ESCO TECHNOLOGIES INC.
2019 ANNUAL REPORT
AEROSPACE HYDRAULIC
FILTRATION
ELECTRIC GRID
INFRASTRUCTURE
MAINTENANCE
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5G DEVELOPMENT
TESTING
MEDICAL PACKAGING
SOLUTIONS
CONTINUING OUR HISTORY OF PROFITABLE GROWTH
ESCO’s strategy remains focused on delivering profitable
long-term growth across our portfolio. We firmly believe
our diversified multi-segment approach provides
sustainable long-term growth opportunities and mitigates
risk through serving a wide variety of end-markets.
Our stated long-term goals are to deliver 10 percent revenue growth and 15 percent earnings
growth. Over the past four years we have exceeded these expectations, delivering compound
annual growth rates of 11 percent in revenue and 18 percent in Adjusted EPS. These results
were achieved through meaningful organic growth, supplemented by acquisitions. Our disciplined
culture purposefully strives to drive margin expansion through cost reduction initiatives,
continued integration of newly acquired companies, and investments in our businesses to
broaden our product offerings and improve operational efficiency.
2019 Sales
DOLLARS IN MILLIONS
2019 EBIT – As Adjusted(1)
DOLLARS IN MILLIONS
11%
5%
40%
17%
47%
23%
$813M
$151M
26%
31%
Filtration/Fluid Flow:
Utility Solutions Group:
RF Shielding & Test:
Technical Packaging:
$325.7
211.9
188.4
86.9
Filtration/Fluid Flow:
Utility Solutions Group:
RF Shielding & Test:
Technical Packaging:
$71.3
46.3
25.6
7.3
(1) Excludes $39.4 million of Corporate Costs and $.6 million net of inventory step-up and restructuring charges,
partially offset by the gain on the sale of the Doble Watertown, MA property.
2019 Annual Report 1
COMPANY PORTFOLIO: AT A GLANCE
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Filtration/Fluid Flow
Utility Solutions Group
Filtration/Fluid Flow (Filtration) provides innovative
solutions essential to the aerospace, space, defense,
and industrial markets. The combined technical
capabilities and resources of Crissair, Globe Composite
Solutions (Globe), Mayday Manufacturing (Mayday),
PTI Technologies (PTI), Westland Technologies
(Westland), and VACCO Industries (VACCO) enable
us to provide highly-engineered products for mission
critical systems.
The Utility Solutions Group (USG) offers industry-
leading diagnostic measurement and monitoring
equipment and services vital for ongoing grid
reliability and renewable energy project development.
USG is powered by the combined offerings of
Doble Engineering (Doble), Morgan Schaffer, and
NRG Systems (NRG). USG offers a complete range
of solutions that efficiently measure asset health and
ensure the reliable, safe, and secure delivery of power.
Major End Markets
+ Aerospace
+ Navy
+ Space
+ Industrial
2 2019 Annual Report
Major End Markets
+ Global Electric Utilities
+ Power Generation
+ Renewable Energy
+ Industrial
RF Shielding & Test
Technical Packaging
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 do not interfere with other
electronic devices while complying with regulatory and
industry‑defined standards.
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
+ Wireless
+ Consumer Electronics
+ Healthcare
+ Aerospace/Defense
+ Automotive
+ Acoustics
Major End Markets
+ Medical/Pharmaceutical
+ Medical Device
+ Retail/Consumer
+ Electronic/Food/Other
2019 Annual Report 3
FINANCIAL HIGHLIGHTS
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Net sales
Entered Orders
Earnings per share – GAAP
Earnings per share – As adjusted(1)
2019
$ 813.0
905.3
3.10
3.13
2018
771.6
777.2
3.54
2.77
2017
685.7
736.6
2.07
2.22
2016
571.5
570.2
1.77
2.03
CAPITAL PERFORMANCE (AS OF SEPTEMBER 30)
Net debt
Leverage ratio
Cash from operating activities
$ 224
1.68
105
190
1.72
93
229
2.20
67
56
1.05
74
2015
537.3
561.9
1.62
1.59
11
.68
65
Net Sales
IN MILLIONS
Entered Orders
IN MILLIONS
Earnings Per Share
– As Adjusted(1)
7
3
5
$
1
7
5
$
6
8
6
$
2
7
7
$
3
1
8
$
2
6
5
$
0
7
5
$
7
3
7
$
7
7
7
$
5
0
9
$
9
5
1
$
.
3
0
2
$
.
2
2
2
$
.
7
7
2
$
.
3
1
3
$
.
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
2015
2016
2017
2018
2019
Sustainable Competitive Advantages
42%
Proprietary Products
% OF TOTAL SALES
53%
Recurring Revenues
% OF TOTAL SALES
(1) EPS – As Adjusted excludes $.03 per share of purchase accounting charges related to the Globe acquisition and restructuring charges,
partially offset by the gain on the sale of the Doble Watertown property in 2019, $.17 per share related to restructuring charges and ($.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, $.26 per share of restructuring charges in 2016, and $.03 per share of income from
discontinued operations in 2015.
4 2019 Annual Report
LETTER TO SHAREHOLDERS
2019 was a year of continued profitable growth fueled by solid
operating results across our diversified business segments.
We continued to make significant investments in new product
development, automation, and capital across the company
to expand our product offerings and production capabilities.
Our continuing commitment to finding and implementing cost
reduction initiatives has improved our operating efficiency, thereby
driving margin expansion.
Cash Flow
from Operations
IN MILLIONS
5
6
$
4
7
$
7
6
$
3
9
$
5
0
1
$
2015 2016 2017 2018 2019
We continue to focus on generating
long-term organic growth through the
expansion of our highly-engineered
products and solutions, and we
remain committed to supplementing
our organic growth through selective
acquisitions. The 2019 addition of
Globe Composite Solutions (Globe) to
our Filtration segment builds out our
portfolio of stealth technology products
for the U.S. Navy on the Virginia and
Columbia-Class submarines.
Leverage Ratio
Financial Results
8
6
.
5
0
1
.
0
2
2
.
2
7
1
.
8
6
1
.
2015 2016 2017 2018 2019
2019 was another year of solid
financial results highlighted by
significant growth in sales, orders,
earnings and cash flow from operations.
Sales increased 5 percent to
$813 million, led by Filtration with
strong organic growth in commercial and
defense aerospace sales, supplemented
by the acquisition of Globe. Orders
increased by 16 percent to $905 million,
resulting in a $92 million (24 percent)
increase in backlog. Filtration led the
way with over $400 million in orders and
a book-to-bill of 1.26x.
Adjusted EBIT increased 9 percent to
$111M and Adjusted EPS increased
13 percent to $3.13 per share. Earnings
growth was driven by leveraging the
additional sales and a continuing focus
on cost reduction and capital investment
aimed at driving margin expansion.
Generating $105 million in cash
from operating activities helped fund
investments in capital, R&D, and
acquisitions. Our leverage ratio remains
reasonable at 1.68x, and our recurring
cash generation coupled with our new
credit facility have us well-positioned
to evaluate future opportunities to
supplement organic growth.
2019 Annual Report 5
LETTER TO SHAREHOLDERS | CONTINUED
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Sales
IN MILLIONS
Filtration/Fluid Flow
Filtration sales increased $39 million
(14 percent) to $326 million on
the strength of our organic growth in
aerospace sales across PTI, Mayday
and Crissair. This growth resulted in a
$12 million increase (20 percent) in
Adjusted EBIT to $71 million and an
Adjusted EBITDA margin of 24 percent,
highlighting our ability to drive margin
expansion as revenues increase.
The aerospace market outlook remains
strong with build rates on several key
programs where we have significant
content (Airbus A350, Embraer E2,
and the Joint Strike Fighter) projected
to increase in 2020. This momentum
continues to be supplemented by
growth in MRO content at Mayday and
increasing aftermarket revenue as more
planes are placed in service.
The potential for continuing growth
in Filtration is supported by a record
$410 million in entered orders resulting
in an $84 million increase (41 percent)
in backlog. Additionally, Globe was
awarded a large long-term contract
to provide Special Hull Treatment
(SHT) panels for Block V on the
Virginia-Class submarine program,
and VACCO and Westland were
awarded new development hardware
on the Columbia-Class program. On
the space side, VACCO was awarded
additional content on NASA’s Space
Launch System (SLS) Core Stage 3
and Japanese Aerospace Exploratory
Agency’s (JAXA) updated HTV-X
automated cargo spacecraft.
In 2019, VACCO achieved mission
success providing the Micro-Propulsion
System (MiPS) aboard the JPL Mars
Cube One (MarCO) Mission. Utilizing
VACCO hardware on board the first
interplanetary CubeSats helped NASA
successfully land the InSight Vehicle
on Mars.
Our acquisition of Globe adds a
well-established, vertically integrated
supplier of proprietary military-grade
composite-based solutions which
expands our content on key U.S. Navy
programs. The addition of Globe will
help create additional avenues for
meaningful growth across our shared
customer base.
7
9
1
$
8
0
2
$
0
8
2
$
7
8
2
$
6
2
3
$
2015 2016 2017 2018 2019
EBIT – As Adjusted*
IN MILLIONS
2
4
$
5
4
$
4
5
$
9
5
$
1
7
$
2015 2016 2017 2018 2019
Revenue by Company
20%
18%
PTI
CRISSAIR
MAYDAY
29%
VACCO
WESTLAND
GLOBE
23%
3%
7%
* Excludes $1.2 million in
inventory step-up and
restructuring charges in 2019,
$.8 million in restructuring
charges in 2018, and
$1.9 million in inventory
step-up charges in 2017.
6 2019 Annual Report
Sales
IN MILLIONS
Utility Solutions Group
USG’s sales of $212 million were flat
compared to the prior year, driven
by mid-single digit growth at Doble,
offset by softness in NRG’s sales in the
renewable energy space. Adjusted EBIT
remained steady at $46 million with an
Adjusted EBITDA margin of 27 percent.
To enhance USG’s ROIC and further
improve its operating efficiency, Doble’s
headquarters building in Watertown
Massachusetts was sold in October 2018
for approximately $18 million, which
resulted in a pretax gain recognized in
2019 with the net proceeds used to pay
down debt. We expect to be in Doble’s
new leased facility and fully operational
by the end of calendar year 2019.
Doble’s Boston area operations will now
be consolidated into a single, lower cost,
more efficient facility.
In 2019, USG released several
new products including Doble’s
PatchAssure™ security and compliance
solution offering advanced patch
management for electric utility
applications, and Protection Suite
version 5.0, which upgrades its
4
2
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$
8
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1
$
2
6
1
$
4
1
2
$
2
1
2
$
2015 2016 2017 2018 2019
EBIT – As Adjusted*
IN MILLIONS
0
3
$
3
3
$
8
3
$
6
4
$
6
4
$
2015 2016 2017 2018 2019
* Excludes $5.9 million mainly
related to the gain on the
sale of Doble Watertown
property, partially offset
by restructuring charges
in 2019, $3.0 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.
industry-leading protection testing
software package. Additionally,
Doble released dobleASSURANCE™,
a new all-inclusive long-term
service program for preventative
maintenance at a known total cost
of ownership for up to ten years.
During 2019, NRG faced sales headwind
as wind farm developers focused on
completing existing projects prior to
the expiration of U.S tax credits. We
view this as a temporary setback as
renewable electric capacity is projected
to increase by as much as 50 percent
by 2024 according to a recently
released report by the International
Energy Agency (IEA). While waiting
for new development projects to
pick up again, NRG is continuing to
expand its product offerings including
a new Solar Resource Monitoring
System that precisely measures solar
resource conditions at operational PV
projects. In addition, NRG announced
the first commercial sale of its
Bat Deterrent System to Kawailoa
Wind, Hawaii’s largest wind farm.
2019 Annual Report 7
LETTER TO SHAREHOLDERS | CONTINUED
Sales
IN MILLIONS
RF Shielding & Test
In 2019, Test revenue increased
3 percent to $188 million and EBIT
increased 8 percent to $26 million
(14 percent EBIT and 16 percent
EBITDA margins). It was a fourth
consecutive year of margin expansion
following significant cost reduction
initiatives undertaken to create a more
efficient, lower cost operating structure.
With $200 million in orders in 2019
(book-to-bill of 1.06x), Test’s ending
backlog grew 9 percent to $134 million,
with the order strength spread across
multiple end markets.
In the wireless market, we had
significant orders in the 5G test space
and continue to have meaningful
representation on international
standards bodies working to develop
and define the new 5G standards.
We continue to develop numerous
custom 5G test solutions for specific
chipset/handset manufacturers, network
providers and test houses as well as
a suite of standard test solutions that
meet current industry test standards.
In the electric vehicle market, we
have several projects currently under
construction and won two new projects
in China this year. In addition, we
won a large Electromagnetic Pulse
(EMP) shielding project in India and
continue to have success winning
defense projects both domestically and
overseas. Our defense content includes
chambers and components related
to satellites, radar, aircraft (including
drones), weapons systems, and
shielding for government facilities. The
continuing strength of our orders across
these developing industries supports our
outlook for meaningful organic growth in
the Test segment going forward.
In 2019, we relocated our
manufacturing operations in China
into a new state-of-the-art facility in
Tianjin. The move and upgrade of our
manufacturing equipment enables us to
significantly increase our production and
development capabilities, and gives us
the ability to move additional production
content to China. It also allows us to
better serve our customers in that region
with faster delivery and better support.
8
7
1
$
2
6
1
$
1
6
1
$
3
8
1
$
8
8
1
$
2015 2016 2017 2018 2019
EBIT – As Adjusted*
IN MILLIONS
0
1
$
9
1
$
9
1
$
4
2
$
6
2
$
2015 2016 2017 2018 2019
* Excludes $5.1 million
in restructuring charges
in 2016.
8 2019 Annual Report
Sales
IN MILLIONS
Technical Packaging
9
3
$
4
7
$
3
8
$
8
8
$
7
8
$
2015 2016 2017 2018 2019
EBIT – As Adjusted*
IN MILLIONS
5
$
0
1
$
8
$
8
$
7
$
2015 2016 2017 2018 2019
* Excludes $1.4 million
in restructuring charges
in 2019.
Technical Packaging’s revenue was
$87 million in 2019 resulting from
solid organic growth in domestic medical
and pharmaceutical sales, offset by
delayed new product introductions in
Europe, which resulted in Adjusted
EBITDA of $11 million, or 13 percent.
Understanding the competitive
nature of the packaging end market,
we have undertaken a number
of actions to address Technical
Packaging’s cost structure in order
to right-size the business and
enhance future competitiveness
domestically and internationally.
During 2019, the focus for our U.S.
operations was on making investments
to accelerate profitable growth within
the business. Most significantly, we
established an extrusion capability
which both lowered our product
cost and substantially enhanced our
competitive position. The investment
in the facility expansion to house the
extrusion operation also provided space
to bring our inventory storage in-house
and to re-layout the existing operations
to enhance work flow. Taken together
we expect the benefits from these
investments to result in both top-line
growth and significant margin expansion.
In Europe, our focus was on continuing
to develop our presence in the medical
packaging market. In 2019, our U.K.
operation won contracts from two
prominent pharmaceutical companies
and developed opportunities with
several others. Building on our success
in the U.K., we initiated investments to
establish a similar medical packaging
capability in Poland. Beyond our
focus on the medical market, we also
completed a facility consolidation
aimed at reducing costs and shortening
the product development cycle. This
consolidation resulted in the closure
of our Administration and Engineering
facility in Tunbridge Wells, U.K. and
the transfer of these functions to
be co-located with our production
operations in Nottingham, U.K.
and Poznan, Poland. Developing a
presence in the medical market,
coupled with our streamlined
operations, offers a foundation
for a more reliable and profitable
book of business going forward.
2019 Annual Report 9
LETTER TO SHAREHOLDERS | CONTINUED
Alyson S. Barclay (left)
Senior Vice President,
Secretary and
General Counsel,
Victor L. Richey (center)
Chairman, Chief Executive
Officer and President,
Gary E. Muenster (right)
Executive Vice President
and Chief Financial Officer
10 2019 Annual Report
Looking to the Future
In 2019, we delivered mid-single digit
revenue growth, that when coupled with
cost reductions and increased operational
efficiency, drove a 13 percent increase in
Adjusted EPS. Our 2019 orders increased
16 percent resulting in a 24 percent
increase in backlog. This growth in
profitability and our order strength gives
us continuing confidence in our ability to
meet our stated long-term goals.
In mid-November, we entered into
a definitive agreement to sell our
Technical Packaging business segment
to Sonoco Products Company. The
transaction is expected to be finalized
upon the completion of certain
customary regulatory approvals with
expected gross cash proceeds of
$187 million. The divestiture monetizes
the Technical Packaging segment at an
opportunistic valuation and will allow
us to narrow our focus to the business
units which we see as core to our
long-term growth.
We believe our solid market positions
and expanding product and solution
offerings result in tangible organic growth
opportunities across the company that
have us well-positioned to continue to
deliver growth rates that exceed the
broader industrial market. Acquisitions
also remain a key focus as we strive to
augment organic growth by expanding
our product portfolio both vertically
and horizontally.
Our disciplined culture and focus on
generating profitable growth, while
improving cash flow and operational
efficiency, are creating competitive
advantages and driving continuing share
price appreciation and shareholder
value creation.
We feel that 2019 was a very positive
year in the continuing evolution of ESCO,
and as we look towards the future,
we would like to thank our employees
and shareholders for their continuing
investment and support.
Vic Richey
Chairman, Chief Executive Officer
& President
Gary Muenster
Executive Vice President &
Chief Financial Officer
November 29, 2019
2019 Form 10-K
ESCO TECHNOLOGIES, INC.
FISCAL YEAR 2019
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
or the fiscal year ended September 30, 2019
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
Trading Symbol(s)
Common Stock, par value $0.01 per share
ESE
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. Yes No
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 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
Non-accelerated filer
Accelerated filer
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 29, 2019, the last business day of the registrant’s most recently completed second fiscal quarter: approximately
$1,698,000,000.*
* Based on the New York Stock Exchange closing price on March 29, 2019. 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 22, 2019: 25,981,313
_______________________
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Report incorporates by reference certain portions of the registrant’s definitive Proxy Statement for its
2020 Annual Meeting of Shareholders, which the registrant currently anticipates first sending to shareholders on or
about December 11, 2019 (hereinafter, the “2019 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
Subsequent Event
Information about our Executive Officers
1A. Risk Factors
1B. Unresolved Staff Comments
Properties
2.
Legal Proceedings
3.
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; repayment of debt
within the next twelve months; the outlook for 2020 and beyond, including amounts, timing and sources of 2020 sales,
revenues, sales growth, Adjusted EBIT, EBITDA, Adjusted EBITDA and Adjusted EPS; 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; the sale of the
Technical Packaging business segment and the Company’s use of the expected proceeds from the sale; 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, tariffs and trade disputes, 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; the Company’s inability to successfully execute internal
restructuring and other plans; and the Company’s inability to complete the sale of its Technical Packaging business
segment.
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 Annual Report, unless the context indicates
otherwise, references to a year (for example 2019) refer to the Company’s fiscal year ending on September 30 of that
year, and references to the “Consolidated Financial Statements” refer to the Consolidated Financial statements
included in the Financial Information section of this Annual Report beginning on page F-1, an Index to which is
provided on page F-1.
The Company is organized based on the products and services it offers, and classifies its business operations in
segments for financial reporting purposes. The Company’s four reportable segments during 2019, together with the
significant domestic and foreign operating subsidiaries within each segment, are as follows:
Filtration/Fluid Flow (Filtration):
PTI Technologies Inc. (PTI)
VACCO Industries (VACCO)
Crissair, Inc. (Crissair)
Westland Technologies, Inc. (Westland)
Mayday Manufacturing Co. (Mayday)
Hi-Tech Metals, Inc. (Hi-Tech)
Globe Composite Solutions, LLC (Globe)
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.
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.
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
has entered into an agreement to sell the entities comprising this segment. See “Subsequent Event” on
page 7.
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 overall operating costs, streamline business processes and enhance the
branding of its products and services. 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. During 2019, Doble sold its headquarters facility in Watertown,
Massachusetts and is in the process of consolidating its headquarters operations into a single, more cost-efficient
facility in Marlborough, Massachusetts. Also during fiscal 2019, Plastique reduced its operating costs and gained
efficiencies through a restructuring that involved 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, Hi-Tech, NRG, the assets of Morgan Schaffer Inc., and the assets of Vanguard
Instruments Company (Vanguard Instruments); in March 2018 the Company acquired the assets of Manta Test
Systems Ltd. (Manta); and in July 2019 the Company acquired Globe. More information about these acquired
businesses is provided in the following section, “Products,” and in Note 2 to the Consolidated Financial Statements.
In November 2019, the Company entered into an agreement to sell the businesses comprising its Technical Packaging
segment. See “Subsequent Event” on page 7.
Products
The Company’s principal products are described below. See Note 13 to the Consolidated Financial Statements for
financial information regarding business segments and 10% customers.
Filtration
The Filtration segment accounted for approximately 40%, 37% and 41% of the Company’s total revenue in 2019,
2018 and 2017, 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
and other space transportation systems such as the Space Launch System, the Orion Multi-Purpose Crew Vehicle and
the European Service Module. 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 the U.S. submarine fleet and various surface ships including aircraft carriers.
2
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 industries.
Hi-Tech is a full-service metal processor offering aerospace 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. Its portfolio includes over 100 OEM processing approvals.
Globe is a well-established, vertically integrated supplier of mission-critical composite-based products and solutions
for navy, defense, and industrial customers; it works directly with the U.S. Navy and also through prime contractors to
cost-effectively and efficiently produce parts that meet rigid military-grade specifications through its internally
developed expertise. Its products are utilized for acoustic, signature-reduction, communications, sealing, vibration-
reducing, surface control, and hydrodynamic-related applications.
USG
The USG segment accounted for approximately 26%, 28% and 24% of the Company’s total revenue in 2019, 2018
and 2017, 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 has seven offices in the United States and five international offices.
Morgan Schaffer designs, develops, manufactures and markets an integrated offering of dissolved gas analysis, oil
testing, and data management solutions which have been combined with doblePrime™ to create a comprehensive
online monitoring solution including bushing monitoring, DGA and partial discharge.
NRG is a global market leader in the design and manufacture of decision support tools for the renewable energy
industry, primarily wind.
Test
The Test segment accounted for approximately 23%, 24% and 23% of the Company’s total revenue in 2019, 2018 and
2017, 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.
Technical Packaging
The Technical Packaging segment accounted for approximately 11%, 11% and 12% of the Company’s total revenue
in 2019, 2018 and 2017, respectively.
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.
3
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 28%, 30% and 27% of the Company’s
total revenue in 2019, 2018 and 2017, respectively. See Note 13 to the Consolidated Financial Statements 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 19%, 20% and 20% of the
Company’s total revenue in 2019, 2018 and 2017, 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 addition, Globe has developed significant manufacturing and logistics capability useful for
special hull treatments for submarines. Globe has also obtained patent protection in the U.S. and Europe for a novel
shielding curtain to be used with electromagnetic radiation scanning systems.
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.
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.
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
4
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, 2019 was $475.1 million, representing an increase of $92.3
million (24.1%) from the backlog of $382.8 million on September 30, 2018. By segment, the backlog at September
30, 2019 and September 30, 2018, respectively, was $288.4 million and $204.2 million for Filtration; $41.7 million
and $40.7 million for USG; $133.6 million and $122.3 million for Test; and $11.4 million and $15.5 million for
Technical Packaging. The Company estimates that as of September 30, 2019 domestic customers accounted for
approximately 73% of the Company’s total firm orders and international customers accounted for approximately 27%.
Of the total Company backlog at September 30, 2019, approximately 90% is expected to be completed in the fiscal
year ending September 30, 2020.
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 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 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 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
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., Safran (Sofrance), CLARCOR
Inc., TransDigm (PneuDraulics), Marotta Controls, and Parker Hannifin.
5
Significant competitors of the USG segment include OMICRON electronics Corp., Megger Group Limited, Vaisala,
and Qualitrol Company LLC (a subsidiary of Danaher Corporation).
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 Technical Packaging segment include Nelipak Corporation, Prent Corporation, Placon
Corporation, and Poli Marian Holz.
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 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.
Employees
As of September 30, 2019, the Company employed 3,239 persons, including 3,012 full time employees. Of the
Company’s full-time employees, 2,440 were located in the United States and 572 were located in 15 foreign countries.
Financing
For information about the Company’s credit facility, see Note 8 to the Consolidated Financial Statements, 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
6
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.
Subsequent Event
On November 15, 2019 the Company, through its wholly owned subsidiaries ESCO Technologies Holding LLC and
ESCO UK Holding Company I Ltd., entered into an agreement to sell its Technical Packaging business segment,
consisting of Thermoform Engineered Quality LLC, Plastique Ltd. and Plastique sp. z o.o., to subsidiaries of Sonoco
Products Company (NYSE: SON) for a cash purchase price of $187 million, plus or minus certain customary
adjustments based on working capital and other typical post-closing adjustments specified in the sale agreement.
Closing of the transaction is subject to specified representations, warranties, covenants and conditions customary in
agreements of this kind and scope. The buyers have agreed to waive any post-closing claims against the sellers for
indemnity under the representations and warranties in the sale agreement (except in the event of fraud) and intend to
obtain a Representation and Warranty Insurance policy to provide coverage in the event of a breach by the sellers.
The Company expects to finalize the sale upon receipt of regulatory clearance under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and similar foreign regulations, and upon satisfaction or waiver of the conditions to
Closing specified in the Agreement. The Company expects the Closing to occur in late 2019 or early 2020.
The Technical Packaging business segment will be reported as discontinued operations in 2020.
The Company intends to use the proceeds from the sale to pay down debt and for other corporate purposes, including
funding, terminating and annuitizing the Company’s defined benefit pension plan, which has been frozen since 2003,
during fiscal 2020.
Information about our Executive Officers
The following sets forth certain information as of November 1, 2019 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
62
59
60
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 19% 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
7
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
portion of VACCO’s, Westland’s and Globe’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 six manufacturers which produce and supply
a substantial portion of its end-products, and one of these suppliers produces approximately 35% 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.
8
Increases in tariffs or other changes in trade policies could adversely affect our ability to compete.
In addition to the effects of increases in market prices, increases in domestic import tariffs could increase the prices to
us of our foreign-sourced raw materials and product components and thereby require us to either increase our selling
prices or accept reduced margins. In the case of ETS-Lindgren, for example, tariffs on imports of Chinese goods have
raised the costs of components purchased by it either from its China facility or from other Chinese suppliers, and its
margins in China have been impacted by the increased costs of its products made in the U.S. and sold through its
Chinese business.
In addition, increases in foreign-country tariffs applicable to our exported 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 and 2019 increased tariffs imposed by China on US origin goods have adversely affected sales of NRG’s
products in China by increasing their prices to Chinese customers.
In addition, trade restrictions against certain foreign-made products or entities may adversely affect our business. For
example, because ETS-Lindgren sells wireless test solutions to Huawei in China the proposed trade ban against
Huawei would adversely impact ETS-Lindgren’s Chinese business.
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 terrorist activities, could
adversely affect our business.
In 2019, approximately 28% 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
the Middle East could be adversely affected by 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 or intellectual property
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
9
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.
Our inability to timely develop new products 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
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 USG and Test 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
10
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.
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, 2019, our twelve-month backlog was approximately $428 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.
11
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.
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. Despite our active recruitment efforts, there remains 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
12
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
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.
At September 30, 2019, the Company’s physical properties, including those described in the table below, comprised
approximately 1,903,800 square feet of floor space, of which approximately 852,200 square feet were owned and
approximately 1,051,600 square feet were leased. The table below includes the Company’s principal physical
properties. The Company does not believe any of the omitted properties, consisting primarily of office and/or
warehouse space, are individually or collectively material to its operations or business. See also Notes 14 and 15 to the
Consolidated Financial Statements.
13
Location
Modesto, CA
Denton, TX
Approx.
Sq. Ft.
181,500
145,000
Owned / Leased (with
Expiration Date)
Principal Use(s)
(M=Manufacturing,
E=Engineering, O=Office,
W=Warehouse)
Leased (9/30/2023)
Leased (9/30/2029, plus
M, E, O
M, O, W
options)
Huntley, IL
132,800
Owned
Cedar Park, TX
Oxnard, CA
South El Monte, CA
Durant, OK
Watertown, MA
Valencia, CA
Marlborough, MA
Hinesburg, VT
Stoughton, MA
130,000
127,400
100,100
100,000
88,700
79,300
79,100
Owned
Owned
Owned
Owned
Leased ( month-to-month)*
Owned
Leased (1/31/2032)
77,000
Leased (12/31/2024)
71,200
Leased (1/31/2024)
M, E, O, W
M, E, O, W
M, E, O, W
M, E, O, W
M, O, W
M, E, O
M, E, O
M, E, O, W
M, E, O, W
M, E, O, W
South El Monte, CA
64,200
Leased (various term ends)
M, O, W
Eura, Finland
Fremont, IN
41,500
39,800
Owned
Owned
Tianjin, China
Minocqua, WI
LaSalle (Montreal), Quebec
Dabrowa, Poland
38,100
35,400
35,200
34,000
Leased (11/19/2027)
Owned
Leased (8/31/2021)
Owned
Dabrowa, Poland
32,000
Owned
Avon, MA
Ontario, CA
Nottingham, England
30,000
26,900
23,900
Leased (4/30/2022)
Leased(8/31/2020)
Leased (8/6/2034)
M, E, O, W
M, E, O, W
M, E, O
M, O, W
M, E, O
M, E, O, W
M, E, O, W
W
M, E, O, W
M, E, O, W
Operating
Segment
Filtration
Filtration
Technical
Packaging
Test
Filtration
Filtration
Test
USG
Filtration
USG
USG
Filtration
Filtration
Test
Technical
Packaging
Test
Test
USG
Technical
Packaging
Technical
Packaging
Filtration
USG
Technical
Packaging
St. Louis, MO
21,500
Leased (8/31/2020 plus
ESCO Corporate Office
Corporate
Mississauga, Ontario
Morrisville, NC
Huntley, IL
options)
15,600
11,600
11,500
Leased (11/30/2023)
Leased (1/31/2027)
Leased (12/31/2022)
M, E, O, W
O
M
Marlborough, MA
Wood Dale, IL
11,200
10,700
Leased (6/30/2020)
Leased (6/30/2024)
E, O
E, O
USG
USG
Technical
Packaging
USG
Test
* Property was sold in October 2018 and leased back pending consolidation into Marlborough facility (expected Q1 2020).
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 November 22, 2019, there were approximately 1,827 holders of record of the Company’s
common stock.
Price Range of Common Stock and Dividends. The Company’s common stock is listed on the New York Stock
Exchange; its trading symbol is “ESE”. 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 18 to the Company’s Consolidated Financial
Statements.
Company Purchases of Equity Securities. The Company did not repurchase any shares of its common stock during
the fourth quarter of fiscal 2019.
Securities Authorized for Issuance Under Equity Compensation Plans. For information about securities
authorized for issuance under the Company’s equity compensation plans, please refer to Item 12 of this Form 10-K
and to Note 10 to the Company’s Consolidated Financial Statements.
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 two customized
peer groups whose individual component companies are listed below. Because the Company changed the composition
of the peer group for 2019, as described below, the peer group used for the corresponding disclosures in 2018 is also
shown for comparison. The Company is not a component of either the 2019 peer group or the 2018 peer group, but it
is a component of the Russell 2000 Index. The measurement period begins on September 30, 2014 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, 2014.
16
$250
$200
$150
$100
$50
$0
9/14
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among ESCO Technologies Inc., the Russell 2000 Index,
and the 2019 and 2018 Peer Groups
9/15
9/16
9/17
9/18
9/19
ESCO Technologies Inc.
2018 Peer Group
Russell 2000
2019 Peer Group
Copyright© 2019 Russell Investment Group. All rights reserved.
ESCO Technologies Inc.
Russell 2000
2019 Peer Group
2018 Peer Group
9/30/14
$100.00
100.00
100.00
100.00
9/30/15
$104.11
101.25
77.58
77.84
9/30/16
$135.69
116.91
89.37
91.81
9/30/17
$175.96
141.15
103.47
108.00
9/30/18
$200.83
162.66
134.34
134.67
9/30/19
$235.87
148.20
122.99
120.34
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
The 2019 peer group was composed of ten companies that corresponded to the Company’s four industry segments
used for financial reporting purposes during 2019, as follows: Filtration/Fluid Flow segment (40% of the Company’s
2019 total revenue): CIRCOR International, Inc., Donaldson Company, Inc. and Moog Inc.; USG segment (26% of
the Company’s 2019 total revenue): Aegion Corporation, Ameresco, Inc. and Thermon Group Holdings, Inc.; Test
segment (23% of the Company’s 2019 total revenue): EXFO Inc. and FARO Technologies, Inc.; and Technical
Packaging segment (11% of the Company’s 2019 total revenue): AptarGroup, Inc. and Berry Global Group, Inc.
The 2018 peer group was composed of nine 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.; USG segment (28% of
the Company’s 2018 total revenue): Aegion Corporation, Ameresco, Inc. and Thermon Group Holdings, Inc.; Test
segment (24% of the Company’s 2018 total revenue): EXFO Inc. and FARO Technologies, Inc.; and Technical
Packaging Segment (11% of the Company’s 2018 total revenue): AptarGroup, Inc. and Bemis Company, Inc. Bemis
Company, Inc. was originally a member of the 2018 peer group, but it was acquired during 2019 and is therefore not
included in the total return calculations.
In calculating the composite return of the 2019 and 2018 peer groups, 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)
2019
2018
2017
2016
2015
For years ended September 30:
Net sales
Net earnings from continuing operations
Net earnings from discontinued operations
Net earnings
Earnings per share:
Basic:
Continuing operations
Discontinued operations
Net earnings
Diluted:
Continuing operations
Discontinued operations
Net earnings
As of September 30:
Working capital
Total assets
Total debt
Shareholders’ equity
Cash dividends declared per common share
__________
$
813.0
771.6
685.7
571.5
537.3
81.0
-
81.0
92.1
-
92.1
53.7
-
53.7
45.9
-
45.9
41.7
0.8
42.5
3.12
-
3.12
3.10
-
3.10
3.56
-
3.56
3.54
-
3.54
2.08
-
2.08
2.07
-
2.07
243.6
1,466.7
286.3
826.2
195.5
1,265.1
220.0
759.4
197.8
1,260.4
275.0
671.9
1.78
-
1.78
1.77
-
1.77
165.4
978.4
110.0
615.1
1.60
0.03
1.63
1.59
0.03
1.62
155.0
864.2
50.0
584.2
0.32
0.32
0.32
0.32
0.32
$
$
$
$
$
$
$
$
See also Notes 1 and 2 to the Consolidated Financial Statements for discussion of the Company’s adoption of
ASU 2014-09, Revenue from Contracts with Customers (ASC 606) and acquisition activity which affect
comparability between years.
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 and Notes thereto
and refers to the Company’s results from continuing operations, except where noted.
This section includes comparisons of certain 2019 financial information to the same information for 2018. Year-to-
year comparisons of the 2018 financial information to the same information for 2017 are contained in Item 7 of the
Company’s Form 10-K for 2018 filed with the Securities and Exchange Commission on November 29, 2018 and
available through the SEC’s website at https://www.sec.gov/edgar/searchedgar/companysearch.html.
Introduction
ESCO Technologies Inc. and its wholly owned subsidiaries (the Company) are organized into four reportable
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); Mayday Manufacturing Co. (Mayday), Hi-Tech Metals, Inc. (Hi-Tech); and Globe
Composite Solutions, LLC (Globe).
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USG: Doble Engineering Company (Doble); Morgan Schaffer Ltd. (Morgan Schaffer); and NRG Systems, Inc.
(NRG).
Test: ETS-Lindgren Inc. (ETS-Lindgren).
Technical Packaging: Thermoform Engineered Quality LLC (TEQ); Plastique Limited and Plastique Sp. z o.o.
(together, Plastique). In November 2019 the Company entered into an agreement to sell the businesses
comprising this segment. See “Subsequent Event” on page 7.
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. Globe is a
vertically integrated supplier of composite-based products and solutions for acoustic, signature-reduction,
communications, sealing, vibration-reducing, surface control, and hydrodynamic-related applications.
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.
Test. ETS-Lindgren is an industry leader in providing its customers with the ability to identify, measure and contain
magnetic, electromagnetic and acoustic energy.
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.
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 2019 Operations
Sales, net earnings and diluted earnings per share in 2019 were $813.0 million, $81.0 million and $3.10 per
share, respectively, compared to sales, net earnings and diluted earnings per share in 2018 of $771.6 million,
$92.1 million and $3.54 per share, respectively.
Diluted EPS – As Adjusted for 2019 was $3.13 and excludes $0.6 million of pretax charges (or $0.03 per
share after tax) consisting primarily of purchase accounting charges related to the Globe acquisition and
certain restructuring charges related to facility consolidations at Doble, Plastique, PTI and VACCO partially
offset by the gain on the Doble Watertown building sale. 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 for 2018 was a $24.4
million (or $0.94 per share) of net tax benefit recorded resulting from the implementation of U.S. Tax
Reform.
Net cash provided by operating activities was approximately $105.1 million in 2019 compared to $93.3
million in 2018.
At September 30, 2019, cash on hand was $61.8 million and outstanding debt was $286.3 million, for a net
debt position (total debt less net cash) of approximately $224.5 million.
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Entered orders for 2019 were $905.3 million resulting in a book-to-bill ratio of 1.11x. Backlog at September
30, 2019 was $475.1 million compared to $382.8 million at September 30, 2018.
In July 2019, the Company acquired Globe for a purchase price of approximately $95 million, net of cash
acquired. Since the date of acquisition, the operating results for Globe have been included within the
Company’s Filtration segment.
The Company declared dividends of $0.32 per share during 2019, totaling $8.3 million in dividend payments.
Results of Operations
Net Sales
(Dollars in millions)
Filtration
USG
Test
Technical Packaging
Total
Fiscal year ended
2019
325.8
211.9
188.4
86.9
813.0
$
$
2018
286.8
214.0
182.9
87.9
771.6
Change
2019
vs. 2018
13.6 %
(1.0) %
3.0 %
(1.1) %
5.4 %
Net sales increased $41.4 million, or 5.4%, to $813.0 million in 2019 from $771.6 million in 2018. The increase in net
sales in 2019 as compared to 2018 was due to a $39.0 million increase in the Filtration segment and a $5.5 million
increase in the Test segment, partially offset by a $2.1 million decrease in the USG segment and a $1.0 million
decrease in the Technical Packaging segment.
Filtration.
The $39.0 million, or 13.6%, increase in net sales in 2019 as compared to 2018 was mainly due to a $14.3 million
increase in net sales at PTI due to higher aerospace and assembly element shipments, a $11.1 million increase in net
sales at Crissair due to higher aerospace shipments, an $8.9 million sales contribution from Globe (acquired in July
2019), a $6.8 million increase in net sales at Mayday due to higher aerospace shipments, and a $1.1 million increase in
net sales at Westland, partially offset by a $3.2 million decrease in net sales at VACCO due to lower shipments of
defense spares.
USG.
The $2.1 million, or 1.0%, decrease in net sales in 2019 as compared to 2018 was mainly due to a $9.5 million
decrease in net sales at NRG due to continued softness in the renewable energy market, partially offset by a $7.4
million increase in net sales at Doble driven by a full year of Manta’s sales and higher F series product shipments.
Test.
The $5.5 million, or 3.0%, increase in net sales in 2019 as compared to 2018 was mainly due to a $7.7 million
increase in net sales from the segment’s U.S. and Asian operations partially offset by a $2.2 million decrease in net
sales from the segment’s European operations, both due to the timing of test and measurement chamber projects.
Technical Packaging.
The $1.0 million, or 1.1%, decrease in net sales in 2019 as compared to 2018 was mainly due to a $5.5 million
decrease in net sales from Plastique due to lower shipments to commercial customers partially offset by a $4.5 million
increase in net sales at TEQ.
Orders and Backlog
New orders received in 2019 were $905.3 million as compared to $777.2 million in 2018, resulting in order backlog
of $475.1 million at September 30, 2019 as compared to order backlog of $382.8 million at September 30, 2018.
Orders are entered into backlog as firm purchase order commitments are received.
In 2019, the Company recorded orders of $409.9 million related to Filtration products, $212.9 million related to
USG products, $199.6 million related to Test products and $82.9 million related to Technical Packaging products. In
2018, the Company recorded orders of $287.9 million related to Filtration products, $219.1 million related to USG
products, $190.4 million related to Test products and $79.8 million related to Technical Packaging products.
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Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses were $172.1million, or 21.2% of net sales, in 2019, and $162.4
million, or 21.0% of net sales, in 2018.
The increase in SG&A expenses in 2019 as compared to 2018 was mainly due to an increase in the USG segment due
to higher sales commissions including additional sales and marketing expenses to support future revenue growth.
Amortization of Intangible Assets
Amortization of intangible assets was $19.5 million in 2019 and $18.3 million in 2018. Amortization of intangible
assets included $11.8 million and $10.9 million of amortization of acquired intangible assets in 2019 and 2018,
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 2019 as compared to 2018 was
mainly due to an increase in amortization of intangible assets related to the Company’s recent acquisitions.
Other Expenses or Income, Net
Other expenses, net, were $2.2 million in 2019, compared to other expenses, net, of $3.7 million in 2018. The
principal components of other expenses, net, in 2019 included $3 million of purchase accounting charges related to
the Globe acquisition; $1.4 million of restructuring charges incurred related to the Plastique facility consolidation in
2019 consisting primarily of severance and compensation benefits and asset impairment charges; $0.9 million of
restructuring charges related to the consolidation of VACCO’s aircraft/aerospace business into PTI’s aerospace
facility in Oxnard, California; approximately $1 million of charges at Doble related to facility consolidations begun in
2018; and approximately $3 million of losses on derivative instruments; partially offset by a net gain of
approximately $8 million on the sale of the Doble Watertown, MA building and land. The principal components of
other expenses, net, in 2018 included $3 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. There were no other
individually significant items included in other expenses, net, in 2019 or 2018.
Non-GAAP Financial Measures
The information reported herein includes the financial measures EPS – As Adjusted, which the Company defines as
EPS excluding the per-share net impact of the purchase accounting charges related to the Globe acquisition and the
restructuring charges incurred at Doble, Plastique, PTI and VACCO during fiscal 2019, partially offset by the gain on
the Doble Watertown, MA property sale; and 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; EBIT,
which the Company defines as earnings before interest and taxes; 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 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.
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EBIT
(Dollars in millions)
Filtration
% of net sales
USG
% of net sales
Test
% of net sales
Technical Packaging
% of net sales
Corporate
Total
% of net sales
Fiscal year ended
$
$
2019
70.1
21.5 %
52.2
24.6 %
25.6
13.6 %
5.9
6.8 %
(43.2 )
110.6
13.6 %
2018
58.7
20.5 %
43.2
20.2 %
23.8
13.0 %
8.1
9.2 %
(37.0 )
96.8
12.5 %
Change
2019
vs. 2018
19.4 %
20.8 %
7.6 %
(27.2 )%
16.8 %
14.3 %
The reconciliation of EBIT to a GAAP financial measure is as follows:
(Dollars in millions)
Net earnings
Add: Interest expense
Add (less): Income taxes
EBIT
Filtration
2019
81.0
8.4
21.2
110.6
$
$
2018
92.1
8.8
(4.1 )
96.8
The $11.4 million increase in EBIT in 2019 as compared to 2018 was primarily due to the EBIT contribution from
higher sales volumes at PTI, Crissair, Mayday and Westland and Globe (acquired July 2019). EBIT in 2019 was
negatively impacted by $0.9 million of restructuring charges related to the consolidation of VACCO’s
aircraft/aerospace business into PTI’s aerospace facility in Oxnard, California and $0.3 million of purchase accounting
charges at Globe related to the inventory step-up charge.
USG
The $9.0 million increase in EBIT in 2019 as compared to 2018 was primarily due to a $12.0 million increase in EBIT
at Doble (which included a net gain on the sale of the Doble Watertown facility of approximately $8.0 million
partially offset by certain charges to close the Doble facilities in Dubai and Mexico), and also due to higher sales
volumes at Doble; partially offset by a $3.0 million decrease in EBIT from NRG due to softness in the renewable
energy market.
Test
The $1.8 million increase in EBIT in 2019 as compared to 2018 was primarily due to the increased sales volumes
from the segment’s U.S. and Asian operations.
Technical Packaging
The $2.2 million decrease in EBIT in 2019 as compared to 2018 was primarily due to the $1.4 million of restructuring
charges incurred related to the Plastique facility consolidation in 2019. These charges consisted primarily of severance
and compensation benefits and asset impairment charges.
Corporate
Corporate operating charges included in 2019 consolidated EBIT increased to $43.2 million as compared to $37.0
million in 2018 due to purchase accounting charges related to the Globe acquisition, higher professional fees and
acquisition costs.
The “Reconciliation to Consolidated Totals (Corporate)” in Note 13 to the Consolidated Financial Statements
represents Corporate office operating charges.
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Interest Expense, Net
Interest expense was $8.4 million in 2019 compared to $8.8 million in 2018, due to lower average outstanding
borrowings ($236.4 million compared to $258.8 million) partially offset by higher average interest rates (3.2% vs.
3.0%) as a result of the additional borrowings to fund the Company’s recent acquisitions.
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”). Provisions under the TCJA affecting the Company include a further reduction in the
U.S. statutory rate to 21%, a new minimum tax on global intangible low-taxed income (“GILTI”), the benefit of the
deduction for foreign-derived intangible income (“FDII”), and changes to IRC Section 162(m) related to the
deductibility of executive compensation.
The effective tax rates for 2019, 2018 and 2017 were 20.7%, (4.7)% and 33.0%, respectively. The increase in the
2019 effective tax rate as compared to 2018 was primarily due to the enactment of the TCJA. The specific impacts of
the TCJA in 2018 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 (complete as of
December 31, 2018) of federal 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 2019 effective tax rate was favorably impacted by tax planning strategies to increase foreign tax credits claimed
retrospectively. The Company reduced the valuation allowance for excess foreign tax credits by $2.4 million and
recorded an amended return benefit of $0.3 million, which favorably impacted the 2019 effective tax rate by 2.8%.
The TJCA made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified
territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S. federal income tax.
No provision is made for foreign withholding any applicable U.S. income taxes on the undistributed earnings of non-
U.S. subsidiaries where these earnings are considered indefinitely invested or otherwise retained for continuing
international operations. Determination of the amount of taxes that might be paid on these undistributed earnings if
eventually remitted is not practicable.
Acquisitions and Dispositions
Information regarding the Company’s acquisitions during 2019, 2018 and 2017 is set forth in Note 2 to the
Company’s Consolidated Financial Statements, 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 to the end of fiscal 2019 the Company entered into an agreement to sell the businesses comprising its
Technical Packaging segment. See “Subsequent Event” on page 7.
Capital Resources and Liquidity
The Company’s overall financial position and liquidity are strong. Working capital (current assets less current
liabilities) increased to $243.6 million at September 30, 2019 from $195.5 million at September 30, 2018. Contract
assets increased $62.3 million in 2019 mainly within the Filtration segment due to the adoption of ASU No. 2014-
09, Revenue from Contracts with Customers (ASC 606). Inventories decreased by $6.6 million during 2019 mainly
due to a 9.5 million decrease within the Filtration segment resulting primarily from the adoption of ASC 606. The
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$8.3 million increase in accounts payable at September 30, 2019 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.
Net cash provided by operating activities was $105.1 million and $93.3 million in 2019 and 2018, respectively.
Net cash used in investing activities was $125.1 million and $41.6 million in 2019 and 2018, respectively. The
increase in net cash used in investing activities in 2019 as compared to 2018 was due to the Globe acquisition and
higher capital expenditures. Capital expenditures were $37.2 million and $20.6 million in 2019 and 2018,
respectively. The increase in capital expenditures in 2019 as compared to 2018 was mainly due to the facility
expansion at TEQ in 2019. There were no commitments outstanding that were considered material for capital
expenditures at September 30, 2019. In addition, the Company incurred expenditures for capitalized software of $8.4
million and $9.6 million in 2019 and 2018, respectively.
The Company made pension contributions of $2.5 million and $10.0 million in 2019 and 2018, respectively.
Net cash provided by financing activities was $53.5 million in 2019, compared to net cash used by financing
activities of $66.4 million in 2018. The change in 2019 as compared to 2018 was primarily due to additional
borrowings in 2019 related to the Globe acquisition.
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, 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 and $8.3 million in 2019 and 2018, respectively.
Contractual Obligations
The following table shows the Company’s contractual obligations as of September 30, 2019:
(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
1.3
9.6
6.4
18.2
35.5
Total
286.3
25.1
30.0
18.2
359.6
$
$
1 to 3
years
-
12.9
9.9
-
22.8
3 to 5 More than
5 years
years
-
285.0
-
2.6
8.0
5.7
-
-
8.0
293.3
(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.
The Company had no off-balance-sheet arrangements outstanding at September 30, 2019.
Share Repurchases
Information about the Company’s common stock repurchases is provided in Note 9 to the Consolidated Financial
Statements.
Pension Funding Requirements
The minimum cash funding requirements related to the Company’s defined benefit pension plans are estimated to be
approximately $0 in 2020, $0 in 2021, and $1.4 million in 2022. Additional information about the Company’s pension
plans is provided in Note 11 to the Consolidated Financial Statements.
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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 2020 and beyond will generally exceed the
broader industrial market. Given the pending sale of the Technical Packaging business expected to be completed in
the first half of 2020 (see “Subsequent Event” on page 7), this business will be reported as discontinued operations in
2020 and is excluded from the Outlook section and comparisons to 2019 described below. The details of
Management’s growth expectations for 2020 compared to 2019 are as follows:
Sales from continuing operations are expected to increase 9 to 10 percent on a consolidated basis, with
Filtration growing 13.5 to 14.5 percent, USG growing 7 to 8 percent and Test growing 4 to 5 percent;
Interest expense is expected to be lower than 2019, and will be impacted by the timing of the final after-tax
cash proceeds received on the sale of the Technical Packaging business;
Non-cash depreciation and amortization of intangible assets is expected to increase approximately $5 million,
or $0.15 per share after-tax, related to previous acquisitions and capital spending;
Income tax expense is expected to increase as Management is expecting a 23 to 24 percent effective tax rate
calculated on higher pretax earnings;
In summary, excluding Technical Packaging and the accounting impact of terminating and annuitizing the
Company’s defined benefit pension plan, Management projects 2020 Adjusted EPS to be in the range of
$3.20 to $3.30 per share (compared to 2019 Adjusted EPS of $2.95 per share, excluding the 2019 results of
Technical Packaging).
On a quarterly basis and consistent with prior years, Management expects 2020 revenues and Adjusted EPS to be
more second-half weighted. Management expects Q1 2020 Adjusted EPS to be in the range of $0.35 to $0.40 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. In
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 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 2019 and 2018.
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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, 2019.
For more information about the Company’s derivative financial instruments, see Note 12 to the Company’s
Consolidated Financial Statements included herein.
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
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.
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.
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.
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. The Company completed its analysis of the impact of
the TCJA during the first quarter of 2019.
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
26
commensurate with the risk inherent in each of our reporting units’ current business models. 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, 2019, the Company has determined that no reporting units are at risk of goodwill impairment as the
fair value of each reporting unit 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. In
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.
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.V to the Company’s Consolidated Financial Statements
included herein.
27
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
See “Market Risk Exposure” 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 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 2019, 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 effective as of September 30, 2019.
As disclosed in Item 9A, Controls and Procedures, in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2018, during the fourth quarter of 2018 we identified a material weakness in internal control related to
the ineffective design and operation of controls impacting the deferred revenue general ledger account. During 2019,
Management implemented our previously disclosed remediation plan that included enhancing our policies and
procedures related to the deferred revenue reconciliation and review and providing additional training to certain
personnel in our finance department. During the fourth quarter of 2019, we completed our testing of the operating
effectiveness of the implemented controls and found them to be effective. As a result we have concluded the material
weakness has been remediated as of September 30, 2019.
Except for the changes in connection with our implementation of the remediation plan discussed above, there have
been no other 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, 2019 that have materially affected, or are reasonably
likely to materially affect, the Company’s internal control over financial reporting.
For the remainder of the information required by this item, see “Management’s Report on Internal Control over
Financial Reporting” and the related “Report of Independent Registered Public Accounting Firm” of KPMG LLP, in
the Financial Information section beginning on page F-1 of this Annual Report, which are incorporated into this Item
by reference.
Item 9B. Other Information
None.
28
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding directors, nominees and nominating procedures, the Company’s Code of Ethics, its Audit and
Finance Committee, and non-compliance (if any) 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” in the 2019 Proxy
Statement.
Information regarding the Company’s executive officers is set forth in Item 1, “Business – Information about our
Executive Officers,” 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 2019 Proxy
Statement.
29
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 2019 Proxy Statement.
The following table summarizes certain information regarding shares of Company common stock that may be issued
by the Company pursuant to its equity compensation plans existing as of September 30, 2019:
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights (1)
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities remaining
available for future issuance under
equity compensation plans (excluding
securities reflected in column (a)) (1)
281,004 (3)
N/A (4)
792,196 (5)(6)
70,362 (7)
351,366
N/A (4)
N/A (4)
51,833 (7)
844,029
Plan Category
Equity compensation plans
approved by security
holders (2)
Equity compensation plans
not approved by security
holders
Total
__________________
(1) The number of shares is subject to adjustment for future changes in capitalization by stock splits, stock dividends and
similar events.
(2) Consists of the Company’s 2013 Incentive Compensation Plan and 2018 Omnibus Incentive Plan.
(3) Consists of 96,322 and 184,682 shares issuable in connection with the vesting and distribution of outstanding
performance-accelerated restricted share units awarded under the 2013 Incentive Compensation Plan and 2018
Omnibus Incentive Plan, respectively.
(4) The securities outstanding at September 30, 2019 have no exercise price.
(5) Represents shares currently available for awards under the 2018 Omnibus Incentive Plan. No shares remain available
for issuance under the 2013 Incentive Compensation Plan.
(6) Does not include shares that may be purchased on the open market pursuant to the Company’s Employee Stock
Purchase Plan (ESPP). Under the ESPP, participants may elect to have up to 10% of their current salary or wages
withheld and contributed to one or more independent trustees for the purchase of shares. At the discretion of an officer of
the Company, the Company or a domestic subsidiary or division may contribute cash in an amount not to exceed 20% of
the amounts contributed by participants; however, the total number of shares purchased with the Company’s matching
contributions after October 15, 2003 may not exceed 275,000. As of September 30, 2019, 611,833 shares had been
purchased with the Company’s matching funds of which 199,811 were purchased after October 15, 2003.
(7) Represents shares issuable pursuant to the Company’s Compensation Plan for Non-Employee Directors (Director
Compensation Plan). The Director Compensation Plan provides for each director to be paid an annual retainer fee
payable in shares of Company stock as well as an annual retainer fee and certain other fees payable in cash, all as
determined periodically by the Human Resources and Compensation Committee of the Board of Directors. Directors may
elect to defer receipt of their stock and/or cash compensation. The maximum number of shares available for issuance
under the Director Compensation Plan is 400,000 shares; as of September 30, 2019, 277,805 shares had been issued
and four directors had elected to defer the issuance of a total of approximately 70,362 shares. Deferred amounts are
credited to the director’s deferred compensation account in stock equivalents and are distributed at a future date or dates
specified by the director unless distribution is accelerated in certain circumstances, including a change in control of the
Company. Deferred cash compensation may be distributed in shares or cash, but any deferred stock portion may only be
distributed in shares.
30
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 2019 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 2019 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
February 5, 2018
February 7, 2018
3.2
Bylaws
Exhibit 3.1 to the Company’s Form 8-K filed
4.1(a)
4.1(b)
4.2
10.1
Description of Common Stock
November 19, 2019
Filed herewith
Specimen revised Common Stock Certificate
Exhibit 4.1 to the Company’s Form 10-Q for the
fiscal quarter ended March 31, 2010
Credit Agreement dated September 27, 2019,
Exhibit 10.1 to the Company’s Form 8-K filed
incorporated by reference to Exhibit 10.1 hereto
September 30, 2019
Credit Agreement dated as of September 27, 2019
among the Registrant, the Foreign Subsidiary
Borrowers party thereto, the Lenders party thereto,
JPMorgan Chase Bank, N.A. as Administrative Agent,
BMO Harris Bank N.A. as Syndication Agent, and Bank
of America, N.A., SunTrust Bank, U.S. Bank National
Association and Wells Fargo Bank, National
Association as Co-Documentation Agents
Exhibit 10.1 to the Company’s Form 8-K filed
September 30, 2019
10.2
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
10.3
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
10.4(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
10.4(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
32
Exhibit No.
Description
Document Location
10.4(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
10.5
* Directors’ Extended Compensation Plan, adopted
effective October 11, 1993, restated to include all
amendments through August 7, 2013 (current as of
November 2019)
Filed herewith
10.6
* 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
10.7(a)
* 2013 Incentive Compensation Plan
Appendix A to the Company’s Schedule 14A Proxy
Statement filed December 19, 2012
10.7(b)
* 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
10.7(c)
* 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
10.8(a)
* 2018 Omnibus Incentive Plan
Exhibit 10.1 to the Company’s Form 8-K filed
February 6, 2018
10.8(b)
* Form of Award Agreement for Performance-
Exhibit 10.6(f) to the Company’s Form 10-K for the
Accelerated Restricted Shares under 2018 Omnibus
Incentive Plan (revised August 29, 2018)
fiscal year ended September 30, 2018
10.8(c)
* Form of Award Agreement for Performance-
Exhibit 10.1 to the Company’s Form 8-K filed
Accelerated Restricted Shares under 2018 Omnibus
Incentive Plan (revised May 1, 2019)
May 7, 2019
10.9(a)
* Eighth Amendment and Restatement of Employee
Stock Purchase Plan, effective August 2, 2018
Exhibit 10.7 to the Company’s Form 10-K for the
fiscal year ended September 30, 2018
10.9(b)
Ninth Amendment and Restatement of Employee Stock
Exhibit 10.1 to the Company’s Form 8-K filed
Purchase Plan, effective February 5, 2019
February 7, 2019
10.10
* 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 February 4, 2019
November 19, 2019
10.11
* Compensation Recovery Policy, adopted effective
Exhibit 10.6 to the Company’s Form 8-K filed
February 4, 2010
February 10, 2010
10.12
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
10.13(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)
10.13(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
10.13(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
33
Exhibit No.
Description
Document Location
10.14(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)
10.14(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
10.14(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)
10.14(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
10.15(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
(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)
10.15(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: 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)
10.15(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)
10.15(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
21
Subsidiaries of the Company
August 3, 2010
Filed herewith
34
Exhibit No.
Description
Document Location
Consent of Independent Registered Public Accounting
Filed herewith
23
31.1
31.2
32
Firm
Certification of Chief Executive Officer
Certification of Chief Financial Officer
** Certification of Chief Executive Officer and
Chief Financial Officer
101.INS
*** Inline XBRL Instance Document
101.SCH
*** Inline XBRL Schema Document
Filed herewith
Filed herewith
Filed herewith
Submitted herewith
Submitted herewith
101.CAL
*** Inline XBRL Calculation Linkbase Document
Submitted herewith
101.LAB
*** Inline XBRL Label Linkbase Document
Submitted herewith
101.PRE
*** Inline XBRL Presentation Linkbase Document
Submitted herewith
101.DEF
*** Inline XBRL Definition Linkbase Document
Submitted herewith
104
*** Cover Page Inline Interactive Data File
Submitted herewith
(contained in Exhibit 101)
-----------
*
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.
*** Exhibits 101 and 104 to this report consist 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, 2019
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, 2019
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
/s/ Gloria L. Valdez
Gloria L. Valdez
Executive Vice President, Chief Financial
Officer (Principal Accounting Officer)
and Director
November 29, 2019
November 29, 2019
November 29, 2019
November 29, 2019
November 29, 2019
November 29, 2019
November 29, 2019
November 29, 2019
Director
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-5
F-5
F-6
F-8
F-9
F-10
F-35
F-36
F-37
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, 2019 and 2018, 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,
2019, 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,
2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended
September 30, 2019, 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, 2019, 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, 2019 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting
for revenue from contracts with customers as of October 1, 2018 due to the adoption of ASU No. 2014-09, Revenue
from Contracts with Customers (ASC Topic 606).
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated
financial statements that were communicated or required to be communicated to the audit committee and that: (1)
relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter
in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating
the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or
disclosures to which they relate.
Assessment of the estimation of total contract costs at completion for contracts in the Filtration segment for which revenue is
recognized over time using a cost-to-cost model
As discussed in Notes 2 and 14 to the consolidated financial statements, the Company’s Filtration segment enters into
certain long-term fixed price contracts with aerospace and defense customers to produce various products. These
products do not have an alternative use and the Company has an enforceable right to payment for costs incurred plus a
reasonable margin. Revenue for these contracts is recognized over time using a cost-to-cost model. Under such model,
the Company measures the extent of progress towards completion of these contracts based on the ratio of contract
F-2
costs incurred to date to the estimate of total contract costs at completion. The estimation of these costs requires
judgment by the Company given the unique product specifications and requirements for contracts related to the
design, development, and manufacture of complex products.
We identified the assessment of the estimation of total contract costs at completion for contracts in the Filtration
segment for which revenue is recognized over time using a cost-to-cost model as a critical audit matter. Complex
auditor judgment was required in evaluating expected engineering and production requirements of the contracts and
the associated cost estimates for labor hours and materials.
The primary procedures we performed to address this critical audit matter included the following. We tested certain
internal controls over the Company’s revenue recognition process, including controls over the accumulation and
estimation of labor hours and costs of materials. We compared the Company’s historical estimated costs and profit
margin to the actual costs and profit margin for completed contracts to assess the Company’s ability to accurately
estimate costs. We challenged the Company’s assumptions for labor hours and materials to be incurred for a sample of
contracts by:
Reading the underlying contract documents to obtain an understanding of the contractual requirements and
deliverables;
Comparing the costs incurred to date, as a percentage of the estimated costs at completion, to the Company’s
physical production to date under the contract;
Comparing actual incurred and remaining estimated material costs to the original estimated amount of material
costs at the beginning of the project plus incremental material costs due to modifications;
Comparing actual incurred and remaining estimated labor hours to the original estimate of labor hours at the
beginning of the project plus incremental labor hours due to modification;
Comparing the estimated costs at completion, which includes costs incurred to date plus estimated costs to
complete, to actual costs incurred for similar products previously developed and produced, if applicable; and
Inspecting correspondence between the Company and the customer regarding actual and expected contract
performance to date and comparing to the estimate to complete.
Evaluation of the sufficiency of audit evidence obtained over net sales
As discussed in Notes 1 and 16 to the consolidated financial statements, and disclosed in the consolidated statements
of operations, the Company recorded $813.0 million of net sales in 2019. Net sales are recognized primarily from the
sale of highly engineered products and systems across various industries and through multiple Company divisions and
locations around the world.
We identified the evaluation of the sufficiency of audit evidence obtained over net sales as a critical audit matter.
Evaluating the sufficiency of audit evidence obtained over net sales required especially subjective auditor judgment
because of the disaggregated nature of the Company’s operations, including revenue recognition accounting policies
and procedures that differ among the various divisions and locations. This included determining the Company
divisions and locations at which procedures were performed.
The primary procedures we performed to address this critical audit matter included the following. We applied auditor
judgment to determine the nature and extent of procedures to be performed over net sales, including the determination
of the Company divisions and locations at which those procedures were to be performed. At each Company division
and location where procedures were performed, we:
Tested certain internal controls over the Company’s net sales process at the applicable division and location; and
Assessed the recorded net sales by selecting a sample of transactions and compared the amount recognized for
consistency with underlying documentation, including contracts with customers and shipping documentation, if
applicable, and the Company’s revenue recognition policies.
After completion of these procedures, we evaluated the overall sufficiency of audit evidence obtained over net sales.
Evaluation of initial measurement of customer relationship and trade name intangible assets acquired in the Globe Composite
Solutions, LLC business combination
As discussed in Note 2 to the consolidated financial statements, the Company acquired Globe Composite Solutions,
LLC (Globe) on July 2, 2019. As a result of the transaction, the Company acquired a customer relationship intangible
asset associated with the generation of future income from Globe’s existing customers and a trade name intangible
asset associated with the Globe Composite Solutions trade name (collectively, the intangible assets).
F-3
We identified the evaluation of the initial measurement of these intangible assets acquired in the Globe business
combination as a critical audit matter. There was a high degree of subjectivity in evaluating the discounted cash flow
model used to calculate the acquisition-date fair value of the intangible assets. In addition, auditor judgment was
required to evaluate the following assumptions used by the Company in valuing the intangible assets:
Forecasted revenues and revenue growth rates;
Forecasted revenues from existing customer contracts, inclusive of attrition;
Forecasted earnings before interest, taxes, depreciation, and amortization (EBITDA);
Royalty rate; and
Estimated discount rate.
The primary procedures we performed to address this critical audit matter included the following. We tested certain
internal controls over the Company’s acquisition-date valuation process, including controls related to the development
of the relevant assumptions, as listed above. We compared the Company’s estimates of forecasted revenues and
EBITDA to Globe’s historical results. We evaluated the Company’s forecasted revenues from existing customers,
exclusive of attrition, and forecasted EBITDA by comparing forecasted revenue growth and EBITDA assumptions to
those of the Company’s peers and trends in the industry. We tested the Company’s determination of the weighted
average cost of capital (WACC) by comparing it to the WACCs of comparable peer companies. In addition, we
involved valuation professionals with specialized skills and knowledge, who assisted in:
Comparing the valuation approaches used by the Company to calculate the fair value of the intangible assets to
standard valuation approaches for comparable types of assets;
Comparing customer attrition to an independent estimate developed based on historical attrition rates for Globe
and certain qualitative market factors;
Evaluating the Company’s royalty rate, by comparing it to royalty rates used for similar assets in the same
industry;
Evaluating the Company’s discount rate, by comparing it against a discount rate range that was independently
developed using publicly available market data for comparable peers;
Developing an estimate of the fair value of the customer relationship intangible asset using the Company’s cash
flow forecast and an independently developed discount rate; and
Developing an estimate of the fair value of the trade name intangible asset using the Company’s forecasted
revenues and estimated royalty rate and an independently developed discount rate.
/s/ KPMG LLP
We have served as the Company’s auditor since 1990.
St. Louis, Missouri
November 29, 2019
F-4
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 expense (benefit)
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.
2019
812,970
2018
771,582
$
2017
685,740
508,521
172,109
19,488
8,396
2,240
710,754
102,216
21,177
81,039
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
3.12
3.56
3.10
3.54
2.08
2.07
25,946
26,097
25,874
26,058
25,774
25,995
$
$
$
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 on derivative instruments
Total other comprehensive (loss) income, net of tax
Comprehensive income
See accompanying Notes to Consolidated Financial Statements.
2019
81,039
2018
92,136
$
(6,474 )
(6,066 )
94
(12,446 )
(2,254 )
(2,003 )
37
(4,220 )
$
68,593
87,916
2017
53,703
6,383
5,573
19
11,975
65,678
F-5
CONSOLIDATED BALANCE SHEETS
2019
2018
(Dollars in thousands)
As of September 30,
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $1,505 and $1,683 in 2019 and
$
61,808
30,477
2018, respectively
Contract assets, net
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.
174,427
115,310
128,825
14,824
495,194
9,830
102,178
166,693
12,639
291,340
(129,870 )
161,470
393,047
409,215
7,794
163,740
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
$ 1,466,720
1,265,122
F-6
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
As of September 30,
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt
Accounts payable
Contract liabilities, net
Accrued salaries
Accrued other expenses
Total current liabilities
Pension obligations
Deferred tax liabilities
Other liabilities
Long-term debt
Total liabilities
Shareholders’ equity:
$
2019
2018
21,261
71,370
81,177
38,531
39,296
251,635
22,682
64,855
36,326
265,000
640,498
20,000
63,033
49,035
29,379
39,083
200,530
16,286
64,794
24,102
200,000
505,712
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
30,596,940 and 30,534,786 shares in 2019 and 2018, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of tax
Less treasury stock, at cost (4,615,627 and 4,623,958 common shares in 2019 and 2018,
respectively)
Total shareholders’ equity
306
292,408
684,741
(43,974 )
933,481
305
291,190
606,837
(31,528 )
866,804
(107,259 )
826,222
(107,394 )
759,410
Total Liabilities and Shareholders’ Equity
$
1,466,720
1,265,122
See accompanying Notes to Consolidated Financial Statements.
F-7
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, 2016
30,364 $
304 290,588 471,272
(39,283 ) (107,772 )
615,109
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, net
—
—
—
—
—
—
—
—
—
—
— 53,703
—
—
—
—
—
—
—
(8,257 )
—
6,383
5,573
19
—
—
—
—
—
—
53,703
6,383
5,573
19
(8,257 )
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 new accounting standard ASU 2018-02
Stock options and stock compensation plans, net
—
—
—
—
—
—
—
—
—
—
— 92,136
—
—
—
—
—
—
—
(8,278 )
—
(2,254 )
(2,003 )
37
—
—
—
—
—
—
92,136
(2,254 )
(2,003 )
37
(8,278 )
6,261
—
—
6,261
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
Comprehensive income (loss):
Net earnings
Translation adjustments, net of tax of $0
Net unrecognized actuarial loss, net of tax
of $1,817
Forward exchange contracts, net of tax of $(22)
Cash dividends declared ($0.32 per share)
Adoption of new accounting standard
ASU 2014-09
Stock options and stock compensation plans, net
of tax of $0
—
—
—
—
—
—
62
—
—
—
—
—
—
— 81,039
—
—
—
—
—
—
—
(6,474 )
(6,066 )
94
—
—
81,039
(6,474 )
(6,066 )
94
—
—
(8,302 )
—
—
(8,302 )
—
5,167
—
—
5,167
1
1,218
—
—
135
1,354
Balance, September 30, 2019
30,597 $
306 292,408 684,741
(43,974 ) (107,259 )
826,222
See accompanying Notes to Consolidated Financial Statements.
F-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Years ended September 30,
Cash flows from operating activities:
Net earnings
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization
Stock compensation expense
Changes in assets and liabilities
Change in property, plant and equipment from gain on building sale
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 building and 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
Debt issuance costs
Other
Net cash provided (used) by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Changes in assets and liabilities:
Accounts receivable, net
Contract assets
Inventories
Other assets and liabilities
Accounts payable
Contract liabilities
Accrued expenses
Supplemental cash flow information:
Interest paid
Income taxes paid (including state & foreign)
See accompanying Notes to Consolidated Financial Statements.
2019
2018
2017
$
81,039
92,136
53,703
40,050
5,353
(9,944 )
(8,922 )
61
(2,500 )
—
105,137
(96,777 )
(37,183 )
(8,386 )
17,201
—
(125,145 )
131,261
(65,000 )
(8,302 )
(1,071 )
(3,371 )
53,517
(2,178 )
31,331
30,477
61,808
(7,230 )
(66,885 )
10,150
8,020
7,400
36,751
1,850
(9,944 )
8,076
26,084
$
$
$
$
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
(1,466 )
771
(10,315 )
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
7,914
5,644
(17,889 )
8,540
8,789
3,731
25,674
F-9
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 on September 30. Throughout the Consolidated Financial Statements, unless the
context indicates otherwise, references to a year (for example 2019) 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; products and systems to reduce vibration and/or acoustic signatures and otherwise reduce or obscure a
vessel’s signature, and other communications, sealing, surface control and hydrodynamic related applications to
enhance U.S. Navy maritime survivability; precision-tolerance machined components for the aerospace and defense
industry; and metal processing services.
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.
Test: ETS-Lindgren Inc. provides its customers with the ability to identify, measure and contain magnetic,
electromagnetic and acoustic energy.
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
On October 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606). Significant
changes to our policies resulting from the adoption are provided below. We adopted ASC 606 using the modified
retrospective transition method applied to contracts that were not substantially complete at the end of fiscal year 2018.
We recorded a $5.2 million adjustment to increase retained earnings to reflect the cumulative impact of adopting this
standard at the beginning of fiscal year 2019, primarily related to certain long-term contracts in our Filtration and
Technical Packaging segments that converted to the cost-to-cost method for revenue recognition. The comparative
information has not been restated and is reported under the accounting standards in effect for those periods. A
reconciliation of the financial statement line items impacted for the year ended September 30, 2019 under ASC 606 to
the prior accounting standards is provided in Note 16.
F-10
Revenue Recognition
Revenue is recognized when control of the goods or services promised under the contract is transferred to the
customer either at a point in time (e.g., upon delivery) or over time (e.g., as we perform under the contract). We
account for a contract when it has approval and commitment from both parties, the rights and payment terms of the
parties are identified, the contract has commercial substance and collectability of consideration is probable. Contracts
are reviewed to determine whether there is one or multiple performance obligations. A performance obligation is a
promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue
recognition. For contracts with multiple performance obligations, the expected consideration, or the transaction price,
is allocated to each performance obligation identified in the contract based on the relative standalone selling price of
each performance obligation. Revenue is then recognized for the transaction price allocated to the performance
obligation when control of the promised goods or services underlying the performance obligation is transferred.
Payment terms with customers vary by the type and location of the customer and the products or services offered. The
Company does not adjust the promised amount of consideration for the effects of significant financing components
based on the expectation that the period between when the Company transfers a promised good or service to a
customer and when the customer pays for that good or service will be one year or less. Arrangements with customers
that include payment terms extending beyond one year are not significant.
Filtration: Within the Filtration segment, approximately 50% of revenues (approximately 20% of consolidated
revenues) are recognized at a point in time when products are shipped (when control of the goods transfers) to
unaffiliated customers. The related contracts are with commercial and military customers and have a single
performance obligation as there is only one good promised or the promise to transfer the goods or services is not
distinct or separately identifiable from other promises in the contract. The transaction price for these contracts reflects
our estimate of returns, rebates and discounts, which are based on historical, current and forecasted information to
determine the expected amount to which the Company will be entitled in exchange for transferring the promised
goods or services to the customer. The realization of variable consideration occurs within a short period of time from
product delivery; therefore, the time value of money effect is not significant. Amounts billed to customers for shipping
and handling are included in the transaction price as the related activities are performed prior to customer obtaining
control of the products. They generally are not treated as separate performance obligations as these costs fulfill a
promise to transfer the product to the customer and are expensed in selling, general, and other costs in the period they
are incurred. Taxes collected from customers and remitted to government authorities are recorded on a net basis. We
primarily provide standard warranty programs for products in our commercial businesses for periods that typically
range from one to two years. These assurance-type programs typically cannot be purchased separately and do not meet
the criteria to be considered a performance obligation.
Approximately 50% of the segment’s revenues (approximately 20% of consolidated revenues) are accounted for over
time as the product does not have an alternative use and the Company has an enforceable right to payment for costs
incurred plus a reasonable margin or the inventory is owned by the customer. The related contracts are primarily cost-
plus or fixed price contracts related to the design, development and manufacture of complex fluid control products,
quiet valves, manifolds, shock and vibration dampening, thermal insulation and systems primarily for the commercial
aerospace and military (U.S. Government) markets. The contracts may contain multiple products, which are capable
of being distinct as the customer could benefit from each product on its own or together with other readily available
resources. Each product is separately identifiable from the other products in the contract. Therefore, each product is
distinct in context of the contract and will be accounted for as a separate performance obligation. Our contracts are
frequently modified for changes in contract specifications and requirements. Most of our contract modifications are
for products that are not distinct from the existing contract and are accounted for as part of that existing contract.
Contracts with the U.S. Government generally contain clauses that provide lien rights to work-in-process along with
clauses that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a
reasonable profit and take control of any work-in-process. Due to the continuous transfer of control to the U.S.
Government, we recognize revenue over the time that we perform under the contract.
Selecting the method to measure progress towards completion for the commercial and military contracts requires
judgment and is based on the nature of the products or service to be provided. We generally use the cost-to-cost
method to measure progress for our Filtration segment contracts, as the rate at which costs are incurred to fulfill a
contract best depicts the transfer of control to the customer. Under this measure, the extent of progress towards
completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the
performance obligation, and revenue is recorded proportionally as costs are incurred based on an estimated profit
margin.
F-11
The transaction price for our contracts represents our best estimate of the consideration we will receive and includes
assumptions regarding variable consideration as applicable. Certain of our long-term contracts contain incentive fees
that can increase the transaction price. These variable amounts generally are awarded upon achievement of certain
performance metrics, program milestones or cost targets and can be based upon customer discretion. We include
estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue
recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of
variable consideration and determination of whether to include estimated amounts in the transaction price are based
largely on an assessment of our anticipated performance and all other information that is reasonably available to us.
Total contract cost is estimated utilizing current contract specifications and expected engineering requirements.
Contract costs typically are incurred over a period of several months to one or more years, and the estimation of these
costs requires judgment. Our cost estimation process is based on the professional knowledge and experience of
engineers and program managers along with finance professionals. We review and update our projections of costs
quarterly or more frequently when circumstances significantly change.
Under the typical payment terms of our long term fixed price contracts, the customer pays us either performance-
based or progress payments. Performance-based payments represent interim payments based on quantifiable measures
of performance or on the achievement of specified events or milestones. Progress payments are interim payments of
costs incurred as the work progresses. Because of the timing difference of revenue recognition and customer billing,
these contracts will often result in revenue recognized in excess of billings and billings in excess of costs incurred,
which we present as contract assets and contract liabilities, respectively, in the Consolidated Balance Sheets. Amounts
billed and due from our customers are classified in Accounts receivable, net. For short term fixed price and cost-type
contracts, we are generally paid within a short period of time.
For contracts where revenue is recognized over time, we generally recognize changes in estimated contract revenues,
costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect
of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current
period. We have net revenue recognized in the current year from performance obligations satisfied in the prior year
due to changes in our estimated costs to complete the related performance obligations. Anticipated losses on contracts
are recognized in full in the period in which the losses become probable and estimable.
USG: Within the USG segment, approximately 75% of revenues (approximately 19% of consolidated revenues) are
recognized at a point in time when products are shipped (when control of the goods transfers) to unaffiliated
customers. The related contracts are with commercial customers. The contracts may contain multiple products which
are capable of being distinct as the customer could benefit from each product on its own or together with other readily
available resources. Each product is separately identifiable from the other products in the contract. Therefore, each
product is distinct in context of the contract and is accounted for as a separate performance obligation. The transaction
price for these contracts reflects our estimate of variable consideration in the form of returns, rebates and discounts,
which are based on historical, current and forecasted information to determine the expected amount to which the
Company will be entitled in exchange for transferring the promised goods or services to the customer. The realization
of variable consideration occurs within a short period of time from product delivery; therefore, the time value of
money effect is not significant. Amounts billed to customers for shipping and handling are included in the transaction
price as the related activities are performed prior to customer obtaining control of the products. They generally are not
treated as separate performance obligations as these costs fulfill a promise to transfer the product to the customer and
are expensed in selling, general, and other costs in the period they are incurred. Taxes collected from customers and
remitted to government authorities are recorded on a net basis. We primarily provide standard warranty programs for
products in our commercial businesses for periods that typically range from one to two years. These assurance-type
programs typically cannot be purchased separately and do not meet the criteria to be considered a performance
obligation.
Approximately 25% of the segment’s revenues (approximately 7% of consolidated revenues) are recognized over time
as services are performed. The services accounted for under this method include an obligation to provide testing
services using hardware and embedded software, software maintenance, training, lab testing, and consulting services.
The related contracts contain a bundle of goods and services that are integrated in the context of the contract.
Therefore, the goods and services are not distinct and the Company has a single performance obligation. Selecting the
method to measure progress towards completion for these contracts requires judgment and is based on the nature of
the products and service to be provided. We will recognize revenue as a series of distinct services based on each day
of providing services (straight-line over the contract term) for our USG segment contracts. The transaction price for
our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding
variable consideration as applicable. Under the typical payment terms of our service contracts, the customer pays us in
advance of when services are performed. Because of the timing difference of revenue recognition and customer
F-12
payment, which is typically received upon commencement of the contract, these contracts result in deferred revenue,
which we present as contract liabilities, in the Consolidated Balance Sheets.
Included in this category, approximately 10% of the segment’s revenues (approximately 2% of consolidated revenues)
are recognized based on the terms of the software contract. For contracts that transfer a software license to the
customer, revenue will be recognized at a point in time. These type of software contracts represent a right to use the
software, or a functional license, in which revenue should be recognized upon transfer of the license. For contracts in
software as a service (SaaS) arrangements, revenue will be recognized over time. The customer receives and
consumes the benefits of the SaaS arrangement through access to the system which is for a stated period. We will
recognize revenue based on each day of providing access (straight-line over the contract term). The transaction price
for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding
variable consideration as applicable. Under the typical payment terms of our software contracts, the customer pays us
in advance of when services are performed. Because of the timing difference of revenue recognition and customer
payment, these contracts result in deferred revenue, which we present as contract liabilities, in the Consolidated
Balance Sheets.
Test: Within the Test segment, approximately 20% of revenues (approximately 4% of consolidated revenues) are
recognized at a point in time when products such as, antennas and probes are shipped (when control of the goods
transfers) to unaffiliated customers. The related contracts are with commercial customers. The contracts may contain
multiple products which are capable of being distinct as the customer could benefit from each product on its own or
together with other readily available resources. Each product is separately identifiable from the other products in the
contract. Therefore, each product is distinct in context of the contract and will be accounted for as a separate
performance obligation. The transaction price for these contracts reflects our estimate of variable consideration in the
form of returns, rebates and discounts, which are based on historical, current and forecasted information to determine
the expected amount to which the Company will be entitled in exchange for transferring the promised goods or
services to the customer. The realization of variable consideration occurs within a short period of time from product
delivery; therefore, the time value of money effect is not significant. Amounts billed to customers for shipping and
handling are included in the transaction price as the related activities are performed prior to customer obtaining
control of the products. They generally are not treated as separate performance obligations as these costs fulfill a
promise to transfer the product to the customer and are expensed in selling, general, and other costs in the period they
are incurred. Taxes collected from customers and remitted to government authorities are recorded on a net basis. We
primarily provide standard warranty programs for products in our commercial businesses for periods that typically
range from one to two years. These assurance-type programs typically cannot be purchased separately and do not meet
the criteria to be considered a performance obligation.
Approximately 80% of the segment’s revenues (approximately 19% of consolidated revenues) are recorded over time
as the product does not have an alternative use and the Company has an enforceable right to payment for costs
incurred plus a reasonable margin. Products accounted for under this guidance include the construction and
installation of test chambers to a buyer’s specifications that provide its customers with the ability to measure and
contain magnetic, electromagnetic and acoustic energy. The goods and services related to each installed test chamber
are not distinct due to the significant amount of integration provided and each installed chamber is accounted for as a
single performance obligation. Selecting the method to measure progress towards completion for these contracts
requires judgment and is based on the nature of the products and service to be provided. We use milestones to measure
progress for our Test segment contracts because it best depicts the transfer of control to the customer that occurs as we
incur costs on our contracts. 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 transaction price for our contracts represents our best estimate of the
consideration we will receive and includes assumptions regarding variable consideration as applicable.
Total contract cost is estimated utilizing current contract specifications and expected engineering requirements.
Contract costs typically are incurred over a period of several months to a year, and the estimation of these costs
requires judgment. Our cost estimation process is based on the professional knowledge and experience of engineers
and program managers along with finance professionals. We review and update our projections of costs quarterly or
more frequently when circumstances significantly change.
Under the typical payment terms of our fixed price contracts, the customer pays us either performance-based or
progress payments. Performance-based payments represent interim payments based on quantifiable measures of
performance or on the achievement of specified events or milestones. Progress payments are interim payments of
costs incurred as the work progresses. Because of the timing difference of revenue recognition and customer billing,
these contracts result in revenue recognized in excess of billings and billings in excess of costs incurred, which we
F-13
present as contract assets and contract liabilities, respectively, in the Consolidated Balance Sheets. Amounts billed and
due from our customers are classified in Accounts receivable, net.
For contracts where revenue is recognized over time, we generally recognize changes in estimated contract revenues,
costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect
of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current
period. We have net revenue recognized in the current year from performance obligations satisfied in the prior year
due to changes in our estimated costs to complete the related performance obligations. Anticipated losses on contracts
are recognized in full in the period in which the losses become probable and estimable.
Technical Packaging: Within the Technical Packaging segment, 100% of the revenues (approximately 11% of
consolidated revenues) are recognized over time as the product does not have an alternative use and the Company has
an enforceable right to payment. Selecting the method to measure progress towards completion for the contracts
requires judgment and is based on the nature of the products to be provided. We use the cost-to-cost method to
measure progress for our Technical Packaging segment contracts because it best depicts the transfer of control to the
customer that occurs as we incur costs on our contracts. Under this measure, the extent of progress towards
completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the
performance obligation, and revenue is recorded proportionally as costs are incurred. The transaction price for our
contracts reflects our estimate of variable consideration in the form of returns, rebates and discounts, which are based
on historical, current and forecasted information to determine the expected amount to which the Company will be
entitled in exchange for transferring the promised goods or services to the customer. The realization of variable
consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is
not significant.
Total contract cost is estimated utilizing current contract specifications and expected engineering requirements.
Contract costs typically are incurred over a period of weeks, minimizing the amount of judgment in developing the
cost estimate. Our cost estimation process is based on the professional knowledge and experience of engineers and
program managers along with finance professionals. We review and update our projections of costs quarterly or more
frequently when circumstances significantly change.
Under the typical payment terms of our contracts, the customer is billed upon shipment of product. Amounts billed
and due from our customers are classified in Accounts receivable, net. Because of the timing difference of revenue
recognition and customer billing, these contracts result in revenue recognized in excess of billings, which we present
as contract assets in the Consolidated Balance Sheets.
For contracts where revenue is recognized over time, we generally recognize changes in estimated contract revenues,
costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect
of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current
period. Anticipated losses on contracts are recognized in full in the period in which the losses become probable and
estimable.
Contract Assets and Liabilities
Contract assets arise from contracts when revenue is recognized over time and the amount of revenue recognized,
including our estimate of variable consideration that has been included in the transaction price, exceeds the amount
billed to the customer. These amounts are included in contract assets until the right to payment is no longer
conditional on events other than the passage of time. These contract assets are reclassified to receivables when the
right to consideration becomes unconditional. Contract liabilities include deposits, deferred revenue, upfront payments
and billings in excess of revenue recognized. Liabilities for customer rebates and discounts are included in other
current liabilities in the accompanying balance sheet.
See the further discussion of the Company’s revenue recognition in Note 16 below.
Prior to Adoption of ASC 606
Prior to October 1, 2018, Management recognized revenue consistent with ASC 605. The Filtration and Technical
Packaging segments were most impacted by the change in the timing of revenue recognition. Under ASC 605, the
Filtration segment recognized 85% and 86% of revenues upon delivery of products (when title and risk of ownership
transfers) and when the other general conditions to revenue recognition (collectability of revenues is probable, there is
evidence of an arrangement, fees are fixed and determinable) were met, and 15% and 14% of revenues under
percentage-of-completion in 2018 and 2017, respectively. Under ASC 605, the Technical Packaging segment
recognized 100% of revenues upon delivery of products (when title and risk of ownership transfers) in 2018 and 2017.
The change to recording more revenue over time as costs are incurred at both segments is the result of the products not
F-14
having an alternative use and the Company having an enforceable right to payment for costs incurred plus a
reasonable margin or the inventory is owned by the customer.
The timing of revenue recognition under ASC 605 and ASC 606 was similar for the USG and Test segments. Within
the USG segment, 25% and 22% of revenues were recognized under percentage-of-completion and 75% and 78% of
revenues were recognized when products were delivered or services performed (when title and risk of ownership
transfers) and when the other general conditions to revenue recognition (collectability of revenues is probable, there is
evidence of an arrangement, fees are fixed and determinable) were met in 2018 and 2017, respectively. Within the
Test segment, 75% and 70% of revenues were recognized under percentage-of-completion and 25% and 30% of
revenues were recognized when products were delivered or services performed (when title and risk of ownership
transfers) in 2018 and 2017, respectively.
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. 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.
I. 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.
J. 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).
K. 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 each of our reporting units’ current business models.
F-15
During 2019, the revenue softness in the Company’s renewable energy subsidiary NRG led management to perform a
more comprehensive impairment analysis, which included a detailed calculation surrounding the carrying value of its
$8 million of goodwill and $8 million of tradename related to that reporting unit. The results of these additional
analyses indicated that our estimates of discounted cash flows for assets measured in accordance with ASC 350,
Intangibles – Goodwill and Other would allow the carrying amounts to be recovered. Since we are using estimates of
discounted cash flows, these may change, and if they change negatively it could result in the need to write down those
assets to fair value.
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.
L. Capitalized Software
The costs incurred for the development of computer software that will be sold, leased, or otherwise marketed are
charged to expense when incurred as research and development until technological feasibility has been established for
the product. Technological feasibility is typically established upon completion of a detailed program design. Costs
incurred after this point are capitalized on a project-by-project basis. Capitalized costs consist of internal and external
development costs. Upon general release of the product to customers, the Company ceases capitalization and begins
amortization, which is calculated on a project-by-project basis as the greater of (1) the ratio of current gross revenues
for a product to the total of current and anticipated future gross revenues for the product or (2) the straight-line method
over the estimated economic life of the product. The Company generally amortizes the software development costs
over a three-to-seven year period based upon the estimated future economic life of the product. Factors considered in
determining the estimated future economic life of the product include anticipated future revenues, and changes in
software and hardware technologies. Management annually reviews the carrying values of capitalized costs for
impairment or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If
expected cash flows are insufficient to recover the carrying amount of the asset, then an impairment loss is recognized
to state the asset at its net realizable value.
M. Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected
to be recovered or settled. Deferred tax assets may be reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date. The Company regularly
reviews its deferred tax assets for recoverability and establishes a valuation allowance when Management believes it
is more likely than not such assets will not be recovered, taking into consideration historical operating results,
expectations of future earnings, tax planning strategies, and the expected timing of the reversals of existing temporary
differences.
N. Research and Development Costs
Company-sponsored research and development costs include research and development and bid and proposal efforts
related to the Company’s products and services. Company-sponsored product development costs are charged to
expense when incurred. Customer-sponsored research and development costs incurred pursuant to contracts are
accounted for similarly to other program costs. Customer-sponsored research and development costs refer to certain
situations whereby customers provide funding to support specific contractually defined research and development
costs. Total Company and customer-sponsored research and development expenses were approximately $14.5 million,
$13.1 million and $14.0 million for 2019, 2018 and 2017, respectively. These expense amounts exclude certain
engineering costs primarily associated with product line extensions, modifications and maintenance, which amounted
to approximately $15.8 million, $13.1 million and $10.4 million for 2019, 2018 and 2017, respectively.
F-16
O. Foreign Currency Translation
The financial statements of the Company’s foreign operations are translated into U.S. dollars in accordance with
FASB ASC Topic 830, Foreign Currency Matters. The resulting translation adjustments are recorded as a separate
component of accumulated other comprehensive income.
P. Earnings Per Share
Basic earnings per share is calculated using the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated using the weighted average number of common shares outstanding
during the period plus shares issuable upon the assumed exercise of dilutive common share options and vesting of
performance-accelerated restricted shares using the treasury stock method. 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
Q. Share-Based Compensation
2019
25,946
151
26,097
2018
25,874
184
26,058
2017
25,774
221
25,995
The Company provides compensation benefits to certain key employees under several share-based plans providing for
employee stock options and/or performance-accelerated restricted shares (restricted shares), and to non-employee
directors under a non-employee directors compensation plan. Share-based payment expense is measured at the grant
date based on the fair value of the award and is recognized on a straight-line basis over the requisite service period
(generally the vesting period of the award).
R. Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss of $(44.0) million at September 30, 2019 consisted of $(37.0) million related
to the pension actuarial loss; and $(7.0) million related to currency translation adjustments. 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.
S. 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.
T. Derivative Financial Instruments
All derivative financial instruments are reported on the balance sheet at fair value. The accounting for changes in fair
value of a derivative instrument depends on whether it has been designated and qualifies as a hedge and on the type of
hedge. For each derivative instrument designated as a cash flow hedge, the effective portion of the gain or loss on the
derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying
hedged item. For each derivative instrument designated as a fair value hedge, the gain or loss on the derivative and the
offsetting gain or loss on the hedged item are recognized immediately in earnings. Regardless of type, a fully effective
hedge will result in no net earnings impact while the derivative is outstanding. To the extent that any hedge is
ineffective at offsetting cash flow or fair value changes in the underlying hedged item, there could be a net earnings
impact.
U. 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
F-17
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, 2019 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
2019.
V. New Accounting Standards
Leases
In February 2016, the FASB issued ASU No. 2016-062, “Leases” (ASU 2016-02) which supersedes ASC 840,
“Leases” and creates a new topic, ASC 842, “Leases.” Subsequent to the issuance of ASU 2016-02, ASC 842 was
amended by various updates that amend and clarify the impact and implementation of the aforementioned update.
These updates require lessees to recognize a lease liability and a lease asset for all leases, including operating leases,
with a term greater than 12 months on its balance sheet. Upon initial application, the provisions of these updates are
required to be applied using the modified retrospective method which requires retrospective adoption to each prior
reporting period presented with the cumulative effect of adoption recorded to the earliest reporting period presented.
An optional transition method can be utilized which requires retrospective adoption beginning on the date of
adoption with the cumulative effect of initially applying these updates recognized at the date of initial adoption.
These updates also expand the required quantitative and qualitative disclosures surrounding leases. These updates
are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with
earlier application permitted. We adopted these updates on October 1, 2019 using the optional transition method.
The adoption resulted in the addition of “right of use” assets and lease liabilities of approximately $25 million to our
consolidated balance sheet, with no significant change to our consolidated statements of operations or cash flows.
The updates will also have an impact on our accounting policies, internal controls and disclosures related to leases.
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, it reclassified $6.3 million from AOCI to retained
earnings.
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
F-18
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.
2. Acquisitions
2019
On July 2, 2019 the Company acquired Globe Composite Solutions, LLC, for a purchase price of approximately $95
million, net of cash acquired. Globe, based in Stoughton, Massachusetts, is a well-established, vertically integrated
supplier of mission-critical composite-based products and solutions for navy, defense, and industrial customers, Globe
has annualized sales of approximately $37 million. Since the date of acquisition, the operating results for Globe have
been included in the Company’s Filtration segment. Based on the preliminary purchase price allocation, the Company
recorded approximately $3.5 million of accounts receivable, $3.5 million of inventory, $6.3 million of property, plant
and equipment, $10.5 million of accounts payable, accrued expenses and advance payments, $28.5 million of
goodwill, $3.7 million of tradenames and $59.7 million of amortizable intangible assets consisting mainly of $56.7
million of customer relationships with a weighted average life of 20 years and $2.8 million of customer contract
assets. The final working capital adjustment is due in January 2020. The acquired goodwill relates to excess value
associated with the opportunities to expand the services and markets that the Company can offer to its customers. The
Company estimates approximately $25 million of the goodwill will be deductible for tax purposes.
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. 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. 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. 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. 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. Since the date of acquisition, the operating
results for NRG have been included in the Company’s USG 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.
F-19
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. 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.
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 acquisition mentioned above is not expected to be deductible for U.S. Federal
or state income tax purposes. The goodwill recorded for the Globe, 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.
3. Goodwill and Other Intangible Assets
Included on the Company’s Consolidated Balance Sheets at September 30, 2019 and 2018 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
$
$
$
$
$
$
$
$
$
$
2019
409.2
2018
381.7
2.1
0.9
1.2
79.7
49.2
30.5
241.3
59.0
182.3
5.3
2.6
2.7
1.8
0.8
1.0
71.3
41.6
29.7
185.3
47.8
137.5
5.5
2.0
3.5
176.3
173.7
The Company performed its annual evaluation of goodwill and intangible assets for impairment during the fourth
quarter of 2019 and concluded no impairment existed at September 30, 2019 and there are no accumulated impairment
losses as of September 30, 2019.
F-20
The changes in the carrying amount of goodwill attributable to each business segment for 2019 and 2018 are as
follows:
(Dollars in millions)
Balance as of September 30, 2017
Acquisition activity
Foreign currency translation and other
Balance as of September 30, 2018
Acquisition activity
Foreign currency translation and other
$
Balance as of September 30, 2019
$
Filtration
73.7
–
–
73.7
28.5
–
102.2
Test
34.1
–
–
34.1
–
–
34.1
Technical
Packaging
19.9
–
(0.1 )
19.8
–
(0.9 )
18.9
USG
250.2
3.9
–
254.1
–
(0.1 )
254.0
Total
377.9
3.9
(0.1 )
381.7
28.5
(1.0 )
409.2
Amortization expense related to intangible assets with determinable lives was $19.5 million, $18.3 million and $16.3
million in 2019, 2018 and 2017, 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 2020 through 2024 is estimated at approximately $22 million per year.
4. Accounts Receivable
Accounts receivable, net of the allowance for doubtful accounts, consist of the following at September 30, 2019 and
2018:
(Dollars in thousands)
Commercial
U.S. Government and prime contractors
Total
5.
Inventories, Net
Inventories consist of the following at September 30, 2019 and 2018:
(Dollars in thousands)
Finished goods
Work in process
Raw materials
Total
6. Related Parties
2019
153,265
21,162
174,427
$
$
2018
146,049
17,691
163,740
2019
23,550
26,407
78,868
128,825
$
$
2018
26,678
47,765
60,973
135,416
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 $3.3 million, $2.1 million and $3.6 million during fiscal 2019, 2018 and
2017, 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 2019, 2018 and 2017 consisted of the following:
(Dollars in thousands)
United States
Foreign
Total income before income taxes
2019
93,654
8,562
102,216
$
$
2018
80,994
7,029
88,023
2017
72,353
7,800
80,153
F-21
The principal components of income tax expense (benefit) for 2019, 2018 and 2017 consist of:
(Dollars in thousands)
Federal:
Current
Deferred
State and local:
Current
Deferred
Foreign:
Current
Deferred
Total
2019
2018
2017
$
14,097
1,020
9,174
(22,943 )
3,189
204
2,493
174
21,177
$
2,121
2,972
2,233
2,330
(4,113 )
21,448
628
1,795
(49 )
4,450
(1,822 )
26,450
The actual income tax expense (benefit) for 2019, 2018 and 2017 differs from the expected tax expense for those
years (computed by applying the U.S. Federal corporate statutory rate) as follows:
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
GILTI and FDII
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
2019
2018
2017
21.0 %
3.3
0.7
(0.9 )
–
(0.1 )
0.3
(2.4 )
(0.8 )
(0.3 )
(0.1 )
–
–
20.7 %
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 %
On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the Tax Cut and
Jobs Act (the “TCJA”). Provisions under the TCJA that became effective for the Company in the current fiscal year
include a further reduction in the U.S. statutory rate to 21%, a new minimum tax on global intangible low-taxed
income (“GILTI”), the benefit of the deduction for foreign-derived intangible income (“FDII”), and changes to IRC
Section 162(m) related to the deductibility of executive compensation.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at
September 30, 2019 and 2018 are presented below:
F-22
(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:
Timing differences related to revenue recognition
Goodwill
Acquisition assets
Depreciation, software amortization
Net deferred tax liabilities before valuation allowance
Less valuation allowance
Net deferred tax liabilities
$
2019
5,089
5,533
617
3,766
–
7,952
1,914
24,871
(1,508 )
(2,673 )
(60,224 )
(20,161 )
(59,695 )
(4,520 )
(64,215 )
$
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 )
The Company has a foreign net operating loss (NOL) carryforward of $16.6 million at September 30, 2019, which
reflects tax loss carryforwards in Germany, Finland, South Africa, Japan, Canada, Norway and the United Kingdom.
Approximately $16.0 million of the tax loss carryforwards have no expiration date while the remaining $0.6 million
will expire between 2027 and 2039. The Company has deferred tax assets related to state NOL carryforwards of $0.6
million at September 30, 2019 which expire between 2027 and 2039. The Company also has net state research and
other credit carryforwards of $1.9 million of which $1.4 million expires between 2025 and 2037. The remaining $0.5
million does not have an expiration date.
The valuation allowance for deferred tax assets as of September 30, 2019 and 2018 was $4.5 million and $7.1
million, respectively. The net change in the total valuation allowance for each of the years ended September 30,
2019 and 2018 was a decrease of $2.6 million and an increase of $2.7 million, respectively. The Company has
established a valuation allowance for excess foreign tax credits that are not expected to be utilized in future periods
of $0 and $2.4 million at September 30, 2019 and 2018, respectively. The Company has established a valuation
allowance against state credit carryforwards of $0.4 million at both September 30, 2019 and 2018. 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 at both September 30, 2019 and 2018. Lastly, the Company has established a
valuation allowance against certain NOL carryforwards in foreign jurisdictions which may not be realized in future
periods of $3.6 million and $3.8 million at September 30, 2019 and 2018, respectively.
On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act, which made comprehensive
changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result,
cash repatriated to the U.S. is generally no longer subject to U.S. federal income tax. No provision is made for
foreign withholding any applicable U.S. income taxes on the undistributed earnings of non-U.S. where these
earnings are considered indefinitely invested or otherwise retained for continuing international operations.
Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not
practicable.
The Company had $0 and $0.1 million of unrecognized tax benefits as of September 30, 2019 and 2018, respectively,
which, if recognized, would affect the Company’s effective tax rate. 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,
2019, 2018 and 2017, the Company had zero accrued interest related to uncertain tax positions on its Consolidated
Balance Sheets. No penalties have been accrued.
The principal jurisdictions for which the Company files income tax returns are U.S. Federal and the various city, state,
and international locations where the Company has operations. The U.S. Federal tax years for the periods ended
September 30, 2016 and forward remain subject to income tax examination. Various state tax years for the periods
ended September 30, 2015 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.
F-23
8. Debt
Debt consists of the following at September 30, 2019 and 2018:
(Dollars in thousands)
Revolving credit facility, including current portion
Current portion of long-term debt
Total long-term debt, less current portion
2019
286,261
(21,261 )
265,000
$
$
2018
220,000
(20,000 )
200,000
On September 27, 2019, the Company entered into a new five-year credit facility (“the Credit Facility”), modifying its
previous credit facility which would have matured December 21, 2020. The Credit Facility includes a $500 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 eight banks led by JP Morgan Chase Bank, N.A., as Administrative Agent. The Credit
Facility matures September 27, 2024.
Interest on borrowings under the Credit Facility is calculated at a spread over either the London Interbank Offered
Rate (LIBOR), the New York Federal Reserve Bank Rate or the prime rate, depending on various factors. The Credit
Facility also requires a facility fee ranging from 10 to 25 basis points per annum on the unused portion. The interest
rate spreads and the facility fee are subject to increase or decrease depending on the Company’s leverage ratio.
The Credit Facility is secured by the unlimited guaranty of the Company’s direct and indirect material U.S.
subsidiaries and the pledge of 100% of the equity interests of its direct and indirect material foreign subsidiaries. The
financial covenants of the Credit Facility include a leverage ratio and an interest coverage ratio. As of September 30,
2019, the Company was in compliance with all covenants.
At September 30, 2019, the Company had approximately $207 million available to borrow under the Credit Facility,
plus the $250 million increase option, in addition to $61.8 million cash on hand. The Company classified
$21.3 million as the current portion of long-term debt as of September 30, 2019, 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.
During 2019 and 2018, the maximum aggregate short-term borrowings at any month-end were $308 million and $271
million, respectively, and the average aggregate short-term borrowings outstanding based on month-end balances were
$236.4 million and $258.8 million, respectively. The weighted average interest rates were 3.21%, 3.03% and 2.09%
for 2019, 2018 and 2017, respectively. The letters of credit issued and outstanding under the Credit Facility totaled
$8.2 million and $7.8 million at September 30, 2019 and 2018, respectively.
9. Capital Stock
The 30,596,940 and 30,534,786 common shares as presented in the accompanying Consolidated Balance Sheets at
September 30, 2019 and 2018 represent the actual number of shares issued at the respective dates. The Company held
4,615,627 and 4,623,958 common shares in treasury at September 30, 2019 and 2018, 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, 2021. There were no share repurchases in 2019, 2018 or
2017. At September 30, 2019, approximately $50.4 million remained available for repurchases under the program.
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, 2019, the
Company’s equity compensation plans had a total of 844,029 shares authorized and available for future issuance.
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
F-24
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 $4.3 million,
$4.1 million and $4.4 million for 2019, 2018 and 2017, respectively.
The following summary presents information regarding outstanding PARS awards as of the specified dates, and
changes during the specified periods:
FY 2019
FY 2018
FY 2017
Estimated
Weighted
Avg. Price
47.23
74.77
37.00
45.20
59.72
Estimated
Weighted
Avg. Price
40.35
56.06
35.59
53.86
47.23
Shares
335,825 $
104,320
(121,301 )
(3,300 )
315,544 $
Shares
315,544 $
84,862
(113,402 )
(6,000 )
281,004 $
Estimated
Weighted
Avg. Price
35.40
51.16
35.78
–
40.35
Shares
427,438 $
110,422
(202,035 )
–
335,825 $
Nonvested at October 1,
Granted
Vested
Cancelled
Nonvested at September 30,
Compensation Plan for Non-Employee Directors
Through the first quarter of 2018 the Company’s Compensation Plan for Non-Employee Directors 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, $1.1 million and $1.0 million for 2019, 2018 and 2017, 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 $5.4 million, $5.2 million and $5.4 million for 2019, 2018 and 2017, respectively.
The total income tax benefit recognized in results of operations for share-based compensation arrangements was
$1.1 million, $1.3 million and $1.8 million for 2019, 2018 and 2017, respectively. As of September 30, 2019, there
was $9.6 million of total unrecognized compensation cost related to share-based compensation arrangements. That
cost is expected to be recognized over a weighted-average period of 2.0 years.
11. Retirement and Other Benefit Plans
Formerly, substantially all domestic employees were covered by a defined benefit 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. Subsequent to
September 30, 2019, the Company announced that it plans to terminate and annuitize the defined benefit pension plan
during fiscal 2020. 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. In addition, substantially all
domestic employees are covered by a defined contribution plan maintained by the Company.
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 $0.6 million and $0.5 million at September 30, 2019 and 2018,
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.
F-25
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, 2019, and a statement of the funded status as of September 30, 2019 and 2018:
(Dollars in millions)
Reconciliation of benefit obligation
Net benefit obligation at beginning of year
Interest cost
Actuarial loss (gain)
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)
$
2019
89.8
3.7
11.3
(4.7 )
–
100.1
2019
73.3
5.9
2.7
(4.7 )
–
77.2
2019
(22.9 )
(22.9 )
(0.2 )
(22.7 )
49.6
49.6
49.6
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
The estimated amount that will be amortized from accumulated other comprehensive (income) loss into net periodic
benefit cost (income) in 2020 is $2.7 million.
The following table provides the components of net periodic benefit cost for the plans for 2019, 2018 and 2017:
(Dollars in millions)
Service cost
Interest cost
Expected return on plan assets
Net actuarial loss
Net periodic benefit cost
Defined contribution plans
Total
$
$
2019
–
3.7
(4.4 )
2.1
1.4
7.3
8.7
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
The discount rate used in measuring the Company’s pension obligations was developed by matching yields of actual
high-quality corporate bonds to expected future pension plan cash flows (benefit payments). Over 400 Aa-rated, non-
callable bonds with a wide range of maturities were used in the analysis. After using the bond yields to determine the
present value of the plan cash flows, a single representative rate that resulted in the same present value was developed.
The expected long-term rate of return on plan assets assumption was determined by reviewing the actual investment
return of the plans since inception and evaluating those returns in relation to expectations of various investment
organizations to determine whether long-term future returns are expected to differ significantly from the past.
F-26
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
2019
4.15 %
N/A
6.00 %
2018
3.65 %
N/A
6.00 %
2017
3.25 %
N/A
6.25 %
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
2019
3.05 %
N/A
2018
4.15 %
N/A
The assumed rate of increase in compensation levels is not applicable in 2019, 2018 and 2017 as the plan was frozen
in earlier years.
The asset allocation for the Company’s pension plans at the end of 2019 and 2018, and the Company’s acceptable
range and the target allocation for 2020, by asset category, are as follows:
Asset Category
Return seeking
Liability hedging
Cash/cash equivalents
Target
Allocation
2020
53%
47%
0%
Acceptable
Range
48%-58%
42%-52%
0%-10%
Percentage of Plan Assets at
Year-end
2019
41%
56%
3%
2018
44%
54%
2%
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, 2019 and 2018, 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
2019
2018
$
$
2.1
8.8
2.4
10.6
49.7
3.6
77.2
2.1
8.7
2.7
10.8
45.6
3.4
73.3
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-27
As of September 30, 2019, the fair values of the investments were classified within the valuation hierarchy under
ASC 825 as follows: $44.9 million within Level 0, $13.0 million within Level 1 and $19.3 million within Level 2.
Expected Cash Flows
Information about the expected cash flows for the pension and other postretirement benefit plans follows:
(Dollars in millions)
Expected Employer Contributions — 2020
Expected Benefit Payments:
2020
2021
2022
2023
2024
2025-2029
Pension
Benefits
0.7
$
Other
Benefits
0.1
5.8
5.5
5.7
5.8
5.9
30.2
$
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. In
2018, the Company entered into three interest rate swaps with a notional amount of $150 million to hedge its
exposure to variability in future LIBOR-based interest payments on variable rate debt. In addition, the Company’s
Canadian subsidiary Morgan Schaffer enters into foreign exchange contracts to manage foreign currency risk as a
portion of their revenue is denominated in U.S. dollars. The Company expects hedging gains or losses to be
essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized may
differ for open positions, which remain subject to ongoing market price fluctuations until settlement. All derivative
instruments are reported in either accrued expenses or other assets on the balance sheet at fair value. For derivative
instruments designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other
comprehensive income until recognized in earnings with the underlying hedged item. The interest rate swaps entered
into during 2018 were not designated as cash flow hedges and, therefore, the gain or loss on the derivative is
reflected in earnings each period.
The following is a summary of the notional transaction amounts and fair values for the Company’s outstanding
derivative financial instruments as of September 30, 2019.
(In thousands)
Forward contracts
Interest rate swap
Interest rate swap *
Notional Amount
(Currency)
5,750 USD
150,000 USD
150,000 USD
Fair Value
(US$)
(35 )
(19 )
(1,143 )
Fix Rate
2.09%
2.24%
* 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
ASC 825, as presented below as of September 30, 2019:
(In thousands)
Asset:
Forward contracts
Level 1
Level 2
Level 3
Total
$
–
(1,197 )
–
(1,197 )
Valuation was based on third party evidence of similarly priced derivative instruments. There are no master netting
arrangements with financial parties.
F-28
13. Business Segment Information
The Company is organized based on the products and services it offers, and classifies its business operations in four
reportable segments for financial reporting purposes: Filtration/Fluid Flow (Filtration), Utility Solutions Group
(USG), RF Shielding and Test (Test) 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), Westland Technologies, Inc.
(Westland), and Globe Composite Solutions, LLC (Globe). 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. Globe supplies navy, defense,
and industrial customers with mission-critical composite-based products and solutions for acoustic, signature-
reduction, communications, sealing, vibration-reducing, surface control, and hydrodynamic-related applications.
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 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 Technical Packaging segment’s operations consist of Thermoform Engineered Quality LLC (TEQ), Plastique
Limited and Plastique sp. z o.o. 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
USG
Test
Technical Packaging
Consolidated totals
No customer exceeded 10% of sales in 2019 or 2018.
F-29
$
$
2019
325.8
211.9
188.4
86.9
813.0
2018
286.8
214.0
182.9
87.9
771.6
2017
279.5
162.4
160.9
82.9
685.7
EBIT
(Dollars in millions)
Year ended September 30,
Filtration
USG
Test
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
USG
Test
Technical Packaging
Corporate – Goodwill
Corporate – Other assets
Consolidated totals
$
$
$
$
2019
70.1
52.2
25.6
5.9
(43.2 )
110.6
(8.4 )
102.2
2019
260.3
190.0
154.2
59.1
409.2
393.9
1,466.7
2018
58.7
43.2
23.8
8.1
(37.0 )
96.8
(8.8 )
88.0
2018
204.7
176.9
138.3
50.9
381.7
312.6
1,265.1
Corporate assets consist primarily of goodwill, deferred taxes, acquired intangible assets and cash balances.
Capital Expenditures
(Dollars in millions)
Year ended September 30,
Filtration
USG
Test
Technical Packaging
Corporate
Consolidated totals
2019
2018
$
$
11.7
8.5
4.0
13.0
–
37.2
7.0
5.2
3.0
5.4
–
20.6
In addition to the above amounts, the Company incurred expenditures for capitalized software of $8.4 million,
$9.5 million and $9.0 million in 2019, 2018 and 2017, respectively.
Depreciation and Amortization
(Dollars in millions)
Year ended September 30,
Filtration
USG
Test
Technical Packaging
Corporate
Consolidated totals
2019
2018
$
$
8.3
11.3
5.1
4.1
11.3
40.1
7.6
11.0
4.5
4.1
10.6
37.8
2017
52.2
36.6
19.5
8.5
(32.1 )
84.7
(4.6 )
80.1
2017
10.2
7.6
4.5
7.4
–
29.7
2017
6.6
9.8
3.6
3.5
8.7
32.2
Depreciation expense of property, plant and equipment was $20.6 million, $19.4 million and $15.9 million for 2019,
2018 and 2017, respectively.
F-30
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
2017
503.1
69.8
75.4
22.2
4.8
10.4
685.7
$
$
$
$
2019
583.0
88.3
82.8
33.2
11.7
14.0
813.0
2019
140.0
16.6
4.9
161.5
2018
536.7
94.5
85.0
30.3
9.4
15.7
771.6
2018
113.2
17.1
4.7
135.0
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 $6.4 million, $6.9 million and $6.8 million for 2019, 2018 and 2017,
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, 2019, are:
(Dollars in thousands)
Years ending September 30:
2020
2021
2022
2023
2024 and thereafter
Total
$
$
6,405
5,279
4,592
3,567
10,197
30,040
At September 30, 2019, the Company had $8.2 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 new Doble building in Marlborough, Massachusetts and the 2017 acquisitions of NRG and Mayday. The Doble
facility lease expires in 2036, the NRG and Mayday facility leases expire in 2029, and the machinery leases expire in
2020. As of September 30, 2019, the net carrying value and accumulated depreciation of the assets under capital
leases recorded by the Company were $28.4 million and $3.5 million, respectively. Capital lease obligations are
included within other long-term liabilities (long-term portion) and accrued other expenses (current portion).
F-31
Remaining payments due on the Company’s capital lease obligations as of September 30, 2019, are:
(Dollars in thousands)
Years ending September 30:
2020
2021
2022
2023
2024 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
16. Revenues
(a) Disaggregation of Revenues
$ 2,518
2,930
3,012
3,094
31,499
43,053
11,241
31,812
1,832
$ 29,980
Our revenues by customer type, geographic location, and revenue recognition method for the year ended
September 30, 2019 are presented in the table below as the Company deems it best depicts how the nature, amount,
timing and uncertainty of net sales and cash flows are affected by economic factors. The table below also includes a
reconciliation of the disaggregated revenue within our reportable segments.
Year Ended September 30, 2019
(In thousands)
Customer type:
Filtration
USG
Test
Technical
Packaging
Total
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 180,356 $ 207,666 $ 168,201 $
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
145,379
20,193
4,249
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 325,735 $ 211,915 $ 188,394 $
Geographic location:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 274,446 $ 150,381 $ 112,358 $
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
51,289
76,036
61,534
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 325,735 $ 211,915 $ 188,394 $
Revenue recognition method:
Point in time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 164,224 $ 164,126 $
Over time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
161,511
47,789
36,787 $
151,607
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 325,735 $ 211,915 $ 188,394 $
(b) Remaining Performance Obligations
86,599 $ 642,822
170,148
86,926 $ 812,970
327
45,787 $ 582,972
41,139
229,998
86,926 $ 812,970
–- $ 365,137
447,833
86,926
86,926 $ 812,970
Our remaining performance obligations, which is the equivalent of our backlog, represent the expected transaction
price allocated to our contracts that we expect to recognize as revenue in future periods when we perform under the
contracts. These remaining obligations include amounts that have been formally appropriated under contracts with the
U.S. Government, and exclude unexercised contract options and potential orders under ordering-type contracts such as
Indefinite Delivery, Indefinite Quantity contracts. At September 30, 2019, we had $475 million in remaining
performance obligations of which we expect to recognize revenues of 90% in the next twelve months.
(c) Contract assets and liabilities
Assets and liabilities related to our contracts with customers are reported on a contract-by-contract basis at the end of
each reporting period. At September 30, 2019, contract assets and liabilities totaled $115.3 million and $81.2 million,
respectively. Upon adoption of ASC 606 on October 1, 2018, contract assets and liabilities related to our contracts
F-32
with customers were $87 million and $51 million, respectively. During 2019, we recognized approximately $40
million in revenues that were included in the contract liabilities balance at the adoption date.
(d) Reconciliation of ASC 606 to Prior Accounting Standards
The amount by which each financial statement line item is affected in 2019 as a result of applying the new accounting
standard as discussed in Note 1 is presented below:
(In thousands)
Consolidated Balance Sheets
Contract assets, net (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contract liabilities, net (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
September 30, 2019
Effect of the
As Reported
adoption of Under Prior
Accounting
ASC 606
115,310 $
128,825
495,194
1,466,720
81,177
251,635
64,855
640,498
684,741
826,222
1,466,720
(39,055 ) $
34,065
(4,990 )
(4,990 )
2,870
2,870
(658 )
2,212
(7,202 )
(7,202 )
(4,990 )
76,255
162,890
490,204
1,461,730
84,047
254,505
64,197
642,710
677,539
819,020
1,461,730
(1) Previously “cost and estimated earnings on long-term contracts”
(2) Previously “advance payments on long-term contracts” and “current portion of deferred revenue”
(In thousands, except per share amounts)
Consolidated Statements of Operations
Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cost of sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
Year Ended
September 30, 2019
Effect of the
adoption of Under Prior
Accounting
As Reported ASC 606
812,970 $
508,521
710,754
102,216
21,177
81,039
(5,598 ) $ 807,372
501,863
(6,658 )
704,096
(6,658 )
103,276
1,060
21,432
255
81,844
805
Basic:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.12 $
0.03 $
Diluted:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
3.10 $
0.03 $
3.15
3.13
Consolidated Statements of Comprehensive Income
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash flows
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net earnings to net cash provided by operating
activities:
81,039 $
68,593
805 $
805
81,844
69,398
81,039 $
805 $
81,844
Change in assets and liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(9,944 )
105,137
(805 ) $
—
(10,749 )
105,137
17. Subsequent Event
On November 15, 2019 the Company, through its wholly owned subsidiaries ESCO Technologies Holding LLC and
ESCO UK Holding Company I Ltd., entered into an agreement to sell its Technical Packaging business segment,
F-33
consisting of Thermoform Engineered Quality LLC, Plastique Ltd. and Plastique sp. z o.o., to subsidiaries of Sonoco
Products Company (NYSE: SON) for a cash purchase price of $187 million, plus or minus certain customary
adjustments based on working capital and other typical post-closing adjustments specified in the sale agreement.
Closing of the transaction is subject to specified representations, warranties, covenants and conditions customary in
agreements of this kind and scope. The buyers have agreed to waive any post-closing claims against the sellers for
indemnity under the representations in the sale agreement (except in the event of fraud) and intend to obtain a
Representation and Warranty Insurance policy to provide coverage in the event of a breach by the sellers.
The Company expects to finalize the sale upon receipt of regulatory clearance under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976 and similar foreign regulations, and upon satisfaction or waiver of the conditions to
Closing specified in the Agreement. The Company expects the Closing to occur in late 2019 or early 2020.
The Technical Packaging business segment will be reported as discontinued operations in 2020.
The Company intends to use the proceeds from the sale to pay down debt and for other corporate purposes, including
funding, terminating and annuitizing the Company’s defined benefit pension plan, which has been frozen since 2003,
during fiscal 2020.
18. Quarterly Financial Information (Unaudited)
(Dollars in thousands, except per share amounts)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2019
Net sales
Net earnings
Earnings per share:
Basic
Diluted
Dividends declared per common share
Common stock price per share:
High
Low
2018
Net sales
Net earnings
Earnings per share:
Basic
Diluted
$
182,597
17,317
193,949
18,797
199,766
20,067
236,658
24,858
$
$
$
0.67
0.66
0.73
0.72
0.77
0.77
0.08
0.08
0.08
0.96
0.95
0.08
71.47
59.00
71.29
62.91
82.70
67.43
85.86
73.04
$
173,495
34,671
174,778
9,994
192,223
19,019
231,086
28,452
Dividends declared per common share
$
0.08
0.08
0.08
$
1.34
1.33
0.39
0.38
0.73
0.73
1.10
1.09
0.08
Common stock price per share:
High
Low
$
65.95
51.55
66.80
57.15
60.25
54.35
70.20
57.00
F-34
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, 2019
/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-35
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.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30,
2019, 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 maintained
effective internal control over financial reporting as of September 30, 2019, based on these criteria.
Our internal control over financial reporting as of September 30, 2019, has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in its report which is included herein.
We acquired Globe Composite Solutions, LLC (Globe) on July 2, 2019. Globe had total assets representing 7.0
percent of consolidated assets, and total net sales representing 1.1 percent of consolidated net sales, as of and for the
year ended September 30, 2019. We excluded from our assessment of the effectiveness of our internal control over
financial reporting as of September 30, 2019 internal control over financial reporting associated with Globe.
November 29, 2019
/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-36
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, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in
all material respects, effective internal control over financial reporting as of September 30, 2019, 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, 2019 and 2018, 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, 2019, and the related notes (collectively, the consolidated
financial statements), and our report dated November 29, 2019 expressed an unqualified opinion 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.
The Company acquired Globe Composite Solutions, LLC (Globe) during the year ended September 30, 2019, and
management excluded from its assessment of the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2019, Globe’s internal control over financial reporting associated with total assets
representing 7.0 percent of consolidated assets, and total sales representing 1.1 percent of consolidated net sales,
included in the consolidated financial statements of ESCO Technologies Inc. and subsidiaries as of and for the year
ended September 30, 2019. Our audit of internal control over financial reporting of the Company also excluded an
evaluation of the internal control over financial reporting of Globe.
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-37
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, 2019
F-38
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
4.1(a)
10.5
21
23
31.1
31.2
32
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
*
*
Description of Common Stock
Esco Technologies Inc. Directors’ Extended Compensation Plan, restated to include all amendments
through August 7, 2013
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
***
***
***
***
***
***
Inline XBRL Instance Document
Inline XBRL Schema Document
Inline XBRL Calculation Linkbase Document
Inline XBRL Label Linkbase Document
Inline XBRL Presentation Linkbase Document
Inline XBRL Definition Linkbase Document
104
*** Cover Page Inline Interactive Data File (contained in Exhibit 101)
-----------
* 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.
*** Exhibits 101 and 104 to this report consist 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
Illinois
Finland
Same
Same
Same
Same
Same
Same
Same
Same
ETS-Lindgren Technology (Tianjin) Co., Ltd.
People’s Republic of China Same; also ETS-Lindgren
Globe Composite Solutions, LLC
Massachusetts
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.
Texas
Texas
Quebec, Canada
Vermont
United Kingdom
Poland
Delaware
Delaware
California
California
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, 333-186537, 333-
192663, 333-223029 and 333-231364) on Form S-8 of ESCO Technologies Inc. (the Company) of our reports dated
November 29, 2019, with respect to the consolidated balance sheets of ESCO Technologies Inc. and subsidiaries as of
September 30, 2019 and 2018, 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, 2019, and the
related notes, and the effectiveness of internal control over financial reporting as of September 30, 2019, which
reports appear in the September 30, 2019 annual report on Form 10-K of the Company.
Our report dated November 29, 2019, on the effectiveness of internal control over financial reporting as of September
30, 2019, contains an explanatory paragraph that states the Company acquired Globe Composite Solutions, LLC
(Globe) during the year ended September 30, 2019, and management excluded from its assessment of the
effectiveness of the Company’s internal control over financial reporting as of September 30, 2019, Globe’s internal
control over financial reporting associated with total assets representing 7.0 percent of consolidated assets and total
sales representing 1.1 percent of consolidated net sales, included in the consolidated financial statements of the
Company as of and for the year ended September 30, 2019. Our audit of internal control over financial reporting of
the Company also excluded an evaluation of the internal control over financial reporting of Globe.
/s/ KPMG LLP
St. Louis, Missouri
November 29, 2019
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, 2019
/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, 2019
/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, 2019 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, 2019
/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
SHAREHOLDERS’ SUMMARY
MANAGEMENT AND BOARD OF DIRECTORS
Shareholders’ Annual Meeting
The Annual Meeting of Shareholders of ESCO Technologies
Inc. will be held at 9:00 a.m. Eastern Time on Friday,
January 31, 2020 at Naples Bay Resort & Marina,
1500 Fifth Avenue South, Naples, FL 34102. 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 12, 2019 and February 6, 2018,
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, 2019 and September 30, 2018.
10-K Report
The Company’s 2019 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 505000
Louisville, KY 40233-5000
(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 1,778 holders of record
of shares of common stock at October 31, 2019.
Executive Officers
Victor Richey
Chairman,
Chief Executive Officer
& President
Gary Muenster
Executive Vice
President & Chief
Financial Officer
Alyson Barclay
Senior Vice President,
Secretary &
General Counsel
Corporate Staff
Deborah Boniske
Vice President
Human Resources
Mark Dunger
Vice President Planning
& Development
Richard Garretson
Vice President
Tax
Charles Kretschmer
Vice President
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.
Evan Vogel
President
NRG Systems, Inc.
Rowland Ellis
President
PTI Technologies Inc.
John Grizzard
President
Westland
Technologies, Inc.
Randall Loga
Technical Packaging
Group Vice President
& President
Thermoform Engineered
Quality LLC
Operating Executives
Mike Alfred
President
Crissair, Inc.
Bruce Butler
President
ETS-Lindgren Inc.
Sam Chapetta
Filtration Group
President
Trevor Drew
Managing Director
Plastique Limited
Mike Dyson
President
Globe Composite
Solutions, LLC
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.
Gloria L. Valdez 4
Retired Deputy Assistant
Secretary of the Navy
Independent Registered Public Accounting Firm
KPMG LLP
10 South Broadway, Suite 900
St. Louis, MO 63102
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.
ESCO Technologies Inc.
9900A Clayton Road • St. Louis, MO 63124
www.escotechnologies.com
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