ESCO Technologies(ESE) - 2025 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents ESCO Technologies Inc.'s unaudited condensed consolidated financial statements for the third quarter and first nine months ended June 30, 2025, along with detailed notes on significant accounting policies, acquisitions, and segment performance Condensed Consolidated Statements of Operations For the third quarter ended June 30, 2025, net sales increased to $296.3 million from $233.6 million year-over-year, but net earnings decreased to $26.1 million from $29.2 million; for the nine months ended June 30, 2025, net sales grew to $742.7 million from $645.6 million, and net earnings increased to $80.6 million from $67.6 million compared to the prior year period Q3 Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Q3 2025 | Q3 2024 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $296,344 | $233,568 | +26.8% | | Earnings from Continuing Operations | $24,755 | $28,312 | -12.6% | | Net Earnings | $26,065 | $29,230 | -10.8% | | Diluted EPS (Net Earnings) | $1.01 | $1.13 | -10.6% | Nine Months Statement of Operations Highlights (in thousands, except per share amounts) | Metric | Nine Months 2025 | Nine Months 2024 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $742,714 | $645,621 | +15.0% | | Earnings from Continuing Operations | $71,445 | $63,330 | +12.8% | | Net Earnings | $80,571 | $67,618 | +19.2% | | Diluted EPS (Net Earnings) | $3.11 | $2.62 | +18.7% | Condensed Consolidated Balance Sheets As of June 30, 2025, total assets increased significantly to $2.53 billion from $1.84 billion at September 30, 2024, primarily driven by increases in Goodwill and Intangible assets from a recent acquisition; total liabilities also rose to $1.20 billion from $601.3 million, largely due to a substantial increase in long-term debt to fund the acquisition, while total shareholders' equity grew to $1.33 billion Balance Sheet Summary (in thousands) | Account | June 30, 2025 | Sept 30, 2024 | | :--- | :--- | :--- | | Total Current Assets | $754,723 | $668,649 | | Goodwill | $760,555 | $529,935 | | Intangible Assets, net | $745,079 | $403,524 | | Total Assets | $2,526,385 | $1,838,620 | | Total Current Liabilities | $496,840 | $349,854 | | Long-term Debt | $505,000 | $102,000 | | Total Liabilities | $1,199,771 | $601,270 | | Total Shareholders' Equity | $1,326,614 | $1,237,350 | Condensed Consolidated Statements of Cash Flows For the nine months ended June 30, 2025, net cash provided by operating activities was $132.0 million, a significant increase from $55.5 million in the prior year period; net cash used in investing activities was $510.2 million, primarily for the acquisition of a business ($472.0 million), and net cash provided by financing activities was $390.6 million, driven by proceeds from long-term debt to fund the acquisition Cash Flow Summary (Nine Months Ended June 30, in thousands) | Cash Flow Activity | 2025 | 2024 | | :--- | :--- | :--- | | Net Cash from Operating Activities | $132,002 | $55,454 | | Net Cash used by Investing Activities | ($510,200) | ($89,888) | | Acquisition of business, net | ($472,006) | ($56,383) | | Net Cash from Financing Activities | $390,599 | $55,301 | | Proceeds from long-term debt | $645,000 | $193,000 | | Net Increase in Cash | $12,853 | $21,176 | | Cash at End of Period | $78,816 | $63,042 | Note 3. Acquisition On April 25, 2025, the company acquired the Signature Management & Power (SM&P) business from Ultra Maritime for approximately $472 million, now known as ESCO Maritime Solutions and part of the A&D segment, which added $37.1 million in revenue since the closing date and is expected to enhance the company's naval product offerings, with the preliminary purchase price allocation resulting in $222.7 million of goodwill - Completed the acquisition of Signature Management & Power (SM&P) for ~$472 million, which will be integrated into the Aerospace & Defense (A&D) segment[17] - The acquired business, now ESCO Maritime Solutions, contributed $37.1 million in revenue in the quarter since the acquisition date[17] - The preliminary purchase price allocation includes $290.5 million for customer relationships, $61.3 million for backlog, and $222.7 million in goodwill[18] Note 4. Assets Held for Sale / Discontinued Operations The company entered into a definitive agreement to sell its VACCO Industries (VACCO) business to RBC Bearings Incorporated, with the divestiture completed on July 18, 2025, for net proceeds of approximately $275 million, representing a strategic exit from the Space business, with VACCO's results now reported as discontinued operations - Agreed to sell VACCO Industries to RBC Bearings, completing the transaction on July 18, 2025, for net proceeds of approximately $275 million[19] - The sale of VACCO represents a strategic shift to exit the Space business; its financial results are now classified as discontinued operations[19] VACCO Net Sales (Discontinued Operations, in millions) | Period | 2025 | 2024 | | :--- | :--- | :--- | | Three Months | $30.3 | $27.2 | | Nine Months | $96.4 | $82.6 | Note 8. Business Segment Information The company operates in three segments: Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Test and Measurement (Test); for the nine months ended June 30, 2025, A&D was the largest segment by sales ($307.8M) and EBIT ($78.2M), followed by USG (Sales $269.8M, EBIT $62.8M) and Test (Sales $165.1M, EBIT $21.5M) Segment Net Sales (in thousands) | Segment | Q3 2025 | Q3 2024 | Nine Months 2025 | Nine Months 2024 | | :--- | :--- | :--- | :--- | :--- | | Aerospace & Defense | $136,324 | $87,235 | $307,819 | $241,279 | | USG | $92,357 | $90,277 | $269,784 | $260,570 | | Test | $67,663 | $56,056 | $165,111 | $143,772 | | Consolidated | $296,344 | $233,568 | $742,714 | $645,621 | Segment EBIT (in thousands) | Segment | Q3 2025 | Q3 2024 | Nine Months 2025 | Nine Months 2024 | | :--- | :--- | :--- | :--- | :--- | | Aerospace & Defense | $36,577 | $20,150 | $78,246 | $55,919 | | USG | $21,540 | $22,155 | $62,808 | $57,355 | | Test | $10,732 | $9,292 | $21,523 | $16,613 | | Corporate (loss) | ($27,859) | ($12,296) | ($56,918) | ($40,289) | | Consolidated EBIT | $40,990 | $39,301 | $105,659 | $89,598 | Note 13. Revenues For the nine months ended June 30, 2025, total revenue was $742.7 million, with commercial customers accounting for $538.2 million and government customers for $204.5 million, and geographically, the United States contributed $496.7 million; the company's remaining performance obligations (backlog) stood at $1.165 billion, with approximately 66% expected to be recognized as revenue in the next twelve months Revenue Disaggregation (Nine Months Ended June 30, 2025, in thousands) | Category | A&D | USG | Test | Total | | :--- | :--- | :--- | :--- | :--- | | By Customer Type | | | | | | Commercial | $151,756 | $261,581 | $124,831 | $538,168 | | Government | $156,063 | $8,203 | $40,280 | $204,546 | | By Geographic Location | | | | | | United States | $226,444 | $173,121 | $97,086 | $496,651 | | International | $81,375 | $96,663 | $68,025 | $246,063 | - Remaining performance obligations (backlog) totaled $1,165.4 million as of June 30, 2025[56] - The company expects to recognize approximately 66% of its backlog as revenue within the next twelve months[56] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results, highlighting a 26.8% increase in Q3 net sales, driven primarily by the A&D segment and the Maritime acquisition; despite higher sales, Q3 net earnings from continuing operations declined due to increased costs associated with the acquisition, and the company's backlog significantly increased to $1.165 billion, with the discussion also covering segment-level performance, liquidity, and the strategic impacts of the recent acquisition and divestiture Net Sales Analysis Q3 2025 net sales rose 26.8% YoY to $296.3 million, and nine-month sales grew 15.0% to $742.7 million; the A&D segment was the primary driver, with Q3 sales up 56.3% ($49.1 million), including $37.1 million from the new Maritime business, while the Test segment grew 20.7%, and the USG segment grew 2.3% in the quarter - Q3 2025 net sales increased by 26.8% year-over-year, driven by a $49.0 million increase in the A&D segment, an $11.6 million increase in Test, and a $2.1 million increase in USG[70] - A&D segment's Q3 sales growth of 56.3% was mainly due to the Maritime acquisition (contributing $37.1 million) and increased commercial and defense aerospace shipments[71] Orders and Backlog The company's backlog from continuing operations surged to $1.165 billion at June 30, 2025, up from $664 million at September 30, 2024; new orders in Q3 2025 were $749.1 million, a substantial increase from $254.9 million in Q3 2024, with this growth dominated by the A&D segment, which received $582.4 million in new orders, including $364.2 million of acquired backlog from the Maritime acquisition - Backlog from continuing operations increased to $1,165 million at June 30, 2025, from $664 million at September 30, 2024[74] - Q3 2025 new orders totaled $749.1 million, with the A&D segment contributing $582.4 million, which includes $364.2 million of backlog acquired with the Maritime business[74] EBIT Analysis Consolidated EBIT from continuing operations was $41.0 million (13.8% of sales) in Q3 2025, compared to $39.3 million (16.8% of sales) in Q3 2024; the A&D segment's EBIT grew significantly due to higher sales volume from the Maritime acquisition, despite being negatively impacted by $2.7 million in acquisition-related charges, while corporate costs increased substantially, mainly due to amortization and transaction costs from the acquisition Consolidated EBIT from Continuing Operations (in thousands) | Period | Q3 2025 | Q3 2024 | Nine Months 2025 | Nine Months 2024 | | :--- | :--- | :--- | :--- | :--- | | EBIT | $40,990 | $39,301 | $105,659 | $89,598 | | EBIT Margin | 13.8% | 16.8% | 14.2% | 13.9% | - A&D segment EBIT increased in Q3 and the first nine months of 2025, driven by higher sales volumes including the Maritime acquisition, though Q3 was negatively impacted by $2.7 million in inventory step-up and stamp duty charges[82] - Corporate costs increased in Q3 2025 to $27.9 million from $12.3 million YoY, primarily due to an $8.4 million increase in acquisition-related amortization and $5.2 million in acquisition costs from the Maritime deal[85] Capital Resources and Liquidity The company's financial position remains strong, with $338 million available under its credit facility and $78.7 million in cash as of June 30, 2025; net cash from continuing operations increased to $88.3 million for the first nine months of 2025, and the company completed the $472 million acquisition of SM&P (Maritime) and the $275 million divestiture of VACCO, strategically reshaping its portfolio, while regular quarterly dividends of $0.08 per share were maintained - Working capital from continuing operations decreased to $255.8 million at June 30, 2025, from $283.9 million at September 30, 2024, mainly due to a $124.7 million increase in contract liabilities from the Maritime acquisition[88] - As of June 30, 2025, the company had approximately $338 million available to borrow under its credit facility, plus a $250 million increase option, and $78.7 million cash on hand[91] - Key strategic activities included the acquisition of SM&P (Maritime) for ~$472 million and the divestiture of VACCO for ~$275 million[92][93] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks stem from changes in interest rates and foreign currency exchange rates, which ESCO selectively manages using derivative financial instruments such as forward contracts and swaps, with no material changes to the company's market risks reported since the fiscal year ended September 30, 2024 - Primary market risks are related to interest rate changes and foreign currency exchange rate fluctuations[99] - The company uses derivative instruments like forward contracts and swaps to manage these risks; no material changes in market risk exposure were reported since September 30, 2024[99] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2025, with the assessment of internal control over financial reporting excluding the recently acquired Signature Management & Power (Maritime) business, as the integration is still in process, which is permissible under SEC guidance - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the reporting period[100] - The assessment of internal controls over financial reporting excludes the newly acquired Maritime business, which is currently being integrated[100] PART II - OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported that it did not repurchase any of its shares during the third quarter of fiscal year 2025 - No shares were repurchased by the company during the third quarter of 2025[102] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, credit agreements, CEO and CFO certifications, and XBRL interactive data files - Exhibits filed include certifications from the CEO (31.1) and CFO (31.2), as well as XBRL data files (101 series)[105]