UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, |
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______ |
COMMISSION FILE NUMBER 1-10596
ESCO TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
MISSOURI | 43-1554045 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
| |
9900A CLAYTON ROAD | |
ST. LOUIS, MISSOURI | 63124-1186 |
(Address of principal executive offices) |
|
(314) 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 |
Common Stock, par value $0.01 per share | | ESE | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| | ||
Large accelerated filer | ☒ | Accelerated filer | ☐ |
| | | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ |
| |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
| Shares outstanding at April 30, |
Common stock, $.01 par value per share |
|
|
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 | | Three Months Ended | |||||||
| | March 31, | | March 31, | |||||||
|
| 2020 |
| 2019 |
| 2021 |
| 2020 | |||
| | | | | | | | | | | |
Net sales | | $ | 180,492 |
| | 171,243 |
| $ | 166,644 |
| 180,492 |
Costs and expenses: | |
| |
| | | |
| |
| |
Cost of sales | |
| 113,242 |
| | 103,547 | |
| 103,113 |
| 113,242 |
Selling, general and administrative expenses | |
| 39,982 |
| | 39,327 | |
| 38,746 |
| 39,982 |
Amortization of intangible assets | |
| 5,220 |
| | 4,371 | |
| 4,917 |
| 5,220 |
Interest expense, net | |
| 1,320 |
| | 1,853 | |
| 432 |
| 1,320 |
Other expenses (income), net | |
| 703 |
| | 2,022 | |||||
Other (income) expenses, net | |
| (1,903) |
| 703 | ||||||
Total costs and expenses | |
| 160,467 |
|
| 151,120 | |
| 145,305 |
| 160,467 |
| |
| |
| | | | | | | |
Earnings before income taxes | |
| 20,025 |
| | 20,123 | |
| 21,339 |
| 20,025 |
Income tax expense | |
| 2,203 |
|
| 2,301 | |
| 5,025 |
| 2,203 |
Earnings from continuing operations | | | 17,822 | | | 17,822 | |||||
Earnings from discontinued operations, net of tax expense of $257 | | | — | | | 975 | |||||
Gain on sale of discontinued operations | |
| — | |
| — | |||||
Earnings from discontinued operations | | | — | | | 975 | |||||
| | | | | | | |||||
Net earnings | | $ | 17,822 |
| | 18,797 | | $ | 16,314 |
| 17,822 |
| |
| |
| | | |
| |
| |
Earnings per share: | |
| |
| | | |
| |
| |
Basic - Continuing operations | | $ | 0.69 | | | 0.69 | |||||
- Discontinued operations | | | 0.00 | | | 0.04 | |||||
- Net earnings | | $ | 0.69 |
| | 0.73 | |||||
Basic - | |
| |
| | ||||||
Net earnings | | | 0.63 | | 0.69 | ||||||
| | | | | | | | | |
| |
Diluted - Continuing operations | | $ | 0.68 | | | 0.68 | |||||
- Discontinued operations | |
| 0.00 |
|
| 0.04 | |||||
- Net earnings | | $ | 0.68 |
| | 0.72 | |||||
Diluted - | | | | | | ||||||
Net earnings | | $ | 0.62 |
| 0.68 |
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)
| | | | | |
| | Six Months Ended | |||
| | March 31, | |||
|
| 2020 |
| 2019 | |
| | | | | |
Net sales | | $ | 352,220 |
| 334,608 |
Costs and expenses: | |
| |
| |
Cost of sales | |
| 219,969 |
| 206,001 |
Selling, general and administrative expenses | |
| 82,087 |
| 77,867 |
Amortization of intangible assets | |
| 11,030 |
| 8,771 |
Interest expense, net | |
| 3,741 |
| 3,708 |
Other expenses (income), net | |
| 998 |
| (5,357) |
Total costs and expenses | |
| 317,825 |
| 290,990 |
| |
| |
| |
Earnings before income taxes | |
| 34,395 |
| 43,618 |
Income tax expense | |
| 5,809 |
| 8,446 |
Earnings from continuing operations | | | 28,586 | | 35,172 |
(Loss) earnings from discontinued operations, net of tax expense of $269 and $52 | | | (601) | | 942 |
Gain on sale of discontinued operations, net of tax expense of $23,734 | | | 76,614 | | — |
Earnings from discontinued operations | | | 76,013 | | 942 |
| | | | | |
Net earnings | | $ | 104,599 |
| 36,114 |
| |
| |
| |
Earnings per share: | |
| |
| |
Basic - Continuing operations | | $ | 1.10 |
| 1.36 |
- Discontinued operations | | | 2.93 | | 0.04 |
- Net earnings | | $ | 4.03 | | 1.40 |
| |
| |
| |
Diluted - Continuing operations | | $ | 1.09 |
| 1.34 |
- Discontinued operations | | | 2.91 | | 0.04 |
- Net earnings | | $ | 4.00 | | 1.38 |
| | | | | | |
| | Six Months Ended | ||||
| | March 31, | ||||
|
| 2021 |
| 2020 | ||
| | | | | | |
Net sales | | $ | 329,593 |
| | 352,220 |
Costs and expenses: | |
| |
|
| |
Cost of sales | |
| 201,890 |
|
| 219,969 |
Selling, general and administrative expenses | |
| 79,746 |
|
| 82,087 |
Amortization of intangible assets | |
| 9,865 |
|
| 11,030 |
Interest expense, net | |
| 973 |
|
| 3,741 |
Other (income) expenses, net | |
| (1,880) |
|
| 998 |
Total costs and expenses | |
| 290,594 |
|
| 317,825 |
| |
| |
|
| |
Earnings before income taxes | |
| 38,999 |
|
| 34,395 |
Income tax expense | |
| 8,999 |
|
| 5,809 |
Earnings from continuing operations | | | 30,000 | | | 28,586 |
Loss from discontinued operations, net of tax expense of $269 | | | — | | | (601) |
Gain on sale of discontinued operations, net of tax expense of $23,734 | |
| — | |
| 76,614 |
Earnings from discontinued operations | | | — | | | 76,013 |
| | | | | | |
Net earnings | | $ | 30,000 |
| | 104,599 |
| |
| |
| | |
Earnings per share: | |
| |
| | |
Basic — Continuing operations | | $ | 1.15 | | | 1.10 |
— Discontinued operations | | | — | | | 2.93 |
— Net earnings | | $ | 1.15 |
| | 4.03 |
| | | | | | |
Diluted — Continuing operations | | $ | 1.15 | | | 1.09 |
— Discontinued operations | |
| — |
| | 2.91 |
— Net earnings | | $ | 1.15 |
| | 4.00 |
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 | | Six Months Ended | | | | | | | | | | | ||||||
| | March 31, | | March 31, | | Three Months Ended | | Six Months Ended | ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | | March 31, | | March 31, | ||||||||
| | | | | | | | | | | | 2021 |
| 2020 |
| 2021 |
| 2020 | ||
Net earnings | | $ | 17,822 |
| | 18,797 |
| 104,599 |
| 36,114 | | $ | 16,314 |
| 17,822 | | | 30,000 |
| 104,599 |
Other comprehensive income (loss), net of tax: | |
| |
| | |
| |
| | |
| |
| | |
| |
| |
Foreign currency translation adjustments | |
| (6,885) |
| | 677 |
| (2,962) |
| (3,852) | |
| 116 |
| (6,885) | |
| 5,465 |
| (2,962) |
Net unrealized gain on derivative instruments | |
| — |
| | 126 |
| — |
| 100 | ||||||||||
Total other comprehensive income (loss), net of tax | |
| (6,885) |
|
| 803 |
| (2,962) |
| (3,752) | |
| 116 |
| (6,885) | |
| 5,465 |
| (2,962) |
Comprehensive income | | $ | 10,937 |
| | 19,600 |
| 101,637 |
| 32,362 | | $ | 16,430 |
| 10,937 | | | 35,465 |
| 101,637 |
See accompanying notes to consolidated financial statements.
4
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
| | | | | | | | | | | | |
| | March 31, | | September 30, | | March 31, | | September 30, | ||||
|
| 2020 |
| 2019 |
| 2021 |
| 2020 | ||||
ASSETS |
| |
|
| |
|
| |
|
| |
|
Current assets: |
| |
|
| |
|
| |
|
| |
|
Cash and cash equivalents | | $ | 100,195 |
| | 61,808 | | $ | 45,653 |
| | 52,560 |
Accounts receivable, net | |
| 157,050 |
| | 158,715 | |
| 124,580 |
| | 144,082 |
Contract assets | |
| 96,100 |
| | 110,211 | |
| 95,002 |
| | 96,746 |
Inventories, net | |
| 141,027 |
| | 124,956 | |
| 145,342 |
| | 136,189 |
Other current assets | |
| 17,228 |
| | 14,190 | |
| 17,523 |
| | 17,053 |
Assets of discontinued operations – current | | | — | | | 25,314 | ||||||
Total current assets | |
| 511,600 |
| | 495,194 | |
| 428,100 |
| | 446,630 |
Property, plant and equipment, net of accumulated depreciation of $122,204 and $113,520, respectively | |
| 139,248 |
| | 127,843 | ||||||
Intangible assets, net of accumulated amortization of $118,277 and $107,247, respectively | |
| 371,779 |
| | 381,605 | ||||||
Property, plant and equipment, net of accumulated depreciation of $140,784 and $130,534, respectively | |
| 143,401 |
| | 139,870 | ||||||
Intangible assets, net of accumulated amortization of $138,928 and $129,063, respectively | |
| 345,261 |
| | 346,632 | ||||||
Goodwill | |
| 389,630 |
| | 390,256 | |
| 411,661 |
| | 408,063 |
Operating lease assets | | | 18,901 | | | — | | | 18,929 | | | 21,390 |
Other assets | |
| 10,421 |
| | 4,445 | |
| 10,050 |
| | 10,938 |
Assets of discontinued operations - other | | | — | | | 67,377 | ||||||
Total assets | | $ | 1,441,579 |
| | 1,466,720 | | $ | 1,357,402 |
| | 1,373,523 |
| |
|
|
| |
| |
| |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
|
|
| |
| |
| |
| | |
Current liabilities: | |
|
|
| |
| |
| |
| | |
Current maturities of long-term debt | | $ | 20,000 |
| | 20,000 | ||||||
Current maturities of long-term debt and short-term borrowings | | $ | 20,000 |
| | 22,368 | ||||||
Accounts payable | |
| 53,617 |
| | 63,800 | |
| 47,091 |
| | 50,525 |
Contract liabilities | |
| 95,382 |
| | 81,177 | |
| 106,622 |
| | 100,551 |
Accrued salaries | |
| 27,062 |
| | 37,194 | |
| 28,740 |
| | 32,149 |
Accrued other expenses | |
| 54,968 |
| | 37,947 | |
| 44,130 |
| | 50,436 |
Liabilities of discontinued operations - current | | | — | | | 11,517 | ||||||
Total current liabilities | |
| 251,029 |
| | 251,635 | |
| 246,583 |
| | 256,029 |
Pension obligations | |
| 22,861 |
| | 22,682 | ||||||
Deferred tax liabilities | |
| 61,690 |
| | 60,856 | |
| 59,949 |
| | 60,938 |
Non-current operating lease liabilities | | | 15,010 | | | — | | | 14,501 | | | 16,785 |
Other liabilities | |
| 34,782 |
| | 36,326 | |
| 39,362 |
| | 38,176 |
Long-term debt | |
| 130,000 |
| | 265,000 | |
| 2,000 |
| | 40,000 |
Liabilities of discontinued operations - other | | | — | | | 3,999 | ||||||
Total liabilities | |
| 515,372 |
| | 640,498 | |
| 362,395 |
| | 411,928 |
Shareholders’ equity: | |
| |
| | | |
| |
| | |
Preferred stock, par value $.01 per share, authorized 10,000,000 shares | |
| — |
| | — | |
| — |
| | — |
Common stock, par value $.01 per share, authorized 50,000,000 shares, issued 30,596,940 and 30,596,940 shares, respectively | |
| 306 |
| | 306 | ||||||
Common stock, par value $.01 per share, authorized 50,000,000 shares, issued 30,645,625 and 30,645,625 shares, respectively | |
| 306 |
| | 306 | ||||||
Additional paid-in capital | |
| 294,787 |
| | 292,408 | |
| 295,796 |
| | 293,682 |
Retained earnings | |
| 785,184 |
| | 684,741 | |
| 804,231 |
| | 778,398 |
Accumulated other comprehensive loss, net of tax | |
| (46,936) |
| | (43,974) | ||||||
Accumulated other comprehensive income (loss), net of tax | |
| 1,808 |
| | (3,657) | ||||||
| |
| 1,033,341 |
| | 933,481 | |
| 1,102,141 |
| | 1,068,729 |
Less treasury stock, at cost: 4,607,911 and 4,615,627 common shares, respectively | |
| (107,134) |
| | (107,259) | ||||||
Less treasury stock, at cost: 4,607,911 and 4,607,911 common shares, respectively | |
| (107,134) |
| | (107,134) | ||||||
Total shareholders’ equity | |
| 926,207 |
| | 826,222 | |
| 995,007 |
| | 961,595 |
Total liabilities and shareholders’ equity | | $ | 1,441,579 |
| | 1,466,720 | | $ | 1,357,402 |
| | 1,373,523 |
See accompanying notes to consolidated financial statements.
5
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
| | | | | | |
| | Six Months Ended | ||||
| | March 31, | ||||
|
| 2020 |
| 2019 | ||
Cash flows from operating activities: |
| |
|
| |
|
Net earnings | | $ | 104,599 |
| | 36,114 |
Earnings from discontinued operations | | | (76,013) | | | (942) |
Adjustments to reconcile net earnings to net cash provided by operating activities: | |
| |
| | |
Depreciation and amortization | |
| 20,583 |
| | 16,837 |
Stock compensation expense | |
| 2,896 |
| | 2,557 |
Changes in assets and liabilities | |
| (16,247) |
| | (28,124) |
Change in property, plant and equipment due to gain on sale of building | | | — | | | (8,922) |
Pension contributions | |
| — | | | (833) |
Effect of deferred taxes | |
| 834 |
| | (1,431) |
Net cash provided by operating activities – continuing operations | |
| 36,652 |
| | 15,256 |
Net cash (used) provided by operating activities – discontinued operations | | | (14,622) | | | 1,736 |
Net cash provided by operating activities | | | 22,030 | | | 16,992 |
| |
| |
| | |
Cash flows from investing activities: | |
|
|
| |
|
Proceeds from sale of building and land | | | — | | | 17,201 |
Additions to capitalized software | |
| (4,280) | | | (4,494) |
Capital expenditures | |
| (21,211) | | | (10,127) |
Net cash (used) provided by investing activities – continuing operations | |
| (25,491) | | | 2,580 |
Proceeds from sale of discontinued operations | | | 183,997 | | | — |
Capital expenditures – discontinued operations | | | (1,728) | | | (7,298) |
Net cash provided (used) by investing activities – discontinued operations | | | 182,269 | | | (7,298) |
Net cash provided (used) by investing activities | | | 156,778 | | | (4,718) |
| | | | | | |
Cash flows from financing activities: | |
| | | | |
Proceeds from long-term debt and short-term borrowings | |
| 10,000 | | | 23,000 |
Principal payments on long-term debt | |
| (145,000) | | | (26,000) |
Dividends paid | |
| (4,156) | | | (4,146) |
Other | |
| — | | | 370 |
Net cash used by financing activities – continuing operations | |
| (139,156) | | | (6,776) |
Net cash (used) provided by financing activities – discontinued operations | | | (2,140) | | | 1,091 |
Net cash used by financing activities | | | (141,296) | | | (5,685) |
Effect of exchange rate changes on cash and cash equivalents | |
| 875 | | | (2,111) |
Net increase in cash and cash equivalents | |
| 38,387 | | | 4,478 |
Cash and cash equivalents, beginning of period | |
| 61,808 | | | 30,477 |
Cash and cash equivalents, end of period | | $ | 100,195 | | | 34,955 |
| |
| | | | |
Supplemental cash flow information: | |
| | | | |
Interest paid | | $ | 3,477 | | | 3,594 |
Income taxes paid (including state and foreign) | |
| 23,098 | | | 13,450 |
| | | | | |
| | Six Months Ended | |||
| | March 31, | |||
|
| 2021 |
| 2020 | |
Cash flows from operating activities: |
| |
|
|
|
Net earnings | | $ | 30,000 |
| 104,599 |
Earnings from discontinued operations | | | — | | (76,013) |
Adjustments to reconcile net earnings to net cash provided by operating activities: | |
| |
| |
Depreciation and amortization | |
| 20,115 |
| 20,583 |
Stock compensation expense | |
| 2,745 |
| 2,896 |
Changes in assets and liabilities | |
| 7,401 |
| (16,247) |
Gain on sale of building and land | | | (1,950) | | — |
Effect of deferred taxes | |
| (989) |
| 834 |
Net cash provided by operating activities – continuing operations | | | 57,322 | | 36,652 |
Net cash used by operating activities – discontinued operations | | | — | | (14,622) |
Net cash provided by operating activities | | | 57,322 | | 22,030 |
Cash flows from investing activities: | |
| |
| |
Acquisition of business, net of cash acquired | |
| (6,684) |
| — |
Proceeds from sale of building and land | |
| 1,950 |
| — |
Additions to capitalized software | |
| (3,973) |
| (4,280) |
Capital expenditures | | | (13,153) | | (21,211) |
Net cash used by investing activities – continuing operations | | | (21,860) | | (25,491) |
Proceeds from sale of discontinued operations | | | — | | 183,997 |
Capital expenditures – discontinued operations | | | — | | (1,728) |
Net cash provided by investing activities – discontinued operations | | | — | | 182,269 |
Net cash (used) provided by investing activities | | | (21,860) | | 156,778 |
Cash flows from financing activities: | |
| |
| |
Proceeds from long-term debt and short-term borrowings | |
| 34,000 |
| 10,000 |
Principal payments on long-term debt and short-term borrowings | |
| (74,368) |
| (145,000) |
Dividends paid | |
| (4,167) |
| (4,156) |
Net cash used by financing activities – continuing operations | | | (44,535) | | (139,156) |
Net cash used by financing activities – discontinued operations | | | — | | (2,140) |
Net cash used by financing activities | | | (44,535) | | (141,296) |
Effect of exchange rate changes on cash and cash equivalents | |
| 2,166 |
| 875 |
Net (decrease) increase in cash and cash equivalents | |
| (6,907) |
| 38,387 |
Cash and cash equivalents, beginning of period | |
| 52,560 |
| 61,808 |
Cash and cash equivalents, end of period | | $ | 45,653 |
| 100,195 |
| | | |
| |
Supplemental cash flow information: | |
| |
| |
Interest paid | | $ | 281 |
| 3,477 |
Income taxes paid (including state and foreign) | |
| 14,047 |
| 23,098 |
See accompanying notes to consolidated financial statements.
6
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required for annual financial statements by accounting principles generally accepted in the United States of America (GAAP). 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, 2019. Certain 2019 amounts have been reclassified to conform with the 2020 presentation.2020.
The Company’s results for the three-month period ended March 31, 20202021 are not necessarily indicative of the results for the entire 20202021 fiscal year. References to the second quarters of 20202021 and 20192020 represent the fiscal quarters ended March 31, 20202021 and 2019,2020, 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.
Beginning in the first quarter of 2020, Management has renamed the Filtration / Fluid Flow (Filtration) segment as Aerospace & Defense (A&D) to better reflect the composition of the segment’s products, end markets and customer characteristics. The A&D’s segment’s individual legal and operating entities, historical financial results, and management structure are unchanged from what was formerly presented as Filtration.
2. TECHNICAL PACKAGING DIVESTITURE
On December 31, 2019, the Company completed the sale of its Technical Packaging business segment, consisting of the Company's wholly-owned subsidiaries Thermoform Engineered Quality LLC, Plastique Ltd. and Plastique sp. z o.o. (the "Technical Packaging Business"), to Sonoco Plastics, Inc. and Sonoco Holdings, Inc. ("Buyers"), 2 wholly-owned subsidiaries of Sonoco Products Company, pursuant to the Equity Purchase Agreement entered into on November 15, 2019. The companies within this segment provide innovative solutions to the medical and commercial markets for thermoformed packages and specialty products using a wide variety of thin gauge plastics and pulp. Results of operations, financial position and cash flows for the Technical Packaging business is reflected as discontinued operations in the consolidated financial statements and related notes for all periods presented.
Net sales from the Technical Packaging business were 0 and $16.5 million in the second quarter and first six months of 2020, respectively, compared to $22.7 million and $41.9 million in the corresponding periods of 2019. The Company received net proceeds from the sale of approximately $184 million and recorded a $76.6 million after-tax gain on the sale in the first quarter of 2020. The Company expects to finalize the working capital adjustment during the third quarter of 2020.
7
The major classes of assets and liabilities of the Technical Packaging business included in the Consolidated Balance Sheet at September 30, 2019 are shown below (in millions).
| | | |
|
| September 30, 2019 | |
Assets: | |
|
|
Accounts receivable, net |
| $ | 15.7 |
Contract assets, net | |
| 5.1 |
Inventories | |
| 3.9 |
Other current assets | |
| 0.6 |
Current assets | |
| 25.3 |
Property, plant & equipment, net | |
| 33.6 |
Intangible assets, net | |
| 11.4 |
Goodwill | |
| 19.0 |
Other assets | |
| 3.4 |
Total assets |
| $ | 92.7 |
Liabilities: | |
| |
Accounts payable |
| $ | 7.6 |
Accrued expenses and other current liabilities | |
| 3.9 |
Current liabilities | |
| 11.5 |
Other liabilities | |
| 4.0 |
Total liabilities |
| $ | 15.5 |
3. ACCOUNTING STANDARDS UPDATE
In February 2016, the FASB issued ASU No. 2016-062, "Leases" (ASU 2016-062) which supersedes ASC 840, "Leases" and creates a new topic, ASC 842, "Leases." Subsequent to the issuance of ASU 2016-062, ASC 842 was amended by various updates that amend and clarify the impact and implementation of the aforementioned update. Effective October 1, 2019, the Company adopted these updates using the optional transition method. These updates require lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. Upon initial application, the provisions of these updates are required to be applied using the modified retrospective method, which requires retrospective adoption to each prior reporting period presented with the cumulative effect of adoption recorded to the earliest reporting period presented. An optional transition method can be utilized which requires retrospective adoption beginning on the date of adoption with the cumulative effect of initially applying these updates recognized at the date of initial adoption. The standard also provided several optional practical expedients for use in transition. The Company elected to use what the FASB has deemed the “package of practical expedients,” which allowed the Company not to reassess previous conclusions regarding lease identification, lease classification and the accounting treatment for initial direct costs. These updates also expand the required quantitative and qualitative disclosures surrounding leases. The adoption resulted in the addition of "right of use" assets and lease liabilities of approximately $20 million in the consolidated balance sheet, with no significant change to the Company’s consolidated statements of operations or cash flows. Refer to Note 16 for further discussion.
8
4.2. EARNINGS PER SHARE (EPS)
Basic EPS is calculated using the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the weighted average number of common shares outstanding during the period plus shares issuable upon the assumed exercise of dilutive common share options and vesting of performance-accelerated restricted shares (restricted shares) by using the treasury stock method. The number of shares used in the calculation of earnings per share for each period presented is as follows (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months | | Six Months |
| Three Months | | Six Months | ||||||||
| | Ended March 31, | | Ended March 31, | | Ended March 31, | �� | Ended March 31, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | | 2021 |
| 2020 |
| 2021 |
| 2020 |
| | | | | | | | | ||||||||
Weighted Average Shares Outstanding - Basic | | 25,988 | | 25,918 | | 25,985 | | 25,915 | ||||||||
Weighted Average Shares Outstanding — Basic |
| 26,038 |
| 25,988 |
| 26,038 |
| 25,985 | ||||||||
Dilutive Options and Restricted Shares |
| 100 |
| 118 |
| 141 |
| 163 | | 163 | | 100 | | 154 | | 141 |
Adjusted Shares - Diluted |
| 26,088 |
| 26,036 |
| 26,126 |
| 26,078 | ||||||||
Adjusted Shares — Diluted |
| 26,201 |
| 26,088 |
| 26,192 |
| 26,126 |
5.3. 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 $1.1 million and $2.3$2.1 million for the three and six-month periods ended March 31, 2020,2021, respectively, and $0.9$1.1 million and $2.0$2.3 million for the corresponding periods in 2019.2020. There were 175,577220,430 non-vested shares outstanding as of March 31, 2020.2021.
Non-Employee Directors Plan
Compensation expense related to the non-employee director grants was $0.3 million and $0.6 million for the three and six-month periods ended March 31, 2020,2021, respectively, and $0.3 million and $0.5$0.6 million for the corresponding periods in 2019.2020.
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 $1.5$1.4 million and $2.9$2.7 million for the three and six-month periods ended March 31, 2020,2021, respectively, and $1.2$1.5 million and $2.6$2.9 million for the corresponding periods in 2019.2020. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $0.3 million and $0.7 million for the three and six-month periods ended March 31, 2020,2021, respectively, and $0.3 million and $0.6$0.7 million for the corresponding periods in 2019.
7
2020. As of March 31, 2020,2021, there was $6.8$6.1 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a remaining weighted-average period of 1.5 years.
2.1 years.
6.4. INVENTORIES
Inventories, net, from continuing operations consist of the following:
| | | | | | | | | | | |
| | March 31, | | September 30, |
| March 31, |
| September 30, | |||
(In thousands) |
| 2020 |
| 2019 |
| 2021 |
| 2020 | |||
| | | | | | | |||||
Finished goods | | $ | 23,898 | | | 23,550 | | $ | 29,363 |
| 28,471 |
Work in process | |
| 39,768 | | | 26,407 | |
| 37,905 |
| 30,183 |
Raw materials | |
| 77,361 | | | 74,999 | |
| 78,074 |
| 77,535 |
Total inventories | | $ | 141,027 | | | 124,956 | | $ | 145,342 |
| 136,189 |
9
7.5. GOODWILL AND OTHER INTANGIBLE ASSETS
Included on the Company’s Consolidated Balance Sheets at March 31, 20202021 and September 30, 20192020 are the following intangible assets gross carrying amounts and accumulated amortization from continuing operations:
| | | | | | | | | | | |
| | March 31, | | September 30, |
| March 31, |
| September 30, | |||
(Dollars in thousands) |
| 2020 |
| 2019 |
| 2021 |
| 2020 | |||
Goodwill | | $ | 389,630 | | | 390,256 | | $ | 411,661 |
| 408,063 |
| | | | | | | |
| | | |
Intangible assets with determinable lives: | |
| | | | | |
| | | |
Patents | |
| | | | | |
| | | |
Gross carrying amount | | $ | 2,067 | | | 1,945 | | $ | 2,136 | | 2,092 |
Less: accumulated amortization | |
| 806 | | | 748 | |
| 915 | | 858 |
Net | | $ | 1,261 | | | 1,197 | | $ | 1,221 | | 1,234 |
| | | | | | | |
| | | |
Capitalized software | |
| | | | | |
| | | |
Gross carrying amount | | $ | 83,243 | | | 78,962 | | $ | 88,862 | | 84,888 |
Less: accumulated amortization | |
| 53,034 | | | 48,530 | |
| 60,563 | | 57,302 |
Net | | $ | 30,209 | | | 30,432 | | $ | 28,299 | | 27,586 |
| | | | | | | |
| | | |
Customer relationships | |
| | | | | |
| | | |
Gross carrying amount | | $ | 226,946 | | | 227,225 | | $ | 229,322 | | 227,178 |
Less: accumulated amortization | |
| 61,486 | | | 55,326 | |
| 73,864 | | 67,643 |
Net | | $ | 165,460 | | | 171,899 | | $ | 155,458 | | 159,535 |
| | | | | | | |
| | | |
Other | |
| | | | | |
| | | |
Gross carrying amount | | $ | 5,081 | | | 5,441 | | $ | 5,356 | | 5,156 |
Less: accumulated amortization | |
| 2,953 | | | 2,645 | |
| 3,586 | | 3,260 |
Net | | $ | 2,128 | | | 2,796 | | $ | 1,770 | | 1,896 |
Intangible assets with indefinite lives: | |
| | | | | |
| | | |
Trade names | | $ | 172,721 | | | 175,281 | | $ | 158,513 | | 156,381 |
The changes in the carrying amount of goodwill attributable to each business segment for the six months ended March 31, 20202021 is as follows on a continuing operations basis:
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Aerospace | | | | | | | | | | Aerospace | | | |
(Dollars in millions) |
| USG |
| Test |
| & Defense |
| Total |
| USG |
| Test |
| & Defense |
| Total | |||||
Balance as of September 30, 2019 |
| | 254.0 |
| | 34.1 |
| | 102.2 |
| | 390.3 | |||||||||
Balance as of September 30, 2020 | | | 271.9 |
| 34.1 |
| 102.1 |
| 408.1 | ||||||||||||
Acquisition activity | | | — | | — | | 2.5 | | 2.5 | ||||||||||||
Foreign currency translation |
| | (0.6) | | | (0.1) | | | — | | | (0.7) | | | 1.1 | | — | | — | | 1.1 |
Balance as of March 31, 2020 | | $ | 253.4 | | | 34.0 | | | 102.2 | | | 389.6 | |||||||||
Balance as of March 31, 2021 | | $ | 273.0 | | 34.1 | | 104.6 | | 411.7 |
8
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 0 impairment charges incurred for the three and six-month periods ended March 31, 2021, however, the fair value of the Mayday reporting unit exceeded carrying value by less than 10%. At March 31, 2021, we had $30 million of goodwill recorded for Mayday.
10
8.6. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers and classifies its continuing business operations in three reportable segments for financial reporting purposes: Aerospace & Defense, (formerly called Filtration/Fluid Flow)Utility Solutions Group (USG), and RF Shielding and Test (Test), and Utility Solutions Group (USG). 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 commercial 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. The USG segment’s operations consist primarily of Doble Engineering Company (Doble), Morgan Schaffer Inc. (Morgan Schaffer), and NRG Systems, Inc. (NRG). Doble provides high-end, intelligent, diagnostic test and data management solutions for the electric power delivery industry and is a leading supplier of partial discharge testing instruments used to assess the integrity of high voltage power delivery equipment. Morgan Schaffer provides an integrated offering of dissolved gas analysis, oil testing, and data management solutions for the electric power industry. NRG designs and manufactures decision support tools for the renewable energy industry, primarily wind.
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.
| | | | | | | | | | | | | | | | | | | |
| | Three Months | | Six Months | | Three Months | | Six Months | |||||||||||
| | Ended March 31, | | Ended September 30, | | Ended March 31, | | Ended March 31, | |||||||||||
(In thousands) |
| 2020 |
| 2019 |
| 2020 | 2019 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
NET SALES |
| |
|
| |
|
|
|
|
| | |
| |
| |
| |
|
Aerospace & Defense | | $ | 95,124 |
| | 79,478 |
| 172,635 |
| 145,702 | | $ | 83,278 | | 95,124 | | 150,169 | | 172,635 |
USG | | | 39,555 | | 43,768 | | 94,095 | | 96,602 | ||||||||||
Test | |
| 41,600 |
| | 42,875 |
| 82,983 |
| 84,161 | | | 43,811 | | 41,600 | | 85,329 | | 82,983 |
USG | |
| 43,768 |
| | 48,890 |
| 96,602 |
| 104,745 | |||||||||
Consolidated totals | | $ | 180,492 |
| | 171,243 |
| 352,220 |
| 334,608 | | $ | 166,644 | | 180,492 | | 329,593 | | 352,220 |
| | | | | | | | | | | | | | | | | | | |
EBIT | |
| |
| | |
| |
| | | | | | | | | | |
Aerospace & Defense | | $ | 21,736 |
| | 17,443 |
| 34,249 |
| 28,053 | | $ | 18,196 | | 21,736 | | 27,576 | | 34,249 |
USG | | | 6,725 | | 4,866 | | 19,456 | | 14,153 | ||||||||||
Test | |
| 5,651 |
| | 5,554 |
| 10,307 |
| 8,864 | | | 5,688 | | 5,651 | | 11,030 | | 10,307 |
USG | |
| 4,866 |
| | 8,767 |
| 14,153 |
| 30,313 | |||||||||
Corporate (loss) | |
| (10,908) |
|
| (9,788) |
| (20,573) |
| (19,904) | | | (8,838) | | (10,908) | | (18,090) | | (20,573) |
Consolidated EBIT | |
| 21,345 |
| | 21,976 |
| 38,136 |
| 47,326 | | | 21,771 | | 21,345 | | 39,972 | | 38,136 |
Less: Interest expense | |
| (1,320) |
|
| (1,853) |
| (3,741) |
| (3,708) | | | (432) | | (1,320) | | (973) | | (3,741) |
Earnings before income taxes | | $ | 20,025 |
| | 20,123 |
| 34,395 |
| 43,618 | | $ | 21,339 | | 20,025 | | 38,999 | | 34,395 |
11
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
9
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.
9.7. DEBT
The Company’s debt is summarized as follows:
| | | | | | | | | | | |
| | March 31, | | September 30, |
| March 31, | | September 30, | |||
(In thousands) |
| 2020 |
| 2019 |
| 2021 |
| 2020 | |||
Total borrowings | | $ | 150,000 |
| | 285,000 | | $ | 22,000 |
| 62,368 |
Current portion of long-term debt | |
| (20,000) |
|
| (20,000) | |||||
Current portion of long-term debt and short-term borrowings | |
| (20,000) |
| (22,368) | ||||||
Total long-term debt, less current portion | | $ | 130,000 |
| | 265,000 | | $ | 2,000 |
| 40,000 |
On September 27, 2019, the Company entered into a new five-year credit facility (“the Credit Facility”), modifying its previous credit facility which would have matured December 21, 2020. The Credit Facility includes a $500 million revolving line of credit as well as provisions allowing for the increase of the credit facility commitment amount by an additional $250 million, if necessary, with the consent of the lenders. The bank syndication supporting the facility is comprised of a diverse group of eight banks led by JP Morgan Chase Bank, N.A., as Administrative Agent. The Credit Facility matures September 27, 2024.
At March 31, 2020,2021, the Company had approximately $341$468 million available to borrow under the Credit Facility, plus the $250 million increase option, subject to lender approval, in addition to $100.2$45.7 million cash on hand. The Company classified $20.0 million as the current portion of long-term debt as of March 31, 2020,2021, 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 $9.8$10.4 million at March 31, 2020.2021.
Interest on borrowings under the Credit Facility is calculated at a spread over either the London Interbank Offered Rate (LIBOR ),(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 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 1.27% and 1.40% for the three and six- month periods ending March 31, 2021, respectively, and 3.24% and 3.21%3.21% for the three and six-month periods ending March 31, 2020, respectively , and 3.20% and 3.23% for the three and six-month periods ending March 31, 2019.2020. As of March 31, 2020,2021, the Company was in compliance with all covenants.
12
10.8. INCOME TAX EXPENSE
The second quarter 20202021 effective income tax rate from continuing operations was 11.0%23.5% compared to 11.4%11.0% in the second quarter of 2019.2020. The effective income tax rate in the first six months of 20202021 was 16.9%23.1% compared to 19.4%16.9% for the first six months of 2019. The income2020. Income tax expense in the second quarter of 2021 was unfavorably impacted by a change in our estimate of the fiscal 2020 research credit increasing the second quarter and year-to-date effective tax rate by 0.6% and 0.3%, respectively. Income tax expense in the second quarter of 2020 was favorably impacted by the release of a valuation allowance of $2.8 million for foreign net operating losses decreasing the second quarter 2020 and year-to-date effective tax rate by 14.3% and 8.2%, respectively. The income tax expense in the second quarter and first six months of 2019 was favorably impacted by tax planning strategies to increase the foreign tax credits claimed retrospectively. The Company reduced the valuation allowance for excess foreign tax credits by $2.3 million and recorded an amended return receivable of $0.2 million, which favorably impacted the 2019 second quarter and year-to-date effective tax rate by 12.9% and 5.9%, respectively.
10
11.9. SHAREHOLDERS’ EQUITY
The change in shareholders’ equity for the first three and six months of 2020 and 2019 is shown below (in thousands):
| | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Six Months Ended March 31, | | Three Months Ended March 31, | | Six Months Ended March 31, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| | | | | | | | | | | | | | | | |
Common stock | | | | | | | | | | | | | | | | |
Beginning balance | | 306 | | 305 | | 306 | | 305 | | 306 | | 306 | | 306 | | 306 |
Stock plans | | — | | — | | — | | — | | — | | — | | — | | — |
Ending balance | | 306 | | 305 | | 306 | | 305 | | 306 | | 306 | | 306 | | 306 |
| | | | | | | | | | | | | | | | |
Additional paid-in-capital | | | | | | | | | | | | | | | | |
Beginning balance | | 293,056 | | 292,293 | | 292,408 | | 291,190 | | 294,735 | | 293,056 | | 293,682 | | 292,408 |
Stock plans | | 1,731 | | 1,319 | | 2,379 | | 2,422 | | 1,061 | | 1,731 | | 2,114 | | 2,379 |
Ending balance | | 294,787 | | 293,612 | | 294,787 | | 293,612 | | 295,796 | | 294,787 | | 295,796 | | 294,787 |
| | | | | | | | | | | | | | | | |
Retained earnings | | | | | | | | | | | | | | | | |
Beginning balance | | 769,439 | | 627,670 | | 684,741 | | 606,837 | | 790,000 | | 769,439 | | 778,398 | | 684,741 |
Net earnings common stockholders | | 17,822 | | 18,797 | | 104,599 | | 36,114 | | 16,314 | | 17,822 | | 30,000 | | 104,599 |
Dividends paid | | (2,077) | | (2,074) | | (4,156) | | (4,147) | | (2,083) | | (2,077) | | (4,167) | | (4,156) |
Adoption of accounting standards updates | | — | | (1,375) | | — | | 4,214 | ||||||||
Ending balance | | 785,184 | | 643,018 | | 785,184 | | 643,018 | | 804,231 | | 785,184 | | 804,231 | | 785,184 |
| | | | | | | | | | | | | | | | |
Accumulated other comprehensive income (loss) | | | | | | | | | | | | | | | | |
Beginning balance | | (40,051) | | (36,083) | | (43,974) | | (31,528) | | 1,692 | | (40,051) | | (3,657) | | (43,974) |
Foreign currency translation | | (6,885) | | 677 | | (2,962) | | (3,853) | | 116 | | (6,885) | | 5,465 | | (2,962) |
Pension | | — | | — | | — | | — | ||||||||
Forward exchange contracts | | — | | 126 | | — | | 101 | ||||||||
Ending balance | | (46,936) | | (35,280) | | (46,936) | | (35,280) | | 1,808 | | (46,936) | | 1,808 | | (46,936) |
| | | | | | | | | | | | | | | | |
Treasury stock | | | | | | | | | | | | | | | | |
Beginning balance | | (107,259) | | (107,394) | | (107,259) | | (107,394) | | (107,134) | | (107,259) | | (107,134) | | (107,259) |
Issued under stock plans | | 125 | | 135 | | 125 | | 135 | | — | | 125 | | — | | 125 |
Ending balance | | (107,134) | | (107,259) | | (107,134) | | (107,259) | | (107,134) | | (107,134) | | (107,134) | | (107,134) |
| | | | | | | | | | | | | | | | |
Total equity | | 926,207 | | 794,396 | | 926,207 | | 794,396 | | 995,007 | | 926,207 | | 995,007 | | 926,207 |
13
12. RETIREMENT PLANS
A summary of net periodic benefit expense for the Company’s defined benefit plans for the three and six-month periods ended March 31, 2020 and 2019 is shown in the following table. Net periodic benefit cost for each period presented is comprised of the following:
| | | | | | | | | | |
| | Three Months | | Six Months | ||||||
| | Ended March 31, | | Ended March 31, | ||||||
(In thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||
Defined benefit plans | | |
| | |
| |
| |
|
Interest cost | | $ | 824 |
| | 875 |
| 1,648 |
| 1,750 |
Expected return on assets | |
| (1,041) |
| | (1,086) |
| (2,082) |
| (2,172) |
Amortization of: | |
| |
| | |
| |
| |
Prior service cost | |
| — |
| | — |
| — |
| — |
Actuarial loss | |
| 543 |
|
| 487 |
| 1,087 |
| 974 |
Net periodic benefit cost | | $ | 326 |
| | 276 |
| 653 |
| 552 |
13. DERIVATIVE FINANCIAL INSTRUMENTS
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. In 2018, the Company entered into three interest rate swaps with a notional amount of $150 million to hedge some of its exposure to variability in future LIBOR-based interest payments on variable rate debt, of which one swap is outstanding as of March 31, 2020. In addition, the Company’s Canadian subsidiary Morgan Schaffer enters into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars. The Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized may differ for open positions, which remain subject to ongoing market price fluctuations until settlement. All derivative instruments are reported in either accrued expenses or other assets on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. The interest rate swaps entered into during 2018 were not designated as cash flow hedges and, therefore, the gain or loss on the derivative is reflected in earnings each period.
The following is a summary of the notional transaction amounts and fair values for the Company’s outstanding derivative financial instruments by risk category and instrument type as of March 31, 2020:
| | | | | | | | | |
| | | | Fair | | | | ||
| | Notional | | Value | | Fix | | ||
(In thousands) |
| amount |
| (US$) |
| Rate |
| ||
Forward contracts |
| 6,250 |
| USD |
| (381) |
|
|
|
Interest rate swap |
| 150,000 |
| USD |
| (1,997) |
| 2.24 | % |
14.10. 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. |
14
Financial Assets and Liabilities
The Company has estimated the fair value of its financial instruments as of March 31, 20202021 and September 30, 20192020 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.
11
Fair Value of Financial Instruments
The Company’s forward contracts and interest rate swaps are classified within Level 2 of the valuation hierarchy in accordance with FASB Accounting Standards Codification (ASC) 825, as presented below as of March 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | |
(In thousands) |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| | Level 3 |
| Total | |||||
Assets (Liabilities): |
| |
|
| |
|
| |
|
| |
| | | | | | | | | | |
Forward contracts and interest rate swaps | | $ | — |
| | (2,378) | | $ | — |
| | (2,378) | ||||||||||
Forward contracts | | $ | — |
| 141 |
| $ | — |
| 141 |
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 six-month periods ended March 31, 2020.2021.
15.11. REVENUES
Disaggregation of Revenues
Revenues by customer type, geographic location, and revenue recognition method for the three and six-month periods ended March 31, 20202021 are presented in the tables below as the Company deems it best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected by economic factors. The tabletables below also include a reconciliation of the disaggregated revenue within each reportable segment on a continuing operations basis.
| | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2020 |
| Aerospace |
| | |
| | |
| | | ||||||||||||||
Three months ended March 31, 2021 |
| Aerospace |
| | |
| | |
| | | | |||||||||||||
(In thousands) | | & Defense | | Test | | USG | | Total | | & Defense | | USG | | Test | | Total | | ||||||||
Customer type: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
|
Commercial | | $ | 51,550 | | $ | 33,952 | | $ | 43,736 | | $ | 129,238 | | $ | 33,973 | | $ | 38,549 | | $ | 39,305 | | $ | 111,827 | |
U.S. Government | |
| 43,574 | | | 7,648 | | | 32 | |
| 51,254 | |
| 49,305 | | | 1,006 | | | 4,506 | |
| 54,817 | |
Total revenues | | $ | 95,124 | | $ | 41,600 | | $ | 43,768 | | $ | 180,492 | | $ | 83,278 | | $ | 39,555 | | $ | 43,811 | | $ | 166,644 | |
| |
| | | | | | | | |
| | |
| | | | | | | | |
| | |
Geographic location: | |
| | | | | | | | |
| | |
|
| | |
| | |
| |
|
| |
United States | | $ | 81,458 | | $ | 25,121 | | $ | 28,706 | | $ | 135,285 | | $ | 73,037 | | $ | 27,445 | | $ | 22,965 | | $ | 123,447 | |
International | |
| 13,666 | | | 16,479 | | | 15,062 | |
| 45,207 | |
| 10,241 | | | 12,110 | | | 20,846 | |
| 43,197 | |
Total revenues | | $ | 95,124 | | $ | 41,600 | | $ | 43,768 | | $ | 180,492 | | $ | 83,278 | | $ | 39,555 | | $ | 43,811 | | $ | 166,644 | |
| |
| | | | | | | | |
| | |
| | | | | | | | |
| | |
Revenue recognition method: | |
| | | | | | | | |
| | |
|
| | |
| | |
| |
|
| |
Point in time | | $ | 46,610 | | $ | 8,009 | | $ | 32,209 | | $ | 86,828 | | $ | 37,127 | | $ | 27,563 | | $ | 9,248 | | $ | 73,938 | |
Over time | |
| 48,514 | | | 33,591 | | | 11,559 | |
| 93,664 | |
| 46,151 | | | 11,992 | | | 34,563 | |
| 92,706 | |
Total revenues | | $ | 95,124 | | $ | 41,600 | | $ | 43,768 | | $ | 180,492 | | $ | 83,278 | | $ | 39,555 | | $ | 43,811 | | $ | 166,644 | |
1512
| | | | | | | | | | | | |
Six months ended March 31, 2020 |
| Aerospace |
| | |
| | |
| | | |
(In thousands) | | & Defense | | Test | | USG | | Total | ||||
Customer type: |
| |
| | | | | | | | |
|
Commercial | | $ | 93,417 | | $ | 69,194 | | $ | 95,971 | | $ | 258,582 |
U.S. Government | |
| 79,218 | | | 13,789 | | | 631 | |
| 93,638 |
Total revenues | | $ | 172,635 | | $ | 82,983 | | $ | 96,602 | | $ | 352,220 |
| |
| | | | | | | | |
| |
Geographic location: | |
| | | | | | | | |
| |
United States | | $ | 146,164 | | $ | 49,959 | | $ | 63,665 | | $ | 259,788 |
International | |
| 26,471 | | | 33,024 | | | 32,937 | |
| 92,432 |
Total revenues | | $ | 172,635 | | $ | 82,983 | | $ | 96,602 | | $ | 352,220 |
| |
| | | | | | | | |
| |
Revenue recognition method: | |
| | | | | | | | |
| |
Point in time | | $ | 82,897 | | $ | 17,019 | | $ | 72,524 | | $ | 172,440 |
Over time | |
| 89,738 | | | 65,964 | | | 24,078 | |
| 179,780 |
Total revenues | | $ | 172,635 | | $ | 82,983 | | $ | 96,602 | | $ | 352,220 |
| | | | | | | | | | | | | |
Six months ended March 31, 2021 | | Aerospace | |
| | |
| | |
| | ||
(In thousands) |
| & Defense |
| USG |
| Test |
| Total |
| ||||
Customer type: |
| |
|
| |
|
| |
|
| |
|
|
Commercial | | $ | 62,114 | | $ | 92,414 | | $ | 76,027 | | $ | 230,555 | |
U.S. Government | |
| 88,055 | |
| 1,681 | |
| 9,302 | |
| 99,038 | |
Total revenues | | $ | 150,169 | | $ | 94,095 | | $ | 85,329 | | $ | 329,593 | |
| | | | | | | | | | | | | |
Geographic location: | |
| | |
| | |
|
| |
|
| |
United States | | $ | 130,849 | | $ | 64,490 | | $ | 46,231 | | $ | 241,570 | |
International | |
| 19,320 | |
| 29,605 | |
| 39,098 | |
| 88,023 | |
Total revenues | | $ | 150,169 | | $ | 94,095 | | $ | 85,329 | | $ | 329,593 | |
| | | | | | | | | | | | | |
Revenue recognition method: | |
| | |
| | |
|
| |
|
| |
Point in time | | $ | 64,000 | | $ | 69,931 | | $ | 18,116 | | $ | 152,047 | |
Over time | |
| 86,169 | |
| 24,164 | |
| 67,213 | |
| 177,546 | |
Total revenues | | $ | 150,169 | | $ | 94,095 | | $ | 85,329 | | $ | 329,593 | |
Revenues by customer type, geographic location, and revenue recognition method for the three and six-month periods ended March 31, 2020 are presented in the tables below.
| | | | | | | | | | | | |
Three months ended March 31, 2020 | | Aerospace | | | | | | | | | | |
(In thousands) |
| & Defense |
| USG |
| Test |
| Total | ||||
Customer type: |
| |
|
| |
|
| |
|
| |
|
Commercial | | $ | 51,550 | | $ | 43,736 | | $ | 33,952 | | $ | 129,238 |
U.S. Government | |
| 43,574 | |
| 32 | |
| 7,648 | |
| 51,254 |
Total revenues | | $ | 95,124 | | $ | 43,768 | | $ | 41,600 | | $ | 180,492 |
| | | | | | | | | | | | |
Geographic location: | |
|
| |
|
| |
|
| |
|
|
United States | | $ | 81,458 | | $ | 28,706 | | $ | 25,121 | | $ | 135,285 |
International | |
| 13,666 | |
| 15,062 | |
| 16,479 | |
| 45,207 |
Total revenues | | $ | 95,124 | | $ | 43,768 | | $ | 41,600 | | $ | 180,492 |
| | | | | | | | | | | | |
Revenue recognition method: | |
|
| |
|
| |
|
| |
|
|
Point in time | | $ | 46,610 | | $ | 32,209 | | $ | 8,009 | | $ | 86,828 |
Over time | |
| 48,514 | |
| 11,559 | |
| 33,591 | |
| 93,664 |
Total revenues | | $ | 95,124 | | $ | 43,768 | | $ | 41,600 | | $ | 180,492 |
| | | | | | | | | | | | |
Six months ended March 31, 2020 | | Aerospace | | | | | | | | | | |
(In thousands) |
| & Defense |
| USG |
| Test |
| Total | ||||
Customer type: | | | | | | | | | | | | |
Commercial | | $ | 93,417 | | $ | 95,971 | | $ | 69,194 | | $ | 258,582 |
U.S. Government | |
| 79,218 | |
| 631 | |
| 13,789 | |
| 93,638 |
Total revenues | | $ | 172,635 | | $ | 96,602 | | $ | 82,983 | | $ | 352,220 |
| | | | | | | | | | | | |
Geographic location: | |
|
| |
|
| |
|
| |
|
|
United States | | $ | 146,164 | | $ | 63,665 | | $ | 49,959 | | $ | 259,788 |
International | |
| 26,471 | |
| 32,937 | |
| 33,024 | |
| 92,432 |
Total revenues | | $ | 172,635 | | $ | 96,602 | | $ | 82,983 | | $ | 352,220 |
| | | | | | | | | | | | |
Revenue recognition method: | |
|
| |
|
| |
|
| |
|
|
Point in time | | $ | 82,897 | | $ | 72,524 | | $ | 17,019 | | $ | 172,440 |
Over time | |
| 89,738 | |
| 24,078 | |
| 65,964 | |
| 179,780 |
Total revenues | | $ | 172,635 | | $ | 96,602 | | $ | 82,983 | | $ | 352,220 |
13
Remaining Performance Obligations
Remaining performance obligations, which is the equivalent of backlog, represent the expected transaction price allocated to contracts that the Company expects to recognize as revenue in future periods when the Company performs under the contracts. These remaining obligations include amounts that have been formally appropriated under contracts with the U.S. Government, and exclude unexercised contract options and potential orders under ordering-type contracts such as Indefinite Delivery, Indefinite Quantity contracts. At March 31, 2020,2021, the Company had $565$521.7 million in remaining performance obligations of which the Company expects to recognize revenues of approximately 68%72% in the next twelve months.
Contract assets and liabilities
Assets and liabilities related to contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. At March 31, 2020,2021, contract assets and liabilities totaled $96.1$95.0 million and $95.4$106.6 million, respectively. Contract assets and 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 six months of 2020,2021, the Company recognized approximately $36.4$56 million in revenues that were included in the contract liabilities balance at the adoption date.September 30, 2020.
16.12. LEASES
As described in Note 3, effective October 1, 2019, the Company adopted ASC 842, 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 options to extend the term of the lease for up to 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.
16
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:
| | | | | | | ||||||
| | Three Months | | Six Months | | | | | | | ||
| | Ended | | Ended | | Three Months Ended | | Three Months Ended | ||||
| | March 31, | | March 31, | | March 31, | | March 31, | ||||
(Dollars in thousands) |
| 2020 |
| 2020 |
| 2021 |
| 2020 | ||||
Finance lease cost |
| | | | |
| | |
| | |
|
Amortization of right-of-use assets | | $ | 622 | | $ | 1,245 | | $ | 492 | | $ | 622 |
Interest on lease liabilities | |
| 323 | |
| 651 | |
| 311 | |
| 198 |
Operating lease cost | |
| 1,402 | |
| 2,750 | |
| 1,424 | |
| 1,402 |
Total lease costs | | $ | 2,347 | | $ | 4,646 | | $ | 2,227 | | $ | 2,222 |
| | | | | | |
|
| Six Months |
| Six Months | ||
| | Ended | | Ended | ||
| | March 31, | | March 31, | ||
(Dollars in thousands) |
| 2021 |
| 2020 | ||
Finance lease cost | | | | | | |
Amortization of right-of-use assets | | $ | 985 | | $ | 1,245 |
Interest on lease liabilities | |
| 623 | |
| 335 |
Operating lease cost | |
| 2,877 | |
| 2,750 |
Total lease costs | | $ | 4,485 | | $ | 4,330 |
14
Additional information related to leases are shown below:
| | | | | | | | |||||||
| | Three Months | | Six Months | | | | | | | | | ||
| | Ended | | Ended | | | Three Months Ended | | Three Months Ended | | ||||
| | March 31, | | September 30, | | | March 31, | | March 31, | | ||||
(Dollars in thousands) |
| 2020 |
| 2020 | |
| 2021 |
| 2020 | | ||||
Cash paid for amounts included in the measurement of lease liabilities |
| | | | |
| | | |
| | |
| |
Operating cash flows from operating leases | | $ | 1,380 | | $ | 2,717 | | | $ | 1,375 | | $ | 1,380 | |
Operating cash flows from finance leases | |
| 198 | |
| 335 | | |
| 311 | |
| 198 | |
Financing cash flows from finance leases | |
| 376 | |
| 727 | | |
| 419 | |
| 377 | |
Right-of-use assets obtained in exchange for lease liabilities | |
| | |
| | | |||||||
Operating leases | | $ | 1,566 | | $ | 22,268 | | |||||||
Weighted-average remaining lease term | | | | |
| | | |||||||
Operating leases | | | | |
| 6.37 | years | |||||||
Finance leases | | | | |
| 12.97 | years | |||||||
Weighted-average discount rate | | | | |
| | | |||||||
Operating leases | | | | |
| 3.14 | % | |||||||
Finance leases | | | | |
| 4.29 | % |
| | | | | | |
|
| Six Months |
| Six Months | ||
| | March 31, | | March 31, | ||
(Dollars in thousands) |
| 2021 |
| 2020 | ||
Cash paid for amounts included in the measurement of lease liabilities | | | | | | |
Operating cash flows from operating leases | | $ | 2,800 | | $ | 2,717 |
Operating cash flows from finance leases | |
| 623 | |
| 335 |
Financing cash flows from finance leases | |
| 838 | |
| 753 |
| | | | | |
Weighted-average remaining lease term |
| March 31, 2021 |
| March 31, 2020 |
|
Operating leases |
| 5.76 years |
| 6.37 years | |
Finance leases |
| 12.2 years |
| 12.7 years | |
Weighted-average discount rate |
|
|
|
| |
Operating leases |
| 3.11 | % | 3.08 | % |
Finance leases |
| 4.31 | % | 4.28 | % |
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 March 31, 2020:2021:
| | | | | | | | | | | | |
(Dollars in thousands) | |
| Operating |
| Finance | | Operating |
| Finance | |||
Years Ending September 30: |
| Leases |
| Leases |
| Leases |
| Leases | ||||
2020 (excluding the six months ended March 31, 2020) | | $ | 2,667 |
| | 1,455 | ||||||
2021 | |
| 4,696 |
| | 2,930 | ||||||
2021 (excluding the six months ended March 31, 2021) | | $ | 2,732 |
| | 1,473 | ||||||
2022 | |
| 4,036 |
| | 3,011 | |
| 4,907 |
| | 3,015 |
2023 | |
| 3,090 |
| | 3,094 | |
| 3,984 |
| | 3,098 |
2024 and thereafter | |
| 6,931 |
| | 31,481 | ||||||
2024 | |
| 2,438 |
| | 3,181 | ||||||
2025 and thereafter | |
| 7,173 |
| | 28,285 | ||||||
Total minimum lease payments | |
| 21,420 |
| | 41,971 | |
| 21,234 |
| | 39,052 |
Less: amounts representing interest | |
| 2,202 |
|
| 10,821 | |
| 1,894 |
|
| 9,625 |
Present value of net minimum lease payments | | $ | 19,218 |
| | 31,150 | | $ | 19,340 |
| | 29,427 |
Less: current portion of lease obligations | |
| 4,208 |
| | 1,902 | |
| 4,839 |
| | 2,001 |
Non-current portion of lease obligations | |
| 15,010 |
| | 29,248 | | | 14,501 |
| | 27,426 |
| | | | | | | ||||||
ROU assets | | $ | 18,901 |
| | 28,072 | | $ | 18,929 |
| | 25,182 |
17
Operating lease liabilities are included in the Consolidated Balance Sheet in accrued other expenses (current portion) and operating lease liabilities.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.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.
As the Company has not restated prior-year information for the adoption of ASC 842, the following presents the Company’s future minimum lease payments for operating and capital leases under ASC 840 for continuing operations as of September 30, 2019:
| | | | | | |
(Dollars in thousands) |
| Operating |
| Finance | ||
Years Ending September 30: |
| Leases |
| Leases | ||
2020 | | $ | 5,574 |
| | 2,518 |
2021 | |
| 4,558 |
| | 2,930 |
2022 | |
| 3,950 |
| | 3,012 |
2023 | |
| 3,270 |
| | 3,094 |
2024 and thereafter | |
| 8,443 |
| | 31,499 |
Total minimum lease payments | | $ | 25,795 |
| | 43,053 |
Less: amounts representing interest | |
| * |
| | 11,241 |
Present value of net minimum lease payments | |
| * |
| | 31,812 |
Less: Current portion of lease obligations | |
| * |
| | 1,832 |
Non-current portion of lease obligations | |
| * |
| | 29,980 |
* Not applicable for operating leases
1815
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 created 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. Our businesses have been deemed essential and are currently operational, supplying our customers with vital and necessary products. To date, our global supply chains have not been materially affected by the global 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 to support our long-term outlook.
Recognizing the uncertainty presented by this global pandemic, we are suspendingcontinuing to suspend our full-year 2020practice of providing financial guidance. Our businesses are facingcontinue to face varying levels of pressure depending on the markets they serve as outlined below and the impact on our businessthe Company cannot be reasonably estimated at this time. In response to COVID-19, we have taken decisive actions to enhance our financial condition, while continuing to execute our long-term strategy for profitable growth. Some of the actions we have taken include: deferring a portion of executive compensation, reducing discretionary spending, minimizing capital spending, implementing hiring and salary freezes, and increasing our focus on optimizing free cash flow. These operational measures are prudent steps to maintain our liquidity and will help manage our financial flexibility as we work through near-term volatility. As of March 31, 2020, we had nearly $700 million of liquidity, with $100 million in cash, net debt of approximately $50 million. Additionally, we have no debt maturities nor repayment obligations coming due and payable until September 2024. The Company has made no changes to its dividend plan. We are also monitoring the impacts of COVID-19 on the fair value of assets. We do not currently anticipate any material impairments on assets as a result of COVID-19. 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. Further details
The economic uncertainty, changes in the propensity for the general public to travel by operating segment are outlined below.
In our A&D segment, we expect to seeair, and reductions in demand for commercial aircraft as a slowdown in commercial aerospace deliveries and revenues over the remainderresult of the year but it is too earlyCOVID-19 pandemic have adversely impacted net sales and operating results in the cycle to determine the impact from the current industry downturn as it relates to future build ratescertain of our Aerospace and airline passenger miles. The defense portion of A&D, both military aerospace and navy products is expected to remain in-line with current forecasts given its backlog coupled with the timing of expected platform deliveries. WeDefense reporting units. In addition, our Westland facility had a temporary two-weekpartial shutdown in April of our Globe manufacturingits facility due to a confirmed COVID-19 case but we are fully operational asfor several weeks during the first quarter of the current date.
In our Test segment, our second quarter revenues were negatively impacted by a decrease of approximately $2 million due to the China facility’s temporary three-week shutdown in February, and delayed timing of installation projects caused by access limitations to customer sites2021 due to COVID-19. We expectare also monitoring the Test segment to remain in-line with current forecasts overimpacts of COVID-19 on the remainderfair value of the year given the strengthassets. We do not currently anticipate any material impairments on assets as a result of its backlog and its served markets, primarily related to new communications technologies such as 5G.
In our USG segment, our second quarter revenues were negatively impacted by approximately $5 million as several utility customers deferred purchase orders and maintenance-related project deliveries so they could divert resources to other issues such as critical power delivery given their concerns around COVID-19. Additionally, Doble’s service business is largely on hold during the pandemic. We expect USG’s customer spending softness to continuedetermined that there was no impairment for the next fewthree and six months beforeended March 31, 2021 and the utilities returnfair value of each reporting unit substantially exceeded carrying value, with the exception of Mayday where fair value exceeded carrying value by less than 10%. At March 31, 2021, we had $30 million of goodwill recorded for Mayday. The valuation methodology we use involves estimates of discounted cash flows, which are subject to a more normal state of businesschange, and if they change negatively it could result in the later partneed to write down those assets to fair value. We will continue to monitor the impacts of thisCOVID-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.year ended September 30, 2020.
See the “Outlook” and “Part II – Other Information, Item 1A, Risk Factors” sections below for additional details.
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RESULTS OF OPERATIONS
References to the second quarters of 20202021 and 20192020 represent the three-month periods ended March 31, 20202021 and 2019,2020, respectively.
OVERVIEW
In the second quarter of 2020,2021, sales, net earnings and diluted earnings per share from continuing operations were $180.5$166.6 million, $17.8$16.3 million and $0.68$0.62 per share, respectively, compared to $171.2$180.5 million, $17.8 million and $0.68 per share, respectively, in the second quarter of 2019.2020. In the first six months of 2020,2021, sales, net earnings and diluted earnings per share from continuing operations were $329.6 million, $30.0 million and $1.15 per share, respectively, compared to $352.2 million, $28.6 million and $1.09 respectively, compared to $334.6 million, $35.2 million and $1.34 per share, respectively, in the first six months of 2019. The decrease in net earnings and diluted earnings per share in the first six months of 2020 as compared to the first six months of 2019 was mainly due the gain of approximately $8 million on the sale of the Doble Watertown property in the first quarter of 2019.2020.
NET SALES
In the second quarter of 2020,2021, net sales of $180.5$166.6 million were $9.3$13.9 million, or 5.4%7.7%, higherlower than the $171.2$180.5 million in the second quarter of 2019.2020. In the first six months of 2020,2021, net sales of $352.2$329.6 million were $17.6$22.6 million, or 5.3%6.4%, higherlower than the $334.6$352.2 million in the first six months of 2019.2020. The increasedecrease in net sales in the second quarter of 20202021 as compared to the second quarter of 20192020 was due to a $15.6an $11.8 million increasedecrease in the Aerospace & Defense segment partially offset by a $1.2 million decrease in the Test segment and a $5.1$4.2 million decrease in the USG segment, partially offset by a $2.2 million increase in the Test segment. The increasedecrease in net sales in the first six months of 20202021 as compared to the first six months of 20192020 was due to a $26.9$22.4 million increasedecrease in the Aerospace & Defense segment partially offset byand a $1.1 million decrease in the Test segment and an $8.2$2.5 million decrease in the USG segment, partially offset by a $2.3 million increase in the Test segment.
-Aerospace & Defense (A&D)
In the second quarter of 2020,2021, net sales of $95.1$83.3 million were $15.6$11.8 million, or 19.6%12.4%, higherlower than the $79.5$95.1 million in the second quarter of 2019.2020. In the first six months of 2020,2021, net sales of $172.6$150.2 million were $26.9$22.4 million, or 18.5%13.0%, higherlower than the $145.7 $172.6
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million in the first six months of 2019.2020. The sales increasedecrease in the second quarter of 20202021 compared to the second quarter of 20192020 was mainly due to the addition of $9.0a $6.3 million decrease in net sales from Globe,at Mayday, a $3.8$5.4 million decrease in net sales at Crissair, a $4.7 million decrease in net sales at PTI primarily driven by the impact of the COVID-19 pandemic, partially offset by a $3.9 million increase in sales at VACCO driven by navy defense. The sales decrease in the first six months of 2021 compared to the first six months of 2020 was mainly due to an $11.5 million decrease in net sales at Mayday, a $9.4 million decrease in net sales at Crissair, a $9.3 million decrease in net sales at PTI, and a $1.5 million decrease in net sales at Westland primarily driven by the impact of the COVID-19 pandemic, partially offset by a $7.8 million increase in net sales at VACCO due to increased revenue from space products,and a $2.6$1.5 million increase in net sales at PTI due to higher aerospace assembly shipments, a $0.5 million increase in net sales at Mayday, and a $0.4 million increase in net sales at Crissair, partially offset by a $0.7 million decrease in net sales at Westland due to timing of revenue on government programs. The sales increase in the first six months of 2020 compared to the first six months of 2019 was due to the addition of $17.8 million in net sales from Globe, a $5.3 million increase in net sales at VACCO due to increased revenue from space products, a $4.0 million increase in net sales at PTI due to higher aerospace assembly shipments, a $0.6 million increase in net sales at Mayday, and a $1.2 million increase in net sales at Crissair, partially offset by a $2.0 million decrease in net sales at Westland due to timing of revenue on government programs.Globe.
--TestUSG
In the second quarter of 2020,2021, net sales of $41.6$39.6 million were $1.3$4.2 million, or 3.0%9.6%, lower than the $42.9$43.8 million in the second quarter of 2019.2020. In the first six months of 2020,2021, net sales of $83.0$94.1 million were $1.2$2.5 million, or 1.4%2.6%, lower than the $84.2$96.6 million in the first six months of 2019.2020. The decrease in the second quarter and first six months of 20202021 compared to the corresponding periods of 2019 was primarily due to lower sales from the segment’s Asian operations due to the temporary three-week shutdown of the China facility due to COVID-19 and the timing of test and measurement chamber projects.
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-USG
In the second quarter of 2020 net sales of $43.8 million were $5.1 million, or 10.4% lower than the $48.9 million in the second quarter of 2019. In the first six months of 2020, net sales of $96.6 million were $8.1 million, or 7.7%, lower than the $104.7 million in the first six months of 2019. The decrease in the second quarter and first six months of 2020 compared to the corresponding periods of 2019 was mainly due to lower product and software salesservice revenue at Doble primarily driven by the impact of COVID-19, partially offset by an increase in product sales at NRG.
-Test
In the second quarter of 2021, net sales of $43.8 million were $2.2 million, or 5.3%, higher than the $41.6 million in the second quarter of 2020. In the first six months of 2021, net sales of $85.3 million were $2.3 million, or 2.8%, higher than the $83.0 million in the first six months of 2020. The increase in the second quarter of 2021 as customers delayed orderscompared to the second quarter of 2020 was primarily due to higher sales from the Company’s Asian and on-site testing.European operations totaling $4.1 million partially offset by a $1.9 million decrease in sales from the segment’s U.S. operations due to the timing of test and measurement chamber projects. The increase in the first six months of 2021 compared to the first six months of 2020 was due to higher sales from the Company’s Asian and European operations totaling $7.7 million partially offset by a $5.4 million decrease in sales from the segment’s U.S. operations due to the timing of test and measurement chamber projects.
ORDERS AND BACKLOG
Backlog from continuing operations was $565.4$521.7 million at March 31, 20202021 compared with $451.6$517.4 million at September 30, 2019.2020. The Company received new orders totaling $176.2 million in the second quarter of 2021 compared to $245.6 million in the second quarter of 2020 compared to $209.4 million2020. Of the new orders received in the second quarter of 2019.2021, $88.2 million related to Aerospace & Defense products, $44.4 million related to Test products, and $43.6 million related to USG products. Of the new orders received in the second quarter of 2020, $156.0 million related to Aerospace & Defense products, $41.8 million related to Test products, and $47.8 million related to USG products. Of the new orders received in the second quarter of 2019, $100.8 million related to Aerospace & Defense products, $57.6 million related to Test products, and $51.0 million related to USG products.
The Company received new orders totaling $333.9 million in the first six months of 2021 compared to $466.1 million in the first six months of 2020 compared to $390.5 million2020. Of the new orders received in the first six months of 2019.2021, $153.6 million related to Aerospace & Defense products, $87.9 million related to Test products, and $92.4 million related to USG products. Of the new orders received in the first six months of 2020, $285.0 million related to Aerospace & Defense products, $80.3 million related to Test products, and $100.8 million related to USG products. Of the new orders received in the first six months of 2019, $184.5 million related to Aerospace & Defense products, $103.0 million related to Test products, and $103.0 million related to USG products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses from continuing operations for the second quarter of 20202021 were $40.0$38.7 million (22.2%(23.2% of net sales), compared with $39.3$40.0 million (23.0%(22.2% of net sales) for the second quarter of 2019.2020. For the first six months of 2020,2021, SG&A expenses from continuing operations were $82.1$79.7 million (23.3%(24.2% of net sales) compared to $77.9$82.1 million (23.3% of net sales) for the first six months of 2019.2020. The increasedecrease in SG&A in the second quarter and first six months of 20202021 compared to the corresponding periods of 20192020 was mainly due to lower discretionary spending related to travel and other discretionary expenses due to the addition of Globe and higher spending on R&D / new product development.COVID-19 pandemic.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets from continuing operations was $5.2$4.9 million and $11.0$9.9 million for the second quarter and first six months of 2020,2021, respectively, compared to $4.4$5.2 million and $8.8$11.0 million for the corresponding periods of 2019.2020. Amortization expenses consist of amortization of acquired intangible assets from acquisitions and other identifiable intangible assets (primarily
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software). The increasedecrease in amortization expense in the second quarter and first six months of 20202021 compared to the corresponding periods of 20192020 was mainly due to an increase in amortization of intangible assets related to the Globe acquisition and an increasea decrease in amortization of capitalized software at Doble.software.
OTHER (INCOME) EXPENSES, (INCOME), NET
Other (income) expenses, net, was $0.7$(1.9) million of income in the second quarter of 20202021 compared to other expenses, net, of $2.0$0.7 million in the second quarter of 2019. There were no individually significant items in other expenses (income), net, in the second quarter of 2020. The principal component of other income, net, in the second quarter 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 facility. There were no individually significant items in other (income) expenses, net, in the second quarter of 20192020.
Other (income) expenses, net, was $0.9$(1.9) million of restructuring charges relatedincome in the first six months of 2021 compared to the consolidation of VACCO’s aircraft/aerospace business into PTI’s aerospace facility in Oxnard, California and the completion of other restructuring activities begun in 2018; and losses on derivative instruments.
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Other expenses, net, wasof $1.0 million in the first six months of 2020 compared to2020. The principal component of other income,(income), expenses, net, of $5.4 million in the first six months of 2019.2021 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 facility. The principal component of other expenses, net, in the first six months of 2020 were losses on derivative instruments of $0.8 million. The principal component of other income, net, in the first six months of 2019 was a gain of approximately $8 million on the sale of the Doble Watertown, MA building and land, partially offset by certain restructuring activities at Doble, PTI and VACCO and losses on derivative instruments.
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 86 to the Consolidated Financial Statements, above. EBIT was $21.8 million (13.1% of net sales) for the second quarter of 2021 compared to $21.3 million (11.8% of net sales) for the second quarter of 2020 compared to $22.0 million (12.8% of net sales) for the second quarter of 2019.2020. For the first six months of 2020,2021, EBIT was $38.1$40.0 million (10.8%(12.1% of net sales) compared to $47.3$38.1 million (14.1%(10.8% of net sales) for the first six months of 2019.2020.
The following table presents a reconciliation of EBIT to net earnings from continuing operations.
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||
| | March 31, | | March 31, | | March 31, | | March 31, | ||||||||||||
(In thousands) |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2021 | | 2020 | | 2021 |
| 2020 | ||||
Consolidated EBIT | | $ | 21,345 | | | 21,976 | | 38,136 | | 47,326 | | $ | 21,771 | | | 21,345 | | 39,972 | | 38,136 |
Less: Interest expense, net | |
| (1,320) |
| | (1,853) |
| (3,741) |
| (3,708) | |
| (432) |
| | (1,320) |
| (973) |
| (3,741) |
Less: Income tax | |
| (2,203) |
|
| (2,301) |
| (5,809) |
| (8,446) | |
| (5,025) |
|
| (2,203) |
| (8,999) |
| (5,809) |
Net earnings from continuing operations | | $ | 17,822 |
| | 17,822 |
| 28,586 |
| 35,172 | | $ | 16,314 |
| | 17,822 |
| 30,000 |
| 28,586 |
-Aerospace & Defense
EBIT in the second quarter of 20202021 was $21.7$18.2 million (22.8%(21.8% of net sales) compared to $17.4$21.7 million (21.9%(22.8% of net sales) in the second quarter of 2019.2020. EBIT in the first six months of 20202021 was $34.2$27.6 million (19.8%(18.4% of net sales) compared to $28.1$34.2 million (19.3%(19.8% of net sales) in the first six months of 2019.2020. The increase in EBIT in the second quarter of 2020 compared to the second quarter of 2019 was mainly due to the $2.4 million contribution from Globe, and a $1.0 million increase at PTI and a $0.7 million increase at VACCO both due to higher sales volumes. The increase in EBIT in the first six months of 2020 compared to the first six months of 2019 was mainly due to the $4.6 million contribution from Globe and a $1.6 million increase at PTI due to higher sales volumes.
-Test
EBIT in the second quarter of 2020 was $5.7 million (13.6% of net sales) compared to $5.6 million (13.0% of net sales) in the second quarter of 2019. EBIT in the first six months of 2020 was $10.3 million (12.4% of net sales) compared to $8.9 million (10.6% of net sales) in the first six months of 2019. The increasedecrease in EBIT in the second quarter and first six months of 20202021 compared to the corresponding periods of 20192020 was mainly due to 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 ATM acquisition.
-USG
EBIT in the second quarter of 2021 was $6.7 million (17.0% of net sales) compared to $4.9 million (11.1% of net sales) in the second quarter of 2020. EBIT in the first six months of 2021 was $19.5 million (20.7% of net sales) compared to $14.2 million (14.7% of net sales) in the first six months of 2020. The increase in EBIT in the second quarter of 2021 compared to the second quarter of 2020 was mainly due to the final settlement received on the sale of the Doble Watertown facility of approximately $2 million partially offset by $0.7 million of facility consolidation charges at its Doble Manta facility, and an increase in EBIT at NRG due to higher sales volumes as mentioned above. The increase in EBIT in the first six months of 2021 compared to the first six 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 $1.3 million of facility consolidation charges at its Doble Manta facility, and an increase in EBIT at NRG due to higher sales volumes.
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-Test
EBIT in the second quarter of 2021 was $5.7 million (13.0% of net sales) compared to $5.7 million (13.6% of net sales) in the second quarter of 2020. EBIT in the first six months of 2021 was $11.0 million (12.9% of net sales) compared to $10.3 million (12.4% of net sales) in the first six months of 2020. The increase in EBIT in the first six months of 2021 compared to the first six months of 2020 was primarily due to product mix and higher margins on projects mainly from the segment’s U.S.Asian operations.
-USG
EBIT in the second quarter of 2020 was $4.9 million (11.1% of net sales) compared to $8.8 million (17.9% of net sales) in the second quarter of 2019. EBIT in the first six months of 2020 was $14.2 million (14.7% of net sales) compared to $30.3 million (28.9% of net sales) in the first six months of 2019. The decrease in EBIT in the second quarter of 2020 compared to the second quarter of 2019 was mainly due to a decrease in EBIT from Doble due to lower sales volumes of higher margin products and software mentioned above and the timing of their annual Client conference (second quarter of 2020 versus third quarter of 2019). The decrease in EBIT in the first six months of 2020 as compared to the first six months of 2019 was mainly due to the gain on sale of the Doble Watertown facility of approximately $8 million in the first quarter of 2019 as well as a decrease in EBIT from Doble due to lower sales volumes in the first six months of 2020. In addition, EBIT in the first quarter of 2020 was negatively impacted by approximately $0.6 million of facility move costs at Doble.
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-Corporate
Corporate costs included in EBIT were $10.9$8.8 million and $20.6$18.1 million in the second quarter and first six months of 2020,2021, respectively, compared to $9.8$10.9 million and $19.9$20.6 million in the corresponding periods of 2019.2020. The increasedecrease in Corporate costs in the second quarter and first six months of 20202021 compared to the corresponding periods of 20192020 was mainly due to the decrease in pension expense as a result of the defined benefit pension plan termination in the fourth quarter of 2020 and losses on derivative instruments of $0.8 million recorded in the first six months of 2020.
INTEREST EXPENSE, NET
Interest expense was $1.3$0.4 million and $3.7$1.0 million in the second quarter and first six months of 2020,2021, respectively, and $1.9$1.3 million and $3.7 million in the corresponding periods of 2019.2020. The decrease in interest expense in the second quarter and first six months of 2020 as2021 compared to the second quartercorresponding periods of 20192020 was mainly due to lower average outstanding borrowings ($150 million compared to $217 million) at relatively consistentand lower average interest ratesrates. Average outstanding borrowings were $23 million and $47 million in the second quarter and first six months of 3.2%.2021, respectively, and $150 million and $215 million in the corresponding periods of 2020.
INCOME TAX EXPENSE
The second quarter 20202021 effective income tax rate from continuing operations was 11.0%23.5% compared to 11.4%11.0% in the second quarter of 2019.2020. The effective income tax rate in the first six months of 20202021 was 16.9%23.1% compared to 19.4%16.9% for the first six months of 2019. The income2020. Income tax expense in the second quarter of 2021 was unfavorably impacted by return to provision true-ups increasing the second quarter and year-to-date effective tax rate by 0.6% and 0.3%, respectively. Income tax expense in the second quarter of 2020 was favorably impacted by the release of a valuation allowance of $2.8 million for foreign net operating losses decreasing the second quarter 2020 and year-to-date effective tax rate by 14.3% and 8.2%, respectively. The income tax expense in the second quarter and first six months of 2019 was favorably impacted by tax planning strategies to increase the foreign tax credits claimed retrospectively. The Company reduced the valuation allowance for excess foreign tax credits by $2.3 million and recorded an amended return receivable of $0.2 million, which favorably impacted the 2019 second quarter and year-to-date effective tax rate by 12.9% and 5.9%, respectively.
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) increaseddecreased to $260.6$181.5 million at March 31, 20202021 from $229.8$190.6 million at September 30, 2019. Inventories increased2020. Accounts receivable decreased by $16.1$19.5 million during this period due to a $10.0$12.5 million decrease within the Test segment, a $5.7 million decrease within the Aerospace & Defense segment and a $1.3 million decrease within the USG segment; due to increased focus on collections during the period and timing of payments. Inventories increased by $9.2 million during this period due to a $3.2 million increase within the Aerospace & Defense segment, a $3.2$3.3 million increase within the Test segment and a $2.9$2.7 million increase within the USG segment,segment; resulting primarily from the timing of receipt of raw materials to meet anticipated demand and work-in-process due to timing of projects.manufacturing existing orders.
Net cash provided by operating activities from continuing operations was $36.7$57.3 million and $10.5$36.7 million in the first six months of 20202021 and 2019,2020, respectively. The increase in net cash provided by operating activities from continuing operations in the first six months of 20202021 as compared to the first six months of 20192020 was mainly driven by lower working capital requirements.
Capital expenditures from continuing operations were $21.2$13.2 million and $10.1$21.2 million in the first six months of 20202021 and 2019,2020, respectively. The increasedecrease in the first six months of 20202021 compared to the prior year period was mainly due to the building improvement additions in 2020 at the new Doble headquarters facility of approximately $7 million and a $2.7 million increase in capital expenditures at VACCO primarily for construction of a new parking lot and certain machinery and equipment.million. In addition, the Company incurred expenditures for capitalized software of $4.3$4.0 million and $4.5$4.3 million in the first six months of 2021 and 2020, and 2019, respectively.
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Credit Facility
At March 31, 2020,2021, the Company had approximately $341$468 million available to borrow under its bank credit facility, a $250 million increase option subject to lender approval, and $100.2$45.7 million cash on hand. At March 31, 2020,2021, the Company had $150$22 million of
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outstanding borrowings under the credit facility in addition to outstanding letters of credit of $9.8$10.4 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.
Dividends
A dividend of $0.08 per share, totaling $2.1 million, was paid on January 17,October 15, 2020 to stockholders of record as of October 1, 2020. A dividend of $0.08 per share, totaling $2.1 million, was paid on January 2, 2020.19, 2021 to stockholders of record as of January 4, 2021. Subsequent to March 31, 2020,2021, a quarterly dividend of $0.08 per share, totaling $2.1 million, was paid on April 17, 202016, 2021 to stockholders of record as of April 2, 2020.1, 2021.
OUTLOOK
DuringManagement’s current expectations for 2021 remain consistent with the second quarter ofdetails outlined in the Business Outlook section presented in the November 19, 2020 press release. In mid-year 2020, business disruptions related to the COVID-19 pandemic began to affect the Company’s operations.operations and continued throughout the balance of the year. During 2021, the commercial aerospace and utility end-markets have seen some degree of customer stabilization, as well as notable pockets of recovery; however there is still uncertainty as to the timing and pace of the recovery in these areas. The wide distribution of viable COVID-19 vaccines is anticipated to benefit and accelerate the recovery of commercial air travel and utility spending with customers resuming normal testing protocols and equipment purchases, but Management has determined that it is advisable to wait before resuming specific guidance. Given the considerablethis uncertainty, around the extent and duration of these economic circumstances, it is difficult to predict how our future operationsthe balance of 2021 will be affected using our normal forecasting methodologies,methodologies; therefore, the Company will continue its suspension of forward-looking guidance.
To assist shareholders and analysts, Management will continue offering “directional” guidance for 2021, by stating that the Company is suspending its previously issuedseeing tangible signs of recovery in the second half of fiscal year2021 that point to a solid outlook for the back half of the year. The outlook for the second half of 2021 is expected to compare favorably to the second half of 2020 guidance.given the anticipated elements of COVID-19 recovery. Management’s current expectations for 2021 show growth in Sales, Adjusted EBITDA, and Adjusted EPS compared to 2020, with Adjusted EBITDA and Adjusted EPS reasonably consistent with 2019.
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, 2019.2020.
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.
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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
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securities laws. These include, but are not necessarily limited to, statements about: the second quarter results, growth in Sales, Adjusted EBITDA, Adjusted EPS; the effects of a widely available COVID-19 vaccine; the continuing effects of the COVID-19 pandemic including any impairment toof the Company’s assets, impacts to commercial aerospace, military and navy markets which the Company serves, and the strength of the markets served by the Company’s Test and USG segments;segments, 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; 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 arewill be offset by losses or gains on related underlying exposures; the Company’s ability to hedge against or otherwise manage them through the use of derivative financial instruments; 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, 20192020 and in this Quarterly Report on Form 10-Q, and the following: the success and timing of available COVID-19 vaccines in ending the pandemic; 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, and weakening of economic conditions in served markets; 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; financial exposure in connection with the Company’s guarantee of a certain Aclara lease; 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. In 2018, the Company entered into three interest rate swaps with a notional amount of $150 million to hedge some of its exposure to variability in future interest payments on variable rate debt, of which one swap is outstanding as of March 31, 2020. In addition, theThe 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. The interest rate swaps entered into during 2018 were not designated as cash flow hedges and, therefore, the gain or loss on the derivative is reflected in earnings each period. There has been no material change to the Company’s market risks since September 30, 2019. See Note 13 to the Consolidated Financial Statements in Item 1 of this Report for a summary of the Company’s outstanding derivative financial instruments as of March 31, 2020. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 20192020 for further discussion about market risk.
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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. 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. 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. 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.
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PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
“Item 1A. Risk Factors” of our most recent Form 10-K, filed November 29, 2019, includes a discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Form 10-K.
The COVID-19 pandemic and its widespread effects on the United States and global economies may have a material adverse effect on our business which could continue for an unknown period of time.
The rapid spread of the COVID-19 virus, as well as the measures governments and private organizations have implemented in order to stem the spread of this pandemic, is resulting in significant worldwide disruptions and contractions in economic activity, including those resulting from “shelter in place” and similar orders, restrictions on non-essential business operations and travel, and increased unemployment. Significant governmental and business resources are being reallocated from normal governmental and business expenditures toward COVID-19 prevention and treatment as well as toward attempting to mitigate the effects of the pandemic on individuals physically or economically harmed by these economic disruptions.
The Company is subject to postponement or cancellation of certain contracts to which it is a party, including a substantial number of government contracts which may be delayed or terminated for convenience without penalty. Current restrictions and conditions may also prevent or delay the Company in accessing customer facilities to deliver products and provide services, and may disrupt or delay the Company’s supply chain. While the Company's businesses have been classified as essential businesses and allowed to remain in operation in jurisdictions in which facility closures have been mandated, the Company can give no assurance that this will not change in the future or that the Company's businesses will be classified as essential in each of the jurisdictions in which it operates. Further, although the Company has implemented prevention procedures at its own facilities, including enhanced cleaning procedures, social distancing efforts and working from home where feasible, and substantially all of its facilities have so far remained in business, due to the nature of the COVID-19 pandemic there can be no assurance that the Company will not suffer facility closures or other adverse effects on its business operations in the future.
These facts and circumstances may have a material adverse effect on the Company’s business, results of operations, financial condition and cash flows. The extent to which the COVID-19 pandemic will impact the Company’s business, results of operations, financial condition and cash flows in the future, and the length of time these impacts may continue, will depend on future developments that are highly uncertain and cannot be predicted at this time, including new information that may emerge concerning the severity of COVID-19, the longevity of COVID-19 and the actions to contain its impact.
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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 |
|
|
|
|
|
3.2 |
|
| Exhibit 3.1 to the Company’s Form 8-K filed November 19, 2019 | |
|
|
|
|
|
31.1 |
|
| Filed herewith | |
|
|
|
|
|
31.2 |
|
| Filed herewith | |
|
|
|
|
|
32 |
| Certification of Chief Executive Officer and Chief Financial Officer |
| Filed herewith |
|
|
|
|
|
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. |
|
|
| /s/ |
|
|
|
|
| (As duly authorized officer and principal accounting and |
| financial officer of the registrant) |
| |
Dated: May | |
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