UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017.30, 2018.
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 1-6357
ESTERLINE TECHNOLOGIES CORPORATION
(Exact name of registrant as specified in its charter)
Delaware |
| 13-2595091 |
(State or other |
| (I.R.S. Employer |
of incorporation or organization) |
| Identification No.) |
500 108th Avenue N.E., Bellevue, Washington 98004
(Address of principal executive offices)(Zip Code)
Registrant’s telephone number, including area code (425) 453-9400
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 and posted on its corporate website,Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer |
| ☑ |
| Accelerated filer |
| ☐ | ||
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Non-accelerated filer |
| ☐ (Do not check if a smaller reporting company) |
| Smaller reporting company |
| ☐ | ||
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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 ☑
As of May 2, 2017, 29,773,8091, 2018, 29,427,834 shares of the issuer’s common stock were outstanding.
PART I – FINANCIAL INFORMATION
Item 1.Financial Statements
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEET
As of March 31, 201730, 2018, and September 30, 201629, 2017
(In thousands, except share amounts)
| March 31, |
|
| September 30, |
|
| March 30, |
|
| September 29, |
|
| ||||
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| ||||
| (Unaudited) |
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| (Unaudited) |
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ASSETS |
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Current Assets |
|
|
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Cash and cash equivalents | $ | 253,475 |
|
| $ | 258,520 |
|
| $ | 367,954 |
|
| $ | 307,826 |
|
|
Cash in escrow |
| - |
|
|
| 1,125 |
|
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Accounts receivable, net of allowances of $18,073 and $17,028 |
| 398,793 |
|
|
| 422,073 |
|
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Accounts receivable, net of allowances of $14,974 and $16,035 |
| 404,516 |
|
|
| 430,524 |
|
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Inventories |
|
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|
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Raw materials and purchased parts |
| 183,441 |
|
|
| 177,069 |
|
|
| 195,562 |
|
|
| 194,034 |
|
|
Work in progress |
| 176,757 |
|
|
| 171,515 |
|
|
| 189,633 |
|
|
| 178,191 |
|
|
Finished goods |
| 105,390 |
|
|
| 101,622 |
|
|
| 105,877 |
|
|
| 105,744 |
|
|
|
| 465,588 |
|
|
| 450,206 |
|
|
| 491,072 |
|
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| 477,969 |
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Income tax refundable |
| 6,046 |
|
|
| 5,183 |
|
|
| 19,930 |
|
|
| 12,814 |
|
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Prepaid expenses |
| 21,470 |
|
|
| 17,909 |
|
|
| 22,202 |
|
|
| 19,239 |
|
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Other current assets |
| 5,433 |
|
|
| 5,322 |
|
|
| 10,893 |
|
|
| 13,836 |
|
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Current assets of businesses held for sale |
| 3,659 |
|
|
| 15,450 |
|
|
| 4,300 |
|
|
| 6,501 |
|
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Total Current Assets |
| 1,154,464 |
|
|
| 1,175,788 |
|
|
| 1,320,867 |
|
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| 1,268,709 |
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Property, Plant and Equipment |
| 812,392 |
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| 795,790 |
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| 836,706 |
|
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| 862,715 |
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Accumulated depreciation |
| 478,647 |
|
|
| 457,756 |
|
|
| 507,981 |
|
|
| 514,081 |
|
|
|
| 333,745 |
|
|
| 338,034 |
|
|
| 328,725 |
|
|
| 348,634 |
|
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Other Non-Current Assets |
|
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Goodwill |
| 1,000,806 |
|
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| 1,024,667 |
|
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| 1,060,668 |
|
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| 1,053,573 |
|
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Intangibles, net |
| 359,179 |
|
|
| 393,035 |
|
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| 341,483 |
|
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| 359,166 |
|
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Deferred income tax benefits |
| 73,961 |
|
|
| 75,409 |
|
|
| 56,600 |
|
|
| 56,793 |
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Other assets |
| 14,177 |
|
|
| 13,698 |
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| 17,066 |
|
|
| 19,804 |
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Non-current assets of businesses held for sale |
| 10,144 |
|
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| 11,400 |
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| 14,118 |
|
|
| 13,334 |
|
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Total Assets | $ | 2,946,476 |
|
| $ | 3,032,031 |
|
| $ | 3,139,527 |
|
| $ | 3,120,013 |
|
|
2
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED BALANCE SHEET
As of March 31, 201730, 2018, and September 30, 201629, 2017
(In thousands, except share amounts)
| March 31, |
|
| September 30, |
|
| March 30, |
|
| September 29, |
|
| ||||
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
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| (Unaudited) |
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| (Unaudited) |
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LIABILITIES AND SHAREHOLDERS' EQUITY |
|
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Current Liabilities |
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Accounts payable | $ | 123,608 |
|
| $ | 121,816 |
|
| $ | 148,414 |
|
| $ | 138,595 |
|
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Accrued liabilities |
| 232,976 |
|
|
| 238,163 |
|
|
| 226,227 |
|
|
| 230,007 |
|
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Current maturities of long-term debt |
| 14,168 |
|
|
| 16,774 |
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| 15,170 |
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| 17,424 |
|
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Federal and foreign income taxes |
| 4,700 |
|
|
| 10,932 |
|
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U.S. and foreign income taxes |
| 7,722 |
|
|
| 582 |
|
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Current liabilities of businesses held for sale |
| 1,069 |
|
|
| 10,813 |
|
|
| 4,529 |
|
|
| 7,184 |
|
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Total Current Liabilities |
| 376,521 |
|
|
| 398,498 |
|
|
| 402,062 |
|
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| 393,792 |
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Long-Term Liabilities |
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Credit facilities |
| 90,000 |
|
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| 155,000 |
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| 45,000 |
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| 50,000 |
|
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Long-term debt, net of current maturities |
| 674,205 |
|
|
| 698,796 |
|
|
| 721,082 |
|
|
| 709,424 |
|
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Deferred income tax liabilities |
| 42,039 |
|
|
| 53,798 |
|
|
| 41,699 |
|
|
| 43,978 |
|
|
Pension and post-retirement obligations |
| 90,962 |
|
|
| 92,520 |
|
|
| 66,639 |
|
|
| 66,981 |
|
|
Long-term U.S. income taxes payable |
| 38,640 |
|
|
| - |
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| ||||||||
Other liabilities |
| 20,178 |
|
|
| 21,968 |
|
|
| 17,138 |
|
|
| 18,838 |
|
|
Non-current liabilities of businesses held for sale |
| 1,685 |
|
|
| 320 |
|
|
| 3,107 |
|
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| 1,724 |
|
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Shareholders' Equity |
|
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Common stock, par value $.20 per share, authorized 60,000,000 shares, issued 32,909,736 and 32,564,252 shares |
| 6,582 |
|
|
| 6,513 |
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| ||||||||
Common stock, par value $.20 per share, authorized 60,000,000 shares, issued 33,164,361 and 33,117,473 shares |
| 6,633 |
|
|
| 6,623 |
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| ||||||||
Additional paid-in capital |
| 724,702 |
|
|
| 702,610 |
|
|
| 746,946 |
|
|
| 738,329 |
|
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Treasury stock at cost, repurchased 3,135,927 and 3,135,927 shares |
| (308,514 | ) |
|
| (308,514 | ) |
| ||||||||
Treasury stock at cost, repurchased 3,737,327 and 3,135,927 shares |
| (351,964 | ) |
|
| (308,514 | ) |
| ||||||||
Retained earnings |
| 1,600,962 |
|
|
| 1,548,805 |
|
|
| 1,644,083 |
|
|
| 1,655,187 |
|
|
Accumulated other comprehensive loss |
| (383,565 | ) |
|
| (348,857 | ) |
|
| (252,743 | ) |
|
| (266,870 | ) |
|
Total Esterline Shareholders' Equity |
| 1,640,167 |
|
|
| 1,600,557 |
|
|
| 1,792,955 |
|
|
| 1,824,755 |
|
|
Noncontrolling interests |
| 10,719 |
|
|
| 10,574 |
|
|
| 11,205 |
|
|
| 10,521 |
|
|
Total Shareholders' Equity |
| 1,650,886 |
|
|
| 1,611,131 |
|
|
| 1,804,160 |
|
|
| 1,835,276 |
|
|
Total Liabilities and Shareholders' Equity | $ | 2,946,476 |
|
| $ | 3,032,031 |
|
| $ | 3,139,527 |
|
| $ | 3,120,013 |
|
|
3
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS AND
COMPREHENSIVE INCOME (LOSS)
For the Three and Six Month Periods Ended March 30, 2018, and March 31, 2017 and April 1, 2016
(Unaudited)
(In thousands, except per share amounts)
| Three Months Ended |
|
| Six Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| ||||||||||||||||||||
| March 31, |
|
| April 1, |
|
| March 31, |
|
| April 1, |
|
| March 30, |
|
| March 31, |
|
| March 30, |
|
| March 31, |
|
| ||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
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| 2018 |
|
| 2017 |
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| 2018 |
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| 2017 |
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Net Sales | $ | 509,182 |
|
| $ | 490,310 |
|
| $ | 966,915 |
|
| $ | 931,787 |
|
| $ | 517,629 |
|
| $ | 509,131 |
|
| $ | 999,674 |
|
| $ | 967,547 |
|
|
Cost of Sales |
| 333,263 |
|
|
| 334,137 |
|
|
| 646,949 |
|
|
| 637,895 |
|
|
| 353,902 |
|
|
| 331,925 |
|
|
| 687,611 |
|
|
| 647,429 |
|
|
|
| 175,919 |
|
|
| 156,173 |
|
|
| 319,966 |
|
|
| 293,892 |
|
|
| 163,727 |
|
|
| 177,206 |
|
|
| 312,063 |
|
|
| 320,118 |
|
|
Expenses |
|
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|
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Selling, general & administrative |
| 97,083 |
|
|
| 102,423 |
|
|
| 192,716 |
|
|
| 196,514 |
|
|
| 102,036 |
|
|
| 97,924 |
|
|
| 200,922 |
|
|
| 193,034 |
|
|
Research, development and engineering |
| 26,808 |
|
|
| 24,974 |
|
|
| 47,846 |
|
|
| 50,549 |
|
|
| 24,725 |
|
|
| 29,041 |
|
|
| 50,567 |
|
|
| 50,747 |
|
|
Restructuring charges |
| - |
|
|
| 940 |
|
|
| - |
|
|
| 1,871 |
|
| ||||||||||||||||
License fee income |
| (2,268 | ) |
|
| - |
|
|
| (5,293 | ) |
|
| - |
|
| ||||||||||||||||
Loss on sale of business |
| 5,310 |
|
|
| - |
|
|
| 5,310 |
|
|
| - |
|
| ||||||||||||||||
Insurance recovery |
| (5,189 | ) |
|
| - |
|
|
| (7,789 | ) |
|
| - |
|
|
| - |
|
|
| (5,189 | ) |
|
| - |
|
|
| (7,789 | ) |
|
Total Expenses |
| 118,702 |
|
|
| 128,337 |
|
|
| 232,773 |
|
|
| 248,934 |
|
|
| 129,803 |
|
|
| 121,776 |
|
|
| 251,506 |
|
|
| 235,992 |
|
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Operating Earnings from Continuing Operations |
| 57,217 |
|
|
| 27,836 |
|
|
| 87,193 |
|
|
| 44,958 |
|
|
| 33,924 |
|
|
| 55,430 |
|
|
| 60,557 |
|
|
| 84,126 |
|
|
Interest Income |
| (100 | ) |
|
| (94 | ) |
|
| (196 | ) |
|
| (181 | ) |
|
| (449 | ) |
|
| (100 | ) |
|
| (747 | ) |
|
| (196 | ) |
|
Interest Expense |
| 7,458 |
|
|
| 7,294 |
|
|
| 15,346 |
|
|
| 14,510 |
|
|
| 8,167 |
|
|
| 7,458 |
|
|
| 15,771 |
|
|
| 15,346 |
|
|
Earnings from Continuing Operations Before Income Taxes |
| 49,859 |
|
|
| 20,636 |
|
|
| 72,043 |
|
|
| 30,629 |
|
|
| 26,206 |
|
|
| 48,072 |
|
|
| 45,533 |
|
|
| 68,976 |
|
|
Income Tax Expense (Benefit) |
| 14,160 |
|
|
| 3,416 |
|
|
| 14,580 |
|
|
| 3,383 |
|
| ||||||||||||||||
Earnings from Continuing Operations Including Noncontrolling Interests |
| 35,699 |
|
|
| 17,220 |
|
|
| 57,463 |
|
|
| 27,246 |
|
| ||||||||||||||||
Income Tax Expense |
| 2,079 |
|
|
| 13,080 |
|
|
| 55,868 |
|
|
| 12,617 |
|
| ||||||||||||||||
Earnings (Loss) from Continuing Operations Including Noncontrolling Interests |
| 24,127 |
|
|
| 34,992 |
|
|
| (10,335 | ) |
|
| 56,359 |
|
| ||||||||||||||||
Earnings Attributable to Noncontrolling Interests |
| (552 | ) |
|
| (224 | ) |
|
| (791 | ) |
|
| (386 | ) |
|
| (173 | ) |
|
| (552 | ) |
|
| (526 | ) |
|
| (791 | ) |
|
Earnings from Continuing Operations Attributable to Esterline, Net of Tax |
| 35,147 |
|
|
| 16,996 |
|
|
| 56,672 |
|
|
| 26,860 |
|
| ||||||||||||||||
Earnings (Loss) from Continuing Operations Attributable to Esterline, Net of Tax |
| 23,954 |
|
|
| 34,440 |
|
|
| (10,861 | ) |
|
| 55,568 |
|
| ||||||||||||||||
Loss from Discontinued Operations Attributable to Esterline, Net of Tax |
| (34 | ) |
|
| (2,023 | ) |
|
| (5,370 | ) |
|
| (6,803 | ) |
|
| (77 | ) |
|
| (34 | ) |
|
| (243 | ) |
|
| (5,370 | ) |
|
Net Earnings Attributable to Esterline | $ | 35,113 |
|
| $ | 14,973 |
|
| $ | 51,302 |
|
| $ | 20,057 |
|
| ||||||||||||||||
Net Earnings (Loss) Attributable to Esterline | $ | 23,877 |
|
| $ | 34,406 |
|
| $ | (11,104 | ) |
| $ | 50,198 |
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Earnings (Loss) Per Share Attributable to Esterline - Basic: | Earnings (Loss) Per Share Attributable to Esterline - Basic: |
|
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| Earnings (Loss) Per Share Attributable to Esterline - Basic: |
|
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|
| ||
Continuing operations | $ | 1.18 |
|
| $ | 0.58 |
|
| $ | 1.91 |
|
| $ | 0.91 |
|
| $ | 0.81 |
|
| $ | 1.16 |
|
| $ | (0.36 | ) |
| $ | 1.87 |
|
|
Discontinued operations |
| - |
|
|
| (0.07 | ) |
|
| (0.18 | ) |
|
| (0.23 | ) |
|
| - |
|
|
| - |
|
|
| (0.01 | ) |
|
| (0.18 | ) |
|
Earnings (Loss) Per Share - Basic | $ | 1.18 |
|
| $ | 0.51 |
|
| $ | 1.73 |
|
| $ | 0.68 |
|
| ||||||||||||||||
Earnings (Loss) Per Share | $ | 0.81 |
|
| $ | 1.16 |
|
| $ | (0.37 | ) |
| $ | 1.69 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (Loss) Per Share Attributable to Esterline - Diluted: | Earnings (Loss) Per Share Attributable to Esterline - Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings (Loss) Per Share Attributable to Esterline - Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Continuing operations | $ | 1.17 |
|
| $ | 0.57 |
|
| $ | 1.90 |
|
| $ | 0.90 |
|
| $ | 0.80 |
|
| $ | 1.15 |
|
| $ | (0.36 | ) |
| $ | 1.86 |
|
|
Discontinued operations |
| - |
|
|
| (0.07 | ) |
|
| (0.18 | ) |
|
| (0.23 | ) |
|
| - |
|
|
| - |
|
|
| (0.01 | ) |
|
| (0.18 | ) |
|
Earnings (Loss) Per Share - Diluted | $ | 1.17 |
|
| $ | 0.50 |
|
| $ | 1.72 |
|
| $ | 0.67 |
|
| ||||||||||||||||
Earnings (Loss) Per Share | $ | 0.80 |
|
| $ | 1.15 |
|
| $ | (0.37 | ) |
| $ | 1.68 |
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earnings | $ | 35,113 |
|
| $ | 14,973 |
|
| $ | 51,302 |
|
| $ | 20,057 |
|
| ||||||||||||||||
Net Earnings (Loss) | $ | 23,877 |
|
| $ | 34,406 |
|
| $ | (11,104 | ) |
| $ | 50,198 |
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Fair Value of Derivative Financial Instruments |
| 5,604 |
|
|
| 20,274 |
|
|
| (695 | ) |
|
| 16,101 |
|
|
| (6,813 | ) |
|
| 5,909 |
|
|
| (7,373 | ) |
|
| (932 | ) |
|
Income Tax Expense (Benefit) |
| 1,428 |
|
|
| 5,779 |
|
|
| (481 | ) |
|
| 4,494 |
|
|
| (1,824 | ) |
|
| 1,428 |
|
|
| (1,934 | ) |
|
| (481 | ) |
|
|
| 4,176 |
|
|
| 14,495 |
|
|
| (214 | ) |
|
| 11,607 |
|
|
| (4,989 | ) |
|
| 4,481 |
|
|
| (5,439 | ) |
|
| (451 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Pension and Post-Retirement Obligations |
| 1,063 |
|
|
| (87 | ) |
|
| 3,596 |
|
|
| 2,188 |
|
|
| 1,019 |
|
|
| 1,063 |
|
|
| 1,861 |
|
|
| 3,596 |
|
|
Income Tax Expense (Benefit) |
| 260 |
|
|
| 83 |
|
|
| 1,252 |
|
|
| 840 |
|
| ||||||||||||||||
Income Tax Expense |
| 177 |
|
|
| 260 |
|
|
| 474 |
|
|
| 1,252 |
|
| ||||||||||||||||
|
| 803 |
|
|
| (170 | ) |
|
| 2,344 |
|
|
| 1,348 |
|
|
| 842 |
|
|
| 803 |
|
|
| 1,387 |
|
|
| 2,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustment |
| 16,189 |
|
|
| 31,246 |
|
|
| (36,838 | ) |
|
| (8,215 | ) |
|
| 11,825 |
|
|
| 16,184 |
|
|
| 18,179 |
|
|
| (36,837 | ) |
|
Comprehensive Income (Loss) | $ | 56,281 |
|
| $ | 60,544 |
|
| $ | 16,594 |
|
| $ | 24,797 |
|
| ||||||||||||||||
Comprehensive Income | $ | 31,555 |
|
| $ | 55,874 |
|
| $ | 3,023 |
|
| $ | 15,254 |
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
ESTERLINE TECHNOLOGIES CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
For the Six MonthSix-Month Periods Ended March 30, 2018, and March 31, 2017 and April 1, 2016
(Unaudited)
(In thousands)
| March 31, |
|
| April 1, |
|
| March 30, |
|
| March 31, |
|
| ||||
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Provided (Used) by Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings including noncontrolling interests | $ | 52,093 |
|
| $ | 20,443 |
|
| ||||||||
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Net earnings (loss) including noncontrolling interests | $ | (10,578 | ) |
| $ | 50,989 |
|
| ||||||||
Adjustments to reconcile net earnings (loss) including noncontrolling interests to net cash provided (used) by operating activities: |
|
|
|
|
|
|
|
| ||||||||
Depreciation and amortization |
| 51,169 |
|
|
| 48,736 |
|
|
| 54,303 |
|
| $ | 51,169 |
|
|
Deferred income taxes |
| (8,311 | ) |
|
| (10,094 | ) |
|
| (1,327 | ) |
|
| (8,648 | ) |
|
Share-based compensation |
| 7,352 |
|
|
| 7,578 |
|
|
| 6,715 |
|
|
| 7,352 |
|
|
Excess tax benefits from share-based compensation |
| - |
|
|
| (496 | ) |
| ||||||||
Loss on disposal of fixed assets |
| 2,165 |
|
|
| - |
|
| ||||||||
Loss on sale of business |
| 5,310 |
|
|
| - |
|
| ||||||||
Gain on sale of discontinued operations |
| (1,188 | ) |
|
| - |
|
|
| - |
|
|
| (1,188 | ) |
|
Loss on assets held for sale |
| 4,409 |
|
|
| 3,572 |
|
| ||||||||
Gain (loss) on assets held for sale |
| (1,395 | ) |
|
| 4,409 |
|
| ||||||||
Working capital changes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
| 17,129 |
|
|
| 7,700 |
|
|
| 22,671 |
|
|
| 19,407 |
|
|
Inventories |
| (24,572 | ) |
|
| (7,275 | ) |
|
| (24,829 | ) |
|
| (24,689 | ) |
|
Prepaid expenses |
| (3,807 | ) |
|
| 1,120 |
|
|
| (3,103 | ) |
|
| (3,807 | ) |
|
Other current assets |
| (271 | ) |
|
| 624 |
|
|
| (144 | ) |
|
| (271 | ) |
|
Accounts payable |
| 2,861 |
|
|
| 1,439 |
|
|
| 9,526 |
|
|
| 1,646 |
|
|
Accrued liabilities |
| (6,927 | ) |
|
| 917 |
|
|
| (11,006 | ) |
|
| (4,432 | ) |
|
Federal and foreign income taxes |
| (6,361 | ) |
|
| (690 | ) |
| ||||||||
U.S. and foreign income taxes |
| 65 |
|
|
| (7,947 | ) |
| ||||||||
Long-term U.S. income taxes payable |
| 38,640 |
|
|
| - |
|
| ||||||||
Other liabilities |
| 996 |
|
|
| (1,345 | ) |
|
| (2,934 | ) |
|
| 996 |
|
|
Other, net |
| 6,773 |
|
|
| 7,159 |
|
|
| 5,639 |
|
|
| 6,357 |
|
|
|
| 91,345 |
|
|
| 79,388 |
|
|
| 89,718 |
|
|
| 91,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Provided (Used) by Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of capital assets |
| (29,077 | ) |
|
| (42,506 | ) |
|
| (27,720 | ) |
|
| (29,077 | ) |
|
Escrow deposit |
| - |
|
|
| (1,125 | ) |
| ||||||||
Proceeds from sale of discontinued operations |
| 600 |
|
|
| - |
|
| ||||||||
Proceeds from sale of capital assets |
| 434 |
|
|
| - |
|
| ||||||||
Proceeds from sale of business |
| 47,814 |
|
|
| 600 |
|
| ||||||||
|
| (28,477 | ) |
|
| (43,631 | ) |
|
| 20,528 |
|
|
| (28,477 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows Provided (Used) by Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds provided by stock issuance under employee stock plans |
| 16,795 |
|
|
| 3,985 |
|
|
| 2,270 |
|
|
| 16,795 |
|
|
Withholding taxes on restricted stock units vested |
| (1,072 | ) |
|
| - |
|
|
| (366 | ) |
|
| (1,072 | ) |
|
Excess tax benefits from share-based compensation |
| - |
|
|
| 496 |
|
| ||||||||
Shares repurchased |
| - |
|
|
| (12,076 | ) |
|
| (43,450 | ) |
|
| - |
|
|
Repayment of long-term credit facilities |
| (70,000 | ) |
|
| (10,000 | ) |
|
| (50,000 | ) |
|
| (70,000 | ) |
|
Repayment of long-term debt |
| (9,433 | ) |
|
| (6,158 | ) |
|
| (7,119 | ) |
|
| (9,433 | ) |
|
Proceeds from issuance of long-term credit facilities |
| 5,000 |
|
|
| 15,000 |
|
|
| 45,000 |
|
|
| 5,000 |
|
|
|
| (58,710 | ) |
|
| (8,753 | ) |
|
| (53,665 | ) |
|
| (58,710 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Foreign Exchange Rates on Cash and Cash Equivalents |
| (9,203 | ) |
|
| 912 |
|
|
| 3,547 |
|
|
| (9,201 | ) |
|
Net Increase (Decrease) in Cash and Cash Equivalents |
| (5,045 | ) |
|
| 27,916 |
|
|
| 60,128 |
|
|
| (5,045 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents - Beginning of Year |
| 258,520 |
|
|
| 191,355 |
|
|
| 307,826 |
|
|
| 258,520 |
|
|
Cash and Cash Equivalents - End of Period | $ | 253,475 |
|
| $ | 219,271 |
|
| $ | 367,954 |
|
| $ | 253,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest | $ | 14,384 |
|
| $ | 13,314 |
|
| $ | 14,126 |
|
| $ | 14,384 |
|
|
Cash paid for taxes |
| 25,323 |
|
|
| 6,654 |
|
|
| 15,268 |
|
|
| 25,323 |
|
|
5
ESTERLINE TECHNOLOGIES CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Three and Six Month Periods Ended March 30, 2018, and March 31, 2017 and April 1, 2016
Note 1 – Basis of Presentation
The consolidated balance sheet as of March 31, 2017,30, 2018, the consolidated statement of operations and comprehensive income (loss) for the three and six month periods ended March 30, 2018, and March 31, 2017, and April 1, 2016, and the consolidated statement of cash flows for the six monthsix-month periods ended March 30, 2018, and March 31, 2017, and April 1, 2016, are unaudited but, in the opinion of management, all of the necessary adjustments, consisting of normal recurring accruals, have been made to present fairly the financial statements referred to above in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the above statements do not include all of the footnotes required for complete financial statements. The results of operations and cash flows for the interim periods presented are not necessarily indicative of results that can be expected for the full year.
The notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K10-K/A for the fiscal year ended September 30, 2016,29, 2017, provide a summary of significant accounting policies and additional financial information that should be read in conjunction with this Form 10-Q.
The timing of the Company’s revenues is impacted by the purchasing patterns of customers and, as a result, revenues are not generated evenly throughout the year. Moreover, the Company’s first fiscal quarter, October through December, includes significant holiday periods in both Europe and North America, resulting in fewer business days.
Note 2 – Recent Accounting Pronouncements
In MarchAugust 2017 the Financial Accounting Standards Board (FASB)(“FASB”) amended its guidance on the financial reporting of hedging relationships. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness, expands permissible cash flow hedges on contractually specified components, and simplifies hedge documentation and effectiveness assessment. The guidance will be effective at the beginning of the Company’s first quarter of fiscal year 2020 and will require a modified retrospective approach on existing cash flow and net investment hedges. The presentation and disclosure requirements will be applied prospectively. The Company is currently evaluating the impact this guidance will have on the Company’s consolidated financial statements and the timing of adoption.
In March 2017 the FASB issued new guidance on the presentation of the net periodic cost of postretirement benefit programs. The new standard requires sponsors of defined benefit postretirement plans to present the non-service cost components of net periodic benefit cost separate from the service cost component on the income statement. The new standard also requires that the non-service cost components of net periodic benefit cost no longer be capitalized within assets. The Company is evaluating the effects the standard will have on the Company'sCompany’s consolidated financial statements and related disclosures beyond the change in income statement presentation. This new standard is effective for the Company in fiscal year 2019, with early adoption permitted.
In January 2017 the FASB issued new guidance regarding the goodwill impairment test. The new guidance eliminates the Step 2 valuation test when evaluating goodwill for impairment. The new guidance requires that an entity performs its annual or interim goodwill test by comparing the fair value of the reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Companyguidance is evaluating the effect the updated standard will have on the Company’s consolidated financial statements and related disclosures. The guidance will be effective for the companyCompany in fiscal year 2021, with early adoption permitted. The standard was implemented in the first quarter of fiscal 2018.
In October 2016 the FASB issued new guidance regarding income taxes. The new guidance will require the tax effects of intercompany transactions, other than sales of inventory, to be recognized currently, eliminating an exception under current Generally Accepted Accounting Principles (GAAP) in which the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use. The Company is evaluating the effect the updated standard will have on the Company’s consolidated financial statements and related disclosures. The guidance will be effective for the Company in fiscal year 2019, with early adoption permitted.
In August 2016 the FASB issued new guidance addressing how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The Company is evaluating the effect the updated standard will have on the Company’s consolidated financial statements and related disclosures. The guidance will be effective for the Company in fiscal year 2019, with early adoption permitted.
In June 2016 the FASB issued a new standard on the measurement of credit losses, which will impact the Company’s measurement of trade receivables. The new standard replaces the current incurred loss model with a forward-looking expected loss model that is likely to result in earlier recognition of losses. The Company is evaluating the effect the updated standard will have on the Company’s
6
consolidated financial statements and related disclosures. The new standard is effective for the Company in fiscal year 2021, with early adoption permitted, but not earlier than in fiscal year 2020.
In March 2016, the FASB issued new guidance simplifying certain aspects of accounting for share-based payments. The key provision of the new standard requires that excess tax benefits and shortfalls be recorded as income tax benefit or expense in the income statement, rather than in equity. The Company adopted the new guidance during the first six months of fiscal 2017, which
6
resulted in a $1.0 million benefit to income tax expense and a favorable impact to operating cash flows of $1.0 million. The Company has also elected to account for forfeitures as they occur, rather than estimate expected forfeitures, which resulted in a positive cumulative effect on retained earnings of $0.9 million and a reduction of additional paid-in capital of $0.9 million.
In February 2016 the FASB issued a new lease accounting standard, which provides revised guidance on accounting for lease arrangements by both lessors and lessees. The central requirement of the new standard is that lessees must recognize lease relatedlease-related assets and liabilities for all leases with a term longer than 12 months. The Company is evaluating the effect the standard will have on the Company’s consolidated financial statements and related disclosures. The new standard is effective for the Company in fiscal year 2020, with early adoption permitted.
In July 2015 the FASB issued guidance which simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. Net realizable value is the estimated selling price of inventory in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This new guidance was adopted in the first quarter of fiscal 2018, with no impact to the Company’s consolidated financial statements and related disclosures.
Revenue Recognition
In May 2014 the FASB amended requirements for an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The updated standard will replace most existingissued a comprehensive new revenue recognition standard that effectively replaces all current guidance in U.S. GAAP when it becomes effective, andon the topic. The guidance permits the use of either thea retrospective or a cumulative effect transition method.
The Company has performed a review of the new guidance against the Company’s current accounting practices. The Company has reviewed a representative sample of contracts and other agreements with customers and evaluated the provisions contained within these agreements compared with the amended guidance.
This amended guidance is expected to change the revenue recognition practices for a number of revenue streams across our businesses; the most significant will be for certain U.S. government contracts and certain other contracts that meet one or more of the mandatory criteria, which will move revenue recognition from a “point-in-time” basis to an “over-time” basis. The ongoing effect of recording revenue on an “over-time” basis is not expected to be materially different than under the historical guidance.
The amended guidance is also expected to change the recognition of certain development costs that are contractually guaranteed for reimbursement by our customers. Contractually guaranteed reimbursements for development efforts are currently recognized as the development activities are performed. Under the amended guidance, the contractually guaranteed reimbursement specific to the development effort will be deferred as a contract liability and recognized as revenue when future products are delivered to the customer in cases where the Company does not transfer all intellectual property rights related to the development effort to the customer or does not have an enforceable right to payment for performance completed to date. The costs associated with development effort under an arrangement with contractually guaranteed reimbursement will also be deferred, up to the amount reimbursed, and recognized through cost of goods sold as products are delivered to the customer. The ongoing effect of deferring contractually guaranteed reimbursements and the related costs until products are delivered to the customer is not expected to be materially different than under the historical guidance.
The new standard also significantly enhances required disclosures regarding revenue and related assets and liabilities. The Company is evaluatingin the effectprocess of implementing changes to business processes, systems and internal controls required to adopt the updated standard will have on the Company’s consolidated financial statements and related disclosures. new accounting standard.
The updated standard becomes effective for the Company in the first quarter of fiscal 2019, with early adoption permitted.
Anticipated changes under the new standard include accounting for development costs and associated customer funding related to certain contracts and increased use of over time revenue recognition based on costs incurred for certain contracts. The new standard also significantly enhances required disclosures regarding revenue and related assets and liabilities.
The Company continuesexpects to evaluateapply the impacts associatedstandard using the cumulative effect transition basis, with a cumulative effect adjustment recognized at the new standard and estimated impactsbeginning of adoption on the financial statements and related disclosures. The Company is in the process of evaluating changes to business processes, systems and internal controls required to implement the new accounting standard.fiscal year 2019.
7
Note 3 – Earnings Per Share and Shareholders’ Equity
Basic earnings per share is computed on the basis of the weighted average number of shares outstanding during the year. Diluted earnings per share includes the dilutive effect of stock options, restricted stock units and share units related to the Company’s performance share plan to the extent that performance share plan objectives are met. Common shares issuable from stock options excluded from the calculation of diluted earnings per shareshares because they were anti-dilutive were 740,575 and 775,225970,625 in the three and six month periodsthree-month period ending March 31, 2017.30, 2018. Due to the net loss for the six months ending March 30, 2018, there was no impact from common shares issuable from stock options for diluted shares. Common shares issuable from stock options excluded from the calculation of diluted earnings per share because they were anti-dilutive were 766,500740,575 and 688,600775,225 in the three and six monthsix-month periods ending April 1, 2016.March 31, 2017, respectively. Shares used for calculating earnings per share are disclosed in the following table:
In Thousands | Three Months Ended |
|
| Six Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| ||||||||||||||||||||
| March 31, |
|
| April 1, |
|
| March 31, |
|
| April 1, |
|
| March 30, |
|
| March 31, |
|
| March 30, |
|
| March 31, |
|
| ||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used for basic earnings per share |
| 29,719 |
|
|
| 29,588 |
|
|
| 29,633 |
|
|
| 29,585 |
|
|
| 29,614 |
|
|
| 29,719 |
|
|
| 29,758 |
|
|
| 29,633 |
|
|
Shares used for diluted earnings per share |
| 29,959 |
|
|
| 29,825 |
|
|
| 29,895 |
|
|
| 29,882 |
|
|
| 29,726 |
|
|
| 29,959 |
|
|
| 29,758 |
|
|
| 29,895 |
|
|
The authorized capital stock of the Company consists of 25,000 shares of preferred stock ($100 par value), 475,000 shares of serial preferred stock ($1.00 par value), each issuable in series, and 60,000,000 shares of common stock ($.20 par value). As of March 31, 2017,30, 2018, and September 30, 2016,29, 2017, there were no shares of preferred stock or serial preferred stock outstanding.
OnIn June 19, 2014 the Company’s boardBoard of directorsDirectors approved a $200 million share repurchase program. In March 2015 the Company’s boardBoard of directorsDirectors approved an additional $200 million for the share repurchase program. Under the program, the Company is authorized to repurchase up to $400 million of outstanding shares of common stock from time to time, depending on market conditions, share price and other factors. Repurchases may be made in the open market or through private transactions, in accordance with SEC requirements. The Company may enter into a Rule 10(b)5-1 plan designed to facilitate the repurchase of all or a portion of the repurchase amount. The program does not require the Company to acquire a specific number of shares. Common stock repurchased can be reissued, and accordingly, the Company accounts for repurchased stock under the cost method of accounting.
During the three months ended March 30, 2018, the Company repurchased 313,900 shares under this program at an average price paid per share of $73.29, for an aggregate purchase price of $23.0 million. During the six months ended March 30, 2018, the Company repurchased 601,400 shares under this program at an average price paid per share of $72.25, for an aggregate purchase price of $43.4 million. There were no shares repurchased during the three or six months ended March 31, 2017. There were 202,310have been no shares repurchased during the six months ended April 1, 2016.subsequent to March 30, 2018. Since the program began, the Company has repurchased 3,135,9273,737,327 shares for an aggregate purchase price of $308.5$352.0 million, leaving $91.5with $48.0 million in shares remaining available for repurchase in the future.
7
Changes in issued and outstanding common shares are summarized as follows:
| Six Months Ended |
|
| Year Ended |
|
| Six Months Ended |
|
| Year Ended |
|
| ||||
| March 31, |
|
| September 30, |
|
| March 30, |
|
| September 29, |
|
| ||||
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| ||||
Shares Issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
| 32,564,252 |
|
|
| 32,378,185 |
|
|
| 33,117,473 |
|
|
| 32,564,252 |
|
|
Shares issued under share-based compensation plans |
| 345,484 |
|
|
| 186,067 |
|
|
| 46,888 |
|
|
| 553,221 |
|
|
Balance, end of current period |
| 32,909,736 |
|
|
| 32,564,252 |
|
|
| 33,164,361 |
|
|
| 33,117,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury Stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year |
| (3,135,927 | ) |
|
| (2,831,350 | ) |
|
| (3,135,927 | ) |
|
| (3,135,927 | ) |
|
Shares purchased |
| - |
|
|
| (304,577 | ) |
|
| (601,400 | ) |
|
| - |
|
|
Balance, end of current period |
| (3,135,927 | ) |
|
| (3,135,927 | ) |
|
| (3,737,327 | ) |
|
| (3,135,927 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares outstanding, end of period |
| 29,773,809 |
|
|
| 29,428,325 |
|
|
| 29,427,034 |
|
|
| 29,981,546 |
|
|
8
The components of Accumulated Other Comprehensive GainIncome (Loss):
In Thousands | March 31, |
|
| September 30, |
|
| March 30, |
|
| September 29, |
|
| ||||
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on derivative contracts | $ | (5,242 | ) |
| $ | (4,547 | ) |
| ||||||||
Unrealized gain on derivative contracts | $ | 6,096 |
|
| $ | 13,469 |
|
| ||||||||
Tax effect |
| 1,558 |
|
|
| 1,077 |
|
|
| (1,958 | ) |
|
| (3,892 | ) |
|
|
| (3,684 | ) |
|
| (3,470 | ) |
|
| 4,138 |
|
|
| 9,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and post-retirement obligations |
| (112,750 | ) |
|
| (116,346 | ) |
|
| (79,921 | ) |
|
| (81,782 | ) |
|
Tax effect |
| 38,552 |
|
|
| 39,804 |
|
|
| 27,482 |
|
|
| 27,956 |
|
|
|
| (74,198 | ) |
|
| (76,542 | ) |
|
| (52,439 | ) |
|
| (53,826 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
| (305,683 | ) |
|
| (268,845 | ) |
|
| (204,442 | ) |
|
| (222,621 | ) |
|
Accumulated other comprehensive gain (loss) | $ | (383,565 | ) |
| $ | (348,857 | ) |
| ||||||||
Accumulated other comprehensive income (loss) | $ | (252,743 | ) |
| $ | (266,870 | ) |
|
Note 4 – Retirement Benefits
The Company’s pension plans principally include a U.S. pension plan maintained by Esterline and a non-U.S. plan maintained by CMC Electronics, Inc. (CMC). The Company also sponsors a number of other non-U.S. defined benefit pension plans, primarily in Belgium, France and Germany. Components of periodic pension cost consisted of the following:
In Thousands | Three Months Ended |
|
| Six Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| ||||||||||||||||||||
| March 31, |
|
| April 1, |
|
| March 31, |
|
| April 1, |
|
| March 30, |
|
| March 31, |
|
| March 30, |
|
| March 31, |
|
| ||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of Net Periodic Cost | Components of Net Periodic Cost |
|
| Components of Net Periodic Cost |
|
| ||||||||||||||||||||||||||
Service cost | $ | 3,368 |
|
| $ | 2,945 |
|
| $ | 6,725 |
|
| $ | 5,902 |
|
| $ | 3,396 |
|
| $ | 3,368 |
|
| $ | 6,769 |
|
| $ | 6,725 |
|
|
Interest cost |
| 3,734 |
|
|
| 4,247 |
|
|
| 7,455 |
|
|
| 8,640 |
|
|
| 4,120 |
|
|
| 3,734 |
|
|
| 8,227 |
|
|
| 7,455 |
|
|
Expected return on plan assets |
| (6,290 | ) |
|
| (5,993 | ) |
|
| (12,555 | ) |
|
| (11,904 | ) |
|
| (6,826 | ) |
|
| (6,290 | ) |
|
| (13,634 | ) |
|
| (12,555 | ) |
|
Amortization of prior service cost |
| 115 |
|
|
| 112 |
|
|
| 229 |
|
|
| 226 |
|
|
| 127 |
|
|
| 115 |
|
|
| 253 |
|
|
| 229 |
|
|
Amortization of actuarial (gain) loss |
| 1,638 |
|
|
| 1,577 |
|
|
| 3,401 |
|
|
| 3,059 |
|
|
| 799 |
|
|
| 1,638 |
|
|
| 1,596 |
|
|
| 3,401 |
|
|
Net periodic cost (benefit) | $ | 2,565 |
|
| $ | 2,888 |
|
| $ | 5,255 |
|
| $ | 5,923 |
|
| $ | 1,616 |
|
| $ | 2,565 |
|
| $ | 3,211 |
|
| $ | 5,255 |
|
|
The Company amortizes prior service cost and actuarial gains and losses from accumulated other comprehensive income to expense over the remaining service period.
Note 5 – Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established that prioritizes the inputs to valuation
8
techniques used to measure fair value. An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy of fair value measurements is described below:
Level 1 – Valuations are based on quoted prices that the Company has the ability to obtain in actively traded markets for identical assets and liabilities. Since valuations are based on quoted prices that are readily and regularly available in an active market or exchange traded market, a valuation of these instruments does not require a significant degree of judgment.
Level 2 – Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
Level 3 – Valuations are based on model-based techniques for which some or all of the assumptions are not observable and therefore obtained from indirect market information that is significant to the overall fair value measurement and which require a significant degree of management judgment.
9
The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis by level within the fair value hierarchy at March 31, 2017,30, 2018, and September 30, 2016.29, 2017.
In Thousands | Level 2 |
|
| Level 2 |
|
| ||||||||||
| March 31, |
|
| September 30, |
|
| March 30, |
|
| September 29, |
|
| ||||
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts designated as hedging instruments | $ | 1,809 |
|
| $ | 2,948 |
|
| $ | 8,473 |
|
| $ | 13,932 |
|
|
Derivative contracts not designated as hedging instruments |
| 219 |
|
|
| 143 |
|
|
| 745 |
|
|
| 284 |
|
|
Embedded derivatives |
| 2,125 |
|
|
| 2,485 |
|
|
| 1,118 |
|
|
| 746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts designated as hedging instruments | $ | 7,052 |
|
| $ | 7,828 |
|
| $ | 2,378 |
|
| $ | 464 |
|
|
Derivative contracts not designated as hedging instruments |
| 5,863 |
|
|
| 6,720 |
|
|
| 874 |
|
|
| 2,440 |
|
|
Embedded derivatives |
| 661 |
|
|
| 985 |
|
|
| 1,191 |
|
|
| 2,239 |
|
|
In Thousands | Level 3 |
|
| Level 3 |
|
| ||||||||||
| March 31, |
|
| September 30, |
|
| March 30, |
|
| September 29, |
|
| ||||
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated value of assets held for sale | $ | 13,803 |
|
| $ | 26,850 |
|
| $ | 18,418 |
|
| $ | 19,835 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated value of liabilities held for sale | $ | 2,754 |
|
| $ | 11,133 |
|
| $ | 7,636 |
|
| $ | 8,908 |
|
|
The Company’s embedded derivatives are the result of entering into sales or purchase contracts that are denominated in a currency other than the Company’s functional currency or the supplier’s or customer’s functional currency. The fair value is determined by calculating the difference between quoted exchange rates at the time the contract was entered into and the period-end exchange rate. These contracts are categorized as Level 2 in the fair value hierarchy.
The Company’s derivative contracts consist of foreign currency exchange contracts and, from time to time, interest rate swap agreements. These derivative contracts are over the counter, and their fair value is determined using modeling techniques that include market inputs such as interest rates, yield curves, and currency exchange rates. These contracts are categorized as Level 2 in the fair value hierarchy.
In fiscal 2014, theThe Company’s board of directors previously approved the plan to sell certain non-core business units. Based upon the estimated fair values, the Company adjusted the carrying value of the assets and liabilities of the businesses to fair value. PrinciplePrincipal assumptions used in measuring the estimated value of assets and liabilities held for sale included estimated selling price of the discontinued business, discount rates, industry growth rates, and pricing of comparable transactions in the market. The change in the estimated value of assets and liabilities held for sale is due to disposing of a business with assets held for sale of $10.5 million and liabilities held for sale of $7.4 million at September 30, 2016. In addition, the estimated selling price of the remaining business held for sale was reduced by $4.4 million during fiscal year 2017. The valuations are categorized as Level 3 in the fair value hierarchy.
9
Note 6 – Derivative Financial Instruments
The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and interest rate swap contracts for the purpose of minimizing exposure to changes in foreign currency exchange rates on business transactions and interest rates, respectively. The Company’s policy is to execute such instruments with banks the Company believes to be creditworthy and not to enter into derivative financial instruments for speculative purposes. These derivative financial instruments do not subject the Company to undue risk, as gains and losses on these instruments generally offset gains and losses on the underlying assets, liabilities, or anticipated transactions that are being hedged.
All derivative financial instruments are recorded at fair value in the Consolidated Balance Sheet. For a derivative that has not been designated as an accounting hedge, the change in the fair value is recognized immediately through earnings. For a derivative that has been designated as an accounting hedge of an existing asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the Consolidated Balance Sheet in Accumulated Other Comprehensive Income (AOCI) to the extent the derivative is effective in mitigating the exposure related to the anticipated transaction. The change in the fair value related to the ineffective portion of the hedge, if any, is immediately recognized in earnings. The amount recorded within AOCI is reclassified into earnings in the same period during which the underlying hedged transaction affects earnings.
10
The fair value of derivative instruments is presented on a gross basis, as the Company does not have any derivative contracts which are subject to master netting arrangements. The Company did not have any hedges with credit-risk-related contingent features or that required the posting of collateral as of March 31, 2017,30, 2018, and September 30, 2016.29, 2017. The cash flows from derivative contracts are recorded in operating activities in the Consolidated Statement of Cash Flows.
Foreign Currency Forward Exchange Contracts
The Company transacts business in various foreign currencies, which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates, and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. At March 31, 2017,30, 2018, and September 30, 2016,29, 2017, the Company had outstanding foreign currency forward exchange contracts principally to sell U.S. dollars with notional amounts of $392.0$476.8 million and $450.9$406.9 million, respectively. The notional value of our foreign currency forward contracts includes $100.0 million related to the hedge of a portion of our net monetary assets, including the embedded derivatives in our backlog. These notional values consist primarily of contracts for the European euro, British pound sterling, and Canadian dollar, and European euro and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates.
Interest Rate Swaps
The Company manages its exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt, which over time shouldare expected to moderate the costs of debt financing. When considered necessary, the Company may use financial instruments in the form of interest rate swaps to help meet this objective.
Embedded Derivative Instruments
The Company’s embedded derivatives are the result of entering into sales or purchase contracts that are denominated in a currency other than the Company’s functional currency or the supplier’s or customer’s functional currency.
Net Investment Hedge
In April 2015 the Company issued €330.0 million in 3.625% Senior Notes due April 2023 (2023 Notes) and requiringwhich require semi-annual interest payments in April and October each year until maturity. The Company designated the 2023 Notes and accrued interest as a hedge of the investment of certain foreign business units. The foreign currency gain or loss that is effective as a hedge is reported as a component of other comprehensive income (loss)AOCI in shareholders’ equity. To the extent that this hedge is ineffective, the foreign currency gain or loss is recorded in earnings. There washas been no ineffectiveness of the hedge since inception.
10
Fair Value of Derivative Instruments
Fair value of derivative instruments in the Consolidated Balance Sheet at March 31, 2017,30, 2018, and September 30, 2016,29, 2017, consisted of:
In Thousands |
|
| Fair Value |
|
|
|
| Fair Value |
|
| ||||||||||
|
|
| March 31, |
|
| September 30, |
|
|
|
| March 30, |
|
| September 29, |
|
| ||||
| Classification |
| 2017 |
|
| 2016 |
|
| Classification |
| 2018 |
|
| 2017 |
|
| ||||
Foreign Currency Forward Exchange Contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current assets |
| $ | 1,817 |
|
| $ | 1,757 |
|
| Other current assets |
| $ | 8,413 |
|
| $ | 11,433 |
|
|
| Other assets |
|
| 211 |
|
|
| 1,334 |
|
| Other assets |
|
| 805 |
|
|
| 2,783 |
|
|
| Accrued liabilities |
|
| 10,519 |
|
|
| 11,168 |
|
| Accrued liabilities |
|
| 1,928 |
|
|
| 2,506 |
|
|
| Other liabilities |
|
| 2,396 |
|
|
| 3,380 |
|
| Other liabilities |
|
| 1,324 |
|
|
| 398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded Derivative Instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Other current assets |
| $ | 1,598 |
|
| $ | 1,864 |
|
| Other current assets |
| $ | 792 |
|
| $ | 604 |
|
|
| Other assets |
|
| 527 |
|
|
| 621 |
|
| Other assets |
|
| 326 |
|
|
| 142 |
|
|
| Accrued liabilities |
|
| 651 |
|
|
| 866 |
|
| Accrued liabilities |
|
| 872 |
|
|
| 1,657 |
|
|
| Other liabilities |
|
| 10 |
|
|
| 119 |
|
| Other liabilities |
|
| 319 |
|
|
| 582 |
|
|
11
The effect of derivative instruments on the Consolidated Statement of Operations and Comprehensive Income (Loss) for the three month and six month periods ended March 30, 2018, and March 31, 2017, and April 1, 2016, consisted of:
Fair Value Hedges and Embedded Derivatives
The Company recognized the following gains (losses) on contracts designated as fair value hedges and embedded derivatives:
In Thousands | Three Months Ended |
|
| Six Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| ||||||||||||||||||||
Gain (Loss) | March 31, |
|
| April 1, |
|
| March 31, |
|
| April 1, |
|
| March 30, |
|
| March 31, |
|
| March 30, |
|
| March 31, |
|
| ||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Fair Value Hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Recognized in cost of sales | $ | (893 | ) |
| $ | 692 |
|
| $ | (1,271 | ) |
| $ | (241 | ) |
| ||||||||||||||||
Recognized in selling, general & administrative |
| (691 | ) |
|
| 561 |
|
|
| (1,014 | ) |
|
| (207 | ) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Embedded derivatives: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in sales | $ | (518 | ) |
| $ | (4,708 | ) |
| $ | (265 | ) |
| $ | (3,607 | ) |
| $ | 386 |
|
| $ | (518 | ) |
| $ | 706 |
|
| $ | (265 | ) |
|
Cash Flow Hedges
The Company recognized the following gains (losses) on contracts designated as cash flow hedges:
In Thousands | Three Months Ended |
|
| Six Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| ||||||||||||||||||||
Gain (Loss) | March 31, |
|
| April 1, |
|
| March 31, |
|
| April 1, |
|
| March 30, |
|
| March 31, |
|
| March 30, |
|
| March 31, |
|
| ||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| ||||||||
Foreign currency forward exchange contracts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in AOCI (effective portion) | $ | 9,050 |
|
| $ | 25,688 |
|
| $ | 7,176 |
|
| $ | 28,574 |
|
| $ | (11,797 | ) |
| $ | 9,355 |
|
| $ | (14,291 | ) |
| $ | 6,939 |
|
|
Reclassified from AOCI into sales |
| (3,446 | ) |
|
| (5,414 | ) |
|
| (7,871 | ) |
|
| (12,473 | ) |
|
| 4,984 |
|
|
| (3,446 | ) |
|
| 6,918 |
|
|
| (7,871 | ) |
|
Net Investment Hedges
The Company recognized the following gains (losses) on contracts designated as net investment hedges:
In Thousands | Three Months Ended |
|
| Six Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| ||||||||||||||||||||
Gain (Loss) | March 31, |
|
| April 1, |
|
| March 31, |
|
| April 1, |
|
| March 30, |
|
| March 31, |
|
| March 30, |
|
| March 31, |
|
| ||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| ||||||||
2023 Notes and Accrued Interest: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized in AOCI | $ | (4,534 | ) |
| $ | (17,785 | ) |
| $ | 19,379 |
|
| $ | (6,252 | ) |
| $ | (10,682 | ) |
| $ | (4,534 | ) |
| $ | (16,979 | ) |
| $ | 19,379 |
|
|
During the second quarter of fiscal 20172018 and 2016,2017, the Company recorded a gaingains of $2.4$2.3 million and a loss of $0.9$1.1 million, respectively, on foreign currency forward exchange contracts that have not been designated as accounting hedges. During the first six months of fiscal 20172018 and 2016,2017, the Company recorded lossesgains of $0.3$2.4 million and $2.7$0.2 million, respectively, on foreign currency forward exchange contracts that have not been designated as accounting hedges. These foreign currency exchange gains and losses are included in selling, general and administrative expense.
There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the first six months of fiscal 20172018 and 2016.2017. In addition, there was no significant impact to the Company’s earnings when a hedged firm commitment no longer qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the first six months of fiscal 20172018 and 2016.2017.
11
Amounts included in AOCI are reclassified into earnings when the hedged transaction settles. The Company expects to reclassify approximately $4.6$7.0 million of net lossgain into earnings over the next 12 months. The maximum duration of the Company’s foreign currency cash flow hedge contracts at March 31, 2017, is30, 2018, was 24 months.
Note 7 – Income TaxesInsurance Recovery
The income tax rate was 28.4% in the second quarter of fiscal 2017 compared with 16.6% in the prior-year period. In the second quarter of fiscal 2017 the Company received a $5.2 million insurance recovery due to an energetic incident at one of its countermeasure operations, which occurred in the third quarter of fiscal 2016. The insurance recovery from this incident was $7.8 million for the first six months of 2017. Management does not anticipate additional insurance recoveries arising from this matter in fiscal 2018. The insurance recovery is reported as a separate line item on the Consolidated Statement of Operations and Comprehensive Income (Loss) and is included in Advanced Materials segment earnings.
12
On January 4, 2018, the Company granted an exclusive license to a third party to manufacture, repair and sell certain legacy avionics components for $4.5 million. In addition, the Company sold $0.4 million in inventory. The Company will be paid a 15% royalty on future sales of the licensed product. The Company recorded $2.3 million in license fee income, net of the write-off of the related intangible assets of $2.2 million. On December 22, 2017, the Company granted an exclusive license to a third party to manufacture, repair and sell certain legacy control devices for $3.0 million. Additionally, the Company sold certain inventory and manufacturing equipment to the licensee for $1.0 million. The Company will be paid a 15% royalty on future sales of the licensed product. The license fee income is reported as a separate line item on the Consolidated Statement of Operations and Comprehensive Income (Loss) and is included in Avionics & Controls segment earnings.
Note 9 – Sale of Business
In March 2018 the Board of Directors approved the sale of the Kirkhill business, and on March 15, 2018, the Company sold the assets and certain liabilities of this business to TransDigm, Inc. for $50 million before selling costs. The Company incurred an estimated $5.3 million loss on sale of the business and an estimated $0.7 million gain after tax due to the release of a valuation allowance on a capital loss carryover. Based on current discontinued operations accounting guidance, the sale of the Kirkhill business does not qualify as a discontinued operation.
Note 10 – Income Taxes
The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates new taxes on certain foreign sourced earnings.
The SEC recognized that a company’s review of certain income tax rate reflects U.K.effects of the Act may be incomplete at the time financial statements are issued. According to FASB Accounting Standards Update No. 2018-05, if a company does not have the necessary information available for certain effects of the Act, the Company may record provisional numbers and adjust those amounts during the measurement period not to extend beyond one year.
At March 30, 2018, the Company had not completed the accounting for the tax law changes limiting interesteffects of enactment of the Act; however, in certain cases, as described below, the Company made a reasonable estimate of the effects on its existing deferred tax balances and the one-time transition tax. In other cases, the Company was not able to make a reasonable estimate and continued to account for those items based on its existing accounting under ASC 740, Income Taxes, and the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which the Company was able to determine a reasonable estimate, the Company recognized a provisional amount of $48.6 million, which is included as a component of income tax expense deductions. from continuing operations. In all cases, the Company will continue to make and refine the calculations as additional analysis is completed. In addition, the estimates may also be affected as the Company gains a more thorough understanding of the tax law.
Provisional Amounts
U.S. Deferred Tax Assets and Liabilities
The Company remeasured certain deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. However, the Company is still analyzing certain aspects of the Act and refining its calculations, including evaluation of limits on employee remuneration, which could affect the measurement of these balances or potentially give rise to new deferred tax amounts. The provisional amount recorded related to the remeasurement of the deferred tax balance was $6.6 million.
Foreign Tax Effects
The one-time transition tax is based on the Company’s total post-1986 earnings and profits (E&P) that the Company previously deferred from U.S. income taxes. The Company recorded a provisional amount for its one-time transition tax liability resulting in an increase in income tax expense of $42.0 million. The Company is still analyzing certain aspects of the Act and refining its calculations, which could potentially affect the measurement of these amounts, including the benefit attributable to foreign tax credits and related elections. Further, the transition tax is based in part on the amount of those earnings held in cash and other specified assets. This amount may change when the Company finalizes the calculations of post-1986 foreign E&P previously deferred from U.S. taxation and finalizes the amounts of cash or other specified assets. The Act sets certain limits that may restrict the Company’s use of any foreign tax credits generated from the one-time transaction tax. As of the date of this report, management was not able to (1) determine a reasonable estimate of the tax liability for the Company’s remaining outside basis; (2) complete an analysis of the Global Intangible Low Taxed Income (GILTI); and (3) evaluate how the Act will impact the Company’s existing APB 23 position to indefinitely reinvest unremitted foreign earnings.
13
The income tax rate differed from the statutory rate infor the second quarter of fiscal 20172018 was 7.9% compared to the prior year period of 27.2%. The 7.9% income tax rate mainly reflected a $4.7 million tax benefit from a reduction of a capital loss valuation reserve due to the realization of a capital gain upon the sale of the Kirkhill business. In addition, the income tax rate for the second fiscal quarter of 2018 reflects a blended U.S. tax rate of 24.5%, which is based upon an income tax rate of 35% for our first three months of fiscal 2018 and 2016, as both years benefited from various tax credits and certain foreign interest expense deductions.21% for the balance of year ending September 28, 2018.
The income tax rate was 20.2% and 11.0% for the first six months of fiscal 2017 and 2016, respectively. 2018 was 122.7% mainly due to the effect of the Act. In addition, the income tax rate for the first six months of fiscal 2018 reflected a $4.7 million tax benefit from a release of a capital loss valuation reserve due to a realized capital gain upon the sale of the Kirkhill business.
The 18.3% income tax rate in the current period was higher primarily due to U.K. limitations on interest deductions. In the first six months of fiscal 2017 reflected the following items: the Company recognized $5.4 million of discrete tax benefits primarily related to a reduction of the income tax rate in France for fiscal year 2020 and the early adoption of the accounting standard update for employee share-based payment awards. In
By the first six monthsend of 2016, the Company recognized approximately $2.2 million of discrete tax benefits principally related to the enactment of tax laws reducing the U.K. statutory income tax rate, and the retroactive extension of the U.S. federal research and development credits.
During the next 12 months,fiscal 2018, it is reasonably possible that approximately $1.4$1.0 million of tax benefits that are currently unrecognized could be recognized as a result of settlement of examinations and/or the expiration of applicable statutes of limitations. The Company recognizes interest related to unrecognized tax benefits in income tax expense.
Note 811 – Debt
Long-term debt at March 31, 201730, 2018 and September 30, 2016,29, 2017, consisted of the following:
In Thousands | March 31, |
|
| September 30, |
|
| March 30, |
|
| September 29, |
|
| ||||
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. credit facility | $ | 90,000 |
|
| $ | 155,000 |
|
| $ | 45,000 |
|
| $ | 50,000 |
|
|
U.S. Term Loan, due April 2020 |
| 231,250 |
|
|
| 237,500 |
|
|
| 218,750 |
|
|
| 225,000 |
|
|
3.625% Senior Notes, due April 2023 |
| 351,648 |
|
|
| 370,920 |
|
|
| 406,692 |
|
|
| 389,862 |
|
|
Government refundable advances |
| 42,139 |
|
|
| 44,994 |
|
|
| 44,590 |
|
|
| 45,549 |
|
|
Obligation under capital leases |
| 70,378 |
|
|
| 71,091 |
|
| ||||||||
Debt issuance costs |
| (5,132 | ) |
|
| (5,609 | ) |
|
| (4,158 | ) |
|
| (4,654 | ) |
|
Obligation under capital leases |
| 68,468 |
|
|
| 67,765 |
|
| ||||||||
|
| 778,373 |
|
|
| 870,570 |
|
|
| 781,252 |
|
|
| 776,848 |
|
|
Less current maturities |
| 14,168 |
|
|
| 16,774 |
|
|
| 15,170 |
|
|
| 17,424 |
|
|
Carrying amount of long-term debt | $ | 764,205 |
|
| $ | 853,796 |
|
| $ | 766,082 |
|
| $ | 759,424 |
|
|
U.S. Credit Facility
On April 9, 2015, the Company amended its secured credit facility to extend the maturity to April 9, 2020, increase the amount available for borrowing under the secured revolving credit facility to $500 million, and provide for a delayed-draw term loan facility of $250 million.million, which was drawn on August 3, 2015. The Company recorded $2.3 million in debt issuance costs. The credit facility is secured by substantially all the Company’s assets, and interest is based on standard inter-bank offering rates. The interest rate ranges from LIBOR plus 1.25% to LIBOR plus 2.00% depending on leverage ratios at the time the funds are drawn. TheAt March 30, 2018, the Company had $90.0$45.0 million outstanding under the secured credit facility at an interest rate of LIBOR plus 1.75%1.50%, which was 3.38%. AtOn February 13, 2018, the Company obtained a waiver and consent from the required lenders under the Company’s U.S. credit facilities of the financial reporting breaches resulting from the Restatement described in Note 2 of Company’s fiscal 2017 Form 10-K/A. As of March 31, 2017,30, 2018, the weighted average interest rate was 2.45%.Company is in compliance with the lenders’ requirements.
U.S. Term Loan, due April 2020
On August 3, 2015, the Company borrowed $250 million under the U.S. Term Loan, due 2020, provided for under the amended secured credit facility (U.S. Term Loan, due 2020). The interest rate on the U.S. Term Loan, due 2020, ranges from LIBOR plus 1.25% to LIBOR plus 2.00%. At March 31, 2017,30, 2018, the interest rate was LIBOR plus 1.75%1.50%, which equaled 2.49%or 3.38%. The loan amortizes at 1.25% of the original principal balance quarterly through March 2020, with the remaining balance due in April 2020.
3.625% Senior Notes, due April 2023
In April 2015 TA Mfg. Limited, a wholly owned subsidiary of the Company, issued €330.0 million in 3.625% Notes, due 2023, requiring semi-annual interest payments in April and October of each year until maturity. The notes are designated as a net investment hedge and translated to U.S. dollars each period, with the associated gains or losses recorded to AOCI. The net proceeds from the sale of the notes, after deducting $5.9 million of debt issuance costs, were $350.8 million. The 2023 Notes are general unsecured senior obligations of the Company. The 2023 Notes are unconditionally guaranteed on a senior basis by the Company and certain subsidiaries of the Company that are guarantors under the Company’s existing secured credit facility. The 2023 Notes are subject to redemption at the option of the Company, at any time prior to April 15, 2018, at a price equal to 100% of the principal amount, plus any accrued interest to the date of redemption and a make-whole provision. The Company may also redeem up to 35% of the 2023 Notes before April 15, 2018, with the net cash proceeds from equity
12
offerings. The 2023 Notes are also subject to redemption at the option of the Company, in whole or in part on or after April 15, 2018, at redemption prices starting at 102.719% of the principal
14
amount plus accrued interest during the period beginning April 15, 2018, and declining annually to 100% of principal and accrued interest on or after April 15, 2021.
Based on quoted market prices, the fair value of the Company’s 2023 Notes was $357.8$414.3 million and $365.3$403.2 million as of March 31, 2017,30, 2018, and September 30, 2016,29, 2017, respectively. The carrying amount of the secured credit facility and the U.S. Term Loan, due 2020, approximate fair value. The estimate of fair value for the 2023 Notes is based on Level 2 inputs as defined in the fair value hierarchy described in Note 5.
Government Refundable Advances
Government refundable advances consist of payments received from the Canadian government to assist in research and development related to commercial aviation. The requirement to repay this advance is solely based on year-over-year commercial aviation revenue growth at CMC beginning in 2014. Imputed interest on the advance was 2.3%2.52% at March 31, 2017.30, 2018. The debt recognized was $42.1$44.6 million and $45.0$45.5 million as ofat March 31, 2017,30, 2018, and September 30, 2016,29, 2017, respectively.
Obligation Under Capital Lease
The Company leases building and equipment under capital leases. The present value of the minimum capital lease payments, net of the current portion, totaled $66.6$68.3 million and $66.2$69.0 million as of March 31, 2017,30, 2018, and September 30, 2016,29, 2017, respectively.
Note 912 – Commitments and Contingencies
The Company is party to various lawsuits and claims, both as a plaintiff and defendant, and has contingent liabilities arising from the conduct of business, none of which, in the opinion of management, is expected to have a material effect on the Company’s financial position or results of operations. The Company believes that it has made appropriate and adequate provisions for contingent liabilities.
As of March 31, 2017, and September 30, 2016, the Company had a liability of $0.3 million and $0.8 million, respectively, related to environmental remediation at a previously sold business for which the Company provided indemnification.
On March 5, 2014, the Company entered into a Consent Agreement with the U.S. Department of State’s Directorate of Defense Trade Controls Office of Defense Trade Controls Compliance (DTCC) to resolve alleged International Traffic in Arms Regulations (ITAR) civil violations. The Consent Agreement settled the pending ITAR compliance matter with the DTCC previously reported by the Company that resulted from voluntary reports the Company filed with DTCC that disclosed possible technical and administrative violations of the ITAR. The Consent Agreement has a three-year term and provides for: (i) a payment of $20 million, $10 million of which is suspended and eligible for offset credit based on verified expenditures for past and future remedial compliance measures; (ii) the appointment of an external Special Compliance Official to oversee compliance with the Consent Agreement and the ITAR; (iii) two external audits of the Company’s ITAR compliance program; and (iv) continued implementation of ongoing remedial compliance measures and additional remedial compliance measures related to automated systems and ITAR compliance policies, procedures and training. The Company expects to be released from the Consent Agreementwas closed in fiscal 2017, depending upon the Company’s satisfactory completion of the remaining requirements under the agreement and the timing of final approval by the DTCC. The $10 million portion of the settlement that was not subject to suspension was paid in installments, with $8 million paid over fiscal years 2014, 2015 and 2016. The remaining $2 million was paid in February 2017. In fiscal 2016, the DTCC approved costs the Company incurred to implement compliance measures to fully offset the $10 million suspended payment.
During the second quarter of fiscal 2017, the Company received a $5.2 million insurance recovery due to an energetic incident at one of its countermeasure operations, which occurred in the third quarter of fiscal 2016. The insurance recovery from this incident was $7.8 million for the first six months of 2017 and was $5 million in fiscal 2016.
Note 1013 – Employee Stock Plans
As of March 31, 2017,30, 2018, the Company had three share-based compensation plans, which are described below. The compensation cost that has been charged against income for those plans was $7.4$6.7 million and $7.6$7.4 million for the first six months of fiscal 20172018 and 2016,2017, respectively. During the first six months of fiscal 20172018 and 2016,2017, the Company issued 345,48446,888 and 103,629345,484 shares, respectively, under its share-based compensation plans.
Employee Stock Purchase Plan (ESPP)
The ESPP is a “safe-harbor” designed plan whereby shares are purchased by participants at a discount of 5% of the market value on the purchase date and, therefore, compensation cost is not recorded.
Employee Sharesave Scheme
The Company offers shares under its employee sharesave scheme for U.K. employees. This plan allows participants the option to purchase shares at a 5% discount of the market price of the stock as of the beginning of the offering period. The term of these options
13
is three years. The sharesave scheme is not a “safe-harbor” design, and therefore, compensation cost is recognized on this plan. Under the sharesave scheme, option exercise prices are equal to the fair market value of the Company’s common stock on the date of grant. There were no grants in the six monthsix-month periods ended March 30, 2018, and March 31, 2017, and April 1, 2016.
2017.
Equity Incentive Plan
Under the equity incentive plan, option exercise prices are equal to the fair market value of the Company’s common stock on the date of grant. The Company granted 234,700218,800 and 218,200234,700 options to purchase shares in the six monthsix-month periods ended March 30, 2018, and March 31, 2017, and April 1, 2016, respectively. The weighted-average grant date fair value of options granted during the six monthsix-month periods ended March 30, 2018, and March 31, 2017, was $30.85 and April 1, 2016, was $32.60 and $35.84 per share, respectively.
The fair value of each option granted by the Company was estimated using a Black-Scholes pricing model, which uses the assumptions noted in the following table. The Company uses historical data to estimate volatility of the Company’s common stock and option exercise and employee termination assumptions. The risk-free rate for the contractual life of the option is based on the U.S. Treasury zero coupon issues in effect at the time of the grant.
| Six Months Ended |
| ||
| March 31, |
| April 1, |
|
| 2017 |
| 2016 |
|
|
|
|
|
|
Volatility | 34.97 - 35.42% |
| 33.06 - 40.52% |
|
Risk-free interest rate | 1.98 - 2.51% |
| 1.61 - 2.24% |
|
Expected life (years) | 5 - 9 |
| 5 - 9 |
|
Dividends | 0 |
| 0 |
|
15
Six Months Ended |
| |||
| March 30, |
| March 31, |
|
| 2018 |
| 2017 |
|
|
|
|
|
|
Volatility | 34.32% |
| 34.97 - 35.42% |
|
Risk-free interest rate | 2.15 - 2.47% |
| 1.98 - 2.51% |
|
Expected life (years) | 5 - 9 |
| 5 - 9 |
|
Dividends | 0 |
| 0 |
|
The Company granted 37,10042,050 and 36,00037,100 restricted stock units in the six monthsix-month periods ended March 30, 2018, and March 31, 2017, and April 1, 2016, respectively. The weighted-average grant date fair value of restricted stock units granted during the six monthsix-month periods ended March 30, 2018, and March 31, 2017, was $87.34 and April 1, 2016, was $76.83 and $85.33 per share, respectively. The fair value of each restricted stock unit granted by the Company is equal to the fair market value of the Company’s common stock on the date of grant.
The Company granted 42,60033,700 and 55,30042,600 performance share plan (PSP) shares in the six monthsix-month periods ended March 30, 2018, and March 31, 2017, and April 1, 2016, respectively. PSP shares will be paid out in shares of Esterline common stock at the end of the three yearthree-year performance period. The PSP shares granted in each period equaled the number of shares participants would receive if the Company achieves target performance over the relevant period. The actual number of shares that will be paid out upon completion of the performance period is based on actual performance and may range from 0% to 300% of the target number of shares.
Note 1114 – Discontinued Operations
The Company’s boardBoard of directorsDirectors previously approved the plan to sell certain non-core business units including Wallop Defence Systems, Ltd. (Wallop), a manufacturer of flare countermeasure devices; a small distribution business; and a small manufacturing business.
On May 4, 2016, the Company sold certain assets of Wallop for 2.5 million British pounds and contingentdeferred consideration of up to a maximum payment of 9 million British pounds. In the definitive purchase and sale agreement for the sale of these assets, the Company provided standard representations and warranties as well as indemnification to the buyer of the Wallop operation. The contingentCompany is obligated to indemnify the buyer for certain losses of up to 5.0 million British pounds, if, among other things, the Company breaches the representations and warranties. In the first quarter of fiscal 2018, the Company received notification of a claim from the buyer of the Wallop operation alleging breaches of representations and warranties primarily associated with defective products and late product deliveries. Although a loss is possible, the amount of any loss related to this claim cannot be estimated at this time. The Company does not expect the possible loss to have a material effect on the Company’s financial position. The deferred consideration is payable based upon receipt of acceptable orders during a three yearthree-year period ending May 3, 2019, and is equal to the amount of the acceptable order multiplied bytimes a specified percentage ranging from 26.5% to 31%. The contingent consideration amount wasearn-out payment is estimated to be 5.64.8 million British pounds, or $6.7 million, at March 31, 2017.30, 2018. The Company was notified in December 2017 that it earned 1.3 million British pounds, or $1.8 million, in deferred consideration, half of which was paid to the Company in the second quarter of fiscal 2018 and the remaining half of which is expected to be paid in the third quarter of fiscal 2018, in accordance with the terms of the purchase and sale agreement.
On March 28, 2017, the Company sold a small manufacturing business for $0.6 million and a note receivable of $2.4 million, resulting in a gain on sale of the business of $1.2$0.8 million. The note receivable is due March 28, 2021, with an interest rate of 2.05%.
The Company incurred a $0.1 million loss from discontinued operations in the second quarter of fiscal 2018 and no loss from discontinued operations in the second quarter of fiscal 2017 compared to $2.0 million loss from discontinued operations in the second quarter of fiscal 2016.2017. During the first six months of fiscal 2018 and 2017, and 2016, the Companycompany incurred a loss from discontinued operations of $5.4$0.2 million and $6.8$5.4 million, respectively. Included in the loss of $5.4 million for the first six months of fiscal 2017 was a $4.3 million loss on Wallop assets held for sale, principally due to a reduction in the estimated sale price and the effect of changes inof foreign currency exchange rates. There was no significant change to the estimated sale price in the second quarter of fiscal 2017.2018.
1416
The operating results of the discontinued operations for the three monththree-month period ended March 30, 2018, consisted of the following:
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
|
|
|
|
| |||
| Controls |
|
| Systems |
|
| Materials |
|
| Other |
|
| Total |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
| 869 |
|
|
| - |
|
|
| (1,207 | ) |
|
| (50 | ) |
|
| (388 | ) |
|
Tax expense (benefit) |
| 10 |
|
|
| - |
|
|
| (308 | ) |
|
| (13 | ) |
|
| (311 | ) |
|
Income (loss) from discontinued operations | $ | 859 |
|
| $ | - |
|
| $ | (899 | ) |
| $ | (37 | ) |
| $ | (77 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Operating Earnings (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Gain (loss) on net assets held for sale | $ | 801 |
|
| $ | - |
|
| $ | 505 |
|
| $ | - |
|
| $ | 1,306 |
|
|
The operating results of the discontinued operations for the three-month period ended March 31, 2017, consisted of the following:
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
|
|
|
|
| |||
| Controls |
|
| Systems |
|
| Materials |
|
| Other |
|
| Total |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales | $ | 2,268 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 2,268 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
| 752 |
|
|
| (2 | ) |
|
| (1,269 | ) |
|
| (289 | ) |
|
| (808 | ) |
|
Tax expense (benefit) |
| (191 | ) |
|
| - |
|
|
| (482 | ) |
|
| (101 | ) |
|
| (774 | ) |
|
Income (loss) from discontinued operations | $ | 943 |
|
| $ | (2 | ) |
| $ | (787 | ) |
| $ | (188 | ) |
| $ | (34 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Operating Earnings (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Gain (loss) on net assets held for sale | $ | 54 |
|
| $ | - |
|
| $ | 265 |
|
| $ | - |
|
| $ | 319 |
|
|
Gain on sale of discontinued operations |
| 1,188 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,188 |
|
|
The operating results of the discontinued operations for the six-month period ended March 30, 2018, consisted of the following:
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
|
|
|
|
| |||
| Controls |
|
| Systems |
|
| Materials |
|
| Other |
|
| Total |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales | $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
| 883 |
|
|
| - |
|
|
| (1,490 | ) |
|
| (50 | ) |
|
| (657 | ) |
|
Tax expense (benefit) |
| 33 |
|
|
| - |
|
|
| (434 | ) |
|
| (13 | ) |
|
| (414 | ) |
|
Income (loss) from discontinued operations | $ | 850 |
|
| $ | - |
|
| $ | (1,056 | ) |
| $ | (37 | ) |
| $ | (243 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Operating Earnings (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Gain (loss) on net assets held for sale | $ | 750 |
|
| $ | - |
|
| $ | 645 |
|
| $ | - |
|
| $ | 1,395 |
|
|
17
The operating results of the discontinued operations for the six-month period ended March 31, 2017, consisted of the following:
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
|
|
|
|
| Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
|
|
|
|
| ||||||
| Controls |
|
| Systems |
|
| Materials |
|
| Other |
|
| Total |
|
| Controls |
|
| Systems |
|
| Materials |
|
| Other |
|
| Total |
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales | $ | 2,268 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 2,268 |
|
| $ | 4,964 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 4,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
| 752 |
|
|
| (2 | ) |
|
| (1,269 | ) |
|
| (289 | ) |
|
| (808 | ) |
|
| (119 | ) |
|
| 893 |
|
|
| (6,616 | ) |
|
| (893 | ) |
|
| (6,735 | ) |
|
Tax expense (benefit) |
| (191 | ) |
|
| - |
|
|
| (482 | ) |
|
| (101 | ) |
|
| (774 | ) |
|
| (430 | ) |
|
| - |
|
|
| (623 | ) |
|
| (312 | ) |
|
| (1,365 | ) |
|
Income (loss) from discontinued operations | $ | 943 |
|
| $ | (2 | ) |
| $ | (787 | ) |
| $ | (188 | ) |
| $ | (34 | ) |
| $ | 311 |
|
| $ | 893 |
|
| $ | (5,993 | ) |
| $ | (581 | ) |
| $ | (5,370 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Operating Earnings (Loss): | Included in Operating Earnings (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Included in Operating Earnings (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Gain (loss) on net assets held for sale | $ | 54 |
|
| $ | - |
|
| $ | 265 |
|
| $ | - |
|
| $ | 319 |
|
| $ | (86 | ) |
| $ | - |
|
| $ | (4,323 | ) |
| $ | - |
|
| $ | (4,409 | ) |
|
Gain on sale of discontinued operation |
| 1,188 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,188 |
|
| ||||||||||||||||||||
Gain on sale of discontinued operations |
| 1,188 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,188 |
|
|
The operating results of the discontinued operations for the six month period ended March 31, 2017, consisted of the following:
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
|
|
|
|
| |||
| Controls |
|
| Systems |
|
| Materials |
|
| Other |
|
| Total |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales | $ | 4,964 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | 4,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
| (119 | ) |
|
| 893 |
|
|
| (6,616 | ) |
|
| (893 | ) |
|
| (6,735 | ) |
|
Tax expense (benefit) |
| (430 | ) |
|
| - |
|
|
| (623 | ) |
|
| (312 | ) |
|
| (1,365 | ) |
|
Income (loss) from discontinued operations | $ | 311 |
|
| $ | 893 |
|
| $ | (5,993 | ) |
| $ | (581 | ) |
| $ | (5,370 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Operating Earnings (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Gain (loss) on net assets held for sale | $ | (86 | ) |
| $ | - |
|
| $ | (4,323 | ) |
| $ | - |
|
| $ | (4,409 | ) |
|
Gain on sale of discontinued operation |
| 1,188 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 1,188 |
|
|
The operating results of the discontinued operations for the three month period ended April 1, 2016, consisted of the following:
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
|
|
|
|
| |||
| Controls |
|
| Systems |
|
| Materials |
|
| Other |
|
| Total |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales | $ | 4,479 |
|
| $ | - |
|
| $ | 2,289 |
|
| $ | - |
|
| $ | 6,768 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
| 1,072 |
|
|
| (151 | ) |
|
| (2,874 | ) |
|
| (7 | ) |
|
| (1,960 | ) |
|
Tax expense (benefit) |
| 273 |
|
|
| - |
|
|
| (210 | ) |
|
| - |
|
|
| 63 |
|
|
Income (loss) from discontinued operations | $ | 799 |
|
| $ | (151 | ) |
| $ | (2,664 | ) |
| $ | (7 | ) |
| $ | (2,023 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Operating Earnings (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Gain (loss) on net assets held for sale | $ | 326 |
|
| $ | - |
|
| $ | (1,381 | ) |
| $ | - |
|
| $ | (1,055 | ) |
|
15
The operating results of the discontinued operations for the six month period ended April 1, 2016, consisted of the following:
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
|
|
|
|
| |||
| Controls |
|
| Systems |
|
| Materials |
|
| Other |
|
| Total |
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales | $ | 10,061 |
|
| $ | - |
|
| $ | 4,773 |
|
| $ | - |
|
| $ | 14,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
| 1,969 |
|
|
| (307 | ) |
|
| (8,867 | ) |
|
| (11 | ) |
|
| (7,216 | ) |
|
Tax expense (benefit) |
| 686 |
|
|
| - |
|
|
| (1,099 | ) |
|
| - |
|
|
| (413 | ) |
|
Income (loss) from discontinued operations | $ | 1,283 |
|
| $ | (307 | ) |
| $ | (7,768 | ) |
| $ | (11 | ) |
| $ | (6,803 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Operating Earnings (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Gain (loss) on net assets held for sale | $ | 56 |
|
| $ | - |
|
| $ | (3,628 | ) |
| $ | - |
|
| $ | (3,572 | ) |
|
Assets and Liabilities Held for Sale within the Consolidated Balance Sheet at March 31, 2017,30, 2018, are comprised of the following:
In Thousands |
|
| Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
|
|
| Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
| ||||||
|
|
| Controls |
|
| Systems |
|
| Materials |
|
| Total |
|
|
|
| Controls |
|
| Systems |
|
| Materials |
|
| Total |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets |
|
| $ | - |
|
| $ | - |
|
| $ | 3,659 |
|
| $ | 3,659 |
|
|
|
| $ | - |
|
| $ | - |
|
| $ | 4,300 |
|
| $ | 4,300 |
|
|
Current Assets of Businesses Held for Sale | Current Assets of Businesses Held for Sale |
|
| - |
|
|
| - |
|
|
| 3,659 |
|
|
| 3,659 |
|
| Current Assets of Businesses Held for Sale |
|
| - |
|
|
| - |
|
|
| 4,300 |
|
|
| 4,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
| 5,262 |
|
|
| - |
|
|
| - |
|
|
| 5,262 |
|
|
|
|
| 5,262 |
|
|
| - |
|
|
| - |
|
|
| 5,262 |
|
|
Other assets |
|
|
| - |
|
|
| - |
|
|
| 4,882 |
|
|
| 4,882 |
|
|
|
|
| - |
|
|
| - |
|
|
| 8,856 |
|
|
| 8,856 |
|
|
Non-Current Assets of Businesses Held for Sale | Non-Current Assets of Businesses Held for Sale |
|
| 5,262 |
|
|
| - |
|
|
| 4,882 |
|
|
| 10,144 |
|
| Non-Current Assets of Businesses Held for Sale |
|
| 5,262 |
|
|
| - |
|
|
| 8,856 |
|
|
| 14,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
| - |
|
|
| - |
|
|
| 231 |
|
|
| 231 |
|
|
|
|
| - |
|
|
| - |
|
|
| 30 |
|
|
| 30 |
|
|
Accrued liabilities |
|
|
| - |
|
|
| - |
|
|
| 838 |
|
|
| 838 |
|
|
|
|
| - |
|
|
| - |
|
|
| 4,499 |
|
|
| 4,499 |
|
|
Current Liabilities of Businesses Held for Sale | Current Liabilities of Businesses Held for Sale |
|
| - |
|
|
| - |
|
|
| 1,069 |
|
|
| 1,069 |
|
| Current Liabilities of Businesses Held for Sale |
|
| - |
|
|
| - |
|
|
| 4,529 |
|
|
| 4,529 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities |
|
|
| - |
|
|
| - |
|
|
| 1,365 |
|
|
| 1,365 |
|
|
|
|
| - |
|
|
| - |
|
|
| 2,787 |
|
|
| 2,787 |
|
|
Other liabilities |
|
|
| - |
|
|
| - |
|
|
| 320 |
|
|
| 320 |
|
|
|
|
| - |
|
|
| - |
|
|
| 320 |
|
|
| 320 |
|
|
Non-Current Liabilities of Businesses Held for Sale | Non-Current Liabilities of Businesses Held for Sale |
|
| - |
|
|
| - |
|
|
| 1,685 |
|
|
| 1,685 |
|
| Non-Current Liabilities of Businesses Held for Sale |
|
| - |
|
|
| - |
|
|
| 3,107 |
|
|
| 3,107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets of Businesses Held for Sale | Net Assets of Businesses Held for Sale |
| $ | 5,262 |
|
| $ | - |
|
| $ | 5,787 |
|
| $ | 11,049 |
|
| Net Assets of Businesses Held for Sale |
| $ | 5,262 |
|
| $ | - |
|
| $ | 5,520 |
|
| $ | 10,782 |
|
|
1618
Assets and Liabilities Held for Sale within the Consolidated Balance Sheet at September 30, 2016,29, 2017, were comprised of the following:
In Thousands |
|
| Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
|
|
| Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
| ||||||
|
|
| Controls |
|
| Systems |
|
| Materials |
|
| Total |
|
|
|
| Controls |
|
| Systems |
|
| Materials |
|
| Total |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
| $ | 2,588 |
|
| $ | - |
|
| $ | 4,093 |
|
| $ | 6,681 |
|
| ||||||||||||||||||
Inventories |
|
|
| 8,070 |
|
|
| - |
|
|
| 398 |
|
|
| 8,468 |
|
| ||||||||||||||||||
Prepaid expenses |
|
|
| 127 |
|
|
| - |
|
|
| 103 |
|
|
| 230 |
|
| ||||||||||||||||||
Income tax refundable |
|
|
| - |
|
|
| - |
|
|
| 71 |
|
|
| 71 |
|
| ||||||||||||||||||
Other current assets |
|
| $ | - |
|
| $ | - |
|
| $ | 6,501 |
|
| $ | 6,501 |
|
| ||||||||||||||||||
Current Assets of Businesses Held for Sale | Current Assets of Businesses Held for Sale |
|
| 10,785 |
|
|
| - |
|
|
| 4,665 |
|
|
| 15,450 |
|
| Current Assets of Businesses Held for Sale |
|
| - |
|
|
| - |
|
|
| 6,501 |
|
|
| 6,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
| 5,368 |
|
|
| - |
|
|
| 2,869 |
|
|
| 8,237 |
|
|
|
|
| 5,262 |
|
|
| - |
|
|
| - |
|
|
| 5,262 |
|
|
Intangibles, net |
|
|
| - |
|
|
| - |
|
|
| 1,856 |
|
|
| 1,856 |
|
| ||||||||||||||||||
Deferred income tax benefits |
|
|
| (392 | ) |
|
| - |
|
|
| 400 |
|
|
| 8 |
|
| ||||||||||||||||||
Other assets |
|
|
| - |
|
|
| - |
|
|
| 1,299 |
|
|
| 1,299 |
|
|
|
|
| - |
|
|
| - |
|
|
| 8,072 |
|
|
| 8,072 |
|
|
Non-Current Assets of Businesses Held for Sale | Non-Current Assets of Businesses Held for Sale |
|
| 4,976 |
|
|
| - |
|
|
| 6,424 |
|
|
| 11,400 |
|
| Non-Current Assets of Businesses Held for Sale |
|
| 5,262 |
|
|
| - |
|
|
| 8,072 |
|
|
| 13,334 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
|
| 441 |
|
|
| - |
|
|
| 1,463 |
|
|
| 1,904 |
|
|
|
|
| - |
|
|
| - |
|
|
| 138 |
|
|
| 138 |
|
|
Accrued liabilities |
|
|
| 7,000 |
|
|
| - |
|
|
| 1,909 |
|
|
| 8,909 |
|
|
|
|
| - |
|
|
| - |
|
|
| 7,046 |
|
|
| 7,046 |
|
|
Current Liabilities of Businesses Held for Sale | Current Liabilities of Businesses Held for Sale |
|
| 7,441 |
|
|
| - |
|
|
| 3,372 |
|
|
| 10,813 |
|
| Current Liabilities of Businesses Held for Sale |
|
| - |
|
|
| - |
|
|
| 7,184 |
|
|
| 7,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax liabilities |
|
|
| - |
|
|
| - |
|
|
| 1,404 |
|
|
| 1,404 |
|
| ||||||||||||||||||
Other liabilities |
|
|
| - |
|
|
| - |
|
|
| 320 |
|
|
| 320 |
|
|
|
|
| - |
|
|
| - |
|
|
| 320 |
|
|
| 320 |
|
|
Non-Current Liabilities of Businesses Held for Sale | Non-Current Liabilities of Businesses Held for Sale |
|
| - |
|
|
| - |
|
|
| 320 |
|
|
| 320 |
|
| Non-Current Liabilities of Businesses Held for Sale |
|
| - |
|
|
| - |
|
|
| 1,724 |
|
|
| 1,724 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Assets of Businesses Held for Sale | Net Assets of Businesses Held for Sale |
| $ | 8,320 |
|
| $ | - |
|
| $ | 7,397 |
|
| $ | 15,717 |
|
| Net Assets of Businesses Held for Sale |
| $ | 5,262 |
|
| $ | - |
|
| $ | 5,665 |
|
| $ | 10,927 |
|
|
Note 1215 – Business Segment Information
Business segment information for continuing operations includes the segments of Avionics & Controls, Sensors & Systems and Advanced Materials.
In Thousands | Three Months Ended |
|
| Six Months Ended |
|
| Three Months Ended |
|
| Six Months Ended |
|
| ||||||||||||||||||||
| March 31, |
|
| April 1, |
|
| March 31, |
|
| April 1, |
|
| March 30, |
|
| March 31, |
|
| March 30, |
|
| March 31, |
|
| ||||||||
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| ||||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avionics & Controls | $ | 213,593 |
|
| $ | 198,665 |
|
| $ | 406,275 |
|
| $ | 384,910 |
|
| $ | 212,814 |
|
| $ | 213,293 |
|
| $ | 415,517 |
|
| $ | 405,975 |
|
|
Sensors & Systems |
| 182,478 |
|
|
| 176,069 |
|
|
| 349,551 |
|
|
| 328,499 |
|
|
| 198,153 |
|
|
| 182,727 |
|
|
| 373,621 |
|
|
| 350,483 |
|
|
Advanced Materials |
| 113,111 |
|
|
| 115,576 |
|
|
| 211,089 |
|
|
| 218,378 |
|
|
| 106,662 |
|
|
| 113,111 |
|
|
| 210,536 |
|
|
| 211,089 |
|
|
| $ | 509,182 |
|
| $ | 490,310 |
|
| $ | 966,915 |
|
| $ | 931,787 |
|
| $ | 517,629 |
|
| $ | 509,131 |
|
| $ | 999,674 |
|
| $ | 967,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from Continuing Operations Before Income Taxes | Earnings from Continuing Operations Before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Earnings from Continuing Operations Before Income Taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Avionics & Controls | $ | 21,761 |
|
| $ | 2,649 |
|
| $ | 39,678 |
|
| $ | 12,062 |
|
| $ | 23,673 |
|
| $ | 20,772 |
|
| $ | 44,058 |
|
| $ | 38,689 |
|
|
Sensors & Systems |
| 27,156 |
|
|
| 20,944 |
|
|
| 47,102 |
|
|
| 33,728 |
|
|
| 19,271 |
|
|
| 26,357 |
|
|
| 30,984 |
|
|
| 44,500 |
|
|
Advanced Materials |
| 28,322 |
|
|
| 23,208 |
|
|
| 38,202 |
|
|
| 36,198 |
|
|
| 9,553 |
|
|
| 28,322 |
|
|
| 24,136 |
|
|
| 38,202 |
|
|
Segment Earnings |
| 77,239 |
|
|
| 46,801 |
|
|
| 124,982 |
|
|
| 81,988 |
|
|
| 52,497 |
|
|
| 75,451 |
|
|
| 99,178 |
|
|
| 121,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate expense |
| (20,022 | ) |
|
| (18,965 | ) |
|
| (37,789 | ) |
|
| (37,030 | ) |
|
| (18,573 | ) |
|
| (20,021 | ) |
|
| (38,621 | ) |
|
| (37,265 | ) |
|
Interest income |
| 100 |
|
|
| 94 |
|
|
| 196 |
|
|
| 181 |
|
|
| 449 |
|
|
| 100 |
|
|
| 747 |
|
|
| 196 |
|
|
Interest expense |
| (7,458 | ) |
|
| (7,294 | ) |
|
| (15,346 | ) |
|
| (14,510 | ) |
|
| (8,167 | ) |
|
| (7,458 | ) |
|
| (15,771 | ) |
|
| (15,346 | ) |
|
| $ | 49,859 |
|
| $ | 20,636 |
|
| $ | 72,043 |
|
| $ | 30,629 |
|
| $ | 26,206 |
|
| $ | 48,072 |
|
| $ | 45,533 |
|
| $ | 68,976 |
|
|
1719
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We operate our businesses in three segments: Avionics & Controls, Sensors & Systems and Advanced Materials. Our segments are structured around our technical capabilities. Sales in all segments include domestic, international, defense and commercial customers.
The Avionics & Controls segment includes avionics systems, control and communication systems, and interface technologies capabilities. The Sensors & Systems segment includes power systems, connection technologies and advanced sensors capabilities. The Advanced Materials segment includes engineered materials and defense technologies capabilities.
Our current business and strategic plan focuses on the continued development and enhancement of our products principally for aerospace and defense markets and operational excellence.markets. We are concentrating our efforts to expand our capabilities in these markets, to anticipate the global needs of our customers, and to continually improve our operational performance. These efforts focus on continuous research and new product development, acquisitions and strategic realignments of operations to offer more comprehensive solutions across our product offerings, and the implementation of the principles of our operating system to become a supplier of choice for our customers.
In March 2014 we entered into a Consent Agreement with the U.S. Department of State’s Directorate of Defense Trade Controls Office of Defense Trade Controls Compliance (DDTC)DTCC to resolve alleged International Traffic in Arms Regulations (ITAR)ITAR civil violations. Among other things,In fiscal 2017 the Consent Agreement required us to pay a $20 million penalty, of which $10 million was suspended and eligible for offset credit. closed.
In fiscal 2016,2014 our Board of Directors approved the DTCCplan to sell certain non-core business units including Eclipse Electronic Systems, Inc. (Eclipse), a manufacturer of embedded communication intercept receivers for signal intelligence applications; Wallop Defence Systems, Ltd. (Wallop), a manufacturer of flare countermeasure devices; a small distribution business; Pacific Aerospace and Electronics Inc. (PA&E), a manufacturer of hermetically sealed electrical connectors; and a small manufacturing business. As of March 30, 2018, we have sold these business units, except for the land and buildings at Eclipse and Wallop, which are currently held for sale. These businesses are reported as discontinued operations.
In fiscal 2017 we evaluated the ongoing performance challenges at our elastomer business based in Brea, California, known as the Kirkhill business, resulting in the decision to explore all strategic options associated with the business. The historic performance volatility of this business was a consideration in this decision. In March 2018 the Board of Directors approved coststhe sale of the Kirkhill business and on March 15, 2018, we sold the assets and certain liabilities of this business to TransDigm, Inc. for $50 million before selling costs. We incurred to implement compliance measures to fully offsetan estimated $5.3 million loss on sale of the $10business and an estimated $0.7 million suspended payment. More information about the Consent Agreement is set forth in Note 9gain after tax due to the Consolidated Financial Statementsreduction of a capital loss valuation reserve of $4.7 million and an additional tax benefit of $1.4 million recognized as a result of the loss on the sale of a business. Based on current discontinued operations accounting guidance, the sale of the Kirkhill business does not qualify as a discontinued operation. Kirkhill was included in Part 1, Item 1the Advanced Materials segment. Operating earnings (loss) for the Kirkhill business are summarized below:
In Thousands | Three Months Ended |
|
| Six Months Ended |
| ||||||||||
| March 30, |
|
| March 31, |
|
| March 30, |
|
| March 31, |
| ||||
| 2018 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings (Loss) | $ | (11,181 | ) |
| $ | 2,070 |
|
| $ | (17,214 | ) |
| $ | (2,946 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Sale |
| (5,310 | ) |
|
| - |
|
|
| (5,310 | ) |
|
| - |
|
Retention Bonus |
| (670 | ) |
|
| - |
|
|
| (670 | ) |
|
| - |
|
Operating Earnings (Loss) Excluding Loss on Sale and Retention Bonus | $ | (5,201 | ) |
| $ | 2,070 |
|
| $ | (11,234 | ) |
| $ | (2,946 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) on Sale of Business, Net of Tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Sale |
| (5,310 | ) |
|
| - |
|
|
| (5,310 | ) |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Tax Benefit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reduction of Capital Loss Valuation Reserve |
| (4,680 | ) |
|
| - |
|
|
| (4,680 | ) |
|
| - |
|
Income Tax Benefit |
| (1,374 | ) |
|
| - |
|
|
| (1,374 | ) |
|
| - |
|
| $ | 744 |
|
| $ | - |
|
| $ | 744 |
|
| $ | - |
|
On June 19, 2014, our Board of Directors approved a share repurchase program and authorized the repurchase of up to $200 million of outstanding shares of common stock. In March 2015 our Board of Directors authorized an additional $200 million for the repurchase of outstanding shares of common stock under the program. Under the program the Company is authorized to repurchase up to $400 million of the outstanding shares of common stock from time to time, depending on market conditions, share price and other factors. In the second quarter of fiscal 2018, we repurchased 313,900 shares under this report.program at an average price paid per share of $73.29, for an aggregate purchase price of $23.0 million. There were no shares repurchased in the second quarter of fiscal 2017.
20
Since the program began, the Company has repurchased 3,737,327 shares for an aggregate purchase price of $352.0 million, with $48.0 million remaining available for repurchase in the future.
Sales for the second quarter of fiscal 20172018 increased $19$8.5 million to $509.2$517.6 million over the prior-year period due mainly to strongincreased segment sales of Avionics & Controls andat Sensors & Systems segment products.of $15.4 million, partially offset by lower sales at Advanced Materials.
Gross margin was 34.5%31.6% in the second quarter of fiscal 20172018 compared with 31.9%34.8% in the prior-year period. Gross profit was $175.9$163.7 million and $156.2$177.2 million for the second quarter of fiscal 2018 and 2017, and 2016, respectively. Gross profit mainly benefited from higher sales volume and favorable product mix of Avionics & Controls and Sensors & Systems segment products.
For further explanation about changes in sales and gross profit in the second quarter of fiscal 20172018 over the prior-year period, refer to the table at the end of this Overview section for a roll forward presentation of sales and gross profit.section.
Selling, general and administrative expenses decreasedincreased by $5.3$4.1 million in the second quarter of fiscal 20172018 over the prior-year period to $97.1$102.0 million, principally reflecting lower integration expense and favorable effectmainly due to the effects of changes in foreign currency exchange rates.
Research, development and engineering expense increaseddecreased by $1.8$4.3 million to $26.8$24.7 million, or 5.3%4.8% of sales, in the second quarter of fiscal 20172018 from the prior-year period. The increasedecrease mainly reflects higherreflected lower expense at Avionics & Controls and Sensors & Systems.
On January 4, 2018, we granted an exclusive license to a third party to manufacture, repair and sell certain legacy avionics components for our Advanced Materials segment.$4.6 million. We recorded $2.3 million in license fee income, net of the write-off of the related intangible assets of $2.3 million. In addition, we sold $0.4 million in inventory at book value. We will be paid a 15% royalty on future sales of the licensed product. On December 22, 2017, we granted an exclusive license to a third party to manufacture, repair and sell certain legacy control devices for $3.0 million. Additionally, we sold certain inventory and manufacturing equipment to the licensee for $1.0 million. We will be paid a 15% royalty on future sales of the licensed product. License fee income from both transactions is reported as a separate line item on the Consolidated Statement of Operations and Comprehensive Income (Loss) and is included in Avionics & Controls segment earnings.
DuringIn the secondfirst quarter of fiscal 2017 we received a $5.2$2.6 million insurance recovery resulting from an energetic incident at one of our countermeasure operations, which occurred in the thirdfirst quarter of fiscal 2016. In the second quarter of fiscal 2017, we received a $5.2 million insurance recovery. We also received a $5.0 million insurance recovery in the fourth quarter of fiscal 2016 related to the energetic incident. We do not anticipate additional insurance recoveries arising from this matter in fiscal 2018. The insurance recovery is reported as a separate line item on the Consolidated Statement of Operations and Comprehensive Income (Loss) and is included in Advanced Materials segment earnings. Sales and gross margin of our countermeasure operations business continued to be impacted by the controlled restart of operations following the incident. Management expects the factory will be at planned production levels beginning in the third quarter of fiscal 2017. We received a $5.0 million insurance recovery in the fourth quarter of fiscal 2016 and a $2.6 million insurance recovery in the first quarter of fiscal 2017.
The income tax rate for the second quarter of fiscal 2018 was 28.4%7.9% compared to the prior-year period of 27.2%. The 7.9% income tax rate mainly reflected the release of a valuation allowance of $4.7 million for a capital loss carryover due to the sale of the Kirkhill business.
Loss from discontinued operations in the second quarter of fiscal 2017 compared2018 was $0.1 million, with 16.6% in the prior-year period.no diluted share effect. The increase in the income tax rate is a result of U.K. limitations on interest deductions.
Earningsloss from continuingdiscontinued operations in the second quarter of fiscal 2017 was $0.035 million, with no diluted share effect.
Net earnings in the second quarter of fiscal 2018 were $35.1$23.9 million, or $1.17$0.80 per diluted share, compared with $17.0$34.4 million, or $0.57$1.15 per diluted share, in the prior-year period.
As explained in Note 11 to the Consolidated Financial Statements included in Part 1, Item 1 of this report, in fiscal 2014, our board of directors previously approved the plan to sell certain non-core business units including Wallop Defence Systems, Ltd. (Wallop), a manufacturer of flare countermeasure devices; a small distribution business; and a small manufacturing business. On March 28, 2017, we sold a small manufacturing business for $0.6Cash flows from operating activities were $89.7 million and a note receivable of $2.4 million, resulting in a gain on sale of the business of $1.2 million. On May 4, 2016, we sold certain assets of Wallop and entered into an agreement to sell Wallop’s naval business. These businesses are reported as discontinued operations.
Discontinued operations in the second quarterfirst six months of fiscal 2017 were breakeven2018 compared with a $2.0$91.3 million loss, or $0.07 per diluted share, in the prior-year period.
18
Net income The decrease in the second quarter of fiscal 2017 was $35.1 million, or $1.17 per diluted share, compared with $15.0 million, or $0.50 per diluted share, in the prior-year period.cash flows from operating activities is primarily from lower net earnings.
Sales for the first six months of fiscal 20172018 increased $35.1$32.1 million to $966.9$999.7 million over the prior-year period due mainly to strongincreased segment sales ofat Avionics & Controls and Sensors & Systems segment products.Systems.
Gross margin was 33.1%31.2% in the first six months of fiscal 20172018 compared with 31.5%33.1% in the prior-year period. Gross profit was $320.0$312.1 million and $293.9$320.1 million for the first six months of fiscal 2018 and 2017, and 2016, respectively. Gross profit mainly benefited from higher sales volume and favorable product mix of Avionics & Controls and Sensors & Systems segment products.
For further explanation about changes in sales and gross profit in the first six months of fiscal 20172018 over the prior-year period, please refer to the table at the end of this Overview section for a roll forward presentation of sales and gross profit.section.
Selling, general and administrative expenses decreasedincreased by $3.8$7.9 million in the first six months of fiscal 20172018 over the prior-year period to $192.7$200.9 million, principally reflecting decreased integration expense and favorable effectdue to the effects of changes in foreign currency exchange rates.
Research, development and engineering expense decreased by $2.7 million to $47.8was $50.6 million, or 4.9%5.1% of sales, in the first six months of fiscal 2017 from2018 and was even with the prior-year period.
As explained in Note 10 to the Consolidated Financial Statements included in Part 1, Item 1 of this report, the Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The decrease mainly reflects lower expense forAct reduces the U.S. federal corporate tax rate from 35% to 21%, requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax deferred, and creates
21
new taxes on certain foreign sourced earnings. At March 30, 2018, we had not completed our Avionics & Controls segment.
We adopted the new guidance on accounting for share-based payments duringthe tax effects of enactment of the Act; however, we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax based on our total post-1986 earnings and profits that we previously deferred from U.S. income tax. In the first quarterthree months of fiscal 2017. The new guidance simplifies certain aspects2018, we recorded a provisional amount related to the remeasurement of accounting for share-based payments. The key provision of the new standard requires that excess tax benefits and shortfalls be recorded asour deferred income tax benefit or expense in thebalance of $6.6 million and a provisional amount related to our one-time transition tax liability of $42.0 million.
The income statement, rather than in additional paid-in capital. Adoption of the new guidance duringtax rate for the first six months of fiscal 2017 resulted in a $1 million decrease in income tax expense.
2018 was 122.7% mainly due to the effect of the Act. The income tax rate was 20.2% in the first six months of fiscal 2017 compared with 11.0% in the prior-year period. The increasewas 18.3%, which reflected certain discrete income tax benefits mainly due to a reduction in the income tax rate isin France in 2020 and the early adoption of the accounting standard update for employee share-based payment awards.
We reported a result of U.K. limitations on interest deductions.
Earningsloss from continuing operations in the first six months of fiscal 2017 were $56.72018 of $10.9 million, or $1.90$0.36 per diluted share, compared with $26.9earnings from continuing operations of $55.6 million, or $0.90$1.86 per diluted share indue to the prior-year period.$48.6 million, or $1.62 per diluted share, due to the income charge resulting from the Act.
Loss from discontinued operations in the first six months of fiscal 20172018 was $5.4$0.2 million, or $0.18$0.01 per diluted share, compared with $6.8a loss of $5.4 million, or $0.23$0.18 per diluted share, in the prior-year period.
Net incomeloss in the first six months of fiscal 20172018 was $51.3$11.1 million, or $1.72$0.37 per diluted share, compared with $20.1net earnings of $50.2 million, or $0.67$1.68 per diluted share, in the prior-year period.
Cash flows from operating activities were $91.3 million in the first six months of fiscal 2017 compared with $79.4 million in the prior-year period. The increase in cash flows from operating activities is primarily from improved earnings.
Our sales, gross marginprofit and earnings results for the second quarter of fiscal 20172018 compared with the prior-year period included a number of significant items which are summarized in the tables below.
19The following is a roll forward of sales and gross profit from the three-month period ended March 31, 2017, to the three-month period ended March 30, 2018:
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
| |||
| Controls |
|
| Systems |
|
| Materials |
|
| Total |
|
| ||||
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month period ended March 31, 2017 | $ | 213,293 |
|
| $ | 182,727 |
|
| $ | 113,111 |
|
| $ | 509,131 |
|
|
Foreign currency gain (loss) |
| 3,852 |
|
|
| 12,038 |
|
|
| 2,798 |
|
|
| 18,688 |
|
|
Forward contract gain (loss) |
| 3,861 |
|
|
| 4,471 |
|
|
| - |
|
|
| 8,332 |
|
|
Sales volume |
| (8,192 | ) |
|
| (1,083 | ) |
|
| (9,247 | ) |
|
| (18,522 | ) |
|
Three-month period ended March 30, 2018 | $ | 212,814 |
|
| $ | 198,153 |
|
| $ | 106,662 |
|
| $ | 517,629 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three-month period ended March 31, 2017 |
| 70,796 |
|
|
| 68,291 |
|
|
| 38,119 |
|
|
| 177,206 |
|
|
Foreign currency gain (loss) |
| (12 | ) |
|
| 605 |
|
|
| 681 |
|
|
| 1,274 |
|
|
Forward contract gain (loss) |
| 3,889 |
|
|
| 4,471 |
|
|
| - |
|
|
| 8,360 |
|
|
Volume/mix |
| (3,979 | ) |
|
| (1,842 | ) |
|
| (7,801 | ) |
|
| (13,622 | ) |
|
Lower (higher) manufacturing costs |
| (1,438 | ) |
|
| (4,595 | ) |
|
| (1,424 | ) |
|
| (7,457 | ) |
|
Business integration |
| 29 |
|
|
| - |
|
|
| - |
|
|
| 29 |
|
|
Inventory cost and EAC adjustment |
| 1,091 |
|
|
| 225 |
|
|
| - |
|
|
| 1,316 |
|
|
Other |
| (1,879 | ) |
|
| (1,500 | ) |
|
| - |
|
|
| (3,379 | ) |
|
Three-month period ended March 30, 2018 | $ | 68,497 |
|
| $ | 65,655 |
|
| $ | 29,575 |
|
| $ | 163,727 |
|
|
22
The following is a roll forward of sales and gross marginprofit from the three month period ended April 1, 2016, to the three monthsix-month period ended March 31, 2017:2017, to the six-month period ended March 30, 2018:
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
| |||
| Controls |
|
| Systems |
|
| Materials |
|
| Total |
|
| ||||
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended April 1, 2016 | $ | 198,665 |
|
| $ | 176,069 |
|
| $ | 115,576 |
|
| $ | 490,310 |
|
|
Foreign currency gain (loss) |
| 744 |
|
|
| (3,178 | ) |
|
| (3,538 | ) |
|
| (5,972 | ) |
|
Forward contract gain (loss) |
| 2,462 |
|
|
| (449 | ) |
|
| - |
|
|
| 2,013 |
|
|
Sales volume |
| 11,722 |
|
|
| 10,036 |
|
|
| 1,073 |
|
|
| 22,831 |
|
|
Three month period ended March 31, 2017 | $ | 213,593 |
|
| $ | 182,478 |
|
| $ | 113,111 |
|
| $ | 509,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three month period ended April 1, 2016 |
| 56,520 |
|
|
| 61,275 |
|
|
| 38,378 |
|
|
| 156,173 |
|
|
Foreign currency gain (loss) |
| 1,662 |
|
|
| (236 | ) |
|
| (955 | ) |
|
| 471 |
|
|
Forward contract gain (loss) |
| 2,571 |
|
|
| (449 | ) |
|
| - |
|
|
| 2,122 |
|
|
Volume/mix |
| 7,017 |
|
|
| 5,446 |
|
|
| 421 |
|
|
| 12,884 |
|
|
Business integration |
| 998 |
|
|
| - |
|
|
| - |
|
|
| 998 |
|
|
Inventory cost and EAC adjustment |
| 3,881 |
|
|
| - |
|
|
| - |
|
|
| 3,881 |
|
|
Other |
| (1,706 | ) |
|
| 821 |
|
|
| 275 |
|
|
| (610 | ) |
|
Three month period ended March 31, 2017 | $ | 70,943 |
|
| $ | 66,857 |
|
| $ | 38,119 |
|
| $ | 175,919 |
|
|
The following is a roll forward of sales and gross margin from the six month period ended April 1, 2016, to the six month period ended March 31, 2017:
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
| Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
| ||||||
| Controls |
|
| Systems |
|
| Materials |
|
| Total |
|
| Controls |
|
| Systems |
|
| Materials |
|
| Total |
|
| ||||||||
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six month period ended April 1, 2016 | $ | 384,910 |
|
| $ | 328,499 |
|
| $ | 218,378 |
|
| $ | 931,787 |
|
| ||||||||||||||||
Six-month period ended March 31, 2017 | $ | 405,975 |
|
| $ | 350,483 |
|
| $ | 211,089 |
|
| $ | 967,547 |
|
| ||||||||||||||||
Foreign currency gain (loss) |
| (898 | ) |
|
| (4,659 | ) |
|
| (7,555 | ) |
|
| (13,112 | ) |
|
| 5,538 |
|
|
| 18,935 |
|
|
| 4,263 |
|
|
| 28,736 |
|
|
Forward contract gain (loss) |
| 5,307 |
|
|
| (548 | ) |
|
| - |
|
|
| 4,759 |
|
|
| 7,681 |
|
|
| 6,926 |
|
|
| - |
|
|
| 14,607 |
|
|
Sales volume |
| 16,956 |
|
|
| 26,259 |
|
|
| 266 |
|
|
| 43,481 |
|
|
| (3,677 | ) |
|
| (2,723 | ) |
|
| (4,816 | ) |
|
| (11,216 | ) |
|
Six month period ended March 31, 2017 | $ | 406,275 |
|
| $ | 349,551 |
|
| $ | 211,089 |
|
| $ | 966,915 |
|
| ||||||||||||||||
Six-month period ended March 30, 2018 | $ | 415,517 |
|
| $ | 373,621 |
|
| $ | 210,536 |
|
| $ | 999,674 |
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Six month period ended April 1, 2016 |
| 116,187 |
|
|
| 111,510 |
|
|
| 66,195 |
|
|
| 293,892 |
|
| ||||||||||||||||
Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Six-month period ended March 31, 2017 |
| 131,284 |
|
|
| 126,262 |
|
|
| 62,572 |
|
|
| 320,118 |
|
| ||||||||||||||||
Foreign currency gain (loss) |
| 1,163 |
|
|
| 152 |
|
|
| (1,803 | ) |
|
| (488 | ) |
|
| (897 | ) |
|
| 721 |
|
|
| 1,058 |
|
|
| 882 |
|
|
Forward contract gain (loss) |
| 5,368 |
|
|
| (548 | ) |
|
| - |
|
|
| 4,820 |
|
|
| 7,770 |
|
|
| 6,926 |
|
|
| - |
|
|
| 14,696 |
|
|
Volume/mix |
| 478 |
|
|
| 14,249 |
|
|
| (1,885 | ) |
|
| 12,842 |
|
|
| (582 | ) |
|
| (7,957 | ) |
|
| (3,963 | ) |
|
| (12,502 | ) |
|
Factory layout costs (Kaikaku) |
| 2,307 |
|
|
| - |
|
|
| - |
|
|
| 2,307 |
|
| ||||||||||||||||
Lower (higher) manufacturing costs |
| (2,115 | ) |
|
| (6,795 | ) |
|
| (1,088 | ) |
|
| (9,998 | ) |
| ||||||||||||||||
Business integration |
| 1,829 |
|
|
| - |
|
|
| - |
|
|
| 1,829 |
|
|
| 330 |
|
|
| - |
|
|
| - |
|
|
| 330 |
|
|
Inventory cost and EAC adjustment |
| 4,642 |
|
|
| - |
|
|
| - |
|
|
| 4,642 |
|
|
| 1,308 |
|
|
| 418 |
|
|
| - |
|
|
| 1,726 |
|
|
Other |
| (543 | ) |
|
| 600 |
|
|
| 65 |
|
|
| 122 |
|
|
| (4,284 | ) |
|
| 1,095 |
|
|
| - |
|
|
| (3,189 | ) |
|
Six month period ended March 31, 2017 | $ | 131,431 |
|
| $ | 125,963 |
|
| $ | 62,572 |
|
| $ | 319,966 |
|
| ||||||||||||||||
Six-month period ended March 30, 2018 | $ | 132,814 |
|
| $ | 120,670 |
|
| $ | 58,579 |
|
| $ | 312,063 |
|
|
The following table shows the average foreign exchange rates for the British pound, Canadian dollar and European euro relative to the U.S. dollar for the three and six monthsix-month periods ended March 30, 2018, and March 31, 2017, and April 1, 2016.2017.
| Three Months Ended |
| Six Months Ended |
| Three Months Ended |
|
| Six Months Ended |
|
| ||||||||||||||||||||||||||||||||||
| March 31, |
|
| April 1, |
|
|
|
| March 31, |
|
| April 1, |
|
|
|
| March 30, |
|
| March 31, |
|
|
|
|
|
| March 30, |
|
| March 31, |
|
|
|
|
|
| ||||||||
| 2017 |
|
|
| 2016 |
|
| Change |
| 2017 |
|
| 2016 |
|
| Change |
| 2018 |
|
|
| 2017 |
|
| Change |
|
| 2018 |
|
| 2017 |
|
| Change |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GBP to USD |
| 1.2485 |
|
|
| 1.4200 |
|
| (12.1)% |
|
| 1.2463 |
|
|
| 1.4670 |
|
| (15.0)% |
|
| 1.3965 |
|
|
| 1.2485 |
|
|
| 11.9 | % |
|
| 1.3635 |
|
|
| 1.2463 |
|
|
| 9.4 | % |
|
CAD to USD |
| 0.7572 |
|
|
| 0.7337 |
|
| 3.2% |
|
| 0.7517 |
|
|
| 0.7425 |
|
| 1.2% |
|
| 0.7964 |
|
|
| 0.7572 |
|
|
| 5.2 | % |
|
| 0.7926 |
|
|
| 0.7517 |
|
|
| 5.4 | % |
|
EUR to USD |
| 1.0616 |
|
|
| 1.0964 |
|
| (3.2)% |
|
| 1.0718 |
|
|
| 1.0922 |
|
| (1.9)% |
|
| 1.2296 |
|
|
| 1.0616 |
|
|
| 15.8 | % |
|
| 1.2057 |
|
|
| 1.0718 |
|
|
| 12.5 | % |
|
20The following table shows the impact of changes in the foreign currency exchange rates for the British pound, Canadian dollar and European euro relative to the U.S. dollar on sales, gross profit, operating earnings during the three-month period ended March 30, 2018, compared with the prior-year period.
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
| |||
| Controls |
|
| Systems |
|
| Materials |
|
| Total |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency gain (loss) | $ | 3,852 |
|
| $ | 12,038 |
|
| $ | 2,798 |
|
| $ | 18,688 |
|
|
Forward contract gain (loss) |
| 3,861 |
|
|
| 4,471 |
|
|
| - |
|
|
| 8,332 |
|
|
| $ | 7,713 |
|
| $ | 16,509 |
|
| $ | 2,798 |
|
| $ | 27,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency gain (loss) | $ | (12 | ) |
| $ | 605 |
|
| $ | 681 |
|
| $ | 1,274 |
|
|
Forward contract gain (loss) |
| 3,889 |
|
|
| 4,471 |
|
|
| - |
|
|
| 8,360 |
|
|
| $ | 3,877 |
|
| $ | 5,076 |
|
| $ | 681 |
|
| $ | 9,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Earnings (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency gain (loss) | $ | (494 | ) |
| $ | (4,005 | ) |
| $ | 1,313 |
|
| $ | (3,186 | ) |
|
Forward contract gain (loss) |
| 2,722 |
|
|
| 4,201 |
|
|
| (662 | ) |
|
| 6,261 |
|
|
| $ | 2,228 |
|
| $ | 196 |
|
| $ | 651 |
|
| $ | 3,075 |
|
|
23
The following table shows the impact of changes in the foreign currency exchange rates for the British pound, Canadian dollar and European euro relative to the U.S. dollar on sales, gross profit, and operating earnings during the three monthsix-month period ended March 31, 2017,30, 2018, compared with the prior-year period.
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
| |||
| Controls |
|
| Systems |
|
| Materials |
|
| Total |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency gain (loss) | $ | 4,717 |
|
| $ | 829 |
|
| $ | (3,071 | ) |
| $ | 2,475 |
|
|
Forward contract gain (loss) |
| 3,194 |
|
|
| (716 | ) |
|
| 3,273 |
|
|
| 5,751 |
|
|
Impact on Operating Earnings (Loss) | $ | 7,911 |
|
| $ | 113 |
|
| $ | 202 |
|
| $ | 8,226 |
|
|
The following table shows the impact of changes in the foreign currency exchange rates for the British pound, Canadian dollar and euro relative to the U.S. dollar on operating earnings during the six month period ended March 31, 2017, compared with the prior-year period.
In Thousands | Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
| Avionics & |
|
| Sensors & |
|
| Advanced |
|
|
|
|
|
| ||||||
| Controls |
|
| Systems |
|
| Materials |
|
| Total |
|
| Controls |
|
| Systems |
|
| Materials |
|
| Total |
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Foreign currency gain (loss) | $ | 5,856 |
|
| $ | 1,862 |
|
| $ | (3,791 | ) |
| $ | 3,927 |
|
| $ | 5,538 |
|
| $ | 18,935 |
|
| $ | 4,263 |
|
| $ | 28,736 |
|
|
Forward contract gain (loss) |
| 5,234 |
|
|
| (1,008 | ) |
|
| 3,535 |
|
|
| 7,761 |
|
|
| 7,681 |
|
|
| 6,926 |
|
|
| - |
|
|
| 14,607 |
|
|
Impact on Operating Earnings (Loss) | $ | 11,090 |
|
| $ | 854 |
|
| $ | (256 | ) |
| $ | 11,688 |
|
| ||||||||||||||||
| $ | 13,219 |
|
| $ | 25,861 |
|
| $ | 4,263 |
|
| $ | 43,343 |
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Foreign currency gain (loss) | $ | (897 | ) |
| $ | 721 |
|
| $ | 1,058 |
|
| $ | 882 |
|
| ||||||||||||||||
Forward contract gain (loss) |
| 7,770 |
|
|
| 6,926 |
|
|
| - |
|
|
| 14,696 |
|
| ||||||||||||||||
| $ | 6,873 |
|
| $ | 7,647 |
|
| $ | 1,058 |
|
| $ | 15,578 |
|
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Operating Earnings (Loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Foreign currency gain (loss) | $ | (4,673 | ) |
| $ | (6,587 | ) |
| $ | 728 |
|
| $ | (10,532 | ) |
| ||||||||||||||||
Forward contract gain (loss) |
| 7,326 |
|
|
| 7,190 |
|
|
| 1,515 |
|
|
| 16,031 |
|
| ||||||||||||||||
| $ | 2,653 |
|
| $ | 603 |
|
| $ | 2,243 |
|
| $ | 5,499 |
|
|
Results of Operations
Three MonthThree-Month Period Ended March 30, 2018, Compared with Three-Month Period Ended March 31, 2017 Compared with Three Month Period Ended April 1, 2016
Total sales for the second quarter of fiscal quarter2018 increased by $18.9$8.5 million, or 3.8%1.7%, over the prior-year period. Sales by segment were as follows:
In Thousands |
|
| Three Months Ended |
|
|
|
| Three Months Ended |
|
| ||||||||||
| Increase (Decrease) |
| March 31, |
|
| April 1, |
|
| Increase (Decrease) |
| March 30, |
|
| March 31, |
|
| ||||
| From Prior Year |
| 2017 |
|
| 2016 |
|
| From Prior Year |
| 2018 |
|
| 2017 |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avionics & Controls | 7.5% |
| $ | 213,593 |
|
| $ | 198,665 |
|
| (0.2)% |
| $ | 212,814 |
|
| $ | 213,293 |
|
|
Sensors & Systems | 3.6% |
|
| 182,478 |
|
|
| 176,069 |
|
| 8.4% |
|
| 198,153 |
|
|
| 182,727 |
|
|
Advanced Materials | (2.1)% |
|
| 113,111 |
|
|
| 115,576 |
|
| (5.7)% |
|
| 106,662 |
|
|
| 113,111 |
|
|
Total Net Sales |
|
| $ | 509,182 |
|
| $ | 490,310 |
|
|
|
| $ | 517,629 |
|
| $ | 509,131 |
|
|
The $14.9$0.5 million increasedecrease in Avionics & Controls sales over the prior-year period mainly reflected the following:
HigherLower sales volumes of avionics systems of $8 million mainly displaysprincipally due to a one-time order in the prior-year period for satellite communication devices for $3 million and decreased sales for defense applications
Lower sales volumes of interface technologies of $2 million principally due to lower demand for medical applications nearing end of life
Partially offset by
Higher sales volumes of control and communication systems of $2 million principally for the secure communications aftermarket
Favorable impact fromeffect of changes in foreign currency exchange rates of $3$8 million mainly from the Canadian dollar relative to the U.S. dollar
The $6.4$15.4 million increase in Sensor & Systems sales over the prior-year period principally reflected the following:
Higher sales of advanced sensors of $4 million and power systems of $6 million for OEM and aftermarket customers
UnfavorableFavorable effect of changes in foreign currency exchange rates of $16 million
Higher sales of connection technologies of $4 million mainly from the euro and British pound relativefor industrial applications
Partially offset by lower sales of power systems of $5 million principally due to the U.S. dollarcompletion of an FAA requirement for ground fault interrupt (GFI) relays in fiscal 2017
The $2.5$6.4 million decrease in sales in Advanced Materials over the prior-year period mainly reflected the following:
Lower sales volumes of combustible ordnanceengineered materials of $16 million due to a new long-term contract for defense applications replacing a higher priced product and countermeasure flare deviceslower demand mainly for aerospace and defense products at the Kirkhill business
24
Higher sales volumes of $5defense technologies of $7 million mainly due to operational challenges in countermeasures in the prior-year period
UnfavorableFavorable effect of changes in foreign currency exchange rates of $4$3 million mainly from the British pound relative to the U.S. dollar
Partially offset by higher sales of engineered materials of $6 million mainly for defense applications
21
Overall, gross margin was 34.5%31.6% and 31.9%34.8% for the second quarter of fiscal 20172018 and 2016,2017, respectively. Gross profit was $175.9$163.7 million and $156.2$177.2 million for the second quarter of fiscal 20172018 and 2016,2017, respectively. Gross profit and gross margin percentage by segment were as follows:
In Thousands |
|
| Three Months Ended |
|
|
|
| Three Months Ended |
|
| ||||||||||
| Increase (Decrease) |
| March 31, |
|
| April 1, |
|
| Increase (Decrease) |
| March 30, |
|
| March 31, |
|
| ||||
| From Prior Year |
| 2017 |
|
| 2016 |
|
| From Prior Year |
| 2018 |
|
| 2017 |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avionics & Controls | 25.5% |
| $ | 70,943 |
|
| $ | 56,520 |
|
| (3.2)% |
| $ | 68,497 |
|
| $ | 70,796 |
|
|
Sensors & Systems | 9.1% |
|
| 66,857 |
|
|
| 61,275 |
|
| (3.9)% |
|
| 65,655 |
|
|
| 68,291 |
|
|
Advanced Materials | (0.7)% |
|
| 38,119 |
|
|
| 38,378 |
|
| (22.4)% |
|
| 29,575 |
|
|
| 38,119 |
|
|
Total Gross Profit |
|
| $ | 175,919 |
|
| $ | 156,173 |
|
|
|
| $ | 163,727 |
|
| $ | 177,206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avionics & Controls | 4.8% |
|
| 33.2 | % |
|
| 28.4 | % |
| (1.0)% |
|
| 32.2 | % |
|
| 33.2 | % |
|
Sensors & Systems | 1.8% |
|
| 36.6 | % |
|
| 34.8 | % |
| (4.3)% |
|
| 33.1 | % |
|
| 37.4 | % |
|
Advanced Materials | 0.5% |
|
| 33.7 | % |
|
| 33.2 | % |
| (6.0)% |
|
| 27.7 | % |
|
| 33.7 | % |
|
Gross Margin Percentage |
|
|
| 34.5 | % |
|
| 31.9 | % |
|
|
|
| 31.6 | % |
|
| 34.8 | % |
|
The $14.4$2.3 million increasedecrease in Avionics & Controls gross profit wasis mainly from higherdue to the following:
Unfavorable mix of $2 million on displays due mainly to startup of a new program and $2 million due to lower sales volumes and unfavorable mix on avionics systems
Higher manufacturing costs of displays,$2 million due to a low rate of initial production of control and communication systems for new programs
Partially offset by favorable effect of changes in foreign currency rates of $4 million and a decrease in estimated cost at completion adjustments of $4 million compared with the prior-year period.
The $5.6$2.6 million increasedecrease in Sensors & Systems gross profit principally reflected increasedthe following:
Unfavorable product mix of $5 million mainly due to lower sales volume of GFI at power systems and favorable product mix.increased manufacturing costs of $5 million principally due to increased inventory excess and obsolete adjustments of $2 million and higher material, labor and overhead costs
Partially offset by
Higher sales volume/mix of connection technologies of $3 million
Favorable effect of changes in foreign currency rates of $5 million
The $8.5 million decrease of $0.3 million in Advanced Materials gross profit principally reflected a $2 million decrease in gross marginthe following:
Unfavorable product mix on sales of defense technologies due to the controlled ramp up of manufacturing following the May 2016 incident noted in the Overview section. Additionally, the decrease in gross margin reflected expenses from the introduction of new countermeasure devices. These decreases were partially offset by an increase in gross profit on higher sales of engineered materials for defense applicationsof $10 million principally at the Kirkhill business and commercial aviation. Gross margin on commercial aviationhigher manufacturing costs of $1 million mainly due to a retention bonus paid in connection with the sale of the Kirkhill business
Partially offset by higher sales benefited from completing the integrationvolume/mix mainly due to countermeasures of certain manufacturing operations with another Esterline facility.$2 million
Selling, general and administrative expenses (which include corporate expenses) totaled $97.1$102.0 million, or 19.1%19.7% of sales, and $102.4$97.9 million, or 20.9%19.2% of sales, for the second quarter of fiscal 20172018 and 2016,2017, respectively. The decreaseincrease in selling, general and administrative expense was mainly reflected a $3 million decrease in integration expenses, a $5 million favorabledue to the unfavorable effect of changes in foreign currency rates of $5 million, higher information technologies expenses driven by government contract data security compliance requirements of $3 million, partially offset by a $2lower pension expense of $1 million and a prior-year bad debt expense.for a long-term contract of $2 million.
Research, development and engineering spending was $26.8$24.7 million, or 5.3%4.8% of sales, for the second quarter of fiscal 20172018 compared with $25.0$29.0 million, or 5.1%5.7% of sales, for the second quarter of fiscal 2016.2017. The $2$4.3 million increasedecrease in research, development and engineering principally reflected higherlower spending in the Advanced Materials segment.Avionics & Controls and Sensors & Systems segments in the second quarter of fiscal 2018. Management expects that the full year research, development and engineering expense will be approximately 5% of sales.
25
Segment earnings (operating earnings excluding corporate expenses and other income or expense) for the second quarter of fiscal 20172018 totaled $77.2$52.5 million, or 15.2%10.1% of sales, compared with $46.8$75.5 million, or 9.5%14.8% of sales, for the second quarter in fiscal 2016.2017. Segment earnings by segment were as follows:
In Thousands |
|
| Three Months Ended |
|
|
|
| Three Months Ended |
|
| ||||||||||
| Increase (Decrease) |
| March 31, |
|
| April 1, |
|
| Increase (Decrease) |
| March 30, |
|
| March 31, |
|
| ||||
| From Prior Year |
| 2017 |
|
| 2016 |
|
| From Prior Year |
| 2018 |
|
| 2017 |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avionics & Controls | 721.5% |
| $ | 21,761 |
|
| $ | 2,649 |
|
| 14.0% |
| $ | 23,673 |
|
| $ | 20,772 |
|
|
Sensors & Systems | 29.7% |
|
| 27,156 |
|
|
| 20,944 |
|
| (26.9)% |
|
| 19,271 |
|
|
| 26,357 |
|
|
Advanced Materials | 22.0% |
|
| 28,322 |
|
|
| 23,208 |
|
| (66.3)% |
|
| 9,553 |
|
|
| 28,322 |
|
|
Total Segment Earnings |
|
| $ | 77,239 |
|
| $ | 46,801 |
|
|
|
| $ | 52,497 |
|
| $ | 75,451 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avionics & Controls | 8.9% |
|
| 10.2 | % |
|
| 1.3 | % |
| 1.4% |
|
| 11.1 | % |
|
| 9.7 | % |
|
Sensors & Systems | 3.0% |
|
| 14.9 | % |
|
| 11.9 | % |
| (4.7)% |
|
| 9.7 | % |
|
| 14.4 | % |
|
Advanced Materials | 4.9% |
|
| 25.0 | % |
|
| 20.1 | % |
| (16.0)% |
|
| 9.0 | % |
|
| 25.0 | % |
|
Segment Earnings Percentage |
|
|
| 15.2 | % |
|
| 9.5 | % |
|
|
|
| 10.1 | % |
|
| 14.8 | % |
|
22
The $19$2.9 million increase in Avionics & Controls segment earnings mainly reflected the following:
License fee income of $2 million from licensing certain legacy avionics components to a third-party manufacturer
A $2 million decrease in research, development and engineering mainly for cockpit control applications for development programs
A $2 million prior-year bad debt incurred on an increaseavionics systems long-term contract
Partially offset by
A $1 million unfavorable effect of changes in foreign currency exchanges rates on operating expenses
A $2 million decrease in gross profit
The $7.1 million decrease in Sensors & Systems segment earnings mainly reflected the following:
A $5 million unfavorable effect of $14 million, lower integration expense ofchanges in foreign currency exchange rates on operating expenses
A $3 million anddecrease in gross profit (including a $5 million favorable effect of changes in foreign currency exchange rates of $4 million on operating expenses. These increases were partially offset byrates)
A $2 million in bad debt expense on a long-term contract.
The $6 million increase in Sensors & Systems segment earnings principally reflected an increaseselling, general and administrative expense
Partially offset by a $3 million decrease in gross profit.research, development and engineering for power systems
The $5$18.8 million increasedecrease in Advanced Materials segment earnings mainly reflected the $5.2following:
A $9 million decrease in gross profit
A $5 million loss on the sale of the Kirkhill business
A prior-year period $5 million insurance recovery noted infrom the Overview section.incident at one of our countermeasure operations
Interest expense for the second quarter of fiscal 20172018 was $7.5$8.2 million compared with $7.3$7.5 million for the second quarter of fiscal 2016.2017. The increase in interest expense mainly reflected a higher interest rate, partially offset by lower borrowings.rate.
The income tax rate was 28.4% in the second fiscal quarter of fiscal 2017 compared with 16.6% in the prior-year period. The income tax rate for the second quarter of fiscal 2017 reflects2018 was 7.9% compared to the U.K. tax law changes limiting interest expense deductions.prior year period of 27.2%. The 7.9% income tax rate differedmainly reflected a $4.7 million tax benefit from the statutoryrelease of a capital loss valuation reserve due to a realized capital gain upon the sale of the Kirkhill business. In addition, the income tax rate infor the second fiscal quarter of 2018 reflects a blended U.S. tax rate of 24.5%, which is based upon an income tax rate of 35% for our first three months of fiscal 20172018 and 2016, as both years benefited from various tax credits and certain foreign interest expense deductions.21% for the balance of year ending September 28, 2018.
2326
Six MonthSix-Month Period Ended March 30, 2018, Compared with Six-Month Period Ended March 31, 2017 Compared with Six Month Period Ended April 1, 2016
Total sales for the first six months of fiscal 20172018 increased by $35.1$32.1 million, or 3.8%3.3%, over the prior-year period. Sales by segment were as follows:
In Thousands |
|
| Six Months Ended |
|
|
|
| Six Months Ended |
|
| ||||||||||
| Increase (Decrease) |
| March 31, |
|
| April 1, |
|
| Increase (Decrease) |
| March 30, |
|
| March 31, |
|
| ||||
| From Prior Year |
| 2017 |
|
| 2016 |
|
| From Prior Year |
| 2018 |
|
| 2017 |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avionics & Controls | 5.6% |
| $ | 406,275 |
|
| $ | 384,910 |
|
| 2.4% |
| $ | 415,517 |
|
| $ | 405,975 |
|
|
Sensors & Systems | 6.4% |
|
| 349,551 |
|
|
| 328,499 |
|
| 6.6% |
|
| 373,621 |
|
|
| 350,483 |
|
|
Advanced Materials | (3.3)% |
|
| 211,089 |
|
|
| 218,378 |
|
| (0.3)% |
|
| 210,536 |
|
|
| 211,089 |
|
|
Total Net Sales |
|
| $ | 966,915 |
|
| $ | 931,787 |
|
|
|
| $ | 999,674 |
|
| $ | 967,547 |
|
|
The $21.4$9.5 million increase in Avionics & Controls sales over the prior-year period mainly reflected the following:
Higher sales volumesFavorable effect of avionics systemschanges in foreign currency exchange rates of $10$13 million mainly for new programs
Higher sales volumes of $9 million in control and communication systems principally for the cockpit switches aftermarket
Partially offset by
Lower sales of interface technologies of $7$8 million, principally due to lower demand for gamingmedical applications nearing end of life and engineering development services for medical devices
Lower sales of avionics systems of $5 million mainly due to a one-time order in the prior-year period for satellite communication devices for $2 million and decreased sales mainly for defense applications
The $23.1 million increase in Sensors & Systems sales over the prior-year period principally reflected the following:
Favorable effect of changes in foreign currency exchange rates of $26 million
Higher sales of advanced sensors for the aftermarket mainly in Asia of $3 million, partially offset by a $2 million in price reductions for late delivery
Higher sales volumes of connection technologies of $5 million mainly for industrial applications
Partially offset by lower sales of power systems of $8 million principally due to the completion of an FAA requirement for GFI relays in fiscal 2017 and lower spare sales for the A400M program
The $0.6 million decrease in sales in Advanced Materials over the prior-year period mainly reflected the following:
Lower sales volumes of engineered materials of $17 million due to a new long-term contract for defense applications replacing a higher priced product and lower demand mainly for aerospace and defense products at the Kirkhill business
Partially offset by
Higher sales volumes of defense technologies of $12 million mainly due to operational challenges in countermeasures in the prior-year period
Favorable effect of changes in foreign currency exchange rates of $4 million
The $21.1 million increase in Sensor & Systems sales over the prior-year period principally reflected the following:
Higher sales of connection technologies of $4 million for commercial aviation and increased distribution orders
Higher sales of advanced sensors of $11 million and power systems of $11 million for OEM and aftermarket programs
Unfavorable effect of changes in foreign currency exchange rates of $5 million
The $7.3 million decrease in sales in Advanced Materials over the prior-year period was mainly due to the unfavorable effect of changes in foreign currency exchange rates of $8 million. Additionally, sales volumes of defense technologies countermeasure devices declined $5 million due to the controlled resumption of efficient operations following the energetic incident at one of our operations in May 2016. These decreases were partially offset by higher sales volumes of engineered materials for commercial aviation of $6 million.
Overall, gross margin was 33.1%31.2% and 31.5%33.1% for the first six months of fiscal 20172018 and 2016,2017, respectively. Gross profit was $320.0$312.1 million and $293.9$320.1 million for the first six months of fiscal 20172018 and 2016,2017, respectively. Gross profit and gross margin percentage by segment were as follows:
In Thousands |
|
| Six Months Ended |
|
|
|
| Six Months Ended |
|
| ||||||||||
| Increase (Decrease) |
| March 31, |
|
| April 1, |
|
| Increase (Decrease) |
| March 30, |
|
| March 31, |
|
| ||||
| From Prior Year |
| 2017 |
|
| 2016 |
|
| From Prior Year |
| 2018 |
|
| 2017 |
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avionics & Controls | 13.1% |
| $ | 131,431 |
|
| $ | 116,187 |
|
| 1.2% |
| $ | 132,814 |
|
| $ | 131,284 |
|
|
Sensors & Systems | 13.0% |
|
| 125,963 |
|
|
| 111,510 |
|
| (4.4)% |
|
| 120,670 |
|
|
| 126,262 |
|
|
Advanced Materials | (5.5)% |
|
| 62,572 |
|
|
| 66,195 |
|
| (6.4)% |
|
| 58,579 |
|
|
| 62,572 |
|
|
Total Gross Profit |
|
| $ | 319,966 |
|
| $ | 293,892 |
|
|
|
| $ | 312,063 |
|
| $ | 320,118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avionics & Controls | 2.2% |
|
| 32.4 | % |
|
| 30.2 | % |
| (0.3)% |
|
| 32.0 | % |
|
| 32.3 | % |
|
Sensors & Systems | 2.1% |
|
| 36.0 | % |
|
| 33.9 | % |
| (3.7)% |
|
| 32.3 | % |
|
| 36.0 | % |
|
Advanced Materials | (0.7)% |
|
| 29.6 | % |
|
| 30.3 | % |
| (1.8)% |
|
| 27.8 | % |
|
| 29.6 | % |
|
Gross Margin Percentage |
|
|
| 33.1 | % |
|
| 31.5 | % |
|
|
|
| 31.2 | % |
|
| 33.1 | % |
|
27
The $15.2$1.5 million increase in Avionics & Controls gross profit is mainly from favorablereflected the following:
Favorable effect of changes in foreign currency effects,rates of $7 million
Higher gross profit of $3 million on increased sales of control and communication systems for the aftermarket
Partially offset by
Higher manufacturing costs of $5 million due to a low rate of initial production of control and communication systems for new programs
Unfavorable mix of $2 million on displays due mainly to startup of a new program and $2 million due lower estimate at completion adjustments on avionics systems long-term contracts and integration/Kaikaku (factory layout) expenses incurred in the prior-year period. These benefits were tempered by higher expenses associated with the introduction of new programs.sales volumes
The $14.5$5.6 million increasedecrease in Sensors & Systems gross profit principally reflected increased sales volume and favorablethe following:
Unfavorable product mix across all platforms.of $8 million mainly due to lower power systems GFI relay sales
Higher manufacturing costs at power systems of $6 million due to increased inventory excess and obsolete adjustments of $2 million and higher material, labor and overhead costs
Partially offset by the favorable effect of changes in foreign currency rates of $8 million
The $3.6$4.0 million decrease in Advanced Materials gross profit principally reflected a decrease in gross marginthe following:
Unfavorable product mix on sales of defense technologiesengineered materials of $11 million principally at the Kirkhill business and higher manufacturing costs of $1 million mainly due to a retention bonus paid in connection with the controlled ramp upsale of manufacturing following the May 2016 incident notedKirkhill business
Partially offset by
Higher sales volume/mix mainly due to countermeasures of $7 million
Favorable effect of changes in the Overview section and expenses from the introductionforeign currency rates of new countermeasure devices.$1 million
24
Selling, general and administrative expenses (which include corporate expenses) totaled $192.7$200.9 million, or 19.9%20.1% of sales, and $196.5$193.0 million, or 21.1%20.0% of sales, for the first six months of fiscal 20172018 and 2016,2017, respectively. The decreaseincrease in selling, general and administrative expense was mainly reflected a $5 million decrease in integration expenses, a favorabledue to the unfavorable effect of changes in foreign currency rates of $6$8 million, higher information technologies expenses driven by government contract data security compliance requirements of $3 million, a $2 million write-off of capitalized software costs, partially offset by a lower pension expense of $2 million inand a prior-year bad debt expense onfor a long-term contract and increased other selling, general and administrative expenses.of $2 million.
Research, development and engineering spending was $47.8$50.6 million, or 4.9%5.1% of sales, for the first six months of fiscal 20172018 compared with $50.5$50.7 million, or 5.4%5.2% of sales, for the first six months of fiscal 2016. The $2.7 million decrease in research, development and engineering principally reflected lower spending in the Avionics & Controls segment in the first six months of fiscal 2017. Management expects that the full year research, development and engineering expense will be approximately 5% of sales.
Segment earnings (operating earnings excluding corporate expenses and other income or expense) for the first six months of fiscal 20172018 totaled $125.0$99.2 million, or 12.9%9.9% of sales, compared with $82.0$121.4 million, or 8.8%12.5% of sales, for the first six months in fiscal 2016.2017. Segment earnings by segment were as follows:
In Thousands |
|
| Six Months Ended |
|
|
|
| Six Months Ended |
|
| ||||||||||
| Increase (Decrease) |
| March 31, |
|
| April 1, |
|
| ||||||||||||
| From Prior Year |
| 2017 |
|
| 2016 |
|
| Increase (Decrease) |
| March 30, |
|
| March 31, |
|
| ||||
|
|
|
|
|
|
|
|
|
|
| From Prior Year |
| 2018 |
|
| 2017 |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avionics & Controls | 229.0% |
| $ | 39,678 |
|
| $ | 12,062 |
|
| 13.9% |
| $ | 44,058 |
|
| $ | 38,689 |
|
|
Sensors & Systems | 39.7% |
|
| 47,102 |
|
|
| 33,728 |
|
| (30.4)% |
|
| 30,984 |
|
|
| 44,500 |
|
|
Advanced Materials | 5.5% |
|
| 38,202 |
|
|
| 36,198 |
|
| (36.8)% |
|
| 24,136 |
|
|
| 38,202 |
|
|
Total Segment Earnings |
|
| $ | 124,982 |
|
| $ | 81,988 |
|
|
|
| $ | 99,178 |
|
| $ | 121,391 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Avionics & Controls | 6.7% |
|
| 9.8 | % |
|
| 3.1 | % |
| 1.1% |
|
| 10.6 | % |
|
| 9.5 | % |
|
Sensors & Systems | 3.2% |
|
| 13.5 | % |
|
| 10.3 | % |
| (4.4)% |
|
| 8.3 | % |
|
| 12.7 | % |
|
Advanced Materials | 1.5% |
|
| 18.1 | % |
|
| 16.6 | % |
| (6.6)% |
|
| 11.5 | % |
|
| 18.1 | % |
|
Segment Earnings Percentage |
|
|
| 12.9 | % |
|
| 8.8 | % |
|
|
|
| 9.9 | % |
|
| 12.5 | % |
|
The $28$5.4 million increase in Avionics & Controls segment earnings mainly reflected the following:
License fee income of $5 million from licensing certain legacy avionics components to third-party manufacturers
A $15$2 million increase in gross profit a $4 million reduction in research, development and engineering due to government funding, and the timing of research, development and engineering efforts
A $4prior-year period $2 million decrease in selling, general and administrativebad debt expense mainly duerelated to lower integration expensean avionics systems program
A $5Partially offset by a $4 million favorableunfavorable effect of changes in foreign currency exchange rates on operating expenses
28
The $13$13.5 million increasedecrease in Sensors & Systems segment earnings principallymainly reflected the increasefollowing:
A $7 million unfavorable effect of changes in foreign currency exchange rates on operating expenses
A $6 million decrease in gross profit on higher sales volumes and improved product mix.(including an $8 million favorable effect of changes in foreign currency exchange rates)
The $2$14.1 million increasedecrease in Advanced Materials segment earnings mainly reflected a $7.8the following:
A prior-year period $8 million insurance recovery noted above, partially offset by afrom the incident at one of our countermeasure operations
A $5 million loss on the sale of the Kirkhill business
A $4 million decrease in gross profit.profit
Partially offset by a $2 million decrease in operating expenses reflecting a $1 million favorable effect of changes in foreign currency exchange rates and a $1 million loss on a disposal of fixed assets in the prior-year period
Interest expense for the first six months of fiscal 20172018 was $15.3$15.8 million compared with $14.5$15.3 million for the first six months of fiscal 2016.2017. The increase in interest expense mainly reflected a higher interest rate partially offset by lower borrowings.rate.
As explained in Note 10 to the Consolidated Financial Statements included in Part 1, Item 1 of this report, the Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. We recorded a provisional amount related to the remeasurement of our deferred income tax balance of $6.6 million and a provisional amount related to our one-time transition tax liability of $42.0 million. We expect that the provisional tax liability of $42.0 million will be paid over an eight-year period.
The income tax rate was 20.2% and 11.0% for the first six months of fiscal 20172018 was 122.7% mainly due to the effect of the Act. In addition, the income tax rate for the first six months of fiscal 2018 also reflected a $4.7 million tax benefit from a release of a capital loss valuation reserve due to a realized capital gain upon the sale of the Kirkhill business.
The income tax rate for the first six months of fiscal 2018 reflected a blended U.S. tax rate of 24.5%, which is based upon an income tax rate of 35% for our first three months of fiscal 2018 and 2016, respectively. 21% for the balance of year ending September 28, 2018.
The 18.3% income tax rate in the current period was higher primarily due to U.K. limitations on interest deductions. In the first six months of fiscal 2017 wereflected the following items: the Company recognized $5.4 million of discrete tax benefits primarily related to a reduction of the income tax rate in France for fiscal year 2020 and the early adoption of the accounting standard update for employee share-based payment awards. In the first six months of 2016, we recognized approximately $2.2 million of discrete tax benefits principally related to the enactment of tax laws reducing the U.K. statutory
We estimate that our income tax rate andfor fiscal 2018, excluding the retroactive extension of$48.6 million provisional amount recognized for the U.S. federal research and development credits.
If enacted, recent proposalsone-time transition income tax, will range from 25% to lower the U.S. corporate27%. Our income tax rate for fiscal 2018 reflects the fact that a significant portion of our earnings from continuing operations before income taxes is earned by our foreign operations and the current Federal statutory income tax rate of 35% would require usfor these foreign operations will range from 26% to reduce our net deferred27%. The Company conducts business in numerous tax assets primarily related to ourjurisdictions, principally in the Canada, France, U.K. and U.S. post-retirement benefit plan, resulting inAs a one-time, non-cash increase inresult, the Company’s income tax expense inrate for the yearfirst fiscal quarter of enactment. In subsequent years, our income2018 reflects the estimated annual global effective tax expense would be materially reduced.rate, excluding discrete items, applied to year-to-date pre-tax earnings.
During the next 12 months, it is reasonably possible that approximately $1.4$1.0 million of tax benefits that are currently unrecognized could be recognized as a result of settlement of examinations and/or the expiration of applicable statutes of limitations. We recognize interest related to unrecognized tax benefits in income tax expense.
25
Backlog was $1.5 billion at March 30, 2018, $1.3 billion at September 29, 2017, and $1.2 billion at March 31, 2017, $1.3 billion at September 30, 2016, and $1.3 billion at April 1, 2016.2017. New orders for the first six months of fiscal 20172018 were approximately $900 million$1.2 billion compared with $1$0.9 billion in the prior-year period reflecting a decreasedue mainly to an increase in all segments. The increase in orders reflects strong demand across all segments.
The decrease inthree segments, mainly for orders reflected the following:
A $78 million decrease in Avionics & Controls orders was duescheduled to the following:
A $31 million decrease in display orders mainly due to the timing of receiving orders
A $40 million decrease in control and communication systems reflecting a $24 million order received in the first six months ofbe shipped beyond fiscal 2016 for communication control systems covering a two year period and the timing of receiving orders2018.
A $25 million decrease in Sensors & Systems orders was mainly due to the effect of foreign currency exchange rates and the timing of receiving orders
A $21 million decrease in Advanced Materials orders reflected the following:
An $11 million decrease due to lower demand for combustible ordnance and the timing of receiving orders for countermeasures
A $9 million decrease in engineered materials mainly reflected lower demand for insulation material for oil and gas applications as well as the effect of changes in foreign currency rates
Liquidity and Capital Resources
Cash and cash equivalents at March 31, 2017,30, 2018, totaled $253.5$368.0 million, a decreasean increase of $5.0$60.1 million from September 30, 2016.29, 2017. Net working capital was $777.9increased to $918.8 million at March 31, 2017, even with30, 2018, from $874.9 million at September 30, 2016.29, 2017. Sources and uses of cash flows from operating activities principally consisted of cash received from the sale of products and cash payments for material, labor and operating expenses.
Cash flows provided by operating activities were $89.7 million and $91.3 million in the first six months of fiscal 2018 and $79.42017, respectively. The decrease in cash flows from operating activities is primarily from lower net earnings.
Cash flows provided by investing activities were $20.5 million in the first six months of fiscal 2018 and reflected the $47.8 million from the sale of the Kirkhill business, partially offset by capital expenditures. Cash flows used by investing activities were $28.5 million in the first six months of fiscal 2017 and 2016, respectively. The increase in cash flows from operating activities is primarily from improved earnings.mainly reflected capital expenditures.
29
Cash flows used by investingfinancing activities were $28.5 million and $43.6$53.7 million in the first six months of fiscal 2017 and 2016, respectively, and were primarily2018, mainly reflecting:
$50.0 million repayment of borrowing under our long-term credit facilities
$43.5 million for capital expenditures, includingshares repurchased
$7.1 million repayment of long-term debt
Partially offset by:
$45.0 million in proceeds from borrowing under our long-term credit facilities
$2.3 million in proceeds from the purchaseissuance of a building forcommon stock under our Esterline Advanced Displays (EAD) operation in the prior year.employee stock plans
Cash flows used by financing activities were $58.7 million in the first six months of fiscal 2017 and mainly reflecting:reflected:
$70.0 million repayment of borrowing under our long-term credit facilities
$9.4 million repayment of long-term debt
Partially offset by:
$16.8 million in proceeds from the issuance of common stock under our employee stock plans
$5.0 million in proceeds from the issuance of long-term credit facilities
Cash flows used by financing activities were $8.8 million in the first six months of fiscal 2016 and mainly reflected:
$10.0 million repayment of long-term credit facilities
$6.2 million repayment of long-term debt
$12.1 million for shares repurchased
Partially offset by
$4.0 million in proceeds from the issuance of common stockborrowing under our employee stock plans
$15.0 million in proceeds from the issuance of long-term credit facilities
Capital expenditures, consisting of building, machinery, equipment and computers, are anticipated to be approximately $60between $65 million to $70 million during fiscal 2017,2018, compared with $68.5$58.0 million expended in fiscal 2016. Capital expenditures in fiscal 2017 are lower compared with the prior year due to the purchase of a building for our EAD operation in the prior year.2017.
Total debt at March 31, 2017,30, 2018, was $778.4$781.3 million and consisted of $231.3$218.8 million of the U.S. Term Loan, due 2020, $351.6$406.7 million (€330.0 million) of the 2023 Notes, $90.0$45.0 million in borrowings under our secured credit facility, $68.5$70.4 million under capital lease obligations, $42.1$44.6 million in government refundable advances and net of debt issuance costs of $5.1$4.2 million.
We expect that the provisional tax liability of $42.0 million will be paid over an eight-year period.
We believe cash on hand and funds generated from operations and borrowing capacity available under our debt facilities are sufficient to fund operating cash requirements and capital expenditures through the next twelve months.
26
This quarterly report on Form 10-Q contains forward-looking statements. These statements relate to future events or our future financial performance. In some cases you can identify forward-looking statements by terminology such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “plan,” “potential,” “predict,” “should” or “will” or the negative of such terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risk factors set forth in “Forward-Looking Statements” and “Risk Factors” in our Report on Form 10-K10-K/A for the fiscal year ended September 30, 2016,29, 2017, that may cause our or the industry’s actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. You should not place undue reliance on these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, performance or achievements. Given these risks and uncertainties, you are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included or incorporated by reference into this report are made only as of the date hereof. We do not undertake and specifically decline any obligation to update any such statements or to publicly announce the results of any revisions to any such statements to reflect future events or developments.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in our exposure to market risk during the first six months of fiscal 2017.2018. A discussion of our exposure to market risk is provided in the Company’s Report on Form 10-K10-K/A for the fiscal year ended September 30, 2016.29, 2017.
Item 4. Controls and Procedures
Our principal executive and financial officers evaluated our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2017. Based upon30, 2018. As described in Management’s Report on Internal Control over Financial Reporting in Item 9A of the Company’s Annual Report on Form 10-K/A for the fiscal year ended September 29, 2017, we reported two material weaknesses in internal control over financial reporting that evaluation, they concludedexisted as of March 31, 2017, thatSeptember 29, 2017.
Financial personnel at our disclosure controls and procedures were effectiveU.S. power systems business unit directed financial accountants to ensure that information we are required to disclosemake improper accounting entries in the reports that we file underfinancial records, which were contrary to our internal accounting policies and circumvented our internal controls over the Exchange Act is recorded, processed, summarizedreconciliation of intercompany charges between our French and U.S. power systems business units. In addition, our monitoring controls at our power systems business units failed to detect these errors, and accordingly, our control over the review and approval of power systems financial statements and intercompany account reconciliations was not effective. These material weaknesses resulted in misstatements in the financial results for fiscal 2017, fiscal 2016 and fiscal 2015 reported within time periods specified in our annual report on Form 10-K for
30
fiscal 2017 filed on November 21, 2017, with the Securities and Exchange Commission rules and forms. In addition,required adjustments that were included in our principal executive andfiscal 2017 Form 10-K/A.
These material weaknesses in our internal control over financial officers concludedreporting were not remediated as of March 31, 2017, that our disclosure controls and procedures are also effective to ensure that information required to be disclosed in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including to30, 2018. As a result, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were not effective as of March 30, 2018.
Remediation of Material Weaknesses
The Board of Directors and management are fully committed to allow timely decisions regarding required disclosure.maintaining a strong internal control environment. The Company has taken and will continue to take significant and comprehensive actions to remediate the material weaknesses in internal control over financial reporting.
DuringOur power systems business units will implement our policies and procedures over the timereconciliation of intercompany transactions. We continue to monitor the reconciliation control execution and will make further changes as necessary. Additionally, we are enhancing our monitoring controls and analytical procedures over reviewing business unit financial statements.
We replaced the financial staff at our U.S.-based power systems unit with a new platform finance director, unit finance director and controller with appropriate levels of experience.
Subject to these remediation efforts, there have been no significant changes in the Company’s internal control over financial reporting during the period covered by this report there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are involved in legal proceedings arising in the ordinary course of business. We believe that adequate reserves for these liabilities have been made and that there is no litigation pending that could have a material adverse effect on our results of operations and financial condition.
See Note 912 to the Consolidated Financial Statements included in Part 1, Item 1 of this report for information regarding legal proceedings.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) | Not applicable. |
(b) | Not applicable. |
(c) |
|
|
|
|
|
|
|
|
|
|
| Total Number of |
|
| Dollar Value |
|
| ||
|
|
|
|
|
|
|
|
|
| Shares Purchased |
|
| of Shares |
|
| ||
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|
|
|
|
|
|
|
|
| as Part of |
|
| That May Yet |
|
| ||
|
| Total Number |
|
| Average |
|
| Publicly |
|
| Be Purchased |
|
| ||||
|
| of Shares |
|
| Price Paid |
|
| Announced Plans |
|
| Under the Plans |
|
| ||||
Period |
| Repurchased |
|
| Per Share |
|
| or Programs |
|
| or Programs |
|
| ||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 30, 2017 to January 26, 2018 |
|
| - |
|
| $ | - |
|
|
| 3,423,427 |
|
| $ | 71,040,787 |
|
|
January 27, 2018 to February 23, 2018 |
|
| 152,952 |
|
|
| 71.95 |
|
|
| 3,576,379 |
|
|
| 60,036,538 |
|
|
February 24, 2018 to March 30, 2018 |
|
| 160,948 |
|
|
| 74.56 |
|
|
| 3,737,327 |
|
|
| 48,035,890 |
|
|
Total |
|
| 313,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
On June 19, 2014, our Board of Directors approved a $200 million share repurchase program. On March 11, 2015, our Board of Directors approved an additional $200 million for the share repurchase program. Under the program, the Company is authorized to repurchase up to $400 million of outstanding shares of common stock from time to time, depending on market conditions, share price and other factors. All of the repurchases in the table above were made under that program.
31
Exhibit |
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Number |
| Exhibit Index | ||
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3.1 | ||||
3.2 | ||||
4.1 | ||||
10.1 | * | |||
10.2 | * | |||
10.3 | * | |||
10.4 | * | |||
10.5 | * | |||
10.6 | * | |||
10.7 | * | |||
10.8 | * | |||
10.9 | * | |||
10.10 | * | |||
10.11 | * | |||
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Number | Exhibit Index | |||
10.12 | * | |||
10.13 | * | |||
10.14 | * | |||
10.15 | * | |||
10.16 | * | |||
10.17 | * | |||
10.18 | * | |||
10.19 | * | |||
10.20 | * | |||
10.21 | * | |||
10.22 | * | |||
10.23 | * | |||
10.24 | * | |||
10.25 | * | |||
10.26 | * | |||
33
Number | Exhibit Index | |||
10.28 | ||||
10.29 | ||||
10.30 | ||||
10.31 | ||||
10.32 | ||||
10.33 | ||||
10.34 | ||||
10.35 | ||||
10.36 | ||||
10.37 | ||||
10.38 | ||||
10.39 | ||||
10.40 | ||||
34
Number | Exhibit Index | |||
10.41 | ||||
10.42 | ||||
10.43 | ||||
10.44 | ||||
10.45 | ||||
10.46 | ||||
10.47 | ||||
10.48 | ||||
10.49 | ||||
10.50 | ||||
10.51 | ||||
10.52 | ||||
10.53 | ||||
35
Number | Exhibit Index | |||
10.54 | ||||
10.55 | ||||
10.56 | ||||
10.57 | ||||
10.58 | * | |||
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11 |
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31.1 |
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31.2 |
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32.1 |
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32.2 |
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101.INS |
| XBRL Instance Document | ||
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101.SCH |
| XBRL Taxonomy Extension Schema | ||
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101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase | ||
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101.DEF |
| XBRL Taxonomy Extension Definition Linkbase | ||
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101.LAB |
| XBRL Taxonomy Extension Label Linkbase | ||
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101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase |
* Indicates management contract or compensatory plan or arrangement.
SIGNATURES
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 hereunto duly authorized.
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| ESTERLINE TECHNOLOGIES CORPORATION |
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| (Registrant) |
Dated: May |
| By: |
| /s/ |
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| Executive Vice President and Chief Financial Officer |
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| (Principal Financial Officer) |
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