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ESCO Technologies Inc.
2020 Annual Report
ESCO Technologies is a global provider of highly-engineered products
and solutions to diverse end-markets that include the defense, aerospace,
space, wireless, consumer electronics, healthcare, automotive, electric utility,
and renewable energy industries. The company consists of three technology-
driven business segments – Aerospace & Defense, Utility Solutions Group,
and RF Shielding & Test.
PHOTO CREDITS // Front cover: F-35 Joint Strike Fighters, courtesy of AF.mil (top); spacecraft, courtesy of NASA.gov (second from top)
Above: Submarine, courtesy of NAVY.mil (top)
Strength Through Diversification
ESCO has a long-stated commitment to our multi-segment
operating structure and a fundamental strategy focused on
continued innovation and expansion of our highly-engineered
products and solutions. This approach has been intentionally
developed to enhance the sustainability of our sales and earnings
through serving a wide variety of end-markets.
COVID-19 put us all to the test in 2020, and our product and end-market diversity has been a key
to our success in navigating the abrupt changes and unique challenges presented by the pandemic.
While the normally predictable aerospace and electric utility markets experienced disruptions in 2020,
strength in navy/defense, space, and 5G development helped provide stability during this unprecedented
time. We feel our ability to deliver solid operating cash flow, enhance our financial liquidity, and
maintain reasonable profitability across all three of our business segments validates our approach.
As we emerge from this crisis, we believe our commitment to expanding our diversified portfolio through
new product development and selective acquisitions will continue to be the foundation for delivering
long-term revenue and earnings growth.
2020 Sales
DOLLARS IN MILLIONS
2020 EBIT – As Adjusted(1)
DOLLARS IN MILLIONS
26%
$733M
48%
26%
21%
$133M
56%
23%
Aerospace & Defense: $354.3
191.7
Utility Solutions Group:
186.9
RF Shielding & Test:
Aerospace & Defense:
Utility Solutions Group:
RF Shielding & Test:
$74.6
31.0
27.3
(1) Excludes $37.5 million of Corporate Costs, a $40.6 million charge related to the pension plan termination, and $8.3 million
of charges within the USG and A&D segments related to facility consolidation, asset impairment, severance, and incremental
costs associated with COVID-19.
1
Highly Engineered Proprietary Products
Aerospace & Defense
Utility Solutions Group
RF Shielding & Test
Aerospace & Defense (A&D)
provides highly-engineered
filtration systems, fluid control
valves, machined components, and
metal finishing for the aerospace,
space, and defense industries,
and complex shock and vibration
dampening tiles for U.S. Navy
submarines and surface ships. Our
A&D companies include Crissair,
Globe Composite Solutions (Globe),
Mayday Manufacturing (Mayday),
PTI Technologies (PTI), Westland
Technologies (Westland), and
VACCO Industries (VACCO).
Our 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) 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.
ETS-Lindgren (Test) provides
a broad and global customer
base with highly-engineered
components, chambers, and
test and measurement systems.
Our comprehensive solutions
identify, measure and contain
magnetic, electromagnetic and
acoustic energy, creating an
environment that isolates and
controls unintended energy
emissions to insure immunity,
compatibility and compliance with
regulatory and industry-defined
standards during the design stage
of new product development.
Major End Markets
Major End Markets
Major End Markets
52%
24%
19%
5%
Aerospace
Navy
Space
Industrial
56%
22%
Electric Utilities
Power Generation
18%
Renewable Energy
4%
Industrial
27%
4%
14%
21%
Wireless
Aerospace/Defense
17%
17%
Consumer
Electronics
Healthcare
Automotive
Acoustics
PHOTO CREDITS // Aircraft carrier, courtesy of NAVY.mil (Above left)
2
Financial Highlights from Continuing Operations(1)
DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS
Net Sales
Entered Orders
Earnings Per Share – GAAP
Earnings Per Share – As Adjusted(2)
Capital Performance (AS OF SEPTEMBER 30)
Net Debt
Leverage Ratio
Cash Flow from Operating Activities
2020
$ 732.9
798.7
0.97
2.76
$ 10
0.47
109
2019
726.0
822.5
2.97
2.95
223
1.68
101
2018
683.7
697.5
3.31
2.54
190
1.72
84
2017
602.8
649.7
1.87
2.02
229
2.20
62
2016
497.0
493.4
1.54
1.80
56
1.05
66
Net Sales
IN MILLIONS
Entered Orders
IN MILLIONS
Earnings Per Share
– As Adjusted(2)
7
9
4
$
3
0
6
$
4
8
6
$
6
2
7
$
3
3
7
$
3
9
4
$
0
5
6
$
7
9
6
$
2
2
8
$
9
9
7
$
0
8
1
$
.
2
0
2
$
.
4
5
2
$
.
5
9
2
$
.
6
7
2
$
.
2016
2017
2018
2019
2020
2016
2017
2018
2019
2020
2016
2017
2018
2019
2020
Sustainable Competitive Advantages
48%
Proprietary Products
% OF TOTAL SALES
56%
Recurring Revenues
% OF TOTAL SALES
(1) Financial Highlights exclude Discontinued Operations – Technical Packaging Segment sale was completed 12/31/19.
(2) EPS – As adjusted excludes a $1.55 per share charge related to the pension plan termination and $0.24 per share of charges within USG and A&D
segments related to facility consolidation, asset impairment, severance, and incremental costs associated with COVID-19 in 2020, $0.02 per share of
income primarily related to the gain on the sale of the Doble Watertown property, partially offset by restructuring charges at Doble, PTI and VACCO in
2019, $.017 per share of restructuring charges and ($0.94) per share net tax benefit resulting from the implementation of U.S. Tax Reform in 2018,
$0.15 per share of purchase accounting inventory step-up charges and acquisition costs in 2017, and $0.26 per share of restructuring charges in 2016.
33
Letter to Shareholders
The COVID-19 pandemic created significant and unprecedented
challenges in 2020. Our diverse portfolio of durable and profitable
businesses serving non-discretionary end-markets provided
strength and resilience during this uncertain time. Our entire
organization stepped up to the challenge as we successfully
navigated through a demanding year. ESCO has faced and
overcome many challenges in our 30-year history and with
our strong balance sheet, significant liquidity, and experienced
leadership team, I am confident we will emerge from this
extraordinary time as an even stronger company.
Financial Results
Despite the economic headwinds created by COVID-19, 2020 was a solid year
highlighted by stable revenue, increased backlog, record high cash flow from
operations, and substantial liquidity.
Sales increased to $733 million, led by A&D, where growth on defense
and space programs, and a full year of Globe revenue offset softness in
commercial aerospace. We booked $799 million in orders which resulted in
a book-to-bill of 1.09 and a 15 percent increase in our ending backlog of
$517 million.
Adjusted EBITDA was $137 million (19 percent margin) and Adjusted EPS
was $2.76 per share. A decrease in 2020 earnings was primarily related to
softness in the commercial aerospace and electric utility markets, partially
offset by cost reduction efforts, and strength in Test and in the defense side
of A&D.
From a liquidity perspective, we generated $109 million in cash flow from
continuing operations and ended the year with $728 million of available
liquidity and a very conservative leverage ratio of .47x. The Q1 divestiture
of our Technical Packaging business proved timely, as a portion of the
$191 million in gross proceeds was utilized to fully fund, terminate, and
annuitize our defined benefit pension plan. Annuitizing this non-strategic
liability lowered risk, reduced ongoing costs, and eliminated future
cash payments.
Cash Flow from
Operating Activities
IN MILLIONS
6
6
$
2
6
$
4
8
$
1
0
1
$
9
0
1
$
2016 2017 2018 2019 2020
Leverage Ratio
5
0
1
.
0
2
.
2
2
7
1
.
8
6
1
.
7
4
0
.
2016 2017 2018 2019 2020
4
Aerospace & Defense
A&D sales increased $29 million (9 percent) to $354 million, on the strength of
defense and space programs and a full year of Globe revenue. Adjusted EBITDA
increased $4 million (6 percent) to $84 million, with an Adjusted EBITDA margin
of 24 percent that remained consistent with 2019. With $423 million in entered
orders, A&D’s ending backlog increased 25 percent, on exceptionally strong
Block V orders on the Virginia Class submarine program. A&D’s solid financial
performance highlights the ability of end market diversity to provide revenue and
earnings sustainability during challenging times.
As the commercial aerospace industry slowed in reaction to COVID-19, the A&D
segment continued working to diversify its product portfolio through building new
customer relationships and expanding into adjacent market segments. PTI entered
the electric propulsion market with its thermal management filtration solutions,
won new business in engine fuel and lube filtration, and expanded its presence
in aircraft potable water filtration. Crissair broadened its focus in space and
defense markets with significant new wins including a complex solenoid operated
spool valve manifold assembly on Blue Origin’s New Glenn Rocket, hydraulic
swivel valve assemblies for landing gear on the B-21 Raider stealth bomber, and
hydraulic valves on the Boeing MQ-25 Stingray unmanned aerial refueling aircraft.
Mayday continued building its presence in the global MRO market and increased
military content on the F-35 (Joint Strike Fighter) and the new T-X military
training aircraft.
VACCO, Globe, and Westland have a combined shipset content of over $28 million
on the Virginia Class submarine program. In 2020, they were awarded significant
Block V orders as well as initial development orders supporting the new Columbia
Class Submarine program. Globe became fully integrated into the ESCO family,
and with increased access to financial resources for capital investment, purchased
innovative new machinery including two hot urethane processors and a robotic
sander to improve productivity and quality, and to meet customer commitments.
Sales
IN MILLIONS
8
0
2
$
0
8
2
$
7
8
2
$
6
2
3
$
4
5
3
$
2016 2017 2018 2019 2020
EBIT – As Adjusted*
IN MILLIONS
5
4
$
4
5
$
9
5
$
1
7
$
5
7
$
2016 2017 2018 2019 2020
* Excludes $1.4 million primarily related to
severence and incremental costs associated with
COVID-19 in 2020, $1.2 million in inventory
step-up and restructuring charges in 2019,
$0.8 million in restructuring charges in 2018, and
$1.9 million in inventory step-up charges in 2017.
VACCO completed qualification testing on the NASA Boeing SLS Core Stage
program and secured new orders for the Core Stage 3 and Orion/Multi-Purpose
Crew Vehicle Exploration Mission. VACCO also supplied numerous valves and
filters on the recently launched Mars 2020 mission.
PHOTO CREDITS // Orion crew module undergoes testing, courtesy of NASA.gov (top); F-35 Joint Strike Fighter,
courtesy of AF.mil (bottom)
5
Utility Solutions Group
USG’s sales were $192 million as the electric utility market was adversely
affected by the economic slowdown. Adjusted EBITDA was $45 million, with an
Adjusted EBITDA margin of 24 percent. The pipeline of new business remains
robust, especially as it relates to cyber security solutions and with $201 million in
entered orders and a book-to-bill of 1.05, USG’s backlog increased by 22 percent.
In 2020, Doble celebrated 100 years of service and support of the electric utility
industry. Unfortunately, it was a challenging year as utility customers deferred
purchases and maintenance-related projects and diverted resources to issues
such as critical power delivery. While utilities can defer testing and maintenance
for a period of time, they cannot do so indefinitely without significantly increasing
the risk of catastrophic failures which could result in serious power outages and
fines from regulatory agencies. COVID-19 does not change the fundamentals of the
global utility market as society needs reliable, safe, and secure electricity. As we put
this crisis behind us, we are confident revenues will return to more normal levels.
On a positive note, Doble has been developing new products and solutions
including its M5500™ Sweep Frequency Response Analyzer which enables
faster analysis of mechanical integrity within high voltage transformers, and its
Calisto™ T1 which consolidates the condition monitoring of bushings, partial
discharge, and input/output modules into a single configurable cost-effective
package. Doble also introduced a platform to support remote inspection and
factory acceptance testing when travel is not permitted, expanded its customer
base for the DUCe Transient Cyber Asset program, and renewed long-term
contracts with two of the earliest DUCe program adopters. On the renewable
energy front, we are seeing recovery in NRG’s markets as investments in both
wind and solar have been increasing.
Sales
IN MILLIONS
8
2
1
$
2
6
1
$
4
1
2
$
2
1
2
$
2
9
1
$
2016 2017 2018 2019 2020
EBIT – As Adjusted*
IN MILLIONS
3
3
$
8
3
$
6
4
$
6
4
$
1
3
$
2016 2017 2018 2019 2020
* Excludes $6.6 million of facility consolidation,
asset impairment, severance, and incremental
costs associated with COVID-19 in 2020,
$5.9 million 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.
Doble recently moved into a new, state of the art facility in Marlborough,
Massachusetts, which consolidated operations from two previous facilities in the
Boston area. The new headquarters features a number of laboratory environments
which support ongoing research and development as well as direct customer
services for insulating material analysis and high voltage testing. The building
is more energy efficient and includes sustainability features such as a 650 KW
rooftop solar array and electrical vehicle charging.
6
RF Shielding & Test
Test delivered $187 million in revenue and 5 percent growth in Adjusted
EBITDA to $32 million. Despite the economic headwinds, 2020 was Test’s
fifth consecutive year of margin expansion, with both Adjusted EBIT and
Adjusted EBITDA margins increasing a full point to 14.6 percent and
17.3 percent, respectively.
The impact of COIVD-19 was felt throughout the Test business as customers
delayed purchasing decisions and temporarily shut down construction sites to
slow the spread of the virus. Test responded quickly, reallocating resources as
necessary and despite the logistical challenges was able to complete several
large projects on a variety of applications including satellite, automotive, and
electromagnetic pulse protection (EMP).
Even as COVID-19 created uncertainty in the market, Test was able to generate
growth in several key markets. In wireless, carriers have begun to roll out
their 5G offerings and we continue to play an active role on international
standards bodies supporting this technology. Over the past year, we delivered
numerous standard and custom systems to wireless carriers, chipset and
handset manufacturers, and test houses in support of 5G development. As
the deployment of 5G ramps up, we expect to see continuing demand for our
products and solutions going forward.
We continue to be active on international standards committees within the
automotive market and offer a variety of test solutions for both the electric
vehicle and connected car markets and expect continued growth as both of
these technologies continue to gain acceptance.
We are also seeing increasing interest in our EMP solutions as our line of
Red Edge™ shielding products are ideal for addressing this market. While
traditionally a defense related market, we are seeing more interest from utilities
and commercial customers concerned about these types of threats.
Sales
IN MILLIONS
2
6
1
$
1
6
1
$
3
8
1
$
8
8
1
$
7
8
1
$
2016 2017 2018 2019 2020
EBIT – As Adjusted*
IN MILLIONS
9
1
$
9
1
$
4
2
$
6
2
$
7
2
$
2016 2017 2018 2019 2020
* Excludes $0.1 million of incremental
costs associated with COVID-19 in 2020
and $5.1 million in restructuring charges
in 2016.
Despite the challenges of 2020, the Test segment was able to come together as
a team and capitalize on their diverse products, solutions, and end markets to
deliver the most profitable year in their history.
7
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
8
Managing Forward
In 2020, we delivered solid operating results, highlighted by stable revenue
and profitability, and increased cash flow from operations and liquidity. With
our diverse end markets, solid balance sheet, and growing order backlog, we
remain confident in our ability to navigate the economic challenges presented
by the pandemic. Even with the slowdown in 2020, we have delivered
compound annual growth rates in excess of 10 percent on revenue, Adjusted
EBITDA, Adjusted EPS, and backlog over the past 4 years.
The fundamentals of our portfolio of highly-engineered products remain
intact and give us confidence that our well-tested operating model and track
record of effective cost management and prudent investments in our business
segments will continue to position us for sustainable long-term growth.
As we move forward, we intend to broaden our investment in new products
and solutions both organically and through the deployment of capital on
acquisitions. We continue to evaluate a robust pipeline of M&A opportunities
and our liquidity and substantial debt capacity give us confidence in our
ability to comfortably and opportunistically add to our diverse portfolio when
the timing is right.
Everyone at ESCO, including our dedicated employees, executive leadership
team, and Board of Directors displayed an amazing resilience and personal
commitment to serving our customers this year. I want to personally thank
everyone for their hard work, dedication, and sacrifice. Together, we were able
to deliver solid operating results in the midst of very trying times.
Vic Richey
Chairman, Chief Executive
Officer & President
November 30, 2020
Gary Muenster
Executive Vice President &
Chief Financial Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
_______________________
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended September 30, 2020
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
Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of
the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act
(15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
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 31, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, based on the
New York Stock Exchange closing price on March 31, 2020: approximately $1,926,000,000.*
*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 20, 2020: 26,037,714
_______________________
DOCUMENTS INCORPORATED BY REFERENCE:
Part III of this Report incorporates by reference certain portions of the registrant’s definitive Proxy Statement for its
2021 Annual Meeting of Shareholders, which the registrant currently anticipates first sending to shareholders on or
about December 16, 2020 (hereinafter, the “2020 Proxy Statement”).
INDEX TO ANNUAL REPORT ON FORM 10-K
FORWARD-LOOKING INFORMATION
PART I
1.
Business
The Company
Products
Marketing and Sales
Government Contracts
Intellectual Property
Backlog
Purchased Components and Raw Materials
Competition
Research and Development
Environmental Matters and Government Regulation
Human Capital
Financing
Additional Information
Information about our Executive Officers
1A. Risk Factors
1B. Unresolved Staff Comments
Properties
2.
3.
Legal Proceedings
4. Mine Safety Disclosures
PART II
5. Market for Registrant’s Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Selected Financial Data
6.
7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
7A. Quantitative and Qualitative Disclosures about Market Risk
8.
9.
9A. Controls and Procedures
9B. Other Information
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
PART III
10. Directors, Executive Officers and Corporate Governance
11. Executive Compensation
12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
13. Certain Relationships and Related Transactions, and Director Independence
14. Principal Accountant Fees and Services
PART IV
15. Exhibits, Financial Statement Schedules
SIGNATURES
FINANCIAL INFORMATION
EXHIBITS
i
Page
ii
1
1
2
3
3
3
4
4
4
5
5
5
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6
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27
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35
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 effects of the
continuing COVID-19 pandemic on the Company’s business and results of operations; 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 all or any part of 2021 and beyond, including amounts, timing and
sources of 2021 sales, revenues, sales growth, Adjusted EBIT, EBITDA, Adjusted EBITDA and Adjusted EPS and
comparisons with 2020; 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; Management’s assumptions about
future liability under the Company’s 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; costs and estimated
earnings from long-term contracts; valuation of inventories; estimates of uncollectible accounts receivable; the risk
of goodwill impairment; the Company’s estimates utilized in software revenue recognition, non-cash depreciation and
the amortization of intangible assets; the valuation of deferred tax assets; estimates of future cash flows and fair values
in connection with the risk of goodwill impairment; amounts of NOL not realizable and the timing and amount of the
reduction of unrecognized tax benefits; the effects of implementing recently issued accounting pronouncements; and
any other statements contained herein which are not strictly historical. Words such as expects, anticipates, targets,
goals, projects, intends, plans, believes, estimates, variations of such words, and similar expressions are intended to
identify such forward-looking statements.
Investors are cautioned that such statements are only predictions and speak only as of the date of this Form 10-K, and
the Company undertakes no duty to update the information in this Form 10-K except as may be required by applicable
laws or regulations. The Company’s actual results in the future may differ materially from those projected in the
forward-looking statements due to risks and uncertainties that exist in the Company’s operations and business
environment, including but not limited to those described herein under “Item 1A, Risk Factors,” and the following:
the duration, scope and effects of the COVID-19 pandemic; the availability of viable COVID-19 vaccines; 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; inability to access
work sites; 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 or orders; 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 and availability 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 integration of recently
acquired businesses.
ii
PART I
Item 1. Business
The Company
The Registrant, ESCO Technologies Inc. (ESCO), is a global provider of highly engineered filtration and fluid control
products for the aviation, navy, space and process markets worldwide, as well as composite-based products and
solutions for navy, defense and industrial customers; is an industry leader in RF shielding and EMC test products; and
provides diagnostic instruments, software and services for the benefit of industrial power users and the 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’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 2020) 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 classifies its business operations in segments for financial reporting purposes. The Company’s three
reportable segments during 2020, together with the significant domestic and foreign operating subsidiaries within each
segment, are as follows:
Aerospace & Defense (formerly called Filtration/Fluid Flow):
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, Morgan Schaffer and the Company’s other USG subsidiaries except 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.
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 during 2020, it consolidated its headquarters operations into a single, more cost-efficient facility in
Marlborough, Massachusetts. Doble has also announced its intention to close its facility in Toronto, Ontario by early
in the second quarter of 2021 and to consolidate the production of its Manta product line with existing Doble
instruments.
ESCO is also continually seeking opportunities to supplement its growth by making strategic acquisitions. 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 December 2019, the Company sold the businesses comprising its former Technical Packaging segment and used the
proceeds from the sale to pay down debt and for other corporate purposes, including the termination of the Company’s
defined benefit pension plan. The Technical Packaging segment was reported as Discontinued Operations in 2020, and
is presented accordingly for all periods in this report. See Note 2 to the Consolidated Financial Statements.
Products
The Company’s principal products are described below. See Note 14 to the Consolidated Financial Statements for
financial information regarding business segments and 10% customers.
Aerospace & Defense
Beginning in the first quarter of 2020, Management renamed the Filtration/Fluid Flow (Filtration) segment as
Aerospace & Defense to better reflect the composition of the segment’s products, end markets and customer
characteristics. The Aerospace & Defense segment’s individual legal and operating entities, historical financial
results, and management structure are unchanged from what was formerly presented as Filtration.
The Aerospace & Defense segment accounted for approximately 48%, 45% and 42% of the Company’s total revenue
in 2020, 2019 and 2018, respectively.
The companies within this segment primarily design and manufacture specialty filtration, fluid control and naval
products, including hydraulic filter elements and fluid control devices used in aerospace and defense applications,
unique filter mechanisms used in micro-propulsion devices for satellites and 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 USG segment accounted for approximately 26%, 29% and 31% of the Company’s total revenue in 2020, 2019
and 2018, respectively.
Doble is an industry leader in the development, manufacture and delivery of diagnostic testing solutions that enable
electric power grid operators to assess the integrity of high-voltage power delivery equipment. It combines three core
elements for customers – diagnostic test and condition monitoring instruments, expert consulting, and testing services
– and provides access to its large reserve of related empirical knowledge.
Doble has six offices in the United States and five international offices, one of which Doble intends to close in 2021
as mentioned above.
NRG is a global market leader in the design and manufacture of decision support tools for the renewable energy
industry, primarily wind and solar.
Test
The Test segment accounted for approximately 26%, 26% and 27% of the Company’s total revenue in 2020, 2019 and
2018, respectively.
ETS-Lindgren is an industry leader in designing and manufacturing products which provide its customers with the
ability to measure and contain magnetic, electromagnetic and acoustic energy. It supplies its 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.
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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.
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 27%, 26% and 27% of the Company’s
total revenue in 2020, 2019 and 2018, respectively. See Note 14 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 Aerospace & Defense segment, accounted for approximately 28%, 21%,
and 23% of the Company’s total revenue in 2020, 2019 and 2018, respectively. See also “Government Contracts,”
below, and see Item 1A, “Risk Factors,” and related risks for a discussion of risks of the Company’s government
business.
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 for the work completed prior to termination. See “Marketing and Sales,” above, and
see Item 1A, “Risk Factors,” for additional information regarding Government contracts and related risks.
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 Aerospace & Defense 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
3
compliance tools. Doble also holds an extensive library of apparatus performance information useful 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 line of bat deterrent systems, which are designed to
significantly reduce bat mortality at windfarms and in other applications where bat conservation is a concern.
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 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, 2020 was $517.4 million, representing an increase of $65.8
million (15%) from the backlog of $451.6 million at September 30, 2019. By segment, the backlog at September 30,
2020 and September 30, 2019, respectively, was $344.7 million and $276.3 million for Aerospace & Defense; $50.7
million and $41.7 million for USG; and $122.0 million and $133.6 million for Test. The Company estimates that as of
September 30, 2020 domestic customers accounted for approximately 78% of the Company’s total firm orders and
international customers accounted for approximately 22%. Of the total Company backlog at September 30, 2020,
approximately 73% is expected to be completed in the fiscal year ending September 30, 2021.
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; and supplies of components and materials may also be impacted by disruptions due to
COVID-19 as well as complications due to current or future trade policies. See Item 1A, “Risk Factors.”
The Aerospace & Defense 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 Aerospace &
Defense 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, performance of these contracts is vulnerable to the risks described above and in Item 1A.
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 Aerospace & Defense segment include Pall Corporation, Moog, Inc., Safran (Sofrance),
CLARCOR Inc., TransDigm (PneuDraulics), Marotta Controls, and Parker Hannifin.
4
Significant competitors of the USG segment include OMICRON electronics Corp., Megger Group Limited, Vaisala,
and Qualitrol Company LLC (a subsidiary of Fortive 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.
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 and Government Regulation
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 or compliance with Governmental regulations will have a material adverse effect on
the Company’s financial condition or results of operations.
Human Capital
As of September 30, 2020, we employed 2,844 persons, including 2,713 full time employees. Of our full-time
employees, 2,289 were located in the United States and 424 were located in 15 foreign countries.
We are dedicated to preserving operational excellence and remaining an employer of choice. We provide and maintain
a work environment that is designed to attract, develop and retain top talent through offering our employees an
engaging work experience that contributes to their career development. Through the ESCO Technologies Foundation,
our charitable arm, and Company-sponsored wellness activities, we provide opportunities for meaningful civic
involvement that not only support our communities but also provide experiences for our employees to promote a
collaborative and rewarding work environment. We strive to maintain a culture that enables all employees to be
treated with dignity and respect while devoting their best efforts to performing their jobs to the best of their respective
abilities. We operate in a supportive culture that incorporates highly ethical behavior and reinforces our human rights
commitment.
Our subsidiaries enjoy modest turnover at less than half the national average of our peer groups in U.S. industries. Of
our workforce of more than 2,800 employees, fewer than 5% are contingent workers. We invest in creating a diverse,
inclusive and safe work environment where our employees can deliver their workplace best every day. In fact, more
than 60% of our U.S. employees come from diverse backgrounds.
We devote resources to training and development, including educational assistance for career-enhancing academic and
professional programs. We also invest time in identifying high-potential future leaders and working with them on
individual development plans. We recognize that our success is based on the collective talents and dedication of those
we employ, and we are highly invested in their success.
Manufacture of our products and performance of our services requires the use of a variety of tools, equipment,
materials and supplies. As a part of our commitment to the safety of our employees, customers and third parties, we
have established safety programs, policies and procedures and training requirements for our employees. We also
welcome employee involvement in local safety committees.
During 2020, we focused significant attention on the effective handling of the COVID-19 pandemic. Our response has
included a re-layout of many of our factory floors and other personnel areas to ensure sufficient distancing in high
density areas of our facilities. We also installed Plexiglas shields, modified training programs to comply with
5
distancing requirements, limited visitor entry and increased virtual meetings, and adjusted shifts to aid in physical
distancing. Additionally, we implemented the use of flexible and remote work arrangements and other creative
solutions. Where applicable, we have also provided additional support through daily symptom checks and self-
assessments. We have identified and/or developed resources to support employees and their families with additional
time off, flexible schedules, employer paid benefits, and the identification of community resources.
We believe strong human capital acts as a competitive differentiator. We strive to ensure that we have the right leaders
in place to drive our strategic initiatives not only today but also into the future. We are committed to a safe workplace
and an ethical environment in which employees are respected in a culture of belonging and dignity and in which they
can continually develop their skills and expertise to advance their careers.
Financing
For information about the Company’s credit facility, see Note 9 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
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.
Information about our Executive Officers
The following sets forth certain information as of November 1, 2020 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
63
60
61
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, and risks and
uncertainties that apply to businesses or public companies generally, the following important risk factors which are
particularly applicable to the Company’s business could cause actual results and events to differ materially from those
contained in any forward-looking statements, or could otherwise materially adversely affect the Company’s business,
operating results or financial condition:
6
COVID-19 Risks
The COVID-19 pandemic and its widespread effects on the United States and global economies may have a
material adverse effect on our business which could continue for an unknown period of time.
The COVID-19 pandemic has significantly increased our economic, demand and operational uncertainty. The rapid
worldwide spread of the COVID-19 virus, as well as the measures governments and private organizations have
implemented in order to stem the spread of this pandemic, is resulting in significant worldwide disruptions and
contractions in economic activity, including those resulting from “shelter in place” and similar orders, restrictions on
non-essential business operations and travel, and increased unemployment. We have global operations, customers and
suppliers, including in countries most impacted by COVID-19, and both the disease itself and the actions taken around
the world to slow the spread of COVID-19 have impacted our customers and suppliers; and future developments could
cause further disruptions to the Company due to the interconnected nature of our business relationships.
We have been and may continue to be subject to postponement or cancellation of certain contracts to which we are a
party. We have also suffered a significant reduction in our commercial aircraft business due to slowdowns in OEM
production and reduced flights, and this business is unlikely to return to pre-COVID levels for an unknown but
possibly significant period of time. Current restrictions and conditions have and may continue to prevent or delay us in
accessing customer facilities to deliver products and provide services, and may disrupt or delay our supply chain.
Even though our businesses have been classified as essential businesses and allowed to remain in operation in
jurisdictions in which facility closures have been mandated, we can give no assurance that this will not change in the
future or that our businesses will be classified as essential in each of the jurisdictions in which we operate. Further,
although we have implemented prevention measures at our own facilities, including enhanced cleaning procedures,
social distancing efforts and working from home where feasible, and substantially all of our facilities have so far
remained in business, we have occasionally incurred short-term disruptions in some facility operations, and due to the
nature of the COVID-19 pandemic there can be no assurance that we will not suffer facility closures or other adverse
effects on our business operations in the future.
These facts and circumstances may have a material adverse effect on our business, results of operations, financial
condition and cash flows. The extent to which the COVID-19 pandemic will impact our business, results of
operations, financial condition and cash flows in the future, and the length of time these impacts may continue,
will depend on future developments that are highly uncertain and cannot be predicted at this time, including new
information that may emerge concerning the severity of COVID-19, the longevity of COVID-19 and the actions
to contain its impact.
Risks Related to our Governmental and Aerospace Business
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 21% to 28% of our revenues have been generated from sales to the
U.S. Government or its contractors, primarily within our Aerospace & Defense segment. These sales are dependent on
government funding of the underlying programs, which is generally subject to annual Congressional appropriations.
There could be reductions or terminations of, or delays in, the government funding on programs which apply to us or
our customers. These funding effects could adversely affect our sales and profit, and could bring about a restructuring
of our operations, which could result in an adverse effect on our financial condition or results of operations. A
significant 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.
Our Government business increases the risk that we may not realize the full amount of our backlog.
As of September 30, 2020, our twelve-month backlog was approximately $375 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 and its subcontractors’ 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.
7
The end of customer product life cycles could negatively affect our Aerospace & Defense segment’s results.
Many of our Aerospace & Defense 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.
Risks Related to our International Business
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.
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 are 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 2019 and 2020 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 and
our ability to compete in certain markets. Our business may also be impacted by the ongoing trade tensions between
the US and China which are causing US goods to be viewed in a less favorable light by Chinese customers.
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 2020, approximately 27% 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;
8
Doble’s UK-based business 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
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.
Risks Related to our Manufacturing and Sales Operations and Technology
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 Aerospace & Defense segment, may at times be in short
supply. Further, some 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,
9
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.
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.
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, many of which are mission-critical to our
customers. 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
Aerospace & Defense 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.
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.
10
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.
Risks Related to Our Business Strategy and Corporate Structure
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 a
regulatory authority were to relax the test standards for certain electronic devices because they were determined not to
interfere with the broadcast spectrum, or if new wireless communication technologies were developed that required
less testing or different types of testing, our sales of certain testing products could be significantly reduced.
We may not be able to identify suitable acquisition candidates or complete acquisitions successfully, which
may inhibit our rate of growth.
As part of our growth strategy, we plan to continue to pursue acquisitions of other companies, assets and product lines
that either complement or expand our existing business. However, we may be unable to implement this strategy if we
are unable to identify suitable acquisition candidates or consummate future acquisitions at acceptable prices and
terms. We expect to face competition for acquisition candidates which may limit the number of acquisition
opportunities available to us and may result in higher acquisition prices. As a result, we may be limited in the number
of acquisitions which we are able to complete and we may face difficulties in achieving the profitability or cash flows
needed to justify our investment in them.
Our acquisitions of other companies carry risk.
Acquisitions of other companies involve numerous risks, including difficulties in the integration of the operations,
technologies and products of the acquired companies, the potential exposure to unanticipated and undisclosed
liabilities, the potential that expected benefits or synergies are not realized and that operating costs increase, the
potential loss of key personnel, suppliers or customers of acquired businesses and the diversion of Management’s time
and attention from other business concerns. Although we attempt to identify and evaluate the risks inherent in any
acquisition, we may not properly ascertain or mitigate all such risks, and our failure to do so could have a material
adverse effect on our business.
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 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.
11
Our decentralized organizational structure presents certain risks.
We are a relatively decentralized company in comparison with some of our peers. This decentralization necessarily
places significant control and decision-making powers in the hands of local management, which present various risks,
including the risk that we may be slower or less able to identify or react to problems affecting a key business than we
would in a more centralized management environment. We may also be slower to detect or react to compliance related
problems (such as an employee undertaking activities prohibited by applicable law or by our internal policies), and
Company-wide business initiatives may be more challenging and costly to implement, and the risks of noncompliance
or failures higher, than they would be under a more centralized management structure. Depending on the nature of the
problem or initiative in question, such noncompliance or failure could have a material adverse effect on our business,
financial condition or result of operations.
Provisions in our articles of incorporation, bylaws and Missouri law could make it more difficult for a third
party to acquire us and could discourage acquisition bids or a change of control, and could adversely affect
the market price of our common stock.
Our articles of incorporation and bylaws contain certain provisions which could discourage potential hostile takeover
attempts, including: a limitation on the shareholders’ ability to call special meetings of shareholders; advance notice
requirements to nominate candidates for election as directors or to propose matters for action at a meeting of
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, 2020, the Company’s physical properties, including those described in the table below, comprised
approximately 1,504,000 square feet of floor space, of which approximately 614,000 square feet were owned and
approximately 890,000 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 15 and 16 to the
Consolidated Financial Statements.
[Table is on following page]
12
Owned / Leased (with
Expiration Date)
Principal Use(s)
(M=Manufacturing,
E=Engineering, O=Office,
W=Warehouse)
Leased (9/30/2023)
M, E, O,W
Location
Modesto, CA
Denton, TX
Cedar Park, TX
Oxnard, CA
Approx.
Sq. Ft.
181,500
145,000
Leased (9/30/2029,
plus options)
130,000
127,400
Owned
Owned
South El Monte, CA
100,100
Owned
Durant, OK
Valencia, CA
100,000
79,300
Owned
Owned
Marlborough, MA
79,100
Leased (2/28/2037)
Hinesburg, VT
Stoughton, MA
77,000
Leased (4/30/2029)
71,400
Leased (1/31/2029)
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, W
M, E, O, W
M, E, O, W
South El Monte, CA
63,300
Leased (various term ends)
M, O, W
Eura, Finland
Tianjin, China
Minocqua, WI
LaSalle (Montreal), Québec
Beijing, China
Avon, MA
Ontario, CA
St. Louis, MO
Mississauga, Ontario
Morrisville, NC
Wood Dale, IL
41,500
38,100
35,400
35,200
33,300
30,000
26,900
21,500
15,600
11,600
10,700
Owned
Leased (11/19/2027)
Owned
Leased (8/31/21) *
Leased (12/21/2024)
Leased (5/31/2022)
Leased (8/31/2025)
Leased (8/31/2025)
Leased (11/30/2023)
Leased (1/31/2027)
Leased (6/30/2024)
M, E, O, W
M, E, O
M, O, W
M, E, O
M, E, O
W
M, E, O, W
ESCO Corporate Office
M, E, O, W
O
E, O
Operating
Segment
Aerospace &
Defense
Aerospace &
Defense
Test
Aerospace &
Defense
Aerospace &
Defense
Test
Aerospace &
Defense
USG
USG
Aerospace &
Defense
Aerospace &
Defense
Test
Test
Test
USG
Test
Aerospace &
Defense
USG
Corporate
USG
USG
Test
* The Company intends not to renew this lease and to move these operations to 38,400 square feet of leased space in a nearby
facility with a lease term beginning 6/1/2021 and expiring 8/31/2036 (plus options).
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 certain types of 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.
13
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 20, 2020, there were approximately 1,800 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 2020.
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 11 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 cumulative total returns of the Russell
2000 index and two customized peer groups. Because the Company changed the composition of the peer group for
2020, as described below, the peer group used for the corresponding disclosures in 2019 is shown for comparison. The
Company is not a component of either the 2020 peer group or the 2019 peer group, but it is a component of the
Russell 2000 Index. The measurement period begins on September 30, 2015 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, 2015.
14
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN
Among ESCO Technologies Inc., the Russell 2000 Index,
and the 2020 and 2019 Peer Groups
$240
$220
$200
$180
$160
$140
$120
$100
$80
$60
9/15
9/16
9/17
9/18
9/19
9/20
ESCO Technologies Inc.
2019 Peer Group
Russell 2000
2020 Peer Group
Copyright© 2020 Russell Investment Group. All rights reserved.
ESCO Technologies Inc.
Russell 2000
2020 Peer Group
2019 Peer Group
9/30/15
$100.00
100.00
100.00
100.00
9/30/16
$130.34
115.47
116.43
117.39
9/30/17
$169.02
139.42
136.53
137.86
9/30/18
$192.90
160.66
176.71
174.26
9/30/19
$226.57
146.38
155.14
154.65
9/30/20
$230.57
146.95
149.13
150.96
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
The 2020 peer group was composed of eight companies that corresponded to the Company’s three industry segments
used for financial reporting purposes during 2020, as follows: Aerospace & Defense segment (48% of the Company’s
2020 total revenue): CIRCOR International, Inc., Donaldson Company, Inc. and Moog Inc.; USG segment (26% of
the Company’s 2020 total revenue): Aegion Corporation, Ameresco, Inc. and Thermon Group Holdings, Inc.; Test
segment (26% of the Company’s 2020 total revenue): EXFO Inc. and FARO Technologies, Inc.
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: Aerospace & Defense 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.
In calculating the composite return of the 2020 and 2019 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 from continuing operations represented by
its corresponding Company industry segment.
15
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)
2020
2019
2018
2017
2016
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 from continuing operations
Total assets
Total debt
Shareholders’ equity
Cash dividends declared per common share
__________
$
732.9
726.0
683.7
602.8
497.0
25.5
76.5
102.0
77.5
3.5
81.0
86.3
5.8
92.1
48.6
5.1
53.7
40.0
5.9
45.9
0.98
2.94
3.92
0.97
2.93
3.90
2.99
0.13
3.12
2.97
0.13
3.10
3.33
0.23
3.56
3.31
0.23
3.54
1.88
0.20
2.08
1.87
0.20
2.07
190.6
1,373.5
62.4
961.6
229.8
1,466.7
285.0
826.2
183.8
1,265.1
220.0
759.4
186.9
1,260.4
275.0
671.9
1.55
0.23
1.78
1.54
0.23
1.77
154.4
978.4
110.0
615.1
0.32
0.32
0.32
0.32
0.32
$
$
$
$
$
$
$
$
See also Note 1.E to the Consolidated Financial Statements for discussion of the Company’s adoption of ASU 2014-
09, Revenue from Contracts with Customers (ASC 606), and Notes 2 and 3 to the Consolidated Financial Statements
for divestiture 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.
In December 2019, the Company sold the businesses comprising its former Technical Packaging segment. The
Company received net proceeds from the sale of approximately $184 million and recorded a $76.5 million after-tax
gain on the sale in 2020. The Company used the proceeds from the sale to pay down debt and for other corporate
purposes including the termination of the Company’s defined benefit pension plan. The Technical Packaging segment
is reflected as discontinued operations in the Consolidated Financial Statements and related notes for all periods
presented, in accordance with accounting principles generally accepted in the United States of America (GAAP). See
Note 2 to the Consolidated Financial Statements for further discussion.
Selected financial information for each of the Company’s business segments is provided in the discussion below
and in Note 14 to the Company’s Consolidated Financial Statements.
This section includes comparisons of certain 2020 financial information to the same information for 2019. Year-to-
year comparisons of the 2019 financial information to the same information for 2018 are contained in Item 7 of the
Company’s Form 10-K for 2019 filed with the Securities and Exchange Commission on November 29, 2019 and
available through the SEC’s website at https://www.sec.gov/edgar/searchedgar/companysearch.html.
16
Introduction
ESCO Technologies Inc. and its wholly owned subsidiaries (the Company) are organized into three reportable
operating segments for financial reporting purposes: Aerospace & Defense (formerly Filtration/Fluid Flow), Utility
Solutions Group (USG), RF Shielding and Test (Test). The Company’s business segments are comprised of the
following primary operating entities:
Aerospace & Defense: 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).
USG: Doble Engineering Company and Morgan Schaffer (together, Doble); and NRG Systems, Inc. (NRG).
Test: ETS-Lindgren Inc. (ETS-Lindgren).
Aerospace & Defense. 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 develops, manufactures and delivers diagnostic testing solutions that enable electric power grid operators
to assess the integrity of high-voltage power delivery equipment. NRG designs and manufactures decision support
tools for the renewable energy industry, primarily wind and solar.
Test. ETS-Lindgren is an industry leader in providing its customers with the ability to identify, measure and contain
magnetic, electromagnetic and acoustic energy.
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.
COVID-19 Trends and Uncertainties
The COVID-19 global pandemic has created significant and unprecedented challenges, and during these highly
uncertain times, our top priority remains the health and safety of our employees, customers and suppliers, thereby
securing the financial well-being of the Company and supporting business continuity. Our businesses have been
deemed essential and are currently operational, supplying our customers with vital and necessary products. To date,
our global supply chains have not been materially affected by the pandemic. Given our diverse portfolio of strong,
durable businesses serving non-discretionary end-markets, the strength and resilience of our business model positions
us to continue to support our long-term outlook.
Recognizing the uncertainty presented by this global pandemic, we are suspending our practice of providing full-year
financial guidance. Our businesses are facing varying levels of pressure depending on the markets they serve as
outlined below and the impact on our business cannot be reasonably estimated at this time. In response to COVID-19,
we have taken actions to enhance our financial condition, while continuing to execute our long-term strategy for
profitable growth. Some of the actions we have taken include: reducing a portion of executive compensation, reducing
discretionary spending, minimizing capital spending, implementing hiring and salary freezes, and increasing our focus
on optimizing free cash flow. These operational measures are prudent steps to maintain our liquidity and will increase
our financial flexibility as we work through near-term volatility. As of September 30, 2020, we had approximately
$725 million of liquidity (amount available to borrow under credit facility plus $250 million increase option and $52.6
million in cash) and net debt (debt outstanding less cash on hand) of approximately $9.8 million. Additionally, we
have no debt maturities nor repayment obligations due and payable until September 2024 on our revolving credit
facility. The Company has made no changes to its dividend plan. We are also monitoring the impacts of COVID-19 on
the fair value of assets. We do not currently anticipate any material impairments on assets as a result of COVID-19. A
portion of our workforce has worked from home at times due to COVID-19, however we have not had to redesign or
design new internal controls over financial reporting at this time. Depending on the duration of COVID-19, it may
17
become necessary for us to redesign or design new internal controls over financial reporting in a future period. We do
not believe such an event will have a material impact on our business. Further details by operating segment are
outlined below.
In our Aerospace & Defense segment, our fiscal 2020 revenues were negatively impacted by a decrease of
approximately $20 million related to the COVID-19 pandemic and we anticipate the slowdown in commercial
aerospace deliveries and revenues continuing into fiscal 2021. For the year ended September 30, 2020, the economic
uncertainty, changes in the propensity for the general public to travel by air, and reductions in demand for commercial
aircraft as a result of the COVID-19 pandemic have adversely impacted net sales and operating results in certain of
our Aerospace & Defense reporting units and was determined to be an event and change in circumstances that
required a quantitative review of our intangible assets, long-lived assets and goodwill for impairment. We determined
that there was no impairment as of and for the year ended September 30, 2020 and the fair value of each reporting unit
reviewed substantially exceeded carrying value, with the exception of Mayday where fair value exceeded carrying
value by 10%. At September 30, 2020, we had $30 million of goodwill recorded for Mayday. The valuation
methodology we use involves estimates of discounted cash flows, which are subject to change, and if they change
negatively it could result in the need to write down those assets to fair value. We will continue to monitor the impacts
of COVID-19 on the fair value of assets. The defense portion of Aerospace & Defense, both military aerospace and
navy products, is expected to remain at approximately historical business levels given its backlog coupled with the
timing of expected platform deliveries.
In our Test segment, our fiscal 2020 revenues were negatively impacted by the COVID-19 pandemic due to the China
facility’s three-week shutdown in February and delayed timing of installation projects caused by access limitations to
customer sites. We expect the Test segment to remain at relatively normal business levels into fiscal 2021 given the
strength of its backlog and its served markets, primarily related to new communications technologies such as 5G.
In our USG segment, our fiscal 2020 revenues were negatively impacted by approximately $20 million related to the
COVID-19 pandemic as several utility customers deferred purchase orders and maintenance-related project deliveries
so they could divert resources to other issues such as critical power delivery given their concerns around COVID-19.
Additionally, Doble’s service business was largely on hold during the pandemic. We expect USG’s customer spending
softness to continue for the next few quarters before returning to normal levels. Goodwill for Doble and NRG was
$246 million and $8 million, respectively, as of September 30, 2020. We reviewed the intangible assets, long-lived
assets and goodwill of our Doble and NRG businesses for impairment. The quantitative reviews determined that there
was no impairment as of September 30, 2020 as the fair value of Doble substantially exceeded carrying value and the
fair value of NRG exceeded carrying value by 15%. The valuation methodology we use involves estimates of
discounted cash flows, which are subject to change, and if they change negatively it could result in the need to write
down those assets to fair value. We will continue to monitor the impacts of COVID-19 on the fair value of assets.
See also Item 1A, “Risk Factors” in Part I above, and “Outlook” below for additional information.
Highlights of 2020
Diluted EPS – GAAP for 2020 was $3.90, consisting of $0.97 per share from continuing operations and
$2.93 from discontinued operations as compared to Diluted EPS – GAAP for 2019 of $3.10, consisting of
$2.97 per share from continuing operations and $0.13 per share from discontinued operations.
Sales, net earnings and diluted earnings per share from continuing operations in 2020 were $732.9 million,
$25.5 million and $0.97 per share, respectively, compared to sales, net earnings and diluted earnings per
share from continuing operations in 2019 of $726.0 million, $77.5 million and $2.97 per share, respectively.
Diluted EPS – Continuing Operations As Adjusted for 2020 was $2.76 and excludes the pension plan
termination charge of $40.6 million (or $1.55 per share after tax) and $8.3 million of pretax charges (or $0.24
per share after tax) consisting primarily of facility consolidation charges for the Doble Manta facility
(including employee severance and compensation benefits), asset impairment charges and the incremental
costs associated with the COVID-19 pandemic. Diluted EPS – Continuing Operations As Adjusted for 2019
was $2.95 and excludes $0.4 million of income (or $0.02 per share after tax) consisting primarily of the gain
on the Doble Watertown building sale partially offset by purchase accounting charges related to the Globe
acquisition and certain restructuring charges related to facility consolidations at Doble, PTI and VACCO. See
“Non-GAAP Financial Measures” below.
18
(Dollars in millions)
Diluted EPS – Continuing Operations GAAP
Pension termination adjustment
Restructuring adjustments
Diluted EPS – Continuing Operations As Adjusted
$
$
2020
0.97
1.55
0.24
2.76
2019
2.97
–
(0.02)
2.95
Fiscal year ended
Net cash provided by operating activities from continuing operations was approximately $108.5 million in
2020 compared to $100.6 million in 2019.
At September 30, 2020, cash on hand was $52.6 million and outstanding debt was $62.4 million, for a net
debt position (total debt less cash on hand) of approximately $9.8 million.
Entered orders for 2020 from continuing operations were $798.7 million resulting in a book-to-bill ratio of
1.09x. Backlog at September 30, 2020 was $517.4 million compared to $451.6 million at September 30,
2019.
The Company declared dividends of $0.32 per share during 2020, totaling $8.3 million in dividend payments.
Results of Continuing Operations
Net Sales
(Dollars in millions)
Aerospace & Defense
USG
Test
Total
Fiscal year ended
2020
354.3
191.7
186.9
732.9
$
$
2019
325.7
211.9
188.4
726.0
Change
2020
vs. 2019
8.8 %
(9.5 ) %
(0.8 ) %
1.0 %
Net sales increased $6.9 million, or 1.0%, to $732.9 million in 2020 from $726.0 million in 2019. The increase in net
sales in 2020 as compared to 2019 was due to a $28.6 million increase in the Aerospace & Defense segment, partially
offset by a $20.2 million decrease in the USG segment and a $1.5 million decrease in the Test segment.
Aerospace & Defense.
The $28.6 million, or 8.8%, increase in net sales in 2020 as compared to 2019 was mainly due to a $27.6 million
increase in net sales from Globe (acquired in July 2019), a $13.5 million increase in net sales at VACCO due to higher
shipments of space products, partially offset by a $6.1 million decrease in net sales at Mayday, a $3.7 million decrease
in net sales at Crissair and a $3.0 million decrease in net sales at PTI all driven by the COVID-19 pandemic in the
current year.
USG.
The $20.2 million, or 9.5%, decrease in net sales in 2020 as compared to 2019 was mainly due to a $19.1 million
decrease in net sales at Doble and a $1.1 million decrease in net sales at NRG, both mainly driven by the COVID-19
pandemic in the current year as customers delayed orders and on-site testing.
Test.
The $1.5 million, or 0.8%, decrease in net sales in 2020 as compared to 2019 was mainly due to a $16.0 million
decrease in net sales from the segment’s U.S. operations due to timing of test and measurement chamber projects and
the COVID-19 pandemic, partially offset by a $7.5 million increase in net sales from the segment’s European
operations and a $7.0 million increase in net sales from the segment’s Asian operations due to timing of projects.
Orders and Backlog
New orders received in 2020 from continuing operations were $798.7 million as compared to $822.5 million in
2019. Order backlog was $517.4 million at September 30, 2020, compared to order backlog of $451.6 million at
September 30, 2019. Orders are entered into backlog as firm purchase order commitments are received.
In 2020, the Company recorded orders of $422.7 million related to Aerospace & Defense products, $200.7 million
related to USG products, and $175.3 million related to Test products. In 2019, the Company recorded orders of
19
$409.9 million related to Aerospace & Defense products, $212.9 million related to USG products, and $199.6
million related to Test products.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses were $159.5 million, or 21.8% of net sales, in 2020, and $162.7
million, or 22.4% of net sales, in 2019.
The decrease in SG&A expenses in 2020 as compared to 2019 was mainly due to lower discretionary spending related
to travel and other discretionary expenses due to the COVID-19 pandemic, partially offset by the addition of Globe.
Amortization of Intangible Assets
Amortization of intangible assets was $21.8 million in 2020 and $18.5 million in 2019. Amortization of intangible
assets included $13.0 million and $10.8 million of amortization of acquired intangible assets in 2020 and 2019,
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 2020 as compared to 2019 was
mainly due to the acquisition of Globe in 2019.
Other Expenses or Income, Net
Other expenses, net, were $7.1 million in 2020, compared to other expenses, net, of $0.9 million in 2019. The
principal components of other expenses, net, in 2020 included approximately $8 million of pretax charges consisting
primarily of facility consolidation charges for the Doble Manta facility, including employee severance and
compensation benefits, and asset impairment charges. The principal components of other expenses, net, in 2019
included $3 million of purchase accounting charges related to the Globe acquisition; $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. There were no other individually significant
items included in other expenses, net, in 2020 or 2019.
Non-GAAP Financial Measures
The information reported herein includes the financial measures Diluted EPS – Continuing Operations As Adjusted,
which the Company defines as EPS excluding the per-share net impact of the pension plan termination charge and
restructuring charges related to the Company’s facility consolidation restructuring plans in 2020 and the gain on the
Doble Watertown, MA property sale in 2019 partially offset by purchase accounting charges related to the Globe
acquisition and the restructuring charges incurred at Doble, PTI and VACCO during 2019; 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. Diluted EPS – Continuing Operations 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 Diluted EPS – Continuing Operations 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.
20
EBIT
The reconciliation of EBIT to a GAAP financial measure is as follows:
(Dollars in millions)
EBIT
Less: Income tax expense
Less: Interest expense
Net earnings from continuing operations
EBIT by business segment is as follows:
(Dollars in millions)
Aerospace & Defense
% of net sales
USG
% of net sales
Test
% of net sales
Corporate
Total
% of net sales
Aerospace & Defense
2020
46.5
14.3
6.7
25.5
$
$
2019
106.0
20.4
8.1
77.5
Fiscal year ended
$
$
2020
73.2
20.7 %
24.4
12.7 %
27.2
14.6 %
(78.3 )
46.5
6.3 %
2019
70.1
21.5 %
52.2
24.6 %
25.6
13.6 %
(41.9 )
106.0
14.6 %
Change
2020
vs. 2019
4.4 %
(53.3 ) %
6.2 %
(86.9 ) %
(56.1 ) %
The $3.1 million increase in EBIT in 2020 as compared to 2019 was primarily due to the $7.3 million EBIT
contribution from Globe; partially offset by a $2.9 million decrease at Crissair and a $1.6 million decrease at Mayday
both driven by the lower sales volumes in the current year. In addition, EBIT in 2020 was negatively impacted by $0.5
million of restructuring charges related to the consolidation of VACCO’s aircraft/aerospace business into PTI’s
aerospace facility in Oxnard, California and severance charges at Crissair and $0.9 million of incremental costs
associated with the COVID-19 pandemic.
USG
The $27.8 million decrease in EBIT in 2020 as compared to 2019 was mainly due to a decrease in EBIT from Doble
due to the lower sales volumes in 2020 and the gain on the sale of the Doble Watertown facility of approximately $8
million in 2019. In addition, EBIT in 2020 was negatively impacted by approximately $6.6 million of restructuring
charges consisting primarily of facility consolidation charges related to the Manta facility including severance and
compensation benefits and asset impairment charges.
Test
The $1.6 million increase in EBIT in 2020 as compared to 2019 was primarily due to the increased sales volumes
from the segment’s Asian operations partially offset by the decrease in sales volumes from the segment’s U.S.
operations.
Corporate
Corporate operating charges included in 2020 consolidated EBIT increased to $78.3 million as compared to $41.9
million in 2019 mainly due to a $40.6 million pension plan termination charge as a result of the decision to terminate
and annuitize the Company’s defined benefit pension plan in 2020. See Note 12 to the Consolidated Financial
Statements for further discussion.
The “Reconciliation to Consolidated Totals (Corporate)” in Note 14 to the Consolidated Financial Statements
represents Corporate office operating charges.
Interest Expense, Net
Interest expense was $6.7 million in 2020 compared to $8.1 million in 2019, primarily due to lower average
outstanding borrowings ($175.6 million compared to $236.4 million) at relatively consistent average interest rates of
3.2%.
21
Income Tax Expense
The effective tax rates from continuing operations for 2020, 2019 and 2018 were 35.9%, 20.8% and (6.4%),
respectively. The 2020 effective tax rate was unfavorably impacted by a pension plan termination charge of $40.6
million which is not deductible for tax purposes increasing the effective tax rate by 21.4%. The 2020 effective tax rate
was favorably impacted by the following: (1) an increase in the available 2019 foreign tax credit which was
attributable to new information and tax planning strategies reducing the 2020 effective tax rate by 1.8%; (2) the
release of a valuation allowance of $2.8 million for foreign net operating losses decreasing the effective tax rate by
7.2%; and (3) favorable 2019 state tax return to provision true-ups decreasing the effective tax rate by 1.6%.
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 3.0%.
The 2017 Tax Cut and Jobs Act (TCJA) 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.
Divestiture and Acquisitions
Information regarding the Company’s divestiture and acquisitions during 2020, 2019 and 2018 is set forth in
Notes 2 and 3 to the Company’s Consolidated Financial Statements, which Notes are 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.
Pension Plan Termination
On November 14, 2019, the Company’s Board of Directors approved a resolution to terminate the Company’s defined
benefit pension plan (the Plan), effective as of February 29, 2020. In connection with the termination, the Company
contributed $25.7 million to the Plan during the fourth quarter of 2020, settled approximately $32.4 million of Plan
liabilities during the fourth quarter of 2020 through lump-sum payments from existing plan assets to eligible
participants who elected to receive them; and recorded approximately $40.6 million of non-cash charges associated
with these settlements. During 2020, the Company settled approximately $69.1 million of Plan liabilities by entering
into an agreement to purchase annuities from Massachusetts Mutual Life Insurance Company (MassMutual). This
agreement covered approximately 825 active and former employees and their beneficiaries, with MassMutual
assuming the future annuity payments for these individuals. Additionally, the Company settled approximately $0.1
million of Plan liabilities through a combination of annuities and direct funding to the Pension Benefit Guaranty
Corporation for the remaining approximately 14 former employees and their beneficiaries. Refer to Note 12 of the
Consolidated Financial Statements for more information.
Capital Resources and Liquidity
The Company’s overall financial position and liquidity are strong. Working capital from continuing operations
(current assets less current liabilities) decreased to $190.6 million at September 30, 2020 from $229.8 million at
September 30, 2019. Accounts receivable decreased $14.6 million during 2020 mainly due to a $12 million decrease
within the USG segment and a $7.9 million decrease within the Aerospace & Defense segment, driven by timing and
lower sales volumes in the current year; partially offset by an increase of approximately $4 million within the Test
segment due to timing of projects. Inventories increased by $11.2 million during 2020 mainly due to a $5.4 million
increase within the Aerospace & Defense segment, a $4.8 million increase within the USG segment and a $1.0
million increase within the Test segment, resulting primarily from the timing of receipt of raw materials and work-
in-progress due to timing of projects. The $13.3 million decrease in accounts payable at September 30, 2020 was
mainly due to a $9.8 million decrease within the Test segment and a $2.4 million decrease within the Aerospace &
Defense segment due to the timing of payments.
22
Net cash provided by operating activities from continuing operations was $108.5 million and $100.6 million in 2020
and 2019, respectively.
Net cash used in investing activities from continuing operations was $41.1 million and $111.2 million in 2020 and
2019, respectively. The decrease in net cash used in investing activities in 2020 as compared to 2019 was due to the
acquisition of Globe in 2019. Capital expenditures from continuing operations were $32.1 million and $24.2 million
in 2020 and 2019, respectively. The increase in 2020 as compared to 2019 was mainly due to building improvements
at the new Doble headquarters facility and an increase at VACCO primarily for construction of a new parking lot
and certain machinery and equipment. There were no commitments outstanding that were considered material for
capital expenditures at September 30, 2020. In addition, the Company incurred expenditures for capitalized software
of $9.0 million and $8.4 million in 2020 and 2019, respectively.
Net cash (used) provided by financing activities from continuing operations was $(234.1) million in 2020, compared
to $52.3 million in 2019. The change in 2020 as compared to 2019 was primarily due to the repayment of debt in the
current year from the proceeds on the sale of the Technical Packaging business.
Bank Credit Facility
A description of the Company’s credit facility (the “Credit Facility”) is set forth in Note 9 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 in both 2020 and 2019.
Contractual Obligations
The following table shows the Company’s contractual obligations as of September 30, 2020:
(Dollars in millions)
Long-Term Debt Obligations
Estimated Interest Payments (1)
Operating Lease Obligations
Finance Lease Obligations
Purchase Obligations (2)
Total
Payments due by period
Less than
1 year
2.4
2.2
5.6
2.9
21.5
34.6
Total
62.4
3.5
24.0
40.5
23.4
153.8
$
$
1 to 3
years
-
1.3
9.0
6.1
1.9
18.3
3 to 5 More than
5 years
years
-
60.0
-
-
7.0
2.4
28.3
3.2
-
-
35.3
65.6
(1) Estimated interest payments for the Company’s debt obligations were calculated based on Management’s
determination of the estimated applicable interest rates and payment dates.
(2) A purchase obligation is defined as a legally binding and enforceable agreement to purchase goods and
services that specifies all significant terms. Since the majority of the Company’s purchase orders can be
cancelled, they are not included in the table above.
The Company had no off-balance-sheet arrangements outstanding at September 30, 2020.
Share Repurchases
Information about the Company’s common stock repurchases is provided in Note 10 to the Consolidated Financial
Statements.
Subsequent Event
On October 22, 2020, the Company acquired the equity of Advanced Technology Machining, Inc. and its affiliate
TECC Grinding, Inc. (collectively TECC and ATM referred to as “ATM”), small privately held manufacturers of
precision machined metal parts serving the aerospace, defense and space industries. Located in Valencia, California
near Crissair’s facility, ATM has a solid customer base supplying custom-designed parts widely used on defense and
23
commercial aircraft, as well as missile and tank programs. ATM will become part of Crissair in the Aerospace &
Defense segment and has annual sales of approximately $7 million.
Outlook
In mid-year 2020, business disruptions related to the COVID-19 pandemic began to affect the Company’s operations
and continued throughout the balance of the year. Entering 2021, the commercial aerospace and utility end-markets
are seeing customer stabilization, as well as some notable pockets of recovery, but there is still some uncertainty as to
the timing and pace of the recovery in these areas. The prospect of a viable COVID-19 vaccine will no doubt benefit
and accelerate the anticipated recovery of commercial air travel and utility spending, with customers resuming normal
testing protocols and equipment purchases, but Management has determined that it is advisable to wait at least another
90 days before resuming specific and finite guidance. Given this uncertainty, it is difficult to predict how 2021 will be
affected using normal forecasting methodologies; therefore, the Company will continue its suspension of forward-
looking guidance.
To assist shareholders and analysts, however, Management is offering “directional” guidance for 2021, seeing tangible
signs of recovery in the second half of fiscal 2021 that point to a solid outlook for the back half of the year. Given the
strength of the first half of 2020 pre-COVID, it is projected that the first half of 2021 will be slightly lower compared
to 2020’s first half, but the outlook for the second half of 2021 is expected to compare favorably to the second half of
2020 given the anticipated elements of recovery. Management’s current expectations for 2021 are for growth in Sales,
Adjusted EBITDA, and Adjusted EPS compared to 2020, with Adjusted EBITDA and Adjusted EPS reasonably
consistent with 2019.
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 interest payments on variable rate debt. 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 final interest rate swap was settled during September 2020, therefore, there are no outstanding interest
rate swaps as of September 30, 2020.
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 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 2020 and 2019.
The Company has determined that the market risk related to interest rates with respect to its variable debt is not
material. The Company estimates that if market interest rates averaged one percentage point higher, the effect would
have been less than 2% of net earnings for the year ended September 30, 2020.
For more information about the Company’s derivative financial instruments, see Note 13 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.
24
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
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. The
unit of account in ASC Topic 606 is a performance obligation. The transaction price for our contracts represents our
best estimate of the consideration we will receive and includes assumptions regarding variable consideration, as
applicable, which are based on historical, current and forecasted information. The transaction price is allocated to each
distinct performance obligation within the contract and recognized as revenue when, or as, the performance obligation
is satisfied. 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. The estimated amounts are
based on an assessment of our anticipated performance and all other information that is reasonably available to us.
Approximately 55% of the Company’s Aerospace & Defense segment’s revenue (26% of consolidated revenue) is
recognized over time as the products do 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. Selecting the method
to measure progress towards completion for our contracts requires judgment and is based on the nature of the products
or services to be provided.
The Aerospace & Defense segment generally uses the cost-to-cost method to measure progress on our contracts, as the
rate at which costs are incurred to fulfill a contract best depicts the transfer of control to the customer. Under this
method, 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.
The Test segment generally used the milestone output method to measure progress on our contracts because it best
depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under this method, the
Company estimates profit as the difference between total revenue and total estimated costs at completion of a contract
and recognizes these revenues and costs based on milestones achieved.
Total contract cost estimates are based on current contract specifications and expected engineering requirements and
require us to make estimates on expected profit. The estimates on profit are based on judgments we make to project
the outcome of future events can often span more than one year and include labor productivity and availability, the
complexity of the work to be performed, change orders issued by our customers, and other specialized engineering
and production related activities. Our cost estimation process is based on historical results of contracts and historical
actuals to original estimates, and the application of professional knowledge and experience of engineers and program
managers along with finance professionals to these historical results. We review and update our estimates of costs
quarterly or more frequently when circumstances significantly change, which can affect the profitability of our
contracts.
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.
The impact of adjustments in contract estimates on our operating earnings can be reflected in either revenue or
operating costs and expenses. The aggregate impact of adjustments in contract estimates decreased our earnings
before income tax and diluted earnings per share by $2.2 million and $0.06 per share, respectively, in the current year.
25
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.
The Company’s policy is to include interest related to unrecognized tax benefits in income tax expense and penalties
in operating expense.
Goodwill and Other Long-Lived Assets
Management annually reviews goodwill and other long-lived assets with indefinite useful lives for impairment or
whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If the Company
determines that the carrying value of the long-lived asset may not be recoverable, a permanent impairment charge is
recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Fair value is
measured based on a discounted cash flow method using a discount rate determined by Management to be
commensurate with the risk inherent in 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, 2020, 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.
For the year ended September 30, 2020, the economic uncertainty, changes in the propensity for the general public to
travel by air, and reductions in demand for commercial aircraft as a result of the COVID-19 pandemic have adversely
impacted net sales and operating results in certain of our Aerospace & Defense reporting units and was determined to
be an event and change in circumstances that required a quantitative review of our intangible assets, long-lived assets
and goodwill for impairment. We determined that there was no impairment as of and for the year ended September 30,
2020 and the fair value of each reporting unit reviewed substantially exceeded carrying value, with the exception of
Mayday where fair value exceeded carrying value by 10%. At September 30, 2020, we had $30 million of goodwill
recorded for Mayday. The valuation methodology we use involves estimates of discounted cash flows, which are
subject to change, and if they change negatively it could result in the need to write down those assets to fair value.
In our USG segment, our fiscal 2020 revenues were negatively impacted by the COVID-19 pandemic as several utility
customers deferred purchase orders and maintenance-related project deliveries so they could divert resources to other
issues such as critical power delivery given their concerns around COVID-19. Additionally, Doble’s service business
was largely on hold during the pandemic. We expect USG’s customer spending softness to continue for the next few
quarters before returning to normal levels. Goodwill for Doble and NRG were $246 million and $8 million,
26
respectively, as of September 30, 2020. We reviewed the intangible assets, long-lived assets and goodwill, of our
Doble and NRG businesses for impairment. The quantitative reviews determined that there was no impairment as of
September 30, 2020 as the fair value of Doble substantially exceeded carrying value and the fair value of NRG
exceeded carrying value by 15%. The valuation methodology we use involves estimates of discounted cash flows,
which are subject to change, and if they change negatively it could result in the need to write down those assets to fair
value.
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 reserved for, 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 interest payments on variable rate debt. The final interest rate swap was settled
during September 2020, therefore, there are no outstanding interest rate swaps as of September 30, 2020. 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.U to the Consolidated Financial Statements.
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.
27
Item 9A. Controls and Procedures
For 2020, 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, 2020.
There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f)
under the Exchange Act) during the fiscal quarter ended September 30, 2020 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 2020 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 2020 Proxy
Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Information regarding the beneficial ownership of shares of the Company’s common stock by nominees and directors,
by executive officers, by directors and executive officers as a group and by any known five percent stockholders is
hereby incorporated by reference to the section captioned “Securities Ownership” in the 2020 Proxy Statement.
Information regarding shares of the Company’s common stock issued or issuable under the Company’s equity
compensation plans is hereby incorporated by reference to the section captioned “Proposal 2: Approval of
Amendments to 2018 Omnibus Incentive Plan – Other Equity Compensation Plan Information” in the 2020 Proxy
Statement.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information regarding transactions with related parties and the independence of the Company’s directors, nominees
for directors and members of the committees of the board of directors is hereby incorporated by reference to the
sections captioned “Board of Directors” and “Committees” in the 2020 Proxy Statement.
Item 14. Principal Accountant 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 2020 Proxy Statement.
29
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
4.1(a)
Description of Common Stock
Exhibit 3.1 to the Company’s Form 8-K filed
November 19, 2019
Exhibit 4.1(a) to the Company’s Form 10-K for the
fiscal year ended September 30, 2019
4.1(b)
Specimen revised Common Stock Certificate
Exhibit 4.1 to the Company’s Form 10-Q for the
fiscal quarter ended March 31, 2010
4.2
10.1
10.2
10.3
Credit Agreement dated September 27, 2019,
Exhibit 10.1 to the Company’s Form 8-K filed
incorporated by reference to Exhibit 10.2 hereto
September 30, 2019
Exhibit 10.1 to the Company’s Form 8-K filed
March 28, 2014
Exhibit 10.1 to the Company’s Form 8-K filed
September 30, 2019
Exhibit 10.1 to the Company’s Form 8-K filed
January 7, 2020
Securities Purchase Agreement dated March 14, 2014
between ESCO Technologies Holding LLC and Meter
Readings Holding LLC
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
Equity Purchase Agreement dated November 15, 2019
by and among Sonoco Plastics, Inc., Sonoco Holdings,
Inc., ESCO Technologies Holding LLC, ESCO UK
Holding Company I LTD., Thermoform Engineered
Quality LLC, and Plastique Holdings Ltd.
30
Exhibit No.
Description
Document Location
10.4
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
10.5(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
10.5(b)
* Second Amendment to Supplemental Executive
Exhibit 10.4 to the Company’s Form 10-K for the
Retirement Plan, effective May 1, 2001
fiscal year ended September 30, 2001
10.5(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
10.6
* Directors’ Extended Compensation Plan, adopted
effective October 11, 1993, restated to include all
amendments through August 7, 2013 (current as of
November 2019)
Exhibit 10.5 to the Company’s Form 10-K for the
fiscal year ended September 30, 2019
10.7
* 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
10.8(a)
* 2013 Incentive Compensation Plan
Appendix A to the Company’s Schedule 14A Proxy
Statement filed December 19, 2012
10.8(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
10.8(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
10.9(a)
* 2018 Omnibus Incentive Plan
Exhibit 10.1 to the Company’s Form 8-K filed
February 6, 2018
10.9(b)
* 2018 Omnibus Incentive Plan as Amended and
Exhibit 10.3 to the Company’s Form 8-K filed
Restated November 17, 2020
November 19, 2020
10.9(c)
* Form of Award Agreement for 2018 awards of
Exhibit 10.6(f) to the Company’s Form 10-K for the
Performance-Accelerated Restricted Shares under
2018 Omnibus Incentive Plan
fiscal year ended September 30, 2018
(Note: Agreements executed with Victor L. Richey,
Gary E. Muenster and Alyson S. Barclay are
substantially identical to the referenced Exhibit and
are therefore omitted as separate exhibits pursuant
to Rule 12b-31)
10.9(d)
* Form of Award Agreement for 2019 awards of
Exhibit 10.1 to the Company’s Form 8-K filed
Performance-Accelerated Restricted Shares under
2018 Omnibus Incentive Plan
May 7, 2019
(Note: Agreements executed with Victor L. Richey,
Gary E. Muenster and Alyson S. Barclay are
substantially identical to the referenced Exhibit and
are therefore omitted as separate exhibits pursuant
to Rule 12b-31)
10.9(e)
* Form of Amendment to 2018 and 2019 Award
Exhibit 10.1 to the Company’s Form 8-K filed
Agreements for Performance-Accelerated Restricted
Shares under 2018 Omnibus Incentive Plan
November 19, 2020
(Note: Amendments executed with Victor L.
Richey, Gary E. Muenster and Alyson S. Barclay
are substantially identical to the referenced Exhibit
and are therefore omitted as separate exhibits
pursuant to Rule 12b-31)
31
Exhibit No.
Description
Document Location
10.10(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
10.10(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
10.11
* 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
10.12
* Compensation Recovery Policy, adopted effective
Exhibit 10.6 to the Company’s Form 8-K filed
February 4, 2010
February 10, 2010
10.13(a)
* 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(b)
* Fourth Amended and Restated Severance Plan
Exhibit 10.2 to the Company’s Form 8-K filed
November 19, 2020
10.14(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)
10.14(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
10.14(c)
* Third Amendment to Employment Agreement with
Victor L. Richey, effective December 31, 2007
Exhibit 10.1 to the Company’s Form 8-K filed
January 7, 2008
10.15(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)
10.15(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
10.15(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)
10.15(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
32
Exhibit No.
Description
Document Location
10.16(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)
10.16(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)
10.16(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)
10.16(d)
* Fourth Amendment to Employment Agreement with
Exhibit 10.1 to the Company’s Form 8-K filed
Alyson S. Barclay, effective July 29, 2010
Subsidiaries of the Company
August 3, 2010
Filed herewith
Consent of Independent Registered Public Accounting
Filed herewith
21
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.
33
** 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).
34
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 30, 2020
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 and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Victor L. Richey
Victor L. Richey
Chairman, President, Chief Executive
November 30, 2020
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 30, 2020
November 30, 2020
November 30, 2020
November 30, 2020
November 30, 2020
November 30, 2020
November 30, 2020
November 30, 2020
Director
Director
Director
Director
Director
Director
Director
35
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FINANCIAL INFORMATION
INDEX
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
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-34
F-35
F-36
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, 2020 and 2019, the related consolidated statements of operations, comprehensive
income, shareholders’ equity, and cash flows for each of the years in the three-year period ended September 30, 2020,
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, 2020 and
2019, and the results of its operations and its cash flows for each of the years in the three-year period ended
September 30, 2020, 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, 2020, 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 30, 2020 expressed an unqualified opinion on the
effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the
U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of
material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the
amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Change in Accounting Principles
As discussed in Note 1 of the consolidated financial statements, the Company has changed its method of accounting
for leases as of October 1, 2019 due to the adoption of ASU No. 2016-062, Leases (ASC Topic 842) and method of
accounting for revenue contracts with customers as of October 1, 2018 due to the adoption of ASU No. 2014-09,
Revenue with Contracts with Customers (ASC Topic 606).
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.
Revenue Recognition – Estimate of contract costs at completion
As discussed in Notes 1 and 17 to the consolidated financial statements, the Company’s Aerospace & Defense
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
generally using a cost-to-cost model. Under such model, the Company measures the extent of progress towards
F-2
completion of these contracts based on the ratio of contract 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 estimate of total contract costs at completion for certain contracts in the
Aerospace & Defense 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, which represent
assumptions with a high level of estimation uncertainty and that are also susceptible to potential management
bias. Changes to these estimates may have a significant impact on the net sales and earnings recorded during the
fiscal year.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the
design and tested the operating effectiveness of certain internal controls related to the Company’s revenue
recognition process. This included controls over the accumulation and estimation of costs to complete for labor
hours and materials for the contracts described above. For a selection of contracts, 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 selection of contracts by:
reading the underlying contract documents, including applicable amendments, to obtain an understanding of
the contractual requirements and deliverables
inquiring of financial and operational personnel of the Company to identify factors that should be considered
within the cost to complete estimates
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, including consideration of remaining contract performance
risks
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 contract modification
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 contract 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
inspecting correspondence, if applicable, between the Company and the customer regarding actual and
expected contract performance to date and comparing to the estimate to complete
assessing the estimates for indicators of management bias by evaluating the audit evidence obtained through
the procedures described above.
Sufficiency of audit evidence obtained over net sales
As discussed in Notes 1 and 17 to the consolidated financial statements, sales are recognized primarily from the
sale of products across various industries and through multiple Company subsidiaries and locations around the
world. The Company recorded $732.9 million of net sales for the year ended September 30, 2020.
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 subsidiaries and locations. This included
determining the Company subsidiaries and locations at which procedures were performed.
The following are the primary procedures we performed to address this critical audit matter. We applied auditor
judgment to determine the nature and extent of procedures to be performed over net sales, including the
determination of the Company subsidiaries and locations at which those procedures were to be performed. At
each Company subsidiary and location where procedures were performed, we:
evaluated the design and tested the operating effectiveness of certain internal controls related to the
Company’s revenue recognition process at the applicable subsidiaries and locations; and
F-3
assessed the recorded net sales for a selection of transactions by comparing the amount recognized for
consistency with underlying documentation, including contracts with customers and shipping documentation,
if applicable, and the Company’s revenue recognition policies.
We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed.
Assessing the carrying value of goodwill and indefinite-lived intangible assets of certain reporting units in the Utility Solutions
Group and Aerospace & Defense segments
As discussed in Notes 1 and 4 to the consolidated financial statements, the Company reviews goodwill and other
– indefinite-lived intangible assets for impairment annually and whenever events or changes in circumstances
indicate it is more likely than not that the fair value of a reporting unit or an indefinite-lived intangible asset is
less than its carrying value. The Company uses a discounted cash flow method, using a discount rate determined
to be commensurate with the risk inherent in each reporting unit’s business model when estimating fair value. The
Company uses a relief from royalty method to estimate the fair value of indefinite-lived intangible assets.
We identified the assessment of the carrying value of goodwill and indefinite-lived intangible assets of certain
reporting units in the Utility Solutions Group and Aerospace & Defense segments as a critical audit matter. The
valuation of each reporting unit and the related indefinite-lived intangible assets involved estimation uncertainty
in the projection of future cash flows, resulting in an increased level of subjective auditor judgment. Specifically,
subjective and challenging auditor judgment was required to evaluate the forecasted revenue growth rates, gross
margins, and discount rates used in the discounted cash flows to derive the fair value of the reporting unit.
Additionally, subjective auditor judgment was required to assess the forecasted revenue growth rates, discount
rate, and royalty rate assumptions used in the valuation of indefinite-lived intangible assets. Evaluation of the
forecasted revenue growth rates and gross margins was challenging as they represented subjective determinations
of future market and economic conditions that were sensitive to variation. Specialized skills and knowledge were
required to evaluate the Company’s discount rate and royalty rate assumptions.
The following were the primary procedures we performed to address this critical audit matter. We evaluated the
design and tested the operating effectiveness of certain internal controls over the Company’s goodwill and
indefinite-lived intangible asset impairment assessment process. This included controls related to the
determination of the fair value of the reporting units and indefinite-lived intangible assets and the development of
forecasted revenue growth rates, gross margins, discount rates, and royalty rate assumptions. We evaluated the
Company’s forecasted revenue growth rates by comparing to industry and peer company forecasted revenue
growth rates. We also assessed the Company’s forecasted revenue growth rates and gross margins by comparing
them to historical experience and to underlying business strategies and growth plans available for market
participants for each reporting unit. We compared historical forecasted revenue growth rates and gross margins to
actual results in order to assess the Company’s ability to forecast. We involved valuation professionals with
specialized skills and knowledge, who assisted in:
evaluating the royalty rate assumptions by comparing them to royalty rate ranges developed using publicly
available market data for comparable company intangible assets and affordability analyses based on
profitability of the reporting unit to which the indefinite-lived intangible assets relate
evaluating the discount rates by comparing them to discount rate ranges that were independently developed
using publicly available market data for comparable entities.
/s/ KPMG LLP
We have served as the Company’s auditor since 1990.
St. Louis, Missouri
November 30, 2020
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
Pension plan termination charge
Other expenses, net
Total costs and expenses
Earnings before income tax
Income tax expense (benefit)
Net earnings from continuing operations
(Loss) earnings from discontinued operations, net of tax expense of $269, $789
and $1,060 in 2020, 2019 and 2018, respectively
Gain on sale from discontinued operations, net of tax expense of $23,232
Net earnings from discontinued operations
Net earnings
Earnings per share:
Basic:
Continuing operations
Discontinued operations
Net earnings
Diluted:
Continuing operations
Discontinued operations
Net earnings
Average common shares outstanding (in thousands):
Basic
Diluted
See accompanying Notes to Consolidated Financial Statements.
$
$
$
$
$
2020
732,915
2019
726,044
$
2018
683,650
457,418
159,490
21,812
6,730
40,600
7,122
693,172
39,743
14,278
25,465
437,998
162,734
18,492
8,092
—
851
628,167
97,877
20,388
77,489
419,713
153,065
17,262
8,798
—
3,721
602,559
81,091
(5,170 )
86,261
(601)
77,116
76,515
101,980
3,550
—
3,550
81,039
5,875
—
5,875
92,136
0.98
2.94
3.92
0.97
2.93
3.90
2.99
0.13
3.12
2.97
0.13
3.10
3.33
0.23
3.56
3.31
0.23
3.54
26,010
26,135
25,946
26,097
25,874
26,058
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
Years ended September 30,
Net earnings
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments
Pension plan termination
Amortization of prior service costs and actuarial losses
Net unrealized gain on derivative instruments
Total other comprehensive (loss) income, net of tax
2020
101,980
$
2019
81,039
3,172
40,600
(3,455 )
—
40,317
(6,474 )
—
(6,066 )
94
(12,446 )
2018
92,136
(2,254 )
—
(2,003 )
37
(4,220 )
Comprehensive income
$
142,297
68,593
87,916
See accompanying Notes to Consolidated Financial Statements.
F-5
CONSOLIDATED BALANCE SHEETS
2020
2019
(Dollars in thousands)
As of September 30,
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable, less allowance for doubtful accounts of $1,995 and $1,505 in 2020 and
$
52,560
61,808
2019, respectively
Contract assets, net
Inventories, net
Other current assets
Assets of discontinued operations - current
Total current assets
Property, plant and equipment:
Land and land improvements
Buildings and leasehold improvements
Machinery and equipment
Construction in progress
Less accumulated depreciation and amortization
Net property, plant and equipment
Intangible assets, net
Goodwill
Operating lease assets
Other assets
Assets of discontinued operations - other
144,082
96,746
136,189
17,053
—
446,630
9,657
98,636
153,718
8,393
270,404
(130,534 )
139,870
346,632
408,063
21,390
10,938
—
158,715
110,211
124,956
14,190
25,314
495,194
8,101
83,255
136,881
9,983
238,220
(110,377 )
127,843
381,605
390,256
–
4,445
67,377
Total Assets
$ 1,373,523
1,466,720
See accompanying Notes to Consolidated Financial Statements.
F-6
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
As of September 30,
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt and short-term borrowings
Accounts payable
Contract liabilities, net
Accrued salaries
Accrued other expenses
Liabilities of discontinued operations - current
Total current liabilities
Pension obligations
Deferred tax liabilities
Other liabilities
Long-term debt
Liabilities of discontinued operations - other
Total liabilities
Shareholders’ equity:
$
2020
2019
22,368
50,525
100,551
32,149
50,436
—
256,029
2,481
60,938
52,480
40,000
—
411,928
20,000
63,800
81,177
37,194
37,947
11,517
251,635
22,682
60,856
36,326
265,000
3,999
640,498
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
30,645,625 and 30,596,940 shares in 2020 and 2019, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss, net of tax
Less treasury stock, at cost (4,607,911 and 4,615,627 common shares in 2020 and 2019,
respectively)
Total shareholders’ equity
306
293,682
778,398
(3,657 )
1,068,729
306
292,408
684,741
(43,974 )
933,481
(107,134 )
961,595
(107,259 )
826,222
Total Liabilities and Shareholders’ Equity
$
1,373,523
1,466,720
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, 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
—
—
—
—
—
—
—
(8,302 )
—
(6,474 )
(6,066 )
94
—
—
—
—
—
—
81,039
(6,474 )
(6,066 )
94
(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
Comprehensive income (loss):
Net earnings
Translation adjustments, net of tax of $0
Pension termination and net unrecognized
actuarial loss, net of tax of $(1,161)
Cash dividends declared ($0.32 per share)
Stock options and stock compensation plans, net
of tax of $0
—
—
—
—
49
—
—
—
—
— 101,980
—
—
—
3,172
—
—
101,980
3,172
—
—
37,145
—
37,145
—
(8,323 )
—
—
(8,323 )
—
1,274
—
—
125
1,399
Balance, September 30, 2020
30,646 $
306 293,682 778,398
(3,657 ) (107,134 )
961,595
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:
Net earnings from discontinued operations, net of tax
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
Pension plan termination charge
Net cash provided by operating activities – continuing operations
Net cash (used) provided by discontinued operations
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
Net cash used by investing activities – continuing operations
Net cash provided (used) by investing activities – discontinued operations
Net cash provided (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 – continuing operations
Net cash used by financing activities – discontinued operations
Net cash provided (used) by financing activities
Effect of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Changes in 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.
F-9
2020
2019
2018
$
101,980
81,039
92,136
(76,515 )
41,338
5,550
23,793
—
(2,562 )
(25,650 )
40,600
108,534
(26,254 )
82,280
—
(32,108 )
(9,023 )
—
(41,131 )
182,084
140,953
12,368
(235,000 )
(8,323 )
—
(3,125 )
(234,080 )
(2,140 )
(236,220 )
3,739
(9,248 )
61,808
52,560
14,633
13,465
(11,233 )
(6,615 )
(13,275 )
19,374
7,444
23,793
5,869
37,714
$
$
$
$
(3,550 )
35,995
5,088
(6,649 )
(8,922 )
61
(2,500 )
—
100,562
4,575
105,137
(95,840 )
(24,229 )
(8,374 )
17,201
(111,242 )
(13,903 )
(125,145 )
130,000
(65,000 )
(8,302 )
(1,071 )
(3,371 )
52,256
(2,472 )
49,784
1,555
31,331
30,477
61,808
(8,722 )
(57,177 )
7,109
7,708
10,716
32,142
1,575
(6,649 )
8,076
26,084
(5,875 )
33,690
5,029
(9,552 )
—
(21,031 )
(9,951 )
—
84,446
8,813
93,259
(9,813 )
(15,243 )
(9,573 )
—
(34,629 )
(6,978 )
(41,607 )
55,000
(110,000 )
(8,278 )
—
(3,078 )
(66,356 )
(1,922 )
(68,278 )
1,587
(15,039 )
45,516
30,477
(340 )
(5,748 )
(9,440 )
1,334
7,932
(1,999 )
(1,291 )
(9,552 )
8,540
8,789
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 2020) refer to the Company’s fiscal year ending on
September 30 of that year.
The Company’s former Technical Packaging segment is reflected as discontinued operations in the Consolidated
Financial Statements and related notes for all periods presented, in accordance with accounting principles generally
accepted in the United States of America (GAAP). Prior period amounts have been reclassified to conform to the
current period presentation. See Note 2.
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 three segments
for financial reporting purposes: Aerospace & Defense, Utility Solutions Group (USG), and RF Shielding and Test
(Test).
Aerospace & Defense: 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 diagnostic testing solutions that enable electric power grid
operators to assess the integrity of high-voltage power delivery equipment, as well as decision support tools for the
renewable energy industry, primarily wind and solar.
Test: ETS-Lindgren Inc. provides its customers with the ability to identify, measure and contain magnetic,
electromagnetic and acoustic energy.
D. Use of Estimates
The preparation of financial statements in conformity with GAAP requires Management to make estimates and
assumptions that affect the reported amounts of assets and liabilities. 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 Aerospace &
Defense 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.
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.
Aerospace & Defense: Within the Aerospace & Defense segment, approximately 45% of revenues (approximately
22% 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 55% of the segment’s revenues (approximately 26% 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 Aerospace & Defense 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 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 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
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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 18% of revenues (approximately 5% 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 82% of the segment’s revenues (approximately 20% 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.
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 17 below.
Prior to Adoption of ASC 606
Prior to October 1, 2018, Management recognized revenue consistent with ASC 605. The Aerospace & Defense
segment was most impacted by the change in the timing of revenue recognition. Under ASC 605, in 2018 the
Aerospace & Defense segment recognized 85% 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% of revenues under
percentage-of-completion. The change to recording more revenue over time as costs are incurred at the Aerospace &
Defense segment is the result of the products not 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. In 2018,
the USG segment recognized 25% of revenues under percentage-of-completion and 75% of revenues 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, the Test segment recognized 75% of revenues under percentage-of-
completion and 25% of revenues when products were delivered or services performed (when title and risk of
ownership transfers).
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
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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
The Company’s lease agreements primarily relate to office space, manufacturing facilities, and machinery and
equipment. The Company determines at lease inception whether an arrangement that provides control over the use of
an asset is a lease. The Company recognizes at lease commencement a right-of-use (ROU) asset and lease liability
based on the present value of the future lease payments over the lease term. The Company has elected not to recognize
a ROU asset and lease liability for leases with terms of 12 months or less. Certain of the Company’s leases include
options to extend the term of the lease for up to 20 years. When it is reasonably certain that the Company will exercise
the option, Management includes the impact of the option in the lease term for purposes of determining total future
lease payments. As most of the Company’s lease agreements do not explicitly state the discount rate implicit in the
lease, Management uses the Company’s incremental borrowing rate on the commencement date to calculate the
present value of future payments based on the tenor of each arrangement.
K. Goodwill and Other Long-Lived Intangible 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 be less than fair value.
If the Company determines that the carrying value of the long-lived asset or reporting unit is less than fair value, 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 of the Company’s reporting units 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. Fair value for trade names is determined using a generally accepted valuation method based
on an income approach called the relief from royalty method. During 2020, the revenue softness in the Company’s
Aerospace & Defense segment as well as its USG segment due to the COVID-19 pandemic led management to
perform a quantitative impairment analysis, which included a detailed calculation of the fair value of its trade names
and reporting units related to certain reporting units within these segments. The results of these impairment analyses
indicated that the fair values of the trade names and reporting units are not less than their carrying values. The
Company’s estimates of discounted cash flows to derive the fair value were measured in accordance with ASC 350,
Intangibles – Goodwill and Other. The Company is using estimates of discounted cash flows that 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 4 regarding goodwill and other intangible assets activity.
L. Capitalized Software
The costs incurred for the development of computer software that will be sold, leased, or otherwise marketed are
charged to expense when incurred as research and development until technological feasibility has been established for
the product. Technological feasibility is typically established upon completion of a detailed program design. Costs
incurred after this point are capitalized on a project-by-project basis. Capitalized costs consist of internal and external
development costs. Upon general release of the product to customers, the Company ceases capitalization and begins
amortization, which 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.
F-15
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 $13.3 million,
$12.1 million and $10.9 million for 2020, 2019 and 2018, respectively. These expense amounts exclude certain
engineering costs primarily associated with product line extensions, modifications and maintenance, which amounted
to approximately $16.1 million, $15.8 million and $13.1 million for 2020, 2019 and 2018, respectively.
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
2020
26,010
125
26,135
2019
25,946
151
26,097
2018
25,874
184
26,058
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 $(3.7) million at September 30, 2020 consisted of currency translation
adjustments. Accumulated other comprehensive loss of $(44.0) million at September 30, 2019 consisted of $(37.0)
million related to the pension net actuarial loss; and $(7.0) million related to currency translation adjustments.
F-16
S. 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.
T. Fair Value Measurements
Fair value is defined as the price at which an asset could be exchanged in a current transaction between
knowledgeable, willing parties or the amount that would be paid to transfer a liability to a new obligor, not the
amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable
market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not
available, valuation models are applied. These valuation techniques involve some level of Management estimation
and judgment, the degree of which is dependent on the price transparency for the instruments or market and the
instruments’ complexity.
The accounting guidance establishes a three-level hierarchy for disclosure of fair value measurements, based upon the
transparency of inputs to the valuation of an asset or liability as of the measurement date, as follows:
Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in
active markets.
Level 2 –Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active
markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the
full term of the financial instrument.
Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
Financial Assets and Liabilities
The Company has estimated the fair value of its financial instruments as of September 30, 2020 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
2020.
F-17
U. New Accounting Standards
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.
Effective October 1, 2019, the Company adopted these updates using the optional transition method. 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. The standard
also provided several optional practical expedients for use in transition. The Company elected to use what the FASB
has deemed the “package of practical expedients,” which allowed the Company not to reassess previous conclusions
regarding lease identification, lease classification and the accounting treatment for initial direct costs. These updates
also expand the required quantitative and qualitative disclosures surrounding leases. The adoption resulted in the
addition of “right of use” assets of approximately $20 million and lease liabilities of approximately $23 million in
the Consolidated Balance Sheet, with no significant change to the Consolidated Statements of Operations or Cash
Flows. Refer to Note 16 for further discussion.
2. Technical Packaging Divestiture
On December 31, 2019, pursuant to an Equity Purchase Agreement entered into on November 15, 2019, the Company
completed the sale of its Technical Packaging business segment, consisting of the Company's wholly-owned
subsidiaries Thermoform Engineered Quality LLC, Plastique Ltd. and Plastique sp. z o.o. (the “Technical Packaging
Business”), to Sonoco Plastics, Inc. and Sonoco Holdings, Inc. (“Buyers”), two wholly-owned subsidiaries of Sonoco
Products Company (NYSE:SON). The companies within this segment provide innovative solutions to the medical and
commercial markets for thermoformed packages and specialty products using a wide variety of thin gauge plastics and
pulp. Results of operations, financial position and cash flows for the Technical Packaging business are reflected as
discontinued operations in the Consolidated Financial Statements and related notes for all periods presented.
Net sales from the Technical Packaging business were $16.5 million, $86.9 million and $87.9 million in 2020, 2019
and 2018, respectively. Pretax (loss) earnings from the Technical Packaging business was $(0.3) million, $4.3 million
and $6.9 million in 2020, 2019 and 2018, respectively. The Company received net proceeds from the sale of
approximately $184 million and recorded a $76.5 million after-tax gain on the sale in 2020. The Company finalized
the working capital adjustment and paid $0.2 million to the buyer during the third quarter of 2020.
The major classes of assets and liabilities of the Technical Packaging business included in the Consolidated Balance
Sheet at September 30, 2019 are shown below (in millions).
F-18
Assets:
Accounts receivable, net
Contract assets, net
Inventories
Other current assets
Current assets
Property, plant & equipment, net
Intangible assets, net
Goodwill
Other assets
Total assets
Liabilities:
Accounts payable
Accrued expenses and other current liabilities
Current liabilities
Other liabilities
Total liabilities
3. Acquisitions
2019
September 30, 2019
$
$
$
$
15.7
5.1
3.9
0.6
25.3
33.6
11.4
19.0
3.4
92.7
7.6
3.9
11.5
4.0
15.5
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 Aerospace & Defense segment. Based on the 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 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.
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 Globe acquisition mentioned above is deductible for U.S. Federal and state income tax
purposes. The goodwill recorded for the Manta acquisition is deductible for Canadian income tax purposes.
F-19
4. Goodwill and Other Intangible Assets
Included on the Company’s Consolidated Balance Sheets at September 30, 2020 and 2019 are the following intangible
assets gross carrying amounts and accumulated amortization:
(Dollars in thousands)
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
2020
408,063
2019
390,256
$
$
$
$
$
$
$
$
$
2,092
858
1,234
84,888
57,302
27,586
1,945
748
1,197
78,962
48,530
30,432
227,178
67,643
159,535
227,225
55,326
171,899
5,156
3,260
1,896
5,441
2,645
2,796
$
156,381
175,281
The Company performed its annual evaluation of goodwill and intangible assets for impairment during the fourth
quarter of 2020 and concluded no impairment existed at September 30, 2020 and there are no accumulated impairment
losses as of September 30, 2020.
The changes in the carrying amount of goodwill attributable to each business segment for 2020 and 2019 are as
follows:
(Dollars in millions)
Balance as of September 30, 2018
Acquisition activity and other
Balance as of September 30, 2019
Out-of-period adjustment
Foreign currency translation and other
Balance as of September 30, 2020
Aerospace &
Defense
73.7
28.5
102.2
–
(0.1 )
102.1
$
Test
34.1
–
34.1
–
–
34.1
USG
254.1
(0.1 )
254.0
18.0
(0.1 )
271.9
Total
361.9
28.4
390.3
18.0
(0.2 )
408.1
As of September 30, 2020, the Company reclassified $18.0 million from Morgan Schaffer’s tradename to goodwill to
correct a misclassification that originated in the original accounting for the acquisition in fiscal 2017. Management has
determined that the effect of this misclassification was not material to the current or any prior periods and it had no
impact on the Company’s total assets, results of operations or cash flows for any period.
Amortization expense related to intangible assets with determinable lives was $21.8 million, $18.5 million and $17.3
million in 2020, 2019 and 2018, 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 2021 through 2025 is estimated at approximately $21 million per year.
F-20
5. Accounts Receivable
Accounts receivable, net of the allowance for doubtful accounts, from continuing operations consist of the following
at September 30, 2020 and 2019:
(Dollars in thousands)
Commercial
U.S. Government and prime contractors
Total
6.
Inventories, Net
2020
121,924
22,158
144,082
$
$
2019
137,553
21,162
158,715
Inventories, net, from continuing operations consist of the following at September 30, 2020 and 2019:
(Dollars in thousands)
Finished goods
Work in process
Raw materials
Total
7. Related Parties
2020
28,471
30,183
77,535
136,189
$
$
2019
23,550
26,407
74,999
124,956
One of the Company’s directors is a former officer at a customer of the Company’s subsidiary Doble. Doble sells
products, rents equipment and provides testing services to the customer in the ordinary course of Doble’s business.
The total amount of these sales were approximately $2.8 million, $3.3 million and $2.1 million during fiscal 2020,
2019 and 2018, 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.
8.
Income Tax Expense
Total income tax expense (benefit) for the years ended September 30, 2020, 2019 and 2018 was allocated to income
tax expense as follows:
(Dollars in thousands)
Income tax expense (benefit) from continuing operations
Income tax expense from discontinued operations
Total income tax expense (benefit)
2020
14,278
23,501
37,779
2019
20,388
789
21,177
$
$
2018
(5,170 )
1,060
(4,110 )
The components of income from continuing operations before income taxes for 2020, 2019 and 2018 consisted of the
following:
(Dollars in thousands)
United States
Foreign
Total income before income taxes
2020
27,288
12,455
39,743
$
$
2019
87,150
10,727
97,877
2018
74,028
7,063
81,091
F-21
The principal components of income tax expense (benefit) from continuing operations for 2020, 2019 and 2018
consist of:
(Dollars in thousands)
Federal:
Current
Deferred
State and local:
Current
Deferred
Foreign:
Current
Deferred
Total
2020
2019
2018
$
10,982
1,507
2,042
(905)
2,875
(2,223)
14,278
$
13,888
250
3,039
98
2,439
674
20,388
7,663
(22,329 )
1,885
2,899
2,208
2,504
(5,170 )
The actual income tax expense (benefit) from continuing operations for 2020, 2019 and 2018 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
Pension plan termination charge
Other, net
Effective income tax rate
2020
2019
2018
21.0 %
2.3
(1.1 )
(3.4 )
-
-
1.5
(6.3 )
0.4
-
-
-
21.4
0.1
35.9 %
21.0 %
3.2
0.6
(0.8 )
-
(0.1 )
0.3
(2.4 )
(0.6 )
(0.3 )
(0.1 )
-
-
-
20.8 %
24.5 %
2.9
0.8
(1.6 )
(1.1 )
(0.1 )
(0.1 )
3.0
-
(39.3 )
1.6
3.0
-
-
(6.4 )%
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at
September 30, 2020 and 2019 are presented below:
F-22
(Dollars in thousands)
Deferred tax assets:
Inventories
Pension and other postretirement benefits
Timing differences related to revenue recognition
Lease liabilities
Net operating and capital loss carryforwards — domestic
Net operating loss carryforward — foreign
Other compensation-related costs and other cost accruals
State credit carryforward
Total deferred tax assets
Deferred tax liabilities:
Timing differences related to revenue recognition
ROU assets
Goodwill
Acquisition assets
Depreciation, software amortization
Net deferred tax liabilities before valuation allowance
Less valuation allowance
Net deferred tax liabilities
$
2020
4,998
842
4,722
5,220
563
3,678
8,953
2,366
31,342
-
(5,220 )
(7,878 )
(52,682 )
(21,283 )
(55,721 )
(1,932 )
(57,653 )
$
2019
4,800
5,533
-
-
602
3,766
7,764
1,914
24,379
(1,805 )
-
(1,450 )
(58,547 )
(18,288 )
(55,711 )
(4,504 )
(60,215 )
The Company has a foreign net operating loss (NOL) carryforward of $14.0 million at September 30, 2020, which
reflects tax loss carryforwards in Germany, South Africa, Canada, India and the United Kingdom. Approximately
$13.8 million of the tax loss carryforwards have no expiration date while the remaining $0.2 million will expire
between 2028 and 2038. The Company has deferred tax assets related to state NOL carryforwards of $0.6 million at
September 30, 2020 which expire between 2025 and 2040. The Company also has net state research and other credit
carryforwards of $2.4 million of which $1.7 million expires between 2023 and 2035. The remaining $0.7 million does
not have an expiration date.
The valuation allowance for deferred tax assets as of September 30, 2020 and 2019 was $1.9 million and $4.5
million, respectively. The net change in the total valuation allowance for each of the years ended September 30,
2020 and 2019 was a decrease of $2.6 million and a decrease of $2.6 million, respectively. The Company has
established a valuation allowance against state credit carryforwards of $0.6 million and $0.4 million at September
30, 2020 and 2019, respectively. In addition, the Company has established a valuation allowance against state NOL
carryforwards that are not expected to be realized in future periods of $0.5 million and $0.6 million at September 30,
2020 and 2019, respectively. Lastly, the Company has established a valuation allowance against certain NOL
carryforwards in foreign jurisdictions which may not be realized in future periods of $0.8 million and $3.6 million at
September 30, 2020 and 2019, 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 or 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.
9. Debt
Debt consists of the following at September 30, 2020 and 2019:
(Dollars in thousands)
Revolving credit facility, including current portion
Current portion of long-term debt and short-term borrowings
Total long-term debt, less current portion
2020
62,368
(22,368 )
40,000
$
$
2019
285,000
(20,000 )
265,000
The Credit Facility includes a $500 million revolving line of credit as well as provisions allowing for an increase of
the commitment amount by an additional $250 million, if necessary, with the consent of the lenders. The bank
F-23
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,
2020, the Company was in compliance with all covenants.
At September 30, 2020, the Company had approximately $430 million available to borrow under the Credit Facility,
plus the $250 million increase option subject to the lenders’ consent, in addition to $52.6 million cash on hand. The
Company classified $20 million as the current portion of long-term debt as of September 30, 2020, 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. In addition, the Company had $2.4 million of short-term
borrowings at its foreign locations outstanding as of September 30, 2020.
During 2020 and 2019, the maximum aggregate short-term borrowings at any month-end were $281 million and $308
million, respectively, and the average aggregate short-term borrowings outstanding based on month-end balances were
$175.6 million and $236.4 million, respectively. The weighted average interest rates were 3.20%, 3.21% and 3.03%
for 2020, 2019 and 2018, respectively. As of September 30, 2020, the interest rate on the Company’s debt was 1.09%.
The letters of credit issued and outstanding under the Credit Facility totaled $9.9 million and $8.2 million at
September 30, 2020 and 2019, respectively.
10. Capital Stock
The 30,645,625 and 30,596,940 common shares as presented in the accompanying Consolidated Balance Sheets at
September 30, 2020 and 2019 represent the actual number of shares issued at the respective dates. The Company held
4,607,911 and 4,615,627 common shares in treasury at September 30, 2020 and 2019, 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 2020, 2019 or
2018. At September 30, 2020, approximately $50.4 million remained available for repurchases under the program.
11. 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, 2020, the
Company’s equity compensation plans had a total of 782,412 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
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,
$4.0 million and $3.9 million for 2020, 2019 and 2018, respectively.
F-24
The following summary presents information regarding outstanding PARS awards as of the specified dates, and
changes during the specified periods:
FY 2020
FY 2019
FY 2018
Estimated
Weighted
Avg. Price
59.72
74.80
50.51
60.48
66.55
Shares
281,004 $
45,723
(89,822 )
(16,605 )
220,300 $
Estimated
Weighted
Avg. Price
47.23
74.77
37.00
45.20
59.72
Shares
315,544 $
84,862
(113,402 )
(6,000 )
281,004 $
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 $
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 $1.3 million, $1.1 million and $1.1 million for 2020, 2019 and 2018, 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 $5.6 million, $5.1 million and $5.0 million for 2020, 2019 and 2018, respectively.
The total income tax benefit recognized in results of operations for share-based compensation arrangements was
$1.2 million, $1.1 million and $1.3 million for 2020, 2019 and 2018, respectively. As of September 30, 2020, there
was $8.2 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.
12. Retirement and Other Benefit Plans
Formerly, substantially all domestic employees were covered by a defined benefit pension plan (the Plan) maintained
by the Company. The Plan was frozen in 2003 and no additional benefits have been accrued since that date. On
November 14, 2019, the Company’s Board of Directors approved a resolution to terminate the Plan effective as of
February 29, 2020. In connection with the termination, the Company contributed $25.7 million of cash to the Plan
during the fourth quarter of 2020, settled approximately $32.4 million of Plan liabilities during the fourth quarter of
2020 through lump-sum payments from existing plan assets to eligible participants who elected to receive them; and
recorded approximately $40.6 million of charges associated with these settlements. During 2020, the Company settled
approximately $69.1 million of Plan liabilities by entering into an agreement to purchase annuities from
Massachusetts Mutual Life Insurance Company (MassMutual). This agreement covered active and former employees
and their beneficiaries, with MassMutual assuming the future annuity payments for these individuals.
Substantially all domestic employees are covered by a defined contribution plan maintained by the Company. In
addition, the Company offers unfunded post-retirement pre-Medicare health insurance benefits to a small number of
eligible retirees and employees. The Company formerly provided unfunded post-retirement life insurance to
qualifying retired employees who retired before 2005, but ceased providing this coverage on July 31, 2020. The
Company currently provides unfunded Medicare supplement coverage to a small number of retired employees, but
will cease providing this coverage on December 31, 2020.
The Company used a measurement date of September 30 for its pension and other postretirement benefit plans. The
Company had an accrued benefit liability of $0.2 million and $0.6 million at September 30, 2020 and 2019,
respectively, related to its other postretirement benefit obligations. All other information related to its postretirement
benefit plans is not considered material to the Company’s results of operations or financial condition.
The following tables provide a reconciliation of the changes in the pension plans and fair value of assets over the two-
year period ended September 30, 2020, and a statement of the funded status as of September 30, 2020 and 2019:
F-25
(Dollars in millions)
Reconciliation of benefit obligation
Net benefit obligation at beginning of year
Interest cost
Actuarial loss
Gross benefits paid
Settlements
Net benefit obligation at end of year
(Dollars in millions)
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Gross benefits paid
Settlements
Fair value of plan assets at end of year
(Dollars in millions)
Funded Status
Funded status at end of year
Accrued benefit cost
$
$
$
$
$
Amounts recognized in the Balance Sheet consist of:
Current liability
Noncurrent liability
Accumulated other comprehensive loss (before tax effect)
Amounts recognized in accumulated other comprehensive loss consist of:
Net actuarial loss
Accumulated other comprehensive loss (before tax effect)
$
2020
100.1
3.0
6.9
(4.8 )
(102.4)
2.8
2020
77.2
3.6
26.4
(4.8 )
(102.4)
–
2020
(2.8 )
(2.8 )
(0.3 )
(2.5 )
0.7
0.7
0.7
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
The following table provides the components of net periodic benefit cost for the plans for 2020, 2019 and 2018:
(Dollars in millions)
Service cost
Interest cost
Expected return on plan assets
Settlements
Net actuarial loss
Net periodic benefit cost
Defined contribution plans
Total
$
$
2020
–
3.0
(4.2 )
53.6
2.8
55.2
7.4
62.6
2019
–
3.7
(4.4 )
–
2.1
1.4
6.8
8.2
2018
–
3.4
(3.8 )
–
2.3
1.9
6.6
8.5
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
Expected Cash Flows
Information about the expected cash flows for the other postretirement benefit plans follows:
(Dollars in millions)
Expected Benefit Payments:
2021
2022
2023
2024
2025
2026-2030
Other
Benefits
0.2
0.2
0.3
0.2
0.2
0.9
$
$
13. 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 $150 million to hedge its
exposure to variability in future LIBOR-based interest payments on variable rate debt. The interest rate swaps
entered into during 2018 were not designated as cash flow hedges and therefore the gain or loss on the derivative is
reflected in earnings each period. The final interest rate swap was settled during September 2020; therefore there are
no outstanding interest rate swaps as of September 30, 2020.
The Company’s Canadian subsidiary Morgan Schaffer enters into foreign exchange contracts to manage foreign
currency risk as a portion of their revenue is denominated in U.S. dollars. The Company expects hedging gains or
losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately
recognized may differ for open positions, which remain subject to ongoing market price fluctuations until settlement.
All derivative instruments are reported in either accrued expenses or other assets on the balance sheet at fair value.
For derivative instruments designated as cash flow hedges, the gain or loss on the derivative is deferred in
accumulated other comprehensive income until recognized in earnings with the underlying hedged item.
The following is a summary of the notional transaction amounts and fair values for the Company’s outstanding
derivative financial instruments as of September 30, 2020.
(In thousands)
Forward contracts
Fair Value of Financial Instruments
Notional Amount
(Currency)
4,250 USD
Fair Value
(US$)
(6 )
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, 2020:
(In thousands)
Asset:
Forward contracts
Level 1
Level 2
Level 3
Total
$
–
(6 )
–
(6 )
Valuation was based on third party evidence of similarly priced derivative instruments. There are no master netting
arrangements with financial parties.
14. Business Segment Information
The Company is organized based on the products and services it offers and classifies its continuing business
operations in three reportable segments for financial reporting purposes: Aerospace & Defense (formerly called
Filtration/Fluid Flow), Utility Solutions Group (USG) and RF Shielding and Test (Test). The former Technical
Packaging segment was divested in December 2019 and has been reflected as discontinued operations for 2020.
The Aerospace & Defense 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).The companies within this segment
F-27
primarily design and manufacture specialty filtration and naval products, including hydraulic filter elements and fluid
control devices used in aerospace and defense applications, unique filter mechanisms used in micro-propulsion
devices for satellites and 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.
The USG segment’s operations consist of Doble Engineering Company and related subsidiaries including Morgan
Schaffer (collectively, Doble), and NRG Systems, Inc. (NRG). Doble is an industry leader in the development,
manufacture and delivery of diagnostic testing and data management solutions that enable electric power grid
operators to assess the integrity of high-voltage power delivery equipment. NRG designs and manufactures decision
support tools for the renewable energy industry, primarily wind and solar.
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.
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. The tables below are presented on
the basis of continuing operations and exclude discontinued operations.
Net Sales
(Dollars in millions)
Year ended September 30,
Aerospace & Defense
USG
Test
Consolidated totals
$
$
2020
354.3
191.7
186.9
732.9
2019
325.7
211.9
188.4
726.0
2018
286.8
214.0
182.9
683.7
One customer exceeded 10% of sales in 2020 and no customer exceeded 10% of sales in 2019.
EBIT
(Dollars in millions)
Year ended September 30,
Aerospace & Defense
USG
Test
Reconciliation to consolidated totals (Corporate)
Consolidated EBIT
Less: interest expense
Earnings before income tax
$
$
2020
73.2
24.4
27.2
(78.3)
46.5
(6.7)
39.8
2019
70.1
52.2
25.6
(41.9 )
106.0
(8.1 )
97.9
2018
58.7
43.2
23.8
(35.8 )
89.9
(8.8 )
81.1
F-28
Identifiable Assets
(Dollars in millions)
Year ended September 30,
Aerospace & Defense
USG
Test
Corporate – goodwill
Corporate – other assets
Assets from discontinued operations
Consolidated totals
$
$
2020
279.5
144.8
153.0
408.1
388.1
–
1,373.5
2019
260.3
146.3
154.2
390.3
422.9
92.7
1,466.7
Corporate other assets consist primarily of deferred taxes, acquired intangible assets and cash balances.
Capital Expenditures
(Dollars in millions)
Year ended September 30,
Aerospace & Defense
USG
Test
Corporate
Consolidated totals
2020
2019
$
$
15.9
12.4
3.6
0.2
32.1
11.7
8.5
4.0
–
24.2
In addition to the above amounts, the Company incurred expenditures for capitalized software of $9.0 million,
$8.4 million and $9.5 million in 2020, 2019 and 2018, respectively.
Depreciation and Amortization
(Dollars in millions)
Year ended September 30,
Aerospace & Defense
USG
Test
Corporate
Consolidated totals
$
$
2020
9.4
14.4
5.0
12.5
41.3
2019
8.3
11.3
5.1
11.3
36.0
2018
7.0
5.2
3.0
–
15.2
2018
7.6
11.0
4.5
10.6
33.7
Depreciation expense of property, plant and equipment was $19.5 million, $16.5 million and $15.4 million for 2020,
2019 and 2018, respectively.
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
Mexico
Other
Consolidated totals
2018
495.8
92.6
41.3
30.2
9.4
14.4
683.7
$
$
$
$
2020
531.9
96.3
51.3
31.7
10.3
11.4
732.9
2020
131.5
3.1
5.3
139.9
2019
537.2
86.2
45.0
33.0
11.7
12.9
726.0
2019
120.7
1.8
5.3
127.8
F-29
Net sales are attributed to countries based on location of customer. Long-lived assets are attributed to countries based
on location of the asset.
15. Commitments and Contingencies
At September 30, 2020, the Company had $9.9 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.
16. Leases
As described in Note 3, effective October 1, 2019, the Company adopted ASC 842, Leases. The Company determines
at lease inception whether an arrangement that provides control over the use of an asset is a lease. The Company
recognizes at lease commencement a right-of-use (ROU) asset and lease liability based on the present value of the
future lease payments over the lease term. The Company has elected not to recognize a ROU asset and lease liability
for leases with terms of 12 months or less. Certain of the Company’s leases include options to extend the term of the
lease for up to 20 years. When it is reasonably certain that the Company will exercise the option, Management
includes the impact of the option in the lease term for purposes of determining total future lease payments. As most of
the Company’s lease agreements do not explicitly state the discount rate implicit in the lease, Management uses the
Company’s incremental borrowing rate on the commencement date to calculate the present value of future payments
based on the tenor of each arrangement.
The Company’s leases for real estate commonly include escalating payments. These variable lease payments are
included in the calculation of the ROU asset and lease liability. In addition to the present value of the future lease
payments, the calculation of the ROU asset also includes any deferred rent, lease pre-payments and initial direct costs
of obtaining the lease.
In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other
similar services, which are considered non-lease components for accounting purposes. Non-lease components are
excluded from our ROU assets and lease liabilities and expensed as incurred.
The Company’s leases are for office space, manufacturing facilities, and machinery and equipment.
The components of lease costs are shown below:
(Dollars in thousands)
Finance lease cost:
Amortization of right-of-use assets
Interest on lease liabilities
Operating lease cost
Total lease cost
Year Ended
September 30,
2020
$
$
2,056
971
5,284
8,311
F-30
Additional information related to leases is shown below:
(Dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Operating cash flows from finance leases
Financing cash flows from finance leases
Year Ended
September 30,
2020
$
5,223
971
1,547
Right-of-use assets obtained in exchange for operating lease liabilities
$
26,244
Weighted-average remaining lease term:
Operating leases
Finance leases
Weighted-average discount rate:
Operating leases
Finance leases
6.00 years
12.53 years
3.09 %
4.30 %
The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and
the related ROU assets, presented on our Consolidated Balance Sheet on September 30, 2020:
(Dollars in thousands)
Years Ending September 30:
2021
2022
2023
2024
2025 and thereafter
Total minimum lease payments
Less: amounts representing interest
Present value of net minimum lease payments
Less: current portion of lease obligations
Non-current portion of lease obligations
Operating
Leases
Finance
Leases
$
$
5,614
4,985
3,984
2,438
6,984
24,005
2,211
21,794
5,009
16,785
2,930
3,011
3,094
3,177
28,323
40,535
10,270
30,265
1,937
28,328
ROU assets
$
21,390
26,164
Operating and finance lease liabilities are included in the Consolidated Balance Sheet in accrued other expenses
(current portion) and other liabilities (long-term portion). Operating lease ROU assets are included as a caption on the
Consolidated Balance Sheet and finance lease ROU assets are included in Property, plant and equipment on the
Consolidated Balance sheets.
As the Company has not restated prior-year information for the adoption of ASC 842, the following presents the
Company’s future minimum lease payments for operating and capital leases under ASC 840 for continuing operations
as of September 30, 2019:
(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
Less: Current portion of lease obligations
Non-current portion of lease obligations
* Not applicable for operating leases
F-31
Operating
Leases
Finance
Leases
$
$
5,574
4,558
3,950
3,270
8,443
25,795
*
*
*
*
2,518
2,930
3,012
3,094
31,499
43,053
11,241
31,812
1,832
29,980
17. Revenues
(a) Disaggregation of Revenues
Our revenues by customer type, geographic location, and revenue recognition method for the year ended
September 30, 2020 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, 2020
(In thousands)
Customer type:
Aerospace
& Defense
USG
Test
Total
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 169,484 $ 184,906 $ 158,420 $
Government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
184,836
28,472
6,797
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354,320 $ 191,703 $ 186,892 $
Geographic location:
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 305,155 $ 134,601 $
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57,102
49,165
92,105 $
94,787
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354,320 $ 191,703 $ 186,892 $
Revenue recognition method:
Point in time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 160,402 $ 144,192 $
Over time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
193,918
47,511
33,482 $
153,410
Total revenues. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354,320 $ 191,703 $ 186,892 $
(b) Remaining Performance Obligations
512,810
220,105
732,915
531,861
201,054
732,915
338,076
394,839
732,915
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, 2020, we had $517.4 million in remaining
performance obligations of which we expect to recognize revenues of 73% 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, 2020, contract assets and liabilities totaled $96.7 million and $100.6 million,
respectively. Upon adoption of ASC 606 on October 1, 2018, contract assets and liabilities related to our contracts
with customers were $87 million and $51 million, respectively. During 2020, we recognized approximately $54
million in revenues that were included in the contract liabilities balance at the adoption date.
F-32
18. Quarterly Financial Information (Unaudited)
(Dollars in thousands, except per share amounts)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
2020
Net sales
Net earnings (loss) from continuing operations
Net earnings from discontinued operations
Net earnings (loss)
Basic earnings per share:
Net earnings (loss) from continuing operations
Net earnings from discontinued operations
Net earnings (loss)
Diluted earnings per share:
Net earnings (loss) from continuing operations
Net earnings from discontinued operations
Net earnings (loss)
Dividends declared per common share
Common stock price per share:
High
Low
2019
Net sales
Net earnings from continuing operations
Net (loss) earnings from discontinued operations
Net earnings
Basic earnings per share:
Net earnings from continuing operations
Net earnings from discontinued operations
Net earnings
Diluted earnings per share:
Net earnings from continuing operations
Net earnings from discontinued operations
Net earnings
Dividends declared per common share
Common stock price per share:
High
Low
See Note 2 for discussion of divestiture activity.
$
$
$
$
$
$
$
$
$
$
$
171,728
10,764
76,013
86,777
180,492
17,822
–
17,822
172,665
18,687
–
18,687
208,030
(21,808 )
502
(21,306 )
0.41
2.93
3.34
0.41
2.91
3.32
0.69
–
0.69
0.68
–
0.68
0.72
–
0.72
0.72
–
0.72
0.08
0.08
0.08
(0.84 )
0.02
(0.82 )
(0.83 )
0.02
(0.81 )
0.08
93.21
74.16
107.10
62.64
94.24
68.09
95.60
78.30
163,365
17,350
(33 )
17,317
171,243
17,822
975
18,797
178,259
19,045
1,022
20,067
213,177
23,272
1,586
24,858
0.67
–
0.67
0.66
–
0.66
0.69
0.04
0.73
0.68
0.04
0.72
0.73
0.04
0.77
0.73
0.04
0.77
0.08
0.08
0.08
0.90
0.06
0.96
0.89
0.06
0.95
0.08
71.47
59.00
71.29
62.91
82.70
67.43
85.86
73.04
F-33
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 30, 2020
/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-34
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,
2020, 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, 2020, based on these criteria.
Our internal control over financial reporting as of September 30, 2020, has been audited by KPMG LLP, an
independent registered public accounting firm, as stated in its report which is included herein.
November 30, 2020
/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
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, 2020, 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, 2020, 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, 2020 and 2019, the related
consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the
years in the three-year period ended September 30, 2020, and the related notes (collectively, the consolidated financial
statements), and our report dated November 30, 2020 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.
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.
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 30, 2020
F-36
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
21
23
31.1
31.2
32
101.INS
101.SCH
101.CAL
101.LAB
101.PRE
101.DEF
*
**
**
**
**
**
**
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)
-----------
* 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.
PTI Technologies Inc.
VACCO Industries
Westland Technologies, Inc.
Texas
Texas
Quebec, Canada
Vermont
Delaware
California
California
Same
Same
Same
Same
Same
Same
Same
Same; Also Westland Machine Shop
Consent of Independent Registered Public Accounting Firm
EXHIBIT 23
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 30, 2020, with respect to the consolidated balance sheets of ESCO Technologies Inc. and subsidiaries as of
September 30, 2020 and 2019, the related consolidated statements of operations, comprehensive income,
shareholders’ equity, and cash flows for each of the years in the three-year period ended September 30, 2020, and the
related notes, and the effectiveness of internal control over financial reporting as of September 30, 2020, which
reports appear in the September 30, 2020 annual report on Form 10-K of the Company.
Our report refers to a change in accounting method for leases due to the adoption of Accounting Standards Update No.
2016-02 – Leases (ASC Topic 842) as of October 1, 2019 and method of accounting for revenue contracts with
customers due to the adoption of Accounting Standards Update No. 2014-09 – Revenue with Contracts with
Customers (ASC Topic 606) as of October 1, 2018.
/s/ KPMG LLP
St. Louis, Missouri
November 30, 2020
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 30, 2020
/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 30, 2020
/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, 2020 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 30, 2020
/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
[This page has been intentionally left blank]
Shareholders’ Summary
Management and Board of Directors
Shareholders’ Annual Meeting
The Annual Meeting of Shareholders of ESCO Technologies
Inc. will be held at 9:30 a.m. Central Time on Friday,
February 5, 2021 at the company’s headquarters located
at 9900A Clayton Road, St. Louis County, MO 63124.
You may access this Annual Report as well as the Notice
of the meeting and the Proxy Statement on the Company’s
Annual Meeting website at 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 7, 2020 and February 12, 2019,
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, 2020 and September 30, 2019.
10-K Report
The Company’s 2020 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 1,817 holders of record of
shares of common stock at November 2, 2020.
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
Operating Executives
Mike Alfred
President
Crissair, Inc.
Bruce Butler
President
ETS-Lindgren Inc.
Sam Chapetta
Aerospace & Defense
Group President
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
Rowland Ellis
President
PTI Technologies Inc.
May Scally
Chief Operating Officer
Morgan Schaffer Ltd.
John Grizzard
President
Westland
Technologies, Inc.
Bryan Sayler
Utility Solutions Group
President & President
Doble Engineering
Company
Tom Shaw
President
Mayday
Manufacturing Co.
Matt Stafford
President
VACCO Industries
Evan Vogel
President
NRG Systems, Inc.
Leon J. Olivier 4
Retired Executive
Vice President
Eversource Energy
Larry W. Solley 3,4
Retired Executive
Vice President
Emerson Electric Co.
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
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.
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ESCO Technologies Inc.
9900A Clayton Road • St. Louis, MO 63124
www.escotechnologies.com