ESCO Technologies(ESE) - 2025 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements for ESCO Technologies Inc. and its subsidiaries for the three months ended December 31, 2024, and 2023 Condensed Consolidated Statements of Operations (Three Months Ended December 31): | Metric | 2024 (in thousands) | 2023 (in thousands) | | :--- | :--- | :--- | | Net sales | $247,026 | $218,314 | | Net earnings | $23,473 | $15,169 | | Basic EPS | $0.91 | $0.59 | | Diluted EPS | $0.91 | $0.59 | Condensed Consolidated Balance Sheets (As of December 31, 2024 vs. September 30, 2024): | Metric | Dec 31, 2024 (in thousands) | Sep 30, 2024 (in thousands) | | :--- | :--- | :--- | | Total assets | $1,795,064 | $1,838,620 | | Total liabilities | $558,131 | $601,270 | | Total shareholders' equity | $1,236,933 | $1,237,350 | Condensed Consolidated Statements of Cash Flows (Three Months Ended December 31): | Metric | 2024 (in thousands) | 2023 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $34,174 | $8,746 | | Net cash used by investing activities | $(7,795) | $(66,969) | | Net cash provided (used) by financing activities | $(18,095) | $66,504 | | Net increase in cash and cash equivalents | $5,321 | $9,530 | | Cash and cash equivalents, end of period | $71,284 | $51,396 | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS This section provides explanatory notes to the condensed consolidated financial statements, detailing the basis of presentation, specific accounting policies, and additional information on key financial line items 1. BASIS OF PRESENTATION The financial statements are unaudited and include all necessary recurring accruals for a fair presentation, prepared in accordance with Form 10-Q and GAAP - The accompanying consolidated financial statements are unaudited and include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation[14] - The statements are presented in accordance with Form 10-Q and GAAP, requiring management to make estimates and assumptions[14][15] 2. EARNINGS PER SHARE (EPS) This note details the calculation of basic and diluted earnings per share, outlining the weighted average number of common shares outstanding used for each period Weighted Average Shares Outstanding for EPS Calculation (in thousands): | Metric | Dec 31, 2024 | Dec 31, 2023 | | :--- | :--- | :--- | | Weighted Average Shares Outstanding — Basic | 25,781 | 25,797 | | Dilutive Restricted Shares | 53 | 49 | | Adjusted Shares — Diluted | 25,834 | 25,846 | 3. SHARE-BASED COMPENSATION The company provides share-based compensation through PSU, RSU, and PARS awards to key employees and non-employee directors, with total expense increasing to $2.5 million in Q1 2025 Share-Based Compensation Expense (Three Months Ended December 31, in millions): | Category | 2024 | 2023 | | :--- | :--- | :--- | | RSU, PSU and PARS Awards | $2.2 | $1.9 | | Non-Employee Directors Plan | $0.3 | $0.3 | | Total Share-Based Compensation Cost | $2.5 | $2.2 | | Total Income Tax Benefit | $0.8 | $0.2 | - As of December 31, 2024, there was $17.7 million of total unrecognized compensation cost related to share-based compensation arrangements, expected to be recognized over a remaining weighted-average period of 2.0 years[20] 4. INVENTORIES This note provides a breakdown of the company's inventory components, including finished goods, work in process, and raw materials, as of December 31, 2024, and September 30, 2024 Inventories (in thousands): | Category | Dec 31, 2024 | Sep 30, 2024 | | :--- | :--- | :--- | | Finished goods | $53,839 | $46,586 | | Work in process | $47,836 | $47,903 | | Raw materials | $117,708 | $114,675 | | Total inventories | $219,383 | $209,164 | 5. GOODWILL AND OTHER INTANGIBLE ASSETS This section details the company's goodwill and other intangible assets, with goodwill decreasing by $7.6 million due to foreign currency translation in Q1 2025 Goodwill and Intangible Assets (Net, in thousands): | Asset Type | Dec 31, 2024 | Sep 30, 2024 | | :--- | :--- | :--- | | Goodwill | $532,312 | $539,899 | | Patents | $1,168 | $1,223 | | Capitalized software | $40,790 | $41,241 | | Customer relationships | $189,105 | $198,193 | | Other | $3,556 | $4,009 | | Trade names (indefinite lives) | $161,683 | $162,936 | Changes in Goodwill by Segment (Three Months Ended December 31, 2024, in millions): | Segment | Balance Sep 30, 2024 | Foreign Currency Translation | Balance Dec 31, 2024 | | :--- | :--- | :--- | :--- | | USG | $356.9 | $(5.5) | $351.4 | | Test | $67.4 | $(2.1) | $65.3 | | A&D | $115.6 | — | $115.6 | | Total | $539.9 | $(7.6) | $532.3 | 6. BUSINESS SEGMENT INFORMATION The company operates in three reportable segments: A&D, USG, and Test, all showing increased net sales and EBIT in Q1 2025 - The A&D segment designs and manufactures specialty filtration, fluid control, and naval products for aerospace and defense applications[23][24] - The USG segment provides diagnostic testing and data management solutions for electric power grids and decision support tools for the renewable energy industry[25] - The Test segment designs and manufactures products and systems to measure and control RF and acoustic energy, serving various markets[26] Net Sales by Segment (Three Months Ended December 31, in thousands): | Segment | 2024 | 2023 | | :--- | :--- | :--- | | A&D | $114,301 | $94,733 | | USG | $86,660 | $82,984 | | Test | $46,065 | $40,597 | | Consolidated totals | $247,026 | $218,314 | EBIT by Segment (Three Months Ended December 31, in thousands): | Segment | 2024 | 2023 | | :--- | :--- | :--- | | A&D | $21,596 | $16,663 | | USG | $20,489 | $17,625 | | Test | $4,422 | $1,779 | | Corporate (loss) | $(14,309) | $(13,946) | | Consolidated EBIT | $32,198 | $22,121 | 7. DEBT The company's total borrowings decreased to $112 million at December 31, 2024, with $383 million available under its credit facility and compliance with all covenants Debt Summary (in thousands): | Metric | Dec 31, 2024 | Sep 30, 2024 | | :--- | :--- | :--- | | Total borrowings | $112,000 | $122,000 | | Current portion of long-term debt | $(20,000) | $(20,000) | | Total long-term debt, less current portion | $92,000 | $102,000 | - The Credit Facility includes a $500 million revolving line of credit and an additional $375 million Incremental Facility for the SM&P Acquisition, maturing August 30, 2028[33][34] - At December 31, 2024, the Company had approximately $383 million available to borrow under the Credit Facility (excluding the Incremental Facility) and $71.3 million cash on hand[35] - The weighted average interest rates were 6.1% for Q1 2025, down from 6.8% in Q1 2024, and the Company was in compliance with all covenants[36] 8. INCOME TAX EXPENSE The effective income tax rate for Q1 2025 was 21.6%, a slight decrease from 22.0% in Q1 2024, due to share-based compensation tax benefits Effective Income Tax Rate (Three Months Ended December 31): | Period | Rate | | :--- | :--- | | Q1 2025 | 21.6% | | Q1 2024 | 22.0% | - Income tax expense in Q1 2025 was favorably impacted by additional tax benefits related to the vesting of share-based compensation awards[37] 9. SHAREHOLDERS' EQUITY Total shareholders' equity increased to $1,236.9 million in Q1 2025, driven by net earnings, partially offset by foreign currency translation adjustments Changes in Shareholders' Equity (Three Months Ended December 31, in thousands): | Category | 2024 | 2023 | | :--- | :--- | :--- | | Common stock (ending balance) | $309 | $308 | | Additional paid-in-capital (ending balance) | $308,143 | $305,283 | | Retained earnings (ending balance) | $1,104,359 | $1,002,420 | | Accumulated other comprehensive loss (ending balance) | $(28,803) | $(14,555) | | Treasury stock (ending balance) | $(147,075) | $(139,362) | | Total equity | $1,236,933 | $1,154,094 | - Net earnings of $23.5 million contributed to retained earnings, while foreign currency translation adjustments resulted in an $18.0 million loss in accumulated other comprehensive income in Q1 2025[38] 10. FAIR VALUE MEASUREMENTS The company uses a three-level hierarchy for fair value measurements, with derivative instruments classified within Level 2, and no impairments recorded for nonfinancial assets - The company classifies fair value measurements into Level 1 (quoted prices in active markets), Level 2 (observable inputs), and Level 3 (unobservable inputs)[39] - Forward contracts and interest rate swaps are classified within Level 2 of the valuation hierarchy[40] - No impairments were recorded for nonfinancial assets (e.g., property, plant and equipment, other intangible assets) during the three-month period ended December 31, 2024[41] 11. REVENUES This note disaggregates revenues by customer type, geographic location, and recognition method, with remaining performance obligations totaling $906.9 million at December 31, 2024 Disaggregation of Revenues (Three Months Ended December 31, 2024, in thousands): | Category | A&D | USG | Test | Total | | :--- | :--- | :--- | :--- | :--- | | Customer type: | | | | | | Commercial | $47,500 | $84,279 | $36,349 | $168,128 | | Government | $66,801 | $2,381 | $9,716 | $78,898 | | Geographic location: | | | | | | United States | $96,703 | $59,917 | $28,630 | $185,250 | | International | $17,598 | $26,743 | $17,435 | $61,776 | | Revenue recognition method: | | | | | | Point in time | $50,126 | $69,278 | $9,791 | $129,195 | | Over time | $64,175 | $17,382 | $36,274 | $117,831 | Disaggregation of Revenues (Three Months Ended December 31, 2023, in thousands): | Category | A&D | USG | Test | Total | | :--- | :--- | :--- | :--- | :--- | | Customer type: | | | | | | Commercial | $37,209 | $81,469 | $35,087 | $153,765 | | Government | $57,524 | $1,515 | $5,510 | $64,549 | | Geographic location: | | | | | | United States | $79,901 | $55,961 | $22,252 | $158,114 | | International | $14,832 | $27,023 | $18,345 | $60,200 | | Revenue recognition method: | | | | | | Point in time | $39,465 | $66,703 | $7,980 | $114,148 | | Over time | $55,268 | $16,281 | $32,617 | $104,166 | - At December 31, 2024, remaining performance obligations (backlog) totaled $906.9 million, with approximately 72% expected to be recognized as revenue in the next twelve months[46] - Contract assets, contract liabilities, and accounts receivable totaled $131.4 million, $138.4 million, and $202.7 million, respectively, at December 31, 2024[47] 12. LEASES The company recognizes ROU assets and lease liabilities for leases, with total lease costs for Q1 2025 at $2.6 million and operating lease ROU assets at $38.7 million Total Lease Costs (Three Months Ended December 31, in thousands): | Lease Type | 2024 | 2023 | | :--- | :--- | :--- | | Finance lease cost | $578 | $616 | | Operating lease cost | $1,983 | $1,864 | | Total lease costs | $2,561 | $2,480 | Lease Metrics (As of December 31, 2024): | Metric | Operating Leases | Finance Leases | | :--- | :--- | :--- | | Weighted-average remaining lease term | 8.5 years | 10.2 years | | Weighted-average discount rate | 4.4 % | 4.7 % | | Present value of net minimum lease payments (in thousands) | $40,882 | $17,632 | | ROU assets (in thousands) | $38,710 | $13,311 | 13. RECENT ACCOUNTING PRONOUNCEMENTS This note outlines recent FASB ASUs impacting future disclosures, effective for fiscal years beginning after December 15, 2023, 2024, and 2026, without changing consolidated financial statements - ASU 2024-03 (Disaggregation of Income Statement Expenses) is effective for fiscal years beginning after December 15, 2026, requiring disaggregated expense disclosures[55] - ASU 2023-09 (Improvements to Income Tax Disclosures) is effective for fiscal years beginning after December 15, 2024, updating rate reconciliation and income taxes paid disclosures[56] - ASU 2023-07 (Improvements to Reportable Segment Disclosures) is effective for fiscal years beginning after December 15, 2023, expanding annual and interim segment disclosures[57] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial performance and condition for the three months ended December 31, 2024, covering sales, segment performance, expenses, EBIT, and liquidity RESULTS OF OPERATIONS The company reported strong financial results for Q1 2025, with significant increases in net sales, net earnings, and diluted EPS, driven by growth across all segments and improved EBIT margins OVERVIEW Key Financial Highlights (Three Months Ended December 31): | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Sales | $247.0 million | $218.3 million | | Net earnings | $23.5 million | $15.2 million | | Diluted earnings per share | $0.91 | $0.59 | NET SALES Net sales increased by $28.7 million, or 13.2%, to $247.0 million in Q1 2025, driven by growth across the A&D, Test, and USG segments - Net sales increased by $28.7 million, or 13.2%, to $247.0 million in Q1 2025[60] Net Sales Increase by Segment (Q1 2025 vs. Q1 2024): | Segment | Increase (in millions) | | :--- | :--- | | A&D | $19.5 | | Test | $5.5 | | USG | $3.7 | - A&D sales increased 20.7% due to higher aerospace shipments at Crissair and PTI, and increased navy sales at VACCO and Globe[61] - USG sales increased 4.5% mainly from Doble's higher sales of offline and protection testing products and services, partially offset by moderation in the renewables end-market for NRG[62] - Test sales increased 13.5% driven by higher sales from European, Asian, and U.S. operations[63] ORDERS AND BACKLOG Orders and Backlog (in millions): | Metric | Dec 31, 2024 | Sep 30, 2024 | | :--- | :--- | :--- | | Backlog | $906.9 | $879.0 | New Orders Received (Three Months Ended December 31): | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Total New Orders | $275.0 | $293.7 | | A&D products | $120.6 | $171.5 | | USG products | $89.6 | $77.0 | | Test products | $64.8 | $45.2 | SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, General and Administrative (SG&A) Expenses (Three Months Ended December 31): | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | SG&A Expenses | $58.8 million | $54.0 million | | % of Net Sales | 23.8% | 24.7% | - The increase in SG&A was mainly due to higher sales, inflationary impacts, R&D expenses, and commission expenses across all three business segments[65] AMORTIZATION OF INTANGIBLE ASSETS Amortization of Intangible Assets (Three Months Ended December 31, in millions): | Period | Amount | | :--- | :--- | | Q1 2025 | $8.0 | | Q1 2024 | $7.9 | - The increase was mainly due to higher amortization of capitalized software and intangible assets related to the MPE acquisition[66] OTHER (INCOME) EXPENSES, NET Other (Income) Expenses, Net (Three Months Ended December 31, in millions): | Period | Amount | | :--- | :--- | | Q1 2025 | $(0.6) (income) | | Q1 2024 | $0.2 (expense) | EBIT Consolidated EBIT significantly increased to $32.2 million (13.0% of net sales) in Q1 2025, driven by higher sales volumes, price increases, and cost reduction efforts across all segments Consolidated EBIT (Three Months Ended December 31, in millions): | Metric | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Consolidated EBIT | $32.2 | $22.1 | | % of Net Sales | 13.0% | 10.1% | EBIT Reconciliation to Net Earnings (Three Months Ended December 31, in thousands): | Metric | 2024 | 2023 | | :--- | :--- | :--- | | Net earnings | $23,473 | $15,169 | | Plus: Interest expense, net | $2,257 | $2,667 | | Plus: Income tax expense | $6,468 | $4,285 | | Consolidated EBIT | $32,198 | $22,121 | - A&D EBIT increased due to higher sales volumes and price increases, partially offset by inflationary pressures and mix[71] - USG EBIT increased due to higher sales volumes at Doble, price increases, and mix, partially offset by inflationary pressures[72] - Test EBIT increased primarily from higher sales volumes in European and Asian operations, price increases, and cost reduction efforts, partially offset by inflationary pressures and $0.4 million in restructuring charges[73] - Corporate costs increased mainly due to higher share-based compensation and acquisition costs[74] INTEREST EXPENSE, NET Interest Expense, Net (Three Months Ended December 31, in millions): | Period | Amount | | :--- | :--- | | Q1 2025 | $2.3 | | Q1 2024 | $2.7 | - The decrease was mainly due to lower average outstanding borrowings and lower average interest rates (6.1% in Q1 2025 vs. 6.8% in Q1 2024)[75] INCOME TAX EXPENSE Effective Income Tax Rate (Three Months Ended December 31): | Period | Rate | | :--- | :--- | | Q1 2025 | 21.6% | | Q1 2024 | 22.0% | - The Q1 2025 rate was favorably impacted by additional tax benefits related to the vesting of share-based compensation awards[76] CAPITAL RESOURCES AND LIQUIDITY The company maintains a strong financial position and liquidity, with working capital increasing to $329.4 million and net cash from operations significantly rising to $34.2 million in Q1 2025 - Working capital increased to $329.4 million at December 31, 2024, from $318.8 million at September 30, 2024[77] Net Cash Provided by Operating Activities (Three Months Ended December 31, in millions): | Period | Amount | | :--- | :--- | | Q1 2025 | $34.2 | | Q1 2024 | $8.7 | - Capital expenditures decreased to $5.2 million in Q1 2025 from $7.8 million in Q1 2024, mainly due to reduced building improvements and machinery & equipment in the A&D segment[79] - At December 31, 2024, the company had approximately $383 million available to borrow under its bank credit facility (excluding the Incremental Facility) and $71.3 million cash on hand[80] - The SM&P Acquisition, with a purchase price of approximately $550 million, is expected to close in Q2 or early Q3 fiscal year, subject to regulatory clearance[81] - Quarterly dividends of $0.08 per share, totaling $2.1 million, were paid in October 2024 and January 2025[82] CRITICAL ACCOUNTING POLICIES Management affirms the reasonableness of accounting policies, which require significant judgment and estimates, with further details available in the company's Annual Report on Form 10-K - Management believes the accounting policies are reasonable and appropriate, requiring significant judgment and estimates based on historical experience, industry trends, and external information[83][85] - The most significant areas involving management judgments and estimates are detailed in the Critical Accounting Policies section of the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2024[85] OTHER MATTERS This section addresses contingencies, which management believes are adequately reserved, and provides a comprehensive disclosure of forward-looking statements, cautioning about inherent risks - Management believes that the aggregate costs involved in the resolution of contingencies (claims, litigation, environmental matters) are adequately reserved, covered by insurance, or would not have a material adverse effect on the company's results[86] - The report contains forward-looking statements, and investors are cautioned that actual future results may differ materially due to various risks and uncertainties, including economic conditions, supply chain disruptions, contract awards, and regulatory changes[87][88] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company's market risks primarily stem from changes in interest rates and foreign currency exchange rates, managed using derivative financial instruments, with no material change since September 30, 2024 - Market risks primarily result from changes in interest rates and foreign currency exchange rates[89] - The company uses derivative financial instruments (forward contracts and swaps) to manage these risks, with all derivatives reported at fair value on the balance sheet[89] - There has been no material change to the company's market risks since September 30, 2024[89] ITEM 4. CONTROLS AND PROCEDURES Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2024, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2024[90] - No material change in the company's internal control over financial reporting occurred during the period covered by this report[90] PART II. OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company reported that it did not repurchase any shares during the first quarter of fiscal 2025 - The Company did not repurchase any shares during the first quarter of 2025[92] ITEM 5. OTHER INFORMATION No director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the first quarter of fiscal 2025 - No director or officer adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the first quarter of fiscal 2025[93] ITEM 6. EXHIBITS This section lists all exhibits filed as part of the Form 10-Q, including corporate governance documents, credit agreements, and certifications from the CEO and CFO - Exhibit 3.1(a) to 3.1(d) and 3.2 detail the Restated Articles of Incorporation, Amended Certificate of Designation, Articles of Merger, Amendment of Articles of Incorporation, and Bylaws[94] - Exhibit 4.1(a) and 4.1(b) relate to the Amended and Restated Credit Agreement and Amendment No. 1 to the Credit Agreement[94] - Exhibits 31.1, 31.2, and 32 are Certifications of the Chief Executive Officer and Chief Financial Officer[94] SIGNATURE This section formally attests that the report has been duly signed on behalf of ESCO Technologies Inc. by Christopher L. Tucker, Senior Vice President and Chief Financial Officer - The report is signed by Christopher L. Tucker, Senior Vice President and Chief Financial Officer, as a duly authorized officer and principal accounting and financial officer of the registrant[97][98] - The signing date for the report is February 10, 2025[98]