UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2022


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

COMMISSION FILE NUMBER 1-10596

ESCO TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)


MISSOURI	43-1554045
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

9900A CLAYTON ROAD
ST. LOUIS, MISSOURI	63124-1186
(Address of principal executive offices)	(Zip Code)

(314) 213-7200

(Registrant’s telephone number, including area code)

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

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

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

Yes ☒ No ☐

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

Yes ☒ No ☐

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

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

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

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

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

Class		Shares outstanding at April 30, 2022
Common stock, $.01 par value per share		25,850,916

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)


	Three Months Ended
	March 31,
	2022		2021

Net sales	$	204,928	165,894
Costs and expenses:
Cost of sales		128,375	103,553
Selling, general and administrative expenses		47,959	38,746
Amortization of intangible assets		6,510	4,917
Interest expense, net		1,020	432
Other income, net		(604)	(1,903)
Total costs and expenses		183,260	145,745

Earnings before income taxes		21,668	20,149
Income tax expense		5,085	4,745
Net earnings	$	16,583	15,404

Earnings per share:
Basic -
Net earnings		0.64	0.59

Diluted -
Net earnings	$	0.64	0.59

See accompanying notes to consolidated financial statements.

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)


	Six Months Ended
	March 31,
	2022		2021

Net sales	$	381,938		328,568
Costs and expenses:
Cost of sales		236,680		203,175
Selling, general and administrative expenses		94,594		79,746
Amortization of intangible assets		12,977		9,865
Interest expense, net		1,753		973
Other income, net		(571)		(1,880)
Total costs and expenses		345,433		291,879

Earnings before income taxes		36,505		36,689
Income tax expense		8,398		8,467
Net earnings	$	28,107		28,222

Earnings per share:
Basic — Net earnings	$	1.08		1.08

Diluted — Net earnings	$	1.08		1.08

See accompanying notes to consolidated financial statements.

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)


	March 31,		September 30,
	2022		2021
ASSETS
Current assets:
Cash and cash equivalents	$	54,324		56,232
Accounts receivable, net of allowance for doubtful accounts of $3,403 and $3,445, respectively		140,497		146,341
Contract assets		111,453		93,771
Inventories, net		175,152		147,148
Other current assets		31,972		22,662
Total current assets		513,398		466,154
Property, plant and equipment, net of accumulated depreciation of $156,237 and $147,551, respectively		156,963		154,265
Intangible assets, net of accumulated amortization of $162,869 and $149,892, respectively		407,203		409,250
Goodwill		508,406		504,853
Operating lease assets		30,139		31,846
Other assets		9,677		10,977
Total assets	$	1,625,786		1,577,345

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt and short-term borrowings	$	20,000		20,000
Accounts payable		71,811		56,669
Contract liabilities		108,629		106,045
Accrued salaries		30,150		39,768
Accrued other expenses		47,205		52,513
Total current liabilities		277,795		274,995
Deferred tax liabilities		82,187		73,560
Non-current operating lease liabilities		26,302		28,032
Other liabilities		42,329		47,062
Long-term debt		176,000		134,000
Total liabilities		604,613		557,649
Shareholders’ equity:
Preferred stock, par value $.01 per share, authorized 10,000,000 shares		—		—
Common stock, par value $.01 per share, authorized 50,000,000 shares, issued 30,705,913 and 30,666,173 shares, respectively		307		307
Additional paid-in capital		298,353		297,644
Retained earnings		854,946		830,989
Accumulated other comprehensive loss, net of tax		(7,472)		(2,161)
		1,146,134		1,126,779
Less treasury stock, at cost: 4,826,545 and 4,604,741 common shares, respectively		(124,961)		(107,083)
Total shareholders’ equity		1,021,173		1,019,696
Total liabilities and shareholders’ equity	$	1,625,786		1,577,345

See accompanying notes to consolidated financial statements.

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)


	Six Months Ended
	March 31,
	2022		2021
Cash flows from operating activities:
Net earnings	$	28,107	28,222
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		24,292	20,115
Stock compensation expense		3,428	2,745
Changes in assets and liabilities		(41,451)	9,179
Gain on sale of building and land		—	(1,950)
Effect of deferred taxes		8,627	(989)
Net cash provided by operating activities		23,003	57,322
Cash flows from investing activities:
Acquisition of business, net of cash acquired		(15,592)	(6,684)
Proceeds from sale of building and land		—	1,950
Additions to capitalized software		(4,727)	(3,973)
Capital expenditures		(20,715)	(13,153)
Net cash used by investing activities		(41,034)	(21,860)
Cash flows from financing activities:
Proceeds from long-term debt and short-term borrowings		88,000	34,000
Principal payments on long-term debt and short-term borrowings		(46,000)	(74,368)
Purchases of common stock into treasury		(17,878)	—
Dividends paid		(4,150)	(4,167)
Other		(2,719)	—
Net cash provided (used) by financing activities		17,253	(44,535)
Effect of exchange rate changes on cash and cash equivalents		(1,130)	2,166
Net decrease in cash and cash equivalents		(1,908)	(6,907)
Cash and cash equivalents, beginning of period		56,232	52,560
Cash and cash equivalents, end of period	$	54,324	45,653

Supplemental cash flow information:
Interest paid	$	1,002	281
Income taxes paid (including state and foreign)		1,558	14,047

See accompanying notes to consolidated financial statements.

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

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

The Company’s results for the three-month period ended March 31, 2022 are not necessarily indicative of the results for the entire 2022 fiscal year. References to the second quarters of 2022 and 2021 represent the fiscal quarters ended March 31, 2022 and 2021, respectively. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates. Certain prior period deferred revenue amounts have been reclassified to noncurrent to conform with the current year presentation.

2. EARNINGS PER SHARE (EPS)

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


	Three Months		Six Months
	Ended March 31,		Ended March 31,
	2022	2021	2022	2021
Weighted Average Shares Outstanding — Basic	25,953	26,038	26,008	26,038
Dilutive Restricted Shares	92	163	90	154
Adjusted Shares — Diluted	26,045	26,201	26,098	26,192

3. ACQUISITION

On November 4, 2021, the Company acquired Networks Electronic Company, LLC (NEco) for a purchase price of approximately $15.2 million, net of cash acquired. NEco, based in Chatsworth, California, provides miniature electro-explosive devices utilized in mission-critical defense and aerospace applications. Since the date of acquisition, the operating results for the NEco business have been included as part of PTI in the A&D segment. The acquisition date fair value of the assets acquired and liabilities assumed primarily were as follows: approximately $0.6 million of accounts receivable, $1.5 million of inventory, $0.2 million of property, plant and equipment, $0.7 million of accounts payable and accrued expenses, $8.1 million of identifiable intangible assets, mainly consisting of customer relationships totaling $6.3 million. The acquired goodwill of $5.7 million related to excess value associated with opportunities to expand the services and products that the Company can offer to its customers. The Company anticipates that the goodwill will be deductible for tax purposes.

4. SHARE-BASED COMPENSATION

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

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

Compensation expense related to the PARS/RSU awards was $1.5 million and $2.8 million for the three and six-month periods ended March 31, 2022, respectively, and $1.1 million and $2.1 million for the corresponding periods in 2021. As of March 31, 2022, there were 210,119 unvested stock units outstanding.

Non-Employee Directors Plan

Compensation expense related to the non-employee director grants was $0.3 million and $0.6 million for the three and six-month periods ended March 31, 2022, respectively, and $0.3 million and $0.6 million for the corresponding periods in 2021.

The total share-based compensation cost that has been recognized in the results of operations and included within selling, general and administrative expenses (SG&A) was $1.7 million and $3.4 million for the three and six-month periods ended March 31, 2022, respectively, and $1.4 million and $2.7 million for the corresponding periods in 2021. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $0.3 million and $0.5 million for the three and six-month periods ended March 31, 2022, respectively, and $0.3 million and $0.7 million for the corresponding periods in 2021. As of March 31, 2022, there was $10.9 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a remaining weighted-average period of 1.9 years.

5. INVENTORIES

Inventories, net, consist of the following:


	March 31,		September 30,
(In thousands)	2022		2021
Finished goods	$	37,434	32,998
Work in process		46,447	34,201
Raw materials		91,271	79,949
Total inventories, net	$	175,152	147,148

6.	GOODWILL AND OTHER INTANGIBLE ASSETS

Included on the Company’s Consolidated Balance Sheets at March 31, 2022 and September 30, 2021 are the following intangible assets gross carrying amounts and accumulated amortization:


	March 31,		September 30,
(Dollars in thousands)	2022		2021
Goodwill	$	508,406	504,853

Intangible assets with determinable lives:
Patents
Gross carrying amount	$	2,208	2,131
Less: accumulated amortization		1,029	972
Net	$	1,178	1,159

Capitalized software
Gross carrying amount	$	98,398	93,671
Less: accumulated amortization		67,013	63,740
Net	$	31,385	29,931

Customer relationships
Gross carrying amount	$	292,887	288,530
Less: accumulated amortization		88,933	80,882
Net	$	203,954	207,648

Other
Gross carrying amount	$	14,567	13,080
Less: accumulated amortization		5,897	4,301
Net	$	8,670	8,779
Intangible assets with indefinite lives:
Trade names	$	162,016	161,733

The changes in the carrying amount of goodwill attributable to each business segment for the six months ended March 31, 2022 is as follows:


					Aerospace
(Dollars in millions)	USG		Test		& Defense	Total
Balance as of September 30, 2021		366.5		34.1	104.3	504.9
Acquisition activity and adjustments		0.3		—	5.7	6.0
Foreign currency translation		(2.5)		—	—	(2.5)
Balance as of March 31, 2022	$	364.3		34.1	110.0	508.4

7. BUSINESS SEGMENT INFORMATION

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

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

The USG segment’s operations consist primarily of Doble Engineering Company and related subsidiaries including Morgan Schaffer and Altanova (collectively, Doble), and NRG Systems, Inc. (NRG). Doble is an industry leader in the development, manufacture and delivery of diagnostic testing solutions that enable electric power grid operators to assess the integrity of high voltage power delivery equipment. It combines three core elements for customers – diagnostic test and condition monitoring instruments, expert consulting, and testing services – and provides access to its large reserve of related empirical knowledge. NRG is a global market leader in the design and manufacture of decision support tools for the renewable energy industry, primarily wind and solar.

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

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


	Three Months			Six Months
	Ended March 31,			Ended March 31,
(In thousands)	2022		2021	2022	2021
NET SALES
Aerospace & Defense	$	84,821	82,528	155,065	149,144
USG		64,191	39,555	127,676	94,095
Test		55,916	43,811	99,197	85,329
Consolidated totals	$	204,928	165,894	381,938	328,568

EBIT
Aerospace & Defense	$	14,349	17,006	24,304	25,266
USG		11,314	6,725	24,705	19,456
Test		8,494	5,688	12,459	11,030
Corporate (loss)		(11,469)	(8,838)	(23,210)	(18,090)
Consolidated EBIT		22,688	20,581	38,258	37,662
Less: Interest expense		(1,020)	(432)	(1,753)	(973)
Earnings before income taxes	$	21,668	20,149	36,505	36,689

Non-GAAP Financial Measures

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

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

8. DEBT

The Company’s debt is summarized as follows:


	March 31,		September 30,
(In thousands)	2022		2021
Total borrowings	$	196,000	154,000
Current portion of long-term debt		(20,000)	(20,000)
Total long-term debt, less current portion	$	176,000	134,000

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

At March 31, 2022, the Company had approximately $296 million available to borrow under the Credit Facility, plus the $250 million increase option, subject to lender approval, in addition to $54.3 million cash on hand. The Company classified $20 million as the current portion of long-term debt as of March 31, 2022, as the Company intends to repay this amount within the next twelve months; however, the Company has no contractual obligation to repay such amount during the next twelve months. The letters of credit issued and outstanding under the Credit Facility totaled $8.1 million at March 31, 2022.

Interest on borrowings under the Credit Facility is calculated at a spread over either the New York Federal Reserve Bank Rate, the prime rate or the London Interbank Offered Rate (LIBOR), depending on various factors. The Credit Facility also requires a facility fee ranging from 10 to 25 basis points per annum on the unused portion. The Credit Facility is secured by the unlimited guaranty of the Company’s direct and indirect material U.S. subsidiaries and the pledge of 100% of the equity interests of its direct and indirect material foreign subsidiaries. The financial covenants of the Credit Facility include a leverage ratio and an interest coverage ratio. The weighted average interest rates were 1.29% and 1.23% for the three and six-month periods ending March 31, 2022, respectively, and 1.27% and 1.40% for the three and six-month periods ending March 31, 2021. As of March 31, 2022, the Company was in compliance with all covenants.

9. INCOME TAX EXPENSE

The second quarter 2022 effective income tax rate was 23.5% compared to 23.5% in the second quarter of 2021. The effective income tax rate in the first six months of 2022 was 23.0% compared to 23.1% for the first six months of 2021. There were no significant or unusual items impacting the 2022 second quarter or year-to-date effective tax rate.

10. SHAREHOLDERS’ EQUITY

The change in shareholders’ equity for the first three and six months of 2022 and 2021 is shown below (in thousands):


	Three Months Ended March 31,			Six Months Ended March 31,
	2022		2021	2022	2021

Common stock
Beginning balance		307	306	307	306
Stock plans		—	—	—	—
Ending balance		307	306	307	306

Additional paid-in-capital
Beginning balance		296,277	294,735	297,644	293,682
Stock plans		2,076	1,061	709	2,114
Ending balance		298,353	295,796	298,353	295,796

Retained earnings
Beginning balance		840,434	786,563	830,989	775,829
Net earnings common stockholders		16,583	15,404	28,107	28,222
Dividends paid		(2,071)	(2,083)	(4,150)	(4,167)
Ending balance		854,946	799,884	854,946	799,884

Accumulated other comprehensive income (loss)
Beginning balance		(4,661)	1,692	(2,161)	(3,657)
Foreign currency translation		(2,811)	116	(5,311)	5,465
Ending balance		(7,472)	1,808	(7,472)	1,808

Treasury stock
Beginning balance		(117,080)	(107,134)	(107,083)	(107,134)
Issued under stock plans		(7,881)	—	(17,878)	—
Ending balance		(124,961)	(107,134)	(124,961)	(107,134)

Total equity		1,021,173	990,660	1,021,173	990,660


Three months ended March 31, 2022	Aerospace
(In thousands)	& Defense		USG		Test		Total
Customer type:
Commercial	$	33,562	$	63,379	$	51,903	$	148,844
U.S. Government		51,259		812		4,013		56,084
Total revenues	$	84,821	$	64,191	$	55,916	$	204,928

Geographic location:
United States	$	72,621	$	41,458	$	31,071	$	145,150
International		12,200		22,733		24,845		59,778
Total revenues	$	84,821	$	64,191	$	55,916	$	204,928

Revenue recognition method:
Point in time	$	35,666	$	51,202	$	14,838	$	101,706
Over time		49,155		12,989		41,078		103,222
Total revenues	$	84,821	$	64,191	$	55,916	$	204,928


Six months ended March 31, 2022	Aerospace
(In thousands)	& Defense		USG		Test		Total
Customer type:
Commercial	$	61,489	$	126,221	$	92,941	$	280,651
U.S. Government		93,576		1,455		6,256		101,287
Total revenues	$	155,065	$	127,676	$	99,197	$	381,938

Geographic location:
United States	$	133,313	$	80,199	$	54,047	$	267,559
International		21,752		47,477		45,150		114,379
Total revenues	$	155,065	$	127,676	$	99,197	$	381,938

Revenue recognition method:
Point in time	$	64,223	$	102,037	$	27,660	$	193,920
Over time		90,842		25,639		71,537		188,018
Total revenues	$	155,065	$	127,676	$	99,197	$	381,938

Revenues by customer type, geographic location, and revenue recognition method for the three and six-month periods ended March 31, 2021 are presented in the tables below.


Three months ended March 31, 2021	Aerospace
(In thousands)	& Defense		USG		Test		Total
Customer type:
Commercial	$	33,223	$	38,549	$	39,305	$	111,077
U.S. Government		49,305		1,006		4,506		54,817
Total revenues	$	82,528	$	39,555	$	43,811	$	165,894

Geographic location:
United States	$	72,287	$	27,445	$	22,965	$	122,697
International		10,241		12,110		20,846		43,197
Total revenues	$	82,528	$	39,555	$	43,811	$	165,894

Revenue recognition method:
Point in time	$	37,127	$	27,563	$	9,248	$	73,938
Over time		45,401		11,992		34,563		91,956
Total revenues	$	82,528	$	39,555	$	43,811	$	165,894


Six months ended March 31, 2021	Aerospace
(In thousands)	& Defense		USG		Test		Total
Customer type:
Commercial	$	61,089	$	92,414	$	76,027	$	229,530
U.S. Government		88,055		1,681		9,302		99,038
Total revenues	$	149,144	$	94,095	$	85,329	$	328,568

Geographic location:
United States	$	129,824	$	64,490	$	46,231	$	240,545
International		19,320		29,605		39,098		88,023
Total revenues	$	149,144	$	94,095	$	85,329	$	328,568