ESCO (ESE) 10-Q 2023 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2023

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM             TO            

COMMISSION FILE NUMBER 1-10596

ESCO TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

MISSOURI	43-1554045
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
9900A CLAYTON ROAD
ST. LOUIS, MISSOURI	63124-1186
(Address of principal executive offices)	(Zip Code)

(314) 213-7200

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.01 per share	ESE	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Shares outstanding at July 31, 2023
Common stock, $.01 par value per share	25,782,563

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended
	June 30,
	2023		2022
Net sales	$	248,749	219,066
Costs and expenses:
Cost of sales		147,274	134,454
Selling, general and administrative expenses		55,376	47,479
Amortization of intangible assets		7,132	6,406
Interest expense, net		2,495	1,331
Other expenses (income), net		966	(106)
Total costs and expenses		213,243	189,564
Earnings before income taxes		35,506	29,502
Income tax expense		7,563	6,329
Net earnings	$	27,943	23,173
Earnings per share:
Basic - Net earnings		1.08	0.90
Diluted - Net earnings	$	1.08	0.89

See accompanying notes to condensed consolidated financial statements.

2

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)

	Nine Months Ended
	June 30,
	2023		2022
Net sales	$	683,386		601,004
Costs and expenses:
Cost of sales		415,953		371,134
Selling, general and administrative expenses		160,555		142,073
Amortization of intangible assets		21,023		19,383
Interest expense, net		6,422		3,084
Other expenses (income), net		1,678		(677)
Total costs and expenses		605,631		534,997
Earnings before income taxes		77,755		66,007
Income tax expense		17,207		14,727
Net earnings	$	60,548		51,280
Earnings per share:
Basic — Net earnings	$	2.35		1.98
Diluted — Net earnings	$	2.34		1.97

See accompanying notes to condensed consolidated financial statements.

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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

	Three Months Ended			Nine Months Ended
	June 30,			June 30,
	2023		2022	2023	2022
Net earnings	$	27,943	23,173	60,548	51,280
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		(821)	(11,905)	12,926	(17,216)
Total other comprehensive income (loss), net of tax		(821)	(11,905)	12,926	(17,216)
Comprehensive income	$	27,122	11,268	73,474	34,064

See accompanying notes to condensed consolidated financial statements.

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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)

	June 30,		September 30,
	2023		2022
ASSETS
Current assets:
Cash and cash equivalents	$	56,052		97,724
Accounts receivable, net of allowance for credit losses of $3,112 and $2,612, respectively		192,146		164,645
Contract assets		128,284		125,154
Inventories		192,493		162,403
Other current assets		24,847		22,696
Total current assets		593,822		572,622
Property, plant and equipment, net of accumulated depreciation of $171,569 and $165,322, respectively		155,337		155,973
Intangible assets, net of accumulated amortization of $196,951 and $175,928, respectively		398,418		394,464
Goodwill		505,590		492,709
Operating lease assets		40,314		29,150
Other assets		10,028		9,538
Total assets	$	1,703,509		1,654,456
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	20,000		20,000
Accounts payable		76,761		78,746
Contract liabilities		122,526		125,009
Accrued salaries		38,428		40,572
Accrued other expenses		51,236		53,802
Total current liabilities		308,951		318,129
Deferred tax liabilities		78,585		82,023
Non-current operating lease liabilities		36,815		24,853
Other liabilities		44,115		48,294
Long-term debt		128,000		133,000
Total liabilities		596,466		606,299
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 30,751,449 and 30,707,748 shares, respectively		308		307
Additional paid-in capital		305,555		301,553
Retained earnings		959,381		905,022
Accumulated other comprehensive loss, net of tax		(18,839)		(31,764)
		1,246,405		1,175,118
Less treasury stock, at cost: 4,995,414 and 4,854,997 common shares, respectively		(139,362)		(126,961)
Total shareholders’ equity		1,107,043		1,048,157
Total liabilities and shareholders’ equity	$	1,703,509		1,654,456

See accompanying notes to condensed consolidated financial statements.

5

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

	Nine Months Ended
	June 30,
	2023		2022
Cash flows from operating activities:
Net earnings	$	60,548	51,280
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		37,699	36,247
Stock compensation expense		7,007	5,318
Changes in assets and liabilities		(72,346)	(60,172)
Effect of deferred taxes		(3,706)	9,020
Net cash provided by operating activities		29,202	41,693
Cash flows from investing activities:
Acquisition of business, net of cash acquired		(17,694)	(15,592)
Additions to capitalized software and other		(9,263)	(9,359)
Capital expenditures		(16,993)	(25,893)
Net cash used by investing activities		(43,950)	(50,844)
Cash flows from financing activities:
Proceeds from long-term debt and short-term borrowings		88,000	111,000
Principal payments on long-term debt and short-term borrowings		(93,000)	(64,000)
Purchases of common stock into treasury		(12,401)	(19,878)
Dividends paid		(6,189)	(6,219)
Other		(2,557)	(2,787)
Net cash (used) provided by financing activities		(26,147)	18,116
Effect of exchange rate changes on cash and cash equivalents		(777)	(4,178)
Net (decrease) increase in cash and cash equivalents		(41,672)	4,787
Cash and cash equivalents, beginning of period		97,724	56,232
Cash and cash equivalents, end of period	$	56,052	61,019
Supplemental cash flow information:
Interest paid	$	5,564	1,685
Income taxes paid (including state and foreign)		18,313	5,574

See accompanying notes to condensed consolidated financial statements.

6

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    BASIS OF PRESENTATION

The accompanying consolidated financial statements, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required for annual financial statements by accounting principles generally accepted in the United States of America (GAAP).

The Company’s results for the three-month period ended June 30, 2023 are not necessarily indicative of the results for the entire 2023 fiscal year. References to the third quarters of 2023 and 2022 represent the fiscal quarters ended June 30, 2023 and 2022, respectively. 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.

2.    EARNINGS PER SHARE (EPS)

Basic EPS is calculated using the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the weighted average number of common shares outstanding during the period plus shares issuable upon the assumed exercise of dilutive common share options and vesting of performance-accelerated restricted shares (restricted shares) by using the treasury stock method. The number of shares used in the calculation of earnings per share for each period presented is as follows (in thousands):

	Three Months		Nine Months
	Ended June 30,		Ended June 30,
	2023	2022	2023	2022
Weighted Average Shares Outstanding — Basic	25,757	25,856	25,808	25,959
Dilutive Restricted Shares	70	94	82	91
Adjusted Shares — Diluted	25,827	25,950	25,890	26,050

3.    ACQUISITION

On February 1, 2023, the Company acquired CMT Materials, LLC and its affiliate Engineered Syntactic Systems, LLC (CMT) for a purchase price of approximately $18 million, net of cash acquired. CMT, based in Attleboro, Massachusetts, is a supplier of syntactic materials for buoyancy and specialty applications. Since the date of acquisition, the operating results for the CMT business have been included as part of Globe in the A&D segment. The acquisition date fair value of the assets acquired and liabilities assumed primarily were as follows: approximately $1.7 million of accounts receivable, $3.0 million of inventory, $1.3 million of property, plant and equipment, $1.2 million of accounts payable and accrued expenses, $7.3 million of identifiable intangible assets, mainly consisting of customer relationships totaling $6.2 million. The acquired goodwill of $5.6 million related to excess value associated with opportunities to expand the services and products that the Company can offer to its customers. The Company anticipates that the goodwill will be deductible for tax purposes. The Company received a $0.2 million working capital settlement during the third quarter of 2023.

4.    SHARE-BASED COMPENSATION

The Company provides compensation benefits to certain key employees under several share-based plans providing for performance-accelerated and/or time-vested restricted stock unit awards, and to non-employee directors under a non-employee directors compensation plan.

Performance-Accelerated Restricted Stock Unit (PARS) Awards and Time-Vested Restricted Stock Unit (RSU) Awards

Compensation expense related to the PARS/RSU awards was $1.4 million and $6.0 million for the three and nine-month periods ended June 30, 2023, respectively, and $1.6 million and $4.4 million for the corresponding periods in 2022. As of June 30, 2023, there were 196,648 unvested stock units outstanding.

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Non-Employee Directors Plan

Compensation expense related to the non-employee director grants was $0.3 million and $1.0 million for the three and nine-month periods ended June 30, 2023, respectively, and $0.3 million and $0.9 million for the corresponding periods in 2022.

The total share-based compensation cost that has been recognized in the results of operations and included within selling, general and administrative expenses (SG&A) was $1.7 million and $7.0 million for the three and nine-month periods ended June 30, 2023, respectively, and $1.9 million and $5.3 million for the corresponding periods in 2022. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $0.2 million and $0.9 million for the three and nine-month periods ended June 30, 2023, respectively, and $0.4 million and $1.0 million for the corresponding periods in 2022. As of June 30, 2023, there was $10.7 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a remaining weighted-average period of 1.8 years.

5.    INVENTORIES

Inventories consist of the following:

	June 30,		September 30,
(In thousands)	2023		2022
Finished goods	$	37,082	32,471
Work in process		48,579	38,492
Raw materials		106,832	91,440
Total inventories	$	192,493	162,403

6. GOODWILL AND OTHER INTANGIBLE ASSETS

Included on the Company’s Consolidated Balance Sheets at June 30, 2023 and September 30, 2022 are the following intangible assets gross carrying amounts and accumulated amortization:

	June 30,		September 30,
(Dollars in thousands)	2023		2022
Goodwill	$	505,590	492,709
Intangible assets with determinable lives:
Patents
Gross carrying amount	$	2,433	2,353
Less: accumulated amortization		1,186	1,091
Net	$	1,247	1,262
Capitalized software
Gross carrying amount	$	118,529	106,583
Less: accumulated amortization		77,308	70,476
Net	$	41,221	36,107
Customer relationships
Gross carrying amount	$	298,110	287,447
Less: accumulated amortization		109,186	96,921
Net	$	188,924	190,526
Other
Gross carrying amount	$	14,345	13,985
Less: accumulated amortization		9,271	7,440
Net	$	5,074	6,545
Intangible assets with indefinite lives:
Trade names	$	161,952	160,024

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The changes in the carrying amount of goodwill attributable to each business segment for the nine months ended June 30, 2023 is as follows:

					Aerospace
(Dollars in millions)	USG		Test		& Defense	Total
Balance as of September 30, 2022	$	348.7		34.0	110.0	492.7
Acquisition activity and adjustments		—		—	5.6	5.6
Foreign currency translation		7.3		—	—	7.3
Balance as of June 30, 2023	$	356.0		34.0	115.6	505.6

7.    BUSINESS SEGMENT INFORMATION

The Company is organized based on the products and services that it offers and classifies its continuing business operations in three reportable segments for financial reporting purposes: Aerospace & Defense, Utility Solutions Group (USG), and RF Shielding and Test (Test).

The Aerospace & Defense segment’s operations consist of PTI Technologies Inc. (PTI), VACCO Industries (VACCO), Crissair, Inc. (Crissair), Mayday Manufacturing Co. (Mayday), Globe Composite Solutions, LLC (Globe) and Westland Technologies Inc. (Westland). The companies within this segment primarily design and manufacture specialty filtration, fluid control and naval products, including hydraulic filter elements and fluid control devices used in aerospace and defense applications; unique filter mechanisms used in micro-propulsion devices for satellites, custom designed filters for manned aircraft and submarines; products and systems to reduce vibration and/or acoustic signatures and otherwise reduce or obscure a vessel’s signature, and other communications, sealing, surface control and hydrodynamic related applications to enhance U.S. Navy maritime survivability; precision-tolerance machined components for the aerospace and defense industry; and metal processing services.

The USG segment’s operations consist primarily 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 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 is a global market leader in the design and manufacture of decision support tools for the renewable energy industry, primarily wind and solar.

The Test segment’s operations consist primarily of ETS-Lindgren Inc. and related subsidiaries (ETS-Lindgren). ETS-Lindgren is an industry leader in designing and manufacturing products which provide its customers with the ability to identify, measure and contain magnetic, electromagnetic and acoustic energy. ETS-Lindgren also manufactures radio frequency shielding products and components used by manufacturers of medical equipment, communications systems, electronic products, and shielded rooms for high-security data processing and secure communication.

9

Management evaluates and measures the performance of its reportable segments based on “Net Sales” and “EBIT”, which are detailed in the table below. EBIT is defined as earnings before interest and taxes.

	Three Months			Nine Months
	Ended June 30,			Ended June 30,
(In thousands)	2023		2022	2023	2022
NET SALES
Aerospace & Defense	$	103,469	92,606	285,434	247,671
USG		89,966	67,201	240,172	194,877
Test		55,314	59,259	157,780	158,456
Consolidated totals	$	248,749	219,066	683,386	601,004
EBIT
Aerospace & Defense	$	21,665	20,738	52,996	45,042
USG		20,351	13,135	50,543	37,840
Test		8,643	8,354	21,280	20,813
Corporate (loss)		(12,658)	(11,394)	(40,642)	(34,604)
Consolidated EBIT		38,001	30,833	84,177	69,091
Less: Interest expense		(2,495)	(1,331)	(6,422)	(3,084)
Earnings before income taxes	$	35,506	29,502	77,755	66,007

Non-GAAP Financial Measures

The financial measure “EBIT” is presented in the above table and elsewhere in this Report. EBIT on a consolidated basis is a non-GAAP financial measure. Management believes that EBIT is useful in assessing the operational profitability of the Company’s business segments because it excludes interest and taxes, which are generally accounted for across the entire Company on a consolidated basis. EBIT is also one of the measures used by management in determining resource allocations within the Company as well as incentive compensation. A reconciliation of EBIT to net earnings is set forth in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations – EBIT.

The Company believes that the presentation of EBIT provides important supplemental information to investors to facilitate comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. However, the Company’s non-GAAP financial measures may not be comparable to other companies’ non-GAAP financial performance measures. Furthermore, the use of non-GAAP financial measures is not intended to replace any measures of performance determined in accordance with GAAP.

8.    DEBT

The Company’s debt is summarized as follows:

	June 30,		September 30,
(In thousands)	2023		2022
Total borrowings	$	148,000	153,000
Current portion of long-term debt		(20,000)	(20,000)
Total long-term debt, less current portion	$	128,000	133,000

The Credit Facility includes a $500 million revolving line of credit as well as provisions allowing for the increase of the credit facility commitment amount by an additional $250 million, if necessary, with the consent of the lenders. The bank syndication supporting the facility is comprised of a diverse group of eight banks led by JP Morgan Chase Bank, N.A., as Administrative Agent. The Credit Facility matures September 27, 2024, with balance due by this date.

At June 30, 2023, the Company had approximately $345 million available to borrow under the Credit Facility, plus the $250 million increase option, subject to lenders’ consent, in addition to $56.1 million cash on hand. The Company classified $20 million as the current portion of long-term debt as of June 30, 2023, as the Company intends to repay this amount within the next twelve months; however, the Company has no contractual obligation to repay such amount during the next twelve months. The letters of credit issued and outstanding under the Credit Facility totaled $7.4 million at June 30, 2023.

10

Interest on borrowings under the Credit Facility is calculated at a spread over either the Standard Overnight Financing Rate (SOFR) or the prime rate depending on various factors. The Credit Facility also requires a facility fee ranging from 10 to 25 basis points per annum on the unused portion. The interest rate spreads on the facility and the facility fee are subject to increase or decrease depending on the Company’s leverage ratio. The weighted average interest rates were 6.05% and 5.57% for the three and nine-month periods ending June 30, 2023, respectively, and 2.20% and 1.57% for the three and nine-month periods ending June 30, 2022. As of June 30, 2023, the Company was in compliance with all covenants.

9.    INCOME TAX EXPENSE

The third quarter 2023 effective income tax rate was 21.3% compared to 21.5% in the third quarter of 2022. The effective income tax rate in the first nine months of 2023 was 22.1% compared to 22.3% for the first nine months of 2022. The income tax expense in the third quarter and first nine months of 2023 was favorably impacted by tax return to provision true-ups related to the federal research and development tax credit, decreasing the third quarter and year-to-date rate by 0.9% and 0.4%, respectively.

The income tax expense in the third quarter and first nine months of 2022 was favorably impacted by tax return to provision true-ups on U.S. tax on the distribution of foreign earnings, and the re-rating of deferred taxes as a result of a Vermont law change, decreasing the third quarter and year-to-date effective tax rate by 1.6% and 0.7%, respectively.

10.    SHAREHOLDERS’ EQUITY

The change in shareholders’ equity for the first three and nine months of 2023 and 2022 is shown below (in thousands):

	Three Months Ended June 30,			Nine Months Ended June 30,
	2023		2022	2023	2022
Common stock
Beginning balance		308	307	307	307
Stock plans		—	—	1	—
Ending balance		308	307	308	307
Additional paid-in-capital
Beginning balance		304,184	298,353	301,553	297,644
Stock plans		1,371	1,510	4,002	2,219
Ending balance		305,555	299,863	305,555	299,863
Retained earnings
Beginning balance		933,499	854,946	905,022	830,989
Net earnings		27,943	23,173	60,548	51,280
Dividends paid		(2,061)	(2,069)	(6,189)	(6,219)
Ending balance		959,381	876,050	959,381	876,050
Accumulated other comprehensive income (loss)
Beginning balance		(18,018)	(7,472)	(31,764)	(2,161)
Foreign currency translation		(821)	(11,905)	12,925	(17,216)
Ending balance		(18,839)	(19,377)	(18,839)	(19,377)
Treasury stock
Beginning balance		(139,178)	(124,961)	(126,961)	(107,083)
Share repurchases		(184)	(2,000)	(12,401)	(19,878)
Ending balance		(139,362)	(126,961)	(139,362)	(126,961)
Total equity		1,107,043	1,029,882	1,107,043	1,029,882

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11.  FAIR VALUE MEASUREMENTS

The accounting guidance establishes a three-level hierarchy for disclosure of fair value measurements, based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, as follows:

● Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

● Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

● Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Financial Assets and Liabilities

The Company has estimated the fair value of its financial instruments as of June 30, 2023 and September 30, 2022 using available market information or other appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, receivables, inventories, payables, and other current assets and liabilities approximate fair value because of the short maturity of those instruments.

Fair Value of Financial Instruments

The Company’s forward contracts and interest rate swaps are classified within Level 2 of the valuation hierarchy in accordance with FASB Accounting Standards Codification (ASC) 825, and are immaterial.

Nonfinancial Assets and Liabilities

The Company’s nonfinancial assets such as property, plant and equipment, and other intangible assets are not measured at fair value on a recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence that an impairment may exist. No impairments were recorded during the three and nine-month periods ended June 30, 2023.

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12.  REVENUES

Disaggregation of Revenues

Revenues by customer type, geographic location, and revenue recognition method for the three and nine-month periods ended June 30, 2023 are presented in the tables below as the Company deems it best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected by economic factors. The tables below also include a reconciliation of the disaggregated revenue within each reportable segment.

Three months ended June 30, 2023	Aerospace
(In thousands)	& Defense		USG		Test		Total
Customer type:
Commercial	$	51,303	$	88,442	$	48,407	$	188,152
Government		52,166		1,524		6,907		60,597
Total revenues	$	103,469	$	89,966	$	55,314	$	248,749
Geographic location:
United States	$	86,031	$	55,011	$	32,246	$	173,288
International		17,438		34,955		23,068		75,461
Total revenues	$	103,469	$	89,966	$	55,314	$	248,749
Revenue recognition method:
Point in time	$	48,496	$	74,128	$	11,496	$	134,120
Over time		54,973		15,838		43,818		114,629
Total revenues	$	103,469	$	89,966	$	55,314	$	248,749

Nine months ended June 30, 2023	Aerospace
(In thousands)	& Defense		USG		Test		Total
Customer type:
Commercial	$	136,271	$	236,715	$	137,587	$	510,573
Government		149,163		3,457		20,193		172,813
Total revenues	$	285,434	$	240,172	$	157,780	$	683,386
Geographic location:
United States	$	237,481	$	154,410	$	87,253	$	479,144
International		47,953		85,762		70,527		204,242
Total revenues	$	285,434	$	240,172	$	157,780	$	683,386
Revenue recognition method:
Point in time	$	129,355	$	194,240	$	32,565	$	356,160
Over time		156,079		45,932		125,215		327,226
Total revenues	$	285,434	$	240,172	$	157,780	$	683,386

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Revenues by customer type, geographic location, and revenue recognition method for the three and nine-month periods ended June 30, 2022 are presented in the tables below.

Three months ended June 30, 2022	Aerospace						��
(In thousands)	& Defense		USG		Test			Total
Customer type:
Commercial	$	38,918	$	65,610	$	54,449		$	158,977
Government		53,688		1,591		4,810			60,089
Total revenues	$	92,606	$	67,201	$	59,259		$	219,066
Geographic location:
United States	$	79,536	$	41,822	$	34,662		$	156,020
International		13,070		25,379		24,597			63,046
Total revenues	$	92,606	$	67,201	$	59,259		$	219,066
Revenue recognition method:
Point in time	$	35,238	$	53,656	$	15,827		$	104,721
Over time		57,368		13,545		43,432			114,345
Total revenues	$	92,606	$	67,201	$	59,259		$	219,066

Nine months ended June 30, 2022	Aerospace
(In thousands)	& Defense		USG		Test		Total
Customer type:
Commercial	$	100,407	$	191,832	$	147,390	$	439,629
Government		147,264		3,045		11,066		161,375
Total revenues	$	247,671	$	194,877	$	158,456	$	601,004
Geographic location:
United States	$	212,849	$	122,021	$	88,708	$	423,578
International		34,822		72,856		69,748		177,426
Total revenues	$	247,671	$	194,877	$	158,456	$	601,004
Revenue recognition method:
Point in time	$	99,464	$	155,693	$	43,488	$	298,645
Over time		148,207		39,184		114,968		302,359
Total revenues	$	247,671	$	194,877	$	158,456	$	601,004

Revenue Recognition

Payment terms with our customers vary by the type and location of the customer and the products or services offered. Arrangements with customers that include payment terms extending beyond one year are not significant. The transaction price for these contracts reflects our estimate of returns 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. 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. 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.

For our overtime revenue recognized using the output method of costs incurred, 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. In addition, in the USG

14

segment, we recognize revenue as a series of distinct services based on each day of providing services (straight-line over the contract term) for certain of our USG segment contracts. Under the typical payment terms of our service contracts, the customer pays us in advance of when services are performed. In addition, in the Test segment, we use milestones to measure progress for our Test segment contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts.

Remaining Performance Obligations

Remaining performance obligations, which is the equivalent of backlog, represent the expected transaction price allocated to contracts that the Company expects to recognize as revenue in future periods when the Company performs 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 June 30, 2023, the Company had $705.4 million in remaining performance obligations of which the Company expects to recognize revenues of approximately 79% in the next twelve months.

Contract assets and liabilities

Assets and liabilities related to contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. 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. At June 30, 2023, contract assets and liabilities totaled $128.3 million and $133.6 million, respectively. During the first nine months of 2023, the Company recognized approximately $81 million in revenues that were included in the contract liabilities balance at September 30, 2022. At September 30, 2022, contract assets and liabilities totaled $125.2 million and $137.6 million, respectively.

13.  LEASES

The Company determines at lease inception whether an arrangement that provides control over the use of an asset is a lease. The Company recognizes at lease commencement a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term. The Company has elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less. Certain of the Company’s leases include options to extend the term of the lease for up to 20 years. When it is reasonably certain that the Company will exercise the option, Management includes the impact of the option in the lease term for purposes of determining total future lease payments. As most of the Company’s lease agreements do not explicitly state the discount rate implicit in the lease, Management uses the Company’s incremental borrowing rate on the commencement date to calculate the present value of future payments based on the tenor of each arrangement.

The Company’s leases for real estate commonly include escalating payments. In addition to the present value of the future lease payments, the calculation of the ROU asset also includes any deferred rent, lease pre-payments and initial direct costs of obtaining the lease.

In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other similar services, which are considered non-lease components for accounting purposes. Non-lease components are excluded from our ROU assets and lease liabilities and expensed as incurred.

The Company’s leases are for office space, manufacturing facilities, and machinery and equipment.

The components of lease costs are shown below:

	Three Months Ended		Three Months Ended
	June 30,		June 30,
(Dollars in thousands)	2023		2022
Finance lease cost
Amortization of right-of-use assets	$	393	$	393
Interest on lease liabilities		230		242
Operating lease cost		1,858		1,577
Total lease costs	$	2,481	$	2,212

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	Nine Months		Nine Months
	Ended		Ended
	June 30,		June 30,
(Dollars in thousands)	2023		2022
Finance lease cost
Amortization of right-of-use assets	$	1,179	$	1,219
Interest on lease liabilities		698		753
Operating lease cost		5,356		4,731
Total lease costs	$	7,233	$	6,703

Additional information related to leases are shown below:

	Three Months Ended		Three Months Ended
	June 30,		June 30,
(Dollars in thousands)	2023		2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	1,792	$	1,485
Operating cash flows from finance leases		230		242
Financing cash flows from finance leases		334		307
Right-of-use assets obtained in exchange for operating lease liabilities		402		566

	Nine Months Ended			Nine Months Ended
	June 30,			June 30,
(Dollars in thousands)	2023			2022
Cash paid for amounts included in the measurement of lease liabilities
Operating cash flows from operating leases	$	5,172		$	4,521
Operating cash flows from finance leases		698			753
Financing cash flows from finance leases		991			971
Right-of-use assets obtained in exchange for operating lease liabilities		14,984			1,813
		June 30, 2023			June 30, 2022
Weighted-average remaining lease term
Operating leases		11.4	years		9.7	years
Finance leases		11.3	years		12.0	years
Weighted-average discount rate
Operating leases		4.42	%		3.12	%
Finance leases		4.62	%		4.59	%

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The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on our Consolidated Balance Sheet on June 30, 2023:

(Dollars in thousands)	Operating		Finance
Years Ending September 30:	Leases		Leases
2023 (excluding the nine months ended June 30, 2023)	$	1,796	566
2024		6,458	2,315
2025		5,168	2,370
2026		4,300	2,434
2027 and thereafter		36,913	18,997
Total minimum lease payments		54,635	26,682
Less: amounts representing interest		12,570	6,491
Present value of net minimum lease payments	$	42,065	20,191
Less: current portion of lease obligations		5,250	1,415
Non-current portion of lease obligations		36,815	18,776
ROU assets	$	40,314	16,164

Operating lease liabilities are included in the Consolidated Balance Sheet in accrued other expenses (current portion) and as a caption on the Consolidated Balance Sheet (long-term portion). Finance lease liabilities are included on the Consolidated Balance Sheet in accrued other expenses (current portion) and other liabilities (long-term portion). Operating lease ROU assets are included as a caption on the Consolidated Balance Sheet and finance lease ROU assets are included in Property, plant and equipment on the Consolidated Balance sheets.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

References to the third quarters of 2023 and 2022 represent the three-month periods ended June 30, 2023 and 2022, respectively.

OVERVIEW

In the third quarter of 2023, sales, net earnings and diluted earnings per share were $248.7 million, $27.9 million and $1.08 per share, respectively, compared to $219.1 million, $23.2 million and $0.89 per share, respectively, in the third quarter of 2022. In the first nine months of 2023, sales, net earnings and diluted earnings per share were $683.4 million, $60.5 million and $2.34 per share, respectively, compared to $601.0 million, $51.3 million and $1.97 per share, respectively, in the first nine months of 2022.

NET SALES

In the third quarter of 2023, net sales of $248.7 million were $29.6 million, or 13.5%, higher than the $219.1 million in the third quarter of 2022. In the first nine months of 2023, net sales of $683.4 million were $82.4 million, or 13.7%, higher than the $601.0 million in the first nine months of 2022. The increase in net sales in the third quarter of 2023 as compared to the third quarter of 2022 was due to a $22.8 million increase in the USG segment, and a $10.9 million increase in the Aerospace & Defense segment, partially offset by a $4.0 million decrease in the Test segment. The increase in net sales in the first nine months of 2023 as compared to the first nine months of 2022 was due to a $45.3 million increase in the USG segment, and a $37.8 million increase in the Aerospace & Defense segment, partially offset by a $0.7 million decrease in the Test segment.

-Aerospace & Defense (A&D)

In the third quarter of 2023, net sales of $103.5 million were $10.9 million, or 11.8%, higher than the $92.6 million in the third quarter of 2022. In the first nine months of 2023, net sales of $285.4 million were $37.8 million, or 15.2%, higher than the $247.7 million in the first nine months of 2022. The sales increase in the third quarter of 2023 compared to the third quarter of 2022 was mainly due to a $6.5 million increase in net sales at Mayday, a $5.0 million increase in net sales at PTI, a $1.8 million increase in net sales at Globe/Westland combined, and a $3.9 million increase in net sales at Crissair, partially offset by a $6.3 million decrease in net sales at VACCO driven by timing of navy and space projects. The sales increase in the first nine months of 2023 compared to the first nine months of 2022 was mainly due to an $18.3 million increase in net sales at Mayday, a $9.6 million increase in net sales at PTI, an $8.4 million increase in net sales at Crissair, and a $2.6 million increase in net sales at Globe/Westland combined, partially offset by a $1.4 million decrease in net sales at VACCO. The increase in net sales at Mayday, PTI and Crissair in the third quarter and first nine months of 2023 as compared to the corresponding periods of 2022 was primarily due to an increase in commercial and defense aerospace sales driven by the rebound from the COVID-19 pandemic.

-USG

In the third quarter of 2023, net sales of $90.0 million were $22.8 million, or 33.9%, higher than the $67.2 million in the third quarter of 2022. In the first nine months of 2023, net sales of $240.2 million were $45.3 million, or 23.2%, higher than the $194.9 million in the first nine months of 2022. The increase in the third quarter and first nine months of 2023 compared to the corresponding periods of 2022 was mainly due to higher shipments of protection testing, condition monitoring and offline testing products and service revenue at Doble and an increase in product sales at NRG.

-Test

In the third quarter of 2023, net sales of $55.3 million were $4.0 million, or 6.7%, lower than the $59.3 million in the third quarter of 2022. In the first nine months of 2023, net sales of $157.8 million were $0.7 million, or 0.4%, lower than the $158.5 million in the first nine months of 2022. The decrease in the third quarter of 2023 as compared to the third quarter of 2022 was primarily due to a $4.4 million decrease in sales from the Company’s Asian operations driven by COVID disruptions in China and a $0.7 million decrease from the Company’s U.S. operations, partially offset by a $1.1 million increase in sales from the segment’s European operations due to strength from test and measurement chamber projects. The decrease in the first nine months of 2023 compared to the first nine months of 2022 was due to a $11.4 million decrease in sales from the Company’s Asian operations due to COVID disruptions in China, partially offset by a $10.7 million increase in sales from the segment’s European and U.S. operations due to timing of test and measurement chamber projects.

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ORDERS AND BACKLOG

Backlog was $705.4 million at June 30, 2023 compared with $695.0 million at September 30, 2022. The Company received new orders totaling $213.3 million in the third quarter of 2023 compared to $254.9 million in the third quarter of 2022. Of the new orders received in the third quarter of 2023, $81.9 million related to Aerospace & Defense products, $85.5 million related to USG products, and $45.9 million related to Test products. Of the new orders received in the third quarter of 2022, $110.2 million related to Aerospace & Defense products, $74.4 million related to USG products, and $70.3 million related to Test products.

The Company received new orders totaling $693.8 million in the first nine months of 2023 compared to $715.8 million in the first nine months of 2022. Of the new orders received in the first nine months of 2023, $290.9 million related to Aerospace & Defense products, $250.3 million related to USG products, and $152.6 million related to Test products. Of the new orders received in the first nine months of 2022, $295.0 million related to Aerospace & Defense products, $227.1 million related to USG products, and $193.7 million related to Test products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (SG&A) expenses for the third quarter of 2023 were $55.4 million (22.3% of net sales), compared with $47.5 million (21.7% of net sales) for the third quarter of 2022. For the first nine months of 2023, SG&A expenses were $160.6 million (23.5% of net sales) compared to $142.1 million (23.6% of net sales) for the first nine months of 2022. The increase in SG&A in the first nine months of 2023 compared to the corresponding periods of 2022 was mainly due to higher expenses at Corporate due to executive management transition costs and professional fees and higher expenses at Doble as a result of increased sales and marketing and event costs.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets was $7.1 million and $21.0 million for the third quarter and first nine months of 2023, respectively, compared to $6.4 million and $19.4 million for the corresponding periods of 2022. Amortization expenses consist of amortization of acquired intangible assets from acquisitions and other identifiable intangible assets (primarily software). The increase in amortization expense in the third quarter and first nine months of 2023 compared to the corresponding periods of 2022 was mainly due to the Company’s recent acquisition of CMT.

OTHER EXPENSES (INCOME), NET

Other expenses, net, were $1.0 million in the third quarter of 2023 compared to ($0.1) million of income in the third quarter of 2022. Other expenses, net, were $1.7 million in the first nine months of 2023 compared to ($0.7) million of income in the first nine months of 2022. The principal items included in other expenses, net, in the third quarter and first nine months of 2023 included a bad debt write-off of $0.5 million due to a customer bankruptcy within the A&D segment and approximately $0.5 million of restructuring costs (mainly severance) in the first nine months of 2023. There were no individually significant items in other expenses (income), net, in the third quarter or first nine months of 2022.

EBIT

The Company evaluates the performance of its operating segments based on EBIT, and provides EBIT on a consolidated basis, which is a non-GAAP financial measure. Please refer to the discussion of non-GAAP financial measures in Note 7 to the Consolidated Financial Statements, above. EBIT was $38.0 million (15.3% of net sales) for the third quarter of 2023 compared to $30.8 million (14.1% of net sales) for the third quarter of 2022. For the first nine months of 2023, EBIT was $84.2 million (12.3% of net sales) compared to $69.1 million (11.5% of net sales) for the first nine months of 2022.

The following table presents a reconciliation of EBIT to net earnings.

19

	Three Months Ended				Nine Months Ended
	June 30,				June 30,
(In thousands)	2023		2022		2023	2022
Net earnings	$	27,943		23,173	60,548	51,280
Plus: Interest expense, net		2,495		1,331	6,422	3,084
Plus: Income tax expense		7,563		6,329	17,207	14,727
Consolidated EBIT	$	38,001		30,833	84,177	69,091

– Aerospace & Defense

EBIT in the third quarter of 2023 was $21.7 million (20.9% of net sales) compared to $20.7 million (22.4% of net sales) in the third quarter of 2022. EBIT in the first nine months of 2023 was $53.0 million (18.6% of net sales) compared to $45.0 million (18.2% of net sales) in the first nine months of 2022. The increase in EBIT in the third quarter and first nine months of 2023 compared to the corresponding periods of 2022 was mainly due to higher sales volumes at Mayday, PTI, Crissair and Globe partially offset by a decrease in EBIT at VACCO due to lower sales volumes as mentioned above and margin erosion on certain space development contracts. EBIT in the first nine months of 2023 was negatively impacted by a $0.6 million inventory step-up charge related to the CMT acquisition. EBIT in the first nine months of 2022 was negatively impacted by a $0.3 million inventory step-up charge related to the NEco acquisition.

-USG

EBIT in the third quarter of 2023 was $20.4 million (22.6% of net sales) compared to $13.1 million (19.5% of net sales) in the third quarter of 2022. EBIT in the first nine months of 2023 was $50.5 million (21.0% of net sales) compared to $37.8 million (19.4% of net sales) in the first nine months of 2022. The increase in EBIT in the third quarter and first nine months of 2023 compared to the corresponding periods of 2022 was mainly due to the higher sales volumes at Doble and NRG as mentioned above and price increases, partially offset by the impacts of wage and material cost inflation and increased commissions, travel, and tradeshow expenses. EBIT in the first nine months of 2022 was negatively impacted by approximately $0.5 million of inventory step-up charges related to the Altanova acquisition.

-Test

EBIT in the third quarter of 2023 was $8.6 million (15.6% of net sales) compared to $8.4 million (14.1% of net sales) in the third quarter of 2022. EBIT in the first nine months of 2023 was $21.3 million (13.5% of net sales) compared to $20.8 million (13.1% of net sales) in the first nine months of 2022. The increase in EBIT in the third quarter of 2023 compared to the third quarter of 2022 was primarily due to favorable product mix, price increases and cost reduction efforts in the segment’s U.S. operations, and higher sales volumes mainly from the segment’s European operations. The increase in EBIT in the first nine months of 2023 compared to the first nine months of 2022 was primarily due to the higher sales volumes from the segment’s European operations partially offset by a decrease in EBIT from the segment’s Asian operations due to COVID disruptions in China.

– Corporate

Corporate costs included in EBIT were $12.7 million and $40.6 million in the third quarter and first nine months of 2023, respectively, compared to $11.4 million and $34.6 million in the corresponding periods of 2022. The increase in Corporate costs in the third quarter of 2023 compared to the third quarter of 2022 was mainly due to an increase in medical insurance premiums. The increase in Corporate costs in the first nine months of 2023 compared to the corresponding period of 2022 was mainly due to executive management transition costs, and an increase in medical costs, professional fees and amortization expense of acquired intangible assets related to the CMT acquisition.

INTEREST EXPENSE, NET

Interest expense was $2.5 million and $6.4 million in the third quarter and first nine months of 2023, respectively, and $1.3 million and $3.1 million in the corresponding periods of 2022. The increase in interest expense in the third quarter and first nine months of 2023 compared to the corresponding periods of 2022 was mainly due to higher average interest rates. The weighted average interest rates were 6.05% and 5.57% for the three and nine-month periods ending June 30, 2023, respectively, and 2.20% and 1.57% for the three and nine-month periods ending June 30, 2022.

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INCOME TAX EXPENSE

The third quarter 2023 effective income tax rate was 21.3% compared to 21.5% in the third quarter of 2022. The effective income tax rate in the first nine months of 2023 was 22.1% compared to 22.3% for the first nine months of 2022. The income tax expense in the third quarter and first nine months of 2023 was favorably impacted by tax return to provision true-ups related to the federal research and development tax credit, decreasing the third quarter and year-to-date rate by 0.9% and 0.4%, respectively.

The income tax expense in the third quarter and first nine months of 2022 was favorably impacted by tax return to provision true-ups on U.S. tax on the distribution of foreign earnings, and the re-rating of deferred taxes as a result of a Vermont law change, decreasing the third quarter and year-to-date effective tax rate by 1.6% and 0.7%, respectively.

CAPITAL RESOURCES AND LIQUIDITY

The Company’s overall financial position and liquidity remains strong. Working capital (current assets less current liabilities) increased to $284.9 million at June 30, 2023 from $254.5 million at September 30, 2022. Inventories increased by $30.0 million during this period mainly due to a $15.4 million increase within the USG segment and a $14.0 million increase within the Aerospace & Defense segment resulting primarily from the timing of receipt of raw materials to meet anticipated demand and an increase in work in process and finished goods inventories due to timing of manufacturing existing orders. Accounts receivable increased $27.5 million during this period mainly due to a $13.0 million increase within the Test segment, a $10.2 million increase within the USG segment and a $4.3 million increase within the A&D segment, due to timing of projects within the Test segment and higher sales volumes in the A&D and USG segments.

Net cash provided by operating activities was $29.2 million and $41.7 million in the first nine months of 2023 and 2022, respectively. The decrease in net cash provided by operating activities in the first nine months of 2023 as compared to the first nine months of 2022 was mainly driven by higher working capital requirements, including an increase in inventories and accounts receivable, and higher tax and interest payments.

Capital expenditures were $17.0 million and $25.9 million in the first nine months of 2023 and 2022, respectively. The decrease in the first nine months of 2023 compared to the prior year period was mainly due to the purchase of the NRG building of approximately $10 million in the first quarter of 2022. In addition, the Company incurred expenditures for capitalized software of $9.3 million and $9.4 million in the first nine months of 2023 and 2022, respectively.

Acquisition

On February 1, 2023, the Company acquired CMT Materials, LLC and its affiliate Engineered Syntactic Systems, LLC (CMT) for a purchase price of approximately $18 million. CMT, based in Attleboro, Massachusetts, is a leading supplier of syntactic materials for buoyancy and specialty applications. Since the date of acquisition, the operating results for the CMT business have been included as part of Globe within the A&D segment.

Credit Facility

At June 30, 2023, the Company had approximately $345 million available to borrow under its bank credit facility, a $250 million increase option, and $56.1 million cash on hand. At June 30, 2023, the Company had $148 million of outstanding borrowings under the credit facility in addition to outstanding letters of credit of $7.4 million. Cash flow from operations and borrowings under the Company’s credit facility are expected to meet the Company’s capital requirements and operational needs for the foreseeable future. The Company’s ability to access the additional $250 million increase option of the credit facility is subject to acceptance by participating or other outside banks.

Share Repurchases

During the first nine months of 2023, the Company repurchased approximately 140,000 shares for approximately $12.4 million. For further information on the share repurchases during the third quarter of 2023, see Part II, Item 2 of this Report.

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Dividends

A dividend of $0.08 per share, totaling $2.1 million, was paid on October 18, 2022 to stockholders of record as of October 4, 2022. A dividend of $0.08 per share, totaling $2.1 million, was paid on January 20, 2023 to stockholders of record as of January 5, 2023. A dividend of $0.08 per share, totaling $2.1 million, was paid on April 18, 2023 to stockholders of record as of April 3, 2023. Subsequent to June 30, 2023, a quarterly dividend of $0.08 per share, totaling $2.1 million, was paid on July 19, 2023 to stockholders of record as of July 5, 2023.

CRITICAL ACCOUNTING ESTIMATES

Management has evaluated the accounting policies used in the preparation of the Company’s financial statements and related notes and believes those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by Management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving Management judgments and estimates may be found in the Critical Accounting Policies section of Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022.

OTHER MATTERS

Contingencies

As a normal incident of the business in which the Company is engaged, various claims, charges and litigation are asserted or commenced against the Company. Additionally, the Company is currently involved in various stages of investigation and remediation relating to environmental matters. In the opinion of Management, the aggregate costs involved in the resolution of these matters, and final judgments, if any, which might be rendered against the Company, are adequately reserved, are covered by insurance, or would not have a material adverse effect on the Company’s results from operations, capital expenditures, or competitive position.

FORWARD LOOKING STATEMENTS

Statements contained in this Form 10-Q regarding future events and the Company’s future results that reflect or are based on current expectations, estimates, forecasts, projections or assumptions 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, but are not necessarily limited to, statements about: any potential effects of the COVID-19 pandemic; the adequacy of the Company’s credit facility and the Company’s ability to increase it; the outcome of current litigation, claims and charges; the amount and timing of payment of the current portion of the Company’s long-term debt; the amount and timing of future revenues from remaining performance obligations; fair values of reporting units; the deductibility of goodwill; the amount and timing of the Company’s obligations to pay deferred taxes; estimates and assumptions that affect the present values and reported amounts of assets and liabilities; the recognition of compensation cost related to share-based compensation arrangements; the Company’s ability to hedge against or otherwise manage market risks through the use of derivative financial instruments; the extent to which hedging gains or losses will be offset by losses or gains on related underlying exposures; 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-Q, and the Company undertakes no duty to update them except as may be required by applicable laws or regulations. The Company’s actual results in the future may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company’s operations and business environment, including but not limited to those described in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2022, and the following: the continuing impact of the COVID-19 pandemic including the impacts of known or unknown COVID-19 variants, labor shortages, facility closures, shelter in place policies or quarantines, material shortages, transportation delays, termination or delays of Company contracts and the inability of our suppliers or customers to perform, the impacts of natural disasters on the Company’s operations and those of the Company’s customers and suppliers; the timing and content of future contract awards or customer orders; the appropriation, allocation and availability of Government funds; the termination for convenience of Government and other customer contracts or orders; weakening of economic conditions in served markets; the success of the Company’s competitors; changes in customer demands or customer

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insolvencies; competition; intellectual property rights; technical difficulties; the availability of selected acquisitions; delivery delays or defaults by customers; performance issues with key customers, suppliers and subcontractors; material changes in the costs and availability of certain raw materials; inflationary pressures on the Company’s costs of labor, materials, components and supplies; labor disputes; changes in U.S. tax laws and regulations; other changes in laws and regulations including but not limited to changes in accounting standards and foreign taxation; changes in interest rates; costs relating to environmental matters arising from current or former facilities; uncertainty regarding the ultimate resolution of current disputes, claims, litigation or arbitration; and the integration of recently acquired businesses.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks. The Company’s Canadian subsidiary Morgan Schaffer enters into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars. All derivative instruments are reported on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the respective derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. There has been no material change to the Company’s market risks since September 30, 2022.

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation, under the supervision and with the participation of Management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of that date. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

ISSUER PURCHASES OF EQUITY SECURITIES*

				Total Number of	Approximate Dollar
				Shares Purchased as	Value of Shares that
	Total Number	Average		Part of Publicly	May Yet Be
	of Shares	Price Paid		Announced Plans	Purchased Under the
Period	Purchased	per Share		or Programs	Plans or Programs
April 1-30, 2023	—	$	N/A	—	$	167.8 million
May 1-31, 2023	1,742	$	89.98	1,742	$	167.6 million
June 1-30, 2023	300	$	89.83	300	$	167.6 million
Total	2,042	$	89.95	2,042	$	167.6 million

* On August 5, 2021, the Company’s Board of Directors approved a new common stock program, which was announced on August 9, 2021, authorizing us to repurchase shares of our stock from time to time at our discretion, in the open market or otherwise, up to a maximum total repurchase amount equal to $200 million (or such lesser amount as may be permitted under the Company’s bank credit agreements). This program is scheduled to expire September 30, 2024. The Company has not determined whether or when it may cease making repurchases under the program prior to its expiration.

ITEM 5. OTHER INFORMATION

During the third quarter of fiscal 2023, no director or officer (as defined in Securities and Exchange Commission Rule 16a-1(f) of the Company adopted or terminated:

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(i) Any contract, instruction or written plan for the purchase or sale of Company securities intended to satisfy the affirmative defense conditions of SEC Rule 10b5-1(c) (a “Rule 10b5-1 trading arrangement”); or

(ii) Any “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of SEC Regulation S-K.

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ITEM 6. EXHIBITS

Exhibit Number	Description	Document Location
3.1(a)	Restated Articles of Incorporation	Exhibit 3(a) to the Company’s Form 10-K for the fiscal year ended September 30, 1999
3.1(b)	Amended Certificate of Designation, Preferences and Rights of Series A Participating Cumulative Preferred Stock of the Registrant	Exhibit 4(e) to the Company’s Form 10-Q for the fiscal quarter ended March 31, 2000
3.1(c)	Articles of Merger effective July 10, 2000	Exhibit 3(c) to the Company’s Form 10-Q for the fiscal quarter ended June 30, 2000
3.1(d)	Amendment of Articles of Incorporation effective February 5, 2018	Exhibit 3.1 to the Company’s Form 8-K filed February 7, 2018
3.2	Bylaws	Exhibit 3.1 to the Company’s Form 8-K filed November 22, 2022
4.2	Amendment No. 2 dated as of March 13, 2023 to Credit Agreement dated as of September 27, 2019 among ESCO Technologies Inc., the Foreign Subsidiary Borrowers party thereto, the Lenders party thereto, JPMorgan Chase Bank, N.A. as Administrative Agent, BMO Harris Bank N.A. as Syndication Agent, and Bank of America, N.A., SunTrust Bank, U.S. Bank National Association and Wells Fargo Bank, National Association as Co-Documentation Agents	Exhibit 10.1 to the Company’s Form 10-Q filed May 10, 2023
10.1	Form of Restricted Stock Unit (RSU) Awards to Executive Officers under 2018 Omnibus Incentive Plan (2023)	Filed herewith
31.1	Certification of Chief Executive Officer	Filed herewith
31.2	Certification of Chief Financial Officer	Filed herewith
32	Certification of Chief Executive Officer and Chief Financial Officer	Filed herewith
101.INS	XBRL Instance Document*	Submitted herewith
101.SCH	XBRL Schema Document*	Submitted herewith
101.CAL	XBRL Calculation Linkbase Document*	Submitted herewith
101.DEF	XBRL Definition Linkbase Document*	Submitted herewith
101.LAB	XBRL Label Linkbase Document*	Submitted herewith
101.PRE	XBRL Presentation Linkbase Document*	Submitted herewith
104	Cover Page Interactive Data File (contained in Exhibit 101)	Submitted herewith

* Exhibit 101 to this report consists of documents formatted in XBRL (Extensible Business Reporting Language). The financial information contained in the XBRL – related documents is “unaudited” or “unreviewed”.

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SIGNATURE

Pursuant to the requirements 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.
	/s/ Christopher L. Tucker
	Christopher L. Tucker
	Senior Vice President and Chief Financial Officer
	(As duly authorized officer and principal accounting and financial officer of the registrant)
Dated: August 9, 2023

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