COVID-19 Related Risks
The continuation of the COVID-19 pandemic and its widespread effects on the United States and global economiesimpacts of known or unknown COVID-19 variants may have a material adverse effect on our business which could continue for an unknown period of time.
The effects of the COVID-19 global pandemic has significantly increased ourcontinue to create or increase the economic, demand and operational uncertainty. The rapid worldwide spreaduncertainties 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.our business. 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 and its variants 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.
The facilities of our suppliers and customers have experienced, and may continue to experience, disruptions in manufacturing and supply arrangements due to the loss or disruption of critical manufacturing and supply elements, such as raw materials or other finished product components, transportation, workforce or other manufacturing and distribution capability. We may also experience failure of third parties on which we rely, including our suppliers, distributors and contractors, to meet their obligations to us, or significant restrictions in their ability to do so.
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 and its variants, the longevity of COVID-19 and its variants, and the actions taken to contain its impact.their impacts.
RisksPART II
Our salesIssuer Purchases of products to the Government depend upon continued Government funding.Equity Securities
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.16
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
17
Management’s Discussion and Analysis of ContentsFinancial Condition and Results of Operations
The end of customer product life cycles could negatively affect our Aerospace & Defense segment’s results.17
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
8
negatively affect our business; several of our subsidiaries are basedQuantitative and Qualitative Disclosures about Market Risk
25
25
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.25
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.
9
In addition, our reliance on sole or limited sources of supply of raw materialsControls and components in each of our segments could adversely affect our business, as described in the preceding Risk Factor. Weather-created disruptions in supply, in addition to affecting costs, could impact our ability to procure an adequate supply of these raw materials and components, and delay or prevent deliveries of products to our customers.Procedures
Our inability to timely develop new products could reduce our future sales.26
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
10
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.Other Information
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.26
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
26
Directors, Executive Officers and Corporate StructureGovernance
27
Changes in testing standards could adversely impact our Test11.
27
Security Ownership of Certain Beneficial Owners and USG segments’ sales.
A significant portion of the business of our USGManagement and Test segments involves sales to technology customers who need to have a third party verify that their products meet specific internationalRelated Stockholder Matters
27
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, assetsRelated Transactions, 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 pricesDirector Independence
27
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
11
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.27
Our decentralized organizational structure presents certain risks.PART IV
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 ConsolidatedExhibits, Financial Statements.Statement Schedules
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i
(M=Manufacturing,
Approx.
Owned / Leased (with
E=Engineering, O=Office,
Operating
Location
Sq. Ft.
Expiration Date)
W=Warehouse)
Segment
Modesto, CA
181,500
Leased (9/30/2023)
M, E, O,W
Aerospace & Defense
Denton, TX
145,000
Leased (9/30/2029, plus options)
M, E, O, W
Aerospace & Defense
Cedar Park, TX
130,000
Owned
M, E, O, W
Test
Oxnard, CA
127,400
Owned
M, E, O, W
Aerospace & Defense
South El Monte, CA
100,100
Owned
M, E, O, W
Aerospace & Defense
Durant, OK
100,000
Owned
M, O, W
Test
Valencia, CA
79,300
Owned
M, E, O
Aerospace & Defense
Marlborough, MA
79,100
Leased (2/28/2037)
M, E, O, W
USG
Hinesburg, VT
77,000
Leased (4/30/2029)
M, E, O, W
USG
Stoughton, MA
71,400
Leased (1/31/2029)
M, E, O, W
Aerospace & Defense
South El Monte, CA
63,300
Leased (various term ends)
M, O, W
Aerospace & Defense
Eura, Finland
41,500
Owned
M, E, O, W
Test
Tianjin, China
38,100
Leased (11/19/2027)
M, E, O
Test
Minocqua, WI
35,400
Owned
M, O, W
Test
LaSalle (Montreal), Québec
35,200
Leased (8/31/21) *
M, E, O
USG
Beijing, China
33,300
Leased (12/21/2024)
M, E, O
Test
Avon, MA
30,000
Leased (5/31/2022)
W
Aerospace & Defense
Ontario, CA
26,900
Leased (8/31/2025)
M, E, O, W
USG
St. Louis, MO
21,500
Leased (8/31/2025)
ESCO Corporate Office
Corporate
Mississauga, Ontario
15,600
Leased (11/30/2023)
M, E, O, W
USG
Morrisville, NC
11,600
Leased (1/31/2027)
O
USG
Wood Dale, IL
10,700
Leased (6/30/2024)
E, O
Test
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 and its known or unknown variants 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 the Company’s business, including amounts, timing and sources of future sales, revenues, sales growth, and comparisons with the current year; 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; 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 and its variants, including the impact of mandates or other restrictive protocols on our business and workforce and the availability and acceptance of effective vaccines by enough of the U.S. and the world’s population to curtail or alleviate the seriousness of the pandemic; the impacts of climate change and related regulation of greenhouse gases, the impacts of labor disputes, civil disorder, wars, elections, political changes, tariffs and trade disputes, terrorist activities, cyberattacks or natural disasters on the Company’s operations and those of the Company’s customers and suppliers; disruptions in manufacturing or delivery arrangements due to shortages or unavailability of materials or components or supply chain disruptions; 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 or data breaches; the availability of selected acquisitions; 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 and performance of recently acquired businesses. ii PART I Item 1. Business The Company The Registrant is ESCO Technologies Inc., sometimes referred to in this report as ESCO. Except where the context indicates otherwise, the terms “Company”, “we”, “our” and “us” are used in this report to refer to ESCO together with its subsidiaries through which its businesses are conducted. We are:
Our business is focused on generating predictable and profitable long-term growth through continued innovation and expansion of our product offerings across each of our business segments. We conduct our business through a number of wholly-owned direct and indirect subsidiaries. Our 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. Our stock is listed on the New York Stock Exchange, where its ticker symbol is “ESE”. Our fiscal year ends September 30. Throughout this Annual Report, unless the context indicates otherwise, references to a year (for example 2022) refer to our fiscal year ending on September 30 of that year, and references to the “Consolidated Financial Statements” refer to our 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. We classify our business operations into three segments for financial reporting purposes, although for reporting certain financial information we treat Corporate activities as a separate segment. Our three operating segments during 2022, together with the significant domestic and foreign operating subsidiaries within each segment, are as follows: Aerospace & Defense (A&D): VACCO Industries (VACCO) PTI Technologies Inc. (PTI) Crissair, Inc. (Crissair) Globe Composite Solutions, LLC (Globe) Mayday Manufacturing Co. (Mayday) (includes former subsidiary Hi-Tech Metals, Inc., which was merged into Mayday effective December 31, 2021) Networks Electronic Co. (NEco) Westland Technologies, Inc. (Westland) Utility Solutions Group (USG): Doble Engineering Company I.S.A. – Altanova Group S.r.l. and affiliates (Altanova) Morgan Schaffer Ltd. (Morgan Schaffer) NRG Systems, Inc. (NRG) Except as the context otherwise indicates, the term “Doble” as used herein includes Doble Engineering Company and ESCO’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 ESCO’s other Test segment subsidiaries. Our 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 We are continually seeking ways to reduce our overall operating costs, streamline business processes and enhance the branding of our products and services. For example, during 2020 Doble consolidated its headquarters operations into a single, more cost-efficient facility in Marlborough, Massachusetts, and in 2021 it closed its facility in Toronto, Ontario and consolidated its Manta product line into its existing production capacity for Doble instruments. We are also continually seeking opportunities to supplement our growth by making strategic acquisitions. In October 2020 we acquired Advanced Technology Machining, Inc. (ATM) and its sister company TECC Grinding, Inc.; in July 2021 we acquired I.S.A Altanova Group S.r.l. and its affiliated companies (Altanova); in August 2021 we acquired the assets of Phenix Technologies Inc. (Phenix); and in November 2021 we acquired Networks Electronic Company, LLC (NEco), a provider of miniature electro-explosive components and subsystems supporting mission, flight, and life-critical applications to the aerospace and defense end-markets. Information about these acquired businesses is provided in the following section, “Products,” and in Note 2 to the Consolidated Financial Statements. In December 2019, we sold the businesses comprising our former Technical Packaging segment and used the proceeds from the sale to pay down debt and for other corporate purposes. The Technical Packaging segment was reported as Discontinued Operations in 2020. See Note 3 to the Consolidated Financial Statements. Products Our principal products are described below. See Note 12 to the Consolidated Financial Statements for financial information regarding business segments and 10% customers. A&D Beginning in the first quarter of 2020, we renamed our Filtration/Fluid Flow segment as Aerospace & Defense to better reflect the composition of the segment’s products, end markets and customer characteristics. The A&D segment’s individual legal and operating entities and historical financial results are unchanged from what was formerly presented as Filtration/Fluid Flow. The A&D segment accounted for approximately 41%, 44% and 48% of our total revenue in 2022, 2021 and 2020, respectively. This segment has seven facilities in the United States and one in Mexico. Our companies within this segment primarily design and manufacture specialty filtration, fluid control and naval products, including hydraulic filter elements, fluid control devices, and precision-tolerance machined components used in aerospace and defense 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; and miniature electro-explosive devices for military aircraft ejection seats and missile arming devices. USG Our USG segment accounted for approximately 32%, 28% and 26% of our total revenue in 2022, 2021 and 2020, respectively. This segment has seven facilities in the United States, one in Canada, and eight outside North America. 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. It combines three core elements for customers – diagnostic test instruments and condition monitoring systems, expert consulting, and testing services. The acquisition of Phenix’s assets has enhanced Doble’s high voltage, high current, high power test systems, components and solutions. NRG is a global market leader in the design and manufacture of decision support tools for the renewable energy industry, primarily wind and solar. 2 Altanova, headquartered in Taino, Italy, provides products and services in more than 100 countries. Its strong market share in Europe and Asia creates a significant international platform for our USG segment and fills important product gaps and geographies not previously served by our existing products and solutions. Doble’s offices outside North America have been consolidated with Altanova’s, and going forward we expect that Altanova will represent their combined businesses in markets outside the U.S. and Canada. Test Our Test segment accounted for approximately 27%, 28% and 26% of our total revenue in 2022, 2021 and 2020, respectively. This segment has four facilities in the United States and six outside the United States. 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. 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. Marketing and Sales Our products generally are distributed to customers through a domestic and foreign network of distributors, sales representatives, direct sales teams and in-house sales personnel. Our sales to international customers accounted for approximately 30%, 28% and 27% of our total revenue in 2022, 2021 and 2020, respectively. See Note 12 to the Consolidated Financial Statements for financial information by geographic area. See Item 1A, “Risk Factors,” for a discussion of risks related to our international operations. Government Contracts Some of our products are sold to the U.S. Government either directly under contracts with the Army, Navy and Air Force as well as other Government agencies or indirectly under subcontracts with their prime contractors. Direct and indirect sales to the U.S. Government, primarily related to the A&D segment, accounted for approximately 27%, 26% and 28% of our total revenue in 2022, 2021 and 2020, respectively. Our Government contracts primarily 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 our Government subcontracts provide that they may be terminated at the convenience of the Government or the customer. Upon a termination for convenience, we are entitled to receive equitable compensation from the customer for the work we completed prior to termination. All of our facilities are in material compliance with appliable COVID-related Government regulations and executive orders. See Item 1A, “Risk Factors,” for a discussion of risks related to our Government business. Intellectual Property We own or have 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, we emphasize developing intellectual property and protecting our rights therein. However, the legal protection afforded by intellectual property rights is often uncertain and can involve complex legal and factual issues. Some intellectual property rights, such as patents, have a 3 limited term, and there can be no assurance that third parties will not infringe or design around our intellectual property. Policing the unauthorized use of intellectual property is difficult, and infringement and misappropriation are persistent problems for many companies, particularly in some international markets, and in some cases, we may elect not 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. In the USG segment, our 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 our businesses, as such developments are made. Doble has obtained and is pursuing additional patent protection on improvements to its line of diagnostic equipment and NERC CIP compliance tools and its newly-introduced Calisto R9 dissolved gas analyzer. Doble also holds an extensive library of apparatus performance information useful to entities that generate, distribute or consume electric energy, and it makes part of this library available to registered users via an Internet portal. Altonova has obtained and is pursuing additional patent protection on instruments and methods for detecting partial discharges in electrical apparatus. NRG has intellectual property related to certain LIDAR technology and applications, and has obtained and is pursuing additional 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, we have sought patent protection 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. We consider our patents and other intellectual property to be of significant value to each of our segments. Backlog Total Company backlog of firm orders at September 30, 2022 was $695.0 million, representing an increase of $103.0 million (17.4%) from the backlog of $592.0 million at September 30, 2021. By segment, the backlog at September 30, 2022 and September 30, 2021, respectively, was $408.3 million and $367.2 million for A&D; $128.1 million and $91.6 million for USG; and $158.6 million and $133.2. million for Test. We estimate that as of September 30, 2022 domestic customers accounted for approximately 70% of our total firm orders and international customers accounted for approximately 30%. Of our total backlog at September 30, 2022, approximately 80% is expected to be completed in the fiscal year ending September 30, 2023. Purchased Components and Raw Materials Our products require a wide variety of components and materials. Although we have multiple sources of supply for most of our materials requirements, certain components and raw materials are supplied by sole source vendors, and our ability to perform certain contracts depends on their timely performance. In the past, these required raw materials and various purchased components generally have been available in sufficient quantities. However, we do 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 are periodically impacted by supply chain disruptions, as well as complications due to current or future trade policies. Where feasible, we engineer and qualify substitute products to avoid short-term supply issues; however, we are subject to the same supply chain risks as other electronics manufacturers. An unanticipated delay in delivery by our suppliers could result in the inability to deliver our products on-time and to meet the expectations of our customers. Additionally, we have experienced, and could continue to experience, an increase in the costs of doing business, including increasing raw material prices and transportation costs, which have and could continue to have an adverse impact on our business, results of operations, financial condition and cash flows. See also Item 1A, “Risk Factors.” Our A&D 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 A&D segment subsidiaries, may at times be in short supply. Our 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 these 4 electronic components can be subject to supply chain constraints. USG purchases only a limited amount of raw materials, although some USG products require helium, which may at times be in short supply. Our Test segment is a vertically integrated supplier of electro-magnetic (EM) shielding and RF absorbing products, producing most of its critical RF components itself. 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 in Item 1A. Competition Competition in our major markets is broadly based and global in scope. This competition can be particularly intense during periods of economic slowdown, and we have experienced this in some of our markets. Although we are a leading supplier in several of the markets we serve, we maintain a relatively small share of the business in many of our other markets. Individual competitors range in size from annual revenues of less than $1 million to billion-dollar enterprises. Because of the specialized nature of our products, our competitive position with respect to our products cannot be precisely stated. In our major served markets, competition is driven primarily by quality, technology, price and delivery performance. See also Item 1A, “Risk Factors.” Primary competitors of our A&D segment include Pall Corporation, Moog, Inc., Safran (Sofrance), CLARCOR Inc., TransDigm (PneuDraulics), Marotta Controls, and Parker Hannifin. Significant competitors of our USG segment include OMICRON electronics Corp., Megger Group Limited, Vaisala, and Qualitrol Company LLC (a subsidiary of Fortive Corporation). Our 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 our technological expertise are important factors in our business. Our 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. We perform research and development at our own expense, and also engage in research and development funded by our customers. See Note 1 to the Consolidated Financial Statements for financial information about our research and development expenditures. Environmental Matters and Government Regulation We are involved in various stages of investigation and cleanup relating to environmental matters. It is difficult to estimate the potential costs of these 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 our 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, we do not believe that the aggregate costs involved in the resolution of environmental matters or compliance with Governmental regulations will have a material adverse effect on our financial condition or results of operations. Human Capital Management As of September 30, 2022, we employed 2,922 persons, including 2,894 full time employees 18% of whom were located in 17 foreign countries. We strive to be a responsible member of the communities in which we operate, and we are dedicated to preserving operational excellence and remaining an employer of choice. We provide and maintain a work environment that attracts, develops and retains top talent by offering our employees an engaging work experience that contributes to their career development. Through our charitable Foundation and wellness activities we provide opportunities for civic involvement that not only support our communities and provides our employees with meaningful experiences that promote collaborative and rewarding work environments. We strive to maintain a culture that enables all employees to be treated with dignity and respect while performing their jobs to the best of their abilities. We 5 operate in a supportive culture that incorporates strong ethical behavior and reinforces our human rights commitment through annual training on ethics, human rights, anti-human trafficking and anti-harassment. Our subsidiaries enjoy modest turnover at about half the national average for our industry. Fewer than 6% of our workforce are contingent workers. We invest in creating a diverse, inclusive and safe work environment which will inspire our employees to give their best efforts every day. In fact, nearly half of our employee base comes from diverse backgrounds. We generally conduct formal compensation benchmarking reviews every 1-2 years to ensure wages are competitive in local markets and support our retention and recruiting efforts. Additionally, we invest time and resources in reviewing pay equity within our workforce. The majority of full-time domestic and international employees are eligible for bonus or commission plans, most of which are designed to incentivize and reward performance based on results such as EPS, EBIT, cash flow, quality and backlog reduction, or other measures. We recognize that our success is based on the talents and dedication of those we employ, and we are invested in their success. Significant investments are made in the areas of talent development, technical skills and compliance training in areas such as supervisor training, employee coaching, ethics, safety, hazmat, ITAR, etc. For succession planning purposes, we focus on identifying high-potential future leaders and working with them on individual development plans and executive coaching. Attracting and retaining a talented workforce is of utmost importance. Given the ever-changing talent market, we have looked to broaden the ways in which we can recognize and reward performance, including more frequent merit increases, market adjustments, spot bonuses, and other creative ways to recognize and reward employees. While utilizing these and other measures, at the end of our fiscal year the average tenure of our workforce was nine years. One third of employees have been with us for 10 or more years and more than 50% of employees have been with us for five or more years. We are committed to the health and wellbeing of our employees and their families by encouraging participation in wellness programs. Generally, all our full-time employees, both domestic and international, are offered health and welfare benefits. We remain committed to our communities through financial support from our employees and the ESCO Foundation, and through personal participation of our employees with a variety of local organizations, such as food banks, blood drives, the Boys & Girls Club, and Habitat for Humanity. We believe strong human capital is a competitive differentiator, and we focus on ensuring we have the right domestic and international talent in place to drive our strategic initiatives not only today but well into the future. Workforce Composition (As of September 30, 2022)
*Some countries do not permit the collection or reporting of some or all of the above types of data.
Minorities are defined to include individuals of Native American or Alaskan Native, Asian, Black or The above is based on employees’ self-identification or other information believed by the Company to be reliable. Financing For information about our credit facility, see Note 8 to the Consolidated Financial Statements, which is incorporated into this Item by reference. 6 Additional Information The information set forth in Item 1A, “Risk Factors,” is incorporated in this Item by reference. We make available free of charge on or through our website, www.escotechnologies.com, our 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 well as our recent Proxy Statements for meetings of our shareholders, as soon as reasonably practicable after we file or furnish this material to the Securities and Exchange Commission. Information contained on our website is not incorporated into this Report. Information about our Executive Officers The following sets forth certain information as of the date of this report with respect to the persons who are, or who have been selected to become, our executive officers. These officers are elected annually to terms which expire at the first meeting of the Board of Directors held after the Annual Meeting of Stockholders.
There are no family relationships among any of our 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 those Items 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 our business could cause actual results and events to differ materially from those contained in any forward-looking statements, or could otherwise materially adversely affect our business, operating results or financial condition: 7 COVID-19 Related Risks The continuation of the COVID-19 pandemic and the impacts of known or unknown COVID-19 variants may have a material adverse effect on our business which could continue for an unknown period of time. The effects of the COVID-19 global pandemic continue to create or increase the economic, demand and operational uncertainties of our business. 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 and its variants 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. Current restrictions and conditions have and may continue to prevent or delay us in accessing customer facilities to deliver products and provide services, and disrupt or delay our supply chain. Further, 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. The facilities of our suppliers and customers have experienced, and may continue to experience, disruptions in manufacturing and supply arrangements due to the loss or disruption of critical manufacturing and supply elements, such as raw materials or other finished product components, transportation, workforce or other manufacturing and distribution capability. We may also experience failure of third parties on which we rely, including our suppliers, distributors and contractors, to meet their obligations to us, or significant restrictions in their ability to do so. 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 and its variants, the longevity of COVID-19 and its variants, and the actions taken to contain their impacts. PART II | | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 26 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Certain Relationships and Related Transactions, and Director Independence | 27 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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i 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 and its known or unknown variants 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 the Company’s business, including amounts, timing and sources of future sales, revenues, sales growth, and comparisons with the current year; 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; 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 and its variants, including the impact of mandates or other restrictive protocols on our business and workforce and the availability and acceptance of effective vaccines by enough of the U.S. and the world’s population to curtail or alleviate the seriousness of the pandemic; the impacts of climate change and related regulation of greenhouse gases, the impacts of labor disputes, civil disorder, wars, elections, political changes, tariffs and trade disputes, terrorist activities, cyberattacks or natural disasters on the Company’s operations and those of the Company’s customers and suppliers; disruptions in manufacturing or delivery arrangements due to shortages or unavailability of materials or components or supply chain disruptions; 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 or data breaches; the availability of selected acquisitions; 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 and performance of recently acquired businesses. Fiscal year ended (Dollars in millions) 2020 2019 Diluted EPS – Continuing Operations GAAP $ 0.97 2.97 Pension termination adjustment 1.55 — Restructuring adjustments 0.24 (0.02) Diluted EPS – Continuing Operations As Adjusted $ 2.76 2.95 ii PART I Item 1. Business The Company The Registrant is ESCO Technologies Inc., sometimes referred to in this report as ESCO. Except where the context indicates otherwise, the terms “Company”, “we”, “our” and “us” are used in this report to refer to ESCO together with its subsidiaries through which its businesses are conducted. We are: Change Fiscal year ended 2020 (Dollars in millions) 2020 2019 vs. 2019 Aerospace & Defense $ 354.3 325.7 8.8 % USG 191.7 211.9 (9.5) % Test 186.9 188.4 (0.8) % Total $ 732.9 726.0 1.0 % (Dollars in millions) 2020 2019 EBIT $ 46.5 106.0 Less: Income tax expense 14.3 20.4 Less: Interest expense 6.7 8.1 Net earnings from continuing operations $ 25.5 77.5 Change Fiscal year ended 2020 (Dollars in millions) 2020 2019 vs. 2019 Aerospace & Defense $ 73.2 70.1 4.4 % % of net sales 20.7 % 21.5 % USG 24.4 52.2 (53.3) % % of net sales 12.7 % 24.6 % Test 27.2 25.6 6.2 % % of net sales 14.6 % 13.6 % Corporate (78.3) (41.9) (86.9) % Total $ 46.5 106.0 (56.1) % % of net sales 6.3 % 14.6 % Our business is focused on generating predictable and profitable long-term growth through continued innovation and expansion of our product offerings across each of our business segments. We conduct our business through a number of wholly-owned direct and indirect subsidiaries. Our 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. Our stock is listed on the New York Stock Exchange, where its ticker symbol is “ESE”. Our fiscal year ends September 30. Throughout this Annual Report, unless the context indicates otherwise, references to a year (for example 2022) refer to our fiscal year ending on September 30 of that year, and references to the “Consolidated Financial Statements” refer to our 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. We classify our business operations into three segments for financial reporting purposes, although for reporting certain financial information we treat Corporate activities as a separate segment. Our three operating segments during 2022, together with the significant domestic and foreign operating subsidiaries within each segment, are as follows: Aerospace & Defense (A&D): VACCO Industries (VACCO) PTI Technologies Inc. (PTI) Crissair, Inc. (Crissair) Globe Composite Solutions, LLC (Globe) Mayday Manufacturing Co. (Mayday) (includes former subsidiary Hi-Tech Metals, Inc., which was merged into Mayday effective December 31, 2021) Networks Electronic Co. (NEco) Westland Technologies, Inc. (Westland) Utility Solutions Group (USG): Doble Engineering Company I.S.A. – Altanova Group S.r.l. and affiliates (Altanova) Morgan Schaffer Ltd. (Morgan Schaffer) NRG Systems, Inc. (NRG) Except as the context otherwise indicates, the term “Doble” as used herein includes Doble Engineering Company and ESCO’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 ESCO’s other Test segment subsidiaries. Our 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.” We are continually seeking ways to reduce our overall operating costs, streamline business processes and enhance the branding of our products and services. For example, during 2020 Doble consolidated its headquarters operations into a single, more cost-efficient facility in Marlborough, Massachusetts, and in 2021 it closed its facility in Toronto, Ontario and consolidated its Manta product line into its existing production capacity for Doble instruments. We are also continually seeking opportunities to supplement our growth by making strategic acquisitions. In October 2020 we acquired Advanced Technology Machining, Inc. (ATM) and its sister company TECC Grinding, Inc.; in July 2021 we acquired I.S.A Altanova Group S.r.l. and its affiliated companies (Altanova); in August 2021 we acquired the assets of Phenix Technologies Inc. (Phenix); and in November 2021 we acquired Networks Electronic Company, LLC (NEco), a provider of miniature electro-explosive components and subsystems supporting mission, flight, and life-critical applications to the aerospace and defense end-markets. Information about these acquired businesses is provided in the following section, “Products,” and in Note 2 to the Consolidated Financial Statements. In December 2019, we sold the businesses comprising our former Technical Packaging segment and used the proceeds from the sale to pay down debt and for other corporate purposes. The Technical Packaging segment was reported as Discontinued Operations in 2020. See Note 3 to the Consolidated Financial Statements. Products Our principal products are described below. See Note 12 to the Consolidated Financial Statements for financial information regarding business segments and 10% customers. A&D Beginning in the first quarter of 2020, we renamed our Filtration/Fluid Flow segment as Aerospace & Defense to better reflect the composition of the segment’s products, end markets and customer characteristics. The A&D segment’s individual legal and operating entities and historical financial results are unchanged from what was formerly presented as Filtration/Fluid Flow. The A&D segment accounted for approximately 41%, 44% and 48% of our total revenue in 2022, 2021 and 2020, respectively. This segment has seven facilities in the United States and one in Mexico. Our companies within this segment primarily design and manufacture specialty filtration, fluid control and naval products, including hydraulic filter elements, fluid control devices, and precision-tolerance machined components used in aerospace and defense 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; and miniature electro-explosive devices for military aircraft ejection seats and missile arming devices. USG Our USG segment accounted for approximately 32%, 28% and 26% of our total revenue in 2022, 2021 and 2020, respectively. This segment has seven facilities in the United States, one in Canada, and eight outside North America. 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. It combines three core elements for customers – diagnostic test instruments and condition monitoring systems, expert consulting, and testing services. The acquisition of Phenix’s assets has enhanced Doble’s high voltage, high current, high power test systems, components and solutions. NRG is a global market leader in the design and manufacture of decision support tools for the renewable energy industry, primarily wind and solar. 2 Altanova, headquartered in Taino, Italy, provides products and services in more than 100 countries. Its strong market share in Europe and Asia creates a significant international platform for our USG segment and fills important product gaps and geographies not previously served by our existing products and solutions. Doble’s offices outside North America have been consolidated with Altanova’s, and going forward we expect that Altanova will represent their combined businesses in markets outside the U.S. and Canada. Test Our Test segment accounted for approximately 27%, 28% and 26% of our total revenue in 2022, 2021 and 2020, respectively. This segment has four facilities in the United States and six outside the United States. 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. 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. Marketing and Sales Our products generally are distributed to customers through a domestic and foreign network of distributors, sales representatives, direct sales teams and in-house sales personnel. Our sales to international customers accounted for approximately 30%, 28% and 27% of our total revenue in 2022, 2021 and 2020, respectively. See Note 12 to the Consolidated Financial Statements for financial information by geographic area. See Item 1A, “Risk Factors,” for a discussion of risks related to our international operations. Government Contracts Some of our products are sold to the U.S. Government either directly under contracts with the Army, Navy and Air Force as well as other Government agencies or indirectly under subcontracts with their prime contractors. Direct and indirect sales to the U.S. Government, primarily related to the A&D segment, accounted for approximately 27%, 26% and 28% of our total revenue in 2022, 2021 and 2020, respectively. Our Government contracts primarily 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 our Government subcontracts provide that they may be terminated at the convenience of the Government or the customer. Upon a termination for convenience, we are entitled to receive equitable compensation from the customer for the work we completed prior to termination. All of our facilities are in material compliance with appliable COVID-related Government regulations and executive orders. See Item 1A, “Risk Factors,” for a discussion of risks related to our Government business. Intellectual Property We own or have 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, we emphasize developing intellectual property and protecting our rights therein. However, the legal protection afforded by intellectual property rights is often uncertain and can involve complex legal and factual issues. Some intellectual property rights, such as patents, have a 3 limited term, and there can be no assurance that third parties will not infringe or design around our intellectual property. Policing the unauthorized use of intellectual property is difficult, and infringement and misappropriation are persistent problems for many companies, particularly in some international markets, and in some cases, we may elect not 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. In the USG segment, our 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 our businesses, as such developments are made. Doble has obtained and is pursuing additional patent protection on improvements to its line of diagnostic equipment and NERC CIP compliance tools and its newly-introduced Calisto R9 dissolved gas analyzer. Doble also holds an extensive library of apparatus performance information useful to entities that generate, distribute or consume electric energy, and it makes part of this library available to registered users via an Internet portal. Altonova has obtained and is pursuing additional patent protection on instruments and methods for detecting partial discharges in electrical apparatus. NRG has intellectual property related to certain LIDAR technology and applications, and has obtained and is pursuing additional 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, we have sought patent protection 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. We consider our patents and other intellectual property to be of significant value to each of our segments. Backlog Total Company backlog of firm orders at September 30, 2022 was $695.0 million, representing an increase of $103.0 million (17.4%) from the backlog of $592.0 million at September 30, 2021. By segment, the backlog at September 30, 2022 and September 30, 2021, respectively, was $408.3 million and $367.2 million for A&D; $128.1 million and $91.6 million for USG; and $158.6 million and $133.2. million for Test. We estimate that as of September 30, 2022 domestic customers accounted for approximately 70% of our total firm orders and international customers accounted for approximately 30%. Of our total backlog at September 30, 2022, approximately 80% is expected to be completed in the fiscal year ending September 30, 2023. Purchased Components and Raw Materials Our products require a wide variety of components and materials. Although we have multiple sources of supply for most of our materials requirements, certain components and raw materials are supplied by sole source vendors, and our ability to perform certain contracts depends on their timely performance. In the past, these required raw materials and various purchased components generally have been available in sufficient quantities. However, we do 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 are periodically impacted by supply chain disruptions, as well as complications due to current or future trade policies. Where feasible, we engineer and qualify substitute products to avoid short-term supply issues; however, we are subject to the same supply chain risks as other electronics manufacturers. An unanticipated delay in delivery by our suppliers could result in the inability to deliver our products on-time and to meet the expectations of our customers. Additionally, we have experienced, and could continue to experience, an increase in the costs of doing business, including increasing raw material prices and transportation costs, which have and could continue to have an adverse impact on our business, results of operations, financial condition and cash flows. See also Item 1A, “Risk Factors.” Our A&D 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 A&D segment subsidiaries, may at times be in short supply. Our 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 these 4 electronic components can be subject to supply chain constraints. USG purchases only a limited amount of raw materials, although some USG products require helium, which may at times be in short supply. Our Test segment is a vertically integrated supplier of electro-magnetic (EM) shielding and RF absorbing products, producing most of its critical RF components itself. 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 in Item 1A. Competition Competition in our major markets is broadly based and global in scope. This competition can be particularly intense during periods of economic slowdown, and we have experienced this in some of our markets. Although we are a leading supplier in several of the markets we serve, we maintain a relatively small share of the business in many of our other markets. Individual competitors range in size from annual revenues of less than $1 million to billion-dollar enterprises. Because of the specialized nature of our products, our competitive position with respect to our products cannot be precisely stated. In our major served markets, competition is driven primarily by quality, technology, price and delivery performance. See also Item 1A, “Risk Factors.” Primary competitors of our A&D segment include Pall Corporation, Moog, Inc., Safran (Sofrance), CLARCOR Inc., TransDigm (PneuDraulics), Marotta Controls, and Parker Hannifin. Significant competitors of our USG segment include OMICRON electronics Corp., Megger Group Limited, Vaisala, and Qualitrol Company LLC (a subsidiary of Fortive Corporation). Our 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 our technological expertise are important factors in our business. Our 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. We perform research and development at our own expense, and also engage in research and development funded by our customers. See Note 1 to the Consolidated Financial Statements for financial information about our research and development expenditures. Environmental Matters and Government Regulation We are involved in various stages of investigation and cleanup relating to environmental matters. It is difficult to estimate the potential costs of these 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 our 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, we do not believe that the aggregate costs involved in the resolution of environmental matters or compliance with Governmental regulations will have a material adverse effect on our financial condition or results of operations. Human Capital Management As of September 30, 2022, we employed 2,922 persons, including 2,894 full time employees 18% of whom were located in 17 foreign countries. We strive to be a responsible member of the communities in which we operate, and we are dedicated to preserving operational excellence and remaining an employer of choice. We provide and maintain a work environment that attracts, develops and retains top talent by offering our employees an engaging work experience that contributes to their career development. Through our charitable Foundation and wellness activities we provide opportunities for civic involvement that not only support our communities and provides our employees with meaningful experiences that promote collaborative and rewarding work environments. We strive to maintain a culture that enables all employees to be treated with dignity and respect while performing their jobs to the best of their abilities. We 5 operate in a supportive culture that incorporates strong ethical behavior and reinforces our human rights commitment through annual training on ethics, human rights, anti-human trafficking and anti-harassment. Our subsidiaries enjoy modest turnover at about half the national average for our industry. Fewer than 6% of our workforce are contingent workers. We invest in creating a diverse, inclusive and safe work environment which will inspire our employees to give their best efforts every day. In fact, nearly half of our employee base comes from diverse backgrounds. We generally conduct formal compensation benchmarking reviews every 1-2 years to ensure wages are competitive in local markets and support our retention and recruiting efforts. Additionally, we invest time and resources in reviewing pay equity within our workforce. The majority of full-time domestic and international employees are eligible for bonus or commission plans, most of which are designed to incentivize and reward performance based on results such as EPS, EBIT, cash flow, quality and backlog reduction, or other measures. We recognize that our success is based on the talents and dedication of those we employ, and we are invested in their success. Significant investments are made in the areas of talent development, technical skills and compliance training in areas such as supervisor training, employee coaching, ethics, safety, hazmat, ITAR, etc. For succession planning purposes, we focus on identifying high-potential future leaders and working with them on individual development plans and executive coaching. Attracting and retaining a talented workforce is of utmost importance. Given the ever-changing talent market, we have looked to broaden the ways in which we can recognize and reward performance, including more frequent merit increases, market adjustments, spot bonuses, and other creative ways to recognize and reward employees. While utilizing these and other measures, at the end of our fiscal year the average tenure of our workforce was nine years. One third of employees have been with us for 10 or more years and more than 50% of employees have been with us for five or more years. We are committed to the health and wellbeing of our employees and their families by encouraging participation in wellness programs. Generally, all our full-time employees, both domestic and international, are offered health and welfare benefits. We remain committed to our communities through financial support from our employees and the ESCO Foundation, and through personal participation of our employees with a variety of local organizations, such as food banks, blood drives, the Boys & Girls Club, and Habitat for Humanity. We believe strong human capital is a competitive differentiator, and we focus on ensuring we have the right domestic and international talent in place to drive our strategic initiatives not only today but well into the future. Workforce Composition (As of September 30, 2022) By Gender By Race Male 71 % Minorities 48 % Female 24 % White 40 % Unknown* 5 % Unknown* 12 % *Some countries do not permit the collection or reporting of some or all of the above types of data. By Generation Gen Z (1996-2015) 8 % Millennials (1977-1995) 39 % Gen X (1965-1976) 28 % Boomers (1946-1964) 25 % Silent (1945 & before) <1 % Minorities are defined to include individuals of Native American or Alaskan Native, Asian, Black or The above is based on employees’ self-identification or other information believed by the Company to be reliable. Financing For information about our credit facility, see Note 8 to the Consolidated Financial Statements, which is incorporated into this Item by reference. 6 Additional Information The information set forth in Item 1A, “Risk Factors,” is incorporated in this Item by reference. We make available free of charge on or through our website, www.escotechnologies.com, our 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 well as our recent Proxy Statements for meetings of our shareholders, as soon as reasonably practicable after we file or furnish this material to the Securities and Exchange Commission. Information contained on our website is not incorporated into this Report. Information about our Executive Officers The following sets forth certain information as of the date of this report with respect to the persons who are, or who have been selected to become, our executive officers. These officers are elected annually to terms which expire at the first meeting of the Board of Directors held after the Annual Meeting of Stockholders. Name Age Position(s) and Business Experience Victor L. Richey 65 Mr. Richey has been Chairman of the Board of Directors and Chief Executive Officer since April 2003, and President since October 2006. He also serves as Chairman of the Executive Committee of the Board of Directors. Mr. Richey will retire as Chief Executive Officer and President on December 31, 2022 but will continue as an employee and Chairman of the Board for a transition period. Bryan H. Sayler 56 Mr. Sayler will become the Company’s Chief Executive Officer and President on January 1, 2023. Mr. Sayler has led our Utility Solutions Group since 2016, where he played a key role in strategically building out the group, including leading our entry into the renewables business and overseeing six successful acquisitions that have more than doubled the size of the segment. From 1995 to 2016, he held senior positions with ETS-Lindgren. Christopher L. Tucker 51 Mr. Tucker has been Senior Vice President and Chief Financial Officer since April 2021. Prior to joining ESCO, Mr. Tucker worked at Emerson Electric Co (NYSE:EMR) for 24 years, where he held a series of financial and administrative positions, most recently as Vice President and Chief Financial Officer of Emerson’s Commercial and Residential Solutions business, consisting of 11 business units generating approximately $6 billion in annual revenue. David M. Schatz 59 Mr. Schatz has been Senior Vice President, General Counsel and Secretary since April 2021.He has worked at ESCO since 1998 in various positions with increasing responsibility, including serving as Vice President, IP Counsel and Assistant Secretary from 2015 until April 2021; he has extensive knowledge of ESCO’s operations, technologies, intellectual property, regulatory matters, M&A and other complex legal matters. There are no family relationships among any of our 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 those Items 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 our business could cause actual results and events to differ materially from those contained in any forward-looking statements, or could otherwise materially adversely affect our business, operating results or financial condition: 7 COVID-19 Related Risks The continuation of the COVID-19 pandemic and the impacts of known or unknown COVID-19 variants may have a material adverse effect on our business which could continue for an unknown period of time. The effects of the COVID-19 global pandemic continue to create or increase the economic, demand and operational uncertainties of our business. 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 and its variants 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. Current restrictions and conditions have and may continue to prevent or delay us in accessing customer facilities to deliver products and provide services, and disrupt or delay our supply chain. Further, 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. The facilities of our suppliers and customers have experienced, and may continue to experience, disruptions in manufacturing and supply arrangements due to the loss or disruption of critical manufacturing and supply elements, such as raw materials or other finished product components, transportation, workforce or other manufacturing and distribution capability. We may also experience failure of third parties on which we rely, including our suppliers, distributors and contractors, to meet their obligations to us, or significant restrictions in their ability to do so. 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 and its variants, the longevity of COVID-19 and its variants, and the actions taken to contain their impacts. 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 26% to 28% of our revenues have been generated from sales to the U.S. Government or its contractors, primarily within our A&D 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, 2022, our twelve-month backlog was approximately $556.2 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. The end of customer product life cycles could negatively affect our A&D segment’s results. Many of our A&D 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 8 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 inflation, rising interest rates and a potential economic slowdown 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 increases in cost of capital, which could limit 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, since 2019 increased tariffs imposed by China on U.S. 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 U.S. and China which are causing U.S. 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 or armed conflict, could adversely affect our business. In 2022, approximately 30% of our net sales were to customers outside the United States. Adverse changes 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 the ongoing conflict between Russia and Ukraine. If this conflict were to spread beyond these two countries, we would expect an increasingly unfavorable impact on our global business environment. 9 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 Disruptions of Our Information Technology Systems, or Information Security and/or Data Privacy Breaches, Could Adversely Affect Our Business. We have many information technology systems that are important to the operation of our businesses, some of which are managed by third parties. These systems are used to obtain, process, transmit and store electronic information and to manage or support a variety of integral business processes and activities. Our primary and backup computer systems are vulnerable to damage, disruptions or shutdowns during the process of upgrading or replacing software, databases or components and from power outages, computer and telecommunication failures, security breaches, natural disasters and errors by employees. Any failure in the operation of our information technology systems could adversely affect our businesses or operating results. Although losses arising from some of these issues may be covered by information security insurance, we cannot guarantee that our coverage will be adequate for all costs or losses incurred. Global information technology security threats and targeted computer crime are increasing in frequency and sophistication and pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data and communications. We attempt to mitigate these risks through numerous measures, including implementation of standard cybersecurity controls, employee training and testing, comprehensive monitoring of our networks and systems, and maintenance of backup and protective systems. Although we do not believe we have experienced a material information security breach in the last three years, and we have incurred no fines, settlement costs or other material expenses related to information security breaches, if we were to experience such a breach it could adversely affect our reputation and result in litigation, regulatory action, liability for fines, penalties and related expenses, and costs of implementing additional data protection procedures. In addition, even though we generally do not conduct business directly with retail or individual customers or consumers we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S. and elsewhere. Compliance with data privacy laws and regulations increases operational complexity, and failure to comply with legal or regulatory standards could subject us to fines and penalties, as well as legal and reputational risks, including proceedings against us by governmental entities or others. Although we maintain insurance coverage for data privacy risks, we cannot guarantee that our coverage will be adequate for all costs or losses incurred. 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 23% of Doble’s products from a single location within the United States. 10 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 A&D segment, may at times be in short supply; in addition, although we try to tie our supplier pricing to long-term contracts this is not always possible, and we are experiencing price inflation on a number of products. 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. We have experienced COVID-related short term disruptions in the supply chain which have periodically resulted in extended lead times and cost increases, and the long term impacts of these disruptions are uncertain. See also “COVID-19 Related Risks” above. 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. The potential physical impacts of climate change, such as increased frequency and severity of storms, floods and other climatic events, could disrupt our supply chain, and cause our suppliers to incur significant costs in preparing for or responding to these effects. These and other weather-created disruptions in supply, in addition to affecting costs, could impact our ability to procure an adequate supply of these raw materials and components, and delay or prevent deliveries of products to our customers. The entire electronics industry is currently disrupted due to limited sources of supply, and we are subject to the same supply chain risks as other manufacturers of products containing electronic components. 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. 11 Product defects or customer claims 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 A&D 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. 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. 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. Environmental laws and regulations or environmental contamination 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. In addition, governments around the world are increasingly focused on enacting laws and regulations regarding climate change and regulation of greenhouse gases. These regulations, and changes to them, could increase our cost of compliance, and our failure to comply could result in the imposition of significant fines, suspension of production, alteration of product processes, cessation of operations or other actions which could materially and adversely affect our business, financial condition and results of operations. We are currently involved as a responsible party in several ongoing investigations and remediations of contaminated third-party owned properties. In addition, environmental contamination may be discovered in the future on properties which we formerly owned or operated and for which we could be legally responsible. Future costs associated with these situations, including ones which may be currently unknown to us, are difficult to quantify but could have a significant effect on our financial condition. See Item 1, “Business – Environmental Matters” for a discussion of these factors. 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 12 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. Our inability to hire or retain qualified 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, and our other segments similarly rely on qualified and experienced employees to carry on their businesses. Despite our active recruitment efforts, there remains a shortage of these qualified engineers and other employees because of hiring competition from other companies in the industry and a generally tight labor market, possibly exacerbated by COVID-related retirements or career changes. Losing current employees or qualified candidates to other employers or for other reasons could reduce our ability to provide services and negatively affect our revenues. Our decentralized organizational structure presents certain risks. We are a relatively decentralized company in comparison with some of our peers. This decentralization necessarily places significant control and decision-making powers in the hands of local management, which present various risks, including the risk that we may be slower or less able to identify or react to problems affecting a key business than we would in a more centralized management environment. We may also be slower to detect or react to compliance related problems (such as an employee undertaking activities prohibited by applicable law or by our internal policies), and Company-wide business initiatives may be more challenging and costly to implement, and the risks of noncompliance or failures higher, than they would be under a more centralized management structure. Depending on the nature of the problem or initiative in question, such noncompliance or failure could have a material adverse effect on our business, financial condition or result of operations. 13 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 We believe our buildings, machinery and equipment have been generally well maintained, are in good operating condition and are adequate for our current production requirements and other needs. At September 30, 2022, our physical properties, including those described in the table below, comprised approximately 1,618,000 square feet of floor space, of which approximately 757,500 square feet were owned and approximately 860,500 square feet were leased. The table below includes our principal physical properties. We do not believe any of the omitted properties, consisting primarily of office and/or warehouse space, are individually or collectively material to our operations or business. See also Note 14 to the Consolidated Financial Statements. Principal Use(s) (M=Manufacturing, Approx. Owned / Leased (with E=Engineering, O=Office, Operating Location Sq. Ft. Expiration Date) W=Warehouse) Segment Modesto, CA 181,500 Leased (9/30/2033) M, E, O,W A&D Denton, TX 145,000 Leased (9/30/2029, plus options) M, E, O, W A&D Cedar Park, TX 130,000 Owned M, E, O, W Test Oxnard, CA 127,400 Owned M, E, O, W A&D South El Monte, CA 100,100 Owned M, E, O, W A&D Durant, OK 100,000 Owned M, O, W Test Valencia, CA 79,300 Owned M, E, O A&D Marlborough, MA 79,100 Leased (2/28/2037) M, E, O, W USG Hinesburg, VT 77,000 Owned M, E, O, W USG Stoughton, MA 71,400 Leased (1/31/2029) M, E, O, W A&D Accident, MD 66,800 Owned M, E, O, W USG South El Monte, CA 63,300 Leased (6/30/2024) M, O, W A&D Brockton, MA 47,300 Leased (7/31/2023) W A&D Eura, Finland 41,500 Owned M, E, O, W Test Montreal, Québec 38,400 Leased (8/31/2041) M, E, O, W USG Tianjin, China 38,100 Leased (11/19/2027) M, E, O Test Minocqua, WI 35,400 Owned M, O, W Test Bologna, Italy 28,200 Leased (8/13/2028) M, E, O, W USG Ontario, CA 26,900 Leased (8/31/2025) M, E, O, W USG Chatsworth, CA 24,800 Leased (12/31/2023) M, E, O, W A&D St. Louis, MO 21,500 Leased (8/31/2025) ESCO Corporate Office Corporate Taino, Italy 18,000 Leased (various term ends) M, E, O, W USG Zola Predosa, Italy 12,900 Leased (1/31/2029) M, E, O, W USG Morrisville, NC 11,600 Leased (1/31/2027), plus options O USG Wood Dale, IL 10,700 Leased (6/30/2024) E, O Test 14 Item 3. Legal Proceedings As a normal incident of the businesses in which we are engaged, various claims, charges and litigation are asserted or commenced from time to time against us. With respect to claims and litigation currently asserted or commenced against us, it is the opinion of our Management that final judgments, if any, which might be rendered against us are adequately reserved for, are covered by insurance, or are not likely to have a material adverse effect on our 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 us; see Item 1A, “Risk Factors.” Item 4. Mine Safety Disclosures Not applicable. 15 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Holders of Record.As of November 7, 2022, there were approximately 1,808 holders of record of our common stock. Price Range of Common Stock and Dividends. Our common stock is listed on the New York Stock Exchange; its trading symbol is “ESE”. Company Purchases of Equity Securities. For information about our common stock repurchase programs, please refer to Note 9 to the Consolidated Financial Statements. We did not repurchase any shares of our common stock during the fourth quarter of fiscal 2022. Securities Authorized for Issuance Under Equity Compensation Plans. For information about securities authorized for issuance under our equity compensation plans, please refer to Item 12 of this Form 10-K and to Note 10 to the Consolidated Financial Statements. Performance Graph.The graph and table on the following page present a comparison of the cumulative total shareholder return on our common stock as measured against the cumulative total returns of the Russell 2000 index, which is a broad equity market index, and the S&P SmallCap 600 Industrials index, which is a published industry index designed to measure the performance of small-cap companies that are classified as members of the GICS Industrials sector. The Company is a component of both the Russell 2000 index and the S&P SmallCap 600 Industrials index. The measurement period begins on September 30, 2017 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 our common stock were $100 at the close of trading on September 30, 2017. 16 COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among ESCO Technologies Inc., the Russell 2000 Index, and the S&P SmallCap 600 Industrials Index 9/30/17 9/30/18 9/30/19 9/30/20 9/30/21 9/30/22 ESCO Technologies Inc. $ 100.00 $ 114.13 $ 134.04 $ 136.42 $ 130.83 $ 125.19 Russell 2000 Index 100.00 115.24 104.99 105.40 155.66 119.08 S&P Small Cap 600 Industrials Index 100.00 121.53 112.63 105.97 155.41 134.57 The stock price performance included in this graph is not necessarily indicative of future stock price performance. Item 6. [Reserved] 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 our results from continuing operations except where noted. Selected financial information for each of our business segments is provided in the discussion below and in Note 12 to the Company’s Consolidated Financial Statements. This section includes comparisons of certain 2022 financial information to the same information for 2021. Year-to-year comparisons of the 2021 financial information to the same information for 2020 are contained in Item 7 of our Form 10-K for 2021 filed with the Securities and Exchange Commission on November 29, 2021 and available through the SEC’s website at https://www.sec.gov/edgar/searchedgar/companysearch.html. 17 Introduction We classify our business operations into three segments for financial reporting purposes, although for reporting certain financial information we treat Corporate activities as a separate segment. Our three operating segments during 2022 were Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Shielding and Test (Test). Our operating segments are comprised of the following primary operating subsidiaries: A&D. 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 and Globe design, develop and manufacture 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. 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. We continue to operate with meaningful growth prospects in our primary served markets and with considerable financial flexibility. We continue to focus on new products that incorporate proprietary design and process technologies. Our Management is committed to delivering shareholder value through organic growth, ongoing performance improvement initiatives, and acquisitions. In December 2019, we sold the businesses comprising our former Technical Packaging segment. We received net proceeds from the sale of approximately $184 million and recorded $76.5 million of after-tax net earnings on the sale in 2020. 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 3 to the Consolidated Financial Statements for further discussion. Highlights of 2022 18 Fiscal year ended (Dollars in millions) 2022 2021 Diluted EPS – GAAP $ 3.16 2.42 One time compensation & acquisition related costs 0.02 0.12 Restructuring adjustments 0.01 0.08 Purchase accounting adjustments 0.02 0.03 Gain on building sale — (0.06) Diluted EPS – As Adjusted $ 3.21 2.59 Results of Operations Net Sales Change Fiscal year ended 2022 (Dollars in millions) 2022 2021 vs. 2021 A&D $ 351.4 314.8 11.6 % USG 278.4 202.9 37.2 % Test 227.7 197.7 15.2 % Total $ 857.5 715.4 19.9 % Net sales increased $142.1 million, or 19.9%, to $857.5 million in 2022 from $715.4 million in 2021. The increase in net sales in 2022 as compared to 2021 was mainly due to a $75.5 million increase in the USG segment, a $36.6 million increase in the A&D segment, and a $30.0 million increase in the Test segment. Organic sales increased $90 million and recent acquisitions added approximately $52 million of revenue growth in 2022 as compared to 2021. A&D. The $36.6 million, or 11.6%, increase in net sales in 2022 as compared to 2021 was mainly due to a $16.4 million increase in net sales at PTI (including $5.2 million from NEco), a $14.1 million increase in net sales at Mayday, both primarily due to an increase in commercial aerospace sales driven by the rebound from the COVID-19 pandemic; a $3.0 million increase in net sales at Westland driven by timing of navy defense projects, a $1.5 million increase in net sales at VACCO, a $0.9 million increase in net sales at Crissair and a $0.7 million increase in net sales at Globe. 19 USG. The $75.5 million, or 37.2%, increase in net sales in 2022 as compared to 2021 was mainly due to a $46.9 million increase in net sales from the 2021 acquisitions of Altanova and Phenix, a $20 million increase in core Doble products and services; and a $8.2 million increase in net sales at NRG driven by renewable energy products. Test. The $30.0 million, or 15.2%, increase in net sales in 2022 as compared to 2021 was mainly due to a $22.3 million increase in net sales from the Company’s U.S. operations, $11.5 million increase in net sales from the Company’s Asian operations both driven by increased medical and industrial shielding and power filter demand, partially offset by a $3.8 million decrease in net sales from the Company’s European operations, primarily driven by the timing of test and measurement chamber projects. Orders and Backlog New orders received were $960.5 million in 2022 and $796.3 million in 2021. Order backlog was $695.0 million at September 30, 2022, compared to order backlog of $592.0 million at September 30, 2021. Orders are entered into backlog as firm purchase order commitments are received. By operating segment, 2022 orders were $392.5 million related to A&D products, $314.9 million related to USG products, and $253.1 million related to Test products; and 2021 orders were $337.4 million related to A&D products, $243.9 million related to USG products (including $29 million of acquired backlog), and $215.0 million related to Test products. Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses were $195.1 million, or 22.7% of net sales, in 2022, and $167.5 million, or 23.4% of net sales, in 2021. The increase in SG&A expenses in 2022 as compared to 2021 was mainly due to higher expenses at Doble as a result of the SG&A expenses from the Altanova and Phenix acquisitions and the return of discretionary spending to more normal levels (travel, events, etc.) as COVID-19 pandemic related restrictions eased. Amortization of Intangible Assets Amortization of intangible assets was $25.9 million in 2022 and $20.8 million in 2021, including $19.3 million and $14.3 million of amortization of acquired intangible assets in 2022 and 2021, respectively, related to our acquisitions. The amortization of acquired intangible assets related to acquisitions is included in the Corporate 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 2022 as compared to 2021 was mainly due to the Company’s recent acquisitions of Phenix, Altanova and NEco. Other Income or Expenses, Net Other income, net, was $0.3 million in 2022, compared to other income, net, of $0.9 million in 2021. There were no individually significant items in other income, net in 2022. The principal components of other income, net, in 2021 included a gain of approximately $2 million for the final settlement on the sale of the Doble Watertown, MA property, partially offset by facility consolidation charges within the USG segment (Doble Manta, Morgan Schaffer and Altanova facilities). Non-GAAP Financial Measures The information reported herein includes the financial measures Diluted EPS As Adjusted, which we define as Diluted EPS excluding the per-share impact of discrete compensation and acquisition related costs, severance charges primarily within the A&D segment, and purchase accounting charges related to the Company’s recent acquisitions (Altanova and NEco) in 2022; the per-share net impact of discrete compensation and acquisition related costs, facility consolidation charges within the USG segment, and purchase accounting charges related to the Company’s recent acquisitions in 2021, partially offset by a gain on the final installment of the Doble Watertown, MA property sale; and pension plan termination charge and restructuring charges related to our facility consolidation restructuring plans in 2020; EBIT, which we define as earnings before interest and taxes; and EBIT margin, which we define as EBIT 20 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, we believe that EBIT and EBIT margin provide investors and Management with valuable information for assessing our operating results. Management evaluates the performance of our operating segments based on EBIT and believes that EBIT is useful to investors to demonstrate the operational profitability of our 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. We believe 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. EBIT The reconciliation of EBIT to a GAAP financial measure is as follows: (Dollars in millions) 2022 2021 EBIT $ 111.3 82.9 Less: Interest expense, net (4.9) (2.2) Less: Income tax expense (24.1) (17.2) Net earnings $ 82.3 63.5 EBIT by business segment is as follows: Change Fiscal year ended 2022 (Dollars in millions) 2022 2021 vs. 2021 A&D $ 68.4 56.5 21.1 % % of net sales 19.5 % 17.9 % USG 57.6 40.9 40.8 % % of net sales 20.7 % 20.2 % Test 32.6 27.6 18.1 % % of net sales 14.3 % 14.0 % Corporate (47.3) (42.1) (12.4) % Total $ 111.3 82.9 34.3 % % of net sales 13.0 % 11.6 % A&D The $11.9 million, or 21.1%, increase in EBIT in 2022 as compared to 2021 was primarily due to higher sales volumes, favorable product mix and price increases at Mayday, Westland, PTI and Globe partially offset by a decrease in EBIT at Crissair and VACCO due to product mix and inflationary pressures. EBIT in 2022 was negatively impacted by a $0.3 million inventory step-up charge related to the NEco acquisition and $0.4 million of severance charges primarily at VACCO. USG The $16.7 million, or 40.8%, increase in EBIT in 2022 as compared to 2021 was mainly due to higher sales volumes at Doble and NRG with a favorable product mix and price increases, partially offset by inflationary pressures and increased travel and event costs. EBIT in 2022 was negatively impacted by approximately $0.5 million of inventory step-up charges related to the Altanova acquisition. Test The $5.0 million, or 18.1%, increase in EBIT in 2022 as compared to 2021 was primarily due to leverage on higher sales volumes and price increases mainly from the segment’s Asian and U.S. operations partially offset by material cost and wage inflation. 21 Corporate Corporate operating charges included in 2022 consolidated EBIT increased to $47.3 million as compared to $42.1 million in 2021 mainly due to an increase in amortization expense of acquired intangible assets related to the Company’s recent acquisitions of Phenix, Altanova and NEco. The “Reconciliation to Consolidated Totals (Corporate)” in Note 12 to the Consolidated Financial Statements represents Corporate office operating charges. Interest Expense, Net Interest expense, net was $4.9 million and $2.3 million in 2022 and 2021, respectively. The increase in interest expense in 2022 was mainly due to higher average outstanding borrowings and higher average interest rates. Average outstanding borrowings were $190 million in 2022 compared to $71 million in 2021. The weighted average interest rates were 2.11% in 2022 compared to 1.20% in 2021. Income Tax Expense The effective tax rates from continuing operations for 2022, 2021 and 2020 were 22.7%, 21.3% and 37.1%, respectively. The increase in the 2022 effective tax rate as compared to 2021 was due an increase in state income tax expense and a reduction in research credit benefits, increasing the rate by 1.0% and 0.6%, respectively. No provision has been made in 2022 for foreign withholding of any applicable U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries where these earnings are considered indefinitely invested or otherwise retained for continuing international operations. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable. Acquisitions and Divestiture Information regarding our acquisitions and divestiture during 2022, 2021 and 2020 is set forth in Notes 2 and 3 to the Consolidated Financial Statements, which Notes are incorporated by reference herein. All of our 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 our financial statements from the date of acquisition. Capital Resources and Liquidity Net cash provided by operating activities Net cash used in investing activities 22 the NRG building There were no commitments outstanding that were considered material for capital expenditures at September 30, Net cash Bank Credit Facility A description of Cash flow from operations and borrowings under the Credit Facility is expected to provide adequate resources to meet Dividends Payments due by period Less than 1 to 3 3 to 5 More than (Dollars in millions) Total 1 year years years 5 years Long-Term Debt Obligations $ 62.4 2.4 — 60.0 — Estimated Interest Payments (1) 3.5 2.2 1.3 — — Operating Lease Obligations 24.0 5.6 9.0 2.4 7.0 Finance Lease Obligations 40.5 2.9 6.1 3.2 28.3 Purchase Obligations (2) 23.4 21.5 1.9 — — Total $ 153.8 34.6 18.3 65.6 35.3 Share Repurchases 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 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 23 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 The The Test segment generally difference between total revenue and total estimated costs at completion of a contract and 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, and 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 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 Income Taxes Goodwill and Other Long-Lived Assets Our Management annually reviews goodwill and other long-lived assets determined by Management to be commensurate with the risk inherent in each of our reporting units’ or asset groups’ current business models. Other Matters Quantitative and Qualitative Disclosures about Market Risk Market risks relating to Item 7A. Quantitative and Qualitative Disclosures about Market Risk 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 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. 25 Item 9A. Controls and Procedures Our Chief Executive Officer and Chief Financial Officer (“Certifying Officers”) 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) Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s Management, with participation of the Certifying Officers, under the oversight of our Board of Directors, evaluated the effectiveness of the Company’s internal control over financial reporting as of September 30, 2022 using the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Because of its inherent limitations, any system of internal control over financial reporting, no matter how well designed, may not prevent or detect misstatement 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, 2022, using criteria established in Internal Control – Integrated Framework (2013) issued by COSO and concluded that the Company maintained effective internal control over financial reporting as of September 30, 2022, based on these criteria. Our internal control over financial reporting as of September 30, 2022, has been Changes in Internal Control Over Financial Reporting No changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding our directors, nominees and nominating procedures, Information regarding Item 11. Executive Compensation Information regarding Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding the beneficial ownership of Information regarding shares of Item 13. Certain Relationships and Related Transactions and Director Independence Information regarding transactions with related parties and the independence of Item 14. Principal Accountant Fees and Services Information regarding PART IV Item 15. Exhibits, Financial Statement Schedules 21 Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP) 23.2 Consent of Independent Registered Public Accounting Firm (KPMG LLP) 31.1 31.2 32 ** Certification of Chief Executive Officer and Chief Financial Officer 101.INS *** Inline XBRL Instance Document Submitted herewith 101.SCH *** Inline XBRL Schema Document 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 (contained in Exhibit 101) Submitted herewith * Indicates a management contract or compensatory plan or arrangement. ** Furnished (and not filed) *** Exhibits 101 and 104 to this report consist of documents formatted in XBRL (Extensible Business Reporting Language) and filed with the Securities and Exchange Commission; they are not included in printed copies of this Report. Item16.Form10-K Summary Not applicable. 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 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 Chairman, President, Chief Executive Officer (Principal Executive Officer) and Director November Victor L. Richey /s/ November /s/ Patrick M. Dewar Director November Patrick M. Dewar /s/ Janice L. Hess Director November 29, 2022 Janice L. Hess /s/ Vinod M. Khilnani Director November Vinod M. Khilnani /s/ Leon J. Olivier Director November Leon J. Olivier /s/ Robert J. Phillippy Director November Robert J. Phillippy /s/ James M. Stolze Director November James M. Stolze /s/ Gloria L. Valdez Director November Gloria L. Valdez FINANCIAL INFORMATION INDEX Reports of Independent Registered Public Accounting Firm, PCAOB ID Number 248 [Grant Thornton LLP] F-2 F-5 F-6 F-7 F-8 Consolidated Statements of Cash Flows for the Years Ended September 30, 2022, 2021 and 2020 F-11 F-1 REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, PCAOB ID NUMBER 248 Board of Directors and Shareholders ESCO Technologies Inc. Opinion on the financial statements We have audited the accompanying consolidated balance sheet of ESCO Technologies Inc. (a Missouri corporation) and subsidiaries (the “Company”) as of September 30, 2022, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for the fiscal year ended September 30, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2022, and the results of its operations and its cash flows for the fiscal year ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America. 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, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated November 29, 2022 expressed an unqualified opinion. Basis for opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s 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 financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the 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 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 financial statements. We believe that our audit provides a reasonable basis for our opinion. Critical audit matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the 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 financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition – Estimate of contract costs expected at completion As described further in Notes 1 and 15 to the financial statements, the Company’s Aerospace & Defense and Test segments enter into certain long-term fixed price contracts with their customers to produce certain products that do not have an alternative use to the Company and for which the Company has an enforceable right to payment for costs incurred to date plus a reasonable margin. For the Aerospace & Defense segment, the Company uses a cost-to-cost method to recognize the revenue for these contracts over time. Using the cost-to-cost method, the Company measures progress to contract completion using the ratio of contract costs incurred to date compared to estimated total contract costs at completion. Judgment is required in estimating the total contract costs at completion due to the unique specifications and requirements for each individual contract relating to the design, development, manufacturing, and installation of the built-to-spec products. F-2 We identified the determination of the estimated total contract costs at completion for certain contracts in the Aerospace & Defense segment for which revenue is recognized over time using the cost-to-cost method as a critical audit matter. The principal considerations for our determination that the estimated total contract costs at completion is a critical audit matter are that the estimated total contract costs at completion require complex judgment to evaluate the engineering and production requirements of the contract and the related labor and materials costs, which are assumptions with a high level of estimation uncertainty and susceptibility to potential management bias. Changes to the assumptions used in developing these estimates may significantly impact the net sales and earnings recorded during the fiscal year. Our audit procedures related to the estimated total contract costs at completion include the following, among others. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s revenue recognition and job cost processes. This included controls over the accumulation and estimation of costs to complete the contracts. For a selection of completed contracts, we compared the Company’s historical estimated costs and profit margin to the actual costs and profit margin to assess the Company’s ability to accurately estimate costs. We also tested the Company’s assumptions for labor hours and materials to be incurred for a selection of in-process contracts by: /s/ GRANT THORNTON LLP We have served as the Company’s auditor since 2021. St. Louis, Missouri November 29, 2022 F-3 Board of Directors and Shareholders ESCO Technologies Inc. Opinion on internal control over financial reporting We have audited the internal control over financial reporting of ESCO Technologies Inc. (a Missouri corporation) and subsidiaries (the “Company”) as of September 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended September 30, 2022, and our report dated November 29, 2022 expressed an unqualified opinion on those 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 included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and 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/ GRANT THORNTON LLP St. Louis, Missouri November 29, 2022 F-4 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, 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 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. We St. Louis, Missouri November CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share amounts) Years ended September 30, 2020 2019 2018 Net sales $ 732,915 726,044 683,650 Costs and expenses: Cost of sales 457,418 437,998 419,713 Selling, general and administrative expenses 159,490 162,734 153,065 Amortization of intangible assets 21,812 18,492 17,262 Interest expense, net 6,730 8,092 8,798 Pension plan termination charge 40,600 — — Other expenses, net 7,122 851 3,721 Total costs and expenses 693,172 628,167 602,559 Earnings before income tax 39,743 97,877 81,091 Income tax expense (benefit) 14,278 20,388 (5,170) Net earnings from continuing operations 25,465 77,489 86,261 (Loss) earnings from discontinued operations, net of tax expense of $269, $789 and $1,060 in 2020, 2019 and 2018, respectively (601) 3,550 5,875 Gain on sale from discontinued operations, net of tax expense of $23,232 77,116 — — Net earnings from discontinued operations 76,515 3,550 5,875 Net earnings $ 101,980 81,039 92,136 Earnings per share: Basic: Continuing operations $ 0.98 2.99 3.33 Discontinued operations 2.94 0.13 0.23 Net earnings $ 3.92 3.12 3.56 Diluted: Continuing operations $ 0.97 2.97 3.31 Discontinued operations 2.93 0.13 0.23 Net earnings $ 3.90 3.10 3.54 Average common shares outstanding (in thousands): Basic 26,010 25,946 25,874 Diluted 26,135 26,097 26,058 (Dollars in thousands, except per share amounts) Years ended September 30, 2022 2021 2020 Net sales $ 857,502 715,440 730,471 Costs and expenses: Cost of sales 525,457 445,045 458,311 Selling, general and administrative expenses 195,127 167,534 159,490 Amortization of intangible assets 25,936 20,829 21,812 Interest expense, net 4,851 2,255 6,730 Pension plan termination charge — — 40,600 Other (income) expenses, net (304) (894) 7,122 Total costs and expenses 751,067 634,769 694,065 Earnings before income tax 106,435 80,671 36,406 Income tax expense 24,115 17,175 13,510 Net earnings from continuing operations 82,320 63,496 22,896 Net gain on sale from discontinued operations, net of tax expense of $23,501 — — 76,515 Net earnings from discontinued operations — — 76,515 Net earnings $ 82,320 63,496 99,411 Earnings per share: Basic: Continuing operations $ 3.17 2.44 0.88 Discontinued operations — — 2.94 Net earnings $ 3.17 2.44 3.82 Diluted: Continuing operations $ 3.16 2.42 0.88 Discontinued operations — — 2.93 Net earnings $ 3.16 2.42 3.81 Average common shares outstanding (in thousands): Basic 25,933 26,046 26,010 Diluted 26,067 26,225 26,135 See accompanying Notes to Consolidated Financial Statements. F-6 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) Years ended September 30, 2020 2019 2018 2022 2021 2020 Net earnings $ 101,980 81,039 92,136 $ 82,320 63,496 99,411 Other comprehensive (loss) income, net of tax: Foreign currency translation adjustments 3,172 (6,474) (2,254) (28,876) 1,496 3,172 Pension plan termination 40,600 — — — — 40,600 Amortization of prior service costs and actuarial losses (3,455) (6,066) (2,003) Net unrealized gain on derivative instruments — 94 37 Amortization of prior service costs, actuarial losses and other (727) — (3,455) Total other comprehensive (loss) income, net of tax 40,317 (12,446) (4,220) (29,603) 1,496 40,317 Comprehensive income $ 142,297 68,593 87,916 $ 52,717 64,992 139,728 See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED BALANCE SHEETS (Dollars in thousands) As of September 30, 2022 2021 ASSETS Current assets: Cash and cash equivalents $ 97,724 56,232 Accounts receivable, less allowance for credit losses of $2,612 and $1,949 in 2022 and 2021, respectively 164,645 146,341 Contract assets, net 125,154 93,771 Inventories, net 162,403 147,148 Other current assets 22,696 22,662 Total current assets 572,622 466,154 Property, plant and equipment: Land and land improvements 12,126 10,547 Buildings and leasehold improvements 110,306 109,279 Machinery and equipment 187,287 176,447 Construction in progress 11,576 5,543 321,295 301,816 Less accumulated depreciation and amortization (165,322) (147,551) Net property, plant and equipment 155,973 154,265 Intangible assets, net 394,464 409,250 Goodwill 492,709 504,853 Operating lease assets, net 29,150 31,846 Other assets 9,538 10,977 Total Assets $ 1,654,456 1,577,345 See accompanying Notes to Consolidated Financial Statements. F-8 CONSOLIDATED BALANCE SHEETS (Dollars in thousands) As of September 30, 2020 2019 ASSETS Current assets: Cash and cash equivalents $ 52,560 61,808 Accounts receivable, less allowance for doubtful accounts of $1,995 and $1,505 in 2020 and 2019, respectively 144,082 158,715 Contract assets, net 96,746 110,211 Inventories, net 136,189 124,956 Other current assets 17,053 14,190 Assets of discontinued operations - current — 25,314 Total current assets 446,630 495,194 Property, plant and equipment: Land and land improvements 9,657 8,101 Buildings and leasehold improvements 98,636 83,255 Machinery and equipment 153,718 136,881 Construction in progress 8,393 9,983 270,404 238,220 Less accumulated depreciation and amortization (130,534) (110,377) Net property, plant and equipment 139,870 127,843 Intangible assets, net 346,632 381,605 Goodwill 408,063 390,256 Operating lease assets 21,390 — Other assets 10,938 4,445 Assets of discontinued operations - other — 67,377 Total Assets $ 1,373,523 1,466,720 (Dollars in thousands) As of September 30, 2022 2021 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Current maturities of long-term debt and short-term borrowings $ 20,000 20,000 Accounts payable 78,746 56,669 Contract liabilities, net 125,009 106,045 Accrued salaries 40,572 39,768 Accrued other expenses 53,802 52,513 Total current liabilities 318,129 274,995 Deferred tax liabilities, net 82,023 73,560 Non-current operating lease liabilities 24,853 28,032 Other liabilities 48,294 47,062 Long-term debt 133,000 134,000 Total liabilities 606,299 557,649 Shareholders’ equity: Preferred stock, par value $.01 per share, authorized 10,000,000 shares Common stock, par value $.01 per share, authorized 50,000,000 shares; issued 30,707,748 and 30,666,173 shares in 2022 and 2021, respectively 307 307 Additional paid-in capital 301,553 297,644 Retained earnings 905,022 830,989 Accumulated other comprehensive loss, net of tax (31,764) (2,161) 1,175,118 1,126,779 Less treasury stock, at cost (4,854,997 and 4,604,741 common shares in 2022 and 2021, respectively) (126,961) (107,083) Total shareholders’ equity 1,048,157 1,019,696 Total Liabilities and Shareholders’ Equity $ 1,654,456 1,577,345 See accompanying Notes to Consolidated Financial Statements. (Dollars in thousands) As of September 30, 2020 2019 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: Current maturities of long-term debt and short-term borrowings $ 22,368 20,000 Accounts payable 50,525 63,800 Contract liabilities, net 100,551 81,177 Accrued salaries 32,149 37,194 Accrued other expenses 50,436 37,947 Liabilities of discontinued operations - current — 11,517 Total current liabilities 256,029 251,635 Pension obligations 2,481 22,682 Deferred tax liabilities 60,938 60,856 Other liabilities 52,480 36,326 Long-term debt 40,000 265,000 Liabilities of discontinued operations - other — 3,999 Total liabilities 411,928 640,498 Shareholders’ equity: Preferred stock, par value $.01 per share, authorized 10,000,000 shares Common stock, par value $.01 per share, authorized 50,000,000 shares; issued 30,645,625 and 30,596,940 shares in 2020 and 2019, respectively 306 306 Additional paid-in capital 293,682 292,408 Retained earnings 778,398 684,741 Accumulated other comprehensive loss, net of tax (3,657) (43,974) 1,068,729 933,481 Less treasury stock, at cost (4,607,911 and 4,615,627 common shares in 2020 and 2019, respectively) (107,134) (107,259) Total shareholders’ equity 961,595 826,222 Total Liabilities and Shareholders’ Equity $ 1,373,523 1,466,720 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Accumulated Accumulated Additional Other Additional Other Common Stock Paid-In Retained Comprehensive Treasury Common Stock Paid-In Retained Comprehensive Treasury (In thousands) Shares Amount Capital Earnings Income (Loss) Stock Total Shares Amount Capital Earnings Income (Loss) Stock Total Balance, September 30, 2017 30,469 $ 305 289,785 516,718 (27,308) (107,582) 671,918 Comprehensive income (loss): Net earnings 0 0 0 92,136 0 0 92,136 Translation adjustments, net of tax of $0 0 0 0 0 (2,254) 0 (2,254) Net unrecognized actuarial loss, net of tax of $(1,326) 0 0 0 0 (2,003) 0 (2,003) Forward exchange contracts, net of tax of $(41) 0 0 0 0 37 0 37 Cash dividends declared ($0.32 per share) 0 0 0 (8,278) 0 0 (8,278) Reclassification from accumulated other comprehensive loss as a result of the adoption of new accounting standard ASU 2018-02 6,261 0 0 6,261 Stock options and stock compensation plans, net of tax of $0 66 0 1,405 0 0 188 1,593 Balance, September 30, 2018 30,535 $ 305 291,190 606,837 (31,528) (107,394) 759,410 Comprehensive income (loss): Net earnings 0 0 0 81,039 0 0 81,039 Translation adjustments, net of tax of $0 0 0 0 0 (6,474) 0 (6,474) Net unrecognized actuarial loss, net of tax of $1,817 0 0 0 0 (6,066) 0 (6,066) Forward exchange contracts, net of tax of $(22) 0 0 0 0 94 0 94 Cash dividends declared ($0.32 per share) 0 0 0 (8,302) 0 0 (8,302) Adoption of new accounting standard ASU 2014-09 0 0 0 5,167 0 0 5,167 Stock options and stock compensation plans, net of tax of $0 62 1 1,218 0 0 135 1,354 Balance, September 30, 2019 30,597 $ 306 292,408 684,741 (43,974) (107,259) 826,222 30,597 $ 306 292,408 684,741 (43,974) (107,259) 826,222 Comprehensive income (loss): Net earnings 0 0 0 101,980 0 0 101,980 — — — 99,411 — — 99,411 Translation adjustments, net of tax of $0 0 0 0 0 3,172 0 3,172 — — — — 3,172 — 3,172 Pension termination and net unrecognized actuarial loss, net of tax of $(1,161) 0 0 0 0 37,145 0 37,145 — — — — 37,145 — 37,145 Cash dividends declared ($0.32 per share) 0 0 0 (8,323) 0 0 (8,323) — — — (8,323) — — (8,323) Stock options and stock compensation plans, net of tax of $0 49 0 1,274 0 0 125 1,399 Stock compensation plans, net of tax of $0 49 — 1,274 — — 125 1,399 Balance, September 30, 2020 30,646 $ 306 293,682 778,398 (3,657) (107,134) 961,595 30,646 $ 306 293,682 775,829 (3,657) (107,134) 959,026 Comprehensive income (loss): Net earnings — — — 63,496 — — 63,496 Translation adjustments, net of tax of $0 — — — — 1,496 — 1,496 Cash dividends declared ($0.32 per share) — — — (8,336) — — (8,336) Stock compensation plans, net of tax of $0 20 1 3,962 — — 51 4,014 Balance, September 30, 2021 30,666 $ 307 297,644 830,989 (2,161) (107,083) 1,019,696 Comprehensive income (loss): Net earnings — — — 82,320 — — 82,320 Net unrecognized actuarial loss – SERP — — — — (727) — (727) Translation adjustments, net of tax of $0 — — — — (28,876) — (28,876) Cash dividends declared ($0.32 per share) — — — (8,287) — — (8,287) Purchases of common stock into treasury — — — — — (19,878) (19,878) Stock compensation plans, net of tax of $0 42 — 3,909 — — — 3,909 Balance, September 30, 2022 30,708 307 301,553 905,022 (31,764) (126,961) 1,048,157 See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) Years ended September 30, 2020 2019 2018 Cash flows from operating activities: Net earnings $ 101,980 81,039 92,136 Adjustments to reconcile net earnings to net cash provided by operating activities: Net earnings from discontinued operations, net of tax (76,515) (3,550) (5,875) Depreciation and amortization 41,338 35,995 33,690 Stock compensation expense 5,550 5,088 5,029 Changes in assets and liabilities 23,793 (6,649) (9,552) Change in property, plant and equipment from gain on building sale — (8,922) — Effect of deferred taxes on tax provision (2,562) 61 (21,031) Pension contributions (25,650) (2,500) (9,951) Pension plan termination charge 40,600 — — Net cash provided by operating activities – continuing operations 108,534 100,562 84,446 Net cash (used) provided by discontinued operations (26,254) 4,575 8,813 Net cash provided by operating activities 82,280 105,137 93,259 Cash flows from investing activities: Acquisition of businesses, net of cash acquired — (95,840) (9,813) Capital expenditures (32,108) (24,229) (15,243) Additions to capitalized software (9,023) (8,374) (9,573) Proceeds from sale of building and land — 17,201 — Net cash used by investing activities – continuing operations (41,131) (111,242) (34,629) Net cash provided (used) by investing activities – discontinued operations 182,084 (13,903) (6,978) Net cash provided (used) by investing activities 140,953 (125,145) (41,607) Cash flows from financing activities: Proceeds from long-term debt 12,368 130,000 55,000 Principal payments on long-term debt (235,000) (65,000) (110,000) Dividends paid (8,323) (8,302) (8,278) Debt issuance costs — (1,071) — Other (3,125) (3,371) (3,078) Net cash provided (used) by financing activities – continuing operations (234,080) 52,256 (66,356) Net cash used by financing activities – discontinued operations (2,140) (2,472) (1,922) Net cash provided (used) by financing activities (236,220) 49,784 (68,278) Effect of exchange rate changes on cash and cash equivalents 3,739 1,555 1,587 Net (decrease) increase in cash and cash equivalents (9,248) 31,331 (15,039) Cash and cash equivalents at beginning of year 61,808 30,477 45,516 Cash and cash equivalents at end of year $ 52,560 61,808 30,477 Changes in assets and liabilities: Accounts receivable, net $ 14,633 (8,722) (340) Contract assets 13,465 (57,177) (5,748) Inventories (11,233) 7,109 (9,440) Other assets and liabilities (6,615) 7,708 1,334 Accounts payable (13,275) 10,716 7,932 Contract liabilities 19,374 32,142 (1,999) Accrued expenses 7,444 1,575 (1,291) $ 23,793 (6,649) (9,552) Supplemental cash flow information: Interest paid $ 5,869 8,076 8,540 Income taxes paid (including state & foreign) 37,714 26,084 8,789 (Dollars in thousands) Years ended September 30, 2022 2021 2020 Cash flows from operating activities: Net earnings $ 82,320 63,496 99,411 Adjustments to reconcile net earnings to net cash provided by operating activities: Net earnings from discontinued operations, net of tax — — (76,515) Depreciation and amortization 48,343 42,049 41,338 Stock compensation expense 7,320 6,914 5,550 Changes in assets and liabilities (11,654) 15,671 26,585 Gain on sale of building and land — (1,950) — Effect of deferred taxes on tax provision 8,946 (3,041) (2,785) Pension contributions — — (25,650) Pension plan termination charge — — 40,600 Net cash provided by operating activities – continuing operations 135,275 123,139 108,534 Net cash (used) by discontinued operations — — (26,254) Net cash provided by operating activities 135,275 123,139 82,280 Cash flows from investing activities: Acquisition of businesses, net of cash acquired (10,906) (168,903) — Capital expenditures (32,101) (26,705) (32,108) Additions to capitalized software (12,912) (8,783) (9,023) Proceeds from sale of building and land — 1,950 — Net cash used by investing activities – continuing operations (55,919) (202,441) (41,131) Net cash provided by investing activities – discontinued operations — — 182,084 Net cash (used) provided by investing activities (55,919) (202,441) 140,953 Cash flows from financing activities: Proceeds from long-term debt 100,000 216,000 12,368 Principal payments on long-term debt (101,000) (124,368) (235,000) Dividends paid (8,268) (8,336) (8,323) Purchases of common stock into treasury (19,878) — — Other (2,976) (1,823) (3,125) Net cash (used) provided by financing activities – continuing operations (32,122) 81,473 (234,080) Net cash used by financing activities – discontinued operations — — (2,140) Net cash (used) provided by financing activities (32,122) 81,473 (236,220) Effect of exchange rate changes on cash and cash equivalents (5,742) 1,501 3,739 Net increase (decrease) in cash and cash equivalents 41,492 3,672 (9,248) Cash and cash equivalents at beginning of year 56,232 52,560 61,808 Cash and cash equivalents at end of year $ 97,724 56,232 52,560 Changes in assets and liabilities: Accounts receivable, net $ (17,676) 11,266 14,633 Contract assets and liabilities, net (12,419) 8,974 35,283 Inventories (13,788) 612 (10,340) Other assets and liabilities 9,412 (477) (8,609) Accounts payable 21,985 (688) (13,275) Accrued expenses 832 (3,836) 8,893 $ (11,654) 15,671 26,585 Supplemental cash flow information: Interest paid $ 2,835 590 5,869 Income taxes paid (including state & foreign) 9,856 26,054 37,714 See accompanying Notes to Consolidated Financial Statements. 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. Except where the context indicates otherwise, the terms “Company”, “we”, “our” and “us” are used in this report to refer to ESCO together with its subsidiaries B. Basis of Presentation C. Nature of Operations 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: In addition, for reporting certain financial information we treat Corporate activities as a separate segment. 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 F-12 consideration, or the transaction price, Payment terms with our customers vary by the type and location of the customer and the products or services offered. Approximately 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 method, we measure the extent of progress towards completion 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 F-13 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. For contracts where revenue is recognized over time, we USG: Within the USG segment, approximately Approximately 20% of the segment’s revenues (approximately 6% 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. Typically, 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 we have 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 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 6% 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 F-14 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 25% of revenues (approximately 7% 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 because 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 the 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 we 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 Under the typical payment terms of our fixed price contracts, the customer pays us either 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. F-15 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. See the further discussion of 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 H. Inventories 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, J. Leases 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 F-16 current business models. Other intangible assets represent costs allocated to identifiable intangible assets, principally customer relationships, capitalized software, patents, trademarks, and technology rights. See Note 4 regarding goodwill and other intangible assets activity. L. Capitalized Software M. Income Taxes N. Research and Development Costs Company-sponsored research and development costs include research and development and bid and proposal efforts related to O.Foreign Currency Translation We translate the financial statements of our foreign operations into U.S. dollars in accordance with FASB ASC Topic 830, Foreign Currency Matters. We record the resulting translation adjustments as a separate component of accumulated other comprehensive income. P.Earnings Per Share We calculate basic earnings per share using the weighted average number of common shares outstanding during the period. We calculate diluted earnings per share using the weighted average number of common shares outstanding during the period plus shares issuable upon the assumed exercise of dilutive The number of shares used in the calculation of earnings per share for each year presented is as follows: (in thousands) 2020 2019 2018 Weighted Average Shares Outstanding - Basic 26,010 25,946 25,874 Performance-Accelerated Restricted Stock 125 151 184 Shares - Diluted 26,135 26,097 26,058 (in thousands) 2022 2021 2020 Weighted Average Shares Outstanding — Basic 25,933 26,046 26,010 Dilutive Restricted Shares 134 179 125 Shares — Diluted 26,067 26,225 26,135 Q. Share-Based Compensation R. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss of S. 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, we base fair value 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 Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Financial Assets and Liabilities Nonfinancial Assets and Liabilities 2. Acquisitions On November 4, 2021, we acquired Networks Electronic Company, LLC (NEco) for a purchase price of approximately $15.4 million, net of cash acquired. NEco, based in Chatsworth, California, provides miniature electro-explosive devices utilized in mission-critical defense and 2021 On August 9, 2021 we acquired the assets of On July 29, 2021 we acquired I.S.A. – Altanova Group S.r.l., (Altanova), headquartered in Taino, Italy, for a purchase price of approximately $115 million, net of cash acquired. Altanova is a supplier of diagnostic products, monitoring systems and services related to power generation, transmission and distribution networks, renewable energy and storage, and process industries to customers in more than 100 countries. Since the date of acquisition, the operating results for the Altanova business have been included as part of the USG segment. The acquisition date fair value of the assets acquired and liabilities assumed were as follows: $9.7 million of accounts receivable, $5.6 million of inventory, $1.2 million of property, plant and equipment, $9.0 million of other assets, $12.8 million of accounts payable and accrued expenses, $6.9 million of other liabilities, $16.7 million of deferred tax liabilities, $50.5 million of customer relationships and $4.3 million of tradenames. The tradename was determined to have a useful life of ten years and the customer relationships were determined to have a useful life of twenty years. The acquired goodwill of $71.1 million relates to the excess value associated with opportunities to expand the services and products that the Company can offer to its customers, access to new markets, and synergies anticipated by combining Altanova with existing USG businesses. The goodwill is not deductible for tax purposes. F-19 We accounted for these Net sales and pretax (loss) from the Technical Packaging business were $16.5 million September 30, 2019 Assets: Accounts receivable, net $ 15.7 Contract assets, net 5.1 Inventories 3.9 Other current assets 0.6 Current assets 25.3 Property, plant & equipment, net 33.6 Intangible assets, net 11.4 Goodwill 19.0 Other assets 3.4 Total assets $ 92.7 Liabilities: Accounts payable $ 7.6 Accrued expenses and other current liabilities 3.9 Current liabilities 11.5 Other liabilities 4.0 Total liabilities $ 15.5 4. Goodwill and Other Intangible Assets Included on the (Dollars in thousands) 2020 2019 2022 2021 Goodwill $ 408,063 390,256 $ 492,709 504,853 Intangible assets with determinable lives: Patents Gross carrying amount $ 2,092 1,945 $ 2,353 2,131 Less: accumulated amortization 858 748 1,091 972 Net $ 1,234 1,197 $ 1,262 1,159 Capitalized software Gross carrying amount $ 84,888 78,962 $ 106,583 93,671 Less: accumulated amortization 57,302 48,530 70,476 63,740 Net $ 27,586 30,432 $ 36,107 29,931 Customer Relationships Gross carrying amount $ 227,178 227,225 $ 287,447 288,530 Less: accumulated amortization 67,643 55,326 96,921 80,882 Net $ 159,535 171,899 $ 190,526 207,648 Other Gross carrying amount $ 5,156 5,441 $ 13,985 13,177 Less: accumulated amortization 3,260 2,645 7,440 4,398 Net $ 1,896 2,796 $ 6,545 8,779 Intangible assets with indefinite lives: Trade names $ 156,381 175,281 $ 160,024 161,733 F-20 The changes in the carrying amount of goodwill attributable to each business segment for Aerospace & (Dollars in millions) Defense Test USG Total A&D Test USG Total Balance as of September 30, 2018 73.7 34.1 254.1 361.9 Acquisition activity and other 28.5 0 (0.1) 28.4 Balance as of September 30, 2019 102.2 34.1 254.0 390.3 Out-of-period adjustment — 0 18.0 18.0 Balance as of September 30, 2020 $ 102.1 34.1 271.9 408.1 Acquisition activity 2.2 — 95.2 97.4 Foreign currency translation and other (0.1) 0 (0.1) (0.2) — — (0.6) (0.6) Balance as of September 30, 2020 $ 102.1 34.1 271.9 408.1 Balance as of September 30, 2021 $ 104.3 34.1 366.5 504.9 Acquisition activity 5.7 — (4.7) 1.0 Foreign currency translation and other — (0.1) (13.1) (13.2) Balance as of September 30, 2022 $ 110.0 34.0 348.7 492.7 Amortization expense related to intangible assets with determinable lives was $25.9 million, $20.8 million and $21.8 million 5. Accounts Receivable Accounts receivable, net of the allowance for (Dollars in thousands) 2020 2019 2022 2021 Commercial $ 121,924 137,553 $ 151,565 128,952 U.S. Government and prime contractors 22,158 21,162 13,080 17,389 Total $ 144,082 158,715 $ 164,645 146,341 6. Inventories, Net Inventories, net, from continuing operations (Dollars in thousands) 2020 2019 2022 2021 Finished goods $ 28,471 23,550 $ 32,471 32,998 Work in process 30,183 26,407 38,492 34,201 Raw materials 77,535 74,999 91,440 79,949 Total $ 136,189 124,956 $ 162,403 147,148 (Dollars in thousands) 2020 2019 2018 2022 2021 2020 Income tax expense (benefit) from continuing operations $ 14,278 20,388 (5,170) Income tax expense from continuing operations $ 24,115 17,175 13,510 Income tax expense from discontinued operations 23,501 789 1,060 — — 23,501 Total income tax expense (benefit) $ 37,779 21,177 (4,110) $ 24,115 17,175 37,011 The components of income from continuing operations before income taxes for (Dollars in thousands) 2020 2019 2018 2022 2021 2020 United States $ 27,288 87,150 74,028 $ 90,674 70,214 23,951 Foreign 12,455 10,727 7,063 15,761 10,457 12,455 Total income before income taxes $ 39,743 97,877 81,091 $ 106,435 80,671 36,406 F-21 The principal components of income tax expense (benefit) from continuing operations for (Dollars in thousands) 2020 2019 2018 2022 2021 2020 Federal: Current $ 10,982 13,888 7,663 $ 7,248 14,807 10,495 Deferred 1,507 250 (22,329) 9,752 (1,598) 1,311 State and local: Current 2,042 3,039 1,885 1,635 2,257 1,984 Deferred (905) 98 2,899 1,774 (786) (932) Foreign: Current 2,875 2,439 2,208 4,645 2,922 2,875 Deferred (2,223) 674 2,504 (939) (427) (2,223) Total $ 14,278 20,388 (5,170) $ 24,115 17,175 13,510 The actual income tax expense 2020 2019 2018 2022 2021 2020 Federal corporate statutory rate 21.0 % 21.0 % 24.5 % 21.0 % 21.0 % 21.0 % State and local, net of Federal benefits 2.3 3.2 2.9 2.9 1.9 2.3 Foreign (1.1) 0.6 0.8 Research credit (3.4) (0.8) (1.6) Domestic production deduction 0 0 (1.1) Change in uncertain tax positions 0 (0.1) (0.1) Impact of foreign operations (0.3) (0.4) 1.3 Federal research credit (0.3) (0.9) (3.7) Executive compensation 1.5 0.3 (0.1) 0.5 0.9 1.6 Valuation allowance (6.3) (2.4) 3.0 (0.3) — (6.8) GILTI and FDII 0.4 (0.6) 0 Tax reform – impact on U.S. deferred tax assets and liabilities 0 (0.3) (39.3) Tax reform – transition tax 0 (0.1) 1.6 Tax reform – taxes related to foreign unremitted earnings 0 0 3.0 U.S. tax on GILTI 1.8 1.0 3.2 GILTI foreign tax credits (1.5) (0.6) (2.7) FDII deduction (0.9) (1.7) (2.6) Pension plan termination charge 21.4 0 0 — — 23.4 Other, net 0.1 0 0 (0.2) 0.1 0.1 Effective income tax rate 35.9 % 20.8 % (6.4) % 22.7 % 21.3 % 37.1 % F-22 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, (Dollars in thousands) 2020 2019 2022 2021 Deferred tax assets: Inventories $ 4,998 4,800 $ 4,990 4,267 Pension and other postretirement benefits 842 5,533 664 859 Timing differences related to revenue recognition 4,722 0 61 9,365 Lease liabilities 5,220 0 7,073 7,614 Net operating and capital loss carryforwards — domestic 563 602 575 542 Net operating loss carryforward — foreign 3,678 3,766 3,396 4,279 Other compensation-related costs and other cost accruals 8,953 7,764 9,032 8,174 State credit carryforward 2,366 1,914 1,676 2,639 Foreign credit carryforward 203 192 Total deferred tax assets 31,342 24,379 27,670 37,931 Deferred tax liabilities: Timing differences related to revenue recognition 0 (1,805) ROU assets (5,220) 0 (7,073) (7,614) Goodwill (7,878) (1,450) (11,691) (13,746) Acquisition assets (52,682) (58,547) Acquisition intangible assets (62,051) (62,052) Depreciation, software amortization (21,283) (18,288) (24,503) (22,418) Net deferred tax liabilities before valuation allowance (55,721) (55,711) (77,648) (67,899) Less valuation allowance (1,932) (4,504) (1,208) (2,011) Net deferred tax liabilities $ (57,653) (60,215) $ (78,856) (69,910) The valuation allowance for deferred tax assets as of September 30, Debt consists of the following at September 30, (Dollars in thousands) 2020 2019 2022 2021 Revolving credit facility, including current portion $ 62,368 285,000 Total borrowings $ 153,000 154,000 Current portion of long-term debt and short-term borrowings (22,368) (20,000) (20,000) (20,000) Total long-term debt, less current portion $ 40,000 265,000 $ 133,000 134,000 The Credit Facility includes a $500 million revolving line of credit as well as provisions allowing for an increase of the credit facility commitment amount by an additional $250 million, if necessary, with the consent of the lenders. The bank syndication supporting the facility is comprised of a diverse group of eight banks led by JP Morgan Chase Bank, N.A., as Administrative Agent. The Credit Facility matures September 27, F-23 Interest on borrowings under the Credit Facility is calculated at a spread over either the The Credit Facility is secured by the unlimited guaranty of At September 30, During The In August Performance-Accelerated Restricted Stock Unit (PARS) Awards, Time-Vested Restricted Stock Unit (RSU) Awards, and Performance Share Unit 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. The terms of the RSU awards are similar to those of the PARS awards, but without any provision for acceleration of the vesting date. Each RSU represents the right to receive one share of Company common stock if the recipient remains continuously employed by the Company until the award vests, in this case 3 ½ years after the effective award date. The RSU award grants were valued at the stock price on the date of grant. F-24 Beginning in fiscal year 2022, the Company granted PSU awards with a three-year vesting period, with each PSU representing the right to receive one share of Company common stock if certain performance targets are achieved. The targets are based on achieving certain EBITDA metrics and a Total Shareholder return (rTSR) metric over a three-year period. Pretax compensation expense related to the The following summary presents information regarding outstanding FY 2020 FY 2019 FY 2018 FY 2022 FY 2021 FY 2020 Estimated Estimated Estimated Estimated Estimated Estimated Weighted Weighted Weighted Weighted Weighted Weighted Shares Avg. Price Shares Avg. Price Shares Avg. Price Shares Avg. Price Shares Avg. Price Shares Avg. Price Nonvested at October 1, 281,004 $ 59.72 315,544 $ 47.23 335,825 $ 40.35 226,705 $ 76.15 220,300 $ 66.55 281,004 $ 59.72 Granted 45,723 74.80 84,862 74.77 104,320 56.06 117,045 82.54 51,476 108.05 45,723 74.80 Vested (89,822) 50.51 (113,402) 37.00 (121,301) 35.59 (75,327) 56.87 (35,753) 64.40 (89,822) 50.51 Cancelled (16,605) 60.48 (6,000) 45.20 (3,300) 53.86 (3,056) 89.51 (9,318) 70.50 (16,605) 60.48 Nonvested at September 30, 220,300 $ 66.55 281,004 $ 59.72 315,544 $ 47.23 265,367 $ 84.29 226,705 $ 76.15 220,300 $ 66.55 Compensation Plan for Non-Employee Directors 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 $7.3 million, $6.9 million and $5.6 million Substantially all our domestic employees are covered by a defined contribution plan maintained by the Company. In addition, (Dollars in millions) Reconciliation of benefit obligation 2020 2019 Net benefit obligation at beginning of year $ 100.1 89.8 Interest cost 3.0 3.7 Actuarial loss 6.9 11.3 Gross benefits paid (4.8) (4.7) Settlements (102.4) 0 Net benefit obligation at end of year $ 2.8 100.1 (Dollars in millions) Reconciliation of fair value of plan assets 2020 2019 Fair value of plan assets at beginning of year $ 77.2 73.3 Actual return on plan assets 3.6 5.9 Employer contributions 26.4 2.7 Gross benefits paid (4.8) (4.7) Settlements (102.4) 0 Fair value of plan assets at end of year $ 0 77.2 (Dollars in millions) Funded Status 2020 2019 Funded status at end of year $ (2.8) (22.9) Accrued benefit cost (2.8) (22.9) Amounts recognized in the Balance Sheet consist of: Current liability (0.3) (0.2) Noncurrent liability (2.5) (22.7) Accumulated other comprehensive loss (before tax effect) 0.7 49.6 Amounts recognized in accumulated other comprehensive loss consist of: Net actuarial loss 0.7 49.6 Accumulated other comprehensive loss (before tax effect) $ 0.7 49.6 (Dollars in millions) 2020 2019 2018 Service cost $ 0 0 0 Interest cost 3.0 3.7 3.4 Expected return on plan assets (4.2) (4.4) (3.8) Settlements 53.6 0 0 Net actuarial loss 2.8 2.1 2.3 Net periodic benefit cost 55.2 1.4 1.9 Defined contribution plans 7.4 6.8 6.6 Total $ 62.6 8.2 8.5 Other (Dollars in millions) Benefits Expected Benefit Payments: 2021 $ 0.2 2022 0.2 2023 0.3 2024 0.2 2025 0.2 2026‑2030 $ 0.9 Notional Amount Fair Value (In thousands) (Currency) (US$) Forward contracts 4,250 USD (6) (In thousands) Level 1 Level 2 Level 3 Total Asset: Forward contracts $ 0 (6) 0 (6) The The USG segment’s operations consist of Doble Engineering Company and related subsidiaries including Morgan Schaffer and Altanova (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. 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. NRG The Test 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. We evaluate the performance of our 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. 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, 2020 2019 2018 2022 2021 2020 Aerospace & Defense $ 354.3 325.7 286.8 A&D $ 351.4 314.8 351.9 USG 191.7 211.9 214.0 278.4 202.9 191.7 Test 186.9 188.4 182.9 227.7 197.7 186.9 Consolidated totals $ 732.9 726.0 683.7 $ 857.5 715.4 730.5 EBIT (Dollars in millions) Year ended September 30, 2020 2019 2018 2022 2021 2020 Aerospace & Defense $ 73.2 70.1 58.7 A&D $ 68.4 56.5 69.9 USG 24.4 52.2 43.2 57.6 40.9 24.4 Test 27.2 25.6 23.8 32.6 27.6 27.2 Reconciliation to consolidated totals (Corporate) (78.3) (41.9) (35.8) (47.3) (42.1) (78.4) Consolidated EBIT 46.5 106.0 89.9 111.3 82.9 43.1 Less: interest expense (6.7) (8.1) (8.8) (4.9) (2.2) (6.7) Earnings before income tax $ 39.8 97.9 81.1 $ 106.4 80.7 36.4 Identifiable Assets (Dollars in millions) Year ended September 30, 2020 2019 2022 2021 Aerospace & Defense $ 279.5 260.3 A&D $ 295.2 270.0 USG 144.8 146.3 220.0 197.5 Test 153.0 154.2 174.6 153.6 Corporate – goodwill 408.1 390.3 Corporate – other assets 388.1 422.9 Assets from discontinued operations – 92.7 Corporate 964.7 956.2 Consolidated totals $ 1,373.5 1,466.7 $ 1,654.5 1,577.3 Corporate Capital Expenditures (Dollars in millions) Year ended September 30, 2020 2019 2018 2022 2021 2020 Aerospace & Defense $ 15.9 11.7 7.0 A&D $ 9.4 10.4 15.9 USG 12.4 8.5 5.2 14.4 11.6 12.4 Test 3.6 4.0 3.0 8.3 4.7 3.6 Corporate 0.2 0 0 — — 0.2 Consolidated totals $ 32.1 24.2 15.2 $ 32.1 26.7 32.1 In addition to the above amounts, Depreciation and Amortization (Dollars in millions) Year ended September 30, 2020 2019 2018 2022 2021 2020 Aerospace & Defense $ 9.4 8.3 7.6 A&D $ 11.1 10.4 9.4 USG 14.4 11.3 11.0 12.6 13.5 14.4 Test 5.0 5.1 4.5 5.4 5.2 5.0 Corporate 12.5 11.3 10.6 19.2 12.9 12.5 Consolidated totals $ 41.3 36.0 33.7 $ 48.3 42.0 41.3 Depreciation expense of property, plant and equipment was $22.4 million, $21.2 million and $19.5 million Geographic Information Net Sales (Dollars in millions) Year ended September 30, 2020 2019 2018 2022 2021 2020 United States $ 531.9 537.2 495.8 $ 603.2 517.0 529.4 Asia 96.3 86.2 92.6 122.4 92.3 96.3 Europe 51.3 45.0 41.3 72.4 53.5 51.3 Canada 31.7 33.0 30.2 31.2 27.0 31.7 India 10.3 11.7 9.4 10.3 12.4 10.3 Other 11.4 12.9 14.4 18.0 13.2 11.5 Consolidated totals $ 732.9 726.0 683.7 $ 857.5 715.4 730.5 Long-Lived Assets (Dollars in millions) Year ended September 30, 2020 2019 2022 2021 United States $ 131.5 120.7 $ 141.5 141.0 Mexico 3.1 1.8 5.8 3.8 Other 5.3 5.3 8.7 9.5 Consolidated totals $ 139.9 127.8 $ 156.0 154.3 At September 30, 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 components of lease costs are shown below: Year Ended Year Ended Year Ended September 30, September 30, (Dollars in thousands) September 30, 2020 2022 2021 Finance lease cost: Amortization of right-of-use assets $ 2,056 Amortization $ 1,572 2,413 Interest on lease liabilities 971 973 1,235 Operating lease cost 5,284 6,347 5,879 Total lease cost $ 8,311 $ 8,892 9,527 Year Ended September 30, (Dollars in thousands) 2020 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 5,223 Operating cash flows from finance leases 971 Financing cash flows from finance leases 1,547 Right-of-use assets obtained in exchange for operating lease liabilities $ 26,244 Weighted-average remaining lease term: Operating leases 6.00 years Finance leases 12.53 years Weighted-average discount rate: Operating leases 3.09 % Finance leases 4.30 % Additional information related to leases is shown below: Year Ended Year Ended September 30, September 30, (Dollars in thousands) 2022 2021 Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 6,101 5,504 Operating cash flows from finance leases 973 1,228 Financing cash flows from finance leases 1,224 1,757 Right-of-use assets obtained in exchange for operating lease liabilities $ 4,160 15,609 Weighted-average remaining lease term: Operating leases 9.3 yrs 10.3 yrs Finance leases 12.0 yrs 11.7 yrs Weighted-average discount rate: Operating leases 3.2 % 3.1 % Finance leases 4.6 % 4.2 % The (Dollars in thousands) Operating Finance Operating Finance Years Ending September 30: Leases Leases Leases Leases 2021 $ 5,614 2,930 2022 4,985 3,011 2023 3,984 3,094 $ 5,953 2,256 2024 2,438 3,177 5,132 2,315 2025 and thereafter 6,984 28,323 2025 3,790 2,370 2026 2,881 2,434 2027 and thereafter 17,029 18,997 Total minimum lease payments 24,005 40,535 34,785 28,372 Less: amounts representing interest 2,211 10,270 4,760 7,189 Present value of net minimum lease payments $ 21,794 30,265 $ 30,025 21,183 Less: current portion of lease obligations 5,009 1,937 5,172 1,331 Non-current portion of lease obligations 16,785 28,328 24,853 19,852 ROU assets $ 21,390 26,164 $ 29,150 17,343 (Dollars in thousands) Operating Finance Years Ending September 30: Leases Leases 2022 $ 5,448 3,153 2023 4,679 3,235 2024 4,032 3,319 2025 3,654 3,399 2026 and thereafter 20,453 25,516 Total minimum lease payments 38,266 38,622 Less: amounts representing interest 5,691 9,092 Present value of net minimum lease payments $ 32,575 29,530 Less: current portion of lease obligations 4,543 2,180 Non-current portion of lease obligations 28,032 27,350 ROU assets $ 31,846 24,964 F-30 We include operating and finance lease liabilities in the Consolidated Balance Sheet in accrued other expenses (current portion) and other liabilities (long-term portion). (Dollars in thousands) Operating Finance Years Ending September 30: Leases Leases 2020 $ 5,574 2,518 2021 4,558 2,930 2022 3,950 3,012 2023 3,270 3,094 2024 and thereafter 8,443 31,499 Total minimum lease payments $ 25,795 43,053 Less: amounts representing interest * 11,241 Present value of net minimum lease payments * 31,812 Less: Current portion of lease obligations * 1,832 Non-current portion of lease obligations * 29,980 Year Ended September 30, 2020 Aerospace Year Ended September 30, 2022 (In thousands) & Defense USG Test Total A&D USG Test Total Customer type: Commercial $ 169,484 $ 184,906 $ 158,420 $ 512,810 $ 144,305 272,432 209,016 625,753 Government 184,836 6,797 28,472 220,105 207,108 5,935 18,706 231,749 Total revenues $ 354,320 $ 191,703 $ 186,892 $ 732,915 $ 351,413 278,367 227,722 857,502 Geographic location: United States $ 305,155 $ 134,601 $ 92,105 $ 531,861 $ 299,158 180,586 123,428 603,172 International 49,165 57,102 94,787 201,054 52,255 97,781 104,294 254,330 Total revenues $ 354,320 $ 191,703 $ 186,892 $ 732,915 $ 351,413 278,367 227,722 857,502 Revenue recognition method: Point in time $ 160,402 $ 144,192 $ 33,482 $ 338,076 $ 144,039 224,502 58,522 427,063 Over time 193,918 47,511 153,410 394,839 207,374 53,865 169,200 430,439 Total revenues $ 354,320 $ 191,703 $ 186,892 $ 732,915 $ 351,413 278,367 227,722 857,502 Year Ended September 30, 2021 (In thousands) A&D USG Test Total Customer type: Commercial $ 130,217 199,111 177,601 506,929 Government 184,607 3,797 20,107 208,511 Total revenues $ 314,824 202,908 197,708 715,440 Geographic location: United States $ 275,976 140,545 100,438 516,959 International 38,848 62,363 97,270 198,481 Total revenues $ 314,824 202,908 197,708 715,440 Revenue recognition method: Point in time $ 136,449 153,163 40,609 330,221 Over time 178,375 49,745 157,099 385,219 Total revenues $ 314,824 202,908 197,708 715,440 F-31 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, First Second Third Fourth (Dollars in thousands, except per share amounts) Quarter Quarter Quarter Quarter 2020 Net sales $ 171,728 180,492 172,665 208,030 Net earnings (loss) from continuing operations 10,764 17,822 18,687 (21,808) Net earnings from discontinued operations 76,013 — — 502 Net earnings (loss) 86,777 17,822 18,687 (21,306) Basic earnings per share: Net earnings (loss) from continuing operations $ 0.41 0.69 0.72 (0.84) Net earnings from discontinued operations 2.93 — — 0.02 Net earnings (loss) 3.34 0.69 0.72 (0.82) Diluted earnings per share: Net earnings (loss) from continuing operations $ 0.41 0.68 0.72 (0.83) Net earnings from discontinued operations 2.91 — — 0.02 Net earnings (loss) $ 3.32 0.68 0.72 (0.81) Dividends declared per common share $ 0.08 0.08 0.08 0.08 Common stock price per share: High $ 93.21 107.10 94.24 95.60 Low 74.16 62.64 68.09 78.30 2019 Net sales $ 163,365 171,243 178,259 213,177 Net earnings from continuing operations 17,350 17,822 19,045 23,272 Net (loss) earnings from discontinued operations (33) 975 1,022 1,586 Net earnings 17,317 18,797 20,067 24,858 Basic earnings per share: Net earnings from continuing operations 0.67 0.69 0.73 0.90 Net earnings from discontinued operations — 0.04 0.04 0.06 Net earnings $ 0.67 0.73 0.77 0.96 Diluted earnings per share: Net earnings from continuing operations 0.66 0.68 0.73 0.89 Net earnings from discontinued operations — 0.04 0.04 0.06 Net earnings $ 0.66 0.72 0.77 0.95 Dividends declared per common share $ 0.08 0.08 0.08 0.08 Common stock price per share: High $ 71.47 71.29 82.70 85.86 Low 59.00 62.91 67.43 73.04 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. 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 Grant Thornton LLP and KPMG LLP, whose November /s/Victor L. Richey /s/ Victor L. Richey Chairman, Chief Executive Officer and President and Chief Financial Officer 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 Consent of Independent Registered Public Accounting Firm (Grant Thornton LLP) 23.2 Consent of Independent Registered Public Accounting Firm (KPMG LLP) 31.1 31.2 32 * Certification of Chief Executive Officer and Chief Financial Officer 101.INS ** Inline XBRL Instance Document 101.SCH ** Inline XBRL Schema Document 101.CAL ** Inline XBRL Calculation Linkbase Document 101.LAB ** Inline XBRL Label Linkbase Document 101.PRE ** Inline XBRL Presentation Linkbase Document 101.DEF ** 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) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
