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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, 2023

OR

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, 2023

Common stock, $.01 par value per share

 

25,758,077

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, 

    

2023

    

2022

Net sales

    

$

229,136

    

204,928

Costs and expenses:

 

 

Cost of sales

 

142,296

 

128,375

Selling, general and administrative expenses

 

53,877

 

47,959

Amortization of intangible assets

 

7,030

 

6,510

Interest expense, net

 

2,269

 

1,020

Other expenses (income), net

 

314

 

(604)

Total costs and expenses

 

205,786

 

183,260

Earnings before income taxes

 

23,350

 

21,668

Income tax expense

 

5,472

 

5,085

Net earnings

$

17,878

 

16,583

 

 

Earnings per share:

 

 

Basic - Net earnings

0.69

0.64

Diluted - Net earnings

$

0.69

 

0.64

See accompanying notes to consolidated financial statements.

2

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)

Six Months Ended

March 31,

    

2023

    

2022

Net sales

$

434,637

 

381,938

Costs and expenses:

 

 

 

Cost of sales

 

268,679

 

 

236,680

Selling, general and administrative expenses

 

105,179

 

 

94,594

Amortization of intangible assets

 

13,891

 

 

12,977

Interest expense, net

 

3,927

 

 

1,753

Other expenses (income), net

 

712

 

 

(571)

Total costs and expenses

 

392,388

 

 

345,433

 

 

 

Earnings before income taxes

 

42,249

 

 

36,505

Income tax expense

 

9,644

 

 

8,398

Net earnings

$

32,605

 

28,107

 

 

Earnings per share:

 

 

Basic — Net earnings

$

1.26

1.08

Diluted — Net earnings

$

1.26

1.08

See accompanying notes to consolidated financial statements.

3

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

Three Months Ended

Six Months Ended

March 31, 

March 31, 

    

2023

    

2022

    

2023

    

2022

Net earnings

$

17,878

 

16,583

32,605

28,107

Other comprehensive income (loss), net of tax:

 

 

Foreign currency translation adjustments

 

2,233

 

(2,811)

13,747

(5,311)

Total other comprehensive income (loss), net of tax

 

2,233

 

(2,811)

13,747

(5,311)

Comprehensive income

$

20,111

 

13,772

46,352

22,796

See accompanying notes to consolidated financial statements.

4

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)

March 31, 

September 30, 

    

2023

    

2022

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

48,221

 

97,724

Accounts receivable, net of allowance for credit losses of $2,693 and $2,612, respectively

 

180,817

 

164,645

Contract assets

 

128,205

 

125,154

Inventories, net

 

185,753

 

162,403

Other current assets

 

27,144

 

22,696

Total current assets

 

570,140

 

572,622

Property, plant and equipment, net of accumulated depreciation of $166,699 and $165,322, respectively

 

154,020

 

155,973

Intangible assets, net of accumulated amortization of $189,819 and $175,928, respectively

 

401,717

 

394,464

Goodwill

 

505,194

 

492,709

Operating lease assets

41,418

29,150

Other assets

 

10,113

 

9,538

Total assets

$

1,682,602

1,654,456

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

Current liabilities:

 

 

Current maturities of long-term debt

$

20,000

20,000

Accounts payable

 

79,619

78,746

Contract liabilities

 

119,970

125,009

Accrued salaries

 

31,092

40,572

Accrued other expenses

 

46,374

53,802

Total current liabilities

 

297,055

318,129

Deferred tax liabilities

 

81,150

82,023

Non-current operating lease liabilities

37,657

24,853

Other liabilities

 

44,945

48,294

Long-term debt

 

141,000

133,000

Total liabilities

 

601,807

606,299

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 30,751,449 and 30,707,748 shares, respectively

 

308

307

Additional paid-in capital

 

304,184

301,553

Retained earnings

 

933,499

905,022

Accumulated other comprehensive loss, net of tax

 

(18,018)

(31,764)

 

1,219,973

1,175,118

Less treasury stock, at cost: 4,993,372 and 4,854,997 common shares, respectively

 

(139,178)

(126,961)

Total shareholders’ equity

 

1,080,795

1,048,157

Total liabilities and shareholders’ equity

$

1,682,602

1,654,456

See accompanying notes to consolidated financial statements.

5

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

Six Months Ended

March 31, 

    

2023

    

2022

Cash flows from operating activities:

 

  

 

  

Net earnings

$

32,605

 

28,107

Adjustments to reconcile net earnings to net cash (used) provided by operating activities:

 

 

Depreciation and amortization

 

24,910

24,292

Stock compensation expense

 

5,309

 

3,428

Changes in assets and liabilities

 

(67,140)

 

(41,451)

Effect of deferred taxes

(1,145)

8,627

Net cash (used) provided by operating activities

 

(5,461)

 

23,003

Cash flows from investing activities:

 

 

Acquisition of business, net of cash acquired

 

(17,901)

 

(15,592)

Additions to capitalized software and other

 

(5,918)

 

(4,727)

Capital expenditures

(10,305)

(20,715)

Net cash used by investing activities

 

(34,124)

 

(41,034)

Cash flows from financing activities:

 

 

Proceeds from long-term debt and short-term borrowings

 

68,000

 

88,000

Principal payments on long-term debt and short-term borrowings

 

(60,000)

 

(46,000)

Purchases of common stock into treasury

(12,217)

(17,878)

Dividends paid

 

(4,128)

 

(4,150)

Other

 

(2,374)

 

(2,719)

Net cash (used) provided by financing activities

(10,719)

17,253

Effect of exchange rate changes on cash and cash equivalents

801

(1,130)

Net decrease in cash and cash equivalents

(49,503)

(1,908)

Cash and cash equivalents, beginning of period

97,724

56,232

Cash and cash equivalents, end of period

$

48,221

54,324

 

 

Supplemental cash flow information:

 

 

Interest paid

$

3,384

 

1,002

Income taxes paid (including state and foreign)

 

13,346

 

1,558

See accompanying notes to consolidated financial statements.

6

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, 2023 are not necessarily indicative of the results for the entire 2023 fiscal year. References to the second quarters of 2023 and 2022 represent the fiscal quarters ended March 31, 2023 and 2022, 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.

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, 

    

2023

    

2022

    

2023

    

2022

Weighted Average Shares Outstanding — Basic

 

25,800

 

25,953

25,831

 

26,008

Dilutive Restricted Shares

95

92

88

90

Adjusted Shares — Diluted

 

25,895

 

26,045

25,919

 

26,098

3.    ACQUISITION

On February 1, 2023, the Company acquired CMT Materials, LLC and its affiliate Engineered Syntactic Systems, LLC (CMT) for a purchase price of approximately $18 million, net of cash acquired. CMT, based in Attleboro, Massachusetts, is a supplier of syntactic materials for buoyancy and specialty applications. Since the date of acquisition, the operating results for the CMT business have been included as part of Globe in the A&D segment. The acquisition date fair value of the assets acquired and liabilities assumed primarily were as follows: approximately $1.7 million of accounts receivable, $3.0 million of inventory, $1.3 million of property, plant and equipment, $1.2 million of accounts payable and accrued expenses, $7.3 million of identifiable intangible assets, mainly consisting of customer relationships totaling $6.2 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 $3.1 million and $4.7 million for the three and six-month periods ended March 31, 2023, respectively, and $1.5 million and $2.8 million for the corresponding periods in 2022. As of March 31, 2023, there were 244,387 unvested stock units outstanding.

7

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, 2023, respectively, and $0.3 million and $0.6 million for the corresponding periods in 2022.

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 $3.4 million and $5.3 million for the three and six-month periods ended March 31, 2023, respectively, and $1.7 million and $3.4 million for the corresponding periods in 2022. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $0.3 million and $0.6 million for the three and six-month periods ended March 31, 2023, respectively, and $0.3 million and $0.5 million for the corresponding periods in 2022. As of March 31, 2023, there was $10.8 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 1.7 years.

5.    INVENTORIES

Inventories, net, consist of the following:

March 31, 

September 30, 

(In thousands)

    

2023

    

2022

Finished goods

$

32,712

 

32,471

Work in process

 

46,596

 

38,492

Raw materials

 

106,445

 

91,440

Total inventories, net

$

185,753

 

162,403

8

6.

GOODWILL AND OTHER INTANGIBLE ASSETS

Included on the Company’s Consolidated Balance Sheets at March 31, 2023 and September 30, 2022 are the following intangible assets gross carrying amounts and accumulated amortization:

    

March 31, 

    

September 30, 

(Dollars in thousands)

    

2023

    

2022

Goodwill

$

505,194

    

492,709

 

Intangible assets with determinable lives:

 

Patents

 

Gross carrying amount

$

2,425

2,353

Less: accumulated amortization

 

1,154

1,091

Net

$

1,271

1,262

 

Capitalized software

 

Gross carrying amount

$

115,191

106,583

Less: accumulated amortization

 

74,787

70,476

Net

$

40,404

36,107

 

Customer relationships

 

Gross carrying amount

$

298,005

287,447

Less: accumulated amortization

 

105,013

96,921

Net

$

192,992

190,526

 

Other

 

Gross carrying amount

$

14,298

13,985

Less: accumulated amortization

 

8,779

7,440

Net

$

5,519

6,545

Intangible assets with indefinite lives:

 

Trade names

$

161,531

160,024

The changes in the carrying amount of goodwill attributable to each business segment for the six months ended March 31, 2023 is as follows:

Aerospace

(Dollars in millions)

    

USG

    

Test

    

& Defense

    

Total

Balance as of September 30, 2022

$

348.7

 

34.0

 

110.0

 

492.7

Acquisition activity and adjustments

5.7

5.7

Foreign currency translation

6.8

6.8

Balance as of March 31, 2023

$

355.5

34.0

115.7

505.2

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.

9

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)

    

2023

    

2022

    

2023

    

2022

NET SALES

  

  

  

  

Aerospace & Defense

$

98,982

84,821

181,965

155,065

USG

79,161

64,191

150,206

127,676

Test

50,993

55,916

102,466

99,197

Consolidated totals

$

229,136

204,928

434,637

381,938

EBIT

Aerospace & Defense

$

18,795

14,349

31,331

24,304

USG

14,061

11,314

30,192

24,705

Test

7,226

8,494

12,637

12,459

Corporate (loss)

(14,463)

(11,469)

(27,984)

(23,210)

Consolidated EBIT

25,619

22,688

46,176

38,258

Less: Interest expense

(2,269)

(1,020)

(3,927)

(1,753)

Earnings before income taxes

$

23,350

21,668

42,249

36,505

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.

10

8.    DEBT

The Company’s debt is summarized as follows:

    

March 31, 

September 30, 

(In thousands)

    

2023

    

2022

Total borrowings

$

161,000

 

153,000

Current portion of long-term debt

 

(20,000)

 

(20,000)

Total long-term debt, less current portion

$

141,000

 

133,000

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, with balance due by this date.

At March 31, 2023, the Company had approximately $332 million available to borrow under the Credit Facility, plus the $250 million increase option, subject to lenders’ consent, in addition to $48.2 million cash on hand. The Company classified $20 million as the current portion of long-term debt as of March 31, 2023, 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 $7.3 million at March 31, 2023.

Interest on borrowings under the Credit Facility is calculated at a spread over either the Standard Overnight Financing Rate (SOFR) or the prime rate 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 interest rate spreads on the facility and the facility fee are subject to increase or decrease depending on the Company’s leverage ratio. The weighted average interest rates were 5.97% and 5.33% for the three and six-month periods ending March 31, 2023, respectively, and 1.29% and 1.23% for the three and six-month periods ending March 31, 2022. As of March 31, 2023, the Company was in compliance with all covenants.

9.    INCOME TAX EXPENSE

The second quarter 2023 effective income tax rate was 23.4% compared to 23.5% in the second quarter of 2022. The effective income tax rate in the first six months of 2023 was 22.8% compared to 23.0% for the first six months of 2022. There were no significant or unusual items impacting the 2023 second quarter or year-to-date effective tax rate.

11

10.    SHAREHOLDERS’ EQUITY

The change in shareholders’ equity for the first three and six months of 2023 and 2022 is shown below (in thousands):

Three Months Ended March 31, 

Six Months Ended March 31, 

    

2023

    

2022

    

2023

    

2022

Common stock

Beginning balance

307

307

307

307

Stock plans

1

1

Ending balance

308

307

308

307

Additional paid-in-capital

Beginning balance

300,697

296,277

301,553

297,644

Stock plans

3,487

2,076

2,631

709

Ending balance

304,184

298,353

304,184

298,353

Retained earnings

Beginning balance

917,682

840,434

905,022

830,989

Net earnings common stockholders

17,878

16,583

32,605

28,107

Dividends paid

(2,061)

(2,071)

(4,128)

(4,150)

Ending balance

933,499

854,946

933,499

854,946

Accumulated other comprehensive income (loss)

Beginning balance

(20,251)

(4,661)

(31,764)

(2,161)

Foreign currency translation

2,233

(2,811)

13,746

(5,311)

Ending balance

(18,018)

(7,472)

(18,018)

(7,472)

Treasury stock

Beginning balance

(132,037)

(117,080)

(126,961)

(107,083)

Share repurchases

(7,141)

(7,881)

(12,217)

(17,878)

Ending balance

(139,178)

(124,961)

(139,178)

(124,961)

Total equity

1,080,795

1,021,173

1,080,795

1,021,173

11.  FAIR VALUE MEASUREMENTS

The accounting guidance establishes a three-level hierarchy for disclosure of fair value measurements, based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Financial Assets and Liabilities

The Company has estimated the fair value of its financial instruments as of March 31, 2023 and September 30, 2022 using available market information or other appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, receivables, inventories, payables, and other current assets and liabilities approximate fair value because of the short maturity of those instruments.

12

Fair Value of Financial Instruments

The Company’s forward contracts and interest rate swaps are classified within Level 2 of the valuation hierarchy in accordance with FASB Accounting Standards Codification (ASC) 825, and are immaterial.

Nonfinancial Assets and Liabilities

The Company’s nonfinancial assets such as property, plant and equipment, and other intangible assets are not measured at fair value on a recurring basis; however they are subject to fair value adjustments in certain circumstances, such as when there is evidence that an impairment may exist. No impairments were recorded during the three and six-month periods ended March 31, 2023.

12.  REVENUES

Disaggregation of Revenues

Revenues by customer type, geographic location, and revenue recognition method for the three and six-month periods ended March 31, 2023 are presented in the tables below as the Company deems it best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected by economic factors. The tables below also include a reconciliation of the disaggregated revenue within each reportable segment.

Three months ended March 31, 2023

Aerospace

(In thousands)

    

& Defense

    

USG

    

Test

    

Total

Customer type:

 

  

 

  

 

  

 

  

Commercial

$

48,228

$

78,110

$

43,188

$

169,526

Government

 

50,754

 

1,051

 

7,805

 

59,610

Total revenues

$

98,982

$

79,161

$

50,993

$

229,136

Geographic location:

 

 

 

 

United States

$

82,516

$

53,020

$

27,504

$

163,040

International

 

16,466

 

26,141

 

23,489

 

66,096

Total revenues

$

98,982

$

79,161

$

50,993

$

229,136

Revenue recognition method:

 

 

 

 

Point in time

$

47,255

$

64,080

$

11,968

$

123,303

Over time

 

51,727

 

15,081

 

39,025

 

105,833

Total revenues

$

98,982

$

79,161

$

50,993

$

229,136

Six months ended March 31, 2023

Aerospace

 

(In thousands)

    

& Defense

    

USG

    

Test

    

Total

Customer type:

 

  

 

  

 

  

 

  

Commercial

 

$

84,968

$

148,273

$

89,180

$

322,421

Government

96,997

 

1,933

 

13,286

 

112,216

Total revenues

 

$

181,965

$

150,206

$

102,466

$

434,637

Geographic location:

 

 

 

United States

 

$

151,450

$

99,399

$

55,007

$

305,856

International

30,515

 

50,807

 

47,459

 

128,781

Total revenues

 

$

181,965

$

150,206

$

102,466

$

434,637

Revenue recognition method:

 

 

 

Point in time

 

$

80,859

$

120,111

$

21,069

$

222,039

Over time

101,106

 

30,095

 

81,397

 

212,598

Total revenues

 

$

181,965

$

150,206

$

102,466

$

434,637

13

Revenues by customer type, geographic location, and revenue recognition method for the three and six-month periods ended March 31, 2022 are presented in the tables below.

Three months ended March 31, 2022

Aerospace

    

    

    

(In thousands)

    

& Defense

    

USG

    

Test

    

Total

Customer type:

Commercial

$

33,562

$

63,379

$

51,903

$

148,844

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

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

Revenue Recognition

Payment terms with our customers vary by the type and location of the customer and the products or services offered. Arrangements with customers that include payment terms extending beyond one year are not significant. The transaction price for these contracts reflects our estimate of returns and discounts, which are based on historical, current and forecasted information to determine the expected amount to which we will be entitled in exchange for transferring the promised goods or services to the customer. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant. We primarily provide standard warranty programs for products in our commercial businesses for periods that typically range from one to two years. These assurance-type programs typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation. Under the typical payment terms of our long term fixed price contracts, the customer pays us either performance-based or progress payments. Performance-based payments represent interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments of costs incurred as the work progresses.

For our overtime revenue recognized using the output method of costs incurred, contract cost is estimated utilizing current contract specifications and expected engineering requirements. Contract costs typically are incurred over a period of several months to one or more years, and the estimation of these costs requires judgment. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We review and update our projections of costs quarterly or more frequently when circumstances significantly change. In addition, in the USG

14

segment, we recognize revenue as a series of distinct services based on each day of providing services (straight-line over the contract term) for certain of our USG segment contracts. Under the typical payment terms of our service contracts, the customer pays us in advance of when services are performed. In addition, in the Test segment, we use milestones to measure progress for our Test segment contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts.

Remaining Performance Obligations

Remaining performance obligations, which is the equivalent of backlog, represent the expected transaction price allocated to contracts that the Company expects to recognize as revenue in future periods when the Company performs under the contracts. These remaining obligations include amounts that have been formally appropriated under contracts with the U.S. Government, and exclude unexercised contract options and potential orders under ordering-type contracts such as Indefinite Delivery, Indefinite Quantity contracts. At March 31, 2023, the Company had $740.9 million in remaining performance obligations of which the Company expects to recognize revenues of approximately 79% in the next twelve months.

Contract assets and liabilities

Assets and liabilities related to contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. Because of the timing difference of revenue recognition and customer billing, these contracts will often result in revenue recognized in excess of billings and billings in excess of costs incurred. At March 31, 2023, contract assets and liabilities totaled $128.2 million and $131.7 million, respectively. During the first six months of 2023, the Company recognized approximately $55 million in revenues that were included in the contract liabilities balance at September 30, 2022. At September 30, 2022, contract assets and liabilities totaled $125.2 million and $137.6 million, respectively.

13.  LEASES

The Company determines at lease inception whether an arrangement that provides control over the use of an asset is