchase price of $48.8 million in cash. Morgan Schaffer has
annualized sales of approximately $25 million. It designs, develops, manufactures and markets an integrated offering
of dissolved gas analysis, oil testing, and data management solutions which enhance the ability of electric utilities to
accurately monitor the health of critical power transformers. Since the date of acquisition, the operating results for
Morgan Schaffer have been included in the Company’s USG segment. Based on the purchase price allocation, the
Company recorded approximately $2.5 million of accounts receivable, $5.2 million of inventory, $1.7 million of
property, plant and equipment, $0.4 million of other assets, $4.9 million of accounts payable and accrued expenses,
$4.8 million of goodwill, $35.6 million of trade names and $3.6 million of amortizable intangible assets consisting of
customer relationships and developed technology with a weighted average life of approximately 10 years.
On May 8, 2017, the Company acquired NRG Systems, Inc. (NRG), located in Hinesburg, Vermont, for a purchase
price of $38.6 million in cash (net of cash acquired). NRG is a global market leader in the design and manufacture of
decision support tools for the renewable energy industry, primarily wind. NRG has annualized sales of approximately
$45 million. Since the date of acquisition, the operating results for NRG have been included in the Company’s USG
F-14
segment. Based on the purchase price allocation, the Company recorded approximately $1.5 million of cash, $4.1
million of accounts receivable, $5.1 million of inventory, $0.4 million of other assets, $9.4 million of property, plant
and equipment (including a capital lease), $4.3 million of accounts payable and accrued expenses, $8.9 million of
long-term lease liability, $7.5 million of goodwill, $8.1 million of trade names and $17.2 million of amortizable
intangible assets consisting of customer relationships with a weighted average life of approximately 14 years.
On November 7, 2016, the Company acquired aerospace suppliers Mayday Manufacturing Co. (Mayday) and its
affiliate, Hi-Tech Metals, Inc. (Hi-Tech), which share a state-of-the-art, expandable 130,000 square foot facility in
Denton, Texas, for a purchase price of approximately $75 million in cash. Mayday is a leading manufacturer of
mission-critical bushings, pins, sleeves and precision-tolerance machined components for landing gear, rotor heads,
engine mounts, flight controls and actuation systems for the aerospace and defense industry. Hi-Tech is a full-service
metal processor offering aerospace OEM’s and Tier 1 suppliers a large portfolio of processing services including
anodizing, cadmium and zinc-nickel plating, organic coatings, non-destructive testing and heat treatment. Mayday and
Hi-Tech together have annual sales of approximately $40 million. Since the date of acquisition, the consolidated
operating results for Mayday and Hi-Tech have been included in the Company’s Filtration segment. Based on the
purchase price allocation, the Company recorded approximately $7.4 million of accounts receivable, $11.0 million of
inventory, $0.3 million of other assets, $16.6 million of property, plant and equipment (including a capital lease), $2.8
million of accounts payable and accrued expenses, $9.5 million of long-term lease liability, $15.7 million of deferred
tax liabilities, $30.1 million of goodwill, $4.8 million of trade names and $32.8 million of amortizable identifiable
intangible assets consisting primarily of customer relationships with a weighted-average life of approximately 20
years.
2016
On September 2, 2016, the Company acquired the stock of Westland Technologies, Inc. (Westland), located in
Modesto, California, for a purchase price of approximately $41 million in cash (net of cash acquired). Westland is a
market leader in the design, development and manufacture of elastomeric-based signature reduction solutions which
enhance U.S. Naval maritime platform survivability. Westland has annual sales of approximately $25 million. Since
the date of acquisition, the operating results for Westland have been included within the Company’s Filtration
segment. Based on the purchase price allocation, the Company recorded tangible assets, net, of $4.6 million, deferred
tax liabilities of $9.5 million, goodwill of $17.3 million, and $28.3 million of identifiable intangible assets primarily
consisting of customer relationships.
On January 29, 2016, the Company acquired Plastique Limited and Plastique Sp. z o.o. (together, Plastique),
headquartered in Tunbridge Wells, England with manufacturing locations in Nottingham, England and Poznan,
Poland, for a purchase price of approximately $31.6 million (of which $2.7 million is due over the next two years, one
payment in January 2018 and one in January 2019). Plastique is a market leader in the development and manufacture
of highly-technical thermoformed plastic and precision molded pulp fiber packaging primarily serving
pharmaceutical, personal care, and various specialty end markets. Since the date of acquisition, the operating results
for Plastique have been included within the Company’s Technical Packaging segment. Plastique has annual sales of
approximately $35 million. Based on the purchase price allocation, the Company recorded tangible assets, net, of $9.6
million, goodwill of $10.2 million, and $11.9 million of identifiable intangible assets primarily consisting of customer
relationships.
On October 16, 2015, the Company acquired the stock of Fremont Plastics, Inc. (Fremont) for a purchase price of
$10.5 million in cash. The Company also purchased for $2 million Fremont’s real property located in Fremont,
Indiana. Fremont was a developer, manufacturer, promoter and seller of high quality sterile-ready and non-sterile thin
gauge thermoformed medical plastic packaging products. Immediately following the closing of the transaction,
Fremont was merged into TEQ, and therefore since the date of acquisition the operating results for Fremont have been
included as part of TEQ.
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.
The goodwill recorded for the Mayday, Westland, Plastique and Fremont acquisitions mentioned above is not
expected to be deductible for U.S. Federal or state income tax purposes. The goodwill recorded for the Vanguard
Instruments and NRG acquisitions mentioned above is expected to be deductible for U.S. Federal and state income tax
purposes. The goodwill recorded for the Manta and Morgan Schaffer acquisitions is expected to be deductible for
Canadian income tax purposes.
F-15
3. Goodwill and Other Intangible Assets
Included on the Company’s Consolidated Balance Sheets at September 30, 2018 and 2017 are the following intangible
assets gross carrying amounts and accumulated amortization:
(Dollars in millions)
Goodwill
Intangible assets with determinable lives:
Patents
Gross carrying amount
Less: accumulated amortization
Net
Capitalized software
Gross carrying amount
Less: accumulated amortization
Net
Customer Relationships
Gross carrying amount
Less: accumulated amortization
Net
Other
Gross carrying amount
Less: accumulated amortization
Net
Intangible assets with indefinite lives:
Trade names
2018
381.7
2017
377.9
1.8
0.8
1.0
71.3
41.6
29.7
185.3
47.8
137.5
5.5
2.0
3.5
1.0
0.8
0.2
63.0
34.4
28.6
181.9
37.4
144.5
5.4
1.4
4.0
$
$
$
$
$
$
$
$
$
$
173.7
173.8
The Company performed its annual evaluation of goodwill and intangible assets for impairment during the fourth
quarter of 2018 and concluded no impairment existed at September 30, 2018 and there are no accumulated impairment
losses as of September 30, 2018.
The changes in the carrying amount of goodwill attributable to each business segment for 2018 and 2017 are as
follows:
(Dollars in millions)
Balance as of September 30, 2016
Acquisition activity
Foreign currency translation and other
Balance as of September 30, 2017
Acquisition activity
Foreign currency translation and other
$
Balance as of September 30, 2018
$
Filtration
43.9
29.8
–
73.7
–
–
73.7
Test
34.1
–
–
34.1
–
–
34.1
Technical
Packaging
19.4
–
0.5
19.9
–
(0.1 )
19.8
USG
226.2
23.6
0.4
250.2
3.9
–
254.1
Total
323.6
53.4
0.9
377.9
3.9
(0.1 )
381.7
Amortization expense related to intangible assets with determinable lives was $18.3 million, $16.3 million and $11.6
million in 2018, 2017 and 2016, 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 fifteen to twenty years. Intangible asset amortization for fiscal
years 2019 through 2023 is estimated at approximately $19 million per year.
F-16
4. Accounts Receivable
Accounts receivable, net of the allowance for doubtful accounts, consist of the following at September 30, 2018 and
2017:
(Dollars in thousands)
Commercial
U.S. Government and prime contractors
Total
5.
Inventories, Net
Inventories consist of the following at September 30, 2018 and 2017:
(Dollars in thousands)
Finished goods
Work in process
Raw materials
Total
6. Related Parties
2018
146,049
17,691
163,740
$
$
2017
152,265
8,315
160,580
2018
26,678
47,765
60,973
135,416
$
$
2017
28,127
43,750
52,638
124,515
One of the Company’s directors is an officer at a customer of the Company’s subsidiary Doble. Doble sells products,
rents equipment and provides testing services to the customer in the ordinary course of Doble’s business. The total
amount of these sales were approximately $2.1 million, $3.6 million and $1.4 million during fiscal 2018, 2017 and
2016, respectively. All transactions between Doble and the customer are intended to be and have been consistent with
Doble’s normal commercial terms offered to its customers, and the Company’s Board of Directors has determined that
the relationship between the Company and the customer is not material and did not impair either the Company’s or the
director’s independence.
7.
Income Tax Expense
The components of income before income taxes for 2018, 2017 and 2016 consisted of the following:
(Dollars in thousands)
United States
Foreign
Total income before income taxes
2018
80,994
7,029
88,023
$
$
2017
72,353
7,800
80,153
2016
62,353
6,067
68,420
The principal components of income tax expense (benefit) for 2018, 2017 and 2016 consist of:
(Dollars in thousands)
Federal:
Current
Deferred
State and local:
Current
Deferred
Foreign:
Current
Deferred
Total
2018
2017
2016
$
9,174
(22,943 )
2,121
2,972
2,233
2,330
(4,113 )
$
21,448
628
1,795
(49 )
4,450
(1,822 )
26,450
19,236
(909 )
1,674
(222 )
1,899
860
22,538
The actual income tax expense (benefit) for 2018, 2017 and 2016 differs from the expected tax expense for those
years (computed by applying the U.S. Federal corporate statutory rate) as follows:
F-17
Federal corporate statutory rate
State and local, net of Federal benefits
Foreign
Research credit
Domestic production deduction
Change in uncertain tax positions
Executive compensation
Valuation allowance
Tax reform – impact on U.S. deferred tax assets and liabilities
Tax reform – transition tax
Tax reform – taxes related to foreign unremitted earnings
Other, net
Effective income tax rate
2018
2017
2016
24.5 %
3.0
0.6
(1.6 )
(1.1 )
(0.1 )
(0.1 )
3.0
(37.2 )
1.5
2.8
–
(4.7 )%
35.0 %
2.4
(0.1 )
(1.1 )
(2.7 )
–
(0.1 )
(0.3 )
–
–
–
(0.1 )
33.0 %
35.0 %
2.0
(1.0 )
(2.5 )
(2.8 )
–
0.9
1.8
–
–
–
(0.5 )
32.9 %
On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the Tax Cut and
Jobs Act (the “TCJA”). The TCJA includes broad and complex changes to the U.S. tax code that impacted the
Company’s accounting and reporting for income taxes in the current year. These impacts primarily consist of the
following:
A reduction in the U.S. federal corporate income tax rate from 35% to 21%, effective January 1, 2018, which
resulted in a fiscal 2018 U.S. blended statutory income tax rate for the Company of 24.5%.
A remeasurement of U.S. deferred tax assets and liabilities.
A one-time mandatory deemed repatriation tax on unremitted foreign earnings (the “Transition Tax”), which
may be paid over an eight-year period.
Staff Accounting Bulletin No. 118 (SAB 118) was issued by the SEC effective December 22, 2017. SAB 118 allows
registrants to record provisional amounts of the income tax effects of the TCJA where the information necessary to
complete the accounting under ASC Topic 740 is not available but the amounts are based on reasonable estimates.
SAB 118 permits registrants to record adjustments to its provisional amounts during the measurement period (which
cannot exceed one year).
The statutory tax rate reduction of the TCJA reduced U.S. net deferred tax liabilities by $30.7 million. An additional
$1.0 million benefit was recorded as a result of a $7.5 million pension contribution approved during the second
quarter of 2018. In addition, a tax accounting method change was filed in the third quarter of 2018 which resulted in
an additional favorable deferred tax liability adjustment of $1.0 million. The remeasurement of U.S. net deferred tax
liabilities is complete as of September 30, 2018.
The Company recorded a provisional charge for the Transition Tax of $3.7 million for the year ended September 30,
2018. Certain technical aspects of the TCJA remain subject to varying degrees of uncertainty and the Company has
therefore made interpretations of the enacted legislation in its provisional income tax computations based upon the
best available guidance while it awaits expected technical guidance and clarification from the U.S. government. One
such calculation requiring further guidance is the possible unintended benefit of the application of new Section 245A
(dividend received deduction) as it relates to the Transition Tax for fiscal year companies. The Company believes
there is insufficient clarity and significant uncertainty with respect to this issue as of September 30, 2018 and,
therefore, has decided not to reduce its Transitional Tax provisional charge for the possible benefit at this time.
In addition, as a result of the Transition Tax, the Company recorded a charge of $2.4 million related to foreign
withholding taxes in connection with the reversal of its indefinite reinvestment assertion related to cumulative
undistributed foreign earnings as of December 31, 2017. This charge is complete as of September 30, 2018.
There are other impacts under the TCJA that are not effective for the Company until fiscal 2019. These primarily
include a further reduction in the U.S. statutory rate to 21%, a new minimum tax on global intangible low-taxed
income (“GILTI”) and the benefit of the deduction for Foreign-Derived Intangible Income (“FDII”). With respect to
the new GILTI provision, U.S. GAAP allows companies to make an accounting policy election and record taxes as a
period cost as incurred or factor such amounts in the measurement of deferred taxes. The Company has made an
accounting policy election to record these taxes as a period cost.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at
September 30, 2018 and 2017 are presented below:
F-18
(Dollars in thousands)
Deferred tax assets:
Inventories
Pension and other postretirement benefits
Net operating and capital loss carryforwards — domestic
Net operating loss carryforward — foreign
Foreign tax credit carryforward
Other compensation-related costs 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
Net deferred tax liabilities
$
2018
5,834
3,969
639
4,603
2,377
7,048
2,103
26,573
(969 )
(62,841 )
(19,584 )
(56,821 )
(7,144 )
(63,965 )
$
2017
9,639
11,345
501
4,486
–
12,104
2,098
40,173
(4,874 )
(91,752 )
(24,092 )
(80,545 )
(4,440 )
(84,985 )
The Company has a foreign net operating loss (NOL) carryforward of $19.0 million at September 30, 2018, which
reflects tax loss carryforwards in Germany, India, Finland, China, South Africa, Japan, Canada and the United
Kingdom. $16.7 million of the tax loss carryforwards have no expiration date while the remaining $2.3 million will
expire between 2019 and 2027. The Company has deferred tax assets related to state NOL carryforwards of $0.6
million at September 30, 2018 which expire between 2025 and 2038. The Company also has net state research and
other credit carryforwards of $2.1 million of which $1.7 million expires between 2025 and 2037. The remaining $0.4
million does not have an expiration date.
The valuation allowance for deferred tax assets as of September 30, 2018 and 2017 was $7.1 million and $4.4
million, respectively. The net change in the total valuation allowance for each of the years ended September 30,
2018 and 2017 was an increase of $2.7 million and a decrease of $1.3 million, respectively. In 2018 the Company
established a valuation allowance for excess foreign tax credits that are not expected to be utilized in future periods
of $2.4 million at September 30, 2018. The Company has established a valuation allowance against state credit
carryforwards of $0.4 million at both September 30, 2018 and 2017. In addition, the Company has established a
valuation allowance against state NOL carryforwards that are not expected to be realized in future periods of $0.6
million and $0.4 million at September 30, 2018 and 2017, respectively. Lastly, the Company has established a
valuation allowance against certain NOL carryforwards in foreign jurisdictions which may not be realized in future
periods of $3.8 million and $3.7 million at September 30, 2018 and 2017, respectively.
The Company’s subsidiary ETS-Lindgren Oy, Finland, has recorded a deferred tax asset of $0.2 million reflecting the
benefit of $2.2 million in loss carryforwards, which expires in 2027. Realization is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Although realization is not assured, Management believes
it is more likely than not that all of the deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could be reduced in the near term if estimates of future taxable income during the
carryforward period are reduced.
The Company’s foreign subsidiaries have accumulated unremitted earnings of $3.5 million at September 30, 2018. 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 approximately $0.3 million of foreign tax withholding would be paid. The Company
does not expect that these taxes would be creditable against U.S. income tax, so they 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.
The Company had $0.1 million of unrecognized tax benefits as of both September 30, 2018 and 2017, which, if
recognized, would affect the Company’s effective tax rate. The Company expects $0.1 million of unrecognized tax
benefits to reverse in the next twelve months. 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, 2018, 2017 and 2016, the
Company had zero accrued interest related to uncertain tax positions on its Consolidated Balance Sheets. No
significant penalties have been accrued.
F-19
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, 2015 and forward remain subject to income tax examination. Various state tax years for the periods
ended September 30, 2014 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 significant.
8. Debt
Debt consists of the following at September 30, 2018 and 2017:
(Dollars in thousands)
Revolving credit facility, including current portion
Current portion of long-term debt
Total long-term debt, less current portion
2018
220,000
(20,000 )
200,000
$
$
2017
275,000
(20,000 )
255,000
The Company’s existing credit facility (“the Credit Facility”) matures December 21, 2020. The Credit Facility
includes a $450 million revolving line of credit as well as provisions allowing for the increase of the credit facility
commitment amount by an additional $250 million, if necessary, with the consent of the lenders. The bank syndication
supporting the facility is comprised of a diverse group of nine banks led by JP Morgan Chase Bank, N.A., as
Administrative Agent.
At September 30, 2018, the Company had approximately $204 million available to borrow under the Credit Facility,
plus the $250 million increase option, in addition to $30.5 million cash on hand. The Company classified $20 million
as the current portion of long-term debt as of September 30, 2018, as the Company intends to repay this amount
within the next twelve months; however, the Company has no contractual obligation to repay such amount during the
next twelve months.
The Credit Facility requires, as determined by certain financial ratios, a facility fee ranging from 12.5 to 27.5 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 its 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, 2018, the Company was in compliance with all bank
covenants.
During 2018 and 2017, the maximum aggregate short-term borrowings at any month-end were $271 million and $298
million, respectively, and the average aggregate short-term borrowings outstanding based on month-end balances were
$258.8 million and $211.3 million, respectively. The weighted average interest rates were 3.03%, 2.09% and 1.58%
for 2018, 2017 and 2016, respectively. The letters of credit issued and outstanding under the Credit Facility totaled
$7.8 million and $9.7 million at September 30, 2018 and 2017, respectively.
9. Capital Stock
The 30,534,786 and 30,468,824 common shares as presented in the accompanying Consolidated Balance Sheets at
September 30, 2018 and 2017 represent the actual number of shares issued at the respective dates. The Company held
4,623,958 and 4,635,622 common shares in treasury at September 30, 2018 and 2017, respectively.
In August 2012, the Company’s Board of Directors authorized a common stock repurchase program under which the
Company may repurchase shares of its stock from time to time in its discretion, in the open market or otherwise, up to
a maximum total repurchase amount of $100 million (or such lesser amount as may be permitted under the
Company’s bank credit agreements). This program has been repeatedly extended by the Company’s Board of
Directors and is currently scheduled to expire September 30, 2019. There were no share repurchases in 2018 or 2017.
The Company repurchased approximately 120,000 shares for $4.3 million in 2016.
10. Share-Based Compensation
The Company provides compensation benefits to certain key employees under several share-based plans providing for
performance-accelerated restricted share unit (PARS) awards, and to non-employee directors under a non-employee
directors compensation plan. The Company has no stock options currently outstanding. As of September 30, 2018, the
Company had 947,377 shares available for future issuance under equity compensation plans.
F-20
Performance-Accelerated Restricted Share Unit (PARS) Awards
A PARS award represents the right to receive a specified number of shares of Company common stock if and when
the award vests. A PARS award is not stock and does not give the recipient any rights as a shareholder until it vests
and is paid out in shares of stock. PARS awards currently outstanding have a five-year vesting period, 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 outstanding PARS awards is being recognized over the shorter performance period, as it is
probable the performance condition will be met. The PARS award grants were valued at the stock price on the date of
grant. Pretax compensation expense related to the PARS awards for continuing operations was $4.1 million, $4.4
million and $3.9 million for 2018, 2017 and 2016, respectively.
The following summary presents information regarding outstanding PARS awards as of the specified dates, and
changes during the specified periods:
FY 2018
FY 2017
FY 2016
Estimated
Weighted
Avg. Price
40.35
56.06
35.59
53.86
47.23
Estimated
Weighted
Avg. Price
35.40
51.16
35.78
–
40.35
Estimated
Weighted
Avg. Price
35.29
35.75
36.06
35.47
35.40
Shares
326,536 $
120,902
(8,000 )
(12,000 )
427,438 $
Shares
427,438 $
110,422
(202,035 )
–
335,825 $
Shares
335,825
104,320
(121,301 )
(3,300 )
315,544
Nonvested at October 1,
Granted
Vested
Cancelled
Nonvested at September 30,
Non-Employee Directors Plan
Through the first quarter of 2018 the non-employee directors compensation plan provided to each non-employee
director a retainer of 900 common shares per quarter. Beginning in the second quarter of 2018, the quarterly retainer
was replaced by an annual retainer of Company stock having a grant date market value of $180,000. Non-employee
director grants were valued at the NYSE closing price of the Company’s stock on the date of grant and were issued
from the Company’s treasury stock. Compensation expense related to the non-employee director grants was $1.1
million, $1.0 million and $0.8 million for 2018, 2017 and 2016, 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 $5.2 million, $5.4 million and $4.7 million for 2018, 2017 and 2016, respectively.
The total income tax benefit recognized in results of operations for share-based compensation arrangements was $1.3
million, $1.8 million and $1.3 million for 2018, 2017 and 2016, respectively. As of September 30, 2018, there was
$7.8 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 1.7 years.
11. Retirement and Other Benefit Plans
Formerly, 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. The annual contributions to the defined benefit retirement
plan 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 $0.5 million and $0.6 million at September 30, 2018 and 2017,
F-21
respectively, related to its other postretirement benefit obligations. All other information related to its postretirement
benefit plans is not considered material to the Company’s results of operations or financial condition.
The following tables provide a reconciliation of the changes in the pension plans and fair value of assets over the two-
year period ended September 30, 2018, and a statement of the funded status as of September 30, 2018 and 2017:
(Dollars in millions)
Reconciliation of benefit obligation
Net benefit obligation at beginning of year
Interest cost
Actuarial (gain) loss
Gross benefits paid
Settlements
Net benefit obligation at end of year
(Dollars in millions)
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
Fair value of plan assets at end of year
(Dollars in millions)
Funded Status
Funded status at end of year
Accrued benefit cost
$
$
$
$
$
Amounts recognized in the Balance Sheet consist of:
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
Accumulated other comprehensive (income)/loss (before tax effect)
$
2018
95.3
3.4
(4.3 )
(4.6 )
–
89.8
2018
65.0
2.7
10.2
(4.6 )
–
73.3
2018
(16.5 )
(16.5 )
(0.2 )
(16.3 )
41.9
41.9
41.9
2017
100.6
3.2
(4.1 )
(4.4 )
–
95.3
2017
60.6
5.9
2.9
(4.4 )
–
65.0
2017
(30.3 )
(30.3 )
(0.2 )
(30.1 )
47.4
47.4
47.4
The estimated amount that will be amortized from accumulated other comprehensive (income) loss into net periodic
benefit cost (income) in 2019 is $2.1 million.
The following table provides the components of net periodic benefit cost for the plans for 2018, 2017 and 2016:
(Dollars in millions)
Service cost
Interest cost
Expected return on plan assets
Net actuarial loss
Net periodic benefit cost
Defined contribution plans
Total
$
$
2018
–
3.4
(3.8 )
2.3
1.9
7.1
9.0
2017
–
3.2
(3.9 )
2.6
1.9
6.3
8.2
2016
–
3.9
(4.4 )
2.0
1.5
5.2
6.7
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
F-22
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
2018
3.65 %
N/A
6.00 %
2017
3.25 %
N/A
6.25 %
2016
4.25 %
N/A
6.75 %
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
2018
4.15 %
N/A
2017
3.65 %
N/A
The assumed rate of increase in compensation levels is not applicable in 2018, 2017 and 2016 as the plan was frozen
in earlier years.
The asset allocation for the Company’s pension plans at the end of 2018 and 2017, and the Company’s acceptable
range and the target allocation for 2019, by asset category, are as follows:
Asset Category
Return seeking
Liability hedging
Cash/cash equivalents
Target
Allocation
2019
37%
63%
–
Acceptable
Range
39%-47%
53%-61%
0%-5%
Percentage of Plan Assets at
Year-end
2018
44%
54%
2%
2017
62%
35%
3%
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
The fair values of the Company’s defined benefit plan investments as of September 30, 2018 and 2017, by asset
category, were as follows:
(Dollars in millions)
Investments at fair value:
Cash and cash equivalents
Common and preferred stock funds:
Domestic large capitalization
Domestic small-/mid-capitalization
International funds
Fixed income funds
Real estate investment funds
Total investments at fair value
2018
2017
$
$
2.1
8.7
2.7
10.8
45.6
3.4
73.3
1.9
10.6
3.3
14.3
30.7
4.2
65.0
The following methods 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.
Investment Funds: The fair value of the investment funds, which offer daily redemptions, is determined based on the
published net asset value of the funds as a practical expedient for fair value.
F-23
Expected Cash Flows
Information about the expected cash flows for the pension and other postretirement benefit plans follows:
(Dollars in millions)
Expected Employer Contributions — 2019
Expected Benefit Payments:
2019
2020
2021
2022
2023
2024-2028
Pension
Benefits
1.0
$
Other
Benefits
0.1
5.1
5.8
5.5
5.7
5.8
30.0
$
0.1
0.1
0.1
0.1
0.1
0.2
12. Derivative Financial Instruments
Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in
foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and
selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks.
During 2016, the Company entered into forward contracts to purchase pounds sterling (GBP) to hedge two deferred
payments due in connection with the acquisition of Plastique. During 2018, the Company entered into three interest
rate swaps with a notional amount of $150 million to hedge its exposure to variability in future LIBOR-based
interest payments on variable rate debt. In addition, the Company’s Canadian subsidiary Morgan Schaffer enters into
foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S.
dollars. The Company expects hedging gains or losses to be essentially offset by losses or gains on the related
underlying exposures. The amounts ultimately recognized may differ for open positions, which remain subject to
ongoing market price fluctuations until settlement. All derivative instruments are reported in either accrued expenses
or other assets on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain
or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with
the underlying hedged item. The interest rate swaps entered into during 2018 were not designated as cash flow
hedges and, therefore, the gain or loss on the derivative is reflected in earnings each period. The following is a
summary of the notional transaction amounts and fair values for the Company’s outstanding derivative financial
instruments as of September 30, 2018.
(In thousands)
Forward contracts
Forward contracts
Forward contracts
Interest rate swap
Interest rate swap *
Interest rate swap **
Notional Amount
(Currency)
700 GBP
9,500 USD
200 EUR
150,000 USD
150,000 USD
150,000 USD
Fair Value
(US$)
Float Rate
Fix Rate
(94 )
(17 )
6
94
913
1,235
2.18%
N/A
N/A
1.80%
2.09%
2.24%
* This swap represents a forward contract and will be effective in November 2018.
** This swap represents a forward contract and will be effective in November 2019.
Fair Value of Financial Instruments
The Company’s forward contracts are classified within Level 2 of the valuation hierarchy in accordance with FASB
Accounting Standards Codification (ASC) 825, as presented below as of September 30, 2018:
(In thousands)
Asset:
Forward contracts
Level 1
Level 2
Level 3
Total
$
–
2,137
–
2,137
Valuation was based on third party evidence of similarly priced derivative instruments. There are no master netting
arrangements with financial parties.
F-24
13. Business Segment Information
The Company is organized based on the products and services it offers, and classifies its business operations in
segments for financial reporting purposes. Currently, the Company has four reporting segments: Filtration/Fluid
Flow (Filtration), RF Shielding and Test (Test), Utility Solutions Group (USG) and Technical Packaging.
The Filtration segment’s operations consist of PTI Technologies Inc. (PTI), VACCO Industries (VACCO), Crissair,
Inc. (Crissair), Mayday Manufacturing Co. (Mayday), Hi-Tech Metals, Inc. (Hi-Tech) and Westland Technologies,
Inc. (Westland). PTI, VACCO and Crissair 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. Mayday
designs and manufactures mission-critical bushings, pins, sleeves and precision-tolerance machined components for
landing gear, rotor heads, engine mounts, flight controls, and actuation systems for the aerospace and defense
industries. Hi-Tech is a full-service metal processor offering aerospace OEM’s and Tier 1 suppliers, a large portfolio
of processing services including anodizing, cadmium and zinc-nickel plating, organic coatings, non-destructive
testing, and heat treatment. Westland designs, develops and manufactures elastomeric-based signature reduction
solutions for U.S. naval vessels.
The Test segment’s operations consist of ETS-Lindgren Inc. and related subsidiaries (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 and related subsidiaries (Doble), Morgan
Schaffer Ltd. (Morgan Schaffer), and NRG Systems, Inc. (NRG). 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. Morgan Schaffer provides an
integrated offering of dissolved gas analysis, oil testing, and data management solutions which enhance the ability of
electric utilities to accurately monitor the health of critical power transformers. NRG designs and manufactures
decision support tools for the renewable energy industry, primarily wind.
The Technical Packaging segment’s operations consist of Thermoform Engineered Quality LLC (TEQ) and Plastique.
The companies within this segment provide innovative solutions to the medical and commercial markets for
thermoformed and precision molded pulp fiber packages and specialty products using a wide variety of thin gauge
plastics and pulp.
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. EBIT on a consolidated basis is a non-GAAP financial measure; see “Non-GAAP Financial
Measures” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Intersegment sales and transfers are not significant. Segment assets consist primarily of customer receivables,
inventories, capitalized software and fixed assets directly associated with the production processes of the segment.
Segment depreciation and amortization is based upon the direct assets listed above.
Net Sales
(Dollars in millions)
Year ended September 30,
Filtration
Test
USG
Technical Packaging
Consolidated totals
No customer exceeded 10% of sales in 2018 or 2017.
$
$
2018
286.8
182.9
214.0
87.9
771.6
2017
279.5
160.9
162.4
82.9
685.7
2016
207.8
161.5
127.8
74.4
571.5
F-25
EBIT
(Dollars in millions)
Year ended September 30,
Filtration
Test
USG
Technical Packaging
Reconciliation to consolidated totals (Corporate)
Consolidated EBIT
Less: interest expense
Earnings before income tax
Identifiable Assets
(Dollars in millions)
Year ended September 30,
Filtration
Test
USG
Technical Packaging
Corporate – Goodwill
Corporate – Other assets
Consolidated totals
2016
45.2
13.9
31.1
9.6
(30.1 )
69.7
(1.3 )
68.4
$
$
$
$
2018
58.7
23.8
43.2
8.1
(37.0 )
96.8
(8.8 )
88.0
2018
204.7
138.3
176.9
50.9
381.7
312.6
1,265.1
2017
52.2
19.5
36.6
8.5
(32.1 )
84.7
(4.6 )
80.1
2017
194.2
132.2
175.5
47.1
377.9
333.5
1,260.4
Corporate assets consist primarily of goodwill, deferred taxes, acquired intangible assets and cash balances.
Capital Expenditures
(Dollars in millions)
Year ended September 30,
Filtration
Test
USG
Technical Packaging
Corporate
Consolidated totals
2018
2017
$
$
7.0
3.0
5.2
5.4
–
20.6
10.2
4.5
7.6
7.4
–
29.7
2016
3.3
3.3
3.3
3.9
–
13.8
In addition to the above amounts, the Company incurred expenditures for capitalized software of $9.5 million, $9.0
million and $8.7 million in 2018, 2017 and 2016, respectively.
Depreciation and Amortization
(Dollars in millions)
Year ended September 30,
Filtration
Test
USG
Technical Packaging
Corporate
Consolidated totals
2018
2017
$
$
7.6
4.5
11.0
4.1
10.6
37.8
6.6
3.6
9.8
3.5
8.7
32.2
2016
4.0
3.6
8.1
2.9
5.0
23.6
Depreciation expense of property, plant and equipment was $19.4 million, $15.9 million and $11.9 million for 2018,
2017 and 2016, respectively.
F-26
Geographic Information
Net Sales
(Dollars in millions)
Year ended September 30,
United States
Asia
Europe
Canada
India
Other
Consolidated totals
Long-Lived Assets
(Dollars in millions)
Year ended September 30,
United States
Europe
Other
Consolidated totals
2016
403.6
68.1
71.6
12.9
2.9
12.4
571.5
$
$
$
$
2018
536.7
94.5
85.0
30.3
9.4
15.7
771.6
2018
113.2
17.1
4.7
135.0
2017
503.1
69.8
75.4
22.2
4.8
10.4
685.7
2017
111.5
16.8
4.4
132.7
Net sales are attributed to countries based on location of customer. Long-lived assets are attributed to countries based
on location of the asset.
14. Commitments and Contingencies
The Company leases certain real property, equipment and machinery under non-cancelable operating leases. Rental
expense under these operating leases was $6.9 million, $6.8 million and $6.0 million for 2018, 2017 and 2016,
respectively. Future aggregate minimum lease payments under operating leases that have initial or remaining non-
cancelable lease terms in excess of one year as of September 30, 2018, are:
(Dollars in thousands)
Years ending September 30:
2019
2020
2021
2022
2023 and thereafter
Total
$
$
6,702
5,428
3,540
2,822
3,467
21,959
At September 30, 2018, the Company had $7.8 million in letters of credit outstanding as guarantees of contract
performance. As a normal incident of the businesses in which the Company is engaged, various claims, charges and
litigation are asserted or commenced from time to time against the Company. Additionally, the Company is currently
involved in various stages of investigation and remediation relating to environmental matters. It is the opinion of
Management that the aggregate costs involved in the resolution of these matters, and final judgments, if any, which
might be rendered against the Company are adequately accrued, are covered by insurance or are not likely to have a
material adverse effect on the Company’s results from continuing operations, capital expenditures or competitive
position.
15. Capital Leases
The Company leases certain real property, equipment and machinery under capital leases, primarily associated with
the 2017 acquisitions of NRG and Mayday. The facility leases expire in 2029 and the machinery leases expire in 2020.
As of September 30, 2018, the net carrying value and accumulated depreciation of the assets under capital leases
recorded by the Company were $14.9 million and $2.0 million, respectively. Capital lease obligations are included
within other long-term liabilities (long-term portion) and accrued other expenses (current portion). Remaining
payments due on the Company’s capital lease obligations as of September 30, 2018, are:
F-27
(Dollars in thousands)
Years ending September 30:
2019
2020
2021
2022
2023 and thereafter
Total minimum lease payments
Less: amounts representing interest
Present value of net minimum lease payments
Current portion of capital lease obligations
Non-current portion of capital lease obligations
$ 1,922
1,917
1,859
1,900
14,077
21,675
3,514
18,161
1,346
$ 16,815
16. Quarterly Financial Information (Unaudited)
(Dollars in thousands, except per share amounts)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2018
Net sales
Net earnings
Earnings per share:
Basic
Diluted
Dividends declared per common share
Common stock price per share:
High
Low
2017
Net sales
Net earnings
Earnings per share:
Basic
Diluted
$
173,495
34,671
174,778
9,994
192,223
19,019
231,086
28,452
$
$
$
1.34
1.33
0.39
0.38
0.73
0.73
0.08
0.08
0.08
1.10
1.09
0.08
65.95
51.55
66.80
57.15
60.25
54.35
70.20
57.00
$
146,368
10,727
161,178
11,157
171,189
12,645
207,005
19,174
Dividends declared per common share
$
0.08
0.08
0.08
$
0.42
0.41
0.43
0.43
0.49
0.49
0.74
0.74
0.08
Common stock price per share:
High
Low
$
58.75
42.95
58.95
51.80
61.40
55.15
63.80
50.30
F-28
MANAGEMENT’S STATEMENT OF FINANCIAL RESPONSIBILITY
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 interest policy to ensure that key corporate
decisions are made by individuals who do not have a financial interest in the outcome, separate from their
interest as Company officials.
The charters of the Board committees clearly establish their respective roles and responsibilities.
The Company has a Corporate Ethics Committee, ethics officers at each operating location and an
ombudsman hot line available to all domestic employees and all foreign employees have local ethics
officers and access to the Company’s ombudsman.
The Company has a strong financial team, from its executive leadership to each of its individual contributors.
Management monitors compliance with its financial policies and practices over critical areas including internal controls,
financial accounting and reporting, accountability, and safeguarding of its corporate assets. The internal audit 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.
November 29, 2018
/s/Victor L. Richey
/s/Gary E. Muenster
Victor L. Richey
Chairman, Chief Executive Officer
and President
Gary E. Muenster
Executive Vice President
and Chief Financial Officer
F-29
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
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.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement of the Company’s annual or interim consolidated
financial statements will not be prevented or detected on a timely basis.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30,
2018, using criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) and concluded that the Company had a material
weakness in internal control over financial reporting as of September 30, 2018, based on these criteria. The material
weakness relates to the ineffective design and operation of certain controls impacting the deferred revenue general
ledger account. Specifically, the control deficiencies affected the accuracy of the financial information used in a
reconciliation control, resulting in errors in the recalculation of revenue to be recognized over the related contract term
not being detected on a timely basis. As a result, an adjustment was identified primarily related to revenue and
deferred revenue that was corrected prior to the issuance of the Company’s consolidated financial statements as of and
for the year ended September 30, 2018. Although the adjustment was not material, Management concluded the
ineffectiveness of the controls noted above in the aggregate constituted a material weakness in the Company’s internal
control over financial reporting.
Our internal control over financial reporting as of September 30, 2018, has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in its report which is included elsewhere in this Form 10-K
and contains an adverse opinion on the effectiveness of our internal control over financial reporting.
November 29, 2018
/s/Victor L. Richey
/s/Gary E. Muenster
Victor L. Richey
Chairman, Chief Executive Officer
and President
Gary E. Muenster
Executive Vice President
and Chief Financial Officer
F-30
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
ESCO Technologies Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited ESCO Technologies Inc. and subsidiaries’ (the Company) internal control over financial reporting as
of September 30, 2018, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the
material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of September 30, 2018, based on criteria established
in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 2018 and 2017, 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, 2018, and the related notes (collectively, the consolidated
financial statements), and our report dated November 29, 2018 expressed an unqualified opinion on those consolidated
financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. A material weakness related to the ineffective design
and operation of certain controls impacting the deferred revenue general ledger account has been identified and
included in management’s assessment. The material weakness was considered in determining the nature, timing, and
extent of audit tests applied in our audit of the 2018 consolidated financial statements, and this report does not affect
our report on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible 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 the
Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered
with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. 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 audit
also included performing such other procedures as we considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
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.
F-31
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.
/s/ KPMG LLP
St. Louis, Missouri
November 29, 2018
F-32
EXHIBITS
The following exhibits are submitted with and attached to this Form 10-K; exhibit numbers correspond to the exhibit
table in Item 601 of Regulation S-K. For a complete list of exhibits including those incorporated by reference, see
Item 15(a)(3) of this Form 10-K, above.
Exhibit No.
Exhibit
10.6(f)
10.7
21
23
31.1
31.2
32
*
*
Form of Award Agreement for Performance-Accelerated Restricted Shares under 2018 Omnibus
Incentive Plan (Omnibus Form, last revised August 29, 2018)
Eighth Amendment and Restatement of Employee Stock Purchase Plan, effective as of August 2,
2018
Subsidiaries of the Company
Consent of Independent Registered Public Accounting Firm
Certification of Chief Executive Officer
Certification of Chief Financial Officer
** Certification of Chief Executive Officer and Chief Financial Officer
101.INS
*** XBRL Instance Document
101.SCH
*** XBRL Schema Document
101.CAL
*** XBRL Calculation Linkbase Document
101.LAB
*** XBRL Label Linkbase Document
101.PRE
*** XBRL Presentation Linkbase Document
101.DEF
*** XBRL Definition Linkbase Document
-----------
* Filed with the Securities and Exchange Commission but not included in the Company’s Annual
Report to Shareholders; the Exhibit may be viewed and copied on the SEC’s website or a
printed copy may be obtained from the Company on request.
** Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K.
*** Exhibit 101 to this report consists of documents formatted in XBRL (Extensible Business
Reporting Language); a printed copy is not included.
Subsidiaries of Esco Technologies Inc.
EXHIBIT 21
The following list omits certain of the Company’s subsidiaries which, if considered in the aggregate as a single
subsidiary, would not, as of the end of the year covered by this Report, constitute a “significant subsidiary” as defined
in SEC Regulation S-X.
Name
State or Jurisdiction
of Incorporation
or Organization
Name(s) Under Which
It Does Business
Beijing Lindgren ElectronMagnetic Technology Co., Ltd. People’s Republic of China Same; also ETS-Lindgren
Crissair, Inc.
Doble Engineering Company
Doble PowerTest Limited
ESCO International Holding Inc.
ESCO Technologies Holding LLC
California
Massachusetts
United Kingdom
Delaware
Delaware
ESCO UK Global Holdings Ltd
United Kingdom
ETS-Lindgren Inc.
ETS-Lindgren OY
Hi-Tech Metals, Inc.
Mayday Manufacturing Co.
Morgan Schaffer Ltd.
NRG Systems, Inc.
Plastique Limited
Plastique Sp. z o.o.
PTI Technologies Inc.
Thermoform Engineered Quality LLC
VACCO Industries
Westland Technologies, Inc.
Illinois
Finland
Texas
Texas
Quebec, Canada
Vermont
United Kingdom
Poland
Delaware
Delaware
California
California
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
Same
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
The Board of Directors
ESCO Technologies Inc.:
We consent to the incorporation by reference in the registration statements (Nos. 333-63930, 333-77887, 333-186537,
333-192663 and 333-223029) on Form S-8 of ESCO Technologies Inc. (the Company) of our reports dated November
29, 2018, with respect to the consolidated balance sheets of ESCO Technologies Inc. and subsidiaries as of
September 30, 2018 and 2017, 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, 2018, and the
related notes, and the effectiveness of internal control over financial reporting as of September 30, 2018, which
reports appear in the September 30, 2018 annual report on Form 10-K of the Company.
Our report dated November 29, 2018, on the effectiveness of internal control over financial reporting as of September
30, 2018, expresses our opinion that ESCO Technologies Inc. and subsidiaries did not maintain effective internal
control over financial reporting as of September 30, 2018 because of the effect of a material weakness on the
achievement of the objectives of the control criteria and contains an explanatory paragraph that states a material
weakness related to the ineffective design and operation of certain controls impacting the deferred revenue general
ledger account has been identified and included in management’s assessment.
/s/ KPMG LLP
St. Louis, Missouri
November 29, 2018
EXHIBIT 31.1
I, Victor L. Richey, certify that:
Certification
1.
I have reviewed this annual report on Form 10-K of ESCO Technologies Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit and finance committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: November 29, 2018
/s/ Victor L. Richey
Victor L. Richey
Chairman, President and Chief Executive Officer
EXHIBIT 31.2
I, Gary E. Muenster, certify that:
Certification
1.
I have reviewed this annual report on Form 10-K of ESCO Technologies Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report.
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control
over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant, and
have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to
be designed under our supervision, to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, 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;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this
report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that
occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit and finance committee of the
registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record,
process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant’s internal control over financial reporting.
Date: November 29, 2018
/s/ Gary E. Muenster
Gary E. Muenster
Executive Vice President and Chief Financial Officer
Certification
Pursuant to 18 U.S.C. Section 1350
As Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32
In connection with the annual report of ESCO Technologies Inc. (the “Company”) on Form 10-K for the period ended
September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), we,
Victor L. Richey, Chairman, President and Chief Executive Officer of the Company, and Gary E. Muenster, Executive
Vice President and Chief Financial Officer of the Company, certify, to the best of our knowledge, pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange
Act of 1934; and
(2)`The information contained in the Report fairly presents, in all material respects, the financial condition
and results of operations of the Company.
Date: November 29, 2018
/s/ Victor L. Richey
Victor L. Richey
Chairman, President and Chief Executive Officer
/s/ Gary E. Muenster
Gary E. Muenster
Executive Vice President and Chief Financial Officer
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Shareholders’ Summary
Management and Board of Directors
Shareholders’ Annual Meeting
The Annual Meeting of Shareholders of ESCO Technologies
Inc. will be held at 9:30 a.m. Central Time on Tuesday,
February 5, 2019 at Mayday Manufacturing Co.,
3100 Jim Christal Rd., Denton, TX 76207. You may
access this Annual Report as well as the Notice of the
meeting and the Proxy Statement on the Company’s
Annual Meeting website at www.envisionreports.com/ese.
Certifications
Pursuant to New York Stock Exchange (NYSE)
requirements, the Company submitted to the NYSE the
annual certifications by the Company’s chief executive
officer dated February 6, 2018 and February 9, 2017,
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, 2018 and September 30, 2017.
10-K Report
The Company’s 2018 Annual Report on Form 10-K as
filed with the Securities and Exchange Commission
is included in this Annual Report to Shareholders,
except that certain of its Exhibits have been
omitted. The complete Form 10-K is available on the
Company’s website at www.escotechnologies.com,
or a copy will be provided to shareholders without
charge upon written request to Kate Lowrey, Director
of Investor Relations, ESCO Technologies Inc.,
9900A Clayton Road, St. Louis, MO 63124.
Investor Relations
Additional investor-related information may be obtained
by contacting the Director of Investor Relations at
(314) 213-7277 or toll free at (888) 622-3726.
Information is also available through the Company’s
website at www.escotechnologies.com or via
e-mail to klowrey@escotechnologies.com.
Transfer Agent and Registrar
Shareholder inquiries concerning lost certificates, transfer
of shares or address changes should be directed to:
Computershare Shareholder Services
P.O. Box 30170
College Station, TX 77842-3170
(800) 368-5948
www.computershare.com/investor
Capital Stock Information
ESCO Technologies Inc. common stock shares (symbol
ESE) are listed on the New York Stock Exchange.
There were approximately 1,844 holders of record
of shares of common stock at October 31, 2018.
Independent Registered Public Accounting Firm
KPMG LLP
10 South Broadway, Suite 900
St. Louis, MO 63102
Executive Officers
Victor Richey
Chairman,
Chief Executive Officer
& President
Corporate Staff
Deborah Boniske
Vice President
Human Resources
Mark Dunger
Vice President Planning
& Development
Operating Executives
Mike Alfred
President
Crissair, Inc.
Bruce Butler
President
ETS-Lindgren Inc.
Sam Chapetta
Filtration Group
President
Trevor Drew
Managing Director
Plastique Limited
Rowland Ellis
President
PTI Technologies Inc.
Gary Muenster
Executive Vice President
& Chief Financial Officer
Alyson Barclay
Senior Vice President,
Secretary &
General Counsel
Richard Garretson
Vice President
Tax
Charles Kretschmer
Vice President
Antonio Gonzalez
President
VACCO Industries
John Grizzard
President
Westland Technologies,
Inc.
Randall Loga
Technical Packaging
Group Vice President
& President
Thermoform Engineered
Quality LLC
Michele Marren
Vice President &
Corporate Controller
David Schatz
Vice President
& Intellectual
Property Counsel &
Asst. Secretary
Bryan Sayler
Utility Solutions Group
President & President
Doble Engineering
Company
Tom Shaw
President
Mayday
Manufacturing Co.
May Scally
Chief Operating Officer
Morgan Schaffer Ltd.
Justin Wheating
President
NRG Systems, Inc.
Board of Directors
Patrick M. Dewar 2
Chief Executive
The Trenton Group, LLC
Vinod M. Khilnani 2,3
Retired Executive
Chairman
CTS Corporation
Gary E. Muenster
Executive Vice President
& Chief Financial Officer
Leon J. Olivier 4
EVP of Enterprise
Energy Strategy &
Business Development
Eversource Energy
Robert J. Phillippy 2,4
Executive Advisor;
Former President and
Chief Executive Officer
of Newport Corporation
Victor L. Richey 1
Chairman, Chief
Executive Officer
& President
Larry W. Solley 3,4
Retired Executive
Vice President
Emerson Electric Co.
James M. Stolze 1,2,3
Retired Vice President &
Chief Financial Officer
Stereotaxis, Inc.
1 Executive Committee
2 Audit and Finance Committee
3 Human Resources and Compensation Committee
4 Nominating and Corporate Governance Committee
This annual report is printed on recycled paper,
made in the USA, with 10% post-consumer waste.
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ESCO Technologies Inc.
9900A Clayton Road • St. Louis, MO 63124
www.escotechnologies.com