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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 8/09/21 Esco Technologies Inc. 10-Q 6/30/21 70:7.6M Toppan Merrill/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 873K
2: EX-10.1 Material Contract HTML 52K
3: EX-10.2 Material Contract HTML 50K
4: EX-10.3 Material Contract HTML 65K
5: EX-10.4 Material Contract HTML 60K
6: EX-10.5 Material Contract HTML 60K
7: EX-31.1 Certification -- §302 - SOA'02 HTML 23K
8: EX-31.2 Certification -- §302 - SOA'02 HTML 23K
9: EX-32 Certification -- §906 - SOA'02 HTML 20K
16: R1 Document And Entity Information HTML 71K
17: R2 Consolidated Statements of Operations HTML 105K
18: R3 Consolidated Statements of Operations HTML 24K
(Parenthetical)
19: R4 Consolidated Statements of Comprehensive Income HTML 38K
20: R5 Consolidated Balance Sheets HTML 112K
21: R6 Consolidated Balance Sheets (Parenthetical) HTML 36K
22: R7 Consolidated Statements of Cash Flows HTML 111K
23: R8 Basis of Presentation HTML 22K
24: R9 Earnings Per Share (Eps) HTML 36K
25: R10 Share-Based Compensation HTML 23K
26: R11 Inventories HTML 30K
27: R12 Goodwill and Other Intangible Assets HTML 78K
28: R13 Business Segment Information HTML 71K
29: R14 Debt HTML 32K
30: R15 Income Tax Expense HTML 24K
31: R16 Shareholders' Equity HTML 90K
32: R17 Fair Value Measurements HTML 38K
33: R18 Revenues HTML 256K
34: R19 Leases HTML 121K
35: R20 Adjusted Quarterly Financial Information HTML 107K
36: R21 Subsequent Events HTML 22K
37: R22 Earnings Per Share (Eps) (Tables) HTML 35K
38: R23 Inventories (Tables) HTML 31K
39: R24 Goodwill and Other Intangible Assets (Tables) HTML 79K
40: R25 Business Segment Information (Tables) HTML 63K
41: R26 Debt (Tables) HTML 29K
42: R27 Shareholders' Equity (Tables) HTML 89K
43: R28 Fair Value Measurements (Tables) HTML 32K
44: R29 Revenues (Tables) HTML 251K
45: R30 Leases (Tables) HTML 120K
46: R31 Adjusted Quarterly Financial Information (Tables) HTML 105K
47: R32 Earnings Per Share (Eps) (Details) HTML 27K
48: R33 Share-Based Compensation (Details) HTML 39K
49: R34 Inventories (Details) HTML 28K
50: R35 Goodwill and Other Intangible Assets (Details) HTML 52K
51: R36 Goodwill and Other Intangible Assets - Changes in HTML 45K
carrying amount of goodwill (Details)
52: R37 Business Segment Information (Details) HTML 47K
53: R38 Debt (Details) HTML 25K
54: R39 Debt - Additional information (Details) HTML 45K
55: R40 Income Tax Expense (Details) HTML 34K
56: R41 Shareholders' Equity (Details) HTML 59K
57: R42 Fair Value Measurements (Details) HTML 24K
58: R43 REVENUES - Disaggregation of Revenues (Details) HTML 68K
59: R44 REVENUES - Remaining Performance Obligations HTML 25K
(Details)
60: R45 REVENUES - Contract assets and liabilities HTML 25K
(Details)
61: R46 LEASES - Components of lease costs (Details) HTML 36K
62: R47 LEASES - Additional information related to leases HTML 42K
(Details)
63: R48 LEASES - Reconciliation of future undiscounted HTML 77K
cash flows to the operating and finance lease
liabilities, and the related ROU assets (Details)
64: R49 Adjusted Quarterly Financial Information (Details) HTML 95K
65: R50 Adjusted Quarterly Financial Information - HTML 26K
Additional Information (Details)
66: R51 Subsequent Events (Details) HTML 27K
68: XML IDEA XML File -- Filing Summary XML 116K
15: XML XBRL Instance -- ese-20210630x10q_htm XML 2.34M
67: EXCEL IDEA Workbook of Financial Reports XLSX 69K
11: EX-101.CAL XBRL Calculations -- ese-20210630_cal XML 170K
12: EX-101.DEF XBRL Definitions -- ese-20210630_def XML 236K
13: EX-101.LAB XBRL Labels -- ese-20210630_lab XML 781K
14: EX-101.PRE XBRL Presentations -- ese-20210630_pre XML 589K
10: EX-101.SCH XBRL Schema -- ese-20210630 XSD 109K
69: JSON XBRL Instance as JSON Data -- MetaLinks 289± 418K
70: ZIP XBRL Zipped Folder -- 0001104659-21-102250-xbrl Zip 225K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM i 10-Q
(MARK ONE)
| |
i ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED i JUNE 30, 2021 |
OR
i ☐ | 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 i 1-10596
i ESCO TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
| |
MISSOURI | i 43-1554045 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
| |
i 9900A CLAYTON ROAD | |
i ST. LOUIS, MISSOURI | i 63124-1186 |
(Address of principal executive offices) | (Zip Code) |
( i 314) i 213-7200
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
|
| |
| Name of each exchange |
Title of each class | | Trading Symbol(s) | | on which registered |
i Common Stock, par value $0.01 per share | | i ESE | | i 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.
i 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).
i 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.
| | ||
| | | |
i Large accelerated filer | ☒ | Accelerated filer | ☐ |
| | | |
Non-accelerated filer | ☐ | Smaller reporting company | i ☐ |
Emerging growth company | i ☐ |
| |
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 i ☐ 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 July 31, 2021 |
Common stock, $.01 par value per share |
| i 26,061,432 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
| | | | | |
| | Three Months Ended | |||
| | ||||
|
| 2021 |
| 2020 | |
| | | | | |
Net sales |
| $ | i 181,394 |
| i 172,665 |
Costs and expenses: | |
| |
| |
Cost of sales | |
| i 113,610 |
| i 107,686 |
Selling, general and administrative expenses | |
| i 42,882 |
| i 36,936 |
Amortization of intangible assets | |
| i 4,864 |
| i 5,535 |
Interest expense, net | |
| i 480 |
| i 1,523 |
Other expenses (income), net | |
| i 615 |
| ( i 824) |
Total costs and expenses | |
| i 162,451 |
| i 150,856 |
| | | | | |
Earnings before income taxes | |
| i 18,943 |
| i 21,809 |
Income tax expense | |
| i 4,034 |
| i 3,122 |
Net earnings | | $ | i 14,909 |
| i 18,687 |
| |
| |
| |
Earnings per share: | |
| |
| |
Basic - | |
| |
| |
Net earnings | | | i 0.57 | | i 0.72 |
| | | |
| |
Diluted - | | | | | |
Net earnings | | $ | i 0.57 |
| i 0.72 |
See accompanying notes to consolidated financial statements.
2
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
| | | | | | |
| | Nine Months Ended | ||||
| | |||||
|
| 2021 |
| 2020 | ||
| | | | | | |
Net sales | | $ | i 509,962 |
| | i 524,885 |
Costs and expenses: | |
| |
|
| |
Cost of sales | |
| i 316,785 |
|
| i 327,655 |
Selling, general and administrative expenses | |
| i 122,628 |
|
| i 119,023 |
Amortization of intangible assets | |
| i 14,729 |
|
| i 16,565 |
Interest expense, net | |
| i 1,453 |
|
| i 5,264 |
Other (income) expenses, net | |
| ( i 1,265) |
|
| i 174 |
Total costs and expenses | |
| i 454,330 |
|
| i 468,681 |
| |
| |
|
| |
Earnings before income taxes | |
| i 55,632 |
|
| i 56,204 |
Income tax expense | |
| i 12,501 |
|
| i 8,931 |
Earnings from continuing operations | | | i 43,131 | | | i 47,273 |
Loss from discontinued operations, net of tax expense of $ i 269 | | | — | | | ( i 601) |
Gain on sale of discontinued operations, net of tax expense of $ i 23,734 | |
| — | |
| i 76,614 |
Earnings from discontinued operations | | | — | | | i 76,013 |
| | | | | | |
Net earnings | | $ | i 43,131 |
| | i 123,286 |
| |
| |
| | |
Earnings per share: | |
| |
| | |
Basic — Continuing operations | | $ | i 1.66 | | | i 1.82 |
— Discontinued operations | | | — | | | i 2.92 |
— Net earnings | | $ | i 1.66 |
| | i 4.74 |
| | | | | | |
Diluted — Continuing operations | | $ | i 1.65 | | | i 1.81 |
— Discontinued operations | |
| — |
| | i 2.91 |
— Net earnings | | $ | i 1.65 |
| | i 4.72 |
See accompanying notes to consolidated financial statements.
3
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
| | | | | | | | | | |
|
| Three Months Ended | | Nine Months Ended | ||||||
| | June 30, | | |||||||
| | 2021 |
| 2020 |
| 2021 |
| 2020 | ||
Net earnings | | $ | i 14,909 |
| i 18,687 | | | i 43,131 |
| i 123,286 |
Other comprehensive income (loss), net of tax: | |
| |
| | |
| |
| |
Foreign currency translation adjustments | |
| i 535 |
| i 2,802 | |
| i 6,000 |
| ( i 160) |
Total other comprehensive income (loss), net of tax | |
| i 535 |
| i 2,802 | |
| i 6,000 |
| ( i 160) |
Comprehensive income | | $ | i 15,444 |
| i 21,489 | | | i 49,131 |
| i 123,126 |
See accompanying notes to consolidated financial statements.
4
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
| | | | | | |
| | June 30, | | |||
|
| 2021 |
| 2020 | ||
ASSETS |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | i 78,359 |
| | i 52,560 |
Accounts receivable, net | |
| i 135,343 |
| | i 144,082 |
Contract assets | |
| i 94,768 |
| | i 94,302 |
Inventories, net | |
| i 141,113 |
| | i 135,296 |
Other current assets | |
| i 21,282 |
| | i 17,053 |
Total current assets | |
| i 470,865 |
| | i 443,293 |
Property, plant and equipment, net of accumulated depreciation of $ i 144,642 and $ i 130,534, respectively | |
| i 141,967 |
| | i 139,870 |
Intangible assets, net of accumulated amortization of $ i 143,792 and $ i 129,063, respectively | |
| i 343,346 |
| | i 346,632 |
Goodwill | |
| i 411,732 |
| | i 408,063 |
Operating lease assets | | | i 30,426 | | | i 21,390 |
Other assets | |
| i 10,347 |
| | i 10,938 |
Total assets | | $ | i 1,408,683 |
| | i 1,370,186 |
| |
| |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| |
| | |
Current liabilities: | |
| |
| | |
Current maturities of long-term debt and short-term borrowings | | $ | i 20,000 |
| | i 22,368 |
Accounts payable | |
| i 50,921 |
| | i 50,525 |
Contract liabilities | |
| i 105,822 |
| | i 100,551 |
Accrued salaries | |
| i 33,132 |
| | i 32,149 |
Accrued other expenses | |
| i 43,517 |
| | i 50,436 |
Total current liabilities | |
| i 253,392 |
| | i 256,029 |
Deferred tax liabilities | |
| i 56,992 |
| | i 60,170 |
Non-current operating lease liabilities | | | i 26,458 | | | i 16,785 |
Other liabilities | |
| i 38,987 |
| | i 38,176 |
Long-term debt | |
| i 28,000 |
| | i 40,000 |
Total liabilities | |
| i 403,829 |
| | i 411,160 |
Shareholders’ equity: | |
| |
| | |
Preferred stock, par value $ i i .01 / per share, authorized i i 10,000,000 / shares | |
| — |
| | — |
Common stock, par value $ i i .01 / per share, authorized i i 50,000,000 / shares, issued i 30,665,868 and i 30,645,625 shares, respectively | |
| i 307 |
| | i 306 |
Additional paid-in capital | |
| i 296,578 |
| | i 293,682 |
Retained earnings | |
| i 812,709 |
| | i 775,829 |
Accumulated other comprehensive income (loss), net of tax | |
| i 2,343 |
| | ( i 3,657) |
| |
| i 1,111,937 |
| | i 1,066,160 |
Less treasury stock, at cost: i 4,604,741 and i 4,607,911 common shares, respectively | |
| ( i 107,083) |
| | ( i 107,134) |
Total shareholders’ equity | |
| i 1,004,854 |
| | i 959,026 |
Total liabilities and shareholders’ equity | | $ | i 1,408,683 |
| | i 1,370,186 |
See accompanying notes to consolidated financial statements.
5
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
| | | | | |
| | Nine Months Ended | |||
| | ||||
|
| 2021 |
| 2020 | |
Cash flows from operating activities: |
| |
|
|
|
Net earnings | | $ | i 43,131 |
| i 123,286 |
Earnings from discontinued operations | | | — | | ( i 76,013) |
Adjustments to reconcile net earnings to net cash provided by operating activities: | |
| |
| |
Depreciation and amortization | |
| i 30,259 |
| i 31,066 |
Stock compensation expense | |
| i 5,386 |
| i 4,184 |
Changes in assets and liabilities | |
| i 2,520 |
| ( i 20,926) |
Gain on sale of building and land | | | ( i 1,950) | | — |
Pension contributions | | | — | | ( i 10,000) |
Effect of deferred taxes | |
| ( i 3,946) |
| i 2,155 |
Net cash provided by operating activities – continuing operations | | | i 75,400 | | i 53,752 |
Net cash used by operating activities – discontinued operations | | | — | | ( i 14,737) |
Net cash provided by operating activities | | | i 75,400 | | i 39,015 |
Cash flows from investing activities: | |
| |
| |
Acquisition of business, net of cash acquired | |
| ( i 6,684) |
| — |
Proceeds from sale of building and land | |
| i 1,950 |
| — |
Capital expenditures | | | ( i 17,887) | | ( i 28,291) |
Additions to capitalized software | |
| ( i 6,500) |
| ( i 6,564) |
Net cash used by investing activities – continuing operations | | | ( i 29,121) | | ( i 34,855) |
Proceeds from sale of discontinued operations | | | — | | i 183,812 |
Capital expenditures – discontinued operations | | | — | | ( i 1,728) |
Net cash provided by investing activities – discontinued operations | | | — | | i 182,084 |
Net cash (used) provided by investing activities | | | ( i 29,121) | | i 147,229 |
Cash flows from financing activities: | |
| |
| |
Proceeds from long-term debt and short-term borrowings | |
| i 80,000 |
| i 11,577 |
Principal payments on long-term debt and short-term borrowings | |
| ( i 94,368) |
| ( i 145,000) |
Dividends paid | |
| ( i 6,251) |
| ( i 6,240) |
Other | |
| ( i 1,672) |
| ( i 3,127) |
Net cash used by financing activities – continuing operations | | | ( i 22,291) | | ( i 142,790) |
Net cash used by financing activities – discontinued operations | | | — | | ( i 2,140) |
Net cash used by financing activities | | | ( i 22,291) | | ( i 144,930) |
Effect of exchange rate changes on cash and cash equivalents | |
| i 1,811 |
| i 1,617 |
Net increase in cash and cash equivalents | |
| i 25,799 |
| i 42,931 |
Cash and cash equivalents, beginning of period | |
| i 52,560 |
| i 61,808 |
Cash and cash equivalents, end of period | | $ | i 78,359 |
| i 104,739 |
| | | |
| |
Supplemental cash flow information: | |
| |
| |
Interest paid | | $ | i 316 |
| i 4,669 |
Income taxes paid (including state and foreign) | |
| i 21,982 |
| i 23,435 |
See accompanying notes to consolidated financial statements.
6
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
i1. 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). As a result of the pension plan termination referenced in the fourth quarter of 2020, certain prior year amounts have been reclassified to conform with the current year presentation. For further information, refer to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
The Company’s results for the three-month and nine-month periods ended June 30, 2021 are not necessarily indicative of the results for the entire 2021 fiscal year. References to the third quarters of 2021 and 2020 represent the fiscal quarters ended June 30, 2021 and 2020, 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.
i2. 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 unvested restricted share units (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):
i
| | | | | | | | |
|
| Three Months | | Nine Months | ||||
| | Ended June 30, | | Ended June 30, | ||||
| | 2021 |
| 2020 |
| 2021 |
| 2020 |
Weighted Average Shares Outstanding — Basic |
| i 26,045 |
| i 26,031 |
| i 26,040 |
| i 26,002 |
Dilutive Options and Restricted Shares | | i 169 | | i 103 | | i 159 | | i 128 |
Adjusted Shares — Diluted |
| i 26,214 |
| i 26,134 |
| i 26,199 |
| i 26,130 |
/
i3. SHARE-BASED COMPENSATION
The Company provides compensation benefits to certain key employees under several share-based plans providing for performance-accelerated restricted shares (restricted shares), and to non-employee directors under a non-employee directors compensation plan.
Performance-Accelerated Restricted Share Awards
Compensation expense related to the restricted share awards was $ i 2.5 million and $ i 4.5 million for the three and nine-month periods ended June 30, 2021, respectively, and $ i 1.0 million and $ i 3.2 million for the corresponding periods in 2020. There were i 229,602 non-vested shares outstanding as of June 30, 2021.
Non-Employee Directors Plan
Compensation expense related to the non-employee director grants was $ i 0.3 million and $ i 1.0 million for the three and nine-month periods ended June 30, 2021, respectively, and $ i 0.3 million and $ i 1.0 million for the corresponding periods in 2020.
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 $ i 2.8 million and $ i 5.5 million for the three and nine-month periods ended June 30, 2021, respectively, and $ i 1.3 million and $ i 4.2 million for the corresponding periods in 2020. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $ i 0.4 million and $ i 1.1 million for the three
/7
and nine-month periods ended June 30, 2021, respectively, and $ i 0.2 million and $ i 0.9 million for the corresponding periods in 2020. As of June 30, 2021, there was $ i 9.2 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 i 1.9 years.
i4. INVENTORIES
Inventories, net, from continuing operations consist of the following:
i
| | | | | |
|
| June 30, |
| September 30, | |
(In thousands) |
| 2021 |
| 2020 | |
Finished goods | | $ | i 28,732 |
| i 28,471 |
Work in process | |
| i 37,874 |
| i 30,183 |
Raw materials | |
| i 74,507 |
| i 76,642 |
Total inventories | | $ | i 141,113 |
| i 135,296 |
/
i5. GOODWILL AND OTHER INTANGIBLE ASSETS
Included on the Company’s Consolidated Balance Sheets at June 30, 2021 and September 30, 2020 are the following intangible assets gross carrying amounts and accumulated amortization from continuing operations:
i
| | | | | |
|
| June 30, |
| September 30, | |
(Dollars in thousands) |
| 2021 |
| 2020 | |
Goodwill | | $ | i 411,732 |
| i 408,063 |
| |
| | | |
Intangible assets with determinable lives: | |
| | | |
Patents | |
| | | |
Gross carrying amount | | $ | i 2,144 | | i 2,092 |
Less: accumulated amortization | |
| i 943 | | i 858 |
Net | | $ | i 1,201 | | i 1,234 |
| |
| | | |
Capitalized software | |
| | | |
Gross carrying amount | | $ | i 91,388 | | i 84,888 |
Less: accumulated amortization | |
| i 62,111 | | i 57,302 |
Net | | $ | i 29,277 | | i 27,586 |
| |
| | | |
Customer relationships | |
| | | |
Gross carrying amount | | $ | i 229,385 | | i 227,178 |
Less: accumulated amortization | |
| i 76,986 | | i 67,643 |
Net | | $ | i 152,399 | | i 159,535 |
| |
| | | |
Other | |
| | | |
Gross carrying amount | | $ | i 5,358 | | i 5,156 |
Less: accumulated amortization | |
| i 3,730 | | i 3,260 |
Net | | $ | i 1,628 | | i 1,896 |
Intangible assets with indefinite lives: | |
| | | |
Trade names | | $ | i 158,841 | | i 156,381 |
/8
The changes in the carrying amount of goodwill attributable to each business segment for the nine months ended June 30, 2021 is as follows on a continuing operations basis:
i
| | | | | | | | | |
| | | | | | | Aerospace | | |
(Dollars in millions) |
| USG |
| Test |
| & Defense |
| Total | |
Balance as of September 30, 2020 | | | i 271.9 |
| i 34.1 |
| i 102.1 |
| i 408.1 |
Acquisition activity | | | — | | — | | i 2.2 | | i 2.2 |
Foreign currency translation | | | i 1.4 | | — | | — | | i 1.4 |
Balance as of June 30, 2021 | | $ | i 273.3 | | i 34.1 | | i 104.3 | | i 411.7 |
The economic uncertainty, changes in the propensity for the general public to travel by air, and reductions in demand for commercial aircraft as a result of the COVID-19 pandemic have adversely impacted net sales and operating results in certain of the Aerospace and Defense reporting units. There were i i no / impairment charges incurred for the three and nine-month periods ended June 30, 2021, however, the fair value of the Mayday and Westland reporting units, included in the Aerospace and Defense segment, exceeded carrying value by less than i 10%. At June 30, 2021, we had $ i 30 million and $ i 18 million of goodwill recorded for Mayday and Westland, respectively.
i6. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers and classifies its continuing business operations in i 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. and its affiliate Hi-Tech Metals, Inc. (collectively referred to as 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 and 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. The USG segment’s operations consist primarily of Doble Engineering Company and Morgan Schaffer Ltd. (together 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. NRG designs and manufactures decision support tools for the renewable energy industry, primarily wind and solar. The Test segment’s operations consist primarily of ETS-Lindgren Inc. (ETS-Lindgren). ETS-Lindgren is an industry leader in providing 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.
/9
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 from continuing operations before interest and taxes. The table below is presented on the basis of continuing operations and excludes discontinued operations.
i
| | | | | | | | | |
| | Three Months | | Nine Months | |||||
| | Ended June 30, | | Ended June 30, | |||||
(In thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | |
NET SALES | | |
| |
| |
| |
|
Aerospace & Defense | | $ | i 85,576 | | i 84,072 | | i 234,720 | | i 256,707 |
USG | | | i 47,704 | | i 42,577 | | i 141,799 | | i 139,179 |
Test | | | i 48,114 | | i 46,016 | | i 133,443 | | i 128,999 |
Consolidated totals | | $ | i 181,394 | | i 172,665 | | i 509,962 | | i 524,885 |
| | | | | | | | | |
EBIT | | | | | | | | | |
Aerospace & Defense | | $ | i 16,714 | | i 17,409 | | i 41,980 | | i 51,658 |
USG | | | i 8,227 | | i 6,156 | | i 27,683 | | i 20,310 |
Test | | | i 6,751 | | i 7,177 | | i 17,781 | | i 17,483 |
Corporate (loss) | | | ( i 12,269) | | ( i 7,410) | | ( i 30,359) | | ( i 27,983) |
Consolidated EBIT | | | i 19,423 | | i 23,332 | | i 57,085 | | i 61,468 |
Less: Interest expense | | | ( i 480) | | ( i 1,523) | | ( i 1,453) | | ( i 5,264) |
Earnings before income taxes | | $ | i 18,943 | | i 21,809 | | i 55,632 | | i 56,204 |
/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 from continuing operations 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.
i7. DEBT
The Company’s debt is summarized as follows:
i
| | | | | |
|
| June 30, | | September 30, | |
(In thousands) |
| 2021 |
| 2020 | |
Total borrowings | | $ | i 48,000 |
| i 62,368 |
Current portion of long-term debt and short-term borrowings | |
| ( i 20,000) |
| ( i 22,368) |
Total long-term debt, less current portion | | $ | i 28,000 |
| i 40,000 |
The Credit Facility includes a $ i 500 million revolving line of credit as well as provisions allowing for the increase of the credit facility commitment amount by an additional $ i 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.
At June 30, 2021, the Company had approximately $ i 444 million available to borrow under the Credit Facility, plus the $ i 250 million increase option, subject to lender approval, in addition to $ i 78.4 million cash on hand. The Company classified $ i 20.0 million as the current portion of long-term debt as of June 30, 2021, 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 $ i 8.4 million at June 30, 2021.
/10
Interest on borrowings under the Credit Facility is calculated at a spread over either the London Interbank Offered Rate (LIBOR), the New York Federal Reserve Bank Rate 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 Credit Facility is secured by the unlimited guaranty of the Company’s direct and indirect material U.S. subsidiaries and the pledge of i 100% of the equity interests of its direct and indirect material foreign subsidiaries. The financial covenants of the Credit Facility include a leverage ratio and an interest coverage ratio. The weighted average interest rates were i 1.16% and i 1.33% for the three and nine- month periods ending June 30, 2021, respectively, and i 3.24% and i 3.22% for the three and nine-month periods ending June 30, 2020. As of June 30, 2021, the Company was in compliance with all covenants.
i8. INCOME TAX EXPENSE
The third quarter 2021 effective income tax rate was i 21.3% compared to i 14.3% in the third quarter of 2020. The effective income tax rate from continuing operations in the first nine months of 2021 was i 22.5% compared to i 15.9% in the first nine months of 2020. The income tax expense in the third quarter and first nine months of 2021 was favorably impacted by a tax return to provision true-up to foreign derived intangible income and other 2020 true-ups decreasing the third quarter and year-to-date effective tax rate by i 3.9% and i 1.2%, respectively.
The income tax expense in the third quarter and first nine months of 2020 was favorably impacted mainly by the following items: 1) an increase in the available 2019 foreign tax credit which was attributable to new information and tax planning strategies reducing the third quarter effective tax rate and year-to-date effective tax rate by i 3.3% and i 1.3%; and 2) new information and tax planning strategies resulted in an increase in the 2020 foreign tax credit and the catch-up of the benefit which reduced the 2020 third quarter effective tax rate by i 2.5%. The year-to-date 2020 effective tax rate was favorably impacted by the release of a valuation allowance of $ i 2.8 million for foreign net operating losses decreasing the year-to-date 2020 effective tax rate by i 5.1%.
/
11
9. SHAREHOLDERS’ EQUITY
iThe change in shareholders’ equity for the first three and nine months of 2021 and 2020 is shown below (in thousands):
| | | | | | | | |
| | Three Months Ended June 30, | | Nine Months Ended June 30, | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| | | | | | | | |
Common stock | | | | | | | | |
Beginning balance | | i 306 | | i 306 | | i 306 | | i 306 |
Stock plans | | i 1 | | i 1 | | i 1 | | i 1 |
Ending balance | | i 307 | | i 307 | | i 307 | | i 307 |
| | | | | | | | |
Additional paid-in-capital | | | | | | | | |
Beginning balance | | i 295,796 | | i 294,787 | | i 293,682 | | i 292,408 |
Stock plans | | i 782 | | ( i 2,156) | | i 2,896 | | i 223 |
Ending balance | | i 296,578 | | i 292,631 | | i 296,578 | | i 292,631 |
| | | | | | | | |
Retained earnings | | | | | | | | |
Beginning balance | | i 799,884 | | i 785,184 | | i 775,829 | | i 684,741 |
Net earnings common stockholders | | i 14,909 | | i 18,687 | | i 43,131 | | i 123,286 |
Dividends paid | | ( i 2,084) | | ( i 2,084) | | ( i 6,251) | | ( i 6,240) |
Ending balance | | i 812,709 | | i 801,787 | | i 812,709 | | i 801,787 |
| | | | | | | | |
Accumulated other comprehensive income (loss) | | | | | | | | |
Beginning balance | | i 1,808 | | ( i 46,936) | | ( i 3,657) | | ( i 43,974) |
Foreign currency translation | | i 535 | | i 2,802 | | i 6,000 | | ( i 160) |
Ending balance | | i 2,343 | | ( i 44,134) | | i 2,343 | | ( i 44,134) |
| | | | | | | | |
Treasury stock | | | | | | | | |
Beginning balance | | ( i 107,134) | | ( i 107,134) | | ( i 107,134) | | ( i 107,259) |
Issued under stock plans | | i 51 | | — | | i 51 | | i 125 |
Ending balance | | ( i 107,083) | | ( i 107,134) | | ( i 107,083) | | ( i 107,134) |
| | | | | | | | |
Total equity | | i 1,004,854 | | i 943,457 | | i 1,004,854 | | i 943,457 |
/
i10. 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 June 30, 2021 and September 30, 2020 using available market information or other appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, receivables, inventories, payables, debt and other current assets and liabilities approximate fair value because of the short maturity of those instruments.
12
Fair Value of Financial Instruments
iThe 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, as presented below as of June 30, 2021:
| | | | | | | | | | |
(In thousands) |
| Level 1 |
| Level 2 |
| | Level 3 |
| Total | |
Assets (Liabilities): | | | | | | | | | | |
Forward contracts | | $ | — |
| ( i 27) |
| $ | — |
| ( i 27) |
Valuation was based on third party evidence of similarly priced derivative instruments.
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 nine-month periods ended June 30, 2021.
i11. REVENUES
Disaggregation of Revenues
Revenues by customer type, geographic location, and revenue recognition method for the three and nine-month periods ended June 30, 2021 are presented in the tables below as the Company believes it best depicts how the nature, amount, timing and
13
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 on a continuing operations basis.
i
| | | | | | | | | | | | | |
Three months ended June 30, 2021 |
| Aerospace |
| | |
| | |
| | | | |
(In thousands) | | & Defense | | USG | | Test | | Total | | ||||
Customer type: |
| |
|
| |
|
| |
|
| |
|
|
Commercial | | $ | i 34,708 | | $ | i 46,735 | | $ | i 42,063 | | $ | i 123,506 | |
U.S. Government | |
| i 50,868 | | | i 969 | | | i 6,051 | |
| i 57,888 | |
Total revenues | | $ | i 85,576 | | $ | i 47,704 | | $ | i 48,114 | | $ | i 181,394 | |
| |
| | | | | | | | |
| | |
Geographic location: | |
| | | |
| | |
| |
| | |
United States | | $ | i 75,701 | | $ | i 32,111 | | $ | i 27,719 | | $ | i 135,531 | |
International | |
| i 9,875 | | | i 15,593 | | | i 20,395 | |
| i 45,863 | |
Total revenues | | $ | i 85,576 | | $ | i 47,704 | | $ | i 48,114 | | $ | i 181,394 | |
| |
| | | | | | | | |
| | |
Revenue recognition method: | |
| | | |
| | |
| |
| | |
Point in time | | $ | i 37,513 | | $ | i 35,242 | | $ | i 9,673 | | $ | i 82,428 | |
Over time | |
| i 48,063 | | | i 12,462 | | | i 38,441 | |
| i 98,966 | |
Total revenues | | $ | i 85,576 | | $ | i 47,704 | | $ | i 48,114 | | $ | i 181,394 | |
| | | | | | | | | | | | | |
Nine months ended June 30, 2021 | | Aerospace | |
| | |
| | |
| | ||
(In thousands) |
| & Defense |
| USG |
| Test |
| Total |
| ||||
Customer type: |
| |
|
| |
|
| |
|
| |
|
|
Commercial | | $ | i 95,712 | | $ | i 139,149 | | $ | i 118,089 | | $ | i 352,950 | |
U.S. Government | |
| i 139,008 | |
| i 2,650 | |
| i 15,354 | |
| i 157,012 | |
Total revenues | | $ | i 234,720 | | $ | i 141,799 | | $ | i 133,443 | | $ | i 509,962 | |
| | | | | | | | | | | | | |
Geographic location: | |
| | |
| | |
|
| |
| | |
United States | | $ | i 205,527 | | $ | i 96,601 | | $ | i 73,950 | | $ | i 376,078 | |
International | |
| i 29,193 | |
| i 45,198 | |
| i 59,493 | |
| i 133,884 | |
Total revenues | | $ | i 234,720 | | $ | i 141,799 | | $ | i 133,443 | | $ | i 509,962 | |
| | | | | | | | | | | | | |
Revenue recognition method: | |
| | |
| | |
|
| |
| | |
Point in time | | $ | i 103,492 | | $ | i 105,173 | | $ | i 27,789 | | $ | i 236,454 | |
Over time | |
| i 131,228 | |
| i 36,626 | |
| i 105,654 | |
| i 273,508 | |
Total revenues | | $ | i 234,720 | | $ | i 141,799 | | $ | i 133,443 | | $ | i 509,962 | |
/14
Revenues by customer type, geographic location, and revenue recognition method for the three and nine-month periods ended June 30, 2020 are presented in the tables below.
| | | | | | | | | | | | |
Three months ended June 30, 2020 | | Aerospace | | | | | | | | | | |
(In thousands) |
| & Defense |
| USG |
| Test |
| Total | ||||
Customer type: |
| |
|
| |
|
| |
|
| |
|
Commercial | | $ | i 37,485 | | $ | i 39,740 | | $ | i 38,737 | | $ | i 115,962 |
U.S. Government | |
| i 46,587 | |
| i 2,837 | |
| i 7,279 | |
| i 56,703 |
Total revenues | | $ | i 84,072 | | $ | i 42,577 | | $ | i 46,016 | | $ | i 172,665 |
| | | | | | | | | | | | |
Geographic location: | |
|
| |
|
| |
|
| |
|
|
United States | | $ | i 73,476 | | $ | i 26,499 | | $ | i 19,441 | | $ | i 119,416 |
International | |
| i 10,596 | |
| i 16,078 | |
| i 26,575 | |
| i 53,249 |
Total revenues | | $ | i 84,072 | | $ | i 42,577 | | $ | i 46,016 | | $ | i 172,665 |
| | | | | | | | | | | | |
Revenue recognition method: | |
|
| |
|
| |
|
| |
|
|
Point in time | | $ | i 36,461 | | $ | i 27,765 | | $ | i 9,138 | | $ | i 73,364 |
Over time | |
| i 47,611 | |
| i 14,812 | |
| i 36,878 | |
| i 99,301 |
Total revenues | | $ | i 84,072 | | $ | i 42,577 | | $ | i 46,016 | | $ | i 172,665 |
| | | | | | | | | | | | |
Nine months ended June 30, 2020 | | Aerospace | | | | | | | | | | |
(In thousands) |
| & Defense |
| USG |
| Test |
| Total | ||||
Customer type: | | | | | | | | | | | | |
Commercial | | $ | i 130,817 | | $ | i 135,711 | | $ | i 107,931 | | $ | i 374,459 |
U.S. Government | |
| i 125,890 | |
| i 3,468 | |
| i 21,068 | |
| i 150,426 |
Total revenues | | $ | i 256,707 | | $ | i 139,179 | | $ | i 128,999 | | $ | i 524,885 |
| | | | | | | | | | | | |
Geographic location: | |
|
| |
|
| |
|
| |
|
|
United States | | $ | i 219,640 | | $ | i 90,155 | | $ | i 69,399 | | $ | i 379,194 |
International | |
| i 37,067 | |
| i 49,024 | |
| i 59,600 | |
| i 145,691 |
Total revenues | | $ | i 256,707 | | $ | i 139,179 | | $ | i 128,999 | | $ | i 524,885 |
| | | | | | | | | | | | |
Revenue recognition method: | |
|
| |
|
| |
|
| |
|
|
Point in time | | $ | i 118,660 | | $ | i 100,289 | | $ | i 26,157 | | $ | i 245,106 |
Over time | |
| i 138,047 | |
| i 38,890 | |
| i 102,842 | |
| i 279,779 |
Total revenues | | $ | i 256,707 | | $ | i 139,179 | | $ | i 128,999 | | $ | i 524,885 |
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 June 30, 2021, the Company had $ i 539.0 million in remaining performance obligations of which the Company expects to recognize revenues of approximately 70% in the next i twelve months.
Contract assets and contract liabilities
Assets and liabilities related to contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. At June 30, 2021, contract assets and contract liabilities totaled $ i 94.8 million and $ i 105.8 million, respectively. Contract assets and contract liabilities are presented as current in the consolidated balance sheets as it is expected all related transaction activity with customers will be substantially completed within twelve months. During the first nine months of 2021, the Company recognized approximately $ i 75 million in revenues that were included in the contract liabilities balance at September 30, 2020.
15
12. LEASES
The Company determines at lease inception whether an arrangement that provides control over the use of an asset is a lease. The Company recognizes at lease commencement a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term. The Company has elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less. Certain of the Company’s leases include i options to extend the term of the lease for up to i 20 years. When it is reasonably certain that the Company will exercise the option, Management includes the impact of the option in the lease term for purposes of determining total future lease payments. As most of the Company’s lease agreements do not explicitly state the discount rate implicit in the lease, Management uses the Company’s incremental borrowing rate on the commencement date to calculate the present value of future payments based on the tenor of each arrangement.
The Company’s leases for real estate commonly include escalating payments. These variable lease payments are included in the calculation of the ROU asset and lease liability. In addition to the present value of the future lease payments, the calculation of the ROU asset also includes any deferred rent, lease pre-payments and initial direct costs of obtaining the lease.
In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other similar services, which are considered non-lease components for accounting purposes. Non-lease components are excluded from our ROU assets and lease liabilities and expensed as incurred.
The Company’s leases are for office space, manufacturing facilities, and machinery and equipment.
The components of lease costs are shown below:
i
| | | | | | |
| | Three Months Ended | | Three Months Ended | ||
| | June 30, | | June 30, | ||
(Dollars in thousands) |
| 2021 |
| 2020 | ||
Finance lease cost | | |
| | |
|
Amortization of right-of-use assets | | $ | i 492 | | $ | i 540 |
Interest on lease liabilities | |
| i 306 | |
| i 319 |
Operating lease cost | |
| i 1,471 | |
| i 1,474 |
Total lease costs | | $ | i 2,269 | | $ | i 2,333 |
| | | | | | |
|
| Nine Months |
| Nine Months | ||
| | Ended | | Ended | ||
| | June 30, | | June 30, | ||
(Dollars in thousands) |
| 2021 |
| 2020 | ||
Finance lease cost | | | | | | |
Amortization of right-of-use assets | | $ | i 1,477 | | $ | i 1,622 |
Interest on lease liabilities | |
| i 929 | |
| i 970 |
Operating lease cost | |
| i 4,347 | |
| i 4,399 |
Total lease costs | | $ | i 6,753 | | $ | i 6,991 |
/16
Additional information related to leases are shown below:
i
| | | | | | | |
| | Three Months Ended | | Three Months Ended | | ||
| | June 30, | | June 30, | | ||
(Dollars in thousands) |
| 2021 |
| 2020 | | ||
Cash paid for amounts included in the measurement of lease liabilities | | |
| | |
| |
Operating cash flows from operating leases | | $ | i 1,320 | | $ | i 1,452 | |
Operating cash flows from finance leases | |
| i 306 | |
| i 319 | |
Financing cash flows from finance leases | |
| i 428 | |
| i 418 | |
Right-of-use assets obtained in exchange for operating lease liabilities | | | i 12,780 | | | i 53 | |
| | | | | | |
|
| Nine Months |
| Nine Months | ||
| | June 30, | | June 30, | ||
(Dollars in thousands) |
| 2021 |
| 2020 | ||
Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
Operating cash flows from operating leases | | $ | i 4,102 | | $ | i 4,334 |
Operating cash flows from finance leases | |
| i 915 | |
| i 655 |
Financing cash flows from finance leases | |
| i 1,261 | |
| i 1,145 |
Right-of-use assets obtained in exchange for operating lease liabilities | | | i 12,780 | |
| i 22,072 |
| | | | | |
Weighted-average remaining lease term |
|
|
| ||
Operating leases |
| i 10.31 years |
| i 6.64 years | |
Finance leases |
| i 11.86 years |
| i 12.76 years | |
Weighted-average discount rate |
|
|
|
| |
Operating leases |
| i 3.12 | % | i 3.14 | % |
Finance leases |
| i 4.31 | % | i 4.29 | % |
The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on our Consolidated Balance Sheet on June 30, 2021:
i
| | | | | | |
(Dollars in thousands) | | Operating |
| Finance | ||
Years Ending September 30: |
| Leases |
| Leases | ||
2021 (excluding the nine months ended June 30, 2021) | | $ | i 1,378 |
| | i 739 |
2022 | |
| i 5,093 |
| | i 3,015 |
2023 | |
| i 4,324 |
| | i 3,098 |
2024 | |
| i 3,677 |
| | i 3,181 |
2025 and thereafter | |
| i 21,976 |
| | i 28,285 |
Total minimum lease payments | |
| i 36,448 |
| | i 38,318 |
Less: amounts representing interest | |
| i 5,460 |
|
| i 9,320 |
Present value of net minimum lease payments | | $ | i 30,988 |
| | i 28,998 |
Less: current portion of lease obligations | |
| i 4,530 |
| | i 1,859 |
Non-current portion of lease obligations | | | i 26,458 |
| | i 27,139 |
| | | | | | |
ROU assets | | $ | i 30,426 |
| | i 24,689 |
Operating lease liabilities are included in the Consolidated Balance Sheet in accrued other expenses (current portion) and as a caption on the Consolidated Balance Sheet (long-term portion). Finance lease liabilities are included on the Consolidated Balance Sheet in accrued other expenses (current portion) and other liabilities (long-term portion). Operating lease ROU assets are included as a caption on the Consolidated Balance Sheet and finance lease ROU assets are included in Property, plant and equipment on the Consolidated Balance sheets.
17
i13. ADJUSTED QUARTERLY FINANCIAL INFORMATION
During the third quarter of 2021, the Company identified immaterial errors in the historical consolidated financial statements of Westland, within the A&D segment, and are being corrected as an immaterial revision of those financial statements. Specifically, the adjustments include $ i 3.5 million related to net sales being overstated, of which $ i 2.4 million related to the fourth quarter of 2020, $ i 0.3 million related to the first quarter of 2021, and $ i 0.8 million related to the second quarter of 2021. In addition, $ i 2.1 million of the total adjustments resulted from inventory being overstated and cost of goods sold being understated, of which $ i 0.9 million related to the fourth quarter of 2020, $ i 0.8 million related to the first quarter of 2021, and $ i 0.4 million related to the second quarter of 2021. The tax impact of correcting these errors was a reduction in tax expense of $ i 0.8 million, $ i 0.2 million, and $ i 0.3 million in the fourth quarter of 2020, first quarter of 2021, and second quarter of 2021, respectively. This correction also resulted in a reclassification in the Consolidated Statements of Cash Flows between line items of net earnings, changes in assets and liabilities, and effect of deferred taxes totaling $ i 3.3 million in the fourth quarter of 2020, $ i 1.1 million in the first quarter of 2021, and $ i 1.2 million in the second quarter of 2021, with no impact to the total net cash provided by operating activities for any period. The fiscal 2021 and 2020 quarterly results have been adjusted to reflect the correction of these adjustments in the proper periods. The table below shows the impact of all adjustments to the respective periods. Management has determined that all of these adjustments are not material to any prior periods or the current fiscal year.
i | | | | | | | | | |
| | First Quarter | | First Quarter | | Second Quarter | | Second Quarter | |
(Dollars in thousands, except per share amounts) |
| (As Reported) |
| (As Adjusted) |
| (As Reported) |
| (As Adjusted) | |
| | | | | | | | | |
2021 | | | | | | | | | |
| | | | | | | | | |
Net sales | | $ | i 162,949 | | i 162,674 | | i 166,644 | | i 165,894 |
Cost of sales | | | i 98,777 | | i 99,622 | | i 103,113 | | i 103,553 |
Earnings before income taxes | | | i 17,660 | | i 16,540 | | i 21,339 | | i 20,149 |
Income tax expense | | | i 3,974 | | i 3,722 | | i 5,025 | | i 4,745 |
Net earnings | | | i 13,686 | | i 12,818 | | i 16,314 | | i 15,404 |
| | | | | | | | | |
Diluted earnings (loss) per share: | | | | | | | | | |
Net earnings | | $ | i 0.52 | | i 0.49 | | i 0.62 | | i 0.59 |
| | | | | | | | | |
|
| First Quarter |
| First Quarter |
| Second Quarter |
| Second Quarter | |
| | (As Reported) | | (As Adjusted) | | (As Reported) | | (As Adjusted) | |
Contract assets | | $ | i 93,762 |
| i 91,043 |
| i 95,002 |
| i 91,533 |
Inventories | |
| i 144,054 |
| i 142,316 |
| i 145,342 |
| i 143,164 |
Retained earnings | | $ | i 790,000 |
| i 786,563 |
| i 804,231 |
| i 799,884 |
| | | | | |
|
| Fourth Quarter |
| Fourth Quarter | |
(Dollars in thousands, except per share amounts) | | (As Reported | | (As Adjusted) | |
| | | | | |
2020 | | | | | |
| | | | | |
Net sales | | $ | i 208,030 |
| i 205,586 |
Cost of sales | |
| i 129,763 |
| i 130,656 |
Loss before income taxes | |
| ( i 16,461) |
| ( i 19,798) |
Income tax expense | |
| i 5,347 |
| i 4,579 |
Net loss | |
| ( i 21,808) |
| ( i 24,377) |
| | | | | |
Diluted earnings (loss) per share: | |
|
|
|
|
Net loss | | $ | ( i 0.83) |
| ( i 0.93) |
/ /18
| | | | | |
|
| Fourth Quarter |
| Fourth Quarter | |
(Dollars in thousands, except per share amounts) | | (As Reported | | (As Adjusted) | |
| | | | | |
| | |
|
| |
| | | | | |
Contract assets | | $ | i 96,746 |
| i 94,302 |
Inventories | |
| i 136,189 |
| i 135,296 |
Total current assets | |
| i 446,630 |
| i 443,293 |
Total assets | |
| i 1,373,523 |
| i 1,370,186 |
Total shareholders’ equity | |
| i 961,595 |
| i 959,026 |
Total liabilities and shareholders’ equity | |
| i 1,373,523 |
| i 1,370,186 |
i14. SUBSEQUENT EVENTS
On May 20, 2021, the Company announced it had entered into an agreement to acquire I.S.A. Altanova Group S.R.L. (Altanova), a supplier in the field of advanced condition assessment technologies including partial discharge measurement and analysis, as well as test instruments for electrical apparatus. Altanova, which will become part of the USG operating segment, had annual sales of approximately $ i 30 million in 2020. As of June 30, 2021, the Company had i 30 million Euros held in an escrow account related to this transaction which will be used to partially fund the acquisition. The transaction was subject to Italian regulatory approval, which was obtained and the transaction closed on July 29, 2021.
On August 9, 2021, the Company announced it had acquired the assets of Phenix Technologies, Inc. (Phenix), a manufacturer of stationary and portable high voltage, high current, high power test systems, components and solutions supporting the electric utility industry. Phenix, which will become part of the USG operating segment, had annual sales of approximately $ i 25 million in 2020.
/
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COVID-19 TRENDS AND UNCERTAINTIES
The COVID-19 global pandemic has continued to create significant and unprecedented challenges, and during these highly uncertain times, our top priority remains the health and safety of our employees, customers and suppliers, thereby securing the financial well-being of the Company and supporting business continuity. To date, our global supply chains have not been materially affected by the pandemic. Given our diverse portfolio of strong, durable businesses serving non-discretionary end-markets, the strength and resilience of our business model positions us to continue our long-term outlook. A portion of our workforce has worked from home at times due to COVID-19, however we have not had to redesign or design new internal controls over financial reporting at this time. Depending on the duration of COVID-19, it may become necessary for us to redesign or design new internal controls over financial reporting in a future period. We do not believe such an event will have a material impact on our business.
The economic uncertainty, changes in the propensity for the general public to travel by air, and reductions in demand for commercial aircraft as a result of the COVID-19 pandemic have adversely impacted net sales and operating results in certain of our Aerospace and Defense reporting units. In addition, our Westland facility had a partial shutdown of its facility for several weeks during the first quarter of 2021 due to COVID-19. We are monitoring the impacts of COVID-19 on the fair value of assets. We determined that there was no impairment for the three and nine months ended June 30, 2021 and the fair value of each reporting unit substantially exceeded carrying value, with the exception of Mayday and Westland where fair value exceeded carrying value by less than 10%. At June 30, 2021, we had $30 million and $18 million of goodwill recorded for Mayday and Westland, respectively. The valuation methodology we use involves estimates of discounted cash flows, which are subject to change, and if they change negatively it could result in the need to write down those assets to fair value. We will continue to monitor the impacts of COVID-19 on the fair value of assets. For further discussion, refer to Management’s Discussion and Analysis contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
RESULTS OF OPERATIONS
References to the third quarters of 2021 and 2020 represent the three-month periods ended June 30, 2021 and 2020, respectively.
OVERVIEW
In the third quarter of 2021, sales, net earnings and diluted earnings per share were $181.4 million, $14.9 million and $0.57 per share, respectively, compared to $172.7 million, $18.7 million and $0.72 per share, respectively, in the third quarter of 2020. In the first nine months of 2021, sales, net earnings and diluted earnings per share from continuing operations were $510.0 million, $43.1 million and $1.65 per share, respectively, compared to $524.9 million, $47.3 million and $1.81 per share, respectively, in the first nine months of 2020. See footnote 13, Quarterly Financial Information, for further discussion about the impact to the first and second quarters of 2021 and the fourth quarter of 2020.
NET SALES
In the third quarter of 2021, net sales of $181.4 million were $8.7 million, or 5.0%, higher than the $172.7 million in the third quarter of 2020. In the first nine months of 2021, net sales of $510.0 million were $14.9 million, or 2.8%, lower than the $524.9 million in the first nine months of 2020. The increase in net sales in the third quarter of 2021 as compared to the third quarter of 2020 was due to a $5.1 million increase in the USG segment, a $2.1 million increase in the Test segment, and a $1.5 million increase in the Aerospace & Defense segment. The decrease in net sales in the first nine months of 2021 as compared to the first nine months of 2020 was due to a $21.9 million decrease in the Aerospace & Defense segment, partially offset by a $4.5 million increase in the Test segment and a $2.5 million increase in the USG segment.
-Aerospace & Defense (A&D)
In the third quarter of 2021, net sales of $85.6 million were $1.5 million, or 1.8%, higher than the $84.1 million in the third quarter of 2020. In the first nine months of 2021, net sales of $234.7 million were $22.0 million, or 8.6%, lower than the $256.7 million in the first nine months of 2020. The sales increase in the third quarter of 2021 compared to the third quarter of 2020 was mainly due to a $2.4 million increase in net sales at Globe, a $1.7 million increase in net sales at VACCO and a $1.1 million increase in net sales at PTI, partially offset by a $3.4 million decrease in net sales at Mayday driven by the impact of the COVID-19 pandemic. The sales decrease in the first nine months of 2021 compared to the first nine months of 2020 was mainly due to an $14.9 million decrease in net sales at Mayday, a $9.4 million decrease in net sales at Crissair, an $8.2 million decrease in net sales at PTI, and a $2.9 million
20
decrease in net sales at Westland primarily driven by the impact of the COVID-19 pandemic; partially offset by a $9.5 million increase in net sales at VACCO and a $3.9 million increase in net sales at Globe driven by an increase in navy defense.
-USG
In the third quarter of 2021, net sales of $47.7 million were $5.1 million, or 12.0%, higher than the $42.6 million in the third quarter of 2020. In the first nine months of 2021, net sales of $141.8 million were $2.6 million, or 1.9%, higher than the $139.2 million in the first nine months of 2020. The increase in the third quarter of 2021 compared to the third quarter of 2020 was mainly due to higher service and product revenue at Doble and an increase in product sales at NRG. The increase in the first nine months of 2021 compared to the first nine months of 2020 was mainly due to an increase in product sales at NRG, partially offset by lower events and service revenue at Doble primarily driven by the impact of COVID-19.
-Test
In the third quarter of 2021, net sales of $48.1 million were $2.1 million, or 4.6%, higher than the $46.0 million in the third quarter of 2020. In the first nine months of 2021, net sales of $133.4 million were $4.4 million, or 3.4%, higher than the $129.0 million in the first nine months of 2020. The increase in the third quarter of 2021 as compared to the third quarter of 2020 was primarily due to higher sales from the Company’s U.S. and European operations totaling $7.4 million partially offset by a $5.3 million decrease in sales from the segment’s Asian operations due to the timing of test and measurement chamber projects. The increase in the first nine months of 2021 compared to the first nine months of 2020 was due to higher sales from the Company’s European operations totaling $6.1 million partially offset by a $1.7 million decrease in sales from the segment’s Asian and U.S. operations due to the timing of test and measurement chamber projects.
ORDERS AND BACKLOG
Backlog was $539.0 million at June 30, 2021 compared with $539.0 million at September 30, 2020. The Company received new orders totaling $203.8 million in the third quarter of 2021 compared to $157.8 million in the third quarter of 2020. Of the new orders received in the third quarter of 2021, $95.1 million related to Aerospace & Defense products, $53.2 million related to Test products, and $55.5 million related to USG products. Of the new orders received in the third quarter of 2020, $65.9 million related to Aerospace & Defense products, $41.5 million related to Test products, and $50.4 million related to USG products.
The Company received new orders totaling $537.7 million in the first nine months of 2021 compared to $623.9 million in the first nine months of 2020. Of the new orders received in the first nine months of 2021, $248.8 million related to Aerospace & Defense products, $141.1 million related to Test products, and $147.8 million related to USG products. Of the new orders received in the first nine months of 2020, $350.9 million related to Aerospace & Defense products, $121.8 million related to Test products, and $151.2 million related to USG products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the third quarter of 2021 were $42.9 million (23.6% of net sales), compared with $36.9 million (21.4% of net sales) for the third quarter of 2020. For the first nine months of 2021, SG&A expenses from continuing operations were $122.6 million (24.0% of net sales) compared to $119.0 million (22.7% of net sales) for the first nine months of 2020. The increase in SG&A in the third quarter and first nine months of 2021 compared to the corresponding periods of 2021 was mainly due to a $2.0 million increase at Corporate for compensation expenses due to the transition of key executives and a $1.0 million increase at Corporate due to acquisition costs.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets from continuing operations was $4.9 million and $14.7 million for the third quarter and first nine months of 2021, respectively, compared to $5.5 million and $16.6 million for the corresponding periods of 2020. Amortization expenses consist of amortization of acquired intangible assets from acquisitions and other identifiable intangible assets (primarily software). The decrease in amortization expense in the third quarter and first nine months of 2021 compared to the corresponding periods of 2020 was mainly due to a decrease in amortization of capitalized software.
21
OTHER EXPENSES (INCOME), NET
Other expenses (income), net, was $0.6 million in the third quarter of 2021 compared to other expenses (income), net, of $(0.8) million in the third quarter of 2020. The principal component of other expenses, net, in the third quarter of 2021 was $0.5 million of facility consolidation charges for the Doble Morgan Schaffer facility. The principal component of other income, net, in the third quarter of 2020 was a gain on derivative instruments of $0.5 million.
Other (income) expenses, net, was $(1.3) million of income in the first nine months of 2021 compared to other expenses, net, of $0.2 million in the first nine months of 2020. The principal component of other (income), expenses, net, in the first nine months of 2021 was a gain of approximately $2 million for the final settlement on the sale of the Doble Watertown, MA building, partially offset by facility consolidation charges for the Doble Manta and Morgan Schaffer facilities. There were no individually significant items in other expenses, net, in the first nine months of 2020.
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 was $19.4 million (10.7% of net sales) for the third quarter of 2021 compared to $23.3 million (13.5% of net sales) for the third quarter of 2020. For the first nine months of 2021, EBIT was $57.1 million (11.2% of net sales) compared to $61.5 million (11.7% of net sales) for the first nine months of 2020.
The following table presents a reconciliation of EBIT to net earnings from continuing operations.
| | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||
| | June 30, | | June 30, | ||||||
(In thousands) |
| 2021 | | 2020 | | 2021 |
| 2020 | ||
Consolidated EBIT | | $ | 19,423 | | | 23,332 | | 57,085 | | 61,468 |
Less: Interest expense, net | |
| (480) |
| | (1,523) |
| (1,453) |
| (5,264) |
Less: Income tax | |
| (4,034) |
|
| (3,122) |
| (12,501) |
| (8,931) |
Net earnings from continuing operations | | $ | 14,909 |
| | 18,687 |
| 43,131 |
| 47,273 |
-Aerospace & Defense
EBIT in the third quarter of 2021 was $16.7 million (19.5% of net sales) compared to $17.4 million (20.7% of net sales) in the third quarter of 2020. EBIT in the first nine months of 2021 was $42.0 million (17.9% of net sales) compared to $51.7 million (20.1% of net sales) in the first nine months of 2020. The decrease in EBIT in the third quarter of 2021 compared to the third quarter of 2020 was mainly due to $2.1 million of pretax charges at Westland driven by new product development challenges, increased production costs, and product quality issues; lower sales volumes at Mayday; partially offset by an increase in EBIT at VACCO and Globe due to the higher sales volumes as mentioned above. The decrease in EBIT in the first nine months of 2021 compared to the first nine months of 2020 was mainly due to $4.4 million of pretax charges at Westland driven by new product development challenges, increased production costs, and product quality issues; lower sales volumes at Mayday, Crissair and PTI; partially offset by an increase in EBIT at VACCO and Globe due to the higher sales volumes as mentioned above. In addition, EBIT in the first quarter of 2021 was negatively impacted by a $0.3 million inventory step-up charge related to the acquisition of Advanced Technology Machining, Inc. and TECC Grinding, Inc. (ATM).
-USG
EBIT in the third quarter of 2021 was $8.2 million (17.2% of net sales) compared to $6.2 million (14.5% of net sales) in the third quarter of 2020. EBIT in the first nine months of 2021 was $27.7 million (19.5% of net sales) compared to $20.3 million (14.6% of net sales) in the first nine months of 2020. The increase in EBIT in the third quarter of 2021 compared to the third quarter of 2020 was mainly due higher sales volumes partially offset by $0.5 million of facility consolidation charges at its Doble Morgan Schaffer facility, and an increase in EBIT at NRG due to higher sales volumes as mentioned above. The increase in EBIT in the first nine months of 2021 compared to the first nine months of 2020 was mainly due to higher EBIT at Doble driven by favorable product mix, $2 million final settlement received on the sale of the Doble Watertown facility, partially offset by $1.8 million of facility consolidation charges at its Doble Manta and Morgan Schaffer facilities, and an increase in EBIT at NRG due to higher sales volumes.
22
-Test
EBIT in the third quarter of 2021 was $6.8 million (14.0% of net sales) compared to $7.2 million (15.6% of net sales) in the third quarter of 2020. EBIT in the first nine months of 2021 was $17.8 million (13.3% of net sales) compared to $17.5 million (13.5% of net sales) in the first nine months of 2020. The increase in EBIT in the first nine months of 2021 compared to the first nine months of 2020 was primarily due to product mix and higher margins on projects mainly from the segment’s Asian operations.
-Corporate
Corporate costs included in EBIT were $12.3 million and $30.4 million in the third quarter and first nine months of 2021, respectively, compared to $7.4 million and $28.0 million in the corresponding periods of 2020. The increase in Corporate costs in the third quarter and first nine months of 2021 compared to the corresponding periods of 2020 was mainly due to an increase in compensation costs related to the transition of key executives and acquisition costs.
INTEREST EXPENSE, NET
Interest expense was $0.5 million and $1.5 million in the third quarter and first nine months of 2021, respectively, and $1.5 million and $5.3 million in the corresponding periods of 2020. The decrease in interest expense in the third quarter and first nine months of 2021 compared to the corresponding periods of 2020 was mainly due to lower average outstanding borrowings and lower average interest rates. Average outstanding borrowings were $39 million and $44 million in the third quarter and first nine months of 2021, respectively, and $151 million and $193 million in the corresponding periods of 2020.
INCOME TAX EXPENSE
The third quarter 2021 effective income tax rate was 21.3% compared to 14.3% in the third quarter of 2020. The effective income tax rate from continuing operations in the first nine months of 2021 was 22.5% compared to 15.9% in the first nine months of 2020. The income tax expense in the third quarter and first nine months of 2021 was favorably impacted by a tax return to provision true-up to foreign derived intangible income and other 2020 true-ups decreasing the third quarter and year-to-date effective tax rate by 3.9% and 1.2%, respectively.
The income tax expense in the third quarter and first nine months of 2020 was favorably impacted mainly by the following items: 1) an increase in the available 2019 foreign tax credit which was attributable to new information and tax planning strategies reducing the third quarter effective tax rate and year-to-date effective tax rate by 3.3% and 1.3%; and 2) new information and tax planning strategies resulted in an increase in the 2020 foreign tax credit and the catch-up of the benefit which reduced the 2020 third quarter effective tax rate by 2.5%. The year-to-date 2020 effective tax rate was favorably impacted by the release of a valuation allowance of $2.8 million for foreign net operating losses decreasing the year-to-date 2020 effective tax rate by 5.1%.
CAPITAL RESOURCES AND LIQUIDITY
The Company’s overall financial position and liquidity remains strong. The effects of COVID-19 have not materially affected liquidity. Working capital from continuing operations (current assets less current liabilities) increased to $217.5 million at June 30, 2021 from $187.3 million at September 30, 2020. Accounts receivable decreased by $8.7 million during this period primarily due to a $12.6 million decrease within the Test segment due to increased focus on collections during the period and timing of payments; partially offset by a $4.8 million increase within the USG segment due to the timing of payments.
Net cash provided by operating activities from continuing operations was $75.4 million and $53.8 million in the first nine months of 2021 and 2020, respectively. The increase in net cash provided by operating activities from continuing operations in the first nine months of 2021 as compared to the first nine months of 2020 was mainly driven by lower working capital requirements.
Capital expenditures from continuing operations were $17.9 million and $28.3 million in the first nine months of 2021 and 2020, respectively. The decrease in the first nine months of 2021 compared to the prior year period was mainly due to the building improvement additions in 2020 at the new Doble headquarters facility. In addition, the Company incurred expenditures for capitalized software of $6.5 million and $6.6 million in the first nine months of 2021 and 2020, respectively.
23
Credit Facility
At June 30, 2021, the Company had approximately $444 million available to borrow under its bank credit facility, a $250 million increase option subject to lender approval, and $78.4 million cash on hand. At June 30, 2021, the Company had $48 million of outstanding borrowings under the credit facility in addition to outstanding letters of credit of $8.4 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.
Subsequent Events
On May 20, 2021, the Company announced it had entered into an agreement to acquire I.S.A. Altanova Group S.R.L. (Altanova), a supplier in the field of advanced condition assessment technologies including partial discharge measurement and analysis, as well as test instruments for electrical apparatus. Altanova, which will become part of the USG operating segment, had annual sales of approximately $30 million in 2020. As of June 30, 2021, the Company had 30 million Euros held in an escrow account related to this transaction which will be used to partially fund the acquisition. The transaction was subject to Italian regulatory approval, which was obtained and the transaction closed on July 29, 2021.
On August 9, 2021, the Company announced it had acquired the assets of Phenix Technologies, Inc. (Phenix), a manufacturer of stationary and portable high voltage, high current, high power test systems, components and solutions supporting the electric utility industry. Phenix, which will become part of the USG operating segment, had annual sales of approximately $25 million in 2020.
Dividends
A quarterly dividend of $0.08 per share, totaling $2.1 million, was paid on October 15, 2020 to stockholders of record as of October 1, 2020. A quarterly dividend of $0.08 per share, totaling $2.1 million, was paid on January 19, 2021 to stockholders of record as of January 4, 2021. A quarterly dividend of $0.08 per share, totaling $2.1 million, was paid on April 16, 2021 to stockholders of record as of April 1, 2021. Subsequent to June 30, 2021, a quarterly dividend of $0.08 per share, totaling $2.1 million, was paid on July 16, 2021 to stockholders of record as of July 1, 2021.
New Share Repurchase Program
On August 5, 2021, the Company’s Board of Directors adopted a new stock repurchase program, replacing the previous program which was adopted in 2012 and was scheduled to expire September 30, 2021. Under the new program, which is similar to the previous one, Management may repurchase shares of its outstanding stock in the open market and otherwise throughout the period ending September 30, 2024. The total value authorized is the lesser of $200 million or the dollar limitation imposed by the Company’s Credit Agreement. The repurchase program does not obligate the Company to repurchase any particular amount of stock, and it may be modified, extended, suspended or discontinued at any time. The timing and amount of repurchases are determined by Management based on a variety of factors such as the market price of our common stock, our corporate requirements, and overall market conditions. Purchases of our common stock may be made in open market transactions effected through a broker-dealer at prevailing market prices, in block trades, or in privately negotiated transactions. In addition, we may repurchase common stock through private or other transactions outside of the repurchase program.
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, 2020.
24
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 include, but are not necessarily limited to, statements about: the third quarter results, growth in sales, the effects of a widely available COVID-19 vaccine; the continuing effects of the COVID-19 pandemic including any impairment of the Company’s assets, impacts to commercial aerospace, military and navy markets which the Company serves, the strength of the markets served by the Company’s Test and USG segments, and the timing of the recovery of certain end markets which the Company serves; the correction of production issues, the effect of certain changes in the Company’s internal controls or in other factors on the effectiveness of its internal controls; the adequacy of the Company’s credit facility and the Company’s ability to increase it; the outcome of current litigation, claims and charges; cash flow; 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 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, 2020 and the following: the success and timing of COVID-19 vaccines in ending the pandemic and the effects of known or unknown COVID-19 variants; the continuing impact of the COVID-19 pandemic including labor shortages, facility closures, shelter in place policies or quarantines, material shortages, transportation delays, termination or delays of Company contracts and the inability of our suppliers or customers to perform, the impacts of natural disasters on the Company’s operations and those of the Company’s customers and suppliers; the timing and content of future contract awards or customer orders; the 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; 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; labor disputes; changes in U.S. tax laws and regulations; other changes in laws and regulations including but not limited to changes in accounting standards and foreign 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 of recently acquired businesses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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
25
underlying hedged item. There has been no material change to the Company’s market risks since September 30, 2020. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020 for further discussion about market risk.
ITEM 4. CONTROLS AND PROCEDURES
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. 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. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of June 30, 2021 as a result of material weaknesses in the Company’s internal control over financial reporting at a reporting unit within the Aerospace & Defense (A&D) segment, related to the ineffective design of certain controls over revenue recognition and the accumulation of inventory costs and determination of inventory carrying value resulting from changes in the business.
Other than identifying the specific deficiencies at a reporting unit within the A&D segment related to the material weaknesses disclosed, there were no changes 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.
The Company is in the process of remediating the material weaknesses and is taking the following actions: enhancing policies, procedures and controls related to inventory costing and revenue recognition, providing additional training to the segment finance department, and dedicating additional resources to improve the Company’s risk assessment process. The Company believes these measures will remediate the control deficiencies and strengthen internal control over financial reporting. The operating effectiveness of the revised and new controls will be assessed subsequent to full implementation, and the material weaknesses will be considered remediated only after the applicable controls have operated effectively for a sufficient period of time.
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
Exhibit Number |
| Description |
| Document Location |
|
|
|
|
|
3.1(a) |
|
| Exhibit 3(a) to the Company’s Form 10-K for the fiscal year ended September 30, 1999 | |
|
|
|
|
|
3.1(b) |
|
| Exhibit 4(e) to the Company’s Form 10-Q for the fiscal quarter ended March 31, 2000 | |
|
|
|
|
|
3.1(c) |
|
| Exhibit 3(c) to the Company’s Form 10-Q for the fiscal quarter ended June 30, 2000 | |
|
|
|
|
|
3.1(d) |
| Amendment of Articles of Incorporation effective February 5, 2018 |
| Exhibit 3.1 to the Company’s Form 8-K filed February 7, 2018 |
|
|
|
|
|
10.1 |
|
| (Note: Awards substantially identical to the referenced Exhibit except in amount have been granted to Victor L. Richey and David M. Schatz; these awards have been omitted as separate exhibits pursuant to Rule 12b-31) | |
| | | | |
10.2 | | Form of Restricted Stock Unit Awards to Executive Officers under 2018 Omnibus Incentive Plan | | (Note: Awards substantially identical to the referenced Exhibit except in amount have been granted to Victor L. Richey, Christopher L. Tucker and David M. Schatz; these awards have been omitted as separate exhibits pursuant to Rule 12b-31) |
| | | | |
10.3 | | Employment Agreement with Victor L. Richey effective May 10, 2021 | | |
| | | | |
10.4 | | Employment Agreement with Christopher L. Tucker effective April 30, 2021 | | |
| | | | |
10.5 | | Employment Agreement with David M. Schatz effective April 30, 2021 | | |
| | | | |
31.1 |
|
| ||
|
|
|
|
|
31.2 |
|
| ||
|
|
|
|
|
32 |
| Certification of Chief Executive Officer and Chief Financial Officer |
| |
|
|
|
|
|
101.INS |
| XBRL Instance Document* |
| Submitted herewith |
101.SCH |
| XBRL Schema Document* |
| Submitted herewith |
101.CAL |
| XBRL Calculation Linkbase Document* |
| Submitted herewith |
101.DEF |
| XBRL Definition Linkbase Document* |
| Submitted herewith |
101.LAB |
| XBRL Label Linkbase Document* |
| Submitted herewith |
101.PRE |
| XBRL Presentation Linkbase Document* |
| Submitted herewith |
|
|
|
|
|
104 | | Cover Page Interactive Data File (contained in Exhibit 101) | | Submitted herewith |
* Exhibit 101 to this report consists of documents formatted in XBRL (Extensible Business Reporting Language). The financial information contained in the XBRL – related documents is “unaudited” or “unreviewed”.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ESCO TECHNOLOGIES INC. |
|
|
| |
| |
| Senior Vice President and Chief Financial Officer |
| (As duly authorized officer and principal accounting and |
| financial officer of the registrant) |
| |
Dated: August 9, 2021 | |
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| This ‘10-Q’ Filing | Date | Other Filings | ||
|---|---|---|---|---|
 | ||||
| 9/30/24 | ||||
| 9/27/24 | ||||
| 9/30/21 | 10-K | |||
| Filed on: | 8/9/21 | 8-K | ||
| 8/5/21 | ||||
| 7/31/21 | ||||
| 7/29/21 | ||||
| 7/16/21 | 4 | |||
| 7/1/21 | ||||
| For Period end: | 6/30/21 | |||
| 5/20/21 | ||||
| 4/16/21 | 4 | |||
| 4/1/21 | ||||
| 1/19/21 | 4 | |||
| 1/4/21 | 4 | |||
| 10/15/20 | 4 | |||
| 10/1/20 | ||||
| 9/30/20 | 10-K | |||
| 6/30/20 | 10-Q | |||
| 2/7/18 | 10-Q, 8-K | |||
| 6/30/00 | 10-Q | |||
| 3/31/00 | 10-Q | |||
| 9/30/99 | 10-K, 8-K | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/29/23 Esco Technologies Inc. 10-K 9/30/23 81:9.4M Toppan Merrill/FA2 11/29/22 Esco Technologies Inc. 10-K 9/30/22 86:9.6M Toppan Merrill/FA2 11/29/21 Esco Technologies Inc. 10-K 9/30/21 86:9.7M Toppan Merrill/FA2 |
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 2/07/18 Esco Technologies Inc. 8-K:5,9 2/05/18 3:128K Toppan Merrill/FA 8/14/00 Esco Technologies Inc. 10-Q 6/30/00 6:354K Bowne Boc/FA 5/12/00 Esco Technologies Inc. 10-Q 3/31/00 5:62K 12/23/99 Esco Technologies Inc. 10-K 9/30/99 11:318K Bowne Boc/FA |