ESCO TECHNOLOGIES INC

Previous wording

References to the first quarters of 2024 and 2023 represent the three-month periods ended December 31, 2023 and 2022, respectively.

Current wording

References to the second quarters of 2024 and 2023 represent the three-month periods ended March 31, 2024 and 2023, respectively.

Previous wording

Net sales of $83.0 million in the first quarter of 2024 were $12.0 million, or 16.9% higher than the $71.0 million in the first quarter of 2023. The increase in the first quarter of 2024 compared to the first quarter of 2023 was mainly due to a $7.6 million increase in net sales at Doble driven by higher sales of offline testing products and services and a $4.4 million increase in net sales at NRG driven by continued strength in the renewables end-market.

Current wording

In the second quarter of 2024, net sales of $87.3 million were $8.1 million, or 10.2%, higher than the $79.2 million in the second quarter of 2023. In the first six months of 2024, net sales of $170.3 million were $20.1 million, or 13.4%, higher than the $150.2 million in the first six months of 2023. The increase in the second quarter and first six months of 2024 compared to the corresponding periods of 2023 was mainly due to an increase in service revenue and cybersecurity/compliance (DUCe) revenue and an increase in net sales at NRG driven by continued strength in the renewables end-market, primarily solar.

Previous wording

Backlog was $847.8 million at December 31, 2023 compared with $772.4 million at September 30, 2023. The Company received new orders totaling $293.7 million in the first quarter of 2024 compared to $228.9 million in the first quarter of 2023. Of the new orders received in the first quarter of 2024, $171.5 million related to Aerospace & Defense products, $77.0 million related to USG products, and $45.2 million related to Test products. Of the new orders received in the first quarter of 2023, $97.3 million related to Aerospace & Defense products, $80.2 million related to USG products, and $51.4 million related to Test products.

Current wording

The Company received new orders totaling $532.8 million in the first six months of 2024 compared to $480.5 million in the first six months of 2023. Of the new orders received in the first six months of 2024, $287.7 million related to Aerospace & Defense products, $156.0 million related to USG products, and $89.1 million related to Test products. Of the new orders received in the first six months of 2023, $208.9 million related to Aerospace & Defense products, $164.8 million related to USG products, and $106.8 million related to Test products.

Previous wording

Selling, general and administrative (SG&A) expenses were $54.0 million (24.7% of net sales) for the first quarter of 2024, compared with $51.3 million (25.0% of net sales) for the first quarter of 2023. The increase in SG&A in the first quarter of 2024 compared to the first quarter of 2023 was mainly due to an increase within the USG and A&D segments due to higher sales, inflationary impacts and acquisition impacts.

Current wording

Selling, general and administrative (SG&A) expenses for the second quarter of 2024 were $55.1 million (22.1% of net sales), compared with $53.9 million (23.5% of net sales) for the second quarter of 2023. For the first six months of 2024, SG&A expenses were $109.1 million (23.3% of net sales) compared to $105.2 million (24.2% of net sales) for the first six months of 2023. The increase in SG&A in the second quarter and first six months of 2024 compared to the corresponding periods of 2023 was mainly due to an increase within the USG and A&D segments due to higher sales, inflationary impacts and acquisition impacts.

Previous wording

software). The increase in amortization expense in the first quarter of 2024 compared to the first quarter of 2023 was mainly due to an increase in amortization of capitalized software and amortization of intangible assets related to the MPE and CMT acquisitions.

Current wording

Amortization of intangible assets was $8.6 million and $16.4 million for the second quarter and first six months of 2024, respectively, compared to $7.0 million and $13.9 million for the corresponding periods of 2023. Amortization expenses consist of amortization of acquired intangible assets from acquisitions and other identifiable intangible assets (primarily software). The increase in amortization expense in the second quarter and first six months of 2024 compared to the corresponding periods of 2023 was mainly due to an increase in amortization of capitalized software and amortization of intangible assets related to the MPE and CMT acquisitions.

Previous wording

Other expenses, net, were $0.2 million in the first quarter of 2024 compared to $0.4 million in the first quarter of 2023. There were no individually significant items in other expenses, net, in the first quarter of 2024. The principal component of other expenses, net, in the first quarter of 2023 included approximately $0.2 million of restructuring charges within the A&D segment.

Current wording

Other expenses, net, was $0.7 million in the second quarter of 2024 compared to $0.3 million of expenses in the second quarter of 2023. Other expenses, net, was $0.9 million in the first six months of 2024 compared to $0.7 million of expenses in the first six months of 2023. The principal component of other expenses, net, in the second quarter and first six months of 2024 was approximately $0.5 million of restructuring charges (primarily severance) within the Test and A&D segments. There were no individually significant items in other expenses, net, in the second quarter or first six months of 2023.

Previous wording

The Company evaluates the performance of its operating segments based on EBIT, and provides EBIT on a consolidated basis, which is a non-GAAP financial measure. Please refer to the discussion of non-GAAP financial measures in Note 7 to the Consolidated Financial Statements, above. EBIT was $22.1 million (10.1% of net sales) for the first quarter of 2024 compared to $20.6 million (10.0% of net sales) for the first quarter of 2023.

Current wording

The Company evaluates the performance of its operating segments based on EBIT, and provides EBIT on a consolidated basis. EBIT is a non-GAAP financial measure. Please refer to the discussion of non-GAAP financial measures in Note 7 to the Consolidated Financial Statements, above. EBIT was $32.4 million (13.0% of net sales) for the second quarter of 2024 compared to $25.6 million (11.2% of net sales) for the second quarter of 2023. For the first six months of 2024, EBIT was $54.6 million (11.7% of net sales) compared to $46.2 million (10.6% of net sales) for the first six months of 2023.

Previous wording

The following table presents a reconciliation of EBIT to a GAAP financial measure:

Current wording

The following table presents a reconciliation of EBIT to net earnings.

Previous wording

EBIT was $17.6 million (21.2% of net sales) in the first quarter of 2024 compared to $16.1 million (22.7% of net sales) in the first quarter of 2023. The increase in EBIT in the first quarter of 2024 compared to the first quarter of 2023 was mainly due to the higher sales volumes at both Doble and NRG in the first quarter of 2024.

Current wording

EBIT in the second quarter of 2024 was $17.6 million (20.2% of net sales) compared to $14.1 million (17.8% of net sales) in the second quarter of 2023. EBIT in the first six months of 2024 was $35.2 million (20.7% of net sales) compared to $30.2 million (20.1% of net sales) in the first six months of 2023. The increase in EBIT in the second quarter and first six months of 2024 compared to the corresponding periods of 2023 was mainly due to leverage on higher sales volumes at Doble and NRG, price increases and mix, partially offset by inflationary pressures.

Previous wording

EBIT was $1.8 million (4.4% of net sales) in the first quarter of 2024 compared to $5.4 million (10.5% of net sales) in the first quarter of 2023. The decrease in EBIT in the first quarter of 2024 compared to the first quarter of 2023 was primarily driven by the lower sales volumes from the segment’s U.S. and Asian operations. In addition, EBIT in the first quarter of 2024 was negatively impacted by $0.3 million of inventory step-up charges related to the MPE acquisition.

Current wording

EBIT in the second quarter of 2024 was $5.5 million (11.7% of net sales) compared to $7.2 million (14.2% of net sales) in the second quarter of 2023. EBIT in the first six months of 2024 was $7.3 million (8.3% of net sales) compared to $12.6 million (12.3% of net sales) in the first six months of 2023. The decrease in EBIT in the second quarter and first six months of 2024 compared to the corresponding periods of 2023 was primarily due to lower sales volumes mainly from the segment’s U.S and European operations and inflationary pressures partially offset by price increases and cost reduction actions. In addition, EBIT was negatively impacted by $0.2 million of restructuring charges (primarily severance) in the second quarter of 2024. In the first six months of 2024, EBIT was negatively impacted by $0.3 million of inventory step-up charges related to the MPE acquisition and $0.2 million of restructuring charges.

Previous wording

Corporate costs included in EBIT were $13.9 million and $13.5 million in the first quarter of 2024 and 2023, respectively. The increase in Corporate costs in the first quarter of 2024 compared to the first quarter of 2023 was mainly due to an increase in share based compensation costs and costs related to the MPE acquisition.

Current wording

Corporate costs included in EBIT were $14.0 million and $28.0 million in the second quarter and first six months of 2024, respectively, compared to $14.5 million and $28.0 million in the corresponding periods of 2023. The decrease in Corporate costs in the second quarter of 2024 as compared to the prior year quarter was mainly due to executive management transition costs that were incurred in the prior year period.

Previous wording

Interest expense was $2.7 million and $1.7 million in the first quarter of 2024 and 2023, respectively. The increase in interest expense in the first quarter of 2024 as compared to the first quarter of 2023 was mainly due to higher average interest rates (6.8% in the first quarter of 2024 compared to 4.6% in the first quarter of 2023) and higher average outstanding borrowings.

Current wording

Interest expense was $3.2 million and $5.9 million in the second quarter and first six months of 2024, respectively, and $2.3 million and $3.9 million in the corresponding periods of 2023. The increase in interest expense in the second quarter and first six months of 2024 compared to the corresponding periods of 2023 was mainly due to higher average interest rates and higher average outstanding borrowings. The weighted average interest rates were 6.8% and 6.8% for the three and six-month periods ending March 31, 2024, respectively, and 6.0% and 6.3% for the three and six-month periods ending March 31, 2023.

Previous wording

The Company’s overall financial position and liquidity remain strong. Working capital (current assets less current liabilities) increased to $298.5 million at December 31, 2023 from $266.4 million at September 30, 2023. Inventories increased $18.5 million during this period mainly due to a $9.1 million increase within the Aerospace & Defense segment, a $7.5 million increase within the USG segment and a $1.9 million increase within the Test segment primarily from an increase in work in process inventories due to timing of manufacturing existing orders. Accrued salaries decreased by $9.9 million during this period due to timing of salaries and bonus payments.

Current wording

The Company’s overall financial position and liquidity remains strong. Working capital (current assets less current liabilities) increased to $333.0 million at March 31, 2024 from $266.4 million at September 30, 2023. Inventories increased by $27.3 million during this period due to a $13.9 million increase within the Aerospace & Defense segment, a $10.6 million increase within the USG segment and a $2.8 million increase within the Test segment resulting primarily from the timing of receipt of raw materials to meet anticipated demand and an increase in work in process inventories due to timing of manufacturing existing orders. Accrued salaries decreased by $9.2 million during this period due to timing of salaries and bonus payments.

Previous wording

Net cash provided by operating activities was $8.7 million and net cash used by operating activities was $(9.0) million in the first quarters of 2024 and 2023, respectively. The increase in net cash provided by operating activities in the first quarter of 2024 as compared to the first quarter of 2023 was mainly driven by an increase in contract liabilities and lower accounts receivable balances due to timing of collections.

Current wording

Net cash provided (used) by operating activities was $19.2 million and ($5.5) million in the first six months of 2024 and 2023, respectively. The increase in net cash provided by operating activities in the first six months of 2024 as compared to the first six months of 2023 was mainly driven by lower accounts receivable balances due to an increase in collections and higher earnings.

Previous wording

Capital expenditures were $7.8 million and $4.8 million in the first quarters of 2024 and 2023, respectively. The increase in the first quarter of 2024 was mainly due to an increase in building improvements and machinery & equipment within the A&D segment. In addition, the Company incurred expenditures for capitalized software of approximately $2.9 million and $2.8 million in the first quarters of 2024 and 2023, respectively.

Current wording

Capital expenditures were $16.3 million and $10.3 million in the first six months of 2024 and 2023, respectively. The increase in the first six months of 2024 compared to the prior year period was mainly due to an increase in building improvements and machinery & equipment within the A&D segment. In addition, the Company incurred expenditures for capitalized software of $5.9 million and $5.9 million in the first six months of 2024 and 2023, respectively.

Previous wording

At December 31, 2023, the Company had approximately $322 million available to borrow under its bank credit facility, a $250 million increase option, and $51.4 million cash on hand. At December 31, 2023, the Company had $172 million of outstanding borrowings under the credit facility in addition to outstanding letters of credit of $5.8 million. Cash flow from operations and borrowings under the Company’s credit facility are expected to meet the Company’s capital requirements and operational needs for the foreseeable future. The Company’s ability to access the additional $250 million increase option of the credit facility is subject to acceptance by participating or other outside banks.

Current wording

At March 31, 2024, the Company had approximately $303 million available to borrow under its bank credit facility, a $250 million increase option, and $59.4 million cash on hand. At March 31, 2024, the Company had $191 million of outstanding borrowings under the credit facility in addition to outstanding letters of credit of $5.8 million. Cash flow from operations and borrowings under the Company’s credit facility are expected to meet the Company’s capital requirements and operational needs for the foreseeable future. The Company’s ability to access the additional $250 million increase option of the credit facility is subject to acceptance by participating or other outside banks.

Previous wording

A dividend of $0.08 per share, totaling $2.1 million, was paid on October 17, 2023 to stockholders of record as of October 3, 2023. Subsequent to December 31, 2023, a quarterly dividend of $0.08 per share, totaling $2.1 million, was paid on January 19, 2024 to stockholders of record as of January 4, 2024.

Current wording

A dividend of $0.08 per share, totaling $2.1 million, was paid on October 17, 2023 to stockholders of record as of October 3, 2023. A dividend of $0.08 per share, totaling $2.1 million, was paid on January 19, 2024 to stockholders of record as of January 4, 2024. Subsequent to March 31, 2024, a quarterly dividend of $0.08 per share, totaling $2.1 million, was paid on April 16, 2024 to stockholders of record as of April 1, 2024.

Previous wording

Statements contained in this Form 10-Q regarding future events and the Company’s future results that reflect or are based on current expectations, estimates, forecasts, projections or assumptions 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 may include, but are not necessarily limited to, statements about: the strength of certain end markets served by the Company, and the timing of the recovery of certain end markets which the Company serves; the adequacy of the Company’s credit facility and the Company’s ability to increase it; the outcome of current litigation, claims and charges; timing of the repayment of the current portion of the Company’s long-term debt; future revenues from remaining performance obligations; fair values of reporting units; the deductibility of goodwill; estimates and assumptions that affect the reported amounts of assets and liabilities; the recognition of compensation cost related to share-based compensation arrangements; the Company’s ability to hedge against or otherwise manage market risks through the use of derivative financial instruments; the extent to which hedging gains or losses will be offset by losses or gains on related underlying exposures; 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.

Current wording

Company operates are considered “forward-looking statements” within the meaning of the safe harbor provisions of the Federal securities laws. These may include, but are not necessarily limited to, statements about: the strength of certain end markets served by the Company, and the timing of the recovery of certain end markets which the Company serves; the adequacy of the Company’s credit facility and the Company’s ability to increase it; the outcome of current litigation, claims and charges; the determination of the current portion of the Company’s long-term debt and the timing of its repayment; future revenues from remaining performance obligations; fair values of reporting units; the deductibility of goodwill; estimates and assumptions that affect the reported values of assets and liabilities; the future recognition of compensation cost related to share-based compensation arrangements; the Company’s ability to hedge against or otherwise manage market risks through the use of derivative financial instruments; the extent to which hedging gains or losses will be offset by losses or gains on related underlying exposures; 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.

Previous wording

Investors are cautioned that such statements are only predictions and speak only as of the date of this Form 10-Q, and the Company undertakes no duty to update them 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 in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023, and the following: the impacts of climate change and related regulation of greenhouse gases; the impacts of labor disputes, civil disorder, wars, elections, political changes, tariffs and trade disputes, terrorist activities, cyberattacks or natural disasters on the Company’s operations and those of the Company’s customers and suppliers; disruptions in manufacturing or delivery arrangements due to shortages or unavailability of materials or components; or supply chain disruptions; inability to access work sites; the timing and content of future contract awards or customer orders; the timely appropriation, allocation and availability of Government funds; the termination for convenience of Government and other customer contracts or orders; 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 or data breaches; 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; changes in interest rates; costs relating to environmental matters arising from current or former facilities; uncertainty regarding the ultimate resolution of current disputes, claims, litigation or arbitration; and the integration and performance of recently acquired businesses.

Current wording

Investors are cautioned that such statements are only predictions and speak only as of the date of this Form 10-Q, and the Company undertakes no duty to update them 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 in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023, and the following: the impacts of climate change and related regulation of greenhouse gases; the impacts of labor disputes, civil disorder, wars, elections, political changes, tariffs and trade disputes, terrorist activities, cyberattacks or natural disasters on the Company’s operations and those of the Company’s customers and suppliers; disruptions in manufacturing or delivery arrangements due to shortages or unavailability of materials or components; or supply chain disruptions; inability to access work sites; the timing and content of future contract awards or customer orders; the timely appropriation, allocation and availability of Government funds; the termination for convenience of Government and other customer contracts or orders; 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 or data breaches; 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; changes in interest, inflation and employment rates; costs relating to environmental matters arising from current or former facilities; uncertainty regarding the ultimate resolution of current disputes, claims, litigation or arbitration; and the integration and performance of recently acquired businesses.