UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-K

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 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		(I.R.S. Employer
of incorporation or organization)		Identification No.)

9900A Clayton Road
St. Louis, Missouri		63124-1186
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code:

(314) 213-7200

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

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

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ⌧ Yes ◻ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ◻ Yes ⌧ No

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ⌧ Yes ◻ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧ Yes ◻ No

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

Large accelerated filer ☒	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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.

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

Aggregate market value of the Common Stock held by non-affiliates of the registrant as of the close of trading on March 31, 2020, the last business day of the registrant’s most recently completed second fiscal quarter, based on the New York Stock Exchange closing price on March 31, 2020: approximately $1,926,000,000.*

*For purpose of this calculation only, without determining whether the following are affiliates of the registrant, the registrant has assumed that (i) its directors and executive officers are affiliates, and (ii) no party who has filed a Schedule 13D or 13G is an affiliate.

Number of shares of Common Stock outstanding at November 20,2020: 26,037,714

DOCUMENTS INCORPORATED BY REFERENCE:

Part III of this Report incorporates by reference certain portions of the registrant’s definitive Proxy Statement for its 2021 Annual Meeting of Shareholders, which the registrant currently anticipates first sending to shareholders on or about December 16, 2020 (hereinafter, the “2020 Proxy Statement”).

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FORWARD-LOOKING INFORMATION

Statements contained in this Form 10-K regarding future events and the Company’s future results that are based on current expectations, estimates, forecasts and projections about the Company’s performance and the industries in which the Company operates are considered “forward-looking statements” within the meaning of the safe harbor provisions of the Federal securities laws. These include, without limitation, statements about: the effects of the continuing COVID-19 pandemic on the Company’s business and results of operations; the adequacy of the Company’s buildings, machinery and equipment; the adequacy of the Company’s credit facilities and future cash flows; the outcome of litigation, claims and charges; future costs relating to environmental matters; repayment of debt within the next twelve months; the outlook for all or any part of 2021 and beyond, including amounts, timing and sources of 2021 sales, revenues, sales growth, Adjusted EBIT, EBITDA, Adjusted EBITDA and Adjusted EPS and comparisons with 2020; interest on Company debt obligations; the ability of expected hedging gains or losses to be offset by losses or gains on related underlying exposures; the Company’s ability to increase shareholder value; acquisitions; income tax expense and the Company’s expected effective tax rate; Management’s assumptions about future liability under the Company’s postretirement benefit plans; the recognition of unrecognized compensation costs related to share-based compensation arrangements; the Company’s exposure to market risk related to interest rates and to foreign currency exchange risk; the likelihood of future variations in the Company’s assumptions or estimates used in recording contracts and expected costs at completion under the percentage of completion method; the Company’s estimates and assumptions used in the preparation of its financial statements; costs and estimated earnings from long-term contracts; valuation of inventories; estimates of uncollectible accounts receivable; the risk of goodwill impairment; the Company’s estimates utilized in software revenue recognition, non-cash depreciation and the amortization of intangible assets; the valuation of deferred tax assets; estimates of future cash flows and fair values in connection with the risk of goodwill impairment; amounts of NOL not realizable and the timing and amount of the reduction of unrecognized tax benefits; the effects of implementing recently issued accounting pronouncements; and any other statements contained herein which are not strictly historical. Words such as expects, anticipates, targets, goals, projects, intends, plans, believes, estimates, variations of such words, and similar expressions are intended to identify such forward-looking statements.

Investors are cautioned that such statements are only predictions and speak only as of the date of this Form 10-K, and the Company undertakes no duty to update the information in this Form 10-K except as may be required by applicable laws or regulations. The Company’s actual results in the future may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company’s operations and business environment, including but not limited to those described herein under “Item 1A, Risk Factors,” and the following: the duration, scope and effects of the COVID-19 pandemic; the availability of viable COVID-19 vaccines; the impacts of labor disputes, civil disorder, wars, elections, political changes, tariffs and trade disputes, terrorist activities or natural disasters on the Company’s operations and those of the Company’s customers and suppliers; inability to access work sites; the timing and content of future customer orders; the appropriation and allocation of Government funds; the termination for convenience of Government and other customer contracts or orders; the timing and magnitude of future contract awards; weakening of economic conditions in served markets; the success of the Company’s competitors; changes in customer demands or customer insolvencies; competition; intellectual property rights; technical difficulties; the availability of selected acquisitions; delivery delays or defaults by customers; performance issues with key customers, suppliers and subcontractors; material changes in the costs and availability of certain raw materials; material changes in the cost of credit; changes in laws and regulations including but not limited to changes in accounting standards and taxation requirements; costs relating to environmental matters; litigation uncertainty; the Company’s inability to successfully execute internal restructuring and other plans; and the integration of recently acquired businesses.

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PART I

Item 1. Business

The Company

The Registrant, ESCO Technologies Inc. (ESCO), is a global provider of highly engineered filtration and fluid control products for the aviation, navy, space and process markets worldwide, as well as composite-based products and solutions for navy, defense and industrial customers; is an industry leader in RF shielding and EMC test products; and provides diagnostic instruments, software and services for the benefit of industrial power users and the electric utility and renewable energy industries. ESCO is focused on generating predictable and profitable long-term growth through continued innovation and expansion of its product offerings across each of its business segments. ESCO conducts its business through a number of wholly-owned direct and indirect subsidiaries. ESCO and its subsidiaries are referred to in this Report as “the Company.” ESCO’s corporate strategy is centered on a multi-segment approach designed to enhance the strength and sustainability of sales and earnings growth by providing lower risk through diversification. Its stock is listed on the New York Stock Exchange, where its ticker symbol is “ESE”.

The Company’s fiscal year ends September 30. Throughout this Annual Report, unless the context indicates otherwise, references to a year (for example 2020) refer to the Company’s fiscal year ending on September 30 of that year, and references to the “Consolidated Financial Statements” refer to the Consolidated Financial statements included in the Financial Information section of this Annual Report beginning on page F-1, an Index to which is provided on page F-1.

The Company classifies its business operations in segments for financial reporting purposes. The Company’s three reportable segments during 2020, together with the significant domestic and foreign operating subsidiaries within each segment, are as follows:

Aerospace & Defense (formerly called Filtration/Fluid Flow):

PTI Technologies Inc. (PTI)

VACCO Industries (VACCO)

Crissair, Inc. (Crissair)

Westland Technologies, Inc. (Westland)

Mayday Manufacturing Co. (Mayday)

Hi-Tech Metals, Inc. (Hi-Tech)

Globe Composite Solutions, LLC (Globe)

Utility Solutions Group (USG):

Doble Engineering Company

Morgan Schaffer Ltd. (Morgan Schaffer)

NRG Systems, Inc. (NRG)

Except as the context otherwise indicates, the term “Doble” as used herein includes Doble Engineering Company, Morgan Schaffer and the Company’s other USG subsidiaries except NRG.

RF Shielding and Test (Test):

ETS-Lindgren Inc.

Except as the context otherwise indicates, the term “ETS-Lindgren” as used herein includes ETS-Lindgren Inc. and the Company’s other Test segment subsidiaries.

The Company’s operating subsidiaries are engaged primarily in the research, development, manufacture, sale and support of the products and systems described below. Their respective businesses are subject to a number of risks and uncertainties, including without limitation those discussed in Item 1A, “Risk Factors.” See also Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Forward-Looking Information.”

ESCO is continually seeking ways to reduce overall operating costs, streamline business processes and enhance the branding of its products and services. During 2018, the Company undertook several restructuring actions involving the closure of Doble’s sales offices in Norway, China, Mexico and Dubai as part of its consolidation of the global distribution channels of Doble and Morgan Schaffer. During 2019, Doble sold its headquarters facility in Watertown, Massachusetts, and during 2020, it consolidated its headquarters operations into a single, more cost-efficient facility in Marlborough, Massachusetts. Doble has also announced its intention to close its facility in Toronto, Ontario by early in the second quarter of 2021 and to consolidate the production of its Manta product line with existing Doble instruments.

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ESCO is also continually seeking opportunities to supplement its growth by making strategic acquisitions. In March 2018, the Company acquired the assets of Manta Test Systems Ltd. (Manta); and in July 2019 the Company acquired Globe. More information about these acquired businesses is provided in the following section, “Products,” and in Note 2 to the Consolidated Financial Statements.

In December 2019, the Company sold the businesses comprising its former Technical Packaging segment and used the proceeds from the sale to pay down debt and for other corporate purposes, including the termination of the Company’s defined benefit pension plan. The Technical Packaging segment was reported as Discontinued Operations in 2020, and is presented as such for all periods in this report. See Note 2 to the Consolidated Financial Statements.

Products

The Company’s principal products are described below. See Note 14 to the Consolidated Financial Statements for financial information regarding business segments and 10% customers.

Aerospace & Defense

Beginning in the first quarter of 2020, Management renamed the Filtration/Fluid Flow (Filtration) segment as Aerospace & Defense to better reflect the composition of the segment’s products, end markets and customer characteristics. The Aerospace & Defense segment’s individual legal and operating entities, historical financial results, and management structure are unchanged from what was formerly presented as Filtration.

The Aerospace & Defense segment accounted for approximately 48%, 45% and 42% of the Company’s total revenue in 2020, 2019 and 2018, respectively.

The companies within this segment primarily design and manufacture specialty filtration, fluid control and naval products, including hydraulic filter elements and fluid control devices used in aerospace and defense applications, unique filter mechanisms used in micro-propulsion devices for satellites and custom designed filters for manned aircraft and submarines, products and systems to reduce vibration and/or acoustic signatures and otherwise reduce or obscure a vessel’s signature, and other communications, sealing, surface control and hydrodynamic related applications to enhance U.S. Navy maritime survivability; precision-tolerance machined components for the aerospace and defense industry; and metal processing services.

USG

The USG segment accounted for approximately 26%, 29% and 31% of the Company’s total revenue in 2020, 2019 and 2018, respectively.

Doble is an industry leader in the development, manufacture and delivery of diagnostic testing solutions that enable electric power grid operators to assess the integrity of high-voltage power delivery equipment. It combines three core elements for customers – diagnostic test and condition monitoring instruments, expert consulting, and testing services – and provides access to its large reserve of related empirical knowledge.

Doble has six offices in the United States and five international offices, one of which Doble intends to close in 2021 as mentioned above.

NRG is a global market leader in the design and manufacture of decision support tools for the renewable energy industry, primarily wind and solar.

Test

The Test segment accounted for approximately 26%, 26% and 27% of the Company’s total revenue in 2020, 2019 and 2018, respectively.

ETS-Lindgren is an industry leader in designing and manufacturing products which provide its customers with the ability to measure and contain magnetic, electromagnetic and acoustic energy. It supplies its customers with a broad range of isolated environments and turnkey systems, including RF test facilities, acoustic test enclosures, RF and magnetically shielded rooms, secure communication facilities, RF measurement systems and broadcast and recording studios. Many of these facilities include proprietary features such as

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shielded doors and windows. ETS-Lindgren also provides the design, program management, installation and integration services required to successfully complete these types of facilities.

ETS-Lindgren also supplies customers with a broad range of components including RF absorptive materials, RF filters, active compensation systems, antennas, antenna masts, turntables and electric and magnetic probes, RF test cells, proprietary measurement software and other test accessories required to perform a variety of tests. ETS-Lindgren offers a variety of services including calibration for antennas and field probes, chamber certification, field surveys, customer training and a variety of product tests. ETS-Lindgren’s test labs are accredited by the following organizations: American Association for Laboratory Accreditation, National Voluntary Laboratory Accreditation Program and CTIA-The Wireless Association Accredited Test Lab. ETS-Lindgren serves the acoustics, medical, health and safety, electronics, wireless communications, automotive and defense markets. ETS-Lindgren has four offices in the United States and nine international offices.

Marketing and Sales

The Company’s products generally are distributed to customers through a domestic and foreign network of distributors, sales representatives, direct sales teams and in-house sales personnel.

The Company’s sales to international customers accounted for approximately 27%, 26% and 27% of the Company’s total revenue in 2020, 2019 and 2018, respectively. See Note 14 to the Consolidated Financial Statements for financial information by geographic area. See also Item 1A, “Risk Factors,” for a discussion of risks of the Company’s international operations.

Some of the Company’s products are sold directly or indirectly to the U.S. Government under contracts with the Army, Navy and Air Force and subcontracts with prime contractors of such entities. Direct and indirect sales to the U.S. Government, primarily related to the Aerospace & Defense segment, accounted for approximately 28%, 21%, and 23% of the Company’s total revenue in 2020, 2019 and 2018, respectively. See also “Government Contracts,” below, and see Item 1A, “Risk Factors,” and related risks for a discussion of risks of the Company’s government business.

Government Contracts

The Company contracts with the U.S. Government and subcontracts with prime contractors of the U.S. Government. Although VACCO and Westland have a number of “cost-plus” Government contracts, the Company’s Government contracts also include firm fixed-price contracts under which work is performed and paid for at a fixed amount without adjustment for the actual costs experienced in connection with the contracts. All Government prime contracts and virtually all of the Company’s Government subcontracts provide that they may be terminated at the convenience of the Government or the customer. Upon such termination, the Company is entitled to receive equitable compensation from the customer for the work completed prior to termination. See “Marketing and Sales,” above, and see Item 1A, “Risk Factors,” for additional information regarding Government contracts and related risks.

Intellectual Property

The Company owns or has other rights in various forms of intellectual property (i.e., patents, trademarks, service marks, copyrights, mask works, trade secrets and other items). As a major supplier of engineered products to industrial and commercial markets, the Company emphasizes developing intellectual property and protecting its rights therein. However, the scope of protection afforded by intellectual property rights, including those of the Company, is often uncertain and involves complex legal and factual issues. Some intellectual property rights, such as patents, have only a limited term. Also, there can be no assurance that third parties will not infringe or design around the Company’s intellectual property. Policing unauthorized use of intellectual property is difficult, and infringement and misappropriation are persistent problems for many companies, particularly in some international markets. In addition, the Company may not elect to pursue an unauthorized user due to the high costs and uncertainties associated with litigation. Further, there can be no assurance that courts will ultimately hold issued patents or other intellectual property valid and enforceable. See Item 1A, “Risk Factors.”

A number of products in the Aerospace & Defense segment are based on patented or otherwise proprietary technology that sets them apart from the competition, such as VACCO’s proprietary quieting technology and Westland’s signature reduction solutions. In addition, Globe has developed significant manufacturing and logistics capability useful for special hull treatments for submarines. Globe has also obtained patent protection in the U.S. and Europe for a novel shielding curtain to be used with electromagnetic radiation scanning systems.

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In the USG segment, the segment policy is to seek patent and/or other forms of intellectual property protection on new and improved products, components of products and methods of operation for its businesses, as such developments are made. Doble is pursuing patent protection on improvements to its line of diagnostic equipment and NERC CIP compliance tools. Doble also holds an extensive library of apparatus performance information useful to entities that generate, distribute or consume electric energy. Doble makes part of this library available to registered users via an Internet portal. NRG is pursuing patent protection on its line of bat deterrent systems, which are designed to significantly reduce bat mortality at windfarms and in other applications where bat conservation is a concern.

In the Test segment, patent protection has been sought for significant inventions. Examples of such inventions include novel designs for window and door assemblies used in shielded enclosures and anechoic chambers, improved acoustic techniques for sound isolation and a variety of unique antennas. In addition, the Test segment holds a number of patents, and has patents pending, on products used to perform wireless device testing.

The Company considers its patents and other intellectual property to be of significant value in each of its segments.

Backlog

Total Company backlog of firm orders at September 30, 2020 was $517.4 million, representing an increase of $65.8 million (15%) from the backlog of $451.6 million at September 30, 2019. By segment, the backlog at September 30, 2020 and September 30, 2019, respectively, was $344.7 million and $276.3 million for Aerospace & Defense; $50.7 million and $41.7 million for USG; and $122.0 million and $133.6 million for Test. The Company estimates that as of September 30, 2020 domestic customers accounted for approximately 78% of the Company’s total firm orders and international customers accounted for approximately 22%. Of the total Company backlog at September 30, 2020, approximately 73% is expected to be completed in the fiscal year ending September 30, 2021.

Purchased Components and Raw Materials

The Company’s products require a wide variety of components and materials. Although the Company has multiple sources of supply for most of its materials requirements, certain components and raw materials are supplied by sole source vendors, and the Company’s ability to perform certain contracts depends on their performance. In the past, these required raw materials and various purchased components generally have been available in sufficient quantities. However, the Company does have some risk of shortages of materials or components due to reliance on sole or limited sources of supply; and supplies of components and materials may also be impacted by disruptions due to COVID-19 as well as complications due to current or future trade policies. See Item 1A, “Risk Factors.”

The Aerospace & Defense segment purchases supplies from a wide array of vendors. In most instances, multiple vendors of raw materials are screened during a qualification process to ensure that there will not be an interruption of supply should one of them underperform or discontinue operations. Nonetheless, in some situations, there is a risk of shortages due to reliance on a limited number of suppliers or because of price fluctuations due to the nature of the raw materials. For example, aerospace-grade titanium and gaseous helium, important raw materials for our Aerospace & Defense segment subsidiaries, may at times be in short supply.

The USG segment manufactures electronic instrumentation through a network of regional contract manufacturers under long-term contracts. In general, USG purchases the same kinds of component parts as do other electronic products manufacturers, and it purchases only a limited amount of raw materials.

The Test segment is a vertically integrated supplier of electro-magnetic (EM) shielding and RF absorbing products, producing most of its critical RF components. This segment purchases significant quantities of raw materials such as polyurethane foam, polystyrene beads, steel, aluminum, copper, nickel and wood. Accordingly, it is subject to price fluctuations in the worldwide raw materials markets. While ETS-Lindgren has long-term contracts with a number of its suppliers, performance of these contracts is vulnerable to the risks described above and in Item 1A.

Competition

Competition in the Company’s major markets is broadly based and global in scope. Competition can be particularly intense during periods of economic slowdown, and this has been experienced in some of the Company’s markets. Although the Company is a leading supplier in several of the markets it serves, it maintains a relatively small share of the business in many of the other markets it serves. Individual competitors range in size from annual revenues of less than $1 million to billion-dollar enterprises. Because of the specialized nature of the Company’s products, its competitive position with respect to its products cannot be precisely stated. In the

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Company’s major served markets, competition is driven primarily by quality, technology, price and delivery performance. See also Item 1A, “Risk Factors.”

Primary competitors of the Aerospace & Defense segment include Pall Corporation, Moog, Inc., Safran (Sofrance), CLARCOR Inc., TransDigm (PneuDraulics), Marotta Controls, and Parker Hannifin.

Significant competitors of the USG segment include OMICRON electronics Corp., Megger Group Limited, Vaisala, and Qualitrol Company LLC (a subsidiary of Fortive Corporation).

The Test segment is a global leader in EM shielding. Significant competitors in this market include Rohde & Schwarz GMBH, Microwave Vision SA (MVG), TDK RF Solutions Inc., Albatross GmbH, IMEDCO AG, and Universal Shielding Corp.

Research and Development

Research and development and the Company’s technological expertise are important factors in the Company’s business. Research and development programs are designed to develop technology for new products or to extend or upgrade the capability of existing products, and to enhance their commercial potential. The Company performs research and development at its own expense, and also engages in research and development funded by customers. See Note 1 to the Consolidated Financial Statements for financial information about the Company’s research and development expenditures.

Environmental Matters and Government Regulation

The Company is involved in various stages of investigation and cleanup relating to environmental matters. It is difficult to estimate the potential costs of such matters and the possible impact of these costs on the Company at this time due in part to: the uncertainty regarding the extent of pollution; the complexity and changing nature of Government laws and regulations and their interpretations; the varying costs and effectiveness of alternative cleanup technologies and methods; the uncertain level of insurance or other types of cost recovery; the uncertain level of the Company’s responsibility for any contamination; the possibility of joint and several liability with other contributors under applicable law; and the ability of other contributors to make required contributions toward cleanup costs. Based on information currently available, the Company does not believe that the aggregate costs involved in the resolution of any of its environmental matters or compliance with Governmental regulations will have a material adverse effect on the Company’s financial condition or results of operations.

Human Capital

As of September 30, 2020, we employed 2,844 persons, including 2,713 full time employees. Of our full-time employees, 2,289 were located in the United States and 424 were located in 15 foreign countries.

We are dedicated to preserving operational excellence and remaining an employer of choice. We provide and maintain a work environment that is designed to attract, develop and retain top talent through offering our employees an engaging work experience that contributes to their career development. Through the ESCO Technologies Foundation, our charitable arm, and Company-sponsored wellness activities, we provide opportunities for meaningful civic involvement that not only support our communities but also provide experiences for our employees to promote a collaborative and rewarding work environment. We strive to maintain a culture that enables all employees to be treated with dignity and respect while devoting their best efforts to performing their jobs to the best of their respective abilities. We operate in a supportive culture that incorporates highly ethical behavior and reinforces our human rights commitment.

Our subsidiaries enjoy modest turnover at less than half the national average of our peer groups in U.S. industries. Of our workforce of more than 2,800 employees, fewer than 5% are contingent workers. We invest in creating a diverse, inclusive and safe work environment where our employees can deliver their workplace best every day. In fact, more than 60% of our U.S. employees come from diverse backgrounds.

We devote resources to training and development, including educational assistance for career-enhancing academic and professional programs. We also invest time in identifying high-potential future leaders and working with them on individual development plans. We recognize that our success is based on the collective talents and dedication of those we employ, and we are highly invested in their success.

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Manufacture of our products and performance of our services requires the use of a variety of tools, equipment, materials and supplies. As a part of our commitment to the safety of our employees, customers and third parties, we have established safety programs, policies and procedures and training requirements for our employees. We also welcome employee involvement in local safety committees.

During 2020, we focused significant attention on the effective handling of the COVID-19 pandemic. Our response has included a re-layout of many of our factory floors and other personnel areas to ensure sufficient distancing in high density areas of our facilities. We also installed Plexiglas shields, modified training programs to comply with distancing requirements, limited visitor entry and increased virtual meetings, and adjusted shifts to aid in physical distancing. Additionally, we implemented the use of flexible and remote work arrangements and other creative solutions. Where applicable, we have also provided additional support through daily symptom checks and self-assessments. We have identified and/or developed resources to support employees and their families with additional time off, flexible schedules, employer paid benefits, and the identification of community resources.

We believe strong human capital acts as a competitive differentiator. We strive to ensure that we have the right leaders in place to drive our strategic initiatives not only today but also into the future. We are committed to a safe workplace and an ethical environment in which employees are respected in a culture of belonging and dignity and in which they can continually develop their skills and expertise to advance their careers.

Financing

For information about the Company’s credit facility, see Note 9 to the Consolidated Financial Statements, which is incorporated into this Item by reference.

Additional Information

The information set forth in Item 1A, “Risk Factors,” is incorporated in this Item by reference.

The Company makes available free of charge on or through its website, www.escotechnologies.com, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. Information contained on the Company’s website is not incorporated into this Report.

Information about our Executive Officers

The following sets forth certain information as of November 1, 2020 with respect to the Company’s executive officers. These officers are elected annually to terms which expire at the first meeting of the Board of Directors after the next Annual Meeting of Stockholders.


Name	Age	Position(s)
Victor L. Richey	63	Chairman of the Board of Directors and Chief Executive Officer since April 2003; President since October 2006 *
Gary E. Muenster	60	Executive Vice President and Chief Financial Officer since February 2008; Director since February 2011
Alyson S. Barclay	61	Senior Vice President, Secretary and General Counsel since November 2008

Mr. Richey also serves as Chairman of the Executive Committee of the Board of Directors.

There are no family relationships among any of the executive officers and directors.

Item 1A. Risk Factors

This Form 10-K, including Item 1, “Business,” Item 2, “Properties,” Item 3, “Legal Proceedings,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contains “forward-looking statements” within the meaning of the safe harbor provisions of the federal securities laws, as described under “Forward-Looking Statements” above.

In addition to the risks and uncertainties discussed in that section and elsewhere in this Form 10-K, and risks and uncertainties that apply to businesses or public companies generally, the following important risk factors which are particularly applicable to the

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Company’s business could cause actual results and events to differ materially from those contained in any forward-looking statements, or could otherwise materially adversely affect the Company’s business, operating results or financial condition:

COVID-19 Risks

The COVID-19 pandemic and its widespread effects on the United States and global economies may have a material adverse effect on our business which could continue for an unknown period of time.

The COVID-19 pandemic has significantly increased our economic, demand and operational uncertainty. The rapid worldwide spread of the COVID-19 virus, as well as the measures governments and private organizations have implemented in order to stem the spread of this pandemic, is resulting in significant worldwide disruptions and contractions in economic activity, including those resulting from “shelter in place” and similar orders, restrictions on non-essential business operations and travel, and increased unemployment. We have global operations, customers and suppliers, including in countries most impacted by COVID-19, and both the disease itself and the actions taken around the world to slow the spread of COVID-19 have impacted our customers and suppliers; and future developments could cause further disruptions to the Company due to the interconnected nature of our business relationships.

We have been and may continue to be subject to postponement or cancellation of certain contracts to which we are a party. We have also suffered a significant reduction in our commercial aircraft business due to slowdowns in OEM production and reduced flights, and this business is unlikely to return to pre-COVID levels for an unknown but possibly significant period of time. Current restrictions and conditions have and may continue to prevent or delay us in accessing customer facilities to deliver products and provide services, and may disrupt or delay our supply chain. Even though our businesses have been classified as essential businesses and allowed to remain in operation in jurisdictions in which facility closures have been mandated, we can give no assurance that this will not change in the future or that our businesses will be classified as essential in each of the jurisdictions in which we operate. Further, although we have implemented prevention measures at our own facilities, including enhanced cleaning procedures, social distancing efforts and working from home where feasible, and substantially all of our facilities have so far remained in business, we have occasionally incurred short-term disruptions in some facility operations, and due to the nature of the COVID-19 pandemic there can be no assurance that we will not suffer facility closures or other adverse effects on our business operations in the future.

These facts and circumstances may have a material adverse effect on our business, results of operations, financial condition and cash flows. The extent to which the COVID-19 pandemic will impact our business, results of operations, financial condition and cash flows in the future, and the length of time these impacts may continue, will depend on future developments that are highly uncertain and cannot be predicted at this time, including new information that may emerge concerning the severity of COVID-19, the longevity of COVID-19 and the actions to contain its impact.

Risks Related to our Governmental and Aerospace Business

Our sales of products to the Government depend upon continued Government funding.

Sales to the U.S. Government and its prime contractors and subcontractors represent a significant portion of our business. Over the past three fiscal years, from 21% to 28% of our revenues have been generated from sales to the U.S. Government or its contractors, primarily within our Aerospace & Defense segment. These sales are dependent on government funding of the underlying programs, which is generally subject to annual Congressional appropriations. There could be reductions or terminations of, or delays in, the government funding on programs which apply to us or our customers. These funding effects could adversely affect our sales and profit, and could bring about a restructuring of our operations, which could result in an adverse effect on our financial condition or results of operations. A significant portion of VACCO’s, Westland’s and Globe’s sales involve major U.S. Government programs such as NASA’s Space Launch System (SLS) and U.S. Navy submarines. A reduction or delay in Government spending on these programs could have a significant adverse impact on our financial results which could extend for more than a single year.

Our Government business increases the risk that we may not realize the full amount of our backlog.

As of September 30, 2020, our twelve-month backlog was approximately $375 million, which represents confirmed orders we believe will be recognized as revenue within the next twelve months. There can be no assurance that our customers will purchase all the orders represented in our backlog, particularly as to contracts which are subject to the U.S. Government’s and its subcontractors’ ability to modify or terminate major programs or contracts, and if and to the extent that this occurs, our future revenues could be materially reduced.

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The end of customer product life cycles could negatively affect our Aerospace & Defense segment’s results.

Many of our Aerospace & Defense segment products are sold to be components in our customers’ end-products. If a customer discontinues a certain end-product line, our ability to continue to sell those components will be reduced or eliminated. The result could be a significant decrease in our sales. For example, a substantial portion of PTI’s revenue is generated from commercial aviation aftermarket sales. As certain aircraft are retired and replaced by newer aircraft, there could be a corresponding decrease in sales associated with our current products. Such a decrease could adversely affect our operating results.

Risks Related to our International Business

Negative worldwide economic conditions and related credit shortages could result in a decrease in our sales and an increase in our operating costs, which could adversely affect our business and operating results.

If there is a worsening of global and U.S. economic and financial market conditions and additional tightening of global credit markets, many of our customers may further delay or reduce their purchases of our products. Uncertainties in the global economy may cause the utility industry and commercial market customers to experience shortages in available credit, which could limit capital spending. To the extent this problem affects our customers, our sales and profits could be adversely affected. Likewise, if our suppliers face challenges in obtaining credit, they may have to increase their prices or become unable to continue to offer the products and services we use to manufacture our products, which could have an adverse effect on our business, results of operations and financial condition.

Increases in tariffs or other changes in trade policies could adversely affect our ability to compete.

In addition to the effects of increases in market prices, increases in domestic import tariffs could increase the prices to us of our foreign-sourced raw materials and product components and thereby require us to either increase our selling prices or accept reduced margins. In the case of ETS-Lindgren, for example, tariffs on imports of Chinese goods have raised the costs of components purchased by it either from its China facility or from other Chinese suppliers, and its margins in China have been impacted by the increased costs of its products made in the U.S. and sold through its Chinese business.

In addition, increases in foreign-country tariffs applicable to our exported products could increase the effective prices of our products to our customers in those countries unless we are able to offset the tariffs by reducing our selling prices. Any or all of these factors could decrease the demand for our products, reduce our profitability, and/or make our products less competitive than those of other manufacturers that are not subject to the same tariffs. For example, during 2019 and 2020 increased tariffs imposed by China on US origin goods have adversely affected sales of NRG’s products in China by increasing their prices to Chinese customers.

In addition, trade restrictions against certain foreign-made products or entities may adversely affect our business and our ability to compete in certain markets. Our business may also be impacted by the ongoing trade tensions between the US and China which are causing US goods to be viewed in a less favorable light by Chinese customers.

Our international operations expose us to fluctuations in currency exchange rates that could adversely affect our results of operations and cash flows.

We have significant manufacturing and sales activities in foreign countries, and our domestic operations have sales to foreign customers. Our financial results may be affected by fluctuations in foreign currencies and by the translation of the financial statements of our foreign subsidiaries from local currencies into U.S. dollars, and we may not be able to adequately or successfully hedge against these risks. In addition, a rise in the dollar against foreign currencies could make our products more expensive for foreign customers and cause them to reduce the volume of their purchases.

Economic, political and other risks of our international operations, including terrorist activities, could adversely affect our business.

In 2020, approximately 27% of our net sales were to customers outside the United States. Increases in international tariffs resulting from changes in domestic or foreign trade policies could increase the costs of the raw materials used in our products and/or the costs of our products. In addition, an economic downturn or an adverse change in the political situation in certain foreign countries in which we do business could cause a decline in revenues and adversely affect our financial condition. For example, our Test segment does significant business in Asia, and changes in the Asian political climate or political changes in specific Asian countries could

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negatively affect our business; several of our subsidiaries are based in Europe and could be negatively impacted by weakness in the European economy; Doble’s UK-based business could be adversely affected by Brexit; and Doble’s future business in the Middle East could be adversely affected by continuing political unrest, wars and terrorism in the region.

Our international sales are also subject to other risks inherent in foreign commerce, including currency fluctuations and devaluations, differences in foreign laws, uncertainties as to enforcement of contract or intellectual property rights, and difficulties in negotiating and resolving disputes with our foreign customers.

Our governmental sales and our international and export operations are subject to special U.S. and foreign government laws and regulations which may impose significant compliance costs, create reputational and legal risk, and impair our ability to compete in international markets.

The international scope of our operations subjects us to a complex system of commercial and trade regulations around the world, and our foreign operations are governed by laws and business practices that often differ from those of the U.S. In addition, laws such as the U.S. Foreign Corrupt Practices Act and similar laws in other countries increase the need for us to manage the risks of improper conduct not only by our own employees but by distributors and contractors who may not be within our direct control. Many of our exports are of products which are subject to U.S. Government regulations and controls such as the U.S. International Traffic in Arms Regulations (ITAR), which impose certain restrictions on the U.S. export of defense articles and services, and these restrictions are subject to change from time to time, including changes in the countries into which our products may lawfully be sold.

If we were to fail to comply with these laws and regulations, we could be subject to significant fines, penalties and other sanctions including the inability to continue to export our products or to sell our products to the U.S. Government or to certain other customers. In addition, some of these regulations may be viewed as too restrictive by our international customers, who may elect to develop their own domestic products or procure products from other international suppliers which are not subject to comparable export restrictions; and the laws, regulations or policies of certain other countries may also favor their own domestic suppliers over foreign suppliers such as the Company.

Risks Related to our Manufacturing and Sales Operations and Technology

A significant part of our manufacturing operations depends on a small number of third-party suppliers.

A significant part of our manufacturing operations relies on a small number of third-party manufacturers to supply component parts or products. For example, Doble has arrangements with six manufacturers which produce and supply a substantial portion of its end-products, and one of these suppliers produces approximately 35% of Doble’s products from a single location within the United States. As another example, PTI has a single supplier of critical electronic components for a significant aircraft production program, and if this supplier were to discontinue producing these components the need to secure another source could pose a risk to the production program. A significant disruption in the supply of those products or others provided by a small number of suppliers could negatively affect the timely delivery of products to customers as well as future sales, which could increase costs and reduce margins.

Certain of our other businesses are dependent upon sole source or a limited number of third-party manufacturers of parts and components. Many of these suppliers are small businesses. Since alternative supply sources are limited, there is an increased risk of adverse impacts on our production schedules and profits if our suppliers were to default in fulfilling their price, quality or delivery obligations. In addition, some of our customers or potential customers may prefer to purchase from a supplier which does not have such a limited number of sources of supply.

Increases in prices of raw material and components, and decreased availability of such items, could adversely affect our business.

The cost of raw materials and product components is a major element of the total cost of many of our products. For example, our Test segment’s critical components rely on purchases of raw materials from third parties. Increases in the prices of raw materials (such as steel, copper, nickel, zinc, wood and petrochemical products) could have an adverse impact on our business by, among other things, increasing costs and reducing margins. Aerospace-grade titanium and gaseous helium, important raw materials for our Aerospace & Defense segment, may at times be in short supply. Further, some of Doble’s items of equipment which are provided to its customers for their use are in the maturity of their life cycles, which creates the risk that replacement components may be unavailable or available only at increased costs.

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In addition, our reliance on sole or limited sources of supply of raw materials and components in each of our segments could adversely affect our business, as described in the preceding Risk Factor. Weather-created disruptions in supply, in addition to affecting costs, could impact our ability to procure an adequate supply of these raw materials and components, and delay or prevent deliveries of products to our customers.

Our inability to timely develop new products could reduce our future sales.

Much of our business is dependent on the continuous development of new products and technologies to meet the changing needs of our markets on a cost-effective basis. Many of these markets are highly technical from an engineering standpoint, and the relevant technologies are subject to rapid change. If we fail to timely enhance existing products or develop new products as needed to meet market or competitive demands, we could lose sales opportunities, which would adversely affect our business. In addition, in some existing contracts with customers, we have made commitments to develop and deliver new products. If we fail to meet these commitments, the default could result in the imposition on us of contractual penalties including termination. Our inability to enhance existing products in a timely manner could make our products less competitive, while our inability to successfully develop new products may limit our growth opportunities. Development of new products and product enhancements may also require us to make greater investments in research and development than we now do, and the increased costs associated with new product development and product enhancements could adversely affect our operating results. In addition, our costs of new product development may not be recoverable if demand for our products is not as great as we anticipate it to be.

Product defects could result in costly fixes, litigation and damages.

Our business exposes us to potential product liability risks that are inherent in the design, manufacture and sale of our products and the products of third-party vendors which we use or resell, many of which are mission-critical to our customers. If there are claims related to defective products (under warranty or otherwise), particularly in a product recall situation, we could be faced with significant expenses in replacing or repairing the product. For example, the Aerospace & Defense segment obtains raw materials, machined parts and other product components from suppliers who provide certifications of quality which we rely on. Should these product components be defective and pass undetected into finished products, or should a finished product contain a defect, we could incur significant costs for repairs, re-work and/or removal and replacement of the defective product. In addition, if a dispute over product claims cannot be settled, arbitration or litigation may result, requiring us to incur attorneys’ fees and exposing us to the potential of damage awards against us.

Despite our efforts, we may be unable to adequately protect our intellectual property.

Much of our business success depends on our ability to protect and freely utilize our various intellectual properties, including both patents and trade secrets. Despite our efforts to protect our intellectual property, unauthorized parties or competitors may copy or otherwise obtain and use our products and technology, particularly in foreign countries such as China where the laws may not protect our proprietary rights as fully as in the United States. Our current and future actions to enforce our proprietary rights may ultimately not be successful; or in some cases we may not elect to pursue an unauthorized user due to the high costs and uncertainties associated with litigation. We may also face exposure to claims by others challenging our intellectual property rights. Any or all of these actions may divert our resources and cause us to incur substantial costs.

Disputes with contractors could adversely affect our Test segment’s results.

A major portion of our Test segment’s business involves working in conjunction with general contractors to produce complex building components constructed on-site, such as electronic test chambers, secure communication rooms and MRI facilities. If there are performance problems caused by either us or a contractor, they could result in cost overruns and may lead to a dispute as to which party is responsible. The resolution of such disputes can involve arbitration or litigation, and can cause us to incur significant expense including attorneys’ fees. In addition, these disputes could result in a reduction in revenue, a loss on a particular project, or even a significant damages award against us.

Environmental or regulatory requirements could increase our expenses and adversely affect our profitability.

Our operations and properties are subject to U.S. and foreign environmental laws and regulations governing, among other things, the generation, storage, emission, discharge, transportation, treatment and disposal of hazardous materials and the clean-up of contaminated properties. These regulations, and changes to them, could increase our cost of compliance, and our failure to comply

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could result in the imposition of significant fines, suspension of production, alteration of product processes, cessation of operations or other actions which could materially and adversely affect our business, financial condition and results of operations.

We are currently involved as a responsible party in several ongoing investigations and remediations of contaminated third-party owned properties. In addition, environmental contamination may be discovered in the future on properties which we formerly owned or operated and for which we could be legally responsible. Future costs associated with these situations, including ones which may be currently unknown to us, are difficult to quantify but could have a significant effect on our financial condition. See Item 1, “Business – Environmental Matters” for a discussion of these factors.

Risks Related to Our Business Strategy and Corporate Structure

Changes in testing standards could adversely impact our Test and USG segments’ sales.

A significant portion of the business of our USG and Test segments involves sales to technology customers who need to have a third party verify that their products meet specific international and domestic test standards. If regulatory agencies were to eliminate or reduce certain domestic or international test standards, or if demand for product testing from these customers were to decrease for some other reason, our sales could be adversely affected. For example, if a regulatory authority were to relax the test standards for certain electronic devices because they were determined not to interfere with the broadcast spectrum, or if new wireless communication technologies were developed that required less testing or different types of testing, our sales of certain testing products could be significantly reduced.

We may not be able to identify suitable acquisition candidates or complete acquisitions successfully, which may inhibit our rate of growth.

As part of our growth strategy, we plan to continue to pursue acquisitions of other companies, assets and product lines that either complement or expand our existing business. However, we may be unable to implement this strategy if we are unable to identify suitable acquisition candidates or consummate future acquisitions at acceptable prices and terms. We expect to face competition for acquisition candidates which may limit the number of acquisition opportunities available to us and may result in higher acquisition prices. As a result, we may be limited in the number of acquisitions which we are able to complete and we may face difficulties in achieving the profitability or cash flows needed to justify our investment in them.

Our acquisitions of other companies carry risk.

Acquisitions of other companies involve numerous risks, including difficulties in the integration of the operations, technologies and products of the acquired companies, the potential exposure to unanticipated and undisclosed liabilities, the potential that expected benefits or synergies are not realized and that operating costs increase, the potential loss of key personnel, suppliers or customers of acquired businesses and the diversion of Management’s time and attention from other business concerns. Although we attempt to identify and evaluate the risks inherent in any acquisition, we may not properly ascertain or mitigate all such risks, and our failure to do so could have a material adverse effect on our business.

We may incur significant costs, experience short-term inefficiencies, or be unable to realize expected long-term savings from facility consolidations and other business reorganizations.

We periodically assess the cost and operational structure of our facilities in order to manufacture and sell our products in the most efficient manner, and based on these assessments, we may from time to time reorganize, relocate or consolidate certain of our facilities. These actions may require us to incur significant costs and may result in short term business inefficiencies as we consolidate and close facilities and transition our employees; and in addition, we may not achieve the expected long-term benefits. Any or all of these factors could result in an adverse impact on our operating results, cash flows and financial condition.

The loss of specialized key employees could affect our performance and revenues.

There is a risk of our losing key employees having engineering and technical expertise. For example, our USG segment relies heavily on engineers with significant experience and reputation in the utility industry to furnish expert consulting services and support to customers. Despite our active recruitment efforts, there remains a shortage of these qualified engineers because of hiring competition

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from other companies in the industry. Loss of these employees to other employers or for other reasons could reduce the segment’s ability to provide services and negatively affect our revenues.

Our decentralized organizational structure presents certain risks.

We are a relatively decentralized company in comparison with some of our peers. This decentralization necessarily places significant control and decision-making powers in the hands of local management, which present various risks, including the risk that we may be slower or less able to identify or react to problems affecting a key business than we would in a more centralized management environment. We may also be slower to detect or react to compliance related problems (such as an employee undertaking activities prohibited by applicable law or by our internal policies), and Company-wide business initiatives may be more challenging and costly to implement, and the risks of noncompliance or failures higher, than they would be under a more centralized management structure. Depending on the nature of the problem or initiative in question, such noncompliance or failure could have a material adverse effect on our business, financial condition or result of operations.

Provisions in our articles of incorporation, bylaws and Missouri law could make it more difficult for a third party to acquire us and could discourage acquisition bids or a change of control, and could adversely affect the market price of our common stock.

Our articles of incorporation and bylaws contain certain provisions which could discourage potential hostile takeover attempts, including: a limitation on the shareholders’ ability to call special meetings of shareholders; advance notice requirements to nominate candidates for election as directors or to propose matters for action at a meeting of shareholders; a classified board of directors, which means that approximately one-third of our directors are elected each year; and the authority of our board of directors to issue, without shareholder approval, preferred stock with such terms as the board may determine. In addition, the laws of Missouri, in which we are incorporated, require a two-thirds vote of outstanding shares to approve mergers or certain other major corporate transactions, rather than a simple majority as in some other states such as Delaware. These provisions could impede a merger or other change of control not approved by our board of directors, which could discourage takeover attempts and in some circumstances reduce the market price of our common stock.

Item 1B. Unresolved Staff Comments

None

Item 2. Properties

The Company believes its buildings, machinery and equipment have been generally well maintained, are in good operating condition and are adequate for the Company’s current production requirements and other needs.

At September 30, 2020, the Company’s physical properties, including those described in the table below, comprised approximately 1,504,000 square feet of floor space, of which approximately 614,000 square feet were owned and approximately 890,000 square feet were leased. The table below includes the Company’s principal physical properties. The Company does not believe any of the omitted properties, consisting primarily of office and/or warehouse space, are individually or collectively material to its operations or business. See also Notes 15 and 16 to the Consolidated Financial Statements.

[Table is on following page]

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			Principal Use(s)
			(M=Manufacturing,
	Approx.	Owned / Leased (with	E=Engineering, O=Office,	Operating
Location	Sq. Ft.	Expiration Date)	W=Warehouse)	Segment
Modesto, CA	181,500	Leased (9/30/2023)	M, E, O,W	Aerospace & Defense
Denton, TX	145,000	Leased (9/30/2029, plus options)	M, E, O, W	Aerospace & Defense
Cedar Park, TX	130,000	Owned	M, E, O, W	Test
Oxnard, CA	127,400	Owned	M, E, O, W	Aerospace & Defense
South El Monte, CA	100,100	Owned	M, E, O, W	Aerospace & Defense
Durant, OK	100,000	Owned	M, O, W	Test
Valencia, CA	79,300	Owned	M, E, O	Aerospace & Defense
Marlborough, MA	79,100	Leased (2/28/2037)	M, E, O, W	USG
Hinesburg, VT	77,000	Leased (4/30/2029)	M, E, O, W	USG
Stoughton, MA	71,400	Leased (1/31/2029)	M, E, O, W	Aerospace & Defense
South El Monte, CA	63,300	Leased (various term ends)	M, O, W	Aerospace & Defense

Eura, Finland	41,500	Owned	M, E, O, W	Test
Tianjin, China	38,100	Leased (11/19/2027)	M, E, O	Test
Minocqua, WI	35,400	Owned	M, O, W	Test
LaSalle (Montreal), Québec	35,200	Leased (8/31/21) *	M, E, O	USG
Beijing, China	33,300	Leased (12/21/2024)	M, E, O	Test
Avon, MA	30,000	Leased (5/31/2022)	W	Aerospace & Defense
Ontario, CA	26,900	Leased (8/31/2025)	M, E, O, W	USG
St. Louis, MO	21,500	Leased (8/31/2025)	ESCO Corporate Office	Corporate
Mississauga, Ontario	15,600	Leased (11/30/2023)	M, E, O, W	USG
Morrisville, NC	11,600	Leased (1/31/2027)	O	USG
Wood Dale, IL	10,700	Leased (6/30/2024)	E, O	Test

The Company intends not to renew this lease and to move these operations to 38,400 square feet of leased space in a nearby facility with a lease term beginning 6/1/2021 and expiring 8/31/2036 (plus options).

Item 3. Legal Proceedings

As a normal incident of the businesses in which the Company is engaged, various claims, charges and litigation are asserted or commenced from time to time against the Company. With respect to claims and litigation currently asserted or commenced against the Company, it is the opinion of Management that final judgments, if any, which might be rendered against the Company are adequately reserved for, are covered by insurance, or are not likely to have a material adverse effect on the Company’s financial condition or results of operations. Nevertheless, given the uncertainties of litigation, it is possible that certain types of claims, charges and litigation could have a material adverse impact on the Company; see Item 1A, “Risk Factors.”

Item 4. Mine Safety Disclosures

Not applicable.

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COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN

Among ESCO Technologies Inc., the Russell 2000 Index,

and the 2020 and 2019 Peer Groups


	9/30/15		9/30/16		9/30/17		9/30/18		9/30/19		9/30/20
ESCO Technologies Inc.	$	100.00	$	130.34	$	169.02	$	192.90	$	226.57	$	230.57
Russell 2000		100.00		115.47		139.42		160.66		146.38		146.95
2020 Peer Group		100.00		116.43		136.53		176.71		155.14		149.13
2019 Peer Group		100.00		117.39		137.86		174.26		154.65		150.96

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

The 2020 peer group was composed of eight companies that corresponded to the Company’s three industry segments used for financial reporting purposes during 2020, as follows: Aerospace & Defense segment (48% of the Company’s 2020 total revenue): CIRCOR International, Inc., Donaldson Company, Inc. and Moog Inc.; USG segment (26% of the Company’s 2020 total revenue): Aegion Corporation, Ameresco, Inc. and Thermon Group Holdings, Inc.; Test segment (26% of the Company’s 2020 total revenue): EXFO Inc. and FARO Technologies, Inc.

The 2019 peer group was composed of ten companies that corresponded to the Company’s four industry segments used for financial reporting purposes during 2019, as follows: Aerospace & Defense segment (40% of the Company’s 2019 total revenue): CIRCOR International, Inc., Donaldson Company, Inc. and Moog Inc.; USG segment (26% of the Company’s 2019 total revenue): Aegion Corporation, Ameresco, Inc. and Thermon Group Holdings, Inc.; Test segment (23% of the Company’s 2019 total revenue): EXFO Inc. and FARO Technologies, Inc.; and Technical Packaging segment (11% of the Company’s 2019 total revenue): AptarGroup, Inc. and Berry Global Group, Inc.

In calculating the composite return of the 2020 and 2019 peer groups, the return of each company comprising the peer group was weighted by (a) its market capitalization in relation to the other companies in its corresponding Company industry segment, and (b) the percentage of the Company’s total revenue from continuing operations represented by its corresponding Company industry segment.

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Item 6. Selected Financial Data

The following selected consolidated financial data of the Company and its subsidiaries should be read in conjunction with the Company’s Consolidated Financial Statements, the Notes thereto, and Management’s Discussion and Analysis of Financial Condition and Results of Operations, as of the respective dates indicated and for the respective periods ended thereon.


(Dollars in millions, except per share amounts)	2020		2019	2018	2017	2016
For years ended September 30:
Net sales	$	732.9	726.0	683.7	602.8	497.0

Net earnings from continuing operations		25.5	77.5	86.3	48.6	40.0
Net earnings from discontinued operations		76.5	3.5	5.8	5.1	5.9
Net earnings	$	102.0	81.0	92.1	53.7	45.9

Earnings per share:
Basic:
Continuing operations	$	0.98	2.99	3.33	1.88	1.55
Discontinued operations		2.94	0.13	0.23	0.20	0.23
Net earnings	$	3.92	3.12	3.56	2.08	1.78
Diluted:
Continuing operations	$	0.97	2.97	3.31	1.87	1.54
Discontinued operations		2.93	0.13	0.23	0.20	0.23
Net earnings	$	3.90	3.10	3.54	2.07	1.77

As of September 30:
Working capital from continuing operations	$	190.6	229.8	183.8	186.9	154.4
Total assets		1,373.5	1,466.7	1,265.1	1,260.4	978.4
Total debt		62.4	285.0	220.0	275.0	110.0
Shareholders’ equity	$	961.6	826.2	759.4	671.9	615.1

Cash dividends declared per common share	$	0.32	0.32	0.32	0.32	0.32

See also Note 1.E to the Consolidated Financial Statements for discussion of the Company’s adoption of ASU 2014-09, Revenue from Contracts with Customers (ASC 606), and Notes 2 and 3 to the Consolidated Financial Statements for divestiture and acquisition activity, which affect comparability between years.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto and refers to the Company’s results from continuing operations except where noted.

In December 2019, the Company sold the businesses comprising its former Technical Packaging segment. The Company received net proceeds from the sale of approximately $184 million and recorded a $76.5 million after-tax gain on the sale in 2020. The Company used the proceeds from the sale to pay down debt and for other corporate purposes including the termination of the Company’s defined benefit pension plan. The Technical Packaging segment is reflected as discontinued operations in the Consolidated Financial Statements and related notes for all periods presented, in accordance with accounting principles generally accepted in the United States of America (GAAP). See Note 2 to the Consolidated Financial Statements for further discussion.

Selected financial information for each of the Company’s business segments is provided in the discussion below and in Note 14 to the Company’s Consolidated Financial Statements.

This section includes comparisons of certain 2020 financial information to the same information for 2019. Year-to-year comparisons of the 2019 financial information to the same information for 2018 are contained in Item 7 of the Company’s Form 10-K for 2019 filed with the Securities and Exchange Commission on November 29, 2019 and available through the SEC’s website at https://www.sec.gov/edgar/searchedgar/companysearch.html.

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Introduction

ESCO Technologies Inc. and its wholly owned subsidiaries (the Company) are organized into three reportable operating segments for financial reporting purposes: Aerospace & Defense (formerly Filtration/Fluid Flow), Utility Solutions Group (USG), RF Shielding and Test (Test). The Company’s business segments are comprised of the following primary operating entities:

●

Aerospace & Defense: PTI Technologies Inc. (PTI); VACCO Industries (VACCO); Crissair, Inc. (Crissair); Westland Technologies, Inc. (Westland); Mayday Manufacturing Co. (Mayday), Hi-Tech Metals, Inc. (Hi-Tech); and Globe Composite Solutions, LLC (Globe).

●

USG: Doble Engineering Company and Morgan Schaffer (together, Doble); and NRG Systems, Inc. (NRG).

●

Test: ETS-Lindgren Inc. (ETS-Lindgren).

Aerospace & Defense. PTI, VACCO and Crissair primarily design and manufacture specialty filtration products, including hydraulic filter elements and fluid control devices used in commercial aerospace applications, unique filter mechanisms used in micro-propulsion devices for satellites and custom designed filters for manned aircraft and submarines. Westland designs, develops and manufactures elastomeric-based signature reduction solutions for U.S. naval vessels. Mayday designs and manufactures mission-critical bushings, pins, sleeves and precision-tolerance machined components for landing gear, rotor heads, engine mounts, flight controls, and actuation systems for the aerospace and defense industries. Hi-Tech is a full-service metal processor serving aerospace suppliers. Globe is a vertically integrated supplier of composite-based products and solutions for acoustic, signature-reduction, communications, sealing, vibration-reducing, surface control, and hydrodynamic-related applications.

USG. Doble develops, manufactures and delivers diagnostic testing solutions that enable electric power grid operators to assess the integrity of high-voltage power delivery equipment. NRG designs and manufactures decision support tools for the renewable energy industry, primarily wind and solar.

Test. ETS-Lindgren is an industry leader in providing its customers with the ability to identify, measure and contain magnetic, electromagnetic and acoustic energy.

The Company continues to operate with meaningful growth prospects in its primary served markets and with considerable financial flexibility. The Company continues to focus on new products that incorporate proprietary design and process technologies. Management is committed to delivering shareholder value through organic growth, ongoing performance improvement initiatives, and acquisitions.

COVID-19 Trends and Uncertainties

The COVID-19 global pandemic has created significant and unprecedented challenges, and during these highly uncertain times, our top priority remains the health and safety of our employees, customers and suppliers, thereby securing the financial well-being of the Company and supporting business continuity. Our businesses have been deemed essential and are currently operational, supplying our customers with vital and necessary products. To date, our global supply chains have not been materially affected by the pandemic. Given our diverse portfolio of strong, durable businesses serving non-discretionary end-markets, the strength and resilience of our business model positions us to continue to support our long-term outlook.

Recognizing the uncertainty presented by this global pandemic, we are suspending our practice of providing full-year financial guidance. Our businesses are facing varying levels of pressure depending on the markets they serve as outlined below and the impact on our business cannot be reasonably estimated at this time. In response to COVID-19, we have taken actions to enhance our financial condition, while continuing to execute our long-term strategy for profitable growth. Some of the actions we have taken include: reducing a portion of executive compensation, reducing discretionary spending, minimizing capital spending, implementing hiring and salary freezes, and increasing our focus on optimizing free cash flow. These operational measures are prudent steps to maintain our liquidity and will increase our financial flexibility as we work through near-term volatility. As of September 30, 2020, we had approximately $725 million of liquidity (amount available to borrow under credit facility plus $250 million increase option and $52.6 million in cash) and net debt (debt outstanding less cash on hand) of approximately $9.8 million. Additionally, we have no debt maturities nor repayment obligations due and payable until September 2024 on our revolving credit facility. The Company has made no changes to its dividend plan. We are also monitoring the impacts of COVID-19 on the fair value of assets. We do not currently

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anticipate any material impairments on assets as a result of COVID-19. A portion of our workforce has worked from home at times due to COVID-19, however we have not had to redesign or design new internal controls over financial reporting at this time. Depending on the duration of COVID-19, it may become necessary for us to redesign or design new internal controls over financial reporting in a future period. We do not believe such an event will have a material impact on our business. Further details by operating segment are outlined below.

In our Aerospace & Defense segment, our fiscal 2020 revenues were negatively impacted by a decrease of approximately $20 million related to the COVID-19 pandemic and we anticipate the slowdown in commercial aerospace deliveries and revenues continuing into fiscal 2021. For the year ended September 30, 2020, the economic uncertainty, changes in the propensity for the general public to travel by air, and reductions in demand for commercial aircraft as a result of the COVID-19 pandemic have adversely impacted net sales and operating results in certain of our Aerospace & Defense reporting units and was determined to be an event and change in circumstances that required a quantitative review of our intangible assets, long-lived assets and goodwill for impairment. We determined that there was no impairment as of and for the year ended September 30, 2020 and the fair value of each reporting unit reviewed substantially exceeded carrying value, with the exception of Mayday where fair value exceeded carrying value by 10%. At September 30, 2020, we had $30 million of goodwill recorded for Mayday. The valuation methodology we use involves estimates of discounted cash flows, which are subject to change, and if they change negatively it could result in the need to write down those assets to fair value. We will continue to monitor the impacts of COVID-19 on the fair value of assets. The defense portion of Aerospace & Defense, both military aerospace and navy products, is expected to remain at approximately historical business levels given its backlog coupled with the timing of expected platform deliveries.

In our Test segment, our fiscal 2020 revenues were negatively impacted by the COVID-19 pandemic due to the China facility’s three-week shutdown in February and delayed timing of installation projects caused by access limitations to customer sites. We expect the Test segment to remain at relatively normal business levels into fiscal 2021 given the strength of its backlog and its served markets, primarily related to new communications technologies such as 5G.

In our USG segment, our fiscal 2020 revenues were negatively impacted by approximately $20 million related to the COVID-19 pandemic as several utility customers deferred purchase orders and maintenance-related project deliveries so they could divert resources to other issues such as critical power delivery given their concerns around COVID-19. Additionally, Doble’s service business was largely on hold during the pandemic. We expect USG’s customer spending softness to continue for the next few quarters before returning to normal levels. Goodwill for Doble and NRG was $246 million and $8 million, respectively, as of September 30, 2020. We reviewed the intangible assets, long-lived assets and goodwill of our Doble and NRG businesses for impairment. The quantitative reviews determined that there was no impairment as of September 30, 2020 as the fair value of Doble substantially exceeded carrying value and the fair value of NRG exceeded carrying value by 15%. The valuation methodology we use involves estimates of discounted cash flows, which are subject to change, and if they change negatively it could result in the need to write down those assets to fair value. We will continue to monitor the impacts of COVID-19 on the fair value of assets.

See also Item 1A, “Risk Factors” in Part I above, and “Outlook” below for additional information.

Highlights of 2020

●

Diluted EPS – GAAP for 2020 was $3.90, consisting of $0.97 per share from continuing operations and $2.93 from discontinued operations as compared to Diluted EPS – GAAP for 2019 of $3.10, consisting of $2.97 per share from continuing operations and $0.13 per share from discontinued operations.

●

Sales, net earnings and diluted earnings per share from continuing operations in 2020 were $732.9 million, $25.5 million and $0.97 per share, respectively, compared to sales, net earnings and diluted earnings per share from continuing operations in 2019 of $726.0 million, $77.5 million and $2.97 per share, respectively.

●

Diluted EPS – Continuing Operations As Adjusted for 2020 was $2.76 and excludes the pension plan termination charge of $40.6 million (or $1.55 per share after tax) and $8.3 million of pretax charges (or $0.24 per share after tax) consisting primarily of facility consolidation charges for the Doble Manta facility (including employee severance and compensation benefits), asset impairment charges and the incremental costs associated with the COVID-19 pandemic. Diluted EPS – Continuing Operations As Adjusted for 2019 was $2.95 and excludes $0.4 million of income (or $0.02 per share after tax) consisting primarily of the gain on the Doble Watertown building sale partially offset by purchase accounting charges related

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to the Globe acquisition and certain restructuring charges related to facility consolidations at Doble, PTI and VACCO. See “Non-GAAP Financial Measures” below.


	Fiscal year ended
(Dollars in millions)	2020		2019
Diluted EPS – Continuing Operations GAAP	$	0.97	2.97
Pension termination adjustment		1.55	—
Restructuring adjustments		0.24	(0.02)
Diluted EPS – Continuing Operations As Adjusted	$	2.76	2.95

●

Net cash provided by operating activities from continuing operations was approximately $108.5 million in 2020 compared to $100.6 million in 2019.

●

At September 30, 2020, cash on hand was $52.6 million and outstanding debt was $62.4 million, for a net debt position (total debt less cash on hand) of approximately $9.8 million.

●

Entered orders for 2020 from continuing operations were $798.7 million resulting in a book-to-bill ratio of 1.09x. Backlog at September 30, 2020 was $517.4 million compared to $451.6 million at September 30, 2019.

●

The Company declared dividends of $0.32 per share during 2020, totaling $8.3 million in dividend payments.

Results of Continuing Operations

Net Sales


				Change
	Fiscal year ended			2020
(Dollars in millions)	2020		2019	vs. 2019
Aerospace & Defense	$	354.3	325.7	8.8	%
USG		191.7	211.9	(9.5)	%
Test		186.9	188.4	(0.8)	%
Total	$	732.9	726.0	1.0	%

Net sales increased $6.9 million, or 1.0%, to $732.9 million in 2020 from $726.0 million in 2019. The increase in net sales in 2020 as compared to 2019 was due to a $28.6 million increase in the Aerospace & Defense segment, partially offset by a $20.2 million decrease in the USG segment and a $1.5 million decrease in the Test segment.

Aerospace & Defense.

The $28.6 million, or 8.8%, increase in net sales in 2020 as compared to 2019 was mainly due to a $27.6 million increase in net sales from Globe (acquired in July 2019), a $13.5 million increase in net sales at VACCO due to higher shipments of space products, partially offset by a $6.1 million decrease in net sales at Mayday, a $3.7 million decrease in net sales at Crissair and a $3.0 million decrease in net sales at PTI all driven by the COVID-19 pandemic in the current year.

USG.

The $20.2 million, or 9.5%, decrease in net sales in 2020 as compared to 2019 was mainly due to a $19.1 million decrease in net sales at Doble and a $1.1 million decrease in net sales at NRG, both mainly driven by the COVID-19 pandemic in the current year as customers delayed orders and on-site testing.

Test.

The $1.5 million, or 0.8%, decrease in net sales in 2020 as compared to 2019 was mainly due to a $16.0 million decrease in net sales from the segment’s U.S. operations due to timing of test and measurement chamber projects and the COVID-19 pandemic, partially

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offset by a $7.5 million increase in net sales from the segment’s European operations and a $7.0 million increase in net sales from the segment’s Asian operations due to timing of projects.

Orders and Backlog

New orders received in 2020 from continuing operations were $798.7 million as compared to $822.5 million in 2019. Order backlog was $517.4 million at September 30, 2020, compared to order backlog of $451.6 million at September 30, 2019. Orders are entered into backlog as firm purchase order commitments are received.

In 2020, the Company recorded orders of $422.7 million related to Aerospace & Defense products, $200.7 million related to USG products, and $175.3 million related to Test products. In 2019, the Company recorded orders of $409.9 million related to Aerospace & Defense products, $212.9 million related to USG products, and $199.6 million related to Test products.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses were $159.5 million, or 21.8% of net sales, in 2020, and $162.7 million, or 22.4% of net sales, in 2019.

The decrease in SG&A expenses in 2020 as compared to 2019 was mainly due to lower discretionary spending related to travel and other discretionary expenses due to the COVID-19 pandemic, partially offset by the addition of Globe.

Amortization of Intangible Assets

Amortization of intangible assets was $21.8 million in 2020 and $18.5 million in 2019. Amortization of intangible assets included $13.0 million and $10.8 million of amortization of acquired intangible assets in 2020 and 2019, respectively, related to the Company’s acquisitions. The amortization of acquired intangible assets related to the Company’s acquisitions is included in the Corporate operating segment’s results. The remaining amortization expenses relate to other identifiable intangible assets (primarily software, patents and licenses), which are included in the respective segment’s operating results. The increase in amortization expense in 2020 as compared to 2019 was mainly due to the acquisition of Globe in 2019.

Other Expenses or Income, Net

Other expenses, net, were $7.1 million in 2020, compared to other expenses, net, of $0.9 million in 2019. The principal components of other expenses, net, in 2020 included approximately $8 million of pretax charges consisting primarily of facility consolidation charges for the Doble Manta facility, including employee severance and compensation benefits, and asset impairment charges. The principal components of other expenses, net, in 2019 included $3 million of purchase accounting charges related to the Globe acquisition; $0.9 million of restructuring charges related to the consolidation of VACCO’s aircraft/aerospace business into PTI’s aerospace facility in Oxnard, California; approximately $1 million of charges at Doble related to facility consolidations begun in 2018; and approximately $3 million of losses on derivative instruments; partially offset by a net gain of approximately $8 million on the sale of the Doble Watertown, MA building and land. There were no other individually significant items included in other expenses, net, in 2020 or 2019.

Non-GAAP Financial Measures

The information reported herein includes the financial measures Diluted EPS – Continuing Operations As Adjusted, which the Company defines as EPS excluding the per-share net impact of the pension plan termination charge and restructuring charges related to the Company’s facility consolidation restructuring plans in 2020 and the gain on the Doble Watertown property sale in 2019 partially offset by purchase accounting charges related to the Globe acquisition and the restructuring charges incurred at Doble, PTI and VACCO during 2019; EBIT, which the Company defines as earnings before interest and taxes; and EBIT margin, which the Company defines as EBIT expressed as a percentage of net sales. Diluted EPS – Continuing Operations As Adjusted, EBIT on a consolidated basis, and EBIT margin on a consolidated basis are not recognized in accordance with U.S. generally accepted accounting principles (GAAP). However, the Company believes that EBIT and EBIT margin provide investors and Management with valuable information for assessing the Company’s operating results. Management evaluates the performance of its operating segments based on EBIT and believes that EBIT is useful to investors to demonstrate the operational profitability of the Company’s business segments by excluding interest and taxes, which are generally accounted for across the entire company on a consolidated basis. EBIT

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is also one of the measures Management uses to determine resource allocations and incentive compensation. The Company believes that the presentation of EBIT, EBIT margin and Diluted EPS – Continuing Operations As Adjusted provides important supplemental information to investors by facilitating comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. The use of non-GAAP financial measures is not intended to replace any measures of performance determined in accordance with GAAP.

EBIT

The reconciliation of EBIT to a GAAP financial measure is as follows:


(Dollars in millions)	2020		2019
EBIT	$	46.5	106.0
Less: Income tax expense		14.3	20.4
Less: Interest expense		6.7	8.1
Net earnings from continuing operations	$	25.5	77.5

EBIT by business segment is as follows:


						Change
	Fiscal year ended					2020
(Dollars in millions)	2020			2019		vs. 2019
Aerospace & Defense	$	73.2		70.1		4.4	%
% of net sales		20.7	%	21.5	%
USG		24.4		52.2		(53.3)	%
% of net sales		12.7	%	24.6	%
Test		27.2		25.6		6.2	%
% of net sales		14.6	%	13.6	%
Corporate		(78.3)		(41.9)		(86.9)	%
Total	$	46.5		106.0		(56.1)	%
% of net sales		6.3	%	14.6	%

Aerospace & Defense

The $3.1 million increase in EBIT in 2020 as compared to 2019 was primarily due to the $7.3 million EBIT contribution from Globe; partially offset by a $2.9 million decrease at Crissair and a $1.6 million decrease at Mayday both driven by the lower sales volumes in the current year. In addition, EBIT in 2020 was negatively impacted by $0.5 million of restructuring charges related to the consolidation of VACCO’s aircraft/aerospace business into PTI’s aerospace facility in Oxnard, California and severance charges at Crissair and $0.9 million of incremental costs associated with the COVID-19 pandemic.

USG

The $27.8 million decrease in EBIT in 2020 as compared to 2019 was mainly due to a decrease in EBIT from Doble due to the lower sales volumes in 2020 and the gain on the sale of the Doble Watertown facility of approximately $8 million in 2019. In addition, EBIT in 2020 was negatively impacted by approximately $6.6 million of restructuring charges consisting primarily of facility consolidation charges related to the Manta facility including severance and compensation benefits and asset impairment charges.

Test

The $1.6 million increase in EBIT in 2020 as compared to 2019 was primarily due to the increased sales volumes from the segment’s Asian operations partially offset by the decrease in sales volumes from the segment’s U.S. operations.

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Corporate

Corporate operating charges included in 2020 consolidated EBIT increased to $78.3 million as compared to $41.9 million in 2019 mainly due to a $40.6 million pension plan termination charge as a result of the decision to terminate and annuitize the Company’s defined benefit pension plan in 2020. See Note 12 to the Consolidated Financial Statements for further discussion.

The “Reconciliation to Consolidated Totals (Corporate)” in Note 14 to the Consolidated Financial Statements represents Corporate office operating charges.

Interest Expense, Net

Interest expense was $6.7 million in 2020 compared to $8.1 million in 2019, primarily due to lower average outstanding borrowings ($175.6 million compared to $236.4 million) at relatively consistent average interest rates of 3.2%.

Income Tax Expense

The effective tax rates from continuing operations for 2020, 2019 and 2018 were 35.9%, 20.8% and (6.4%), respectively. The 2020 effective tax rate was unfavorably impacted by a pension plan termination charge of $40.6 million which is not deductible for tax purposes increasing the effective tax rate by 21.4%. The 2020 effective tax rate was favorably impacted by the following: (1) an increase in the available 2019 foreign tax credit which was attributable to new information and tax planning strategies reducing the 2020 effective tax rate by 1.8%; (2) the release of a valuation allowance of $2.8 million for foreign net operating losses decreasing the effective tax rate by 7.2%; and (3) favorable 2019 state tax return to provision true-ups decreasing the effective tax rate by 1.6%.

The 2019 effective tax rate was favorably impacted by tax planning strategies to increase foreign tax credits claimed retrospectively. The Company reduced the valuation allowance for excess foreign tax credits by $2.4 million and recorded an amended return benefit of $0.3 million, which favorably impacted the 2019 effective tax rate by 3.0%.

The 2017 Tax Cut and Jobs Act (TCJA) made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S. federal income tax. No provision is made for foreign withholding any applicable U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries where these earnings are considered indefinitely invested or otherwise retained for continuing international operations. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable.

Divestiture and Acquisitions

Information regarding the Company’s divestiture and acquisitions during 2020, 2019 and 2018 is set forth in Notes 2 and 3 to the Company’s Consolidated Financial Statements, which Notes are incorporated by reference herein.

All of the Company’s acquisitions have been accounted for using the purchase method of accounting, and accordingly, the respective purchase prices were allocated to the assets (including intangible assets) acquired and liabilities assumed based on estimated fair values at the date of acquisition. The financial results from these acquisitions have been included in the Company’s financial statements from the date of acquisition.

Pension Plan Termination

On November 14, 2019, the Company’s Board of Directors approved a resolution to terminate the Company’s defined benefit pension plan (the Plan), effective as of February 29, 2020. In connection with the termination, the Company contributed $25.7 million to the Plan during the fourth quarter of 2020, settled approximately $32.4 million of Plan liabilities during the fourth quarter of 2020 through lump-sum payments from existing plan assets to eligible participants who elected to receive them; and recorded approximately $40.6 million of non-cash charges associated with these settlements. During 2020, the Company settled approximately $69.1 million of Plan liabilities by entering into an agreement to purchase annuities from Massachusetts Mutual Life Insurance Company (MassMutual). This agreement covered approximately 825 active and former employees and their beneficiaries, with MassMutual assuming the future annuity payments for these individuals. Additionally, the Company settled approximately $0.1 million of Plan liabilities through a combination of annuities and direct funding to the Pension Benefit Guaranty Corporation for the remaining approximately 14 former employees and their beneficiaries. Refer to Note 12 of the Consolidated Financial Statements for more information.

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Capital Resources and Liquidity

The Company’s overall financial position and liquidity are strong. Working capital from continuing operations (current assets less current liabilities) decreased to $190.6 million at September 30, 2020 from $229.8 million at September 30, 2019. Accounts receivable decreased $14.6 million during 2020 mainly due to a $12 million decrease within the USG segment and a $7.9 million decrease within the Aerospace & Defense segment, driven by timing and lower sales volumes in the current year; partially offset by an increase of approximately $4 million within the Test segment due to timing of projects. Inventories increased by $11.2 million during 2020 mainly due to a $5.4 million increase within the Aerospace & Defense segment, a $4.8 million increase within the USG segment and a $1.0 million increase within the Test segment, resulting primarily from the timing of receipt of raw materials and work-in-progress due to timing of projects. The $13.3 million decrease in accounts payable at September 30, 2020 was mainly due to a $9.8 million decrease within the Test segment and a $2.4 million decrease within the Aerospace & Defense segment due to the timing of payments.

Net cash provided by operating activities from continuing operations was $108.5 million and $100.6 million in 2020 and 2019, respectively.

Net cash used in investing activities from continuing operations was $41.1 million and $111.2 million in 2020 and 2019, respectively. The decrease in net cash used in investing activities in 2020 as compared to 2019 was due to the acquisition of Globe in 2019. Capital expenditures from continuing operations were $32.1 million and $24.2 million in 2020 and 2019, respectively. The increase in 2020 as compared to 2019 was mainly due to building improvements at the new Doble headquarters facility and an increase at VACCO primarily for construction of a new parking lot and certain machinery and equipment. There were no commitments outstanding that were considered material for capital expenditures at September 30, 2020. In addition, the Company incurred expenditures for capitalized software of $9.0 million and $8.4 million in 2020 and 2019, respectively.

Net cash (used) provided by financing activities from continuing operations was $(234.1) million in 2020, compared to $52.3 million in 2019. The change in 2020 as compared to 2019 was primarily due to the repayment of debt in the current year from the proceeds on the sale of the Technical Packaging business.

Bank Credit Facility

A description of the Company’s credit facility (the “Credit Facility”) is set forth in Note 9 to the Company’s Consolidated Financial Statements, which Note is incorporated by reference herein.

Cash flow from operations and borrowings under the Credit Facility is expected to provide adequate resources to meet the Company’s capital requirements and operational needs for the foreseeable future.

Dividends

Since 2010, the Company has paid a regular quarterly cash dividend at an annual rate of $0.32 per share. The Company paid dividends of $8.3 million in both 2020 and 2019.

Contractual Obligations

The following table shows the Company’s contractual obligations as of September 30, 2020:


	Payments due by period
			Less than	1 to 3	3 to 5	More than
(Dollars in millions)	Total		1 year	years	years	5 years
Long-Term Debt Obligations	$	62.4	2.4	—	60.0	—
Estimated Interest Payments ⁽¹⁾		3.5	2.2	1.3	—	—
Operating Lease Obligations		24.0	5.6	9.0	2.4	7.0
Finance Lease Obligations		40.5	2.9	6.1	3.2	28.3
Purchase Obligations ⁽²⁾		23.4	21.5	1.9	—	—
Total	$	153.8	34.6	18.3	65.6	35.3

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(1)

Estimated interest payments for the Company’s debt obligations were calculated based on Management’s determination of the estimated applicable interest rates and payment dates.

(2)

A purchase obligation is defined as a legally binding and enforceable agreement to purchase goods and services that specifies all significant terms. Since the majority of the Company’s purchase orders can be cancelled, they are not included in the table above.

The Company had no off-balance-sheet arrangements outstanding at September 30, 2020.

Share Repurchases

Information about the Company’s common stock repurchases is provided in Note 10 to the Consolidated Financial Statements.

Subsequent Event

On October 22, 2020, the Company acquired the equity of Advanced Technology Machining, Inc. and its affiliate TECC Grinding, Inc. (collectively TECC and ATM referred to as “ATM”), small privately held manufacturers of precision machined metal parts serving the aerospace, defense and space industries. Located in Valencia, California near Crissair’s facility, ATM has a solid customer base supplying custom-designed parts widely used on defense and commercial aircraft, as well as missile and tank programs. ATM will become part of Crissair in the Aerospace & Defense segment and has annual sales of approximately $7 million.

Outlook

In mid-year 2020, business disruptions related to the COVID-19 pandemic began to affect the Company’s operations and continued throughout the balance of the year. Entering 2021, the commercial aerospace and utility end-markets are seeing customer stabilization, as well as some notable pockets of recovery, but there is still some uncertainty as to the timing and pace of the recovery in these areas. The prospect of a viable COVID-19 vaccine will no doubt benefit and accelerate the anticipated recovery of commercial air travel and utility spending, with customers resuming normal testing protocols and equipment purchases, but Management has determined that it is advisable to wait at least another 90 days before resuming specific and finite guidance. Given this uncertainty, it is difficult to predict how 2021 will be affected using normal forecasting methodologies; therefore, the Company will continue its suspension of forward-looking guidance.

To assist shareholders and analysts, however, Management is offering “directional” guidance for 2021, seeing tangible signs of recovery in the second half of fiscal 2021 that point to a solid outlook for the back half of the year. Given the strength of the first half of 2020 pre-COVID, it is projected that the first half of 2021 will be slightly lower compared to 2020’s first half, but the outlook for the second half of 2021 is expected to compare favorably to the second half of 2020 given the anticipated elements of recovery. Management’s current expectations for 2021 are for growth in Sales, Adjusted EBITDA, and Adjusted EPS compared to 2020, with Adjusted EBITDA and Adjusted EPS reasonably consistent with 2019.

Market Risk Exposure

The Company’s Canadian subsidiary Morgan Schaffer entered into foreign exchange contracts to manage foreign currency risk, as a portion of their revenue is denominated in U.S. dollars. All derivative instruments are reported on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item.

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The Company is also subject to foreign currency exchange rate risk inherent in its sales commitments, anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other than the U.S. dollar. The foreign currencies most significant to the Company’s operations are the Canadian Dollar and the Euro. The Company occasionally hedges certain foreign currency commitments by purchasing foreign currency forward contracts. The Company does not have material foreign currency market risk; net foreign currency transaction gain/loss was less than 2% of net earnings for 2020 and 2019.

The Company has determined that the market risk related to interest rates with respect to its variable debt is not material. The Company estimates that if market interest rates averaged one percentage point higher, the effect would have been less than 2% of net earnings for the year ended September 30, 2020.

For more information about the Company’s derivative financial instruments, see Note 13 to the Company’s Consolidated Financial Statements included herein.

Critical Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires Management to make estimates and assumptions in certain circumstances that affect amounts reported in the Consolidated Financial Statements. In preparing these financial statements, Management has made its best estimates and judgments of certain amounts included in the Consolidated Financial Statements, giving due consideration to materiality. The Company does not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The Company’s senior Management discusses the critical accounting policies described below with the Audit and Finance Committee of the Company’s Board of Directors on a periodic basis.

The following discussion of critical accounting policies is intended to bring to the attention of readers those accounting policies which Management believes are critical to the Consolidated Financial Statements and other financial disclosure. It is not intended to be a comprehensive list of all significant accounting policies that are more fully described in Note 1 to the Consolidated Financial Statements.

Revenue Recognition

The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. The unit of account in ASC Topic 606 is a performance obligation. The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration, as applicable, which are based on historical, current and forecasted information. The transaction price is allocated to each distinct performance obligation within the contract and recognized as revenue when, or as, the performance obligation is satisfied. Certain of our long-term contracts contain incentive fees that can increase the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. The estimated amounts are based on an assessment of our anticipated performance and all other information that is reasonably available to us.

Approximately 55% of the Company’s Aerospace & Defense segment’s revenue (26% of consolidated revenue) is recognized over time as the products do not have an alternative use and the Company has an enforceable right to payment for costs incurred plus a reasonable margin or the inventory is owned by the customer. Selecting the method to measure progress towards completion for our contracts requires judgment and is based on the nature of the products or services to be provided.

The Aerospace & Defense segment generally uses the cost-to-cost method to measure progress on our contracts, as the rate at which costs are incurred to fulfill a contract best depicts the transfer of control to the customer. Under this method, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred based on an estimated profit margin.

The Test segment generally used the milestone output method to measure progress on our contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under this method, the Company estimates profit as the

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difference between total revenue and total estimated costs at completion of a contract and recognizes these revenues and costs based on milestones achieved.

Total contract cost estimates are based on current contract specifications and expected engineering requirements and require us to make estimates on expected profit. The estimates on profit are based on judgments we make to project the outcome of future events can often span more than one year and include labor productivity and availability, the complexity of the work to be performed, change orders issued by our customers, and other specialized engineering and production related activities. Our cost estimation process is based on historical results of contracts and historical actuals to original estimates, and the application of professional knowledge and experience of engineers and program managers along with finance professionals to these historical results. We review and update our estimates of costs quarterly or more frequently when circumstances significantly change, which can affect the profitability of our contracts.

For contracts where revenue is recognized over time, we generally recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period. We have net revenue recognized in the current year from performance obligations satisfied in the prior year due to changes in our estimated costs to complete the related performance obligations. Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.

The impact of adjustments in contract estimates on our operating earnings can be reflected in either revenue or operating costs and expenses. The aggregate impact of adjustments in contract estimates decreased our earnings before income tax and diluted earnings per share by $2.2 million and $0.06 per share, respectively, in the current year.

Income Taxes

The Company operates in numerous taxing jurisdictions and is subject to examination by various U.S. Federal, state and foreign jurisdictions for various tax periods. The Company’s income tax positions are based on research and interpretations of the income tax laws and rulings in each of the jurisdictions in which the Company does business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions, as well as the inherent uncertainty in estimating the final resolution of complex tax audit matters, Management’s estimates of income tax liabilities may differ from actual payments or assessments.

On December 22, 2017, the U.S. government enacted the TCJA, which, among other things, lowered the U.S. corporate statutory income tax rate and established a modified territorial system requiring a mandatory deemed repatriation on undistributed earnings of foreign subsidiaries. The Company completed its analysis of the impact of the TCJA during the first quarter of 2019.

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets may be reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company regularly reviews its deferred tax assets for recoverability and establishes a valuation allowance when Management believes it is more likely than not such assets will not be recovered, taking into consideration historical operating results, expectations of future earnings, tax planning strategies, and the expected timing of the reversals of existing temporary differences.

The Company’s policy is to include interest related to unrecognized tax benefits in income tax expense and penalties in operating expense.

Goodwill and Other Long-Lived Assets

Management annually reviews goodwill and other long-lived assets with indefinite useful lives for impairment or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If the Company determines that the carrying value of the long-lived asset may not be recoverable, a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Fair value is measured based on a discounted cash flow method using a discount rate

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determined by Management to be commensurate with the risk inherent in each of our reporting units’ current business models. The estimates of cash flows and discount rate are subject to change due to the economic environment, including such factors as interest rates, expected market returns and volatility of markets served. Management believes that the estimates of future cash flows and fair value are reasonable; however, changes in estimates could result in impairment charges. At September 30, 2020, the Company has determined that no reporting units are at risk of goodwill impairment as the fair value of each reporting unit exceeded its carrying value.

Intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable.

For the year ended September 30, 2020, the economic uncertainty, changes in the propensity for the general public to travel by air, and reductions in demand for commercial aircraft as a result of the COVID-19 pandemic have adversely impacted net sales and operating results in certain of our Aerospace & Defense reporting units and was determined to be an event and change in circumstances that required a quantitative review of our intangible assets, long-lived assets and goodwill for impairment. We determined that there was no impairment as of and for the year ended September 30, 2020 and the fair value of each reporting unit reviewed substantially exceeded carrying value, with the exception of Mayday where fair value exceeded carrying value by 10%. At September 30, 2020, we had $30 million of goodwill recorded for Mayday. The valuation methodology we use involves estimates of discounted cash flows, which are subject to change, and if they change negatively it could result in the need to write down those assets to fair value.

In our USG segment, our fiscal 2020 revenues were negatively impacted by the COVID-19 pandemic as several utility customers deferred purchase orders and maintenance-related project deliveries so they could divert resources to other issues such as critical power delivery given their concerns around COVID-19. Additionally, Doble’s service business was largely on hold during the pandemic. We expect USG’s customer spending softness to continue for the next few quarters before returning to normal levels. Goodwill for Doble and NRG were $246 million and $8 million, respectively, as of September 30, 2020. We reviewed the intangible assets, long-lived assets and goodwill, of our Doble and NRG businesses for impairment. The quantitative reviews determined that there was no impairment as of September 30, 2020 as the fair value of Doble substantially exceeded carrying value and the fair value of NRG exceeded carrying value by 15%. The valuation methodology we use involves estimates of discounted cash flows, which are subject to change, and if they change negatively it could result in the need to write down those assets to fair value.

Other Matters

Contingencies

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

Quantitative and Qualitative Disclosures about Market Risk

Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks. In 2018, the Company entered into three interest rate swaps with a notional amount of $150 million to hedge some of its exposure to variability in future interest payments on variable rate debt. The final interest rate swap was settled during September 2020, therefore, there are no outstanding interest rate swaps as of September 30, 2020. In addition, the Company’s Canadian subsidiary Morgan Schaffer has entered into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars. All derivative instruments are reported on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. See further discussion regarding the Company’s market risks in “Market Risk Analysis,” above.

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Controls and Procedures

For a description of the Company’s evaluation of its disclosure controls and procedures, see Item 9A, “Controls and Procedures.”

New Accounting Pronouncements

Information regarding new and updated accounting standards which affect the content and/or presentation of the Company’s financial information is set forth in Note 1.U to the Consolidated Financial Statements.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

See “Market Risk Exposure” and “Other Matters – Quantitative and Qualitative Disclosures about Market Risk” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are incorporated into this Item by reference.

Item 8. Financial Statements and Supplementary Data

The information required by this Item is incorporated by reference to the Consolidated Financial Statements of the Company, the Notes thereto, and the related “Report of Independent Registered Public Accounting Firm” of KPMG LLP, as set forth in the Financial Information section of this Annual Report; an Index is provided on page F-1.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Not Applicable.

Item 9A. Controls and Procedures

For 2020, the Company carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). The evaluation was conducted under the supervision and with the participation of the Company’s Management, including the Company’s Chief Executive Officer and Chief Financial Officer, using the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2020.

There have been no changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. For the remainder of the information required by this item, see “Management’s Report on Internal Control over Financial Reporting” and the related “Report of Independent Registered Public Accounting Firm” of KPMG LLP, in the Financial Information section beginning on page F-1 of this Annual Report, which are incorporated into this Item by reference.

Item 9B. Other Information

None.

Exhibit No.		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	Exhibit 4(e) to the Company’s Form 10-Q for the fiscal quarter ended March 31, 2000
3.1(c)		Articles of Merger, effective July 10, 2000	Exhibit 3(c) to the Company’s Form 10-Q for the fiscal quarter ended June 30, 2000
3.1(d)		Amendment to Articles of Incorporation, effective 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 19, 2019
4.1(a)		Description of Common Stock	Exhibit 4.1(a) to the Company's Form 10-K for the fiscal year ended September 30, 2019
4.1(b)		Specimen revised Common Stock Certificate	Exhibit 4.1 to the Company’s Form 10-Q for the fiscal quarter ended March 31, 2010
4.2		Credit Agreement dated September 27, 2019, incorporated by reference to Exhibit 10.2 hereto	Exhibit 10.1 to the Company’s Form 8-K filed September 30, 2019
10.1		Securities Purchase Agreement dated March 14, 2014 between ESCO Technologies Holding LLC and Meter Readings Holding LLC	Exhibit 10.1 to the Company’s Form 8-K filed March 28, 2014
10.2		Credit Agreement dated as of September 27, 2019 among the Registrant, the Foreign Subsidiary Borrowers party thereto, the Lenders party thereto, JPMorgan Chase Bank, N.A. as Administrative Agent, BMO Harris Bank N.A. as Syndication Agent, and Bank of America, N.A., SunTrust Bank, U.S. Bank National Association and Wells Fargo Bank, National Association as Co-Documentation Agents	Exhibit 10.1 to the Company’s Form 8-K filed September 30, 2019
10.3		Equity Purchase Agreement dated November 15, 2019 by and among Sonoco Plastics, Inc., Sonoco Holdings, Inc., ESCO Technologies Holding LLC, ESCO UK Holding Company I LTD., Thermoform Engineered Quality LLC, and Plastique Holdings Ltd.	Exhibit 10.1 to the Company’s Form 8-K filed January 7, 2020
10.4		Form of Indemnification Agreement with each of ESCO’s non-employee directors	Exhibit 10.1 to the Company’s Form 10-K for the fiscal year ended September 30, 2012
10.5(a)	*	First Amendment to the ESCO Electronics Corporation Supplemental Executive Retirement Plan, effective August 2, 1993 (comprising restatement of entire Plan)	Exhibit 10.2(a) to the Company's Form 10-K for the fiscal year ended September 30, 2012

Exhibit No.		Description	Document Location
10.5(b)	*	Second Amendment to Supplemental Executive Retirement Plan, effective May 1, 2001	Exhibit 10.4 to the Company's Form 10-K for the fiscal year ended September 30, 2001
10.5(c)	*	Form of Supplemental Executive Retirement Plan Agreement	Exhibit 10.28 to the Company’s Form 10-K for the fiscal year ended September 30, 2002
10.6	*	Directors’ Extended Compensation Plan, adopted effective October 11, 1993, restated to include all amendments through August 7, 2013 (current as of November 2019)	Exhibit 10.5 to the Company's Form 10-K for the fiscal year ended September 30, 2019
10.7	*	Compensation Plan For Non-Employee Directors, as amended and restated November 8, 2017	Exhibit 10.3 to the Company’s Form 8-K filed November 14, 2017
10.8(a)	*	2013 Incentive Compensation Plan	Appendix A to the Company’s Schedule 14A Proxy Statement filed December 19, 2012
10.8(b)	*	Form of Award Agreement under 2013 Incentive Compensation Plan, effective November 11, 2015	Exhibit 10.1 to the Company’s Form 8-K filed November 12, 2015
10.8(c)	*	Form of Amendment to 2012-2014 Awards under 2004 and 2013 Incentive Compensation Plans, effective November 11, 2015	Exhibit 10.2 to the Company’s Form 8-K filed November 12, 2015
10.9(a)	*	2018 Omnibus Incentive Plan	Exhibit 10.1 to the Company’s Form 8-K filed February 6, 2018
10.9(b)	*	2018 Omnibus Incentive Plan as Amended and Restated November 17, 2020	Exhibit 10.3 to the Company's Form 8-K filed November 19, 2020
10.9(c)	*	Form of Award Agreement for 2018 awards of Performance-Accelerated Restricted Shares under 2018 Omnibus Incentive Plan	Exhibit 10.6(f) to the Company’s Form 10-K for the fiscal year ended September 30, 2018 (Note: Agreements executed with Victor L. Richey, Gary E. Muenster and Alyson S. Barclay are substantially identical to the referenced Exhibit and are therefore omitted as separate exhibits pursuant to Rule 12b-31)
10.9(d)	*	Form of Award Agreement for 2019 awards of Performance-Accelerated Restricted Shares under 2018 Omnibus Incentive Plan	Exhibit 10.1 to the Company's Form 8-K filed May 7, 2019 (Note: Agreements executed with Victor L. Richey, Gary E. Muenster and Alyson S. Barclay are substantially identical to the referenced Exhibit and are therefore omitted as separate exhibits pursuant to Rule 12b-31)
10.9(e)	*	Form of Amendment to 2018 and 2019 Award Agreements for Performance-Accelerated Restricted Shares under 2018 Omnibus Incentive Plan	Exhibit 10.1 to the Company’s Form 8-K filed November 19, 2020 (Note: Amendments executed with Victor L. Richey, Gary E. Muenster and Alyson S. Barclay are substantially identical to the referenced Exhibit and are therefore omitted as separate exhibits pursuant to Rule 12b-31)
10.10(a)	*	Eighth Amendment and Restatement of Employee Stock Purchase Plan, effective August 2, 2018	Exhibit 10.7 to the Company’s Form 10-K for the fiscal year ended September 30, 2018
10.10(b)		Ninth Amendment and Restatement of Employee Stock Purchase Plan, effective February 5, 2019	Exhibit 10.1 to the Company’s Form 8-K filed February 7, 2019
10.11	*	Performance Compensation Plan for Corporate, Subsidiary and Division Officers and Key Managers, adopted August 2, 1993, as amended and restated through February 4, 2019	Exhibit 10.1 to the Company’s Form 8-K filed November 19, 2019

Exhibit No.		Description	Document Location
10.12	*	Compensation Recovery Policy, adopted effective February 4, 2010	Exhibit 10.6 to the Company’s Form 8-K filed February 10, 2010
10.13(a)	*	Severance Plan adopted as of August 10, 1995, as Amended and Restated November 11, 2015	Exhibit 10.1 to the Company’s Form 8-K/A filed November 30, 2015
10.13(b)	*	Fourth Amended and Restated Severance Plan	Exhibit 10.2 to the Company's Form 8-K filed November 19, 2020
10.14(a)	*	Employment Agreement with Victor L. Richey, effective November 3, 1999	Exhibit 10(bb) to the Company’s Form 10-K for the fiscal year ended September 30, 1999 (Note: Agreement with Victor L. Richey is substantially identical to the referenced Exhibit and is therefore omitted as a separate exhibit pursuant to Rule 12b-31)
10.14(b)	*	Second Amendment to Employment Agreement with Victor L. Richey, effective May 5, 2004	Exhibit 10.1 to the Company’s Form 10-Q for the fiscal quarter ended June 30, 2004
10.14(c)	*	Third Amendment to Employment Agreement with Victor L. Richey, effective December 31, 2007	Exhibit 10.1 to the Company’s Form 8-K filed January 7, 2008
10.15(a)	*	Employment Agreement with Gary E. Muenster, effective November 3, 1999	Exhibit 10(bb) to the Company’s Form 10-K for the fiscal year ended September 30, 1999 (Note: Agreement with Gary E. Muenster is substantially identical to the referenced Exhibit except that it provides a minimum base salary of $108,000, and is therefore omitted as a separate exhibit pursuant to Rule 12b-31)
10.15(b)	*	Second Amendment to Employment Agreement with Gary E. Muenster, effective May 5, 2004	Exhibit 10.2 to the Company’s Form 10-Q for the fiscal quarter ended June 30, 2004
10.15(c)	*	Third Amendment to Employment Agreement with Gary E. Muenster, effective December 31, 2007	Exhibit 10.1 to the Company’s Form 8-K filed January 7, 2008 (Note: Third Amendment with Gary E. Muenster is substantially identical to the referenced Exhibit except that (i) the termination amounts payable under Paragraph 9.a(1) are equal to base salary for 12 months and (ii) under Paragraph 9.a(1)(B), such termination amounts may be paid in biweekly installments equal to 1/26th of such amounts, and is therefore omitted as a separate exhibit pursuant to Rule 12b-31)
10.15(d)	*	Fourth Amendment to Employment Agreement with Gary E. Muenster, effective February 6, 2008	Exhibit 10.1 to the Company’s Form 8-K filed February 12, 2008
10.16(a)	*	Employment Agreement with Alyson S. Barclay, effective November 3, 1999	Exhibit 10(bb) to the Company’s Form 10-K for the fiscal year ended September 30, 1999 (Note: Agreement with Alyson S. Barclay is substantially identical to the referenced Exhibit except that it provides a minimum base salary of $94,000, and is therefore omitted as a separate exhibit pursuant to Rule 12b-31)
10.16(b)	*	Second Amendment to Employment Agreement with Alyson S. Barclay, effective May 5, 2004	Exhibit 10.2 to the Company’s Form 10-Q for the fiscal quarter ended June 30, 2004 (Note: Second Amendment with Alyson S. Barclay is substantially identical to the referenced Exhibit, and is therefore omitted as a separate exhibit pursuant to Rule 12b-31)

Exhibit No.		Description	Document Location
10.16(c)	*	Third Amendment to Employment Agreement with Alyson S. Barclay, effective December 31, 2007	Exhibit 10.1 to the Company’s Form 8-K filed January 7, 2008 (Note: Third Amendment with Alyson S. Barclay is substantially identical to the referenced Exhibit except that (i) the termination amounts payable under Paragraph 9.a(1) are equal to base salary for 12 months and (ii) under Paragraph 9.a(1)(B), such termination amounts may be paid in biweekly installments equal to 1/26th of such amounts, and is therefore omitted as a separate exhibit pursuant to Rule 12b-31)
10.16(d)	*	Fourth Amendment to Employment Agreement with Alyson S. Barclay, effective July 29, 2010	Exhibit 10.1 to the Company’s Form 8-K filed August 3, 2010
21		Subsidiaries of the Company	Filed herewith
23		Consent of Independent Registered Public Accounting Firm	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	***	Inline XBRL Instance Document	Submitted herewith
101.SCH	***	Inline XBRL Schema Document	Submitted herewith
101.CAL	***	Inline XBRL Calculation Linkbase Document	Submitted herewith
101.LAB	***	Inline XBRL Label Linkbase Document	Submitted herewith
101.PRE	***	Inline XBRL Presentation Linkbase Document	Submitted herewith
101.DEF	***	Inline XBRL Definition Linkbase Document	Submitted herewith
104	***	Cover Page Inline Interactive Data File (contained in Exhibit 101)	Submitted herewith

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ESCO TECHNOLOGIES INC.

	By:	/s/ Victor L. Richey
		Victor L. Richey
		President and Chief Executive Officer

	Date:	November 30, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Signature	Title	Date

/s/ Victor L. Richey	Chairman, President, Chief Executive Officer and Director	November 30, 2020
Victor L. Richey	Chairman, President, Chief Executive Officer and Director	November 30, 2020

/s/ Gary E. Muenster	Executive Vice President, Chief Financial Officer (Principal Accounting Officer) and Director	November 30, 2020
Gary E. Muenster		November 30, 2020

/s/ Patrick M. Dewar	Director	November 30, 2020
Patrick M. Dewar	Director	November 30, 2020

/s/ Vinod M. Khilnani	Director	November 30, 2020
Vinod M. Khilnani	Director	November 30, 2020

/s/ Leon J. Olivier	Director	November 30, 2020
Leon J. Olivier	Director	November 30, 2020

/s/ Robert J. Phillippy	Director	November 30, 2020
Robert J. Phillippy	Director	November 30, 2020

/s/ Larry W. Solley	Director	November 30, 2020
Larry W. Solley	Director	November 30, 2020

/s/ James M. Stolze	Director	November 30, 2020
James M. Stolze	Director	November 30, 2020

/s/ Gloria L. Valdez	Director	November 30, 2020
Gloria L. Valdez	Director	November 30, 2020

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and Board of Directors

ESCO Technologies Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of ESCO Technologies Inc. and subsidiaries (the Company) as of September 30, 2020 and 2019, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended September 30, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated November 30, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Change in Accounting Principles

As discussed in Note 1 of the consolidated financial statements, the Company has changed its method of accounting for leases as of October 1, 2019 due to the adoption of ASU No. 2016-062, Leases (ASC Topic 842) and method of accounting for revenue contracts with customers as of October 1, 2018 due to the adoption of ASU No. 2014-09, Revenue with Contracts with Customers (ASC Topic 606).

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue recognition — Estimate of contract costs at completion

As discussed in Notes 1 and 17 to the consolidated financial statements, the Company’s Aerospace & Defense segment enters into certain long-term fixed price contracts with aerospace and defense customers to produce various products. These products do not have an alternative use and the Company has an enforceable right to payment for costs incurred plus a

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reasonable margin. Revenue for these contracts is recognized over time generally using a cost-to-cost model. Under such model, the Company measures the extent of progress towards completion of these contracts based on the ratio of contract costs incurred to date to the estimate of total contract costs at completion. The estimation of these costs requires judgment by the Company given the unique product specifications and requirements for contracts related to the design, development, and manufacture of complex products.

We identified the assessment of the estimate of total contract costs at completion for certain contracts in the Aerospace & Defense segment for which revenue is recognized over time using a cost-to-cost model as a critical audit matter. Complex auditor judgment was required in evaluating expected engineering and production requirements of the contracts and the associated cost estimates for labor hours and materials, which represent assumptions with a high level of estimation uncertainty and that are also susceptible to potential management bias. Changes to these estimates may have a significant impact on the net sales and earnings recorded during the fiscal year.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s revenue recognition process. This included controls over the accumulation and estimation of costs to complete for labor hours and materials for the contracts described above. For a selection of contracts, we compared the Company’s historical estimated costs and profit margin to the actual costs and profit margin for completed contracts to assess the Company’s ability to accurately estimate costs. We challenged the Company’s assumptions for labor hours and materials to be incurred for a selection of contracts by:

●

reading the underlying contract documents, including applicable amendments, to obtain an understanding of the contractual requirements and deliverables

●

inquiring of financial and operational personnel of the Company to identify factors that should be considered within the cost to complete estimates

●

comparing the costs incurred to date, as a percentage of the estimated costs at completion, to the Company’s physical production to date under the contract, including consideration of remaining contract performance risks

●

comparing actual incurred and remaining estimated material costs to the original estimated amount of material costs at the beginning of the project plus incremental material costs due to contract modification

●

comparing actual incurred and remaining estimated labor hours to the original estimate of labor hours at the beginning of the project plus incremental labor hours due to contract modification

●

comparing the estimated costs at completion, which includes costs incurred to date plus estimated costs to complete, to actual costs incurred for similar products previously developed and produced, if applicable

●

inspecting correspondence, if applicable, between the Company and the customer regarding actual and expected contract performance to date and comparing to the estimate to complete

●

assessing the estimates for indicators of management bias by evaluating the audit evidence obtained through the procedures described above.

Sufficiency of audit evidence obtained over net sales

As discussed in Notes 1 and 17 to the consolidated financial statements, sales are recognized primarily from the sale of products across various industries and through multiple Company subsidiaries and locations around the world. The Company recorded $732.9 million of net sales for the year ended September 30, 2020.

We identified the evaluation of the sufficiency of audit evidence obtained over net sales as a critical audit matter. Evaluating the sufficiency of audit evidence obtained over net sales required especially subjective auditor judgment because of the disaggregated nature of the Company’s operations, including revenue recognition accounting policies and procedures that differ among the various subsidiaries and locations. This included determining the Company subsidiaries and locations at which procedures were performed.

The following are the primary procedures we performed to address this critical audit matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over net sales, including the determination of the Company

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subsidiaries and locations at which those procedures were to be performed. At each Company subsidiary and location where procedures were performed, we:

●

evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s revenue recognition process at the applicable subsidiaries and locations; and

●

assessed the recorded net sales for a selection of transactions by comparing the amount recognized for consistency with underlying documentation, including contracts with customers and shipping documentation, if applicable, and the Company’s revenue recognition policies.

We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed.

Assessing the carrying value of goodwill and indefinite-lived intangible assets of certain reporting units in the Utility Solutions Group and Aerospace & Defense segments

As discussed in Notes 1 and 4 to the consolidated financial statements, the Company reviews goodwill and other – indefinite-lived intangible assets for impairment annually and whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit or an indefinite-lived intangible asset is less than its carrying value. The Company uses a discounted cash flow method, using a discount rate determined to be commensurate with the risk inherent in each reporting unit’s business model when estimating fair value. The Company uses a relief from royalty method to estimate the fair value of indefinite-lived intangible assets.

We identified the assessment of the carrying value of goodwill and indefinite-lived intangible assets of certain reporting units in the Utility Solutions Group and Aerospace & Defense segments as a critical audit matter. The valuation of each reporting unit and the related indefinite-lived intangible assets involved estimation uncertainty in the projection of future cash flows, resulting in an increased level of subjective auditor judgment. Specifically, subjective and challenging auditor judgment was required to evaluate the forecasted revenue growth rates, gross margins, and discount rates used in the discounted cash flows to derive the fair value of the reporting unit. Additionally, subjective auditor judgment was required to assess the forecasted revenue growth rates, discount rate, and royalty rate assumptions used in the valuation of indefinite-lived intangible assets. Evaluation of the forecasted revenue growth rates and gross margins was challenging as they represented subjective determinations of future market and economic conditions that were sensitive to variation. Specialized skills and knowledge were required to evaluate the Company’s discount rate and royalty rate assumptions.

The following were the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s goodwill and indefinite-lived intangible asset impairment assessment process. This included controls related to the determination of the fair value of the reporting units and indefinite-lived intangible assets and the development of forecasted revenue growth rates, gross margins, discount rates, and royalty rate assumptions. We evaluated the Company’s forecasted revenue growth rates by comparing to industry and peer company forecasted revenue growth rates. We also assessed the Company’s forecasted revenue growth rates and gross margins by comparing them to historical experience and to underlying business strategies and growth plans available for market participants for each reporting unit. We compared historical forecasted revenue growth rates and gross margins to actual results in order to assess the Company’s ability to forecast. We involved valuation professionals with specialized skills and knowledge, who assisted in:

●

evaluating the royalty rate assumptions by comparing them to royalty rate ranges developed using publicly available market data for comparable company intangible assets and affordability analyses based on profitability of the reporting unit to which the indefinite-lived intangible assets relate

●

evaluating the discount rates by comparing them to discount rate ranges that were independently developed using publicly available market data for comparable entities.

/s/ KPMG LLP

We have served as the Company’s auditor since 1990.

St. Louis, Missouri

November 30, 2020

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CONSOLIDATED STATEMENTS OF OPERATIONS


(Dollars in thousands, except per share amounts)
Years ended September 30,	2020		2019	2018
Net sales	$	732,915	726,044	683,650
Costs and expenses:
Cost of sales		457,418	437,998	419,713
Selling, general and administrative expenses		159,490	162,734	153,065
Amortization of intangible assets		21,812	18,492	17,262
Interest expense, net		6,730	8,092	8,798
Pension plan termination charge		40,600	—	—
Other expenses, net		7,122	851	3,721
Total costs and expenses		693,172	628,167	602,559

Earnings before income tax		39,743	97,877	81,091
Income tax expense (benefit)		14,278	20,388	(5,170)
Net earnings from continuing operations		25,465	77,489	86,261
(Loss) earnings from discontinued operations, net of tax expense of $269, $789 and $1,060 in 2020, 2019 and 2018, respectively		(601)	3,550	5,875
Gain on sale from discontinued operations, net of tax expense of $23,232		77,116	—	—
Net earnings from discontinued operations		76,515	3,550	5,875
Net earnings	$	101,980	81,039	92,136

Earnings per share:
Basic:
Continuing operations	$	0.98	2.99	3.33
Discontinued operations		2.94	0.13	0.23
Net earnings	$	3.92	3.12	3.56
Diluted:
Continuing operations	$	0.97	2.97	3.31
Discontinued operations		2.93	0.13	0.23
Net earnings	$	3.90	3.10	3.54
Average common shares outstanding (in thousands):
Basic		26,010	25,946	25,874
Diluted		26,135	26,097	26,058

See accompanying Notes to Consolidated Financial Statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


(Dollars in thousands)
Years ended September 30,	2020		2019	2018
Net earnings	$	101,980	81,039	92,136
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments		3,172	(6,474)	(2,254)
Pension plan termination		40,600	—	—
Amortization of prior service costs and actuarial losses		(3,455)	(6,066)	(2,003)
Net unrealized gain on derivative instruments		—	94	37
Total other comprehensive (loss) income, net of tax		40,317	(12,446)	(4,220)
Comprehensive income	$	142,297	68,593	87,916

See accompanying Notes to Consolidated Financial Statements.

F-5

Table of Contents

CONSOLIDATED BALANCE SHEETS


(Dollars in thousands)
As of September 30,	2020		2019
ASSETS

Current assets:
Cash and cash equivalents	$	52,560	61,808
Accounts receivable, less allowance for doubtful accounts of $1,995 and $1,505 in 2020 and 2019, respectively		144,082	158,715
Contract assets, net		96,746	110,211
Inventories, net		136,189	124,956
Other current assets		17,053	14,190
Assets of discontinued operations - current		—	25,314
Total current assets		446,630	495,194

Property, plant and equipment:
Land and land improvements		9,657	8,101
Buildings and leasehold improvements		98,636	83,255
Machinery and equipment		153,718


Report of Independent Registered Public Accounting Firm	F-2
Consolidated Statements of Operations	F-5
Consolidated Statements of Comprehensive Income	F-5
Consolidated Balance Sheets	F-6
Consolidated Statements of Shareholders’ Equity	F-8
Consolidated Statements of Cash Flows	F-9
Notes to Consolidated Financial Statements	F-10
Management’s Statement of Financial Responsibility	F-35
Management’s Report on Internal Control Over Financial Reporting	F-36
Report of Independent Registered Public Accounting Firm	F-37


		Page
FORWARD-LOOKING INFORMATION		ii
PART I
1.	Business	1
	The Company	1
	Products	2
	Marketing and Sales	3
	Government Contracts	3
	Intellectual Property	3
	Backlog	4
	Purchased Components and Raw Materials	4
	Competition	4
	Research and Development	5
	Environmental Matters and Government Regulation	5
	Human Capital	5
	Financing	6
	Additional Information	6
	Information about our Executive Officers	6
1A.	Risk Factors	6
1B.	Unresolved Staff Comments	12
2.	Properties	12
3.	Legal Proceedings	13
4.	Mine Safety Disclosures	13
PART II
5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	14
6.	Selected Financial Data	16
7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
7A.	Quantitative and Qualitative Disclosures about Market Risk	28
8.	Financial Statements and Supplementary Data	28
9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	28
9A.	Controls and Procedures	28
9B.	Other Information	28
PART III
10.	Directors, Executive Officers and Corporate Governance	29
11.	Executive Compensation	29
12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	30
13.	Certain Relationships and Related Transactions, and Director Independence	30
14.	Principal Accountant Fees and Services	30
PART IV
15.	Exhibits, Financial Statement Schedules	31
SIGNATURES		35
FINANCIAL INFORMATION		F-1
EXHIBITS