Esco Technologies Inc: Form 10-Q for the period ended Dec 31, 2025

RESULTS OF OPERATIONS

References to the first quarters of 2026 and 2025 represent the three-month periods ended December 31, 2025 and 2024, respectively.

OVERVIEW

Sales, net earnings and diluted earnings per share from continuing operations were $289.7 million, $28.7 million and $1.11 per share, respectively, in the first quarter of 2026 compared to $214.6 million, $20.3 million and $0.79 per share, respectively, in the first quarter of 2025.

NET SALES

Net sales increased $75.1 million, or 35.0%, to $289.7 million in the first quarter of 2026 from $214.6 million in the first quarter of 2025. The increase in net sales in the first quarter of 2026 as compared to the first quarter of 2025 was due to a $61.9 million increase in the A&D segment, a $12.2 million increase in the Test segment, and a $0.8 million increase in the USG segment.

• A&D

Net sales of $143.8 million in the first quarter of 2026 were $61.9 million, or 75.6%, higher than the $81.9 million in the first quarter of 2025. The sales increase in the first quarter of 2026 compared to the first quarter of 2025 was primarily due to a $44.2 million increase in navy revenues and a $15.8 million increase in aerospace revenues (defense and commercial). Maritime contributed $50.6 million of revenue growth in the first quarter of 2026.

• USG

Net sales of $87.5 million in the first quarter of 2026 were $0.8 million, or 0.9% higher than the $86.7 million in the first quarter of 2025. The increase in the first quarter of 2026 compared to the first quarter of 2025 was mainly due to a $4.1 million increase in net sales at Doble driven by higher sales of condition monitoring and offline products, partially offset by a $3.3 million decrease in net sales at NRG driven by lower shipments of solar and wind products due to renewables market weakness.

-Test

Net sales of $58.3 million in the first quarter of 2026 were $12.2 million, or 26.5%, higher than the $46.1 million in the first quarter of 2025. The increase in the first quarter of 2026 compared to the first quarter of 2025 was primarily due to $13.0 million of higher sales from the segment’s U.S. and European operations mainly driven by higher test and measurement and filters volumes partially offset by a $0.8 million decrease from the segment’s Asian operations.

ORDERS AND BACKLOG

Backlog was $1,401.1 million at December 31, 2025 compared with $1,133.6 million at September 30, 2025. The Company received new orders totaling $557.2 million in the first quarter of 2026 compared to $229.2 million from continuing operations in the first quarter of 2025. Of the new orders received in the first quarter of 2026, $382.3 million related to A&D products, $98.8 million related to USG products, and $76.1 million related to Test products. Of the new orders received in the first quarter of 2025, $74.8 million related to A&D products, $89.6 million related to USG products, and $64.8 million related to Test products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (SG&A) expenses from continuing operations were $61.2 million (21.1% of net sales) for the first quarter of 2026, compared with $55.0 million (25.6% of net sales) for the first quarter of 2025. The increase in SG&A in the first quarter of 2026 compared to the first quarter of 2025 was mainly due to an increase within the A&D segment primarily due to the Maritime acquisition. SG&A as a percentage of net sales decreased in the first quarter of 2026 compared to the first quarter of 2025 within all three business segments.

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets was $20.3 million and $8.0 million for the first quarter of 2026 and 2025, respectively. 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 first quarter of 2026 compared to the first quarter of 2025 was mainly due to an increase in amortization of intangible assets related to the Maritime acquisition.

OTHER (INCOME) EXPENSES, NET

Other expenses, net, was $0.1 million in the first quarter of 2026 compared to other (income), net, of ($0.6) million in the first quarter of 2025. There were no individually significant items in other expenses (income), net, in the first quarter of 2026 or 2025.

EBIT

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 6 to the Consolidated Financial Statements, above. EBIT from continuing operations was $38.4 million (13.2% of net sales) for the first quarter of 2026 compared to $28.1 million (13.1% of net sales) for the first quarter of 2025.

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

(In thousands)

• A&D

EBIT was $38.0 million (26.4% of net sales) in the first quarter of 2026 compared to $17.5 million (21.3% of net sales) in the first quarter of 2025. The increase in EBIT in the first quarter of 2026 compared to the first quarter of 2025 was mainly due to higher sales volumes as mentioned above, favorable mix and price increases, partially offset by inflationary pressures. In addition, EBIT in the first quarter of 2026 was negatively impacted by $0.1 million of restructuring charges.

• USG

EBIT was $19.5 million (22.3% of net sales) in the first quarter of 2026 compared to $20.5 million (23.6% of net sales) in the first quarter of 2025. The decrease in EBIT in the first quarter of 2026 compared to the first quarter of 2025 was mainly due to the lower sales volumes at NRG, unfavorable product mix and inflationary pressures partially offset by an increase in EBIT at Doble due to higher sales volumes.

• Test

EBIT was $8.0 million (13.8% of net sales) in the first quarter of 2026 compared to $4.4 million (9.6% of net sales) in the first quarter of 2025. The increase in EBIT in the first quarter of 2026 compared to the first quarter of 2025 was primarily driven by the higher sales volumes from the segment’s U.S. and European operations and price increases, partially offset by inflationary pressures and unfavorable mix.

• Corporate

Corporate costs included in EBIT were $27.2 million and $14.3 million in the first quarter of 2026 and 2025, respectively. The increase in Corporate costs in the first quarter of 2026 compared to the first quarter of 2025 was mainly due to increases in acquisition related amortization and share based compensation costs.

INTEREST EXPENSE, NET

Interest expense was $2.9 million and $2.3 million in the first quarter of 2026 and 2025, respectively. The increase in interest expense in the first quarter of 2026 as compared to the first quarter of 2025 was mainly due to higher average outstanding borrowings ($171 million in the first quarter of 2026 compared to $122 million in the first quarter of 2025).

INCOME TAX EXPENSE

The effective income tax rate from continuing operations was 19.1% in the first quarter of 2026 compared to 21.3% in the first quarter of 2025. Income tax expense in the first quarter of 2026 was favorably impacted by additional tax benefits related to the vesting of share-based compensation awards.

CAPITAL RESOURCES AND LIQUIDITY

The Company’s overall financial position and liquidity remain strong. Working capital (current assets less current liabilities) decreased to $171.3 million at December 31, 2025 from $180.4 million at September 30, 2025. Accounts receivable decreased $8.2 million during this period mainly due to a $4.7 million decrease within the Test segment and a $4.6 million decrease within the USG segment due to strong cash collections during the quarter. Inventories increased $9.3 million during this period mainly due to a $5.0 million increase within the USG segment, a $3.4 million increase within the Test segment and a $0.9 million increase within the A&D segment primarily from an increase in work in process inventories due to timing of manufacturing existing orders. Contract liabilities increased $35.8 million primarily within the A&D segment due to timing of payments received under long-term contracts.

Net cash provided by operating activities from continuing operations was $68.9 million and $29.2 million in the first quarters of 2026 and 2025, respectively. The increase in net cash provided by operating activities in the first quarter of 2026 as compared to the first quarter of 2025 was mainly driven by an increase in net earnings and an increase in contract liabilities.

Capital expenditures from continuing operations were $5.9 million and $5.1 million in the first quarters of 2026 and 2025, respectively. The increase in the first quarter of 2026 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 $2.2 million and $2.6 million in the first quarters of 2026 and 2025, respectively.

Acquisition

During the first quarter fiscal 2026, the Company paid approximately $5 million for the final working capital settlement in connection with the Maritime acquisition.

Credit Facility

At December 31, 2025, the Company had approximately $469 million available to borrow under its bank credit facility, excluding the Incremental Facility, plus a $250 million increase option, and $103.8 million cash on hand. At December 31, 2025, the Company had $145.5 million of outstanding borrowings under the Credit facility, Incremental facility and short-term borrowings at its foreign locations, in addition to outstanding letters of credit of $10.7 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.

Dividends

A dividend of $0.08 per share, totaling $2.1 million, was paid on October 16, 2025 to stockholders of record as of October 2, 2025. Subsequent to December 31, 2025, a quarterly dividend of $0.08 per share, totaling $2.1 million, was paid on January 16, 2026 to stockholders of record as of January 2, 2026.

CRITICAL ACCOUNTING POLICIES

Management has evaluated the accounting policies used in the preparation of the Company’s financial statements and related notes and believes those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by Management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving Management judgments and estimates may be found in the Critical Accounting Policies section of Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2025.

OTHER MATTERS

Contingencies

As a normal incident of the business in which the Company is engaged, various claims, charges and litigation are asserted or commenced against the Company. Additionally, the Company is currently involved in various stages of investigation and remediation relating to environmental matters. In the opinion of Management, the aggregate costs involved in the resolution of these matters, and final judgments, if any, which might be rendered against the Company, are adequately reserved, are covered by insurance, or would not have a material adverse effect on the Company’s results from operations, capital expenditures, or competitive position.

FORWARD LOOKING STATEMENTS

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.

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, 2025, 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.

Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks. The Company’s Canadian subsidiary Morgan Schaffer enters into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars. All derivative instruments are reported on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the respective derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. There has been no material change to the Company’s market risks since September 30, 2025.

The Company carried out an evaluation, under the supervision and with the participation of Management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of that date. During 2025, the Company acquired the Signature Management and Power business (Maritime). The Company is currently in the process of integrating Maritime into its assessment of its internal control over financial reporting. In accordance with the SEC’s published guidance, Management’s assessment, and conclusions on the effectiveness of our disclosure controls and procedures as of December 31, 2025, excludes an assessment of the internal control over financial reporting of Maritime. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Other than as described above with respect to Maritime, there has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.