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, 2020


	☐	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:

		Name of each exchange
Title of each class	Trading Symbol(s)	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, 2020
Common stock, $.01 par value per share		26,037,714

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)


	Three Months Ended
	June 30,
	2020		2019

Net sales	$	172,665	178,259
Costs and expenses:
Cost of sales		107,686	105,036
Selling, general and administrative expenses		36,936	41,226
Amortization of intangible assets		5,535	4,445
Interest expense, net		1,523	1,878
Other (income) expenses, net		(824)	2,007
Total costs and expenses		150,856	154,592

Earnings before income taxes		21,809	23,667
Income tax expense		3,122	4,622
Earnings from continuing operations		18,687	19,045
Earnings from discontinued operations, net of tax expense of $203		—	1,022

Net earnings	$	18,687	20,067

Earnings per share:
Basic - Continuing operations	$	0.72	0.73
- Discontinued operations		—	0.04
- Net earnings	$	0.72	0.77

Diluted - Continuing operations	$	0.72	0.73
- Discontinued operations		—	0.04
- Net earnings	$	0.72	0.77

See accompanying notes to consolidated financial statements.

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)


	Nine Months Ended
	June 30,
	2020		2019
Net sales	$	524,885	512,867
Costs and expenses:
Cost of sales		327,655	311,037
Selling, general and administrative expenses		119,023	119,093
Amortization of intangible assets		16,565	13,216
Interest expense, net		5,264	5,586
Other expenses (income), net		174	(3,350)
Total costs and expenses		468,681	445,582

Earnings before income taxes		56,204	67,285
Income tax expense		8,931	13,068
Earnings from continuing operations		47,273	54,217
(Loss) earnings from discontinued operations, net of tax expense of $269 and $255		(601)	1,964
Gain on sale of discontinued operations, net of tax expense of $23,734		76,614	—
Earnings from discontinued operations		76,013	1,964

Net earnings	$	123,286	56,181

Earnings per share:
Basic - Continuing operations	$	1.82	2.09
- Discontinued operations		2.92	0.08
- Net earnings	$	4.74	2.17

Diluted - Continuing operations	$	1.81	2.07
- Discontinued operations		2.91	0.08
- Net earnings	$	4.72	2.15

See accompanying notes to consolidated financial statements.

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)


	Three Months Ended			Nine Months Ended
	June 30,			June 30,
	2020		2019	2020		2019
Net earnings	$	18,687	20,067		123,286	56,181
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments		2,802	1,840		(160)	(2,013)
Net unrealized (loss) gain on derivative instruments		—	(7)		—	94
Total other comprehensive income (loss), net of tax		2,802	1,833		(160)	(1,919)
Comprehensive income	$	21,489	21,900		123,126	54,262

See accompanying notes to consolidated financial statements.

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)


	June 30,		September 30,
	2020		2019
ASSETS
Current assets:
Cash and cash equivalents	$	104,739		61,808
Accounts receivable, net		138,080		158,715
Contract assets		101,533		110,211
Inventories, net		152,264		124,956
Other current assets		16,868		14,190
Assets of discontinued operations – current		—		25,314
Total current assets		513,484		495,194
Property, plant and equipment, net of accumulated depreciation of $127,311 and $113,520, respectively		141,461		127,843
Intangible assets, net of accumulated amortization of $123,812 and $107,247, respectively		370,100		381,605
Goodwill		389,942		390,256
Operating lease assets		18,351		—
Other assets		11,247		4,445
Assets of discontinued operations - other		—		67,377
Total assets	$	1,444,585		1,466,720

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt and short-term borrowings	$	21,577		20,000
Accounts payable		54,305		63,800
Contract liabilities		87,421		81,177
Accrued salaries		29,137		37,194
Accrued other expenses		49,975		37,947
Liabilities of discontinued operations - current		—		11,517
Total current liabilities		242,415		251,635
Pension obligations		13,114		22,682
Deferred tax liabilities		65,954		60,856
Non-current operating lease liabilities		14,357		—
Other liabilities		35,288		36,326
Long-term debt		130,000		265,000
Liabilities of discontinued operations - other		—		3,999
Total liabilities		501,128		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, respectively		307		306
Additional paid-in capital		292,631		292,408
Retained earnings		801,787		684,741
Accumulated other comprehensive loss, net of tax		(44,134)		(43,974)
		1,050,591		933,481
Less treasury stock, at cost: 4,607,911 and 4,615,627 common shares, respectively		(107,134)		(107,259)
Total shareholders’ equity		943,457		826,222
Total liabilities and shareholders’ equity	$	1,444,585		1,466,720

See accompanying notes to consolidated financial statements.

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Nine Months Ended
	June 30,
	2020		2019
Cash flows from operating activities:
Net earnings	$	123,286	56,181
Earnings from discontinued operations		(76,013)	(1,964)
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		31,066	25,802
Stock compensation expense		4,184	3,685
Changes in assets and liabilities		(20,926)	(42,528)
Change in property, plant and equipment due to gain on sale of building		—	(8,922)
Pension contributions		(10,000)	(2,500)
Effect of deferred taxes		2,155	1,983
Net cash provided by operating activities – continuing operations		53,752	31,737
Net cash (used) provided by operating activities – discontinued operations		(14,737)	5,304
Net cash provided by operating activities		39,015	37,041

Cash flows from investing activities:
Proceeds from sale of building and land		—	17,201
Additions to capitalized software		(6,564)	(6,207)
Capital expenditures		(28,291)	(15,280)
Net cash used by investing activities – continuing operations		(34,855)	(4,286)
Proceeds from sale of discontinued operations		183,812	—
Acquisition of business – discontinued operations		—	(937)
Capital expenditures – discontinued operations		(1,728)	(11,177)
Net cash provided (used) by investing activities – discontinued operations		182,084	(12,114)
Net cash provided (used) by investing activities		147,229	(16,400)
Cash flows from financing activities:
Proceeds from long-term debt and short-term borrowings		11,577	32,000
Principal payments on long-term debt		(145,000)	(35,000)
Dividends paid		(6,240)	(6,227)
Other		(3,127)	(3,230)
Net cash used by financing activities – continuing operations		(142,790)	(12,457)
Net cash (used) provided by financing activities – discontinued operations		(2,140)	921
Net cash used by financing activities		(144,930)	(11,536)
Effect of exchange rate changes on cash and cash equivalents		1,617	(626)
Net increase in cash and cash equivalents		42,931	8,479
Cash and cash equivalents, beginning of period		61,808	30,477
Cash and cash equivalents, end of period	$	104,739	38,956

Supplemental cash flow information:
Interest paid	$	4,669	5,556
Income taxes paid (including state and foreign)		23,435	18,513

See accompanying notes to consolidated financial statements.

The major classes of assets and liabilities of the Technical Packaging business included in the Consolidated Balance Sheet at September 30, 2019 are shown below (in millions).


	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

3. ACCOUNTING STANDARDS UPDATE

In February 2016, the FASB issued ASU No. 2016-062, "Leases" (ASU 2016-062) which supersedes ASC 840, "Leases" and creates a new topic, ASC 842, "Leases." Subsequent to the issuance of ASU 2016-062, ASC 842 was amended by various updates that amend and clarify the impact and implementation of the aforementioned update. Effective October 1, 2019, the Company adopted these updates using the optional transition method. These updates require lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. Upon initial application, the provisions of these updates are required to be applied using the modified retrospective method, which requires retrospective adoption to each prior reporting period presented with the cumulative effect of adoption recorded to the earliest reporting period presented. An optional transition method can be utilized which requires retrospective adoption beginning on the date of adoption with the cumulative effect of initially applying these updates recognized at the date of initial adoption. The standard also provided several optional practical expedients for use in transition. The Company elected to use what the FASB has deemed the “package of practical expedients,” which allowed the Company not to reassess previous conclusions regarding lease identification, lease classification and the accounting treatment for initial direct costs. These updates also expand the required quantitative and qualitative disclosures surrounding leases. The adoption resulted in the addition of "right of use" assets and lease liabilities of approximately $20 million in the consolidated balance sheet, with no significant change to the Company’s consolidated statements of operations or cash flows. Refer to Note 16 for further discussion.

4. 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 Ended		Nine Months Ended
	June 30,		June 30,
	2020	2019	2020	2019
Weighted Average Shares Outstanding - Basic	26,031	25,971	26,002	25,935
Dilutive Options and Restricted Shares	103	138	128	155
Adjusted Shares - Diluted	26,134	26,109	26,130	26,090

5. SHARE-BASED COMPENSATION

The Company provides compensation benefits to certain key employees under several share-based plans providing for performance-accelerated restricted shares (restricted shares), and to non-employee directors under a non-employee directors compensation plan.

Performance-Accelerated Restricted Share Awards

Compensation expense related to the restricted share awards was $1.0 million and $3.2 million for the three and nine-month periods ended June 30, 2020, respectively, and $1.1 million and $3.1 million for the corresponding periods in 2019. There were 221,024 non-vested shares outstanding as of June 30, 2020.

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, 2020, respectively, and $0.3 million and $0.8 million for the corresponding periods in 2019.

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 $1.3 million and $4.2 million for the three and nine-month periods ended June 30, 2020, respectively, and $1.3 million and $3.9 million for the corresponding periods in 2019. 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, 2020, respectively, and $0.2 million and $0.8 million for the corresponding periods in 2019. As of June 30, 2020, there was $9.2 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 2.2 years.

6. INVENTORIES

Inventories, net, from continuing operations consist of the following:


	June 30,		September 30,
(In thousands)	2020		2019
Finished goods	$	26,706	23,550
Work in process		43,569	26,407
Raw materials		81,989	74,999
Total inventories	$	152,264	124,956

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Included on the Company’s Consolidated Balance Sheets at June 30, 2020 and September 30, 2019 are the following intangible assets gross carrying amounts and accumulated amortization from continuing operations:


	June 30,		September 30,
(Dollars in thousands)	2020		2019
Goodwill	$	389,942	390,256

Intangible assets with determinable lives:
Patents
Gross carrying amount	$	2,079	1,945
Less: accumulated amortization		832	748
Net	$	1,247	1,197

Capitalized software
Gross carrying amount	$	85,528	78,962
Less: accumulated amortization		55,315	48,530
Net	$	30,213	30,432

Customer relationships
Gross carrying amount	$	227,095	227,225
Less: accumulated amortization		64,562	55,326
Net	$	162,533	171,899

Other
Gross carrying amount	$	5,129	5,441
Less: accumulated amortization		3,105	2,645
Net	$	2,024	2,796
Intangible assets with indefinite lives:
Trade names	$	174,083	175,281

The changes in the carrying amount of goodwill attributable to each business segment for the nine months ended June 30, 2020 is as follows on a continuing operations basis:


				Aerospace
(Dollars in millions)	USG		Test	& Defense	Total
Balance as of September 30, 2019	$	254.0	34.1	102.2	390.3
Foreign currency translation		(0.3)	(0.1)	—	(0.4)
Balance as of June 30, 2020	$	253.7	34.0	102.2	389.9

The economic uncertainty, changes in the propensity for the general public to travel by air, and reductions in demand for commercial aircraft as a result of the COVID-19 pandemic have adversely impacted net sales and operating results in certain of our Aerospace and Defense reporting units and was determined to be an event and change in circumstances that required a quantitative review of goodwill and other intangible assets for impairment. The determination of the fair value of reporting units is based, among other things, on estimates of future operating performance of the reporting unit being valued. The Company's methodology includes the use of an income approach that discounts future net cash flows to their present value at a rate that reflects the Company's cost of capital. These estimated fair values are based on estimates of future cash flows of the businesses. Factors affecting these future cash flows include the continued market demand for, and acceptance of, the products and services offered by the businesses, the development of new products and services by the businesses and the underlying cost of development, the future cost structure of the businesses and future technological changes. The Company also incorporates market multiples for comparable companies in determining the fair value of its reporting units where applicable. The quantitative review determined that there was no impairment during the three and nine months ended June 30, 2020. Due to similar and other challenges in our NRG reporting unit, a quantitative review of goodwill and other intangible assets for impairment was performed. The Company determined that there was no impairment during the three and nine months ended June 30, 2020.

8. 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 (formerly called Filtration/Fluid Flow), RF Shielding and Test (Test), and Utility Solutions Group (USG). The Aerospace & Defense segment’s operations consist of PTI Technologies Inc. (PTI), VACCO Industries (VACCO), Crissair, Inc. (Crissair), Westland Technologies Inc. (Westland), Mayday Manufacturing Co. and its affiliate Hi-Tech Metals, Inc. (collectively referred to as Mayday) and Globe Composite Solutions, LLC (Globe). The companies within this segment primarily design and manufacture specialty filtration and naval 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; 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 Test segment’s operations consist primarily of ETS-Lindgren Inc. (ETS-Lindgren). ETS-Lindgren is an industry leader in providing its customers with the ability to identify, measure and contain magnetic, electromagnetic and acoustic energy. ETS-Lindgren also manufactures radio frequency shielding products and components used by manufacturers of medical equipment, communications systems, electronic products, and shielded rooms for high-security data processing and secure communication.

The USG segment’s operations consist primarily of Doble Engineering Company (Doble), Morgan Schaffer Inc. (Morgan Schaffer), and NRG Systems, Inc. (NRG). Doble provides high-end, intelligent, diagnostic test and data management solutions for the electric power delivery industry and is a leading supplier of partial discharge testing instruments used to assess the integrity of high voltage power delivery equipment. Morgan Schaffer provides an integrated offering of dissolved gas analysis, oil testing, and data management solutions for the electric power industry. NRG designs and manufactures decision support tools for the renewable energy industry, primarily wind.

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 from continuing operations before interest and taxes. The table below is presented on the basis of continuing operations and excludes discontinued operations.


	Three Months Ended			Nine Months Ended
	June 30,			June 30,
(In thousands)	2020		2019	2020	2019
NET SALES
Aerospace & Defense	$	84,072	83,067	256,707	228,769
Test		46,016	42,298	128,999	126,459
USG		42,577	52,894	139,179	157,639
Consolidated totals	$	172,665	178,259	524,885	512,867

EBIT
Aerospace & Defense	$	17,409	19,039	51,658	47,092
Test		7,177	5,927	17,483	14,791
USG		6,156	10,148	20,310	40,461
Corporate (loss)		(7,410)	(9,569)	(27,983)	(29,473)
Consolidated EBIT		23,332	25,545	61,468	72,871
Less: Interest expense		(1,523)	(1,878)	(5,264)	(5,586)
Earnings before income taxes	$	21,809	23,667	56,204	67,285

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 from continuing operations 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.

9. DEBT

The Company’s debt is summarized as follows:


	June 30,		September 30,
(In thousands)	2020		2019
Total borrowings	$	151,577	285,000
Current portion of long-term debt and short-term borrowings		(21,577)	(20,000)
Total long-term debt, less current portion	$	130,000	265,000

On September 27, 2019, the Company entered into a new five-year credit facility (“the Credit Facility”), modifying its previous credit facility which would have matured December 21, 2020. The Credit Facility includes a $500 million revolving line of credit, as well as provisions allowing for the increase of the credit facility commitment amount by an additional $250 million, if necessary, with the consent of the lenders. The bank syndication supporting the facility is comprised of a diverse group of eight banks led by JP Morgan Chase Bank, N.A., as Administrative Agent. The Credit Facility matures September 27, 2024.

At June 30, 2020, the Company had approximately $340 million available to borrow under the Credit Facility, plus the $250 million increase option, subject to lender approval, in addition to $104.7 million cash on hand. The Company classified $20.0 million as the current portion of long-term debt as of June 30, 2020, as the Company intends to repay this amount within the next twelve months; however, the Company has no contractual obligation to repay such amount during the next twelve months. The letters of credit issued and outstanding under the Credit Facility totaled $9.9 million at June 30, 2020.

Interest on borrowings under the Credit Facility is calculated at a spread over either the London Interbank Offered Rate (LIBOR ), the New York Federal Reserve Bank Rate or the prime rate, depending on various factors. The Credit Facility also requires a facility fee ranging from 10 to 25 basis points per annum on the unused portion. The Credit Facility is secured by the unlimited guaranty of the Company’s direct and indirect material U.S. subsidiaries and the pledge of 100% of the equity interests of its direct and indirect material foreign subsidiaries. The financial covenants of the Credit Facility include a leverage ratio and an interest coverage ratio. The weighted average interest rates were 3.24% and 3.22% for the three and nine-month periods ending June 30, 2020, respectively , and 3.21% and 3.22% for the three and nine-month periods ending June 30, 2019. As of June 30, 2020, the Company was in compliance with all covenants.

11. SHAREHOLDERS’ EQUITY

The change in shareholders’ equity for the first three and nine months of 2020 and 2019 is shown below (in thousands):


	Three Months Ended June 30,		Nine Months Ended June 30,
	2020	2019	2020	2019

Common stock
Beginning balance	306	305	306	305
Stock plans	1	1	1	1
Ending balance	307	306	307	306

Additional paid-in-capital
Beginning balance	294,787	293,612	292,408	291,190
Stock plans	(2,156)	(2,408)	223	14
Ending balance	292,631	291,204	292,631	291,204

Retained earnings
Beginning balance	785,184	643,018	684,741	606,836
Net earnings common stockholders	18,687	20,067	123,286	56,181
Dividends paid	(2,084)	(2,082)	(6,240)	(6,227)
Adoption of accounting standards updates	—	—	—	4,213
Ending balance	801,787	661,003	801,787	661,003

Accumulated other comprehensive income (loss)
Beginning balance	(46,936)	(35,280)	(43,974)	(31,528)
Foreign currency translation	2,802	1,840	(160)	(2,013)
Pension	—	—	—	—
Forward exchange contracts	—	(7)	—	94
Ending balance	(44,134)	(33,447)	(44,134)	(33,447)

Treasury stock
Beginning balance	(107,134)	(107,259)	(107,259)	(107,394)
Issued under stock plans	—	—	125	135
Ending balance	(107,134)	(107,259)	(107,134)	(107,259)

Total equity	943,457	811,807	943,457	811,807

12. RETIREMENT PLANS

A summary of net periodic benefit expense for the Company’s defined benefit plans for the three and nine-month periods ended June 30, 2020 and 2019 is shown in the following table. Net periodic benefit cost for each period presented is comprised of the following:


	Three Months Ended			Nine Months Ended
	June 30,			June 30,
(In thousands)	2020		2019	2020		2019
Defined benefit plans
Interest cost	$	616	875		2,264	2,626
Expected return on assets		(1,067)	(1,086)		(3,149)	(3,259)
Amortization of:
Prior service cost		—	—		—	—
Actuarial loss		715	487		1,801	1,461
Net periodic benefit cost	$	264	276		916	828

13. DERIVATIVE FINANCIAL INSTRUMENTS

Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks. In 2018, the Company entered into three interest rate swaps with a notional amount of $150 million to hedge some of its exposure to variability in future LIBOR-based interest payments on variable rate debt, of which one swap is outstanding as of June 30, 2020. In addition, the Company’s Canadian subsidiary Morgan Schaffer enters into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars. The Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized may differ for open positions, which remain subject to ongoing market price fluctuations until settlement. All derivative instruments are reported in either accrued expenses or other assets on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. The interest rate swaps entered into during 2018 were not designated as cash flow hedges and, therefore, the gain or loss on the derivative is reflected in earnings each period.

The following is a summary of the notional transaction amounts and fair values for the Company’s outstanding derivative financial instruments by risk category and instrument type as of June 30, 2020:


	Notional		Fair Value
(In thousands)	amount		(US$)	Fix Rate
Forward contracts	5,000	USD	(106)
Interest rate swap	150,000	USD	(1,485)	2.24	%

14. 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, 2020 and September 30, 2019 using available market information or other appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, receivables, inventories, payables, debt 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, as presented below as of June 30, 2020:


(In thousands)	Level 1		Level 2		Level 3	Total
Assets (Liabilities):
Forward contracts and interest rate swaps	$	—	(1,591)	$	—	(1,591)

Valuation was based on third party evidence of similarly priced derivative instruments.

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. As more fully described in note 7, events and changes in circumstances for the NRG reporting unit and certain reporting units in our Aerospace & Defense segment resulting from the COVID-19 pandemic required that the property, plant and equipment, and other intangible assets of those businesses be reviewed for impairment. No impairments were recorded during the three and nine-month periods ended June 30, 2020.

15. REVENUES

Disaggregation of Revenues

Revenues by customer type, geographic location, and revenue recognition method for the three and nine-month periods ended June 30, 2020 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 table below also include a reconciliation of the disaggregated revenue within each reportable segment on a continuing operations basis.


Three Months Ended June 30, 2020	Aerospace
(In thousands)	& Defense		Test		USG		Total
Customer type:
Commercial	$	37,485	$	38,737	$	39,740	$	115,962
U.S. Government		46,587		7,279		2,837		56,703
Total revenues	$	84,072	$	46,016	$	42,577	$	172,665

Geographic location:
United States	$	73,476	$	19,441	$	26,499	$	119,416
International		10,596		26,575		16,078		53,249
Total revenues	$	84,072	$	46,016	$	42,577	$	172,665

Revenue recognition method:
Point in time	$	36,461	$	9,138	$	27,765	$	73,364
Over time		47,611		36,878		14,812		99,301
Total revenues	$	84,072	$	46,016	$	42,577	$	172,665


Nine Months Ended June 30, 2020	Aerospace
(In thousands)	& Defense		Test		USG		Total
Customer type:
Commercial	$	130,817	$	107,931	$	135,711	$	374,459
U.S. Government		125,890		21,068		3,468