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 |
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)
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MISSOURI | 43-1554045 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
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9900A CLAYTON ROAD | |
ST. LOUIS, MISSOURI | 63124-1186 |
(Address of principal executive offices) | (Zip Code) |
(314) 213-7200
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
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| Name of each exchange |
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| 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.
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Large accelerated filer | ☒ | Accelerated filer | ☐ |
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Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ |
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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 |
Common stock, $.01 par value per share |
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
| | | | | |
| | Three Months Ended | |||
| | March 31, | |||
|
| 2021 |
| 2020 | |
| | | | | |
Net sales |
| $ | 166,644 |
| 180,492 |
Costs and expenses: | |
| |
| |
Cost of sales | |
| 103,113 |
| 113,242 |
Selling, general and administrative expenses | |
| 38,746 |
| 39,982 |
Amortization of intangible assets | |
| 4,917 |
| 5,220 |
Interest expense, net | |
| 432 |
| 1,320 |
Other (income) expenses, net | |
| (1,903) |
| 703 |
Total costs and expenses | |
| 145,305 |
| 160,467 |
| | | | | |
Earnings before income taxes | |
| 21,339 |
| 20,025 |
Income tax expense | |
| 5,025 |
| 2,203 |
Net earnings | | $ | 16,314 |
| 17,822 |
| |
| |
| |
Earnings per share: | |
| |
| |
Basic - | |
| |
| |
Net earnings | | | 0.63 | | 0.69 |
| | | |
| |
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 | | Three Months Ended | |||||||
| | March 31, | | December 31, | |||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 | |||
| | | | | | | | | | | |
Net sales | | $ | 329,593 |
| | 352,220 |
| $ | 177,010 |
| 162,674 |
Costs and expenses: | |
| |
|
| | |
| |
| |
Cost of sales | |
| 201,890 |
|
| 219,969 | |
| 108,305 |
| 99,622 |
Selling, general and administrative expenses | |
| 79,746 |
|
| 82,087 | |
| 46,635 |
| 41,000 |
Amortization of intangible assets | |
| 9,865 |
|
| 11,030 | |
| 6,467 |
| 4,948 |
Interest expense, net | |
| 973 |
|
| 3,741 | |
| 733 |
| 541 |
Other (income) expenses, net | |
| (1,880) |
|
| 998 | |||||
Other expenses, net | |
| 33 |
| 23 | ||||||
Total costs and expenses | |
| 290,594 |
|
| 317,825 | |
| 162,173 |
| 146,134 |
| |
| |
|
| | | | | | |
Earnings before income taxes | |
| 38,999 |
|
| 34,395 | |
| 14,837 |
| 16,540 |
Income tax expense | |
| 8,999 |
|
| 5,809 | |
| 3,313 |
| 3,722 |
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 | | $ | 11,524 |
| 12,818 |
| |
| |
| | | |
| |
| |
Earnings per share: | |
| |
| | | |
| |
| |
Basic — Continuing operations | | $ | 1.15 | | | 1.10 | |||||
— Discontinued operations | | | — | | | 2.93 | |||||
— Net earnings | | $ | 1.15 |
| | 4.03 | |||||
Basic - Net earnings | | $ | 0.44 | | 0.49 | ||||||
| | | | | | | | | |
| |
Diluted — Continuing operations | | $ | 1.15 | | | 1.09 | |||||
— Discontinued operations | |
| — |
| | 2.91 | |||||
— Net earnings | | $ | 1.15 |
| | 4.00 | |||||
Diluted - Net earnings | | $ | 0.44 |
| 0.49 |
See accompanying notes to consolidated financial statements.
32
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | |||||||||
| | March 31, | | March 31, | | December 31, | | |||||||||
| | 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | | |||
Net earnings | | $ | 16,314 |
| 17,822 | | | 30,000 |
| 104,599 | | $ | 11,524 |
| 12,818 | |
Other comprehensive income (loss), net of tax: | |
| |
| | |
| |
| | |
| |
| | |
Foreign currency translation adjustments | |
| 116 |
| (6,885) | |
| 5,465 |
| (2,962) | |
| (2,500) |
| 5,349 | |
Total other comprehensive income (loss), net of tax | |
| 116 |
| (6,885) | |
| 5,465 |
| (2,962) | |
| (2,500) |
| 5,349 | |
Comprehensive income | | $ | 16,430 |
| 10,937 | | | 35,465 |
| 101,637 | | $ | 9,024 |
| 18,167 | |
See accompanying notes to consolidated financial statements.
43
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
| | | | | | | | | | | | |
| | March 31, | | September 30, | | December 31, | | September 30, | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2021 | ||||
ASSETS |
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Current assets: |
| |
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Cash and cash equivalents | | $ | 45,653 |
| | 52,560 | | $ | 55,715 |
| | 56,232 |
Accounts receivable, net | |
| 124,580 |
| | 144,082 | ||||||
Contract assets | |
| 95,002 |
| | 96,746 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $3,588 and $3,445, respectively | |
| 135,874 |
| | 146,341 | ||||||
Contract assets, net | |
| 100,863 |
| | 93,771 | ||||||
Inventories, net | |
| 145,342 |
| | 136,189 | |
| 165,021 |
| | 147,148 |
Other current assets | |
| 17,523 |
| | 17,053 | |
| 27,329 |
| | 22,662 |
Total current assets | |
| 428,100 |
| | 446,630 | |
| 484,802 |
| | 466,154 |
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 | ||||||
Property, plant and equipment, net of accumulated depreciation of $150,818 and $147,551, respectively | |
| 155,712 |
| | 154,265 | ||||||
Intangible assets, net of accumulated amortization of $156,359 and $149,892, respectively | |
| 411,679 |
| | 409,250 | ||||||
Goodwill | |
| 411,661 |
| | 408,063 | |
| 509,268 |
| | 504,853 |
Operating lease assets | | | 18,929 | | | 21,390 | | | 31,117 | | | 31,846 |
Other assets | |
| 10,050 |
| | 10,938 | |
| 11,638 |
| | 10,977 |
Total assets | | $ | 1,357,402 |
| | 1,373,523 | | $ | 1,604,216 |
| | 1,577,345 |
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LIABILITIES AND SHAREHOLDERS’ EQUITY | |
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Current liabilities: | |
| |
| | | |
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| | |
Current maturities of long-term debt and short-term borrowings | | $ | 20,000 |
| | 22,368 | | $ | 20,000 |
| | 20,000 |
Accounts payable | |
| 47,091 |
| | 50,525 | |
| 63,651 |
| | 56,669 |
Contract liabilities | |
| 106,622 |
| | 100,551 | ||||||
Contract liabilities, net | |
| 111,596 |
| | 108,814 | ||||||
Accrued salaries | |
| 28,740 |
| | 32,149 | |
| 29,691 |
| | 39,768 |
Accrued other expenses | |
| 44,130 |
| | 50,436 | |
| 40,936 |
| | 52,513 |
Total current liabilities | |
| 246,583 |
| | 256,029 | |
| 265,874 |
| | 277,764 |
Deferred tax liabilities | |
| 59,949 |
| | 60,938 | |
| 80,962 |
| | 73,560 |
Non-current operating lease liabilities | | | 14,501 | | | 16,785 | | | 26,709 | | | 28,032 |
Other liabilities | |
| 39,362 |
| | 38,176 | |
| 37,394 |
| | 44,293 |
Long-term debt | |
| 2,000 |
| | 40,000 | |
| 178,000 |
| | 134,000 |
Total liabilities | |
| 362,395 |
| | 411,928 | |
| 588,939 |
| | 557,649 |
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 30,645,625 and 30,645,625 shares, respectively | |
| 306 |
| | 306 | ||||||
Common stock, par value $.01 per share, authorized 50,000,000 shares, issued 30,705,913 and 30,666,173 shares, respectively | |
| 307 |
| | 307 | ||||||
Additional paid-in capital | |
| 295,796 |
| | 293,682 | |
| 296,277 |
| | 297,644 |
Retained earnings | |
| 804,231 |
| | 778,398 | |
| 840,434 |
| | 830,989 |
Accumulated other comprehensive income (loss), net of tax | |
| 1,808 |
| | (3,657) | ||||||
Accumulated other comprehensive loss, net of tax | |
| (4,661) |
| | (2,161) | ||||||
| |
| 1,102,141 |
| | 1,068,729 | |
| 1,132,357 |
| | 1,126,779 |
Less treasury stock, at cost: 4,607,911 and 4,607,911 common shares, respectively | |
| (107,134) |
| | (107,134) | ||||||
Less treasury stock, at cost: 4,720,417 and 4,604,741 common shares, respectively | |
| (117,080) |
| | (107,083) | ||||||
Total shareholders’ equity | |
| 995,007 |
| | 961,595 | |
| 1,015,277 |
| | 1,019,696 |
Total liabilities and shareholders’ equity | | $ | 1,357,402 |
| | 1,373,523 | | $ | 1,604,216 |
| | 1,577,345 |
See accompanying notes to consolidated financial statements.
54
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
| | | | | | | | | | | |
| | Six Months Ended | | Three Months Ended | | ||||||
| | March 31, | | December 31, | | ||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| ||
Cash flows from operating activities: |
| |
|
|
|
| |
|
|
|
|
Net earnings | | $ | 30,000 |
| 104,599 | | $ | 11,524 |
| 12,818 | |
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 | |
| 12,172 |
| 10,012 | |
Stock compensation expense | |
| 2,745 |
| 2,896 | |
| 1,685 |
| 1,368 | |
Changes in assets and liabilities | |
| 7,401 |
| (16,247) | |
| (30,837) |
| 1,132 | |
Gain on sale of building and land | | | (1,950) | | — | ||||||
Effect of deferred taxes | |
| (989) |
| 834 | | | 7,402 | | (538) | |
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 | |
| 1,946 |
| 24,792 | |
Cash flows from investing activities: | |
| |
| | |
| |
| | |
Acquisition of business, net of cash acquired | |
| (6,684) |
| — | |
| (15,592) |
| (6,508) | |
Proceeds from sale of building and land | |
| 1,950 |
| — | ||||||
Additions to capitalized software | |
| (3,973) |
| (4,280) | |
| (1,958) |
| (1,554) | |
Capital expenditures | | | (13,153) | | (21,211) | | | (14,133) | | (5,973) | |
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 | ||||||
Net cash used by investing activities | |
| (31,683) |
| (14,035) | | |||||
Cash flows from financing activities: | |
| |
| | |
| |
| | |
Proceeds from long-term debt and short-term borrowings | |
| 34,000 |
| 10,000 | |
| 74,000 |
| 30,000 | |
Principal payments on long-term debt and short-term borrowings | |
| (74,368) |
| (145,000) | |
| (30,000) |
| (36,525) | |
Dividends paid | |
| (4,167) |
| (4,156) | |
| (2,079) |
| (2,084) | |
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) | ||||||
Purchases of common stock into treasury | |
| (9,997) |
| — | | |||||
Other | |
| (2,737) |
| — | | |||||
Net cash provided (used) by financing activities | | | 29,187 | | (8,609) | | |||||
Effect of exchange rate changes on cash and cash equivalents | |
| 2,166 |
| 875 | | | 33 | | 2,654 | |
Net (decrease) increase in cash and cash equivalents | |
| (6,907) |
| 38,387 | | | (517) | | 4,802 | |
Cash and cash equivalents, beginning of period | |
| 52,560 |
| 61,808 | | | 56,232 | | 52,560 | |
Cash and cash equivalents, end of period | | $ | 45,653 |
| 100,195 | | $ | 55,715 | | 57,362 | |
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Supplemental cash flow information: | |
| |
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Interest paid | | $ | 281 |
| 3,477 | | $ | 388 |
| 179 | |
Income taxes paid (including state and foreign) | |
| 14,047 |
| 23,098 | |
| 195 |
| 4,336 | |
See accompanying notes to consolidated financial statements.
65
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required for annual financial statements by accounting principles generally accepted in the United States of America (GAAP). As a result of the pension plan termination referenced in the fourth quarter of 2020, certain prior year amounts have been reclassified to conform with the current year presentation. For further information, refer to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
The Company’s results for the three-month period ended MarchDecember 31, 2021 are not necessarily indicative of the results for the entire 20212022 fiscal year. References to the secondfirst quarters of 20212022 and 20202021 represent the fiscal quarters ended MarchDecember 31, 2021 and 2020, respectively. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates.
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 | ||||||
| | Ended March 31, | �� | Ended March 31, | | Ended December 31, | ||||||
| | 2021 |
| 2020 |
| 2021 |
| 2020 | | 2021 |
| 2020 |
Weighted Average Shares Outstanding — Basic |
| 26,038 |
| 25,988 |
| 26,038 |
| 25,985 |
| 26,060 |
| 26,038 |
Dilutive Options and Restricted Shares | | 163 | | 100 | | 154 | | 141 | ||||
Dilutive Restricted Shares | | 82 | | 144 | ||||||||
Adjusted Shares — Diluted |
| 26,201 |
| 26,088 |
| 26,192 |
| 26,126 |
| 26,142 |
| 26,182 |
1. | |
3. ACQUISITION
On November 4, 2021, the Company acquired Networks Electronic Company, LLC (NEco) for a purchase price of approximately $15.2 million, net of cash acquired. NEco, based in Chatsworth, California, provides miniature electro-explosive devices utilized in mission-critical defense and aerospace applications. Since the date of acquisition, the operating results for the NEco business have been included as part of PTI in the A&D segment. The acquisition date fair value of the assets acquired and liabilities assumed primarily were as follows: approximately $0.6 million of accounts receivable, $1.5 million of inventory, $0.2 million of property, plant and equipment, $0.7 million of accounts payable and accrued expenses, $8.1 million of identifiable intangible assets, mainly consisting of customer relationships totaling $6.3 million. The acquired goodwill of $5.7 million related to excess value associated with opportunities to expand the services and products that the Company can offer to its customers. The Company anticipates that the goodwill will be deductible for tax purposes.
3.4. SHARE-BASED COMPENSATION
The Company provides compensation benefits to certain key employees under several share-based plans providing for performance-accelerated and/or time-vested restricted shares (restricted shares),stock unit awards, and to non-employee directors under a separate compensation plan for non-employee directors compensation plan.directors.
Performance-Accelerated Restricted ShareStock Unit (PARS) Awards and Time-Vested Restricted Stock Unit (RSU) Awards
Compensation expense related to the restricted sharePARS/RSU awards was $1.1$1.4 million and $2.1$1.1 million for the three and six-monththree-month periods ended MarchDecember 31, 2021 respectively, and $1.1 million and $2.3 million for the corresponding periods in 2020.2020, respectively. There were 220,430208,354 non-vested shares outstanding as of MarchDecember 31, 2021.
6
Non-Employee Directors Plan
Compensation expense related to the non-employee director grants was $0.3 million and $0.6$0.3 million for the three and six-monththree-month periods ended MarchDecember 31, 2021 respectively, and $0.3 million and $0.6 million for the corresponding periods in 2020.2020, respectively.
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 $1.4$1.7 million and $2.7$1.4 million for the three and six-monththree-month periods ended MarchDecember 31, 2021 respectively, and $1.5 million and $2.9 million for the corresponding periods in 2020.2020, respectively. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $0.3$0.4 million and $0.7$0.3 million for the three and six-monththree-month periods ended MarchDecember 31, 2021 respectively, and $0.3 million and $0.7 million for the corresponding periods in
7
2020.2020, respectively. As of MarchDecember 31, 2021, there was $6.1$12.2 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a remaining weighted-average period of 1.52.4 years.
4.5. INVENTORIES
Inventories, net, from continuing operations consist of the following:
| | | | | | | | | | |
|
| March 31, |
| September 30, |
| December 31, |
| September 30, | ||
(In thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2021 | ||
Finished goods | | $ | 29,363 |
| 28,471 | | $ | 34,629 |
| 32,998 |
Work in process | |
| 37,905 |
| 30,183 | |
| 42,485 |
| 34,201 |
Raw materials | |
| 78,074 |
| 77,535 | |
| 87,907 |
| 79,949 |
Total inventories | | $ | 145,342 |
| 136,189 | |||||
Total inventories, net | | $ | 165,021 |
| 147,148 |
2. | |
7
6. |
|
Included on the Company’s Consolidated Balance Sheets at MarchDecember 31, 2021 and September 30, 20202021 are the following intangible assets gross carrying amounts and accumulated amortization from continuing operations:
| | | | | | | | | | |
|
| March 31, |
| September 30, |
| December 31, |
| September 30, | ||
(Dollars in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2021 | ||
Goodwill | | $ | 411,661 |
| 408,063 | | $ | 509,268 |
| 504,853 |
| |
| | | | |
| | | |
Intangible assets with determinable lives: | |
| | | | |
| | | |
Patents | |
| | | | |
| | | |
Gross carrying amount | | $ | 2,136 | | 2,092 | | $ | 2,170 | | 2,131 |
Less: accumulated amortization | |
| 915 | | 858 | |
| 1,000 | | 972 |
Net | | $ | 1,221 | | 1,234 | | $ | 1,170 | | 1,159 |
| |
| | | | |
| | | |
Capitalized software | |
| | | | |
| | | |
Gross carrying amount | | $ | 88,862 | | 84,888 | | $ | 95,629 | | 93,671 |
Less: accumulated amortization | |
| 60,563 | | 57,302 | |
| 65,366 | | 63,740 |
Net | | $ | 28,299 | | 27,586 | | $ | 30,263 | | 29,931 |
| |
| | | | |
| | | |
Customer relationships | |
| | | | |
| | | |
Gross carrying amount | | $ | 229,322 | | 227,178 | | $ | 293,819 | | 288,530 |
Less: accumulated amortization | |
| 73,864 | | 67,643 | |
| 84,893 | | 80,882 |
Net | | $ | 155,458 | | 159,535 | | $ | 208,926 | | 207,648 |
| |
| | | | |
| | | |
Other | |
| | | | |
| | | |
Gross carrying amount | | $ | 5,356 | | 5,156 | | $ | 14,663 | | 13,080 |
Less: accumulated amortization | |
| 3,586 | | 3,260 | |
| 5,100 | | 4,301 |
Net | | $ | 1,770 | | 1,896 | | $ | 9,563 | | 8,779 |
Intangible assets with indefinite lives: | |
| | | | |
| | | |
Trade names | | $ | 158,513 | | 156,381 | | $ | 161,757 | | 161,733 |
The changes in the carrying amount of goodwill attributable to each business segment for the sixthree months ended MarchDecember 31, 2021 is as follows on a continuing operations basis:follows:
| | | | | | | | | | | | | | | | | | | |
| | | | | | | Aerospace | | | | | | | | | | Aerospace | | |
(Dollars in millions) |
| USG |
| Test |
| & Defense |
| Total |
| USG | | Test |
| & Defense |
| Total | |||
Balance as of September 30, 2020 | | | 271.9 |
| 34.1 |
| 102.1 |
| 408.1 | ||||||||||
Acquisition activity | | | — | | — | | 2.5 | | 2.5 | ||||||||||
Balance as of September 30, 2021 | | $ | 366.5 |
| | 34.1 |
| 104.3 |
| 504.9 | |||||||||
Acquisition activity and adjustments | | | 0.2 | | | — | | 5.7 | | 5.9 | |||||||||
Foreign currency translation | | | 1.1 | | — | | — | | 1.1 | | | (1.5) | | | — | | — | | (1.5) |
Balance as of March 31, 2021 | | $ | 273.0 | | 34.1 | | 104.6 | | 411.7 | ||||||||||
Balance as of December 31, 2021 | | $ | 365.2 | | | 34.1 | | 110.0 | | 509.3 |
3. | |
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.
6.7. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers and classifies its continuing business operations in three3 reportable segments for financial reporting purposes: Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Shielding and Test (Test). The Aerospace & DefenseA&D segment’s operations consist of PTI Technologies Inc. (PTI), VACCO Industries (VACCO), Crissair, Inc. (Crissair), Mayday Manufacturing Co. (Mayday), Westland Technologies, Inc. (Westland), Mayday Manufacturing Co. and its affiliate Hi-Tech Metals, Inc. (collectively referred to as Mayday) and Globe Composite Solutions, LLC (Globe). The companies within this segment primarily design and manufacture specialty filtration, fluid control and naval products, including hydraulic filter elements and fluid control devices used in aerospace and defense applications; unique filter mechanisms used in micro-propulsion devices for satellites, and custom designed filters for manned aircraft and submarines;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 related subsidiaries including Morgan Schaffer Ltd. (togetherand Altanova (collectively, Doble), and NRG Systems, Inc. (NRG). Doble is an industry leader in the development, manufacture and delivery of diagnostic testing and data management solutions that enable electric power grid operators to assess the integrity of high voltage power delivery equipment. It combines three core elements for customers – diagnostic test and condition monitoring instruments, expert consulting, and testing services – and provides access to its large reserve of related empirical knowledge. NRG designsis a global market leader in the design and manufacturesmanufacture of decision support tools for the renewable energy industry, primarily wind and solar.
The Test segment’s operations consist primarily of ETS-Lindgren Inc. and related subsidiaries (ETS-Lindgren). ETS-Lindgren is an industry leader in providingdesigning and manufacturing products which provide its customers with the ability to identify, measure and contain magnetic, electromagnetic and acoustic energy. ETS-Lindgren also manufactures radio frequency shielding products and components used by manufacturers of medical equipment, communications systems, electronic products, and shielded rooms for high-security data processing and secure communication.
Management evaluates and measures the performance of its reportable segments based on “Net Sales” and “EBIT”, which are detailed in the table below. EBIT is defined as earnings 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 | ||||||||
| | Ended March 31, | | Ended March 31, | | Ended December 31, | ||||||||
(In thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||
NET SALES | | |
| |
| |
| |
| | |
| |
|
Aerospace & Defense | | $ | 83,278 | | 95,124 | | 150,169 | | 172,635 | | $ | 70,244 | | 66,616 |
USG | | | 39,555 | | 43,768 | | 94,095 | | 96,602 | | | 63,485 | | 54,540 |
Test | | | 43,811 | | 41,600 | | 85,329 | | 82,983 | | | 43,281 | | 41,518 |
Consolidated totals | | $ | 166,644 | | 180,492 | | 329,593 | | 352,220 | | $ | 177,010 | | 162,674 |
| | | | | | | | | | | | | | |
EBIT | | | | | | | | | | | | | | |
Aerospace & Defense | | $ | 18,196 | | 21,736 | | 27,576 | | 34,249 | | $ | 9,955 | | 8,260 |
USG | | | 6,725 | | 4,866 | | 19,456 | | 14,153 | | | 13,391 | | 12,731 |
Test | | | 5,688 | | 5,651 | | 11,030 | | 10,307 | | | 3,965 | | 5,342 |
Corporate (loss) | | | (8,838) | | (10,908) | | (18,090) | | (20,573) | | | (11,741) | | (9,252) |
Consolidated EBIT | | | 21,771 | | 21,345 | | 39,972 | | 38,136 | | | 15,570 | | 17,081 |
Less: Interest expense | | | (432) | | (1,320) | | (973) | | (3,741) | | | (733) | | (541) |
Earnings before income taxes | | $ | 21,339 | | 20,025 | | 38,999 | | 34,395 | | $ | 14,837 | | 16,540 |
9
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.
7.8. DEBT
The Company’s debt is summarized as follows:
| | | | | | | | | | |
|
| March 31, | | September 30, |
| December 31, | | September 30, | ||
(In thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2021 | ||
Total borrowings | | $ | 22,000 |
| 62,368 | | $ | 198,000 |
| 154,000 |
Current portion of long-term debt and short-term borrowings | |
| (20,000) |
| (22,368) | |||||
Current portion of long-term debt | |
| (20,000) |
| (20,000) | |||||
Total long-term debt, less current portion | | $ | 2,000 |
| 40,000 | | $ | 178,000 |
| 134,000 |
The Credit Facility includes a $500 million revolving line of credit, as well as provisions allowing for the increase of the credit facility commitment amount by an additional $250 million, if necessary, with the consent of the lenders. The bank syndication supporting the facility is comprised of a diverse group of eight banks led by JP Morgan Chase Bank, N.A., as Administrative Agent. The Credit Facility matures September 27, 2024.
At MarchDecember 31, 2021, the Company had approximately $468$291 million available to borrow under the Credit Facility, plus the $250 million increase option, subject to lender approval, in addition to $45.7$55.7 million cash on hand. The Company classified $20.0$20 million as the current portion of long-term debt as of MarchDecember 31, 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 $10.4$10.7 million at MarchDecember 31, 2021.
Interest on borrowings under the Credit Facility is calculated at a spread over either the London Interbank Offered Rate (LIBOR), the New York Federal Reserve Bank Rate, or the prime rate, or the London Interbank Offered Rate (LIBOR), 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%1.17% and 1.40%1.45% for the three and six- monththree-month periods ending MarchDecember 31, 2021 respectively, and 3.24% and 3.21% for the three and six-month periods ending March 31, 2020.2020, respectively. As of MarchDecember 31, 2021, the Company was in compliance with all covenants.
8.9. INCOME TAX EXPENSE
The secondfirst quarter 20212022 effective income tax rate from continuing operations was 23.5%22.3% compared to 11.0% in the second quarter of 2020. The effective income tax rate22.5% in the first six monthsquarter of 2021 was 23.1% compared to 16.9% for the first six months of 2020.2021. Income tax expense in the secondfirst 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 20202022 was favorably impacted by excess tax benefit related to the releasevesting of a valuation allowance of $2.8 million for foreign net operating lossesshare based compensation, decreasing the second quarter 2020 and year-to-date effective tax rate for the quarter by 14.3% and 8.2%, respectively.1.7%.
10
9.10. SHAREHOLDERS’ EQUITY
The change in shareholders’ equity for the first three months ended December 31, 2021 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 December 31, | |||||||
|
| 2021 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
| 2020 | |
| | | | | | | | | | | | | |
Common stock | | | | | | | | | | | | | |
Beginning balance | | 306 | | 306 | | 306 | | 306 | | $ | 307 | | 306 |
Stock plans | | — | | — | | — | | — | | | — | | — |
Ending balance | | 306 | | 306 | | 306 | | 306 | | | 307 | | 306 |
| | | | | | | | | | | | | |
Additional paid-in-capital | | | | | | | | | | | | | |
Beginning balance | | 294,735 | | 293,056 | | 293,682 | | 292,408 | | | 297,644 | | 293,682 |
Stock plans | | 1,061 | | 1,731 | | 2,114 | | 2,379 | | | (1,367) | | 1,053 |
Ending balance | | 295,796 | | 294,787 | | 295,796 | | 294,787 | | | 296,277 | | 294,735 |
| | | | | | | | | | | | | |
Retained earnings | | | | | | | | | | | | | |
Beginning balance | | 790,000 | | 769,439 | | 778,398 | | 684,741 | | | 830,989 | | 775,829 |
Net earnings common stockholders | | 16,314 | | 17,822 | | 30,000 | | 104,599 | | | 11,524 | | 12,818 |
Dividends paid | | (2,083) | | (2,077) | | (4,167) | | (4,156) | | | (2,079) | | (2,084) |
Ending balance | | 804,231 | | 785,184 | | 804,231 | | 785,184 | | | 840,434 | | 786,563 |
| | | | | | | | | | | | | |
Accumulated other comprehensive income (loss) | | | | | | | | | | | | | |
Beginning balance | | 1,692 | | (40,051) | | (3,657) | | (43,974) | | | (2,161) | | (3,657) |
Foreign currency translation | | 116 | | (6,885) | | 5,465 | | (2,962) | | | (2,500) | | 5,349 |
Ending balance | | 1,808 | | (46,936) | | 1,808 | | (46,936) | | | (4,661) | | 1,692 |
| | | | | | | | | | | | | |
Treasury stock | | | | | | | | | | | | | |
Beginning balance | | (107,134) | | (107,259) | | (107,134) | | (107,259) | | | (107,083) | | (107,134) |
Issued under stock plans | | — | | 125 | | — | | 125 | |||||
Share repurchases | | | (9,997) | | — | ||||||||
Ending balance | | (107,134) | | (107,134) | | (107,134) | | (107,134) | | | (117,080) | | (107,134) |
| | | | | | | | | | | | | |
Total equity | | 995,007 | | 926,207 | | 995,007 | | 926,207 | | $ | 1,015,277 | | 976,162 |
10.11. FAIR VALUE MEASUREMENTS
The accounting guidance establishes a three-level hierarchy for disclosure of fair value measurements, based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, as follows:
● | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
● | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
● | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Financial Assets and Liabilities
The Company has estimated the fair value of its financial instruments as of MarchDecember 31, 2021 and September 30, 20202021 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, 2021:
| | | | | | | | | | |
(In thousands) |
| Level 1 |
| Level 2 |
| | Level 3 |
| Total | |
Assets (Liabilities): | | | | | | | | | | |
Forward contracts | | $ | — |
| 141 |
| $ | — |
| 141 |
Valuation was based on third party evidence of similarly priced derivative instruments.and are immaterial.
Nonfinancial Assets and Liabilities
The Company’s nonfinancial assets such as property, plant and equipment, and other intangible assets are not measured at fair value on a recurring basis; however they are subject to fair value adjustments in certain circumstances, such as when there is evidence that an impairment may exist. No impairments were recorded during the three and six-month periodsthree-month period ended MarchDecember 31, 2021.
11.12. REVENUES
Disaggregation of Revenues
Revenues by customer type, geographic location, and revenue recognition method for the three and six-month periodsthree-month period ended MarchDecember 31, 2021 are presented in the tablestable 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 tablestable below also includeincludes a reconciliation of the disaggregated revenue within each reportable segment on a continuing operations basis.segment.
| | | | | | | | | | | | | |
Three months ended March 31, 2021 |
| Aerospace |
| | |
| | |
| | | | |
(In thousands) | | & Defense | | USG | | Test | | Total | | ||||
Customer type: |
| |
|
| |
|
| |
|
| |
|
|
Commercial | | $ | 33,973 | | $ | 38,549 | | $ | 39,305 | | $ | 111,827 | |
U.S. Government | |
| 49,305 | | | 1,006 | | | 4,506 | |
| 54,817 | |
Total revenues | | $ | 83,278 | | $ | 39,555 | | $ | 43,811 | | $ | 166,644 | |
| |
| | | | | | | | |
| | |
Geographic location: | |
|
| | |
| | |
| |
|
| |
United States | | $ | 73,037 | | $ | 27,445 | | $ | 22,965 | | $ | 123,447 | |
International | |
| 10,241 | | | 12,110 | | | 20,846 | |
| 43,197 | |
Total revenues | | $ | 83,278 | | $ | 39,555 | | $ | 43,811 | | $ | 166,644 | |
| |
| | | | | | | | |
| | |
Revenue recognition method: | |
|
| | |
| | |
| |
|
| |
Point in time | | $ | 37,127 | | $ | 27,563 | | $ | 9,248 | | $ | 73,938 | |
Over time | |
| 46,151 | | | 11,992 | | | 34,563 | |
| 92,706 | |
Total revenues | | $ | 83,278 | | $ | 39,555 | | $ | 43,811 | | $ | 166,644 | |
| | | | | | | | | | | | | |
| | Aerospace | | | | | | | | | | | |
(In thousands) | | & Defense | | USG | | Test | | Total |
| ||||
Customer type: |
| |
|
| |
|
| |
|
| |
|
|
Commercial | | $ | 28,075 | | $ | 62,842 | | $ | 41,037 | | $ | 131,954 | |
U.S. Government | |
| 42,169 | | | 643 | | | 2,244 | |
| 45,056 | |
Total revenues | | $ | 70,244 | | $ | 63,485 | | $ | 43,281 | | $ | 177,010 | |
| |
| | | | | | | | |
| | |
Geographic location: | |
| | | | | | | | |
| | |
United States | | $ | 60,687 | | $ | 38,741 | | $ | 22,975 | | $ | 122,403 | |
International | |
| 9,557 | | | 24,744 | | | 20,306 | |
| 54,607 | |
Total revenues | | $ | 70,244 | | $ | 63,485 | | $ | 43,281 | | $ | 177,010 | |
| |
| | | | | | | | |
| | |
Revenue recognition method: | |
| | | | | | | | |
| | |
Point in time | | $ | 28,558 | | $ | 50,835 | | $ | 12,821 | | $ | 92,214 | |
Over time | |
| 41,686 | | | 12,650 | | | 30,460 | |
| 84,796 | |
Total revenues | | $ | 70,244 | | $ | 63,485 | | $ | 43,281 | | $ | 177,010 | |
12
| | | | | | | | | | | | | |
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 periodsthree-month period ended MarchDecember 31, 2020 are presented in the tables below.table below:
| | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2020 | | Aerospace | | | | | | | | | | |||||||||||||
| | Aerospace | | | | | | | | | | |||||||||||||
(In thousands) |
| & Defense |
| USG |
| Test |
| Total |
| & Defense |
| USG |
| Test |
| Total | ||||||||
Customer type: |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Commercial | | $ | 51,550 | | $ | 43,736 | | $ | 33,952 | | $ | 129,238 | | $ | 27,604 | | $ | 53,864 | | $ | 36,722 | | $ | 118,190 |
U.S. Government | |
| 43,574 | |
| 32 | |
| 7,648 | |
| 51,254 | |
| 39,012 | |
| 676 | |
| 4,796 | |
| 44,484 |
Total revenues | | $ | 95,124 | | $ | 43,768 | | $ | 41,600 | | $ | 180,492 | | $ | 66,616 | | $ | 54,540 | | $ | 41,518 | | $ | 162,674 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Geographic location: | |
|
| |
|
| |
|
| |
|
| |
| | |
| | |
| | |
| |
United States | | $ | 81,458 | | $ | 28,706 | | $ | 25,121 | | $ | 135,285 | | $ | 57,538 | | $ | 37,045 | | $ | 23,266 | | $ | 117,849 |
International | |
| 13,666 | |
| 15,062 | |
| 16,479 | |
| 45,207 | |
| 9,078 | |
| 17,495 | |
| 18,252 | |
| 44,825 |
Total revenues | | $ | 95,124 | | $ | 43,768 | | $ | 41,600 | | $ | 180,492 | | $ | 66,616 | | $ | 54,540 | | $ | 41,518 | | $ | 162,674 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Revenue recognition method: | |
|
| |
|
| |
|
| |
|
| |
| | |
| | |
| | |
| |
Point in time | | $ | 46,610 | | $ | 32,209 | | $ | 8,009 | | $ | 86,828 | | $ | 26,946 | | $ | 42,367 | | $ | 8,868 | | $ | 78,181 |
Over time | |
| 48,514 | |
| 11,559 | |
| 33,591 | |
| 93,664 | |
| 39,670 | |
| 12,173 | |
| 32,650 | |
| 84,493 |
Total revenues | | $ | 95,124 | | $ | 43,768 | | $ | 41,600 | | $ | 180,492 | | $ | 66,616 | | $ | 54,540 | | $ | 41,518 | | $ | 162,674 |
| | | | | | | | | | | | |
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 |
Revenue Recognition
13Payment terms with our customers vary by the type and location of the customer and the products or services offered. Arrangements with customers that include payment terms extending beyond one year are not significant. The transaction price for these contracts reflects our estimate of returns and discounts, which are based on historical, current and forecasted information to determine the expected amount to which we will be entitled in exchange for transferring the promised goods or services to the customer. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant. We primarily provide standard warranty programs for products in our commercial businesses for periods that typically range from one to two years. These assurance-type programs typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation. Under the typical payment terms of our long term fixed price contracts, the customer pays us either performance-based or progress payments. Performance-based payments represent interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments of costs incurred as the work progresses.
For our overtime revenue recognized using the output method of costs incurred, contract cost is estimated utilizing current contract specifications and expected engineering requirements. Contract costs typically are incurred over a period of several months to one or more years, and the estimation of these costs requires judgment. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We review and update our projections of costs quarterly or more frequently when circumstances significantly change. In addition, in the USG segment, we recognize revenue as a series of distinct services based on each day of providing services (straight-line over the contract term) for certain of our USG segment contracts. Under the typical payment terms of our service contracts, the customer pays us in advance of when services are performed. In addition, in the Test segment, we use milestones to measure progress for our Test segment contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts.
Remaining Performance Obligations
Remaining performance obligations, which is the equivalent of backlog, represent the expected transaction price allocated to contracts that the Company expects to recognize as revenue in future periods when the Company performs under the contracts. These remaining obligations include amounts that have been formally appropriated under contracts with the U.S. Government, and exclude unexercised contract options and potential orders under ordering-type contracts such as Indefinite Delivery, Indefinite Quantity contracts. At MarchDecember 31, 2021, the Company had $521.7$639.4 million in remaining performance obligations of which the Company expects to recognize revenues of approximately 72%77% in the next twelve months.
13
Contract assets and liabilities
Assets and liabilities related to contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. Because of the timing difference of revenue recognition and customer billing, these contracts will often result in revenue recognized in excess of billings and billings in excess of costs incurred. At MarchDecember 31, 2021, contract assets and liabilities totaled $95.0$100.9 million and $106.6$111.6 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 monthsquarter of 2021,2022, the Company recognized approximately $56$29 million in revenues that were included in the contract liabilities balance at September 30, 2020.2021. The increase in net contract assets in the first quarter of 2022 was due to revenue being recognized for performance completed during the period that exceeded customer billings. Other factors that impacted the change in net contract liabilities were immaterial. At October 1, 2020, contract assets and liabilities totaled $94.3 million and $100.6 million, respectively.
12.13. 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.
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 Ended | | Three Months Ended | | Three Months Ended | | Three Months Ended | ||||
| | March 31, | | March 31, | | December 31, | | December 31, | ||||
(Dollars in thousands) |
| 2021 |
| 2020 |
| 2021 |
| 2020 | ||||
Finance lease cost | | |
| | |
| | |
| | |
|
Amortization of right-of-use assets | | $ | 492 | | $ | 622 | | $ | 607 | | | 492 |
Interest on lease liabilities | |
| 311 | |
| 198 | |
| 302 | |
| 313 |
Operating lease cost | |
| 1,424 | |
| 1,402 | |
| 1,561 | |
| 1,452 |
Total lease costs | | $ | 2,227 | | $ | 2,222 | | $ | 2,470 | | | 2,257 |
| | | | | | |
|
| 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 Ended | | Three Months Ended | | ||
| | 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 | | $ | 1,375 | | $ | 1,380 | |
Operating cash flows from finance leases | |
| 311 | |
| 198 | |
Financing cash flows from finance leases | |
| 419 | |
| 377 | |
| | | | | | |
|
| 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 |
| | | | | | | | | | | | |
| | Three Months Ended | | Three Months Ended | | |||||||
| | December 31, | | December 31, | | |||||||
(Dollars in thousands) |
| 2021 |
| 2020 | | |||||||
Cash paid for amounts included in the measurement of lease liabilities | | |
| | |
| | |||||
Operating cash flows from operating leases | | $ | 1,503 | | | 1,425 | | |||||
Operating cash flows from finance leases | |
| 248 | |
| 313 | | |||||
Financing cash flows from finance leases | |
| 301 | |
| 417 | | |||||
Right-of-use assets obtained in exchange for lease liabilities | | | | | | | | |||||
Operating leases | | $ | 901 | | | — | | |||||
Weighted-average remaining lease term |
| March 31, 2021 |
| March 31, 2020 |
| |
| | |
| | |
Operating leases |
| 5.76 years |
| 6.37 years | | |
| 9.9 | years |
| 5.9 | years |
Finance leases |
| 12.2 years |
| 12.7 years | | |
| 12.7 | years |
| 12.3 | years |
Weighted-average discount rate |
|
|
|
| | |
| | |
| | |
Operating leases |
| 3.11 | % | 3.08 | % | |
| 3.12 | % |
| 3.10 | % |
Finance leases |
| 4.31 | % | 4.28 | % | |
| 4.58 | % |
| 4.30 | % |
The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on ourthe Consolidated Balance Sheet on MarchDecember 31, 2021:
| | | | | | | | | | | |
(Dollars in thousands) | | Operating |
| Finance | | Operating |
| Finance | |||
Years Ending September 30: |
| Leases |
| Leases |
| Leases |
| Leases | |||
2021 (excluding the six months ended March 31, 2021) | | $ | 2,732 |
| | 1,473 | |||||
2022 | |
| 4,907 |
| | 3,015 | |||||
2022 (excluding the three months ended December 31, 2021) | | $ | 4,313 |
| 1,599 | ||||||
2023 | |
| 3,984 |
| | 3,098 | |
| 5,094 |
| 2,189 |
2024 | |
| 2,438 |
| | 3,181 | |
| 4,136 |
| 2,248 |
2025 and thereafter | |
| 7,173 |
| | 28,285 | |||||
2025 | |
| 3,640 |
| 2,304 | ||||||
2026 and thereafter | |
| 19,246 |
| 21,649 | ||||||
Total minimum lease payments | |
| 21,234 |
| | 39,052 | |
| 36,429 |
| 29,989 |
Less: amounts representing interest | |
| 1,894 |
|
| 9,625 | |
| 5,374 |
| 7,915 |
Present value of net minimum lease payments | | $ | 19,340 |
| | 29,427 | | $ | 31,055 |
| 22,074 |
Less: current portion of lease obligations | |
| 4,839 |
| | 2,001 | |
| 4,346 |
| 1,250 |
Non-current portion of lease obligations | | | 14,501 |
| | 27,426 | | $ | 26,709 |
| 20,824 |
| | | | | | | | | | | |
ROU assets | | $ | 18,929 |
| | 25,182 | | $ | 31,117 |
| 18,523 |
Operating lease liabilities are included inon the Consolidated Balance Sheet in accrued other expenses (current portion) and as a caption on the Consolidated Balance Sheet (long-term portion). Finance lease liabilities are included on the Consolidated Balance Sheet in accrued other expenses (current portion) and other liabilities (long-term portion). Operating lease ROU assets are included as a caption on the Consolidated Balance Sheet and finance lease ROU assets are included in Property,, plant and equipment on the Consolidated Balance sheets.sheet.
15
14. ADJUSTED QUARTERLY FINANCIAL INFORMATION
During 2021, the Company identified immaterial errors in the historical consolidated financial statements of Westland, within the A&D segment, that are being corrected as an immaterial revision of those financial statements. Specifically, the adjustments include net sales being overstated by $0.3 million in the first quarter of 2021, along with inventory being overstated and cost of goods sold being understated by $0.8 million in the first quarter of 2021. The tax impact of correcting these errors was a reduction in tax expense of $0.2 million in the first quarter of 2021. The table below shows the impact of these adjustments to the first quarter of 2021. Management has determined that these adjustments are not material to the prior year period.
| | | | | |
|
| First Quarter |
| First Quarter | |
(Dollars in thousands, except per share amounts) | | (As Reported) | | (As Adjusted) | |
| | | | | |
2021 | | | | | |
| | | | | |
Net sales | | $ | 162,949 |
| 162,674 |
Cost of sales | |
| 98,777 |
| 99,622 |
Earnings before income taxes | |
| 17,660 |
| 16,540 |
Income tax expense | |
| 3,974 |
| 3,722 |
Net earnings | |
| 13,686 |
| 12,818 |
| | | | | |
Diluted earnings (loss) per share: | |
|
|
|
|
Net earnings | | $ | 0.52 |
| 0.49 |
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
References to the first quarters of 2022 and 2021 represent the three-month periods ended December 31, 2021 and 2020, respectively.
COVID-19 TRENDS AND UNCERTAINTIES
The COVID-19 global pandemic has createdcontinued to create significant and unprecedented challenges, and during these highly uncertain times, our top priority remains the health and safety of our employees, customers and suppliers, thereby securing the financial well-being of the Company and supporting business continuity. 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 pandemic. Given our diverse portfolio of strong, durable businesses serving non-discretionary end-markets, the strength and resilience of our business model positions us to continue our long-term outlook. Recognizing the uncertainty presented by this global pandemic, we are continuing to suspend our practice of providing financial guidance. Our businesses continue to face varying levels of pressure depending on the markets they serve and the impact on the Company cannot be reasonably estimated at this time. A portion of our workforce has worked from home at times due to COVID-19, however we have not had to redesign or design new internal controls over financial reporting at this time. Depending on the duration of COVID-19, it may become necessary for us to redesign or design new internal controls over financial reporting in a future period. We do not believe such an event will have a material impact on our business.
The economic uncertainty, changes in the propensity for the general public to travel by air, and reductions in demand for commercial aircraft as a result of the COVID-19 pandemic have adversely impacted net sales and operating results in certain of our Aerospace and DefenseA&D reporting units. In addition, our Westland facility had a partial shutdown of its facility for several weeks duringAdditionally, the electric utility market has been impacted by reduced domestic electricity consumption related to the pandemic, which in turn impacts utility spending on investments in grid maintenance and testing.
Throughout 2021 and the first quarter of 2021 due2022, our Navy, defense aerospace, space and Test segment end-markets have remained solid and now we are beginning to COVID-19. see recovery in our core markets most affected by the pandemic. We are encouraged by the growing strength of our entered orders across the commercial aerospace, electric utility and renewable energy end-markets. While there is still uncertainty as to the timing and pace of recovery in the commercial aerospace and electric utility markets, we have seen these markets begin to stabilize and expect strong growth in the second half of fiscal 2022.
We are also monitoring the impacts of COVID-19 on the fair value of assets. We do not currently anticipate any material asset impairments on assets as a result of COVID-19.the COVID-19 global pandemic. We determined that there was no impairment for the three and six months ended MarchDecember 31, 2021 and the fair 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 change, and if they change negatively it could result in the need to write down those assets to fair value.2021. We will continue to monitor the impacts of COVID-19 on the fair value of assets. For further discussion, refer to Management’s Discussion and Analysis contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
See the “Outlook” and “Part II – Other Information, Item 1A, Risk Factors” sections below for additional details.
RESULTS OF OPERATIONS
References to the second quarters of 2021 and 2020 represent the three-month periods ended March 31, 2021 and 2020, respectively.2021.
OVERVIEW
In the second quarter of 2021, sales,Sales, net earnings and diluted earnings per share were $166.6$177.0 million, $16.3$11.5 million and $0.62 per share, respectively, compared to $180.5 million, $17.8 million and $0.68 per share, respectively, in the second quarter of 2020. In the first six months of 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$0.44 per share, respectively, in the first six monthsquarter of 2020.2022 compared to $162.7 million, $12.8 million and $0.49 per share, respectively, in the first quarter of 2021.
NET SALES
In the second quarter of 2021, netNet sales of $166.6 million were $13.9increased $14.3 million, or 7.7%8.8%, lower than the $180.5 million in the second quarter of 2020. In the first six months of 2021, net sales of $329.6 million were $22.6 million, or 6.4%, lower than the $352.2to $177.0 million in the first six monthsquarter of 2020.2022 from $162.7 million in the first quarter of 2021. The decreaseincrease in net sales in the secondfirst quarter of 20212022 as compared to the secondfirst quarter of 20202021 was due to an $11.8$8.9 million decreaseincrease in the USG segment, a $3.6 million increase in the Aerospace & Defense segment, and a $4.2 million decrease in the USG segment, partially offset by a $2.2 million increase in the Test segment. The decrease in net sales in the first six months of 2021 as compared to the first six months of 2020 was due to a $22.4 million decrease in the Aerospace & Defense segment and a $2.5 million decrease in the USG segment, partially offset by a $2.3$1.8 million increase in the Test segment.
-Aerospace & Defense (A&D)
In the second quarter of 2021, netNet sales of $83.3 million were $11.8 million, or 12.4%, lower than the $95.1 million in the second quarter of 2020. In the first six months of 2021, net sales of $150.2 million were $22.4 million, or 13.0%, lower than the $172.6
16
$70.2 million in the first six monthsquarter of 2020.2022 were $3.6 million, or 5.4%, higher than the $66.6 million in the first quarter of 2021. The sales decreaseincrease in the secondfirst quarter of 2022 compared to the first quarter of 2021 was primarily due to an approximately $6.1 million increase in aerospace shipments at PTI and Mayday and a $2.6 million increase in navy sales at Westland, partially offset by a $4.5 million decrease in navy and space sales from VACCO and Globe due to supply chain issues and a $0.6 million decrease in aerospace shipments at Crissair.
-USG
Net sales of $63.5 million in the first quarter of 2022 were $8.9 million, or 16.4% higher than the $54.5 million in the first quarter of 2021. The increase in the first quarter of 2022 compared to the secondfirst quarter of 20202021 was mainly due to a $6.3the recent acquisitions of Altanova and Phenix which contributed $14.5 million decrease in net sales at Mayday, a $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 inlower 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,core Doble products, 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$1.7 million increase in net sales at VACCO and a $1.5 million increase in net sales at Globe.NRG driven by solar products.
-17
USG-Test
In the second quarter of 2021, netNet sales of $39.6 million were $4.2 million, or 9.6%, lower than the $43.8 million in the second quarter of 2020. In the first six months of 2021, net sales of $94.1 million were $2.5 million, or 2.6%, lower than the $96.6$43.3 million in the first six months of 2020. The decrease in the second quarter and first six months of 2021 compared to the corresponding periods of 2020 was mainly due to lower product and service 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 million2022 were $2.2$1.8 million, or 5.3%4.2%, 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$41.5 million in the first six monthsquarter of 2020.2021. The increase in the secondfirst quarter of 2021 as2022 compared to the secondfirst quarter of 20202021 was primarily due to $5.3 million of higher sales from the Company’ssegment’s Asian and European operations totaling $4.1 million partially offset by a $1.9$3.5 million decrease inof lower 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. operationsboth due to the timing of test and measurement chamber projects.
ORDERS AND BACKLOG
Backlog was $521.7$639.4 million at MarchDecember 31, 2021 compared with $517.4$592.0 million at September 30, 2020.2021. 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. Of the new orders received in the second quarter of 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.
The Company received new orders totaling $333.9$224.4 million in the first six monthsquarter of 20212022 compared to $466.1$157.6 million in the first six monthsquarter of 2020.2021. Of the new orders received in the first six monthsquarter of 2021, $153.62022, $90.2 million related to Aerospace & Defense products, $87.9$66.2 million related to TestUSG products, and $92.4$68.0 million related to USGTest products. Of the new orders received in the first six monthsquarter of 2020, $285.02021, $65.4 million related to Aerospace & Defense products, $80.3$48.7 million related to TestUSG products, and $100.8$43.5 million related to USGTest products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the second quarter of 2021 were $38.7$46.6 million (23.2% of net sales), compared with $40.0 million (22.2% of net sales) for the second quarter of 2020. For the first six months of 2021, SG&A expenses from continuing operations were $79.7 million (24.2% of net sales) compared to $82.1 million (23.3%(26.3% of net sales) for the first six monthsquarter of 2020.2022, compared with $41.0 million (25.2% of net sales) for the first quarter of 2021. The decreaseincrease in SG&A in the secondfirst quarter and first six months of 20212022 compared to the corresponding periodsfirst quarter of 20202021 was mainly due to lower discretionary spending related to travelhigher expenses at Doble as a result of the SG&A contribution from the Altanova and other discretionaryPhenix acquisitions and higher expenses at Corporate due to the COVID-19 pandemic.acquisition related costs and professional fees.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets from continuing operations was $4.9$6.5 million and $9.9$4.9 million for the secondfirst quarter of 2022 and first six months of 2021, respectively, compared to $5.2 million and $11.0 million for the corresponding periods of 2020.respectively. Amortization expenses consist of amortization of acquired intangible assets from acquisitions and other identifiable intangible assets (primarily
17
software). The decreaseincrease in amortization expense in the secondfirst quarter and first six months of 20212022 compared to the corresponding periodsfirst quarter of 20202021 was mainly due to a decrease in amortizationthe Company’s recent acquisitions of capitalized software.Phenix, Altanova and NEco.
OTHER (INCOME) EXPENSES, NET
Other (income) expenses, net, was $(1.9)were $0.1 million of income in the secondfirst quarter of 20212022 compared to other expenses, net, of $0.7$0.1 million in the secondfirst 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.2021. There were no individually significant items in other (income) expenses net, in the second quarter of 2020.
Other (income) expenses, net, was $(1.9) million of income in the first six months of 2021 compared to other expenses, net, of $1.0 million in the first six months of 2020. The principal component of other (income), expenses, net, in the first six monthsquarter 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.2022. The principal component of other expenses, net, in the first six monthsquarter of 2020 were losses on derivative instruments2021 included approximately $0.7 million of $0.8 million.facility consolidation charges for the Doble Manta facility, including employee severance and lease termination charges.
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 67 to the Consolidated Financial Statements, above. EBIT was $21.8$15.6 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. For the first six months of 2021, EBIT was $40.0 million (12.1% of net sales) compared to $38.1 million (10.8%(8.8% of net sales) for the first six monthsquarter of 2020.2022 compared to $17.1 million (10.5% of net sales) for the first quarter of 2021.
18
The following table presents a reconciliation of EBIT to net earnings from continuing operations.a GAAP financial measure:
| | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||
| | March 31, | | March 31, | ||||||
(In thousands) |
| 2021 | | 2020 | | 2021 |
| 2020 | ||
Consolidated EBIT | | $ | 21,771 | | | 21,345 | | 39,972 | | 38,136 |
Less: Interest expense, net | |
| (432) |
| | (1,320) |
| (973) |
| (3,741) |
Less: Income tax | |
| (5,025) |
|
| (2,203) |
| (8,999) |
| (5,809) |
Net earnings from continuing operations | | $ | 16,314 |
| | 17,822 |
| 30,000 |
| 28,586 |
| | | | | | |
| | Three Months Ended | ||||
| | December 31, | ||||
(In thousands) |
| 2021 | | 2020 | ||
Net earnings | | $ | 11,524 | | | 12,818 |
Plus: Interest expense, net | |
| 733 |
| | 541 |
Plus: Income tax expense | |
| 3,313 |
|
| 3,722 |
Consolidated EBIT | | $ | 15,570 |
| | 17,081 |
-– Aerospace & Defense
EBIT in the second quarter of 2021 was $18.2$10.0 million (21.8% of net sales) compared to $21.7 million (22.8% of net sales) in the second quarter of 2020. EBIT in the first six months of 2021 was $27.6 million (18.4% of net sales) compared to $34.2 million (19.8%(14.2% of net sales) in the first six monthsquarter of 2020.2022 compared to $8.3 million (12.4% of net sales) in the first quarter of 2021. The decreaseincrease in EBIT in the secondfirst quarter and first six months of 20212022 compared to the corresponding periodsfirst quarter of 20202021 was mainly due to lowerhigher sales volumes at Mayday, CrissairPTI, Westland and PTIMayday partially offset by an increasea decrease in EBIT at VACCO, Crissair and Globe due to the higherlower sales volumes as mentioned above. In addition, EBIT in the first quarter of 20212022 was negatively impacted by a $0.3$0.1 million inventory step-up charge related to the ATMNEco acquisition.
-– USG
EBIT in the second quarter of 2021 was $6.7$13.4 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%(21.1% of net sales) in the first six monthsquarter of 2020. The increase in EBIT2022 compared to $12.7 million (23.3% of net sales) in the secondfirst 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.2021. The increase in EBIT in the first six monthsquarter of 20212022 compared to the first six monthsquarter of 20202021 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
EBITvolumes in the secondfirst 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 2020.2022. EBIT in the first six monthsquarter of 20212022 was $11.0negatively impacted by approximately $0.5 million (12.9% of net sales) comparedinventory step-up charges related to $10.3the Altanova acquisition.
– Test
EBIT was $4.0 million (12.4%(9.2% of net sales) in the first six monthsquarter of 2020.2022 compared to $5.3 million (12.9% of net sales) in the first quarter of 2021. The increasedecrease in EBIT in the first six monthsquarter of 20212022 compared to the first six monthsquarter of 20202021 was primarily due to product mix and higher margins on projects mainlylower sales volumes from the segment’s Asian operations.U.S. and European operations and higher material and labor costs which have negatively impacted EBIT.
-– Corporate
Corporate costs included in EBIT were $8.8$11.7 million and $18.1$9.3 million in the secondfirst quarter of 2022 and first six months of 2021, respectively, compared to $10.9 million and $20.6 million in the corresponding periods of 2020.respectively. The decreaseincrease in Corporate costs in the secondfirst quarter and first six months of 20212022 compared to the corresponding periodsfirst quarter of 20202021 was mainly due to the decreaseincrease in pensionamortization expense as a result of acquired intangible assets related to the defined benefit pension plan termination in the fourth quarterCompany’s recent acquisitions of 2020Phenix, Altanova and losses on derivative instruments of $0.8 million recorded in the first six months of 2020.NEco.
INTEREST EXPENSE, NET
Interest expense was $0.4$0.7 million and $1.0$0.5 million in the secondfirst quarter of 2022 and first six months of 2021, respectively, and $1.3 million and $3.7 million in the corresponding periods of 2020.respectively. The decreaseincrease in interest expense in the secondfirst quarter and first six months of 20212022 as compared to the corresponding periodsfirst quarter of 20202021 was mainly due to lowerhigher average outstanding borrowings and lower average interest rates. Average outstanding borrowings were $23($183 million and $47 million in the second quarter and first six months of 2021, respectively, and $150 million and $215 million in the corresponding periods of 2020.compared to $70 million).
INCOME TAX EXPENSE
The second quarter 2021 effective income tax rate from continuing operations was 23.5% compared to 11.0% in the second quarter of 2020. The effective income tax rate22.3% in the first six monthsquarter of 2021 was 23.1%2022 compared to 16.9% for22.5% in the first six monthsquarter of 2020.2021. Income tax expense in the secondfirst 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 20202022 was favorably impacted by excess tax benefit related to the releasevesting of a valuation allowance of $2.8 million for foreign net operating lossesshare based compensation, decreasing the second quarter 2020 and year-to-date effective tax rate for the quarter by 14.3% and 8.2%, respectively.1.7%.
CAPITAL RESOURCES AND LIQUIDITY
The Company’s overall financial position and liquidity remainsremain strong. The effects of COVID-19 have not materially affected liquidity. Working capital from continuing operations (current assets less current liabilities) decreasedincreased to $181.5$218.9 million at MarchDecember 31, 2021 from $190.6$188.4 million at September 30, 2020. Accounts receivable decreased2021. Inventories increased by $19.5$17.9 million during this period mainly due to a $12.5an $8.8 million decreaseincrease within the Test segment, a $5.7$4.6 million decreaseincrease 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 $3.3 million increase within the Test segment and a $2.7$4.5 million increase within the USG segment;segment resulting primarily from the timing of receipt of raw materials to meet anticipated demand and an increase in work in process inventories due to timing of manufacturing existing orders.
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Net cash provided by operating activities from continuing operations was $57.3$1.9 million and $36.7$24.8 million in the first six monthsquarters of 20212022 and 2020,2021, respectively. The increasedecrease in net cash provided by operating activities from continuing operations in the first six monthsquarter of 20212022 as compared to the first six monthsquarter of 20202021 was mainly driven by lowerhigher working capital requirements.
Capital expenditures from continuing operations were $13.2$14.1 million and $21.2$6.0 million in the first six monthsquarters of 20212022 and 2020,2021, respectively. The decreaseincrease in the first six monthsquarter of 2021 compared to the prior year period2022 was mainly due to the building improvement additions in 2020 atpurchase of the new Doble headquarters facilityNRG building of approximately $7 million.$10 million in the first quarter of 2022. In addition, the Company incurred expenditures for capitalized software of $4.0approximately $2.0 million and $4.3$1.6 million in the first six monthsquarters of 2022 and 2021, respectively.
Acquisition
On November 4, 2021, the Company acquired Networks Electronic Company, LLC (NEco) for a purchase price of approximately $15.2 million, net of cash acquired. NEco, based in Chatsworth, California, provides miniature electro-explosive devices utilized in mission-critical defense and 2020, respectively.aerospace applications. Since the date of acquisition, the operating results for the NEco business have been included as part of PTI in the A&D segment.
Credit Facility
At MarchDecember 31, 2021, the Company had approximately $468$291 million available to borrow under its bank credit facility, a $250 million increase option subject to lender approval, and $45.7$55.7 million cash on hand. At MarchDecember 31, 2021, the Company had $22$198 million of
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outstanding borrowings under the credit facility and short-term borrowings in addition to outstanding letters of credit of $10.4$10.7 million. Cash flow from operations and borrowings under the Company’s credit facility are expected to meet the Company’s capital requirements and operational needs for the foreseeable future. The Company’s ability to access the additional $250 million increase option of the credit facility is subject to acceptance by participating or other outside banks.
Share Repurchases
During the first quarter of 2022, the Company repurchased approximately 116,000 shares for $10.0 million. For further information on the share repurchases during the first quarter of 2022, see Part II, Item 2 of this Report.
Dividends
A dividend of $0.08 per share, totaling $2.1 million, was paid on October 15, 20202021 to stockholders of record as of October 1, 2020. A dividend of $0.08 per share, totaling $2.1 million, was paid on January 19, 2021 to stockholders of record as of January 4, 2021. Subsequent to MarchDecember 31, 2021, a quarterly dividend of $0.08 per share, totaling $2.1 million, was paid on April 16, 2021January 19, 2022 to stockholders of record as of April 1, 2021.
OUTLOOK
Management’s current expectations for 2021 remain consistent with the details 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 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 this uncertainty, it is difficult to predict how the balance of 2021 will be affected using normal forecasting 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 seeing tangible signs of recovery in the second half of fiscal 2021 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 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.January 4, 2022.
CRITICAL ACCOUNTING POLICIES
Management has evaluated the accounting policies used in the preparation of the Company’s financial statements and related notes and believes those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by Management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving Management judgments and estimates may be found in the Critical Accounting Policies section of Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020.2021.
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 may 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 of the Company’s assets, impacts to commercial aerospace, military and navyutility markets which the Company serves, the strength of thecertain end markets served by the Company’s Test and USG segments,Company, and the timing of the recovery of certain end markets which the Company serves; the adequacy of the Company’s credit facility and the Company’s ability to increase it; the outcome of current litigation, claims and charges; 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 deductibility of goodwill; estimates and assumptions that affect the reported amounts of assets and liabilities; the recognition of compensation cost related to share-based compensation arrangements; the Company’s ability to hedge against or otherwise manage market risks through the use of derivative financial instruments; the extent to which hedging gains or losses will be offset by losses or gains on related underlying exposures; and any other statements contained herein which are not strictly historical. Words such as expects, anticipates, targets, goals, projects, intends, plans, believes, estimates, variations of such words, and similar expressions are intended to identify such forward-looking statements.
Investors are cautioned that such statements are only predictions and speak only as of the date of this Form 10-Q, and the Company undertakes no duty to update them except as may be required by applicable laws or regulations. The Company’s actual results in the future may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company’s operations and business environment, including but not limited to those described in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2020 and in this Quarterly Report on Form 10-Q,2021, 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 the effects of known or unknown COVID-19 variants, 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,perform; the impacts of natural disasters on the Company’s operations and those of the Company’s customers and suppliers; the timing and content of future contract awards or customer orders; the appropriation, allocation and availability of Government funds; the termination for convenience of Government and other customer contracts or orders; weakening of economic conditions in served markets; the success of the Company’s competitors; changes in customer demands or customer insolvencies; competition; intellectual property rights; technical difficulties; the availability of selected acquisitions; delivery delays or defaults by customers; performance issues with key customers, suppliers and subcontractors; material changes in the costs and availability of certain raw materials; labor disputes; changes in U.S. tax laws and regulations; other changes in laws and regulations including but not limited to changes in accounting standards and foreign taxation; changes in interest rates; costs relating to environmental matters arising from current or former facilities; uncertainty regarding the ultimate resolution of current disputes, claims, litigation or arbitration; and the integration of recently acquired businesses.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks. The Company’s Canadian subsidiary Morgan Schaffer enters into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars. All derivative instruments are reported on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the respective derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. There has been no material change to the Company’s market risks since September 30, 2020.2021. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 20202021 for further discussion about market risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the participation of Management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. 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
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As previously disclosed in Part II Item 9A in the Company’s Annual Report on Form 10-K for the year ended September 30, 2021, Management concluded there were material weaknesses in the Company’s internal control over financial reporting at a reporting unit within the Company’s Aerospace & Defense (A&D) segment, related to an ineffective design and implementation of certain controls over revenue recognition and the accumulation of inventory costs and the determination of inventory carrying values. Remedial actions have been identified and implemented to address these controls including the following: a) Dedicated additional resources to improve the Company’s risk assessment process to ensure that it is comprehensive, continuous, and designed to identify and assess changes that could significantly impact internal control over financial reporting; b) Improved Company policies, procedures and system and process controls related to inventory costing and revenue recognition; and c) Provided additional risk assessment training to the A&D segment finance department on the applicable financial reporting requirements and related accounting policies. During the first quarter of 2022, we completed our testing of the operating effectiveness of the implemented controls and found them to be effective. As a result, we have concluded the material weaknesses have been remediated as of December 31, 2021.
Except for the changes in connection with our implementation of the remediation plan discussed above, there have been no changeother changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES*
| | | | | | | | | | |
| | | | | | | Total Number of | | Approximate Dollar | |
| | | | | | | Shares Purchased as | | Value of Shares that | |
| | Total Number | | Average | | Part of Publicly | | May Yet Be | ||
| | of Shares | | Price Paid | | Announced Plans | | Purchased Under the | ||
Period |
| Purchased |
| per Share |
| or Programs |
| Plans or Programs* | ||
October 1-31, 2021 |
| — |
| | N/A |
| — | | $ | 200.0 million |
November 1-30, 2021 |
| 6,892 | | $ | 82.11 |
| 6,892 | | $ | 199.4 million |
December 1-31, 2021 |
| 108,784 | | $ | 86.70 |
| 108,784 | | $ | 190.0 million |
Total |
| 115,676 | | $ | 86.43 |
| 115,676 | | $ | 190.0 million |
* On August 5, 2021, the Company’s Board of Directors approved a new common stock program, which was announced on August 9, 2021, authorizing us to repurchase shares of our stock from time to time at our discretion, in the open market or otherwise, up to a maximum total repurchase amount equal to $200 million (or such lesser amount as may be permitted under the Company’s bank credit agreements). This program is scheduled to expire September 30, 2024. The Company has not determined whether or when it will make additional repurchases under the program.
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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 | |
|
|
|
|
|
10.1 | Form of Performance Share Unit Awards to Executive Officers under 2018 Omnibus Incentive Plan | Filed herewith | ||
| | | | |
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/ Christopher L. Tucker |
| Christopher L. Tucker |
| Senior Vice President and Chief Financial Officer |
| (As duly authorized officer and principal accounting and |
| financial officer of the registrant) |
| |
Dated: | |
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