| ● | A provider of diagnostic instruments, software and services for the following primary operating entities: | ● | Filtration: PTI Technologies Inc. (PTI); VACCO Industries (VACCO); Crissair, Inc. (Crissair); Westland Technologies, Inc. (Westland); Mayday Manufacturing Co. (Mayday), Hi-Tech Metals, Inc. (Hi-Tech); and Globe Composite Solutions, LLC (Globe).benefit of industrial power users and the electric utility and renewable energy industries. |
| ● | USG: Doble Engineering Company (Doble); Our business is focused on generating predictable and profitable long-term growth through continued innovation and expansion of our product offerings across each of our business segments. We conduct our business through a number of wholly-owned direct and indirect subsidiaries. Our corporate strategy is centered on a multi-segment approach designed to enhance the strength and sustainability of sales and earnings growth by providing lower risk through diversification. Our stock is listed on the New York Stock Exchange, where its ticker symbol is “ESE”. Our fiscal year ends September 30. Throughout this Annual Report, unless the context indicates otherwise, references to a year (for example 2021) refer to our fiscal year ending on September 30 of that year, and references to the “Consolidated Financial Statements” refer to our Consolidated Financial statements included in the Financial Information section of this Annual Report beginning on page F-1, an Index to which is provided on page F-1. We classify our business operations into three segments for financial reporting purposes, although for reporting certain financial information we treat Corporate activities as a separate segment. Our three operating segments during 2021, together with the significant domestic and foreign operating subsidiaries within each segment, are as follows: Aerospace & Defense (A&D): VACCO Industries (VACCO) PTI Technologies Inc. (PTI) Crissair, Inc. (Crissair) Globe Composite Solutions, LLC (Globe) Mayday Manufacturing Co. (Mayday) Westland Technologies, Inc. (Westland) Hi-Tech Metals, Inc. (Hi-Tech) Utility Solutions Group (USG): Doble Engineering Company I.S.A. – Altanova Group S.r.l. and affiliates (Altanova) Morgan Schaffer Ltd. (Morgan Schaffer) NRG Systems, Inc. (NRG) Except as the context otherwise indicates, the term “Doble” as used herein includes Doble Engineering Company and ESCO’s other USG subsidiaries except NRG. RF Shielding and Test (Test): ETS-Lindgren Inc. Except as the context otherwise indicates, the term “ETS-Lindgren” as used herein includes ETS-Lindgren Inc. and ESCO’s other Test segment subsidiaries. Our operating subsidiaries are engaged primarily in the research, development, manufacture, sale and support of the products and systems described below. Their respective businesses are subject to a number of risks and uncertainties, including without limitation those discussed in Item 1A, “Risk Factors.” See also Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Forward-Looking Information.” We are continually seeking ways to reduce our overall operating costs, streamline business processes and enhance the branding of our products and services. During 2019, Doble sold its headquarters facility in Watertown, Massachusetts, and during 2020 it consolidated its headquarters operations into a single, more cost-efficient facility in Marlborough, Massachusetts. In 2021, Doble closed its facility in Toronto, Ontario and consolidated its Manta product line into its existing production capacity for Doble instruments. We are also continually seeking opportunities to supplement our growth by making strategic acquisitions. In 2019 we acquired Globe Composite Solutions, LLC; in October 2020 we acquired Advanced Technology Machining, Inc. (ATM) and its sister company TECC Grinding, Inc.; in July 2021 we acquired I.S.A Altanova Group S.r.l. and its affiliated companies (Altanova); and in August 2021 we acquired the assets of Phenix Technologies Inc. (Phenix). Information about these acquired businesses is provided in the following section, “Products,” and in Note 2 to the Consolidated Financial Statements. In December 2019, we sold the businesses comprising our former Technical Packaging segment and used the proceeds from the sale to pay down debt and for other corporate purposes, including the termination of our defined benefit pension plan. The Technical Packaging segment was reported as Discontinued Operations in 2020 and is presented accordingly for all periods in this report. See Note 3 to the Consolidated Financial Statements. Products Our principal products are described below. See Note 12 to the Consolidated Financial Statements for financial information regarding business segments and 10% customers. A&D Beginning in the first quarter of 2020, we renamed our Filtration/Fluid Flow segment as Aerospace & Defense to better reflect the composition of the segment’s products, end markets and customer characteristics. The A&D segment’s individual legal and operating entities and historical financial results are unchanged from what was formerly presented as Filtration/Fluid Flow. The A&D segment accounted for approximately 44%, 48% and 45% of our total revenue in 2021, 2020 and 2019, respectively. Our companies within this segment primarily design and manufacture specialty filtration, fluid control and naval products, including hydraulic filter elements and fluid control devices used in aerospace and defense applications, unique filter mechanisms used in micro-propulsion devices for satellites, custom designed filters for manned aircraft and submarines, products and systems to reduce vibration and/or acoustic signatures and otherwise reduce or obscure a vessel’s signature, and other communications, sealing, surface control and hydrodynamic related applications to enhance U.S. Navy maritime survivability; precision-tolerance machined components for the aerospace and defense industry; and metal processing services.The segment has six facilities in the United States and one in Mexico. USG Our USG segment accounted for approximately 28%, 26% and 29% of our total revenue in 2021, 2020 and 2019, respectively. Doble is an industry leader in the development, manufacture and delivery of diagnostic testing and data management solutions that enable electric power grid operators to assess the integrity of high-voltage power delivery equipment. It combines three core elements for customers – diagnostic test instruments and condition monitoring systems, expert consulting, and testing services. The acquisition of Phenix’s assets has enhanced Doble’s high-voltage, high current, high power test systems, components and solutions. NRG is a global market leader in the design and manufacture of decision support tools for the renewable energy industry, primarily wind and solar. Doble and NRG together have eight facilities in the United States and one in Canada. Altanova, headquartered in Taino, Italy, provides products and services in more than 100 countries. Its strong market share in Europe and Asia creates a significant international platform for our USG segment and fills important product gaps and geographies not previously served by our existing products and solutions. Doble’s offices outside North America have been consolidated with Altanova’s, and going forward we expect that Altanova will represent their combined businesses in markets outside the U.S. and Canada. Test Our Test segment accounted for approximately 28%, 26% and 26% of our total revenue in 2021, 2020 and 2019, respectively. ETS-Lindgren is an industry leader in designing and manufacturing products which provide its customers with the ability to measure and contain magnetic, electromagnetic and acoustic energy. It supplies its customers with a broad range of isolated environments and turnkey systems, including RF test facilities, acoustic test enclosures, RF and magnetically shielded rooms, secure communication facilities, RF measurement systems and broadcast and recording studios. Many of these facilities include proprietary features such as shielded doors and windows. ETS-Lindgren also provides the design, program management, installation and integration services required to successfully complete these types of facilities. ETS-Lindgren also supplies customers with a broad range of components including RF absorptive materials, RF filters, active compensation systems, antennas, antenna masts, turntables and electric and magnetic probes, RF test cells, proprietary measurement software and other test accessories required to perform a variety of tests. ETS-Lindgren offers a variety of services including calibration for antennas and field probes, chamber certification, field surveys, customer training and a variety of product tests. ETS-Lindgren’s test labs are accredited by the following organizations: American Association for Laboratory Accreditation, National Voluntary Laboratory Accreditation Program and CTIA-The Wireless Association Accredited Test Lab. ETS-Lindgren serves the acoustics, medical, health and safety, electronics, wireless communications, automotive and defense markets. ETS-Lindgren has four facilities in the United States and nine outside the United States. Marketing and Sales Our products generally are distributed to customers through a domestic and foreign network of distributors, sales representatives, direct sales teams and in-house sales personnel. Our sales to international customers accounted for approximately 28%, 27% and 26% of our total revenue in 2021, 2020 and 2019, respectively. See Note 12 to the Consolidated Financial Statements for financial information by geographic area. See Item 1A, “Risk Factors,” for a discussion of risks related to our international operations. Government Contracts Some of our products are sold to the U.S. Government either directly under contracts with the Army, Navy and Air Force as well as other Government agencies or indirectly under subcontracts with their prime contractors. Direct and indirect sales to the U.S. Government, primarily related to the A&D segment, accounted for approximately 26%, 28% and 21% of our total revenue in 2021, 2020 and 2019, respectively. Our Government contracts primarily include firm fixed-price contracts under which work is performed and paid for at a fixed amount without adjustment for the actual costs experienced in connection with the contracts. All Government prime contracts and virtually all of our Government subcontracts provide that they may be terminated at the convenience of the Government or the customer. Upon a termination for convenience, we are entitled to receive equitable compensation from the customer for the work we completed prior to termination. Executive Order 14042, Ensuring Adequate COVID Safety Protocols for Federal Contractors, issued in September 2021, when implemented, will require government contractors and subcontractors to comply with certain COVID-19 safeguards in workplaces with covered individuals, including vaccination, masking and physical distancing protocols. We are taking steps to comply with the Executive Order at affected locations. See Item 1A, “Risk Factors,” for a discussion of risks related to our Government business. Intellectual Property We own or have other rights in various forms of intellectual property (i.e., patents, trademarks, service marks, copyrights, mask works, trade secrets and other items). As a major supplier of engineered products to industrial and commercial markets, we emphasize developing intellectual property and protecting our rights therein. However, the legal protection afforded by intellectual property rights is often uncertain and can involve complex legal and factual issues. Some intellectual property rights, such as patents, have a limited term, and there can be no assurance that third parties will not infringe or design around our intellectual property. Policing the unauthorized use of intellectual property is difficult, and infringement and misappropriation are persistent problems for many companies, particularly in some international markets, and in some cases, we may elect not to pursue an unauthorized user due to the high costs and uncertainties associated with litigation. Further, there can be no assurance that courts will ultimately hold issued patents or other intellectual property valid and enforceable. See Item 1A, “Risk Factors.” A number of products in the Aerospace & Defense segment are based on patented or otherwise proprietary technology that sets them apart from the competition, such as VACCO’s proprietary quieting technology and Westland’s signature reduction solutions. In addition, Globe has developed significant manufacturing and logistics capability useful for special hull treatments for submarines. Globe has also obtained patent protection in the U.S. and Europe for a novel shielding curtain to be used with electromagnetic radiation scanning systems. In the USG segment, our policy is to seek patent and/or other forms of intellectual property protection on new and improved products, components of products, and methods of operation for our businesses, as such developments are made. Doble has obtained and is pursuing additional patent protection on improvements to its line of diagnostic equipment and NERC CIP compliance tools. Doble also holds an extensive library of apparatus performance information useful to entities that generate, distribute or consume electric energy, and it makes part of this library available to registered users via an Internet portal. NRG has intellectual property related to certain LIDAR technology and applications, and has obtained and is pursuing additional patent protection on its line of bat deterrent systems, which are designed to significantly reduce bat mortality at windfarms and in other applications where bat conservation is a concern. In the Test segment, we have sought patent protection for significant inventions. Examples of such inventions include novel designs for window and door assemblies used in shielded enclosures and anechoic chambers, improved acoustic techniques for sound isolation and a variety of unique antennas. In addition, the Test segment holds a number of patents, and has patents pending, on products used to perform wireless device testing. We consider our patents and other intellectual property to be of significant value to each of our segments. Backlog Total Company backlog of firm orders at September 30, 2021 was $592.0 million, representing an increase of $80.8 million (15.8%) from the backlog of $511.2 million at September 30, 2020. By segment, the backlog at September 30, 2021 and September 30, 2020, respectively, was $367.2 million and $344.7 million for A&D; $91.6 million and $50.7 million for USG; and $133.2 million and $115.9 million for Test. We estimate that as of September 30, 2021 domestic customers accounted for approximately 73% of our total firm orders and international customers accounted for approximately 27%. Of our total backlog at September 30, 2021, approximately 75% is expected to be completed in the fiscal year ending September 30, 2022. Purchased Components and Raw Materials Our products require a wide variety of components and materials. Although we have multiple sources of supply for most of our materials requirements, certain components and raw materials are supplied by sole source vendors, and our ability to perform certain contracts depends on their timely performance. In the past, these required raw materials and various purchased components generally have been available in sufficient quantities. However, we do have some risk of shortages of materials or components due to reliance on sole or limited sources of supply; and supplies of components and materials are periodically impacted by disruptions due to COVID-19 as well as complications due to current or future trade policies. Where feasible, we engineer and qualify substitute products to avoid short-term supply issues; however, we are subject to the same supply chain risks as other electronics manufacturers. An unanticipated delay in delivery by our suppliers could result in the inability to deliver our products on-time and to meet the expectations of our customers. Additionally, we have experienced, and could continue to experience, an increase in the costs of doing business, including increasing raw material prices and transportation costs, which have and could continue to have an adverse impact on our business, results of operations, financial condition and cash flows. See also Item 1A, “Risk Factors.” Our A&D segment purchases supplies from a wide array of vendors. In most instances, multiple vendors of raw materials are screened during a qualification process to ensure that there will not be an interruption of supply should one of them underperform or discontinue operations. Nonetheless, in some situations, there is a risk of shortages due to reliance on a limited number of suppliers or because of price fluctuations due to the nature of the raw materials. For example, aerospace-grade titanium and gaseous helium, important raw materials for our A&D segment subsidiaries, may at times be in short supply. Our USG segment manufactures electronic instrumentation through a network of regional contract manufacturers under long-term contracts. In general, USG purchases the same kinds of component parts as do other electronic products manufacturers, and these electronic components can be subject to supply chain constraints. USG purchases only a limited amount of raw materials. Our Test segment is a vertically integrated supplier of electro-magnetic (EM) shielding and RF absorbing products, producing most of its critical RF components itself. This segment purchases significant quantities of raw materials such as polyurethane foam, polystyrene beads, steel, aluminum, copper, nickel and wood. Accordingly, it is subject to price fluctuations in the worldwide raw materials markets. While ETS-Lindgren has long-term contracts with a number of its suppliers, performance of these contracts is vulnerable to the risks described below and in Item 1A. Competition Competition in our major markets is broadly based and global in scope. This competition can be particularly intense during periods of economic slowdown, and we have experienced this in some of our markets. Although we are a leading supplier in several of the markets we serve, we maintain a relatively small share of the business in many of our other markets. Individual competitors range in size from annual revenues of less than $1 million to billion-dollar enterprises. Because of the specialized nature of our products, our competitive position with respect to our products cannot be precisely stated. In our major served markets, competition is driven primarily by quality, technology, price and delivery performance. See also Item 1A, “Risk Factors.” Primary competitors of our A&D segment include Pall Corporation, Moog, Inc., Safran (Sofrance), CLARCOR Inc., TransDigm (PneuDraulics), Marotta Controls, and Parker Hannifin. Significant competitors of our USG segment include OMICRON electronics Corp., Megger Group Limited, Vaisala, and Qualitrol Company LLC (a subsidiary of Fortive Corporation). Our Test segment is a global leader in EM shielding. Significant competitors in this market include Rohde & Schwarz GMBH, Microwave Vision SA (MVG), TDK RF Solutions Inc., Albatross GmbH, IMEDCO AG, and Universal Shielding Corp. Research and Development Research and development and our technological expertise are important factors in our business. Our research and development programs are designed to develop technology for new products or to extend or upgrade the capability of existing products, and to enhance their commercial potential. We perform research and development at our own expense, and also engage in research and development funded by our customers. See Note 1 to the Consolidated Financial Statements for financial information about our research and development expenditures. Environmental Matters and Government Regulation We are involved in various stages of investigation and cleanup relating to environmental matters. It is difficult to estimate the potential costs of these matters and the possible impact of these costs on the Company at this time due in part to: the uncertainty regarding the extent of pollution; the complexity and changing nature of Government laws and regulations and their interpretations; the varying costs and effectiveness of alternative cleanup technologies and methods; the uncertain level of insurance or other types of cost recovery; the uncertain level of our responsibility for any contamination; the possibility of joint and several liability with other contributors under applicable law; and the ability of other contributors to make required contributions toward cleanup costs. Based on information currently available, we do not believe that the aggregate costs involved in the resolution of environmental matters or compliance with Governmental regulations will have a material adverse effect on our financial condition or results of operations. Human Capital Management As of September 30, 2021, we employed 2,822 persons, including 2,700 full time employees of whom 15% were located in 14 foreign countries. As a responsible member of the communities in which we operate, we are dedicated to preserving operational excellence and remaining an employer of choice. We provide and maintain a work environment that attracts, develops and retains top talent by offering our employees an engaging work experience that contributes to their career development. Through our charitable Foundation and wellness activities we provide opportunities for meaningful civic involvement that not only support our communities but also provide experiences for our employees to promote a collaborative and rewarding work environment. We strive to maintain a culture that enables all employees to be treated with dignity and respect while devoting their best efforts to performing their jobs to the best of their abilities. We operate in a supportive culture that incorporates strong ethical behavior and reinforces our human rights commitment through annual ethics training which incorporates instruction on human rights, anti-human trafficking, and anti-harassment, as well as other areas of importance such as supervisory training on diversity and inclusion. Our subsidiaries enjoy modest turnover at less than half the national average for our industry. Fewer than 4% of our workforce are contingent workers. We invest in creating a diverse, inclusive and safe work environment which will inspire our employees to give their best efforts every day. In fact, nearly half of our employee base comes from diverse backgrounds. We generally conduct formal compensation benchmarking reviews every 1-2 years to ensure wages are competitive in local markets and support retention and recruiting efforts. Additionally, we invest time and resources in reviewing pay equity within our workforce. All full-time domestic and international employees are eligible for bonus or commission plans, most of which are designed to incentivize and reward performance based on results such as EPS, EBIT, cash flow, quality and backlog reduction, or other measures. We recognize that our success is based on the talents and dedication of those we employ, and we are invested in their success. Significant investments are made in the areas of talent development, technical skills and compliance (ethics, safety, hazmat, ITAR, etc.). For succession planning purposes, we focus on identifying high-potential future leaders and working with them on individual development plans. Our product development and manufacturing processes require a variety of manufacturing and testing tools and equipment. As a part of our commitment to the safety of our employees, customers, suppliers and third parties, we have established safety programs, policies, procedures and training requirements. Our local safety committees meet routinely throughout the year to ensure the safety of our employees, and that is reflected in our experience with lost time injuries, which is below industry incidence rates. Throughout 2021, our attention continued to be focused on the effective handling of the COVID-19 pandemic and included maintaining the re-layout of many of our factory floors to ensure sufficient distancing in high density areas. We also installed shields, modified training programs to comply with distancing requirements, limited visitor entry, continued the use of virtual meetings, and adjusted shifts to aid in physical distancing. We also implemented the use of remote work arrangements and encouraged employees to receive, and provided time off for, vaccinations. We are committed to the health and wellbeing of our employees and their families by encouraging participation in wellness programs. Generally, all our full-time employees, both domestic and international, are offered health and welfare benefits. We remain committed to our communities through financial support from our employees and the ESCO Foundation, and through personal participation of our employees with a variety of local organizations, such as, Family Outreach, the Boys & Girls Club, the United Way, and Special Olympics. We believe strong human capital is our competitive differentiator, and we focus not only on ensuring we have the right domestic and international talent in place to drive our strategic initiatives today, but well into the future. Workforce Composition (As of September 30, 2021) | | | | | | | | | By Gender | | | By Race | | Male | | 75 | % | | Minorities | | 49 | % | Female | | 24 | % | | White | | 43 | % | Unknown | | 1 | % | | Unknown | | 8 | % |
| | | | By Generation | | | | Gen Z (1996-2015) | | 5 | % | Millennials (1977-1995) | | 26 | % | Gen X (1965-1976) | | 32 | % | Boomers (1946-1964) | | 27 | % | Silent (1945 & before) | | <1 | % | Unknown | | 9 | % |
Minorities are defined to include individuals of Native American or Alaskan Native, Asian, Black or African American, Hispanic or Latino, Native Hawaiian or Other Pacific Islander, and Two or More Races. The above is based on employees’ self-identification or other information believed by the Company to be reliable, Some countries do not permit the collection or reporting of some or all of the above types of data. Financing For information about our credit facility, see Note 8 to the Consolidated Financial Statements, which is incorporated into this Item by reference. Additional Information The information set forth in Item 1A, “Risk Factors,” is incorporated in this Item by reference. We make available free of charge on or through our website, www.escotechnologies.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as well as our recent Proxy Statements for meetings of our shareholders, as soon as reasonably practicable after we file or furnish this material to the Securities and Exchange Commission. Information contained on our website is not incorporated into this Report. Information about our Executive Officers The following sets forth certain information as of the date of this report with respect to our executive officers. These officers are elected annually to terms which expire at the first meeting of the Board of Directors held after the Annual Meeting of Stockholders. | | | | | Name |
| Age |
| Position(s) and Business Experience | Victor L. Richey | | 64 | | Mr. Richey has been Chairman of the Board of Directors and Chief Executive Officer since April 2003, and President since October 2006. He also serves as Chairman of the Executive Committee of the Board of Directors. | Christopher L. Tucker | | 50 | | Mr. Tucker has been Senior Vice President and Chief Financial Officer since April 2021, succeeding Gary E. Muenster, who resigned as an executive officer prior to his retirement in June 2021. Prior to joining ESCO, Mr. Tucker worked at Emerson Electric Co (NYSE:EMR) for 24 years, where he held a series of financial and administrative positions, most recently as Vice President and Chief Financial Officer of Emerson’s Commercial and Residential Solutions business, consisting of 11 business units generating approximately $6 billion in annual revenue. | David M. Schatz | | 58 | | Mr. Schatz has been Senior Vice President, General Counsel and Secretary since April 2021, succeeding Alyson S. Barclay, who resigned as an executive officer prior to her retirement in May 2021. Mr. Schatz has worked at ESCO since 1998 in various positions with increasing responsibility, including serving as Vice President, IP Counsel and Assistant Secretary from 2015 until April 2021; he has extensive knowledge of ESCO’s operations, technologies, intellectual property, regulatory matters, M&A and other complex legal matters. |
There are no family relationships among any of our executive officers and directors. Item 1A. Risk Factors This Form 10-K, including Item 1, “Business,” Item 2, “Properties,” Item 3, “Legal Proceedings,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” contains “forward-looking statements” within the meaning of the safe harbor provisions of the federal securities laws, as described under “Forward-Looking Statements” above. In addition to the risks and uncertainties discussed in those Items and elsewhere in this Form 10-K, and risks and uncertainties that apply to businesses or public companies generally, the following important risk factors which are particularly applicable to our business could cause actual results and events to differ materially from those contained in any forward-looking statements, or could otherwise materially adversely affect our business, operating results or financial condition: COVID-19 Related Risks The COVID-19 pandemic and its widespread effects on the United States and global economies may have a material adverse effect on our business which could continue for an unknown period of time. The COVID-19 pandemic has significantly increased our economic, demand and operational uncertainty. The rapid worldwide spread of the COVID-19 virus, as well as the measures governments and private organizations have implemented in order to stem the spread of this pandemic, is resulting in significant worldwide disruptions and contractions in economic activity, including those resulting from “shelter in place” and similar orders, restrictions on non-essential business operations and travel, and increased unemployment. We have global operations, customers and suppliers, including in countries most impacted by COVID-19, and both the disease itself and the actions taken around the world to slow the spread of COVID-19 have impacted our customers and suppliers; and future developments could cause further disruptions to the Company due to the interconnected nature of our business relationships. We have been and may continue to be subject to postponement or cancellation of certain contracts to which we are a party. We have also suffered a significant reduction in our commercial aircraft business due to slowdowns in OEM production and reduced flights, and this business is unlikely to return to pre-COVID levels for an unknown but possibly significant period of time. Current restrictions and conditions have and may continue to prevent or delay us in accessing customer facilities to deliver products and provide services, and disrupt or delay our supply chain. Even though our businesses have been classified as essential businesses and allowed to remain in operation in jurisdictions in which facility closures have been mandated, we can give no assurance that this will not change in the future or that our businesses will be classified as essential in each of the jurisdictions in which we operate. Further, although we have implemented prevention measures at our own facilities, including enhanced cleaning procedures, social distancing efforts and working from home where feasible, and substantially all of our facilities have so far remained in business, we have occasionally incurred short-term disruptions in some facility operations, and due to the nature of the COVID-19 pandemic there can be no assurance that we will not suffer facility closures or other adverse effects on our business operations in the future. The facilities of our suppliers and customers have experienced, and may continue to experience, disruptions in manufacturing and supply arrangements due to the loss or disruption of critical manufacturing and supply elements, such as raw materials or other finished product components, transportation, workforce or other manufacturing and distribution capability. We may also experience failure of third parties on which we rely, including our suppliers, distributors and contractors, to meet their obligations to us, or significant restrictions in their ability to do so. In addition, our compliance with applicable safety requirements may cause us to lose critical employees who are unwilling or unable to comply with the requirements. These facts and circumstances may have a material adverse effect on our business, results of operations, financial condition and cash flows. The extent to which the COVID-19 pandemic will impact our business, results of operations, financial condition and cash flows in the future, and the length of time these impacts may continue, will depend on future developments that are highly uncertain and cannot be predicted at this time, including new information that may emerge concerning the severity of COVID-19, the longevity of COVID-19 and the actions to contain its impact. Risks Related to our Governmental and Aerospace Business Our sales of products to the Government depend upon continued Government funding. Sales to the U.S. Government and its prime contractors and subcontractors represent a significant portion of our business. Over the past three fiscal years, from 21% to 28% of our revenues have been generated from sales to the U.S. Government or its contractors, primarily within our A&D segment. These sales are dependent on government funding of the underlying programs, which is generally subject to annual Congressional appropriations. There could be reductions or terminations of, or delays in, the government funding on programs which apply to us or our customers. These funding effects could adversely affect our sales and profit, and could bring about a restructuring of our operations, which could result in an adverse effect on our financial condition or results of operations. A significant portion of VACCO’s, Westland’s and Globe’s sales involve major U.S. Government programs such as NASA’s Space Launch System (SLS) and U.S. Navy submarines. A reduction or delay in Government spending on these programs could have a significant adverse impact on our financial results which could extend for more than a single year. Our Government business increases the risk that we may not realize the full amount of our backlog. As of September 30, 2021, our twelve-month backlog was approximately $441 million, which represents confirmed orders we believe will be recognized as revenue within the next twelve months. There can be no assurance that our customers will purchase all the orders represented in our backlog, particularly as to contracts which are subject to the U.S. Government’s and its subcontractors’ ability to modify or terminate major programs or contracts, and if and to the extent that this occurs, our future revenues could be materially reduced. The end of customer product life cycles could negatively affect our A&D segment’s results. Many of our A&D segment products are sold to be components in our customers’ end-products. If a customer discontinues a certain end-product line, our ability to continue to sell those components will be reduced or eliminated. The result could be a significant decrease in our sales. For example, a substantial portion of PTI’s revenue is generated from commercial aviation aftermarket sales. As certain aircraft are retired and replaced by newer aircraft, there could be a corresponding decrease in sales associated with our current products. Such a decrease could adversely affect our operating results. Risks Related to our International Business Negative worldwide economic conditions and related credit shortages could result in a decrease in our sales and an increase in our operating costs, which could adversely affect our business and operating results. If there is a worsening of global and U.S. economic and financial market conditions and additional tightening of global credit markets, many of our customers may further delay or reduce their purchases of our products. Uncertainties in the global economy may cause the utility industry and commercial market customers to experience shortages in available credit, which could limit capital spending. To the extent this problem affects our customers, our sales and profits could be adversely affected. Likewise, if our suppliers face challenges in obtaining credit, they may have to increase their prices or become unable to continue to offer the products and services we use to manufacture our products, which could have an adverse effect on our business, results of operations and financial condition. Increases in tariffs or other changes in trade policies could adversely affect our ability to compete. In addition to the effects of increases in market prices, increases in domestic import tariffs could increase the prices to us of our foreign-sourced raw materials and product components and thereby require us to either increase our selling prices or accept reduced margins. In the case of ETS-Lindgren, for example, tariffs on imports of Chinese goods have raised the costs of components purchased by it either from its China facility or from other Chinese suppliers, and its margins in China have been impacted by the increased costs of its products made in the U.S. and sold through its Chinese business. In addition, increases in foreign-country tariffs applicable to our exported products could increase the effective prices of our products to our customers in those countries unless we are able to offset the tariffs by reducing our selling prices. Any or all of these factors could decrease the demand for our products, reduce our profitability, and/or make our products less competitive than those of other manufacturers that are not subject to the same tariffs. For example, since 2019 increased tariffs imposed by China on U.S. origin goods have adversely affected sales of NRG’s products in China by increasing their prices to Chinese customers. In addition, trade restrictions against certain foreign-made products or entities may adversely affect our business and our ability to compete in certain markets. Our business may also be impacted by the ongoing trade tensions between the U.S. and China which are causing U.S. goods to be viewed in a less favorable light by Chinese customers. Our international operations expose us to fluctuations in currency exchange rates that could adversely affect our results of operations and cash flows. We have significant manufacturing and sales activities in foreign countries, and our domestic operations have sales to foreign customers. Our financial results may be affected by fluctuations in foreign currencies and by the translation of the financial statements of our foreign subsidiaries from local currencies into U.S. dollars, and we may not be able to adequately or successfully hedge against these risks. In addition, a rise in the dollar against foreign currencies could make our products more expensive for foreign customers and cause them to reduce the volume of their purchases. Economic, political and other risks of our international operations, including terrorist activities, could adversely affect our business. In 2021, approximately 28% of our net sales were to customers outside the United States. Increases in international tariffs resulting from changes in domestic or foreign trade policies could increase the costs of the raw materials used in our products and/or the costs of our products. In addition, an economic downturn or an adverse change in the political situation in certain foreign countries in which we do business could cause a decline in revenues and adversely affect our financial condition. For example, our Test segment does significant business in Asia, and changes in the Asian political climate or political changes in specific Asian countries could negatively affect our business; several of our subsidiaries are based in Europe and could be negatively impacted by weakness in the European economy; and Doble’s future business in the Middle East could be adversely affected by continuing political unrest, wars and terrorism in the region. Our international sales are also subject to other risks inherent in foreign commerce, including currency fluctuations and devaluations, differences in foreign laws, uncertainties as to enforcement of contract or intellectual property rights, and difficulties in negotiating and resolving disputes with our foreign customers. Our governmental sales and our international and export operations are subject to special U.S. and foreign government laws and regulations which may impose significant compliance costs, create reputational and legal risk, and impair our ability to compete in international markets. The international scope of our operations subjects us to a complex system of commercial and trade regulations around the world, and our foreign operations are governed by laws and business practices that often differ from those of the U.S. In addition, laws such as the U.S. Foreign Corrupt Practices Act and similar laws in other countries increase the need for us to manage the risks of improper conduct not only by our own employees but by distributors and contractors who may not be within our direct control. Many of our exports are of products which are subject to U.S. Government regulations and controls such as the U.S. International Traffic in Arms Regulations (ITAR), which impose certain restrictions on the U.S. export of defense articles and services, and these restrictions are subject to change from time to time, including changes in the countries into which our products may lawfully be sold. If we were to fail to comply with these laws and regulations, we could be subject to significant fines, penalties and other sanctions including the inability to continue to export our products or to sell our products to the U.S. Government or to certain other customers. In addition, some of these regulations may be viewed as too restrictive by our international customers, who may elect to develop their own domestic products or procure products from other international suppliers which are not subject to comparable export restrictions; and the laws, regulations or policies of certain other countries may also favor their own domestic suppliers over foreign suppliers such as the Company. Risks Related to our Manufacturing and Sales Operations and Technology Disruptions of Our Information Technology Systems, or Information Security and/or Data Privacy Breaches, Could Adversely Affect Our Business. We have many information technology systems that are important to the operation of our businesses, some of which are managed by third parties. These systems are used to obtain, process, transmit and store electronic information and to manage or support a variety of integral business processes and activities. Our primary and backup computer systems are vulnerable to damage, disruptions or shutdowns during the process of upgrading or replacing software, databases or components and from power outages, computer and telecommunication failures, security breaches, natural disasters and errors by employees. Any failure in the operation of our information technology systems could adversely affect our businesses or operating results. Although losses arising from some of these issues may be covered by information security insurance, we cannot guarantee that our coverage will be adequate for all costs or losses incurred. Global information technology security threats and targeted computer crime are increasing in frequency and sophistication and pose a risk to the security of our systems and networks and the confidentiality, availability and integrity of our data and communications. We attempt to mitigate these risks through numerous measures, including employee training and testing, comprehensive monitoring of our networks and systems, and maintenance of backup and protective systems. Although we do not believe we have experienced a material information security breach in the last three years, and we have incurred no fines, settlement costs or other material expenses related to information security breaches, if we were to experience such a breach it could adversely affect our reputation and result in litigation, regulatory action, liability for fines, penalties and related expenses, and costs of implementing additional data protection procedures. In addition, even though we generally do not conduct business directly with retail or individual customers or consumers we must comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S. and elsewhere. Compliance with data privacy laws and regulations increases operational complexity, and failure to comply with legal or regulatory standards could subject us to fines and penalties, as well as legal and reputational risks, including proceedings against us by governmental entities or others. Although we maintain insurance coverage for data privacy risks, we cannot guarantee that our coverage will be adequate for all costs or losses incurred. A significant part of our manufacturing operations depends on a small number of third-party suppliers. A significant part of our manufacturing operations relies on a small number of third-party manufacturers to supply component parts or products. For example, Doble has arrangements with six manufacturers which produce and supply a substantial portion of its end-products, and one of these suppliers produces approximately 35% of Doble’s products from a single location within the United States. As another example, PTI has a single supplier of critical electronic components for a significant aircraft production program, and if this supplier were to discontinue producing these components the need to secure another source could pose a risk to the production program. A significant disruption in the supply of those products or others provided by a small number of suppliers could negatively affect the timely delivery of products to customers as well as future sales, which could increase costs and reduce margins. Certain of our other businesses are dependent upon sole source or a limited number of third-party manufacturers of parts and components. Many of these suppliers are small businesses. Since alternative supply sources are limited, there is an increased risk of adverse impacts on our production schedules and profits if our suppliers were to default in fulfilling their price, quality or delivery obligations. In addition, some of our customers or potential customers may prefer to purchase from a supplier which does not have such a limited number of sources of supply. Increases in prices of raw material and components, and decreased availability of such items, could adversely affect our business. The cost of raw materials and product components is a major element of the total cost of many of our products. For example, our Test segment’s critical components rely on purchases of raw materials from third parties. Increases in the prices of raw materials (such as steel, copper, nickel, zinc, wood and petrochemical products) could have an adverse impact on our business by, among other things, increasing costs and reducing margins. Aerospace-grade titanium and gaseous helium, important raw materials for our A&D segment, may at times be in short supply; in addition, although we try to tie our supplier pricing to long-term contracts this is not always possible, and we are experiencing price inflation on a number of products. Further, some of Doble’s items of equipment which are provided to its customers for their use are in the maturity of their life cycles, which creates the risk that replacement components may be unavailable or available only at increased costs. Doble has experienced COVID-related short term disruptions in the supply chain which have periodically resulted in extended lead times and cost increases, and the long term impacts of these disruptions are uncertain. See also “COVID-19 Related Risks” above. In addition, our reliance on sole or limited sources of supply of raw materials and components in each of our segments could adversely affect our business, as described in the preceding Risk Factor. The potential physical impacts of climate change, such as increased frequency and severity of storms, floods and other climatic events, could disrupt our supply chain, and cause our suppliers to incur significant costs in preparing for or responding to these effects. These and other weather-created disruptions in supply, in addition to affecting costs, could impact our ability to procure an adequate supply of these raw materials and components, and delay or prevent deliveries of products to our customers. The entire electronics industry is currently disrupted due to limited sources of supply, and we are subject to the same supply chain risks as other manufacturers of products containing electronic components. See also “COVID-19 Related Risks” above. Our inability to timely develop new products could reduce our future sales. Much of our business is dependent on the continuous development of new products and technologies to meet the changing needs of our markets on a cost-effective basis. Many of these markets are highly technical from an engineering standpoint, and the relevant technologies are subject to rapid change. If we fail to timely enhance existing products or develop new products as needed to meet market or competitive demands, we could lose sales opportunities, which would adversely affect our business. In addition, in some existing contracts with customers, we have made commitments to develop and deliver new products. If we fail to meet these commitments, the default could result in the imposition on us of contractual penalties including termination. Our inability to enhance existing products in a timely manner could make our products less competitive, while our inability to successfully develop new products may limit our growth opportunities. Development of new products and product enhancements may also require us to make greater investments in research and development than we now do, and the increased costs associated with new product development and product enhancements could adversely affect our operating results. In addition, our costs of new product development may not be recoverable if demand for our products is not as great as we anticipate it to be. Product defects or customer claims could result in costly fixes, litigation and damages. Our business exposes us to potential product liability risks that are inherent in the design, manufacture and sale of our products and the products of third-party vendors which we use or resell, many of which are mission-critical to our customers. If there are claims related to defective products (under warranty or otherwise), particularly in a product recall situation, we could be faced with significant expenses in replacing or repairing the product. For example, the A&D segment obtains raw materials, machined parts and other product components from suppliers who provide certifications of quality which we rely on. Should these product components be defective and pass undetected into finished products, or should a finished product contain a defect, we could incur significant costs for repairs, re-work and/or removal and replacement of the defective product. In addition, if a dispute over product claims cannot be settled, arbitration or litigation may result, requiring us to incur attorneys’ fees and exposing us to the potential of damage awards against us. A major portion of our Test segment’s business involves working in conjunction with general contractors to produce complex building components constructed on-site, such as electronic test chambers, secure communication rooms and MRI facilities. If there are performance problems caused by either us or a contractor, they could result in cost overruns and may lead to a dispute as to which party is responsible. The resolution of such disputes can involve arbitration or litigation, and can cause us to incur significant expense including attorneys’ fees. In addition, these disputes could result in a reduction in revenue, a loss on a particular project, or even a significant damages award against us. Despite our efforts, we may be unable to adequately protect our intellectual property. Much of our business success depends on our ability to protect and freely utilize our various intellectual properties, including both patents and trade secrets. Despite our efforts to protect our intellectual property, unauthorized parties or competitors may copy or otherwise obtain and use our products and technology, particularly in foreign countries such as China where the laws may not protect our proprietary rights as fully as in the United States. Our current and future actions to enforce our proprietary rights may ultimately not be successful; or in some cases we may not elect to pursue an unauthorized user due to the high costs and uncertainties associated with litigation. We may also face exposure to claims by others challenging our intellectual property rights. Any or all of these actions may divert our resources and cause us to incur substantial costs. Environmental laws and regulations or environmental contamination could increase our expenses and adversely affect our profitability. Our operations and properties are subject to U.S. and foreign environmental laws and regulations governing, among other things, the generation, storage, emission, discharge, transportation, treatment and disposal of hazardous materials and the clean-up of contaminated properties. In addition, governments around the world are increasingly focused on enacting laws and regulations regarding climate change and regulation of greenhouse gases. These regulations, and changes to them, could increase our cost of compliance, and our failure to comply could result in the imposition of significant fines, suspension of production, alteration of product processes, cessation of operations or other actions which could materially and adversely affect our business, financial condition and results of operations. We are currently involved as a responsible party in several ongoing investigations and remediations of contaminated third-party owned properties. In addition, environmental contamination may be discovered in the future on properties which we formerly owned or operated and for which we could be legally responsible. Future costs associated with these situations, including ones which may be currently unknown to us, are difficult to quantify but could have a significant effect on our financial condition. See Item 1, “Business – Environmental Matters” for a discussion of these factors. Risks Related to Our Business Strategy and Corporate Structure Changes in testing standards could adversely impact our Test and USG segments’ sales. A significant portion of the business of our USG and Test segments involves sales to technology customers who need to have a third party verify that their products meet specific international and domestic test standards. If regulatory agencies were to eliminate or reduce certain domestic or international test standards, or if demand for product testing from these customers were to decrease for some other reason, our sales could be adversely affected. For example, if a regulatory authority were to relax the test standards for certain electronic devices because they were determined not to interfere with the broadcast spectrum, or if new wireless communication technologies were developed that required less testing or different types of testing, our sales of certain testing products could be significantly reduced. We may not be able to identify suitable acquisition candidates or complete acquisitions successfully, which may inhibit our rate of growth. As part of our growth strategy, we plan to continue to pursue acquisitions of other companies, assets and product lines that either complement or expand our existing business. However, we may be unable to implement this strategy if we are unable to identify suitable acquisition candidates or consummate future acquisitions at acceptable prices and terms. We expect to face competition for acquisition candidates which may limit the number of acquisition opportunities available to us and may result in higher acquisition prices. As a result, we may be limited in the number of acquisitions which we are able to complete and we may face difficulties in achieving the profitability or cash flows needed to justify our investment in them. Our acquisitions of other companies carry risk. Acquisitions of other companies involve numerous risks, including difficulties in the integration of the operations, technologies and products of the acquired companies, the potential exposure to unanticipated and undisclosed liabilities, the potential that expected benefits or synergies are not realized and that operating costs increase, the potential loss of key personnel, suppliers or customers of acquired businesses and the diversion of Management’s time and attention from other business concerns. Although we attempt to identify and evaluate the risks inherent in any acquisition, we may not properly ascertain or mitigate all such risks, and our failure to do so could have a material adverse effect on our business. We may incur significant costs, experience short-term inefficiencies, or be unable to realize expected long-term savings from facility consolidations and other business reorganizations. We periodically assess the cost and operational structure of our facilities in order to manufacture and sell our products in the most efficient manner, and based on these assessments, we may from time to time reorganize, relocate or consolidate certain of our facilities. These actions may require us to incur significant costs and may result in short term business inefficiencies as we consolidate and close facilities and transition our employees; and in addition, we may not achieve the expected long-term benefits. Any or all of these factors could result in an adverse impact on our operating results, cash flows and financial condition. Our inability to hire or retain qualified key employees could affect our performance and revenues. There is a risk of our losing key employees having engineering and technical expertise. For example, our USG segment relies heavily on engineers with significant experience and reputation in the utility industry to furnish expert consulting services and support to customers, and our other segments similarly rely on qualified and experienced employees to carry on their businesses. Despite our active recruitment efforts, there remains a shortage of these qualified engineers and other employees because of hiring competition from other companies in the industry and a generally tight labor market, possibly exacerbated by COVID-related retirements or career changes. Losing current employees or qualified candidates to other employers or for other reasons could reduce our ability to provide services and negatively affect our revenues. Our decentralized organizational structure presents certain risks. We are a relatively decentralized company in comparison with some of our peers. This decentralization necessarily places significant control and decision-making powers in the hands of local management, which present various risks, including the risk that we may be slower or less able to identify or react to problems affecting a key business than we would in a more centralized management environment. We may also be slower to detect or react to compliance related problems (such as an employee undertaking activities prohibited by applicable law or by our internal policies), and Company-wide business initiatives may be more challenging and costly to implement, and the risks of noncompliance or failures higher, than they would be under a more centralized management structure. Depending on the nature of the problem or initiative in question, such noncompliance or failure could have a material adverse effect on our business, financial condition or result of operations. Provisions in our articles of incorporation, bylaws and Missouri law could make it more difficult for a third party to acquire us and could discourage acquisition bids or a change of control, and could adversely affect the market price of our common stock. Our articles of incorporation and bylaws contain certain provisions which could discourage potential hostile takeover attempts, including: a limitation on the shareholders’ ability to call special meetings of shareholders; advance notice requirements to nominate candidates for election as directors or to propose matters for action at a meeting of shareholders; a classified board of directors, which means that approximately one-third of our directors are elected each year; and the authority of our board of directors to issue, without shareholder approval, preferred stock with such terms as the board may determine. In addition, the laws of Missouri, in which we are incorporated, require a two-thirds vote of outstanding shares to approve mergers or certain other major corporate transactions, rather than a simple majority as in some other states such as Delaware. These provisions could impede a merger or other change of control not approved by our board of directors, which could discourage takeover attempts and in some circumstances reduce the market price of our common stock. Item 1B. Unresolved Staff Comments None Item 2. Properties We believe our buildings, machinery and equipment have been generally well maintained, are in good operating condition and are adequate for our current production requirements and other needs. At September 30, 2021, our physical properties, including those described in the table below, comprised approximately 1,558,000 square feet of floor space, of which approximately 680,000 square feet were owned and approximately 878,000 square feet were leased. The table below includes our principal physical properties. We do not believe any of the omitted properties, consisting primarily of office and/or warehouse space, are individually or collectively material to our operations or business. See also Note 14 to the Consolidated Financial Statements. | | | | | | | | | |
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| | | | | | | | (M=Manufacturing, | | | | | Approx. | | Owned / Leased (with | | E=Engineering, O=Office, | | Operating | Location | | Sq. Ft. | | Expiration Date) | | W=Warehouse) | | Segment | Modesto, CA | | 181,500 | | Leased (9/30/2033) | | M, E, O,W | | A&D | Denton, TX | | 145,000 | | Leased (9/30/2029, plus options) | | M, E, O, W | | A&D | Cedar Park, TX | | 130,000 | | Owned | | M, E, O, W | | Test | Oxnard, CA | | 127,400 | | Owned | | M, E, O, W | | A&D | South El Monte, CA | | 100,100 | | Owned | | M, E, O, W | | A&D | Durant, OK | | 100,000 | | Owned | | M, O, W | | Test | Valencia, CA | | 79,300 | | Owned | | M, E, O | | A&D | Marlborough, MA | | 79,100 | | Leased (2/28/2037) | | M, E, O, W | | USG | Hinesburg, VT | | 77,000 | | Leased (4/30/2029)* | | M, E, O, W | | USG | Stoughton, MA | | 71,400 | | Leased (1/31/2029) | | M, E, O, W | | A&D | Accident, MD | | 66,800 | | Owned | | M, E, O, W | | USG | South El Monte, CA | | 63,300 | | Leased (various term ends) | | M, O, W | | A&D | Eura, Finland | | 41,500 | | Owned | | M, E, O, W | | Test | Montreal, Québec | | 38,400 | | Leased (8/31/2041) | | M, E, O, W | | USG | Tianjin, China | | 38,100 | | Leased (11/19/2027) | | M, E, O | | Test | Minocqua, WI | | 35,400 | | Owned | | M, O, W | | Test | Avon, MA | | 30,000 | | Leased (5/31/2022) | | W | | A&D | Ontario, CA | | 26,900 | | Leased (8/31/2025) | | M, E, O, W | | USG | St. Louis, MO | | 21,500 | | Leased (8/31/2025) | | ESCO Corporate Office | | Corporate | Taino, Italy | | 18,000 | | Leased (2033 & 2034) | | M, E, O, W | | USG | Zola Predosa, Italy | | 11,600 | | Leased (1/31/2029) | | M, E, O, W | | USG | Morrisville, NC | | 11,600 | | Leased (1/31/2027), plus options | | O | | USG | Wood Dale, IL | | 10,700 | | Leased (6/30/2024) | | E, O | | Test |
*The Company purchased this building in the first quarter of fiscal 2022. Item 3. Legal Proceedings As a normal incident of the businesses in which we are engaged, various claims, charges and litigation are asserted or commenced from time to time against us. With respect to claims and litigation currently asserted or commenced against us, it is the opinion of our Management that final judgments, if any, which might be rendered against us are adequately reserved for, are covered by insurance, or are not likely to have a material adverse effect on our financial condition or results of operations. Nevertheless, given the uncertainties of litigation, it is possible that certain types of claims, charges and litigation could have a material adverse impact on us; see Item 1A, “Risk Factors.” Item 4. Mine Safety Disclosures Not applicable. PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Holders of Record.As of November 20, 2021, there were approximately 1,836 holders of record of our common stock. Price Range of Common Stock and Dividends. Our common stock is listed on the New York Stock Exchange; its trading symbol is “ESE”. Company Purchases of Equity Securities. For information about our common stock repurchase programs, please refer to Note 9 to the Consolidated Financial Statements. We did not repurchase any shares of our common stock during the fourth quarter of fiscal 2021. Securities Authorized for Issuance Under Equity Compensation Plans. For information about securities authorized for issuance under our equity compensation plans, please refer to Item 12 of this Form 10-K and to Note 10 to the Consolidated Financial Statements. Performance Graph.The graph and table on the following page present a comparison of the cumulative total shareholder return on our common stock as measured against the cumulative total returns of the Russell 2000 index, which is a broad equity market index, and the S&P SmallCap 600 Industrials index, which is a published industry index designed to measure the performance of small-cap companies that are classified as members of the GICS Industrials sector. The Company is a component of both the Russell 2000 index and the S&P SmallCap 600 Industrials index. We determined to use the S&P SmallCap 600 Industrials index for comparison beginning in 2021 rather than using a peer group of individual companies as we had done in prior years, because of the difficulty of finding comparable companies to select for the peer group and the frequent changes in the selected peer group from year to year necessitated by acquisitions, mergers or other transactions. Because of this change, we also show the returns for the six remaining public companies in the customized peer group we used in 2020: CIRCOR International, Inc., Donaldson Company, Inc., Moog Inc., Ameresco, Inc., Thermon Group Holdings, Inc. and FARO Technologies, Inc. In calculating the composite return of the modified 2020 peer group, we weighted the return of each of the companies by (a) its market capitalization in relation to the other companies in its corresponding Company industry segment, and (b) the percentage of the Company’s total revenue from continuing operations represented by its corresponding Company industry segment. The measurement period begins on September 30, 2016 and measures at each September 30 thereafter. These figures assume that all dividends, if any, paid over the measurement period were reinvested, and that the starting values of each index and the investments in our common stock and the modified 2020 peer group were $100 at the close of trading on September 30, 2016. COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN Among ESCO Technologies Inc., the Russell 2000 Index, the S&P SmallCap 600 Industrials Index and the modified 2020 Peer Group | | | | | | | | | | | | | | | | | | | | | 9/30/16 | | 9/30/17 | | 9/30/18 | | 9/30/19 | | 9/30/20 | | 9/30/21 | ESCO Technologies Inc. | | $ | 100.00 | | $ | 129.68 | | $ | 148.00 | | $ | 173.83 | | $ | 176.91 | | $ | 169.67 | Russell 2000 Index | | | 100.00 | | | 120.74 | | | 139.14 | | | 126.77 | | | 127.27 | | | 187.94 | S&P Small Cap 600 Industrials Index | | | 100.00 | | | 123.30 | | | 136.67 | | | 122.03 | | | 111.54 | | | 160.86 | Modified 2020 Peer Group | | | 100.00 | | | 113.99 | | | 157.27 | | | 138.59 | | | 142.41 | | | 189.08 |
The stock price performance included in this graph is not necessarily indicative of future stock price performance. Item 6. [Reserved] Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto and refers to our results from continuing operations except where noted. Selected financial information for each of our business segments is provided in the discussion below and in Note 12 to the Company’s Consolidated Financial Statements. This section includes comparisons of certain 2021 financial information to the same information for 2020. Year-to-year comparisons of the 2020 financial information to the same information for 2019 are contained in Item 7 of our Form 10-K for 2020 filed with the Securities and Exchange Commission on November 30, 2020 and available through the SEC’s website at https://www.sec.gov/edgar/searchedgar/companysearch.html. Introduction We classify our business operations into three segments for financial reporting purposes, although for reporting certain financial information we treat Corporate activities as a separate segment. Our three operating segments during 2021 were Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Shielding and Test (Test). Our operating segments are comprised of the following primary operating subsidiaries: | ● | A&D: PTI Technologies Inc. (PTI); VACCO Industries (VACCO); Crissair, Inc. (Crissair); Westland Technologies, Inc. (Westland); Mayday Manufacturing Co. (Mayday), Hi-Tech Metals, Inc. (Hi-Tech); and Globe Composite Solutions, LLC (Globe). |
| ● | USG: Doble Engineering Company, I.S.A. – Altanova Group S.r.l. and affiliates (Altanova) and Morgan Schaffer Ltd. (collectively, Doble); and NRG Systems, Inc. (NRG). |
| ● | Test: ETS-Lindgren Inc. (ETS-Lindgren). |
| ● | Technical Packaging: Thermoform Engineered Quality LLC (TEQ); Plastique Limited and Plastique Sp. z o.o. (together, Plastique). In November 2019 the Company entered into an agreement to sell the businesses comprising this segment. See “Subsequent Event” on page 7.A&D. PTI, VACCO and Crissair primarily design and manufacture specialty filtration products, including hydraulic filter elements and fluid control devices used in commercial aerospace applications, unique filter mechanisms used in micro-propulsion devices for satellites and custom designed filters for manned aircraft and submarines. Westland and Globe design, develop and manufacture elastomeric-based signature reduction solutions for U.S. naval vessels. Mayday designs and manufactures mission-critical bushings, pins, sleeves and precision-tolerance machined components for landing gear, rotor heads, engine mounts, flight controls, and actuation systems for the aerospace and defense industries. USG. Doble develops, manufactures and delivers diagnostic testing solutions that enable electric power grid operators to assess the integrity of high-voltage power delivery equipment. NRG designs and manufactures decision support tools for the renewable energy industry, primarily wind and solar. Test. ETS-Lindgren is an industry leader in providing its customers with the ability to identify, measure and contain magnetic, electromagnetic and acoustic energy. We continue to operate with meaningful growth prospects in our primary served markets and with considerable financial flexibility. We continue to focus on new products that incorporate proprietary design and process technologies. Our Management is committed to delivering shareholder value through organic growth, ongoing performance improvement initiatives, and acquisitions. In December 2019, we sold the businesses comprising our former Technical Packaging segment. We received net proceeds from the sale of approximately $184 million and recorded $76.5 million of after-tax net earnings on the sale in 2020. The Technical Packaging segment is reflected as discontinued operations in the Consolidated Financial Statements and related notes for all periods presented, in accordance with accounting principles generally accepted in the United States of America (GAAP). See Note 3 to the Consolidated Financial Statements for further discussion. COVID-19 Trends and Uncertainties The COVID-19 global pandemic has continued to create significant and unprecedented challenges, and during these highly uncertain times, our top priority remains the health and safety of our employees, customers and suppliers, thereby securing the financial well-being of the Company and supporting business continuity. Given our diverse portfolio of strong, durable businesses serving non-discretionary end-markets, the strength and resilience of our business model positions us to continue to support our long-term outlook. A portion of our workforce has worked from home at times due to COVID-19, however we have not had to redesign or design new internal controls over financial reporting at this time. Depending on the duration of COVID-19, it may become necessary for us to redesign or design new internal controls over financial reporting in a future period. We do not believe such an event will have a material impact on our business. The economic uncertainty, changes in the propensity for the general public to travel by air, and reductions in demand for commercial aircraft as a result of the COVID-19 pandemic have adversely impacted net sales and operating results in certain of our A&D reporting units. We continue to monitor the impacts of COVID-19 for events or changes in circumstances that indicate the carrying amount of our assets may be impaired. Throughout 2021, our Navy, defense aerospace, space and Test segment end-markets have remained solid and now we are beginning to see recovery in our core markets most affected by the pandemic. We are encouraged by the growing strength of our entered orders across the commercial aerospace, electric utility and renewable energy end-markets. While there is still uncertainty as to the timing and pace of recovery in the commercial aerospace and electric utility markets, we believe we now have a clearer picture of the near term. Increased U.S. domestic passenger boardings and recent orders for new planes by major airlines are encouraging signs for 2022. The effects of the COVID-19 pandemic have adversely impacted our net sales and operating results in certain of our A&D reporting units that have a higher concentration of business serving the commercial aerospace industry. For the year ended September 30, 2021, we reviewed our indefinite lived intangible assets, long-lived assets and goodwill for impairment and determined that there was no impairment. The valuation methodology we use involves estimates of discounted cash flows, which are subject to change, and if they change negatively it could result in the need to write down those assets to fair value. We will continue to monitor the impacts of COVID-19 on the fair value of assets. The defense portion of A&D, both military aerospace and navy products, is expected to remain at approximately historical business levels given its backlog coupled with the timing of expected platform deliveries. See also Item 1A, “Risk Factors” in Part I above, and “Outlook” below for additional information. Highlights of 2021 | ● | Diluted EPS – GAAP for 2021 was $2.42, compared to Diluted EPS – GAAP for 2020 of $3.81, which consisted of $0.88 per share from continuing operations and $2.93 from discontinued operations. |
| ● | Filtration. PTI, VACCOSales, net earnings and Crissair primarily designdiluted earnings per share from continuing operations in 2021 were $715.4 million, $63.5 million and manufacture specialty filtration products, including hydraulic filter elements$2.42 per share, respectively, compared to sales, net earnings and fluid control devices useddiluted earnings per share from continuing operations in commercial aerospace applications, unique filter mechanisms used in micro-propulsion devices for satellites2020 of $730.5 million, $22.9 million and custom designed filters for manned aircraft and submarines. Westland designs, develops and manufactures elastomeric-based signature reduction solutions for U.S. naval vessels. Mayday designs and manufactures mission-critical bushings, pins, sleeves and precision-tolerance machined components for landing gear, rotor heads, engine mounts, flight controls, and actuation systems for the aerospace and defense industries. Hi-Tech is a full-service metal processor serving aerospace suppliers. Globe is a vertically integrated supplier of composite-based products and solutions for acoustic, signature-reduction, communications, sealing, vibration-reducing, surface control, and hydrodynamic-related applications.USG. Doble provides high-end, intelligent diagnostic test solutions for the electric power delivery industry and is a leading supplier of power factor and partial discharge testing instruments used to assess the integrity of high-voltage power delivery equipment. Morgan Schaffer provides an integrated offering of dissolved gas analysis, oil testing, and data management solutions which enhance the ability of electric utilities to accurately monitor the health of critical power transformers. NRG designs and manufactures decision support tools for the renewable energy industry, primarily wind.
Test. ETS-Lindgren is an industry leader in providing its customers with the ability to identify, measure and contain magnetic, electromagnetic and acoustic energy.
Technical Packaging. The companies within this segment provide innovative solutions to the medical and commercial markets for thermoformed and precision molded pulp fiber packages and specialty products using a wide variety of thin gauge plastics and pulp.
Selected financial information for each of the Company’s business segments is provided in the discussion below and in Note 13 to the Company’s Consolidated Financial Statements.
The Company continues to operate with meaningful growth prospects in its primary served markets and with considerable financial flexibility. The Company continues to focus on new products that incorporate proprietary design and process technologies. Management is committed to delivering shareholder value through organic growth, ongoing performance improvement initiatives, and acquisitions.
Highlights of 2019 Operations
| ● | Sales, net earnings and diluted earnings per share in 2019 were $813.0 million, $81.0 million and $3.10 per share, respectively, compared to sales, net earnings and diluted earnings per share in 2018 of $771.6 million, $92.1 million and $3.54$0.88 per share, respectively. |
| ● | Diluted EPS – As Adjusted for 2019 was $3.13 and excludes $0.6 million of pretax charges (or $0.03 per share after tax) consisting primarily of purchase accounting charges related to the Globe acquisition and certain restructuring charges related to facility consolidations at Doble, Plastique, PTI and VACCO partially offset by the gain on the Doble Watertown building sale. Diluted EPS – As Adjusted for 2018 was $2.77 and excludes $4.8 million of pretax charges (or $0.17 per share after tax) consisting primarily of charges related to closing the Doble offices in Norway, China, Dubai and Mexico, consisting of employee severance and compensation benefits, professional fees, and asset impairment charges; and restructuring charges at PTI related to the exit of the low margin industrial/automotive market. Also excluded for 2018 was a $24.4 million (or $0.94 per share) of net tax benefit recorded resulting from the implementation of U.S. Tax Reform. |
| ● | Net cash provided by operating activities was approximately $105.1 million in 2019 compared to $93.3 million in 2018. |
| ● | At September 30, 2019, cash on hand was $61.8 million and outstanding debt was $286.3 million, for a net debt position (total debt less net cash) of approximately $224.5 million. |
| ● | Entered orders for 2019 were $905.3 million resulting in a book-to-bill ratio of 1.11x. Backlog at September 30, 2019 was $475.1 million compared to $382.8 million at September 30, 2018. |
| ● | In July 2019, the Company acquired Globe for a purchase price of approximately $95 million, net of cash acquired. Since the date of acquisition, the operating results for Globe have been included within the Company’s Filtration segment. |
| ● | The Company declared dividends of $0.32 per share during 2019, totaling $8.3 million in dividend payments. |
Results of Operations
Net Sales
| | | | | | | | | | | | | | | | Change | | | | Fiscal year ended | | 2019 | | (Dollars in millions) | | 2019 | | 2018 | | vs. 2018 | | Filtration | | $ | 325.8 | | 286.8 | | 13.6 | % | USG | | | 211.9 | | 214.0 | | (1.0) | % | Test | | | 188.4 | | 182.9 | | 3.0 | % | Technical Packaging | | | 86.9 | | 87.9 | | (1.1) | % | Total | | $ | 813.0 | | 771.6 | | 5.4 | % |
Net sales increased $41.4 million, or 5.4%, to $813.0 million in 2019 from $771.6 million in 2018. The increase in net sales in 2019 as compared to 2018 was due to a $39.0 million increase in the Filtration segment and a $5.5 million increase in the Test segment, partially offset by a $2.1 million decrease in the USG segment and a $1.0 million decrease in the Technical Packaging segment.
Filtration.
The $39.0 million, or 13.6%, increase in net sales in 2019 as compared to 2018 was mainly due to a $14.3 million increase in net sales at PTI due to higher aerospace and assembly element shipments, a $11.1 million increase in net sales at Crissair due to higher aerospace shipments, an $8.9 million sales contribution from Globe (acquired in July 2019), a $6.8 million increase in net sales at Mayday due to higher aerospace shipments, and a $1.1 million increase in net sales at Westland, partially offset by a $3.2 million decrease in net sales at VACCO due to lower shipments of defense spares.
| ● | USG.The $2.1Diluted EPS – Continuing Operations As Adjusted for 2021 was $2.59 and excludes $6.0 million or 1.0%, decrease in net sales in 2019 as compared to 2018 was mainly due to a $9.5 million decrease in net salesof pretax charges (or $0.17 per share after tax) consisting of one-time compensation and acquisition related costs at NRG due to continued softness in the renewable energy market, partially offset by a $7.4 million increase in net sales at Doble driven by a full year of Manta’s sales and higher F series product shipments.
Test.
The $5.5 million, or 3.0%, increase in net sales in 2019 as compared to 2018 was mainly due to a $7.7 million increase in net sales from the segment’s U.S. and Asian operations partially offset by a $2.2 million decrease in net sales from the segment’s European operations, both due to the timing of test and measurement chamber projects.
Technical Packaging.
The $1.0 million, or 1.1%, decrease in net sales in 2019 as compared to 2018 was mainly due to a $5.5 million decrease in net sales from Plastique due to lower shipments to commercial customers partially offset by a $4.5 million increase in net sales at TEQ.
Orders and Backlog
New orders received in 2019 were $905.3 million as compared to $777.2 million in 2018, resulting in order backlog of $475.1 million at September 30, 2019 as compared to order backlog of $382.8 million at September 30, 2018. Orders are entered into backlog as firm purchase order commitments are received.
In 2019, the Company recorded orders of $409.9 million related to Filtration products, $212.9 million related to USG products, $199.6 million related to Test products and $82.9 million related to Technical Packaging products. In 2018, the Company recorded orders of $287.9 million related to Filtration products, $219.1 million related to USG products, $190.4 million related to Test products and $79.8 million related to Technical Packaging products.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses were $172.1million, or 21.2% of net sales, in 2019, and $162.4 million, or 21.0% of net sales, in 2018.
The increase in SG&A expenses in 2019 as compared to 2018 was mainly due to an increase inCorporate ($0.12 per share); restructuring costs within the USG segment, due to higher sales commissions including additional sales and marketing expenses to support future revenue growth.
Amortization of Intangible Assets
Amortization of intangible assets was $19.5 million in 2019 and $18.3 million in 2018. Amortization of intangible assets included $11.8 million and $10.9 million of amortization of acquired intangible assets in 2019 and 2018, respectively,primarily facility consolidation charges ($0.08 per share); purchase accounting adjustments related to the Company’s acquisitions. The amortization of acquired intangible assets related to the Company’sPhenix and Altanova acquisitions, is included in the Corporate operating segment’s results. The remaining amortization expenses relate to other identifiable intangible assets (primarily software, patents and licenses), which are included in the respective segment’s operating results. The increase in amortization expense in 2019 as compared to 2018 was mainly due to an increase in amortization of intangible assets related to the Company’s recent acquisitions.
Other Expenses or Income, Net
Other expenses, net, were $2.2 million in 2019, compared to other expenses, net, of $3.7 million in 2018. The principal components of other expenses, net, in 2019 included $3 million of purchase accountingprimarily inventory step-up charges related to the Globe acquisition; $1.4 million of restructuring charges incurred related to the Plastique facility consolidation in 2019 consisting primarily of severance and compensation benefits and asset impairment charges; $0.9 million of restructuring charges related to the consolidation of VACCO’s aircraft/aerospace business into PTI’s aerospace facility in Oxnard, California; approximately $1 million of charges at Doble related to facility consolidations begun in 2018; and approximately $3 million of losses on derivative instruments; partially offset by a net gain of approximately $8 million on the sale of the Doble Watertown, MA building and land. The principal components of other expenses, net, in 2018 included $3 million of charges related to the USG segment restructuring activities, including the Doble facility consolidations in Norway, China, Dubai and Mexico; and $0.8 million of charges within the Filtration segment due to the exit of the low margin industrial/automotive market. There were no other individually significant items included in other expenses, net, in 2019 or 2018.
Non-GAAP Financial Measures
The information reported herein includes the financial measures EPS – As Adjusted, which the Company defines as EPS excluding the per-share net impact of the purchase accounting charges related to the Globe acquisition and the restructuring charges incurred at Doble, Plastique, PTI and VACCO during fiscal 2019,($0.03 per share); partially offset by the gain on the Doble Watertown, MA property sale; and restructuring charges related to the Company’s restructuring actions in 2018 and the net recorded per-share tax benefit resultingfinal settlement from the implementation of U.S. Tax Reform in 2018; EBIT, which the Company defines as earnings before interest and taxes; and EBIT margin, which the Company defines as EBIT expressed as a percentage of net sales. EPS – As Adjusted, EBIT on a consolidated basis, and EBIT margin on a consolidated basis are not recognized in accordance with U.S. generally accepted accounting principles (GAAP). However, the Company believes that EBIT and EBIT margin provide investors and Management with valuable information for assessing the Company’s operating results. Management evaluates the performance of its operating segments based on EBIT and believes that EBIT is useful to investors to demonstrate the operational profitability of the Company’s business segments by excluding interest and taxes, which are generally accounted for across the entire company on a consolidated basis. EBIT is also one of the measures Management uses to determine resource allocations and incentive compensation. The Company believes that the presentation of EBIT, EBIT margin and EPS – As Adjusted provides important supplemental information to investors by facilitating comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. The use of non-GAAP financial measures is not intended to replace any measures of performance determined in accordance with GAAP.
EBIT
| | | | | | | | | | | | | | | | Change | | | | Fiscal year ended | | 2019 | | (Dollars in millions) | | 2019 | �� | 2018 | | vs. 2018 | | Filtration | | $ | 70.1 | | 58.7 | | 19.4 | % | % of net sales | | | 21.5 | % | 20.5 | % | | | USG | | | 52.2 | | 43.2 | | 20.8 | % | % of net sales | | | 24.6 | % | 20.2 | % | | | Test | | | 25.6 | | 23.8 | | 7.6 | % | % of net sales | | | 13.6 | % | 13.0 | % | | | Technical Packaging | | | 5.9 | | 8.1 | | (27.2) | % | % of net sales | | | 6.8 | % | 9.2 | % | | | Corporate | | | (43.2) | | (37.0) | | 16.8 | % | Total | | $ | 110.6 | | 96.8 | | 14.3 | % | % of net sales | | | 13.6 | % | 12.5 | % | | |
The reconciliation of EBIT to a GAAP financial measure is as follows:
| | | | | | (Dollars in millions) | | 2019 | | 2018 | Net earnings | | $ | 81.0 | | 92.1 | Add: Interest expense | | | 8.4 | | 8.8 | Add (less): Income taxes | | | 21.2 | | (4.1) | EBIT | | $ | 110.6 | | 96.8 |
Filtration
The $11.4 million increase in EBIT in 2019 as compared to 2018 was primarily due to the EBIT contribution from higher sales volumes at PTI, Crissair, Mayday and Westland and Globe (acquired July 2019). EBIT in 2019 was negatively impacted by $0.9 million of restructuring charges related to the consolidation of VACCO’s aircraft/aerospace business into PTI’s aerospace facility in Oxnard, California and $0.3 million of purchase accounting charges at Globe related to the inventory step-up charge.
USG
The $9.0 million increase in EBIT in 2019 as compared to 2018 was primarily due to a $12.0 million increase in EBIT at Doble (which included a net gain on the sale of the Doble Watertown facility ($0.06 per share). Diluted EPS – Continuing Operations As Adjusted for 2020 was $2.67 and excludes the pension plan termination charge of approximately $8.0$40.6 million partially offset by certain(or $1.55 per share after tax) and $8.3 million of pretax charges to close(or $0.24 per share after tax) consisting primarily of facility consolidation charges for the Doble facilities in Dubai and Mexico), and also due to higher sales volumes at Doble; partially offset by a $3.0 million decrease in EBIT from NRG due to softness in the renewable energy market.
Test
The $1.8 million increase in EBIT in 2019 as compared to 2018 was primarily due to the increased sales volumes from the segment’s U.S. and Asian operations.
Technical Packaging
The $2.2 million decrease in EBIT in 2019 as compared to 2018 was primarily due to the $1.4 million of restructuring charges incurred related to the PlastiqueManta facility consolidation in 2019. These charges consisted primarily of(including employee severance and compensation benefits andbenefits), asset impairment charges.charges and the incremental costs associated with the COVID-19 pandemic. See “Non-GAAP Financial Measures” below.
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| | | | | | | | Fiscal year ended | (Dollars in millions) | | 2021 | | 2020 | Diluted EPS – Continuing Operations GAAP | | $ | 2.42 | | 0.88 | One time compensation & acquisition related costs | | | 0.12 | | — | Restructuring adjustments | | | 0.08 | | 0.24 | Purchase accounting adjustments | | | 0.03 | | — | Gain on building sale | | | (0.06) | | — | Pension termination adjustment | | | — | | 1.55 | Diluted EPS – Continuing Operations As Adjusted | | $ | 2.59 | | 2.67 |
Corporate
Corporate
| ● | Net cash provided by operating charges includedactivities from continuing operations was $123.1 million in 2019 consolidated EBIT increased to $43.2 million as2021 compared to $37.0$108.5 million in 2018 due to purchase accounting charges related to the Globe acquisition, higher professional fees2020. |
| ● | At September 30, 2021, cash on hand was $56.2 million and acquisition costs.The “Reconciliation to Consolidated Totals (Corporate)”outstanding debt was $154.0 million, for a net debt position (total debt less cash on hand) of approximately $97.8 million.
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| ● | Entered orders for 2021 were $796.3 million (including $29 million of acquired backlog) resulting in Note 13 to the Consolidated Financial Statements represents Corporate office operating charges.Interest Expense, Net
Interest expensea book-to-bill ratio of 1.11x. Backlog at September 30, 2021 was $8.4 million in 2019 compared to $8.8 million in 2018, due to lower average outstanding borrowings ($236.4$592.0 million compared to $258.8 million) partially offset by higher average interest rates (3.2% vs. 3.0%) as a result$511.2 million at September 30, 2020.
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| ● | The Company declared dividends of the additional borrowings to fund the Company’s recent acquisitions.Income Tax Expense
On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the Tax Cut and Jobs Act (the “TCJA”). Provisions under the TCJA affecting the Company include a further reduction$0.32 per share during 2021, totaling $8.3 million in the U.S. statutory rate to 21%, a new minimum tax on global intangible low-taxed income (“GILTI”), the benefit of the deduction for foreign-derived intangible income (“FDII”), and changes to IRC Section 162(m) related to the deductibility of executive compensation.
The effective tax rates for 2019, 2018 and 2017 were 20.7%, (4.7)% and 33.0%, respectively. The increase in the 2019 effective tax rate as compared to 2018 was primarily due to the enactment of the TCJA. The specific impacts of the TCJA in 2018 were
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Results of Continuing Operations Net Sales | | | | | | | | | | | | | | | | Change | | | | Fiscal year ended | | 2021 | | (Dollars in millions) | | 2021 | | 2020 | | vs. 2020 | | A&D | | $ | 314.8 | | 351.9 | | (10.5) | % | USG | | | 202.9 | | 191.7 | | 5.8 | % | Test | | | 197.7 | | 186.9 | | 5.8 | % | Total | | $ | 715.4 | | 730.5 | | (2.1) | % |
Net sales decreased $15.1 million, or 2.1%, to $715.4 million in 2021 from $730.5 million in 2020. The decrease in net sales in 2021 as compared to 2020 was mainly due to a $37.1 million decrease in the A&D segment, partially offset by an $11.2 million increase in the USG segment, including $4.4 million of sales from the acquisitions of Altanova and the assets of Phenix, and a $10.8 million increase in the Test segment. A&D. The $37.1 million, or 10.5%, decrease in net sales in 2021 as compared to 2020 was mainly due to a $16.7 million decrease in net sales at Mayday, an $11.0 million decrease in net sales at Crissair, a $9.8 million decrease in net sales at PTI all primarily driven by the impact of the COVID-19 pandemic, and a $3.7 million decrease in net sales at Westland driven by new product development challenges, partially offset by a $3.7 million increase in net sales at Globe and a $0.4 million increase in net sales at VACCO driven by an increase in navy defense shipments. USG. The $11.2 million, or 5.8%, increase in net sales in 2021 as compared to 2020 was mainly due to a $7.7 million increase in net sales at NRG driven by renewable energy products and $4.4 million of sales from the acquisitions of Altanova and the assets of Phenix that closed during the fourth quarter of 2021. Test. The $10.8 million, or 5.8%, increase in net sales in 2021 as compared to 2020 was mainly due to a $4.1 million increase in net sales from the Company’s Asian operations, $3.7 million increase in net sales from the Company’s U.S. operations and a $3.0 million increase in net sales from the Company’s European operations, primarily driven by the timing of test and measurement chamber projects. Orders and Backlog New orders received were $796.3 million in both 2021 and 2020. Order backlog was $592.0 million at September 30, 2021, compared to order backlog of $511.2 million at September 30, 2020. Orders are entered into backlog as firm purchase order commitments are received. By operating segment, 2021 orders were $337.4 million related to A&D products, $243.9 million related to USG products (including $29 million of acquired backlog), and $215.0 million related to Test products; and 2020 orders were $420.4 million related to A&D products, $200.7 million related to USG products, and $175.3 million related to Test products. Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses were $167.5 million, or 23.4% of net sales, in 2021, and $159.5 million, or 21.8% of net sales, in 2020. The increase in SG&A expenses in 2021 as compared to 2020 was mainly due to an increase at Doble due to the return of discretionary spending to more normal levels, the inclusion of SG&A from the Phenix and Altanova acquisitions, compensation expenses due to the transition of key executives, and an increase in acquisition related costs at Corporate. Amortization of Intangible Assets Amortization of intangible assets was $20.8 million in 2021 and $21.8 million in 2020, including $14.3 million and $13.0 million of amortization of acquired intangible assets in 2021 and 2020, respectively, related to our acquisitions. The amortization of acquired intangible assets related to acquisitions is included in the Corporate segment’s results. The remaining amortization expenses relate to other identifiable intangible assets (primarily software, patents and licenses), which are included in the respective segment’s operating results. The decrease in amortization expense in 2021 as compared to 2020 was mainly due to a decrease in amortization of capitalized software. Other Expenses or Income, Net Other income, net, was $0.9 million in 2021, compared to other expenses, net, of $7.1 million in 2020. The principal components of other, net, in 2021 included a gain of approximately $2 million for the final settlement on the sale of the Doble Watertown, MA property, partially offset by facility consolidation charges within the USG segment (Doble Manta, Morgan Schaffer and Altanova facilities). The principal components of other expenses, net, in 2020 included approximately $8 million of pretax charges consisting primarily of facility consolidation charges for the Doble Manta facility, including employee severance and compensation benefits, and asset impairment charges. There were no other individually significant items included in other expenses, net, in 2021 or 2020. Non-GAAP Financial Measures The information reported herein includes the financial measures Diluted EPS – Continuing Operations As Adjusted, which we define as Diluted EPS – Continuing Operations excluding the per-share net impact of one-time compensation and acquisition related costs, facility consolidation charges within the USG segment, and purchase accounting charges related to the Company’s recent acquisitions in 2021, partially offset by a gain on the final installment of the Double Watertown, MA prrperty sale; and pension plan termination charge and restructuring charges related to our facility consolidation restructuring plans in 2020; EBIT, which we define as earnings before interest and taxes; and EBIT margin, which we define as EBIT expressed as a percentage of net sales. Diluted EPS – Continuing Operations As Adjusted, EBIT on a consolidated basis, and EBIT margin on a consolidated basis are not recognized in accordance with U.S. generally accepted accounting principles (GAAP). However, we believe that EBIT and EBIT margin provide investors and Management with valuable information for assessing our operating results. Management evaluates the performance of our operating segments based on EBIT and believes that EBIT is useful to investors to demonstrate the operational profitability of our business segments by excluding interest and taxes, which are generally accounted for across the entire company on a consolidated basis. EBIT is also one of the measures Management uses to determine resource allocations and incentive compensation. We believe that the presentation of EBIT, EBIT margin and Diluted EPS – Continuing Operations As Adjusted provides important supplemental information to investors by facilitating comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. The use of non-GAAP financial measures is not intended to replace any measures of performance determined in accordance with GAAP. EBIT The reconciliation of EBIT to a GAAP financial measure is as follows: | ● | The Company’s 2018 federal statutory rate decreased from 35.0% to 24.5%, which required an adjustment to the value of its deferred tax assets and liabilities. This adjustment of $30.6 million (complete as of September 30, 2018) favorably impacted the 2018 effective tax rate by 34.8%. |
| ● | The TCJA subjected the Company’s cumulative foreign earnings to $3.7 million (complete as of December 31, 2018) of federal income tax which unfavorably impacted the 2018 effective tax rate by 4.2%. In addition to the impacts from the TCJA, the Company recorded $2.4 million (complete as of September 30, 2018) for the income tax effects of the current and future repatriation of the cumulative earnings of its foreign subsidiaries which unfavorably impacted the 2018 effective tax rate by 2.8%. |
| ● | The Company approved an additional $7.5 million pension contribution for the 2017 plan year during the second quarter of 2018 resulting in a favorable adjustment to the 2018 effective tax rate of 0.9%. |
| ● | An accounting method change was filed with the 2017 tax return which resulted in a favorable adjustment to the 2018 effective tax rate of 0.7%. |
The 2019 effective tax rate was favorably impacted by tax planning strategies to increase foreign tax credits claimed retrospectively. The Company reduced the valuation allowance for excess foreign tax credits by $2.4 million and recorded an amended return benefit of $0.3 million, which favorably impacted the 2019 effective tax rate by 2.8%.
The TJCA made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S. federal income tax. No provision is made for foreign withholding any applicable U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries where these earnings are considered indefinitely invested or otherwise retained for continuing international operations. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable.
Acquisitions and Dispositions
Information regarding the Company’s acquisitions during 2019, 2018 and 2017 is set forth in Note 2 to the Company’s Consolidated Financial Statements, which Note is incorporated by reference herein.
All of the Company’s acquisitions have been accounted for using the purchase method of accounting, and accordingly, the respective purchase prices were allocated to the assets (including intangible assets) acquired and liabilities assumed based on estimated fair values at the date of acquisition. The financial results from these acquisitions have been
| | | | | | (Dollars in millions) | | 2021 | | 2020 | Net earnings from continuing operations | | $ | 63.5 | | 22.9 | Plus: Interest expense | | | 2.2 | | 6.7 | Plus: Income tax expense | | | 17.2 | | 13.5 | EBIT | | $ | 82.9 | | 43.1 |
EBIT by business segment is as follows: | | | | | | | | | | | | | | | | Change | | | | Fiscal year ended | | 2021 | | (Dollars in millions) | | 2021 | | 2020 | | vs. 2020 | | A&D | | $ | 56.5 | | 69.9 | | (19.2) | % | % of net sales | | | 17.9 | % | 19.9 | % | | | USG | | | 40.9 | | 24.4 | | 67.6 | % | % of net sales | | | 20.2 | % | 12.7 | % | | | Test | | | 27.6 | | 27.2 | | 1.5 | % | % of net sales | | | 14.0 | % | 14.6 | % | | | Corporate | | | (42.1) | | (78.4) | | 46.3 | % | Total | | $ | 82.9 | | 43.1 | | 92.3 | % | % of net sales | | | 11.6 | % | 5.9 | % | | |
A&D The $13.4 million decrease in EBIT in 2021 as compared to 2020 was primarily due to charges at Westland driven by new product development challenges, increased production costs, and product quality issues; lower sales volumes at Mayday, Crissair and PTI; partially offset by an increase in EBIT at VACCO and Globe due to the higher sales volumes mentioned above. In addition, EBIT in 2021 was negatively impacted by a $0.3 million inventory step-up charge related to the acquisition of ATM. USG The $16.5 million increase in EBIT in 2021 as compared to 2020 was mainly due to higher sales volumes with a favorable product mix, approximately $2 million final settlement received on the sale of the Doble Watertown property, partially offset by $2.4 million of facility consolidation charges at its Doble Manta, Morgan Schaffer and Altanova facilities, and purchase accounting charges of approximately $1.0 million related to the Phenix and Altanova acquisitions mainly consisting of inventory step-up charges. In addition, NRG’s EBIT increased $3.1 million in 2021 due to higher sales volumes as compared to the prior year. Test The $0.4 million increase in EBIT in 2021 as compared to 2020 was primarily due to product mix and increase in sales volumes as mentioned above partially offset by higher material prices. Corporate Corporate operating charges included in 2021 consolidated EBIT decreased to $42.1 million as compared to $78.4 million in 2020 mainly due to a $40.6 million pension plan termination charge in 2020 as a result of the decision to terminate and annuitize the Company’s defined benefit pension plan. Corporate’s operating charges were negatively impacted in 2021 due to higher compensation expenses due to the transition of key executives and an increase in acquisition related costs. The “Reconciliation to Consolidated Totals (Corporate)” in Note 12 to the Consolidated Financial Statements represents Corporate office operating charges. Interest Expense, Net Interest expense, net was $2.2 million and $6.7 million in 2021 and 2020, respectively. The decrease in interest expense in 2021 was mainly due to lower average outstanding borrowings and lower average interest rates. Average outstanding borrowings were $71 million in 2021 compared to $176 million in 2020. The weighted average interest rates were 1.20% in 2021 compared to 3.20% in 2020. Income Tax Expense The effective tax rates from continuing operations for 2021, 2020 and 2019 were 21.3%, 37.1% and 20.8%, respectively. The 2020 effective tax rate was unfavorably impacted by a pension plan termination charge of $40.6 million which is not deductible for tax purposes, increasing the effective tax rate by 23.4%. The 2020 effective tax rate was favorably impacted by the following: (1) an increase in the available 2019 foreign tax credit which was attributable to new information and tax planning strategies reducing the 2020 effective tax rate by 1.9%; (2) the release of a valuation allowance of $2.8 million for foreign net operating losses decreasing the effective tax rate by 7.8%; and (3) favorable 2019 state tax return to provision true-ups decreasing the effective tax rate by 1.7%. The 2017 Tax Cut and Jobs Act (TCJA) made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S. federal income tax. No provision is made for foreign withholding any applicable U.S. income taxes on the undistributed earnings of non-U.S. subsidiaries where these earnings are considered indefinitely invested or otherwise retained for continuing international operations. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable. Acquisitions and Divestiture Information regarding our acquisitions and divestiture during 2021, 2020 and 2019 is set forth in Notes 2 and 3 to the Consolidated Financial Statements, which Notes are incorporated by reference herein. All of our acquisitions have been accounted for using the purchase method of accounting, and accordingly, the respective purchase prices were allocated to the assets (including intangible assets) acquired and liabilities assumed based on estimated fair values at the date of acquisition. The financial results from these acquisitions have been included in our financial statements from the date of acquisition. Subsequent to the end of fiscal 2019 the Company entered into an agreement to sell the business comprising its Technical Packaging segment. See “Subsequent Event” on page 7.
Capital Resources and Liquidity The Company’sOur overall financial position and liquidity are strong. Working capital from continuing operations (current assets less current liabilities) increased to $243.6$188.4 million at September 30, 20192021 from $195.5$187.8 million at September 30, 2018. Contract assets2020. Inventories increased $62.3 million in 2019 mainly within the Filtration segment due to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (ASC 606). Inventories decreased by $6.6$11.9 million during 20192021 mainly due to a 9.5 million decrease within the Filtration segment resulting primarily from the adoption of ASC 606. The $8.3 million increase in accounts payable at September 30, 2019 was mainly due to a $4.9$14.7 million increase within the TestUSG segment driven by the acquisitions of Altanova and a $4.0the assets of Phenix. Accounts payable increased by $6.1 million increase within the Technical Packaging segment bothduring 2021 mainly due to the timing of payments.
Net cash providedUSG segment driven by operating activities was $105.1 millionthe Altanova and $93.3 million in 2019 and 2018, respectively.Phenix acquisitions.
Net cash provided by operating activities from continuing operations was $123.1 million in 2021 and $108.5 million in 2020. Net cash used in investing activities from continuing operations was $125.1 million and $41.6$202.4 million in 20192021 and 2018, respectively.$41.1 million in 2020. The increase in net cash used in investing activities in 20192021 as compared to 2018 was due to the Globe acquisition and higher capital expenditures. Capital expenditures were $37.2 million and $20.6 million in 2019 and 2018, respectively. The increase in capital expenditures in 2019 as compared to 20182020 was mainly due to the facility expansionAltanova and Phenix acquisitions totaling approximately $162 million. Capital expenditures from continuing operations were $26.7 million in 2021 and $32.1 million in 2020. The decrease in 2021as compared to 2020 was mainly due to the building improvement additions in 2020 at TEQthe new Doble headquarters facility. In addition, the Company incurred expenditures for capitalized software of $8.8 million in 2019. 2021 and $9.0 million in 2020. There were no commitments outstanding that were considered material for capital expenditures at September 30, 2019. In addition,2021, except for a commitment to purchase the Company incurred expendituresNRG building for capitalized softwareapproximately $10 million which closed in the first quarter of $8.4 million and $9.6 million in 2019 and 2018, respectively. The Company made pension contributions of $2.5 million and $10.0 million in 2019 and 2018, respectively.fiscal 2022.
Net cash provided by financing activities from continuing operations was $53.5$81.5 million in 2019,2021 compared to net cash used by financing activities from continuing operations of $66.4$(234.1) million in 2018. The change in 2019 as compared to 2018 was2020, primarily due to additionalthe increase in borrowings in 2019 related to2021 as a result of the Globe acquisition.Company’s recent acquisitions. Bank Credit Facility A description of the Company’sour credit facility (the “Credit Facility”) is set forth in Note 8 to the Company’s Consolidated Financial Statements, which Note is incorporated by reference herein. Cash flow from operations and borrowings under the Credit Facility is expected to provide adequate resources to meet the Company’sour capital requirements and operational needs both for the next 12 months and for the foreseeable future. Dividends Since 2010, the Company haswe have paid a regular quarterly cash dividend at an annual rate of $0.32 per share. The CompanyWe paid dividends of $8.3 million andtotaling $8.3 million in 2019both 2021 and 2018, respectively.2020. Contractual ObligationsOff-Balance-Sheet Arrangements
The following table shows the Company’s contractual obligations as of September 30, 2019:
| | | | | | | | | | | | | | Payments due by period | | | | | | Less than | | 1 to 3 | | 3 to 5 | | More than | (Dollars in millions) | | Total | | 1 year | | years | | years | | 5 years | Long-Term Debt Obligation | | $ | 286.3 | | 1.3 | | — | | 285.0 | | — | Estimated Interest Payments (1) | | | 25.1 | | 9.6 | | 12.9 | | 2.6 | | — | Operating Lease Obligations | | | 30.0 | | 6.4 | | 9.9 | | 5.7 | | 8.0 | Purchase Obligations (2) | | | 18.2 | | 18.2 | | — | | — | | — | Total | | $ | 359.6 | | 35.5 | | 22.8 | | 293.3 | | 8.0 |
| (1) | Estimated interest payments for the Company’s debt obligations were calculated based on Management’s determination of the estimated applicable interest rates and payment dates. |
| (2) | A purchase obligation is defined as a legally binding and enforceable agreement to purchase goods and services that specifies all significant terms. Since the majority of the Company’s purchase orders can be cancelled, they are not included in the table above. |
The CompanyWe had no off-balance-sheet arrangements outstanding at September 30, 2019.2021.
Share Repurchases Information about the Company’sour common stock repurchases is provided in Note 9 to the Consolidated Financial Statements. Pension Funding Requirements
The minimum cash funding requirements related to the Company’s defined benefit pension plansA&D segment. Their annual sales are estimatedexpected to be approximately $0 in 2020, $0 in 2021, and $1.4$7 million in 2022. Additional information about the Company’s pension plans is provided in Note 11 to the Consolidated Financial Statements.
Other
As a normal incident of the business in which the Company is engaged, various claims, charges and litigation are asserted or commenced from time to time against the Company. Additionally, the Company is currently involved in various stages of investigation and remediation relating to environmental matters. It is the opinion of Management that the aggregate costs involved in the resolution of these matters, and final judgments, if any, which might be rendered against the Company are adequately reserved for, are covered by insurance or are not likely to have a material adverse effect on the Company’s results of operations, capital expenditures or competitive position.
Outlook
Management continues to see meaningful organic sales, Adjusted EBIT and Adjusted EBITDA growth across each of the Company’s business segments, and anticipates that growth rates in 2020 and beyond will generally exceed the broader industrial market. Given the pending sale of the Technical Packaging business expected to be completed in the first half of 2020 (see “Subsequent Event” on page 7), this business will be reported as discontinued operations in 2020 and is excluded from the Outlook section and comparisons to 2019 described below. The details of Management’s growth expectations for 2020 compared to 2019 are as follows:
| ● | Sales from continuing operations are expected to increase 9 to 10 percent on a consolidated basis, with Filtration growing 13.5 to 14.5 percent, USG growing 7 to 8 percent and Test growing 4 to 5 percent; |
| ● | Interest expense is expected to be lower than 2019, and will be impacted by the timing of the final after-tax cash proceeds received on the sale of the Technical Packaging business; |
| ● | Non-cash depreciation and amortization of intangible assets is expected to increase approximately $5 million, or $0.15 per share after-tax, related to previous acquisitions and capital spending; |
| ● | Income tax expense is expected to increase as Management is expecting a 23 to 24 percent effective tax rate calculated on higher pretax earnings; |
| ● | In summary, excluding Technical Packaging and the accounting impact of terminating and annuitizing the Company’s defined benefit pension plan, Management projects 2020 Adjusted EPS to be in the range of $3.20 to $3.30 per share (compared to 2019 Adjusted EPS of $2.95 per share, excluding the 2019 results of Technical Packaging). |
On a quarterly basis and consistent with prior years, Management expects 2020 revenues and Adjusted EPS to be more second-half weighted. Management expects Q1 2020 Adjusted EPS to be in the range of $0.35 to $0.40 per share.
Market Risk Exposure
Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks. In 2018, the Company entered into three interest rate swaps with a notional amount of $150 million to hedge some of its exposure to variability in future LIBOR-based interest payments on variable rate debt. In addition, the Company’s Canadian subsidiary Morgan Schaffer entered into foreign exchange contracts to manage foreign currency risk, as a portion of their revenue is denominated in U.S. dollars. All derivative instruments are reported on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. The interest rate swaps entered into during 2018 were not designated as cash flow hedges and therefore the gain or loss on the derivative is reflected in earnings each period.
The Company is also subject to foreign currency exchange rate risk inherent in its sales commitments, anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other than the U.S. dollar. The foreign currencies most significant to the Company’s operations are the Canadian Dollar and the Euro. The Company occasionally hedges certain foreign currency commitments by purchasing foreign currency forward contracts. The Company does not have material foreign currency market risk; net foreign currency transaction gain/loss was less than 2% of net earnings for 2019 and 2018.
The Company has determined that the market risk related to interest rates with respect to its variable debt is not material. The Company estimates that if market interest rates averaged one percentage point higher, the effect would have been less than 3% of net earnings for the year ended September 30, 2019.
For more information about the Company’s derivative financial instruments, see Note 12 to the Company’s Consolidated Financial Statements included herein.
Critical Accounting Policies The preparation of financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires Management to make estimates and assumptions in certain circumstances that affect amounts reported in the Consolidated Financial Statements. In preparing these financial statements, Management has made its best estimates and judgments of certain amounts included in the Consolidated Financial Statements, giving due consideration to materiality. The Company doesWe do not believe there is a great likelihood that materially different amounts would be reported under different conditions or using different assumptions related to the accounting policies described below. However, application of these accounting policies involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. The Company’sOur senior Management discusses the critical accounting policies described below with the Audit and Finance Committee of the Company’sour Board of Directors on a periodic basis. The following discussion of critical accounting policies is intended to bring to the attention of readers those accounting policies which Management believes are critical to the Consolidated Financial Statements and other financial disclosure. It is not intended to be a comprehensive list of all significant accounting policies that are more fully described in Note 1 to the Consolidated Financial Statements. Revenue Recognition InformationWe account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. The unit of account in ASC Topic 606 is a performance obligation. The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration, as applicable, which are based on historical, current and forecasted information. The transaction price is allocated to each distinct performance obligation within the recognitioncontract and recognized as revenue when, or as, the performance obligation is satisfied. Certain of our long-term contracts contain incentive fees that can increase the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur. The estimated amounts are based on an assessment of our anticipated performance and all other information that is reasonably available to us.
Approximately 57% of the A&D segment’s revenue (25% of consolidated revenue) is recognized over time as the products do not have an alternative use and either we have an enforceable right to payment for costs incurred plus a reasonable margin or the inventory is owned by the entities in eachcustomer. Selecting the method to measure progress towards completion for our contracts requires judgment and is based on the nature of the Company’s business segments is set forth in Note 1.Eproducts or services to be provided. The A&D segment generally uses the cost-to-cost method to measure progress on our contracts, as the rate at which costs are incurred to fulfill a contract best depicts the transfer of control to the Company’s Consolidated Financial Statements.customer. Under this method, we measure the extent of progress towards completion based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and we record revenue proportionally as costs are incurred based on an estimated profit margin. The Test segment generally uses the milestone output method to measure progress on our contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under this method, we estimate profit as the difference between total revenue and total estimated costs at completion of a contract and recognize these revenues and costs based on milestones achieved. Total contract cost estimates are based on current contract specifications and expected engineering requirements and require us to make estimates on expected profit. The estimates on profit are based on judgments we make to project the outcome of future events, and can often span more than one year and include labor productivity and availability, the complexity of the work to be performed, change orders issued by our customers, and other specialized engineering and production related activities. Our cost estimation process is based on historical results of contracts and historical actuals to original estimates, and the application of professional knowledge and experience of engineers and program managers along with finance professionals to these historical results. We review and update our estimates of costs quarterly or more frequently when circumstances significantly change, which can affect the profitability of our contracts. For contracts where revenue is recognized over time, we recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period. We have net revenue recognized in the current year from performance obligations satisfied in the prior year due to changes in our estimated costs to complete the related performance obligations. We recognize anticipated losses on contracts in full in the period in which the losses become known. The impact of adjustments in contract estimates on our operating earnings can be reflected in either revenue or operating costs and expenses. The aggregate impact of adjustments in contract estimates increased our earnings before income tax and diluted earnings per share by $1.7 million and $0.05 per share, respectively, in 2021. Income Taxes The Company operatesWe operate in numerous taxing jurisdictions and isare subject to examination by various U.S. Federal, state and foreign jurisdictions for various tax periods. The Company’sOur income tax positions are based on research and interpretations of the income tax laws and rulings in each of
the jurisdictions in which the Company doeswe do business. Due to the subjectivity of interpretations of laws and rulings in each jurisdiction, the differences and interplay in tax laws between those jurisdictions, as well as the inherent uncertainty in estimating the final resolution of complex tax audit matters, Management’s estimates of income tax liabilities may differ from actual payments or assessments. On December 22, 2017, the U.S. government enacted the TCJA, which, among other things, lowered the U.S. corporate statutoryWe account for income tax rate and established a modified territorial system requiring a mandatory deemed repatriation on undistributed earnings of foreign subsidiaries. The Company completed its analysis of the impact of the TCJA during the first quarter of 2019.
Income taxes are accounted for under the asset and liability method. DeferredWe recognize deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. DeferredWe measure deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. DeferredWe may reduce deferred tax assets may be reduced by a valuation allowance if it is more likely than not that some portion of the deferred tax assets will not be realized. TheWe recognize the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The CompanyWe regularly reviews itsreview our deferred tax assets for recoverability and establishesestablish a valuation allowance when Management believes it is more likely than not such assets will not be recovered, taking into consideration historical operating results, expectations of future earnings, tax planning strategies, and the expected timing of the reversals of existing temporary differences.
Goodwill and Other Long-Lived Assets Our Management annually reviews goodwill and other long-lived assets with indefinite useful lives for impairment or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If the Company determineswe determine that the carrying value of the goodwill and other long-lived assetassets may not be recoverable, we record a permanent impairment charge is recorded for the amount by which the carrying value of the goodwill and other long-lived assetassets exceeds its fair value. FairWe measure fair value is measured based on a discounted cash flow method using a discount rate determined by Management to be commensurate with the risk inherent in each of our reporting units’ or asset groups’ current business models. TheOur estimates of cash flows and discount rate are subject to change due to the economic environment, including such factors as interest rates, expected market returns and volatility of markets served. Management believesWe believe that theManagement’s estimates of future cash flows and fair value are reasonable; however, changes in estimates could result in impairment charges. At September 30, 2019, the Company has2021 we have determined that no reporting units are at risk of goodwill impairment as the fair value of each reporting unit exceeded its carrying value.or other long-lived assets were impaired. IntangibleWe amortize intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and are reviewedreview them for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable.
Other Matters Contingencies
As a normal incident of the businesses in which the Company is engaged, various claims, charges and litigation are asserted or commenced from time to time against the Company. Additionally, the Company is currently involved in various stages of investigation and remediation relating to environmental matters. It is the opinion of Management that the aggregate costs involved in the resolution of these matters, and final judgments, if any, which might be rendered against the Company are adequately accrued, are covered by insurance or are not likely to have a material adverse effect on the Company’s results from continuing operations, capital expenditures, or competitive position.
Quantitative and Qualitative Disclosures about Market Risk Market risks relating to the Company’sour operations result primarily from changes in interest rates and changes in foreign currency exchange rates. The Company isWe are exposed to market risk related to changes in interest rates, and we selectively usesuse derivative financial instruments, including forward contracts and swaps, to manage these risks. In 2018, the Company entered into three interest rate swaps with a notional amount of $150 million to hedge some of its exposure to variability in future LIBOR-based interest payments on variable rate debt. In addition, the Company’sOur Canadian subsidiary Morgan Schaffer has entered into foreign exchange contracts to manage foreign currency risk, asbecause a portion of their revenue is denominated in U.S. dollars. AllWe report all derivative instruments are reported on theour balance sheet at fair value. For derivative instruments designated as cash flow hedges, we defer the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. See further discussion regarding the Company’sour market risks in “Market Risk Analysis,” above. Controls and Procedures
For a description of the Company’s evaluation of its disclosure controls and procedures, see Item 9A, “Controls and Procedures.”
New Accounting Pronouncements
Information regarding new and updated accounting standards which affect the content and/or presentation of the Company’s financial information is set forth in Note 1.V to the Company’s Consolidated Financial Statements included herein.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk See “Market Risk Exposure” and “Other Matters – Quantitative and Qualitative Disclosures about Market Risk” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are incorporated into this Item by reference.Not Applicable.
Item 8. Financial Statements and Supplementary Data The information required by this Item is incorporated by reference to the Consolidated Financial Statements of the Company, the Notes thereto, and the related “Report of Independent Registered Public Accounting Firm” of KPMG LLP, as set forth in the Financial Information section of this Annual Report;Report, an Index to which is provided on page F-1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not Applicable. Item 9A. Controls and Procedures For 2019, the CompanyEvaluation of Disclosure Controls and Procedures
Our Chief Executive Officer and Chief Financial Officer (“Certifying Officers”) carried out an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act). The evaluation was conducted under the supervision and with the participation as of September 30, 2021. Our Certifying Officers concluded that, as a result of the Company’s Management, including the Company’s Chief Executive Officermaterial weaknesses in internal control over financial reporting as described below, our disclosure controls and Chief Financial Officer, using the Internal Control – Integrated Framework (2013) issued by the Committeeprocedures were not effective as of Sponsoring Organizations of the Treadway Commission (COSO).September 30, 2021. Disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. In light of the material weaknesses at a reporting unit within the Company’s Aerospace & Defense (A&D) segment, described below, management performed additional analyses and other procedures to ensure that our Consolidated Financial Statements were prepared in accordance with U.S. generally accepted accounting principles (GAAP). Accordingly, management believes that the Consolidated Financial Statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial position, results of operations, and cash flows as of and for the periods presented in accordance with GAAP. Management’s Report on Internal Control Over Financial Reporting Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. The Company’s management, with participation of the Certifying Officers, under the oversight of our Board of Directors, evaluated the effectiveness of the Company’s internal control over financial reporting as of September 30, 2021 using the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officermanagement concluded that the Company’s disclosure controls and procedures wereinternal control over financial reporting was not effective as of September 30, 2019.2021, due to the material weaknesses in internal control over financial reporting, described below. As disclosedBased on this assessment, the Company’s management concluded that an effective risk assessment process responsive to changes in Item 9A, Controlsthe operating environment and Procedures,business at a reporting unit in the Company’s Aerospace & Defense (A&D) segment did not occur, resulting in the ineffective design and implementation of certain controls to reduce the risks of material misstatements at that reporting unit. Specifically, the design of certain controls over revenue recognition, and the accumulation of inventory costs and the determination of inventory carrying values were ineffective. The control deficiencies resulted in immaterial misstatements of net sales and cost of sales. The control deficiencies described above created a reasonable possibility that a material misstatement to the consolidated financial statements would not be prevented or detected on a timely basis. Therefore, we concluded that the deficiencies represent material weaknesses in the Company’s internal control over financial reporting and that our internal control over financial reporting was not effective as of September 30, 2021.
The Company acquired Altanova and the assets of Phenix (together, the “Acquired Businesses”) during the year ended September 30, 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2021, the Acquired Businesses’ internal control over financial reporting associated with total assets representing 12.2 percent of consolidated assets, and total sales representing 0.6 percent of consolidated net sales, included in the consolidated financial statements of the Company as of and for the year ended September 30, 2021. The Company’s independent registered public accounting firm, KPMG LLP, who audited the consolidated financial statements included in this Annual Report on Form 10-K forissued an adverse opinion on the fiscal year ended September 30, 2018, duringeffectiveness of the fourth quarter of 2018 we identified a material weakness inCompany’s internal control related toover financial reporting. KPMG LLP’s report appears on page F-33 of this Annual Report on Form 10-K. Remediation The Company is in the ineffective designprocess of remediating the material weaknesses and operationis taking the following actions: | a) | Dedicating additional resources to improve the Company’s risk assessment process to ensure that it is comprehensive, continuous, and designed to identify and assess changes that could significantly impact internal control over financial reporting. |
| b) | Improving Company policies, procedures and system and process controls related to inventory costing and revenue recognition. |
| c) | Providing additional risk assessment training to the A&D segment finance department on the applicable financial reporting requirements and related accounting policies. |
We believe these measures will remediate the deferred revenue general ledger account. During 2019, Management implemented our previously disclosed remediation plan that included: enhancing our policiescontrol deficiencies and procedures related to the deferred revenue reconciliation and review and providing additional training to certain personnel in our finance department. During the fourth quarter of 2019, we completed our testing of thestrengthen internal control over financial reporting. The operating effectiveness of the implementedrevised and new controls are currently being assessed and found them to be effective. As a result we have concluded the material weakness has beenweaknesses will be considered remediated asonly after the applicable controls have operated effectively for a sufficient period of September 30, 2019.time. Except for the changesChanges in connection with our implementation of the remediation plan discussed above, there have been no otherInternal Control Over Financial Reporting
No changes in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the fiscal quarter ended September 30, 20192021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. For the remainder of the information required by this item, see “Management’s Report on Internal Control over Financial Reporting” and the related “Report of Independent Registered Public Accounting Firm” of KPMG LLP, in the Financial Information section beginning on page F-1 of this Annual Report, which are incorporated into this Item by reference.
Item 9B. Other Information None. Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection Not applicable. PART III Item 10. Directors, Executive Officers and Corporate Governance Information regarding our directors, nominees and nominating procedures, the Company’s Code of Ethics, its Audit and Finance Committee, and non-compliance (if any) with Section 16(a) of the Securities Exchange Act of 1934 is hereby incorporated by reference to the sections captioned “Proposal 1: Election of Directors,” ��Board“Board of Directors – Governance Policies and Management Oversight,” “Committees” and “Securities Ownership” in the 20192021 Proxy Statement. Information regarding the Company’sour executive officers is set forth in Item 1, “Business – Information about our Executive Officers,” above. Item 11. Executive Compensation Information regarding the Company’sour compensation committee and director and executive officer compensation is hereby incorporated by reference to the sections captioned “Committees – Compensation Committee Interlocks and Insider Participation,” “Director Compensation” and “Executive Compensation Information” in the 20192021 Proxy Statement. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding the beneficial ownership of shares of the Company’sour common stock by nominees andour directors, by executive officers, by directorsdirector nominees and executive officers individually and as a group, and by any known holder of five percent stockholdersor more of the common stock, is hereby incorporated by reference to the section captioned “Securities Ownership” in the 20192021 Proxy Statement. The following table summarizes certain information regarding shares of Companyour common stock that may be issued by the Company pursuant to itsour equity compensation plans existing as of September 30, 2019:2021: | | | | | | | | | | Number of securities to be | | Weighted-average | | Number of securities remaining available | | | | issued upon exercise of | | exercise price of | | for future issuance under equity | | | | outstanding options, | | outstanding options, | | compensation plans (excluding securities | | Plan Category | | warrants and rights (1) | | warrants and rights | | reflected in the first column) (1) | | Equity compensation plans approved by security holders (2) | | 226,705 | (3) | N/A | (4) | 690,391 | (5) | Equity compensation plans not approved by security holders (6) | | 92,778 | (6) | N/A | (4) | 21,701 | (6) | Total | | 319,483 | | N/A | (4) | 712,092 | |
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| | | | | | | | | | Number of securities to | | Weighted-average | | Number of securities remaining | | | | be issued upon exercise | | exercise price of | | available for future issuance under | | | | of outstanding options, | | outstanding options, | | equity compensation plans (excluding | | Plan Category | | warrants and rights (1) | | warrants and rights | | securities reflected in column (a)) (1) | | Equity compensation plans approved by security holders (2) | | 281,004 | (3) | N/A | (4) | 792,196 | (5)(6) | Equity compensation plans not approved by security holders | | 70,362 | (7) | N/A | (4) | 51,833 | (7) | Total | | 351,366 | | N/A | (4) | 844,029 | |
| (1) | The number of shares is subject to adjustment for future changes in capitalization by stock splits, stock dividends and similar events. |
| (2) | Consists of the Company’s 2013 Incentive Compensation Plan and 2018 Omnibus Incentive Plan. |
| (3) | Consists of 96,322 and 184,682 shares issuable in connection with the vesting and distribution of outstanding performance-accelerated restricted share units awarded under the 2013 Incentive Compensation Plan and 2018 Omnibus Incentive Plan, respectively. |
| (4) | The securities outstanding at September 30, 2019 have no exercise price. |
| (5) | Represents shares currently available for awards under the 2018 Omnibus Incentive Plan. No shares remain available for issuance under the 2013 Incentive Compensation Plan. |
| (6) | Does not include shares that may be purchased on the open market pursuant to the Company’s Employee Stock Purchase Plan (ESPP)(the “ESPP”). Under the ESPP, participants may elect to have up to 10% of their current salary or wages withheld and contributed to one or more independent trustees for the purchase of shares. At the discretion of an officer of the Company, the Company or a domestic subsidiary or division may contribute cash in an amount not to exceed 20% of the amounts contributed by participants; however, the total number of shares purchased with the Company’s matching contributions after October 15, 2003 may not exceed 275,000. As of September 30, 2019, 611,8332021, 629,911 shares had been purchased with the Company’s matching funds of which 199,811217,889 were purchased after October 15, 2003. |
| (7)(2) | Consists of the Company’s 2018 Omnibus Incentive Plan (the “Omnibus Plan”). |
| (3) | Represents shares issuable pursuant to unvested performance-accelerated restricted share (PARS) awards and unvested shares of time-vested restricted stock, all under the Omnibus Plan. |
| (4) | The securities outstanding at September 30, 2021 have no exercise price. |
| (5) | Represents shares currently available for awards under the Omnibus Plan. |
| (6) | Consists of the Company’s Compensation Plan for Non-Employee Directors (Director(the “Directors Compensation Plan). The DirectorPlan”), under which the Company’s directors were compensated prior to the 2021 Annual Meeting; at that time the Company’s shareholders approved granting future director compensation awards under the Omnibus Plan rather than the Directors Compensation Plan provides for each director to be paid an annual retainer fee payable in sharesPlan. As of Company stock as well as an annual retainer fee and certain other fees payable in cash, all as determined periodically by the Human Resources and Compensation CommitteeSeptember 30, 2021, of the Board of Directors. Directors may elect to defer receipt of their stock and/or cash compensation. The maximum number of400,000 shares availableauthorized for issuance under the DirectorDirectors Compensation Plan is 400,000 shares; asa total of September 30, 2019, 277,805285,521 shares had been issued and fourapproximately 92,778 shares had been elected by various directors had elected to deferbe issued on a deferred basis; the issuanceremaining 21,701 shares will be used, if at all, only to satisfy dividend accrual rights attached to deferred shares previously awarded under the Directors Compensation Plan. Details of a total of approximately 70,362 shares. Deferred amountsthe directors’ compensation, including elective deferrals and dividend accrual rights, are creditedhereby incorporated by reference to the director’s deferred compensation accountsection captioned “Directors Compensation” in stock equivalents and are distributed at a future date or dates specified by the director unless distribution is accelerated in certain circumstances, including a change in control of the Company. Deferred cash compensation may be distributed in shares or cash, but any deferred stock portion may only be distributed in shares.2021 Proxy Statement. |
Item 13. Certain Relationships and Related Transactions and Director Independence Information regarding transactions with related parties and the independence of the Company’sour directors, nominees for directors and members of the committees of theour board of directors is hereby incorporated by reference to the sections captioned “Board of Directors” and “Committees” in the 20192021 Proxy Statement. Item 14. Principal AccountingAccountant Fees and Services Information regarding the Company’sour independent registered public accounting firm, its fees and services, and the Company’sour Audit and Finance Committee’s pre-approval policies and procedures regarding such fees and services, is hereby incorporated by reference to the section captioned “Audit-Related Matters” in the 20192021 Proxy Statement. PART IV Item 15. Exhibits, Financial Statement Schedules (a) | The following documents are filed as a part of this Report: |
(1)Financial Statements. The Consolidated Financial Statements of the Company, and the Report of Independent Registered Public Accounting Firm thereon of KPMG LLP, are included in this Report beginning on page F-1; an Index thereto is set forth on page F-1.
(2)Financial Statement Schedules. Financial Statement Schedules are omitted because either they are not applicable or the required information is included in the Consolidated Financial Statements or the Notes thereto.
(3)Exhibits. The following exhibits are filed with this Report or incorporated herein by reference to the document location indicated:
| (1) | Financial Statements. The Consolidated Financial Statements of the Company, and the Report of Independent Registered Public Accounting Firm thereon of KPMG LLP, are included in this Report beginning on page F-1; an Index thereto is set forth on page F-1. |
| (2) | Financial Statement Schedules. Financial Statement Schedules are omitted because either they are not applicable or the required information is included in the Consolidated Financial Statements or the Notes thereto. |
| (3) | Exhibits. The following exhibits are filed with this Report or incorporated herein by reference to the document location indicated: |
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3.1(a) | | Restated Articles of Incorporation | | Exhibit3(a)to the Company’sCompany’s Form10-K for the fiscalyear ended September30, 1999 | 3.1(b) | | Amended Certificate of Designation, Preferences and Rights of SeriesA Participating Cumulative Preferred Stock | | Exhibit4(e)to the Company’sCompany’s Form10-Q for the fiscal quarter ended March31, 2000 | 3.1(c) | | Articles of Merger, effective July10, 2000 | | Exhibit3(c)to the Company’sCompany’s Form10-Q for the fiscal quarter ended June30, 2000 | 3.1(d) | | Amendment to Articles of Incorporation, effective February5, 2018 | | Exhibit3.1 to the Company’sCompany’s Form8-K filed February7, 2018 | 3.2 | | Bylaws | | Exhibit3.1 to the Company’sCompany’s Form8-K filed November19, 2019 | 4.1(a) | | Description of Common Stock | | Filed herewithExhibit 4.1(a) to the Company's Form 10-K for the fiscal year ended September 30, 2019
| 4.1(b) | | Specimen revised Common Stock Certificate | | Exhibit4.1 to the Company’sCompany’s Form10-Q for the fiscal quarter ended March31, 2010 | 4.2 | | Credit Agreement dated September27, 2019, incorporated by reference to Exhibit10.1 hereto | | Exhibit 10.1 to the Company’sCompany’s Form 8-K filed September 30, 2019 | 10.1 | | Credit Agreement dated as of September 27, 2019 among the Registrant,ESCO Technologies Inc., the Foreign Subsidiary Borrowers party thereto, the Lenders party thereto, JPMorgan Chase Bank, N.A. as Administrative Agent, BMO Harris Bank N.A. as Syndication Agent, and Bank of America, N.A., SunTrust Bank, U.S. Bank National Association and Wells Fargo Bank, National Association as Co-Documentation Agents | | Exhibit 10.1 to the Company’s Form 8-K filed September 30, 2019 | 10.2 | | SecuritiesEquity Purchase Agreement dated March 14, 2014 betweenNovember 15, 2019 by and among Sonoco Plastics, Inc., Sonoco Holdings, Inc., ESCO Technologies Holding LLC, ESCO UK Holding Company I LTD., Thermoform Engineered Quality LLC, and Meter Readings Holding LLCPlastique Holdings Ltd.
| | Exhibit 10.1 to the Company’sCompany’s Form 8-K filed March 28, 2014January 7, 2020 | 10.3 |
| Form of Indemnification Agreement with each of ESCO’s non-employee directors | | Exhibit10.1to the Company’sCompany’s Form10-K for the fiscalyear ended September30, 2012 | 10.4(a)
| *
| First Amendment to the ESCO Electronics Corporation Supplemental Executive Retirement Plan, effective August 2, 1993 (comprising restatement of entire Plan)
|
| Exhibit 10.2(a) to the Company’s Form 10-K for the fiscal year ended September 30, 2012
| 10.4(b)
| *
| Second Amendment to Supplemental Executive Retirement Plan, effective May 1, 2001
|
| Exhibit 10.4 to the Company’s Form 10-K for the fiscal year ended September 30, 2001
| 10.4(c)
| *
| Form of Supplemental Executive Retirement Plan Agreement
|
| Exhibit 10.28 to the Company’s Form 10-K for the fiscal year ended September 30, 2002
|
Exhibit No. | | Description | | Document Location |
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| 10.4(a) | * | First Amendment to the ESCO Electronics Corporation Supplemental Executive Retirement Plan, effective August2, 1993 (comprising restatement of entire Plan) | | | Exhibit 10.2(a) to the Company's Form 10-K for the fiscal year ended September 30, 2012 |
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10.4(b) | * | Second Amendment to Supplemental Executive Retirement Plan, effective May1, 2001 | | | Exhibit 10.4 to the Company's Form 10-K for the fiscal year ended September 30, 2001 |
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10.4(c) | * | Formof Supplemental Executive Retirement Plan Agreement | | | Exhibit10.28 to the Company’s Form10-K for the fiscalyear ended September30, 2002
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10.5 | * | Directors’Directors’ Extended Compensation Plan, adopted effective October11, 1993, restated to include all amendments through August7, 2013 (current as of November 2019)2021)
| | Filed herewithExhibit 10.5 to the Company's Form 10-K for the fiscal year ended September 30, 2019
| 10.610.6(a)
| * | Compensation Plan For Non-Employee Directors, as amended and restated Novemberto reflect all amendments through December 8, 2017 |
| Exhibit 10.3 to the Company’s Form 8-K filed November 14, 2017
| 10.7(a)
| *
| 2013 Incentive Compensation Plan
|
| Appendix A to the Company’s Schedule 14A Proxy Statement filed December 19, 2012
| 10.7(b)
| *
| Form of Award Agreement under 2013 Incentive Compensation Plan, effective November 11, 20152020
| | Exhibit 10.1 to the Company’sCompany’s Form 8-K filed November 12, 2015December 9, 2020 | 10.7(c)10.6(b)
| * | Form of Amendment to 2012-2014 Awards under 2004 and 2013 Incentive Compensation Plans, effective November 11, 2015Director Share Award Agreement (Non-Employee Director) | | Exhibit 10.2 to the Company’sCompany’s Form 8-K filed November 12, 2015December 9, 2020 | 10.8(a)10.7(a)
| * | 2018 Omnibus Incentive Plan | | Exhibit 10.1 to the Company’sCompany’s Form 8-K filed February 6, 2018 | 10.7(b) | * | 2018 Omnibus Incentive Plan as Amended and Restated November 17, 2020 | | Exhibit 10.3 to the Company’s Form 8-K filed November 19, 2020 | 10.8(a) | * | Form of Award Agreement for 2018 awards of Performance-Accelerated Restricted Shares under 2018 Omnibus Incentive Plan | | Exhibit 10.6(f) to the Company’s Form 10-K for the fiscal year ended September 30, 2018 | 10.8(b) | * | Form of Award Agreement for 2019 awards of Performance-Accelerated Restricted Shares under 2018 Omnibus Incentive Plan (revised August 29, 2018) | | Exhibit 10.6(f)10.1 to the Company’sCompany's Form 10-K for the fiscal year ended September 30, 20188-K filed May 7, 2019 | 10.8(c) | * | Form of Amendment to 2018 and 2019 Award AgreementAgreements for Performance-Accelerated Restricted Shares under 2018 Omnibus Incentive Plan (revised May 1, 2019) | | Exhibit 10.1 to the Company’s Form 8-K filed November 19, 2020 | 10.8(d) | * | Form of 2020 Award of Performance-Accelerated Restricted Shares to Executive Officers under 2018 Omnibus Incentive Plan | | Exhibit 10.1 to the Company’s Form 8-K filed May 7, 20192021 | 10.9(a)10.8(e)
| * | 2021 Form of Restricted Share Unit Awards to Executive Officers under 2018 Omnibus Incentive Plan | | Exhibit 10.2 to the Company’s Form 10-Q filed August 9,2021 | 10.10(a) | * | Eighth Amendment and Restatement of Employee Stock Purchase Plan, effective August 2, 2018 | | Exhibit 10.7 to the Company’s Form 10-K for the fiscal year ended September 30, 2018 | 10.9(b)10.10(b)
| | Ninth Amendment and Restatement of Employee Stock Purchase Plan, effective February5, 2019 | | Exhibit10.1 to the Company’sCompany’s Form8-K filed February7, 2019 | 10.1010.11
| * | Performance Compensation Plan for Corporate, Subsidiary and Division Officers and Key Managers, adopted August2, 1993, as amended and restated through February4, 2019 | | Exhibit10.1 to the Company’sCompany’s Form8-K filed November19, 2019 | 10.1110.12
| * | Compensation Recovery Policy, adopted effective February4, 2010 | | Exhibit10.6 to the Company’sCompany’s Form8-K filed February10, 2010 | 10.12
|
| Severance Plan adopted as of August 10, 1995, as Amended and Restated November 11, 2015
|
| Exhibit 10.1 to the Company’s Form 8-K/A filed November 30, 2015
| 10.13(a)10.13
| * | Employment Agreement with Victor L. Richey, effectiveFourth Amended and Restated Severance Plan dated November 3, 1999
|
| Exhibit 10(bb) to the Company’s Form 10-K for the fiscal year ended September 30, 1999
(Note: Agreement with Victor L. Richey is substantially identical to the referenced Exhibit and is therefore omitted as a separate exhibit pursuant to Rule 12b-31)
| 10.13(b)
| *
| Second Amendment to Employment Agreement with Victor L. Richey, effective May 5, 2004
|
| Exhibit 10.1 to the Company’s Form 10-Q for the fiscal quarter ended June 30, 2004
| 10.13(c)
| *
| Third Amendment to Employment Agreement with Victor L. Richey, effective December 31, 2007
|
| Exhibit 10.1 to the Company’s Form 8-K filed January 7, 2008
| 10.14(a)
| *
| Employment Agreement with Gary E. Muenster, effective November 3, 1999
|
| Exhibit 10(bb) to the Company’s Form 10-K for the fiscal year ended September 30, 1999
(Note: Agreement with Gary E. Muenster is substantially identical to the referenced Exhibit except that it provides a minimum base salary of $108,000, and is therefore omitted as a separate exhibit pursuant to Rule 12b-31)
| 10.14(b)
| *
| Second Amendment to Employment Agreement with Gary E. Muenster, effective May 5, 200417, 2020
| | Exhibit 10.2 to the Company’sCompany's Form 10-Q for the fiscal quarter ended June 30, 20048-K filed November 19, 2020 |
Exhibit No. | | Description | | Document Location |
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10.14(c)10.14
| * | Third Amendment to Employment and Compensation Agreement with Gary E. Muenster,Victor L. Richey effective December 31, 2007May 10, 2021
| | Exhibit 10.110.3 to the Company’sCompany’s Form 8-K10-Q filed January 7, 2008 (Note: Third Amendment with Gary E. Muenster is substantially identical to the referenced Exhibit except that (i) the termination amounts payable under Paragraph 9.a(1) are equal to base salary for 12 months and (ii) under Paragraph 9.a(1)(B), such termination amounts may be paid in biweekly installments equal to 1/26th of such amounts, and is therefore omitted as a separate exhibit pursuant to Rule 12b-31)August 9, 2021
| 10.14(d)10.15
| * | Fourth Amendment to Employment and Compensation Agreement with Gary E. Muenster,Christopher L. Tucker effective February 6, 2008April 30, 2021
| | Exhibit 10.110.4 to the Company’sCompany’s Form 8-K10-Q filed February 12, 2008August 9, 2021 | 10.15(a)10.16
| * | Employment and Compensation Agreement with Alyson S. Barclay,David M. Schatz effective November 3, 1999April 30, 2021 | | Exhibit 10(bb) to the Company’s Form 10-K for the fiscal year ended September 30, 1999 (Note: Agreement with Alyson S. Barclay is substantially identical to the referenced Exhibit except that it provides a minimum base salary of $94,000, and is therefore omitted as a separate exhibit pursuant to Rule 12b-31)
| 10.15(b)
| *
| Second Amendment to Employment Agreement with Alyson S. Barclay, effective May 5, 2004
|
| Exhibit 10.210.5 to the Company’s Form 10-Q for the fiscal quarter ended June 30, 2004
(Note: Second Amendment with Alyson S. Barclay is substantially identical to the referenced Exhibit, and is therefore omitted as a separate exhibit pursuant to Rule 12b-31)
| 10.15(c)
| *
| Third Amendment to Employment Agreement with Alyson S. Barclay, effective December 31, 2007
|
| Exhibit 10.1 to the Company’s Form 8-K filed January 7, 2008
(Note: Third Amendment with Alyson S. Barclay is substantially identical to the referenced Exhibit except that (i) the termination amounts payable under Paragraph 9.a(1) are equal to base salary for 12 months and (ii) under Paragraph 9.a(1)(B), such termination amounts may be paid in biweekly installments equal to 1/26th of such amounts, and is therefore omitted as a separate exhibit pursuant to Rule 12b-31)
| 10.15(d)
| *
| Fourth Amendment to Employment Agreement with Alyson S. Barclay, effective July 29, 2010
|
| Exhibit 10.1 to the Company’s Form 8-K filed August 3, 20109, 2021
| 21 | | Subsidiaries of the Company | | Filed herewith | 23 | | Consent of Independent Registered Public Accounting Firm | | Filed herewith | 31.1 | | Certification of Chief Executive Officer | | Filed herewith | 31.2 | | Certification of Chief Financial Officer | | Filed herewith | 32 | ** | Certification of Chief Executive Officer and Chief Financial Officer | | FiledFurnished herewith
| 101.INS | *** | Inline XBRL Instance Document | | Submitted herewith | 101.SCH | *** | Inline XBRL Schema Document | | Submitted herewith | 101.CAL | *** | Inline XBRL Calculation Linkbase Document | | Submitted herewith | 101.LAB | *** | Inline XBRL Label Linkbase Document | | Submitted herewith | 101.PRE | *** | Inline XBRL Presentation Linkbase Document | | Submitted herewith | 101.DEF | *** | Inline XBRL Definition Linkbase Document | | Submitted herewith | 104 | *** | Cover PageInline Interactive Data File (contained in Exhibit 101) | | Submitted herewith |
* Indicates a management contract or compensatory plan or arrangement. ** Furnished (and not filed) with the Commissionherewith pursuant to Item 601(b)(32)(ii) of Regulation S-K. *** Exhibits 101 and 104 to this report consist of documents formatted in XBRL (Extensible Business Reporting Language) and filed with the Securities and Exchange Commission; they are not included in printed copies of this Report. Item16.Form10-K Summary Not applicable. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | | ESCO TECHNOLOGIES INC. | | | | | By: | /s/ Victor L. Richey | | | Victor L. Richey | | | President and Chief Executive Officer | | | | | Date: | November 29, 20192021 |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature | | Title | | Date | | | | | | /s/ Victor L. Richey | | Chairman, President, Chief Executive Officer (Principal Executive Officer) and Director | | November 29, 20192021 | Victor L. Richey | | | | | | | | | | /s/ Gary E. MuensterChristopher L. Tucker | | ExecutiveSenior Vice President and Chief Financial Officer (Principal Accounting Officer) and Director
| | November 29, 20192021 | Gary E. MuensterChristopher L. Tucker
| | | | | | | | | | /s/ Patrick M. Dewar | | Director | | November 29, 20192021 | Patrick M. Dewar | | | | | | | | | | /s/ Vinod M. Khilnani | | Director | | November 29, 20192021 | Vinod M. Khilnani | | | | | | | | | | /s/ Leon J. Olivier | | Director | | November 29, 20192021 | Leon J. Olivier | | | | | | | | | | /s/ Robert J. Phillippy | | Director | | November 29, 20192021 | Robert J. Phillippy | | | | | | | | | | /s/ Larry W. Solley | | Director | | November 29, 20192021 | Larry W. Solley | | | | | | | | | | /s/ James M. Stolze | | Director | | November 29, 20192021 | James M. Stolze | | | | | | | | | | /s/ Gloria L. Valdez | | Director | | November 29, 20192021 | Gloria L. Valdez | | | | |
FINANCIAL INFORMATION INDEX REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors ESCO Technologies Inc.: Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of ESCO Technologies Inc. and subsidiaries (the Company) as of September 30, 20192021 and 2018,2020, the related consolidated statements of operations, comprehensive income, (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended September 30, 2019,2021 and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 30, 20192021 and 2018,2020, and the results of its operations and its cash flows for each of the years in the three-year period ended September 30, 2019,2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of September 30, 2019,2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated November 29, 20192021 expressed an unqualifiedadverse opinion on the effectiveness of the Company’s internal control over financial reporting. Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenue from contracts with customers as of October 1, 2018 due to the adoption of ASU No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606).
Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. AssessmentRevenue Recognition — Estimate of the estimation of total contract costs at completion for contracts in the Filtration segment for which revenue is recognized over time using a cost-to-cost model
As discussed in Notes 21 and 1415 to the consolidated financial statements, the Company’s FiltrationAerospace & Defense segment enters into certain long-term fixed price contracts with aerospace and defense customers to produce various products. These products do not have an alternative use and the Company has an enforceable right to payment for costs incurred plus a reasonable margin. Revenue for these contracts is recognized over time generally using a cost-to-cost model. Under such model, the Company measures the extent of progress towards completion of these contracts based on the ratio of contract costs incurred to date to the estimate of total contract costs at completion. The estimation of these costs requires judgment by the Company given the unique product specifications and requirements for contracts related to the design, development, and manufacture of complex products. We identified the assessment of the estimationestimate of total contract costs at completion for certain contracts in the FiltrationAerospace & Defense segment for which revenue is recognized over time using a cost-to-cost model as a critical audit matter. Complex auditor judgment was required in evaluating expected engineering and production requirements of the contracts and the associated cost estimates for labor hours and materials.materials, which represent assumptions with a high level of estimation uncertainty and that are also susceptible to potential management bias. Changes to these estimates may have a significant impact on the net sales and earnings recorded during the fiscal year. The following are the primary procedures we performed to address this critical audit matter includedmatter. We evaluated the following. Wedesign and tested the operating effectiveness of certain internal controls overrelated to the Company’s revenue recognition process, includingprocess. This included controls over the accumulation and estimation of costs to complete for labor hours and costsmaterials for the contracts described above. For a selection of materials. Wecontracts, we compared the Company’s historical estimated costs and profit margin to the actual costs and profit margin for completed contracts to assess the Company’s ability to accurately estimate costs. We challenged the Company’s assumptions for labor hours and materials to be incurred for a sampleselection of contracts by: | ● | Readingreading the underlying contract documents, including applicable amendments, to obtain an understanding of the contractual requirements and deliverables;deliverables |
| ● | Comparinginquiring of financial and operational personnel of the Company to identify factors that should be considered within the cost to complete estimates |
| ● | comparing the costs incurred to date, as a percentage of the estimated costs at completion, to the Company’s physicalCompany’s production to date under the contract;contract, including consideration of remaining contract performance risks |
| ● | Comparingcomparing actual incurred and remaining estimated material costs to the original estimated amount of material costs at the beginning of the project plus incremental material costs due to modifications;contract modification |
| ● | Comparingcomparing actual incurred and remaining estimated labor hours to the original estimate of labor hours at the beginning of the project plus incremental labor hours due to modification;contract modification |
| ● | Comparingcomparing the estimated costs at completion, which includes costs incurred to date plus estimated costs to complete, to actual costs incurred for similar products previously developed and produced, if applicable; andapplicable |
| ● | Inspectinginspecting correspondence, if applicable, between the Company and the customer regarding actual and expected contract performance to date and comparing to the estimate to complete.complete |
| ● | assessing the estimates for indicators of management bias by evaluating the audit evidence obtained through the procedures described above. |
Evaluation of the sufficiencySufficiency of audit evidence obtained over net sales
As discussed in Notes 1 and 1615 to the consolidated financial statements, and disclosed in the consolidated statements of operations, the Company recorded $813.0 million of net sales in 2019. Net sales are recognized primarily from the sale of highly engineered products and systems across various industries and through multiple Company divisionssubsidiaries and locations around the world. The Company recorded $715.4 million of net sales for the year ended September 30, 2021. We identified the evaluation of the sufficiency of audit evidence obtained over net sales as a critical audit matter. Evaluating the sufficiency of audit evidence obtained over net sales required especially subjective auditor judgment because of the disaggregated nature of the Company’s operations, including revenue recognition accounting policies and procedures that differ among the various divisionssubsidiaries and locations. This included determining the Company divisionssubsidiaries and locations at which procedures were performed. The following are the primary procedures we performed to address this critical audit matter included the following.matter. We applied auditor judgment to determine the nature and extent of procedures to be performed over net sales, including the determination of the Company divisionssubsidiaries and locations at which those procedures were to be performed. At each Company divisionsubsidiary and location where procedures were performed, we: | ● | Testedevaluated the design and tested the operating effectiveness of certain internal controls overrelated to the Company’s net salesCompany’s revenue recognition process at the applicable divisionsubsidiaries and location;locations; and |
| ● | Assessedassessed the recorded net sales by selectingfor a sampleselection of transactions and comparedby comparing the amount recognized for consistency with underlying documentation, including contracts with customers and shipping documentation, if applicable, and the Company’sCompany’s revenue recognition policies. |
We evaluated the sufficiency of audit evidence obtained by assessing the results of procedures performed. After completionAssessing the carrying value of thesegoodwill of certain reporting units in the Aerospace & Defense segment
As discussed in Notes 1 and 4 to the consolidated financial statements, the Company reviews goodwill for impairment annually and whenever events or changes in circumstances indicate it is more likely than not that the fair value of a reporting unit is less than its carrying value. The Company uses a discounted cash flow method, using a discount rate determined to be commensurate with the risk inherent in each reporting unit’s business model when estimating fair value. We identified the assessment of the carrying value of goodwill of certain reporting units in the Aerospace & Defense segment as a critical audit matter. The valuation of each reporting unit involved estimation uncertainty in the projection of future cash flows, resulting in an increased level of subjective auditor judgment. Specifically, subjective and challenging auditor judgment was required to evaluate the forecasted revenue growth rates, gross margins, and discount rates used in the discounted cash flows to derive the fair value of the reporting unit. Evaluation of the forecasted revenue growth rates and gross margins was challenging as they represented subjective determinations of future market and economic conditions that were sensitive to variation. Specialized skills and knowledge were required to evaluate the Company’s discount rate assumptions. The following were the primary procedures we performed to address this critical audit matter. We evaluated the overall sufficiencydesign and tested the operating effectiveness of audit evidence obtainedcertain internal controls over net sales.the Company’s goodwill impairment assessment process. This included controls related to the determination of the fair value of the reporting units and the development of forecasted revenue growth rates, gross margins, and discount rates. We evaluated the Company’s forecasted revenue growth rates by comparing to industry and peer company forecasted revenue growth rates. We also assessed the Company’s forecasted revenue growth rates and gross margins by comparing them to historical experience and to underlying business strategies and growth plans available for market participants for each reporting unit. We compared historical forecasted revenue growth rates and gross margins to actual results in order to assess the Company’s ability to forecast. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the discount rates by comparing them to discount rate ranges that were independently developed using publicly available market data for comparable entities. Evaluation of initial measurementthe fair value of customer relationship and trade nameacquired intangible assets acquired in the Globe Composite Solutions, LLC business combination As discussed in Note 2 to the consolidated financial statements, the Company acquired Globe Composite Solutions, LLC (Globe)I.S.A. – Altanova Group S.r.l., (Altanova) on July 2, 2019.29, 2021 and the assets of Phenix Technologies, Inc. (Phenix) on August 9, 2021. As a result of the transaction,these transactions, the Company acquired a customer relationship intangible asset associatedassets with the generationa preliminary valuation of future income from Globe’s existing customers$4.3 million and a$3.7 million, respectively, and trade name intangible asset associatedassets with the Globe Composite Solutions trade namea preliminary valuation of $50.5 million and $9.6 million, respectively (collectively, the intangible assets). We identified the evaluation of the initial measurementfair value of these intangible assets acquired in the GlobeAltanova and Phenix business combinationcombinations as a critical audit matter. There was a highA higher degree of subjectivity in evaluating the discounted cash flow model used to calculate the acquisition-date fair value of the intangible assets. In addition,subjective auditor judgment was required to evaluate forecasted revenue from existing customers, inclusive of attrition, and the followingrelated forecasted cost of sales and operating expenses, discount rate, and the selection of guideline public companies (GPC) assumptions used by the Company in valuingto value the customer relationship intangible assets:assets. A higher degree of subjective auditor judgment was also required to evaluate forecasted revenue, royalty rate, and discount rate assumptions used by the Company to value the trade name intangible assets. ● | Forecasted revenues and revenue growth rates; |
● | Forecasted revenues from existing customer contracts, inclusive of attrition; |
● | Forecasted earnings before interest, taxes, depreciation, and amortization (EBITDA); |
● | Estimated discount rate. |
The following are the primary procedures we performed to address this critical audit matter includedmatter. We evaluated the following. Wedesign and tested the operating effectiveness of certain internal controls over the Company’s acquisition-date valuation process, including controls related to the development of the relevant assumptions as listed above. We compared the Company’s estimates of forecasted revenues from existing customers, total forecasted revenues and EBITDAthe related forecasted cost of sales and operating expenses to Globe’sthe acquiree’s historical results. We evaluated the Company’s forecasted revenues from existing customers, exclusive of attrition,total forecasted revenues, and forecasted EBITDAcost of sales and operating expenses by comparing forecasted revenue growth and EBITDA assumptionsthem to those of the Company’s peers and trends in the industry. We tested the Company’s determination of the weighted average cost of capital (WACC) by comparing it to the WACCs of comparable peer companies. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in: | ● | Comparingevaluating the valuation approaches usedCompany’s determination of the weighted average cost of capital (WACC) by comparing it to the WACCs of comparable peer companies and evaluating the selection of the discount rate by reconciling the weighted average return on assets to the WACC and internal rate of return |
| ● | comparing the selection of GPCs made by the Company to calculatean independent search of GPCs and evaluating the fair valuereasonableness of each GPC selected by reviewing the intangible assets to standard valuation approaches for comparable types of assets;business descriptions, industries, and markets served |
| ● | Comparingcomparing the selected revenue long-term growth rate to publicly available market forecasts of gross domestic product and relevant economic data in the relevant markets and industries |
| ● | comparing customer attrition to an independent estimate developed based on historical attrition rates for GlobeAltanova and Phenix and certain qualitative market factors;factors |
| ● | Evaluatingevaluating the Company’s royalty rate,rates, by comparing itthem to royalty rates used for similar assets in the same industry;industry |
| ● | Evaluatingevaluating the Company’s discount rate,rates, by comparing itthem against a discount rate range that was independently developed using publicly available market data for comparable peers; |
● | Developing an estimate of the fair value of the customer relationship intangible asset using the Company’s cash flow forecast and an independently developed discount rate; and |
● | Developing an estimate of the fair value of the trade name intangible asset using the Company’s forecasted revenues and estimated royalty rate and an independently developed discount rate.peers. |
We have served as the Company’s auditor since 1990. St. Louis, Missouri November 29, 20192021 CONSOLIDATED STATEMENTS OF OPERATIONS | | | | | | | | (Dollars in thousands, except per share amounts) | | | | | | | | Years ended September 30, | | 2019 | | 2018 | | 2017 | Net sales | | $ | 812,970 | | 771,582 | | 685,740 | Costs and expenses: | | | | | | | | Cost of sales | | | 508,521 | | 490,397 | | 436,918 | Selling, general and administrative expenses | | | 172,109 | | 162,431 | | 148,433 | Amortization of intangible assets | | | 19,488 | | 18,328 | | 16,338 | Interest expense, net | | | 8,396 | | 8,748 | | 4,578 | Other expenses (income), net | | | 2,240 | | 3,655 | | (680) | Total costs and expenses | | | 710,754 | | 683,559 | | 605,587 | Earnings before income tax | | | 102,216 | | 88,023 | | 80,153 | Income tax expense (benefit) | | | 21,177 | | (4,113) | | 26,450 | Net earnings | | $ | 81,039 | | 92,136 | | 53,703 | Earnings per share: | | | | | | | | Basic: | | | | | | | | Net earnings | | $ | 3.12 | | 3.56 | | 2.08 | Diluted: | | | | | | | | Net earnings | | $ | 3.10 | | 3.54 | | 2.07 | Average common shares outstanding (in thousands): | | | | | | | | Basic | | | 25,946 | | 25,874 | | 25,774 | Diluted | | | 26,097 | | 26,058 | | 25,995 |
| | | | | | | | (Dollars in thousands, except per share amounts) | | | | | | | | Years ended September 30, | | 2021 | | 2020 | | 2019 | Net sales | | $ | 715,440 | | 730,471 | | 726,044 | Costs and expenses: | | | | | | | | Cost of sales | | | 445,045 | | 458,311 | | 437,998 | Selling, general and administrative expenses | | | 167,534 | | 159,490 | | 162,734 | Amortization of intangible assets | | | 20,829 | | 21,812 | | 18,492 | Interest expense, net | | | 2,255 | | 6,730 | | 8,092 | Pension plan termination charge | | | — | | 40,600 | | — | Other (income) expenses, net | | | (894) | | 7,122 | | 851 | Total costs and expenses | | | 634,769 | | 694,065 | | 628,167 | Earnings before income tax | | | 80,671 | | 36,406 | | 97,877 | Income tax expense | | | 17,175 | | 13,510 | | 20,388 | Net earnings from continuing operations | | | 63,496 | | 22,896 | | 77,489 | (Loss) earnings from discontinued operations, net of tax expense of $269 and $789 in 2020 and 2019, respectively | | | — | | (601) | | 3,550 | Gain on sale from discontinued operations, net of tax expense of $23,232 | | | — | | 77,116 | | — | Net earnings from discontinued operations | | | — | | 76,515 | | 3,550 | Net earnings | | $ | 63,496 | | 99,411 | | 81,039 | | | | | | | | | Earnings per share: | | | | | | | | Basic: | | | | | | | | Continuing operations | | $ | 2.44 | | 0.88 | | 2.99 | Discontinued operations | | | — | | 2.94 | | 0.13 | Net earnings | | $ | 2.44 | | 3.82 | | 3.12 | Diluted: | | | | | | | | Continuing operations | | $ | 2.42 | | 0.88 | | 2.97 | Discontinued operations | | | — | | 2.93 | | 0.13 | Net earnings | | $ | 2.42 | | 3.81 | | 3.10 | Average common shares outstanding (in thousands): | | | | | | | | Basic | | | 26,046 | | 26,010 | | 25,946 | Diluted | | | 26,225 | | 26,135 | | 26,097 |
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) | | | | | | | | (Dollars in thousands) | | | | | | | | Years ended September 30, | | 2019 | | 2018 | | 2017 | Net earnings | | $ | 81,039 | | 92,136 | | 53,703 | Other comprehensive (loss) income, net of tax: | | | | | | | | Foreign currency translation adjustments | | | (6,474) | | (2,254) | | 6,383 | Amortization of prior service costs and actuarial (losses) gains | | | (6,066) | | (2,003) | | 5,573 | Net unrealized gain on derivative instruments | | | 94 | | 37 | | 19 | Total other comprehensive (loss) income, net of tax | | | (12,446) | | (4,220) | | 11,975 | Comprehensive income | | $ | 68,593 | | 87,916 | | 65,678 |
| | | | | | | | (Dollars in thousands) | | | | | | | | Years ended September 30, | | 2021 | | 2020 | | 2019 | Net earnings | | $ | 63,496 | | 99,411 | | 81,039 | Other comprehensive (loss) income, net of tax: | | | | | | | | Foreign currency translation adjustments | | | 1,496 | | 3,172 | | (6,474) | Pension plan termination | | | — | | 40,600 | | — | Amortization of prior service costs, actuarial losses and other | | | — | | (3,455) | | (5,972) | Total other comprehensive (loss) income, net of tax | | | 1,496 | | 40,317 | | (12,446) | Comprehensive income | | $ | 64,992 | | 139,728 | | 68,593 |
See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED BALANCE SHEETS | | | | | | (Dollars in thousands) | | | | | | As of September 30, | | 2019 | | 2018 | ASSETS | | | | | | | | | | | | Current assets: | | | | | | Cash and cash equivalents | | $ | 61,808 | | 30,477 | Accounts receivable, less allowance for doubtful accounts of $1,505 and $1,683 in 2019 and 2018, respectively | | | 174,427 | | 163,740 | Contract assets, net | | | 115,310 | | 53,034 | Inventories, net | | | 128,825 | | 135,416 | Other current assets | | | 14,824 | | 13,356 | Total current assets | | | 495,194 | | 396,023 | | | | | | | Property, plant and equipment: | | | | | | Land and land improvements | | | 9,830 | | 9,944 | Buildings and leasehold improvements | | | 102,178 | | 92,418 | Machinery and equipment | | | 166,693 | | 141,711 | Construction in progress | | | 12,639 | | 6,609 | | | | 291,340 | | 250,682 | | | | | | | Less accumulated depreciation and amortization | | | (129,870) | | (115,728) | Net property, plant and equipment | | | 161,470 | | 134,954 | | | | | | | Intangible assets, net | | | 393,047 | | 345,353 | Goodwill | | | 409,215 | | 381,652 | Other assets | | | 7,794 | | 7,140 | | | | | | | Total Assets | | $ | 1,466,720 | | 1,265,122 |
| | | | | | (Dollars in thousands) | | | | | | As of September 30, | | 2021 | | 2020 | ASSETS | | | | | | | | | | | | Current assets: | | | | | | Cash and cash equivalents | | $ | 56,232 | | 52,560 | Accounts receivable, less allowance for doubtful accounts of $1,949 and $1,995 in 2021 and 2020, respectively | | | 146,341 | | 144,082 | Contract assets, net | | | 93,771 | | 94,302 | Inventories, net | | | 147,148 | | 135,296 | Other current assets | | | 22,662 | | 17,053 | Total current assets | | | 466,154 | | 443,293 | | | | | | | Property, plant and equipment: | | | | | | Land and land improvements | | | 10,547 | | 9,657 | Buildings and leasehold improvements | | | 109,279 | | 98,636 | Machinery and equipment | | | 176,447 | | 153,718 | Construction in progress | | | 5,543 | | 8,393 | | | | 301,816 | | 270,404 | | | | | | | Less accumulated depreciation and amortization | | | (147,551) | | (130,534) | Net property, plant and equipment | | | 154,265 | | 139,870 | | | | | | | Intangible assets, net | | | 409,250 | | 346,632 | Goodwill | | | 504,853 | | 408,063 | Operating lease assets | | | 31,846 | | 21,390 | Other assets | | | 10,977 | | 10,938 | | | | | | | Total Assets | | $ | 1,577,345 | | 1,370,186 |
See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED BALANCE SHEETS | | | | | | | | | | | (Dollars in thousands) | | | | | | | | | | | As of September 30, | | 2019 | | 2018 | | 2021 | | 2020 | LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | Current liabilities: | | | | | | | | | | | Current maturities of long-term debt | | $ | 21,261 | | 20,000 | | Current maturities of long-term debt and short-term borrowings | | | $ | 20,000 | | 22,368 | Accounts payable | | | 71,370 | | 63,033 | | | 56,669 | | 50,525 | Contract liabilities, net | | | 81,177 | | 49,035 | | | 108,814 | | 100,551 | Accrued salaries | | | 38,531 | | 29,379 | | | 39,768 | | 32,149 | Accrued other expenses | | | 39,296 | | 39,083 | | | 52,513 | | 49,891 | Total current liabilities | | | 251,635 | | 200,530 | | | 277,764 | | 255,484 | | | | | | | | | | | | Pension obligations | | | 22,682 | | 16,286 | | Deferred tax liabilities | | | 64,855 | | 64,794 | | | 73,560 | | 60,715 | Non-current operating lease liabilities | | | | 28,032 | | 16,785 | Other liabilities | | | 36,326 | | 24,102 | | | 44,293 | | 38,176 | Long-term debt | | | 265,000 | | 200,000 | | | 134,000 | | 40,000 | Total liabilities | | | 640,498 | | 505,712 | | | 557,649 | | 411,160 | | | | | | | | | | | | Shareholders’ equity: | | | | | | | | | | | | | | | | | | | | | | Preferred stock, par value $.01 per share, authorized 10,000,000 shares | | | | | | | | | | | Common stock, par value $.01 per share, authorized 50,000,000 shares; issued 30,596,940 and 30,534,786 shares in 2019 and 2018, respectively | | | 306 | | 305 | | Common stock, par value $.01 per share, authorized 50,000,000 shares; issued 30,666,173and 30,645,625 shares in 2021 and 2020, respectively | | | | 307 | | 306 | Additional paid-in capital | | | 292,408 | | 291,190 | | | 297,644 | | 293,682 | Retained earnings | | | 684,741 | | 606,837 | | | 830,989 | | 775,829 | Accumulated other comprehensive loss, net of tax | | | (43,974) | | (31,528) | | | (2,161) | | (3,657) | | | | 933,481 | | 866,804 | | | 1,126,779 | | 1,066,160 | | | | | | | | | | | | Less treasury stock, at cost (4,615,627 and 4,623,958 common shares in 2019 and 2018, respectively) | | | (107,259) | | (107,394) | | Less treasury stock, at cost (4,604,741 and 4,607,911 common shares in 2021 and 2020, respectively) | | | | (107,083) | | (107,134) | Total shareholders’ equity | | | 826,222 | | 759,410 | | | 1,019,696 | | 959,026 | | | | | | | | | | | | Total Liabilities and Shareholders’ Equity | | $ | 1,466,720 | | 1,265,122 | | $ | 1,577,345 | | 1,370,186 |
See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | | | | Accumulated | | | | | | | | | | | | Additional | | | | Other | | | | | | | | | | | Additional | | | | Other | | | | | | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | | | Common Stock | | Paid-In | | Retained | | Comprehensive | | Treasury | | | (In thousands) | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Stock | | Total | | Shares | | Amount | | Capital | | Earnings | | Income (Loss) | | Stock | | Total | Balance, September 30, 2016 | | 30,364 | | $ | 304 | | 290,588 | | 471,272 | | (39,283) | | (107,772) | | 615,109 | | | | | | | | | | | | | | | | | | | Comprehensive income (loss): | | | | | | | | | | | | | | | | | Net earnings | | — | | | — | | — | | 53,703 | | — | | — | | 53,703 | | Translation adjustments, net of tax of $0 | | — | | | — | | — | | — | | 6,383 | | — | | 6,383 | | Net unrecognized actuarial gain, net of tax of $(2,938) | | — | | | — | | — | | — | | 5,573 | | — | | 5,573 | | Forward exchange contracts, net of tax of $(66) | | — | | | — | | — | | — | | 19 | | — | | 19 | | | | | | | | | | | | | | | | | | | Cash dividends declared ($0.32 per share) | | — | | | — | | — | | (8,257) | | — | | — | | (8,257) | | | | | | | | | | | | | | | | | | | Stock options and stock compensation plans, net of tax of $0 | | 105 | | | 1 | | (803) | | — | | — | | 190 | | (612) | | | | | | | | | | | | | | | | | | | Balance, September 30, 2017 | | 30,469 | | $ | 305 | | 289,785 | | 516,718 | | (27,308) | | (107,582) | | 671,918 | | | | | | | | | | | | | | | | | | | Comprehensive income (loss): | | | | | | | | | | | | | | | | | Net earnings | | — | | | — | | — | | 92,136 | | — | | — | | 92,136 | | Translation adjustments, net of tax of $0 | | — | | | — | | — | | — | | (2,254) | | — | | (2,254) | | Net unrecognized actuarial loss, net of tax of $(1,326) | | — | | | — | | — | | — | | (2,003) | | — | | (2,003) | | Forward exchange contracts, net of tax of $(41) | | — | | | — | | — | | — | | 37 | | — | | 37 | | | | | | | | | | | | | | | | | | | Cash dividends declared ($0.32 per share) | | — | | | — | | — | | (8,278) | | — | | — | | (8,278) | | | | | | | | | | | | | | | | | | | Reclassification from accumulated other comprehensive loss as a result of the adoption of new accounting standard ASU 2018-02 | | — | | | — | | — | | 6,261 | | — | | — | | 6,261 | | | | | | | | | | | | | | | | | | | Stock options and stock compensation plans, net of tax of $0 | | 66 | | | — | | 1,405 | | — | | — | | 188 | | 1,593 | | | | | | | | | | | | | | | | | | | Balance, September 30, 2018 | | 30,535 | | $ | 305 | | 291,190 | | 606,837 | | (31,528) | | (107,394) | | 759,410 | | 30,535 | | $ | 305 | | 291,190 | | 606,837 | | (31,528) | | (107,394) | | 759,410 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Net earnings | | — | | | — | | — | | 81,039 | | — | | — | | 81,039 | | 0 | | | 0 | | 0 | | 81,039 | | 0 | | 0 | | 81,039 | Translation adjustments, net of tax of $0 | | — | | | — | | — | | — | | (6,474) | | — | | (6,474) | | 0 | | | 0 | | 0 | | 0 | | (6,474) | | 0 | | (6,474) | Net unrecognized actuarial loss, net of tax of $1,817 | | — | | | — | | — | | — | | (6,066) | | — | | (6,066) | | 0 | | | 0 | | 0 | | 0 | | (6,066) | | 0 | | (6,066) | Forward exchange contracts, net of tax of $(22) | | — | | | — | | — | | — | | 94 | | — | | 94 | | 0 | | | 0 | | 0 | | 0 | | 94 | | 0 | | 94 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Cash dividends declared ($0.32 per share) | | — | | | — | | — | | (8,302) | | — | | — | | (8,302) | | 0 | | | 0 | | 0 | | (8,302) | | 0 | | 0 | | (8,302) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Adoption of new accounting standard ASU 2014-09 | | — | | | — | | — | | 5,167 | | — | | — | | 5,167 | | 0 | | | 0 | | 0 | | 5,167 | | 0 | | 0 | | 5,167 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Stock options and stock compensation plans, net of tax of $0 | | 62 | | | 1 | | 1,218 | | — | | — | | 135 | | 1,354 | | Stock compensation plans, net of tax of $0 | | | 62 | | | 1 | | 1,218 | | 0 | | 0 | | 135 | | 1,354 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Balance, September 30, 2019 | | 30,597 | | $ | 306 | | 292,408 | | 684,741 | | (43,974) | | (107,259) | | 826,222 | | 30,597 | | $ | 306 | | 292,408 | | 684,741 | | (43,974) | | (107,259) | | 826,222 | | | | | | | | | | | | | | | | | | Comprehensive income (loss): | | | | | | | | | | | | | | | | | Net earnings | | | 0 | | | 0 | | 0 | | 99,411 | | 0 | | 0 | | 99,411 | Translation adjustments, net of tax of $0 | | | 0 | | | 0 | | 0 | | 0 | | 3,172 | | 0 | | 3,172 | | | | | | | | | | | | | | | | | | Pension termination and net unrecognized actuarial loss, net of tax of $(1,161) | | | 0 | | | 0 | | 0 | | 0 | | 37,145 | | 0 | | 37,145 | Cash dividends declared ($0.32 per share) | | | 0 | | | 0 | | 0 | | (8,323) | | 0 | | 0 | | (8,323) | | | | | | | | | | | | | | | | | | Stock compensation plans, net of tax of $0 | | | 49 | | | 0 | | 1,274 | | 0 | | 0 | | 125 | | 1,399 | | | | | | | | | | | | | | | | | | Balance, September 30, 2020 | | | 30,646 | | $ | 306 | | 293,682 | | 775,829 | | (3,657) | | (107,134) | | 959,026 | | | | | | | | | | | | | | | | | | Comprehensive income (loss): | | | | | | | | | | | | | | | | | Net earnings | | | 0 | | | 0 | | 0 | | 63,496 | | 0 | | 0 | | 63,496 | Translation adjustments, net of tax of $0 | | | 0 | | | 0 | | 0 | | 0 | | 1,496 | | 0 | | 1,496 | | | | | | | | | | | | | | | | | | Cash dividends declared ($0.32 per share) | | | 0 | | | 0 | | 0 | | (8,336) | | 0 | | 0 | | (8,336) | | | | | | | | | | | | | | | | | | Stock compensation plans, net of tax of $0 | | | 20 | | | 1 | | 3,962 | | 0 | | 0 | | 51 | | 4,014 | | | | | | | | | | | | | | | | | | Balance, September 30, 2021 | | | 30,666 | | $ | 307 | | 297,644 | | 830,989 | | (2,161) | | (107,083) | | 1,019,696 |
See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENTS OF CASH FLOWS | | | | | | | | (Dollars in thousands) | | | | | | | | Years ended September 30, | | 2019 | | 2018 | | 2017 | Cash flows from operating activities: | | | | | | | | Net earnings | | $ | 81,039 | | 92,136 | | 53,703 | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | Depreciation and amortization | | | 40,050 | | 37,755 | | 32,229 | Stock compensation expense | | | 5,353 | | 5,218 | | 5,444 | Changes in assets and liabilities | | | (9,944) | | (10,315) | | (17,889) | Change in property, plant and equipment from gain on building sale | | | (8,922) | | — | | — | Effect of deferred taxes on tax provision | | | 61 | | (21,584) | | 1,360 | Pension contributions | | | (2,500) | | (9,951) | | (2,677) | Other | | | — | | — | | (4,830) | Net cash provided by operating activities | | | 105,137 | | 93,259 | | 67,340 | Cash flows from investing activities: | | | | | | | | Acquisition of businesses, net of cash acquired | | | (96,777) | | (11,445) | | (198,628) | Capital expenditures | | | (37,183) | | (20,589) | | (29,728) | Additions to capitalized software | | | (8,386) | | (9,573) | | (9,002) | Proceeds from sale of building and land | | | 17,201 | | — | | 1,184 | Proceeds from life insurance | | | — | | — | | 2,307 | Net cash used by investing activities | | | (125,145) | | (41,607) | | (233,867) | Cash flows from financing activities: | | | | | | | | Proceeds from long-term debt | | | 131,261 | | 55,000 | | 257,000 | Principal payments on long-term debt | | | (65,000) | | (110,000) | | (92,000) | Dividends paid | | | (8,302) | | (8,278) | | (8,257) | Debt issuance costs | | | (1,071) | | — | | — | Other | | | (3,371) | | (3,078) | | 20 | Net cash provided (used) by financing activities | | | 53,517 | | (66,356) | | 156,763 | Effect of exchange rate changes on cash and cash equivalents | | | (2,178) | | (335) | | 1,455 | Net increase (decrease) in cash and cash equivalents | | | 31,331 | | (15,039) | | (8,309) | Cash and cash equivalents at beginning of year | | | 30,477 | | 45,516 | | 53,825 | Cash and cash equivalents at end of year | | $ | 61,808 | | 30,477 | | 45,516 | | | | | | | | | Changes in assets and liabilities: | | | | | | | | Accounts receivable, net | | $ | (7,230) | | (2,789) | | (23,587) | Contract assets | | | (66,885) | | (5,748) | | (18,540) | Inventories | | | 10,150 | | (9,830) | | 3,959 | Other assets and liabilities | | | 8,020 | | (695) | | (2,014) | Accounts payable | | | 7,400 | | 9,442 | | 8,735 | Contract liabilities | | | 36,751 | | (1,466) | | 7,914 | Accrued expenses | | | 1,850 | | 771 | | 5,644 | | | $ | (9,944) | | (10,315) | | (17,889) | Supplemental cash flow information: | | | | | | | | Interest paid | | $ | 8,076 | | 8,540 | | 3,731 | Income taxes paid (including state & foreign) | | | 26,084 | | 8,789 | | 25,674 |
| | | | | | | | (Dollars in thousands) | | | | | | | | Years ended September 30, | | 2021 | | 2020 | | 2019 | Cash flows from operating activities: | | | | | | | | Net earnings | | $ | 63,496 | | 99,411 | | 81,039 | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | Net earnings from discontinued operations, net of tax | | | — | | (76,515) | | (3,550) | Depreciation and amortization | | | 42,049 | | 41,338 | | 35,995 | Stock compensation expense | | | 6,914 | | 5,550 | | 5,088 | Changes in assets and liabilities | | | 15,671 | | 26,585 | | (6,649) | Gain on sale of building and land | | | (1,950) | | — | | (8,922) | Effect of deferred taxes on tax provision | | | (3,041) | | (2,785) | | 61 | Pension contributions | | | — | | (25,650) | | (2,500) | Pension plan termination charge | | | — | | 40,600 | | — | Net cash provided by operating activities – continuing operations | | | 123,139 | | 108,534 | | 100,562 | Net cash (used) provided by discontinued operations | | | — | | (26,254) | | 4,575 | Net cash provided by operating activities | | | 123,139 | | 82,280 | | 105,137 | Cash flows from investing activities: | | | | | | | | Acquisition of businesses, net of cash acquired | | | (168,903) | | — | | (95,840) | Capital expenditures | | | (26,705) | | (32,108) | | (24,229) | Additions to capitalized software | | | (8,783) | | (9,023) | | (8,374) | Proceeds from sale of building and land | | | 1,950 | | — | | 17,201 | Net cash used by investing activities – continuing operations | | | (202,441) | | (41,131) | | (111,242) | Net cash provided (used) by investing activities – discontinued operations | | | — | | 182,084 | | (13,903) | Net cash (used) provided by investing activities | | | (202,441) | | 140,953 | | (125,145) | Cash flows from financing activities: | | | | | | | | Proceeds from long-term debt | | | 216,000 | | 12,368 | | 130,000 | Principal payments on long-term debt | | | (124,368) | | (235,000) | | (65,000) | Dividends paid | | | (8,336) | | (8,323) | | (8,302) | Debt issuance costs | | | — | | — | | (1,071) | Other | | | (1,823) | | (3,125) | | (3,371) | Net cash provided (used) by financing activities – continuing operations | | | 81,473 | | (234,080) | | 52,256 | Net cash used by financing activities – discontinued operations | | | — | | (2,140) | | (2,472) | Net cash provided (used) by financing activities | | | 81,473 | | (236,220) | | 49,784 | Effect of exchange rate changes on cash and cash equivalents | | | 1,501 | | 3,739 | | 1,555 | Net increase (decrease) in cash and cash equivalents | | | 3,672 | | (9,248) | | 31,331 | Cash and cash equivalents at beginning of year | | | 52,560 | | 61,808 | | 30,477 | Cash and cash equivalents at end of year | | $ | 56,232 | | 52,560 | | 61,808 | | | | | | | | | Changes in assets and liabilities: | | | | | | | | Accounts receivable, net | | $ | 11,266 | | 14,633 | | (8,722) | Contract assets | | | 531 | | 15,909 | | (57,177) | Inventories | | | 612 | | (10,340) | | 7,109 | Other assets and liabilities | | | (477) | | (8,609) | | 7,708 | Accounts payable | | | (688) | | (13,275) | | 10,716 | Contract liabilities | | | 8,263 | | 19,374 | | 32,142 | Accrued expenses | | | (3,836) | | 8,893 | | 1,575 | | | $ | 15,671 | | 26,585 | | (6,649) | Supplemental cash flow information: | | | | | | | | Interest paid | | $ | 590 | | 5,869 | | 8,076 | Income taxes paid (including state & foreign) | | | 26,054 | | 37,714 | | 26,084 |
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies A. Principles of Consolidation The Consolidated Financial Statements include the accounts of ESCO Technologies Inc. (ESCO) and its wholly owned subsidiaries. Except where the context indicates otherwise, the terms “Company”, “we”, “our” and “us” are used in this report to refer to ESCO together with its subsidiaries (the Company).through which its businesses are conducted. All significant intercompany transactions and accounts have been eliminated in consolidation. B. Basis of Presentation The Company’sOur fiscal year ends on September 30. Throughout the Consolidated Financial Statements, unless the context indicates otherwise, references to a year (for example 2019)2021) refer to the Company’s fiscal year ending on September 30 of that year.
Our former Technical Packaging segment is reflected as discontinued operations in the Consolidated Financial Statements and related notes for all periods presented, in accordance with accounting principles generally accepted in the United States of America (GAAP). During 2021, the Company identified immaterial errors in the 2020 historical consolidated financial statements of Westland, within the A&D segment. These have been corrected as an immaterial revision of those consolidated financial statements. Specifically, the adjustments include $2.4 million of net sales and contract assets being overstated, and $0.9 million of inventory being overstated and cost of goods sold understated by the same amount, and $0.8 million income tax expense, $0.2 million deferred tax liabilities, and $0.6 million accrued other expense being overstated. The Company accounts for shipping and handling costs onnet impact of the above adjustments resulted in a gross basis and they are includeddecrease in net sales. The Company accounts forearnings from continuing operations, net earnings, comprehensive income and retained earnings of $2.5 million and a decrease of $0.10 in reported basic and diluted earnings per share. This correction also resulted in a reclassification in the 2020 consolidated statement of cash flows between line items of net earnings, changes in assets and liabilities, and effect of deferred taxes collected from customers and remittedtotaling $2.6 million in 2020, with no impact to governmental authorities on athe total net basis and they are excluded from net sales.cash provided by operating activities. C. Nature of Operations The Company isWe are organized based on the products and services it offers,we offer and classifies itswe currently classify our business operations in segments for financial reporting purposes. Under the current organization structure, the Company has 43 segments for financial reporting purposes: Filtration/Fluid Flow (Filtration)Aerospace & Defense (A&D), Utility Solutions Group (USG), and RF Shielding and Test (Test), Utility Solutions Group (USG) and Technical Packaging..
Filtration: A&D:The companies within this segment primarily design and manufacture specialty filtration products, including hydraulic filter elements and fluid control devices used in commercial aerospace applications; unique filter mechanisms used in micro-propulsion devices for satellites; custom designed filters for manned aircraft and submarines; products and systems to reduce vibration and/or acoustic signatures and otherwise reduce or obscure a vessel’s signature, and other communications, sealing, surface control and hydrodynamic related applications to enhance U.S. Navy maritime survivability; precision-tolerance machined components for the aerospace and defense industry; and metal processing services.
USG: The companies within this segment provide high-end, intelligent, diagnostic test and data managementtesting solutions for thethat enable electric power grid operators to assess the integrity of high-voltage power delivery industry, andequipment, as well as decision support tools for the renewable energy industry, primarily wind.wind and solar. Test: ETS-Lindgren Inc. provides itsThe companies within this segment provide their customers with the ability to identify, measure and contain magnetic, electromagnetic and acoustic energy. Technical Packaging: The companies within this segment provide innovative solutions to the medical and commercial marketsIn addition, for thermoformed and precision molded pulp fiber packages and specialty products usingreporting certain financial information we treat Corporate activities as a wide varietyseparate segment.
D. Use of Estimates The preparation of financial statements in conformity with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates. E. Revenue Recognition On October 1, 2018, we adopted ASU No. 2014-09, Revenue from Contracts with Customers(ASC (ASC 606). Significant changes to our policies resulting from the adoption are provided below. We adopted ASC 606 using the modified retrospective transition method applied to contracts that were not substantially complete at the end of fiscal year 2018. We recorded a $5.2 million adjustment to increase retained earnings to reflect the cumulative impact of adopting this standard at the beginning of fiscal year 2019, primarily related to certain long-term contracts in our FiltrationA&D and Technical Packaging segments that converted to the cost-to-cost method for revenue recognition. The comparative information has not been restated and is reported under the accounting standards in effect for those periods. A reconciliation of the financial statement line items impacted for the year ended September 30, 2019 under ASC 606 to the prior accounting standards is provided in Note 16. Revenue Recognition Revenue is recognizedWe recognize revenue when control of the goods or services promised under the contract is transferred to the customer either at a point in time (e.g., upon delivery) or over time (e.g., as we perform under the contract). We account for a contract when it has approval and commitment from both parties, the rights and payment terms of the parties are identified, the contract has commercial substance and collectability of consideration is probable. Contracts are reviewedWe review contracts to determine whether there isare one or multiple performance obligations. A performance obligation is a promise to transfer a distinct good or service to a customer and represents the unit of accounting for revenue recognition. For contracts with multiple performance obligations, we allocate the expected consideration, or the transaction price, is allocated to each performance obligation identified in the contract based on the relative standalone selling price of each performance obligation. Revenue isWe then recognizedrecognize revenue for the transaction price allocated to the performance obligation when control of the promised goods or services underlying the performance obligation is transferred.
Payment terms with our customers vary by the type and location of the customer and the products or services offered. The Company doesWe do not adjust the promised amount of consideration for the effects of significant financing components based on the expectation that the period between when the Company transferswe transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less. Arrangements with customers that include payment terms extending beyond one year are not significant. We account for shipping and handling costs on a gross basis and include them in net sales. We account for taxes collected from customers and remitted to governmental authorities on a net basis and exclude them from net sales. Filtration:A&D: Within the FiltrationA&D segment, approximately 50%43% of revenues (approximately 20%19% of consolidated revenues) are recognized at a point in time when products are shipped (when control of the goods transfers) to unaffiliated customers. The related contracts are with commercial and military customers and have a single performance obligation as there is only one good promised or the promise to transfer the goods or services is not distinct or separately identifiable from other promises in the contract. The transaction price for these contracts reflects our estimate of returns rebates and discounts, which are based on historical, current and forecasted information to determine the expected amount to which the Companywe will be entitled in exchange for transferring the promised goods or services to the customer. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant. Amounts billed to customers for shipping and handling are included in the transaction price as the related activities are performed prior to the customer obtaining control of the products. They generally are not treated as separate performance obligations as these costs fulfill a promise to transfer the product to the customer and are expensed in selling, general, and other costscost of goods sold in the period they are incurred. Taxes collected from customers and remitted to government authorities are recorded on a net basis. We primarily provide standard warranty programs for products in our commercial businesses for periods that typically range from one to two years. These assurance-type programs typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation.
Approximately 50%57% of the segment’s revenues (approximately 20%25% of consolidated revenues) are accounted for over time as the product does not have an alternative use and the Company haswe have an enforceable right to payment for costs incurred plus a reasonable margin or the inventory is owned by the customer. The related contracts are primarily cost-plus or fixed price contracts related to the design, development and manufacture of complex fluid control products, quiet valves, manifolds, shock and vibration dampening, thermal insulation and systems primarily for the commercial aerospace and military (U.S. Government) markets. The contracts may contain multiple products, which are capable of being distinct as the customer could benefit from each product on its own or together with other readily available resources. Each product is separately identifiable from the other products in the contract. Therefore, each product is distinct in context of the contract and will be accounted for as a separate performance obligation. Our contracts are frequently modified for changes in contract specifications and requirements. Most of our contract modifications are for products that are not distinct from the existing contract and are accounted for as part of that existing contract. Contracts with the U.S. Government generally contain clauses that provide lien rights to work-in-process along with clauses that allow the customer to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work-in-process. Due to the continuous transfer of control to the U.S. Government, we recognize revenue over the time that we perform under the contract. Selecting the method to measure progress towards completion for the commercial and military contracts requires judgment and is based on the nature of the products or service to be provided. We generally use the cost-to-cost method to measure progress for our FiltrationAerospace & Defense segment contracts, as the rate at which costs are incurred to fulfill a contract best depicts the transfer of control to the customer. Under this method, we measure the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and record revenue is recorded proportionally as costs are incurred based on an estimated profit margin. The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration as applicable. Certain of our long-term contracts contain incentive fees that can increase the transaction price. These variable amounts generally are awarded upon achievement of certain performance metrics, program milestones or cost targets and can be based upon customer discretion. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all other information that is reasonably available to us. Total contract cost is estimated utilizing current contract specifications and expected engineering requirements. Contract costs typically are incurred over a period of several months to one or more years, and the estimation of these costs requires judgment. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We review and update our projections of costs quarterly or more frequently when circumstances significantly change. Under the typical payment terms of our long term fixed price contracts, the customer pays us either performance-based or progress payments. Performance-based payments represent interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments of costs incurred as the work progresses. Because of the timing difference of revenue recognition and customer billing, these contracts will often result in revenue recognized in excess of billings and billings in excess of costs incurred, which we present as contract assets and contract liabilities, respectively, in the Consolidated Balance Sheets. AmountsWe classify amounts billed and due from our customers are classified in Accounts receivable, net. For short term fixed price and cost-type contracts, we are generally paid within a short period of time. For contracts where revenue is recognized over time, we generally recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period. We have net revenue recognized in the current year from performance obligations satisfied in the prior year due to changes in our estimated costs to complete the related performance obligations. AnticipatedWe recognize anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.known. USG: Within the USG segment, approximately 75% of revenues (approximately 19%21% of consolidated revenues) are recognized at a point in time when products are shipped (when control of the goods transfers) to unaffiliated customers. The related contracts are with commercial customers. The contracts may contain multiple products which are capable of being distinct as the customer could benefit from each product on its own or together with other readily available resources. Each product is separately identifiable from the other products in the contract. Therefore, each product is distinct in context of the contract and is accounted for as a separate performance obligation. The transaction price for these contracts reflects our estimate of variable consideration in the form of returns, rebates and discounts, which are based on historical, current and forecasted information to determine the expected amount to which the Companywe will be entitled in exchange for transferring the promised goods or services to the customer. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant. Amounts billed to customers for shipping and handling are included in the transaction price as the related activities are performed prior to customer obtaining control of the products. TheyWe generally aredo not treatedtreat them as separate performance obligations as these costs fulfill a promise to transfer the product to the customer and are expensed in selling, general, and other costs in the period they are incurred. TaxesWe record taxes collected from customers and remitted to government authorities are recorded on a net basis. We primarily provide standard warranty programs for products in our commercial businesses for periods that typically range from one to two years. These assurance-type programs typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation. Approximately 25% of the segment’s revenues (approximately 7% of consolidated revenues) are recognized over time as services are performed. The services accounted for under this method include an obligation to provide testing services using hardware and embedded software, software maintenance, training, lab testing, and consulting services. The related contracts contain a bundle of goods and services that are integrated in the context of the contract. Therefore, the goods and services are not distinct and the Company haswe have a single performance obligation. Selecting the method to measure progress towards completion for these contracts requires judgment and is based on the nature of the products and service to be provided. We will recognize revenue as a series of distinct services based on each day of providing services (straight-line over the contract term) for our USG segment contracts. The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration as applicable. Under the typical payment terms of our service contracts, the customer pays us in advance of when services are performed. Because of the timing difference of revenue recognition and customer payment, which is typically received upon commencement of the contract, these contracts result in deferred revenue, which we present as contract liabilities, in the Consolidated Balance Sheets. Included in this category, approximately 10%8% of the segment’s revenues (approximately 2% of consolidated revenues) are recognized based on the terms of the software contract. For contracts that transfer a software license to the customer, revenue will be recognized at a point in time. These type of software contracts represent a right to use the software, or a functional license, in which revenue should be recognized upon transfer of the license. For contracts in software as a service (SaaS) arrangements, revenue will be recognized over time. The customer receives and consumes the benefits of the SaaS arrangement through access to the system which is for a stated period. We will recognize revenue based on each day of providing access (straight-line over the contract term). The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration as applicable. Under the typical payment terms of our software contracts, the customer pays us in advance of when services are performed. Because of the timing difference of revenue recognition and customer payment, these contracts result in deferred revenue, which we present as contract liabilities, in the Consolidated Balance Sheets. Test:Within the Test segment, approximately 20% of revenues (approximately 4%6% of consolidated revenues) are recognized at a point in time when products such as, antennas and probes are shipped (when control of the goods transfers) to unaffiliated customers. The related contracts are with commercial customers. The contracts may contain multiple products which are capable of being distinct asbecause the customer could benefit from each product on its own or together with other readily available resources. Each product is separately identifiable from the other products in the contract. Therefore, each product is distinct in the context of the contract and will be accounted for as a separate performance obligation. The transaction price for these contracts reflects our estimate of variable consideration in the form of returns, rebates and discounts, which are based on historical, current and forecasted information to determine the expected amount to which the Companywe will be entitled in exchange for transferring the promised goods or services to the customer. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant. Amounts billed to customers for shipping and handling are included in the transaction price as the related activities are performed prior to customer obtaining control of the products. They generally are not treated as separate performance obligations as these costs fulfill a promise to transfer the product to the customer and are expensed in selling, general, and other costs in the period they are incurred. Taxes collected from customers and remitted to government authorities are recorded on a net basis. We primarily provide standard warranty programs for products in our commercial businesses for periods that typically range from one to two years. These assurance-type programs typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation. Approximately 80% of the segment’s revenues (approximately 19%22% of consolidated revenues) are recorded over time as the product does not have an alternative use and the Company haswe have an enforceable right to payment for costs incurred plus a reasonable margin. Products accounted for under this guidance include the construction and installation of test chambers to a buyer’s specifications that provide its customers with the ability to measure and contain magnetic, electromagnetic and acoustic energy. The goods and services related to each installed test chamber are not distinct due to the significant amount of integration provided and each installed chamber is accounted for as a single performance obligation. Selecting the method to measure progress towards completion for these contracts requires judgment and is based on the nature of the products and service to be provided. We use milestones to measure progress for our Test segment contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. For arrangements that are accounted for under this guidance, the Company estimateswe estimate profit as the difference between total revenue and total estimated cost of a contract and recognizesrecognize these revenues and costs based primarily on contract milestones. The transaction price for our contracts represents our best estimate of the consideration we will receive and includes assumptions regarding variable consideration as applicable. TotalWe estimate total contract cost is estimated utilizing current contract specifications and expected engineering requirements. Contract costs typically are incurred over a period of several months to a year, and the estimation of these costs requires judgment. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We review and update our projections of costs quarterly or more frequently when circumstances significantly change.
Under the typical payment terms of our fixed price contracts, the customer pays us either performance-based or progress payments. Performance-based payments represent interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments of costs incurred as the work progresses. Because of the timing difference of revenue recognition and customer billing, these contracts result in revenue recognized in excess of billings and billings in excess of costs incurred, which we present as contract assets and contract liabilities, respectively, in the Consolidated Balance Sheets. Amounts billed and due from our customers are classified in Accounts receivable, net. For contracts where revenue is recognized over time, we generally recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period. We have net revenue recognized in the current year from performance obligations satisfied in the prior year due to changes in our estimated costs to complete the related performance obligations. AnticipatedWe recognize anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable. Technical Packaging: Within the Technical Packaging segment, 100% of the revenues (approximately 11% of consolidated revenues) are recognized over time as the product does not have an alternative use and the Company has an enforceable right to payment. Selecting the method to measure progress towards completion for the contracts requires judgment and is based on the nature of the products to be provided. We use the cost-to-cost method to measure progress for our Technical Packaging segment contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts. Under this measure, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the estimated costs at completion of the performance obligation, and revenue is recorded proportionally as costs are incurred. The transaction price for our contracts reflects our estimate of variable consideration in the form of returns, rebates and discounts, which are based on historical, current and forecasted information to determine the expected amount to which the Company will be entitled in exchange for transferring the promised goods or services to the customer. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant.
Total contract cost is estimated utilizing current contract specifications and expected engineering requirements. Contract costs typically are incurred over a period of weeks, minimizing the amount of judgment in developing the cost estimate. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We review and update our projections of costs quarterly or more frequently when circumstances significantly change.
Under the typical payment terms of our contracts, the customer is billed upon shipment of product. Amounts billed and due from our customers are classified in Accounts receivable, net. Because of the timing difference of revenue recognition and customer billing, these contracts result in revenue recognized in excess of billings, which we present as contract assets in the Consolidated Balance Sheets.
For contracts where revenue is recognized over time, we generally recognize changes in estimated contract revenues, costs and profits using the cumulative catch-up method of accounting. This method recognizes the cumulative effect of changes on current and prior periods with the impact of the change from inception-to-date recorded in the current period. Anticipated losses on contracts are recognized in full in the period in which the losses become probable and estimable.
Contract Assets and Liabilities Contract assets arise from contracts when revenue is recognized over time and the amount of revenue recognized, including our estimate of variable consideration that has been included in the transaction price, exceeds the amount billed to the customer. These amounts are included in contract assets until the right to payment is no longer conditional on events other than the passage of time. These contract assets are reclassified to receivables when the right to consideration becomes unconditional. Contract liabilities include deposits, deferred revenue, upfront payments and billings in excess of revenue recognized. LiabilitiesWe include liabilities for customer rebates and discounts are included in other current liabilities in the accompanying balance sheet.Consolidated Balance Sheets. See the further discussion of the Company’sour revenue recognition in Note 1615 below. Prior to Adoption of ASC 606
Prior to October 1, 2018, Management recognized revenue consistent with ASC 605. The Filtration and Technical Packaging segments were most impacted by the change in the timing of revenue recognition. Under ASC 605, the Filtration segment recognized 85% and 86% of revenues upon delivery of products (when title and risk of ownership transfers) and when the other general conditions to revenue recognition (collectability of revenues is probable, there is evidence of an arrangement, fees are fixed and determinable) are met, and 15% and 14% of revenues under percentage-of-completion in 2018 and 2017, respectively. Under ASC 605, the Technical Packaging segment recognized 100% of revenues upon delivery of products (when title and risk of ownership transfers) in 2018 and 2017. The change to recording more revenue over time as costs are incurred at both segments is the result of the products not having an alternative use and the Company having an enforceable right to payment for costs incurred plus a reasonable margin or the inventory is owned by the customer.
The timing of revenue recognition under ASC 605 and ASC 606 was similar for the USG and Test segments. Within the USG segment, 25% and 22% of revenues were recognized under percentage-of-completion and 75% and 78% of revenues were recognized when products were delivered or services performed (when title and risk of ownership transfers) and when the other general conditions to revenue recognition (collectability of revenues is probable, there is evidence of an arrangement, fees are fixed and
determinable) are met) in 2018 and 2017, respectively. Within the Test segment, 75% and 70% of revenues were recognized under percentage-of-completion and 25% and 30% of revenues were recognized when products were delivered or services performed (when title and risk of ownership transfers) in 2018 and 2017, respectively.
F. Cash and Cash Equivalents Cash equivalents include temporary investments that are readily convertible into cash, such as money market funds, with original maturities of three months or less. G. Accounts Receivable AccountsWe reduce accounts receivable have been reduced by an allowance for amounts that the Company estimateswe estimate are uncollectible in the future. This estimated allowance is based on Management’s evaluation of the financial condition of the customer and historical write-off experience.
H. Inventories Inventories are valuedWe value inventories at the lower of cost (first-in, first-out) or market value. Inventories areWe regularly reviewedreview inventories for excess quantities and obsolescence based upon historical experience, specific identification of discontinued items, future demand, and market conditions. Inventories under long-term contracts reflect accumulated production costs, factory overhead, initial tooling and other related costs less the portion of such costs charged to cost of sales.
I. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Depreciation and amortization are computed primarily on a straight-line basis over the estimated useful lives of the assets: buildings, 10-4010-40 years; machinery and equipment, 3-10 3-10 years; and office furniture and equipment, 3-103-10 years. Leasehold improvements are amortized over the remaining term of the applicable lease or their estimated useful lives, whichever is shorter. Long-lived tangible assets are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. Impairment losses are recognized based on fair value. J. Leases LeaseOur lease agreements are evaluatedprimarily relate to office space, manufacturing facilities, and machinery and equipment. We determine at lease inception whether they are capital or operating leases in accordance with ASC 840, Leases (ASC 840). When any onean arrangement that provides control over the use of the four test criteria in ASC 840an asset is met,a lease. We recognize at lease commencement a right-of-use (ROU) asset and lease liability based on the lease then qualifies as a capital lease. Capital leases are capitalized at the lower of the net present value of the total amount payable underfuture lease payments over the leasing agreement (excluding finance charges)lease term. We have elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less. Certain of our leases include options to extend the fair market value of the leased asset. Capital lease assets are depreciated on a straight-line basis, over a period consistent with the Company’s normal depreciation policy for tangible fixed assets. The Company allocates each lease payment between a reductionterm of the lease obligation and interest expense usingfor up to 20 years. When it is reasonably certain that we will exercise the effective interest method. Rent expense for operating leases, which may include free rent or fixed escalation amounts in addition to minimum lease payments, is recognized on a straight-line basis overoption, Management includes the durationimpact of the option in the lease term. Capitalterm for purposes of determining total future lease obligations are included within other long-term liabilities (long-term portion) and accrued other expenses (current portion).payments. As most of our lease agreements do not explicitly state the discount rate implicit in the lease, Management uses our incremental borrowing rate on the commencement date to calculate the present value of future payments based on the tenor of each arrangement.
K. Goodwill and Other Long-Lived Intangible Assets Goodwill represents the excess of purchase price over the fair value of net identifiable assets acquired in business acquisitions. Management annually reviews goodwill and other long-lived assets with indefinite useful lives for impairment or whenever events or changes in circumstances indicate the carrying amount may not be recoverable.less than fair value. If the Company determineswe determine that the carrying value of the long-lived asset may not be recoverable,or reporting unit is less than fair value, we record a permanent impairment charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. FairWe measure the fair value is measuredof our reporting units based on a discounted cash flow method using a discount rate determined by Management to be commensurate with the risk inherent in each of our reporting units'units’ current business models. We determine the fair value of trade names using a generally accepted valuation method based on an income approach called the relief from royalty method. During 2019, the revenue softness in the Company’s renewable energy subsidiary NRG led management to perform2021, Management performed a more comprehensivequantitative impairment analysis, which included a detailed calculation surroundingof the carryingfair value of its $8 million of goodwillour trade names and $8 million of tradenamereporting units related to thatcertain reporting unit.units within these segments. The results of these additionalimpairment analyses indicated that ourthe fair values of the trade names and reporting units are not less than their carrying values. Our estimates of discounted cash flows for assetsto derive the fair value were measured in accordance with ASC 350, Intangibles – Goodwill and Other would allow the carrying amounts to be recovered. Since we. We are using estimates of discounted cash flows thesethat may change, and if they change negatively it could result in the need to write down those assets to fair value. Other intangible assets represent costs allocated to identifiable intangible assets, principally customer relationships, capitalized software, patents, trademarks, and technology rights. IntangibleWe amortize intangible assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values, and are reviewedreview them for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may not be recoverable. See Note 34 regarding goodwill and other intangible assets activity. L. Capitalized Software The costsCosts incurred for the development of computer software that will be sold, leased, or otherwise marketed are charged to research and development expense when incurred, as research and development until technological feasibility has been established for the product. Technological feasibility is typically established upon completion of a detailed program design. Costs incurred after this point are capitalized on a project-by-project basis. Capitalized costs consist of internal and external development costs. Upon general release of the product to customers, the Company ceaseswe cease capitalization and beginsbegin amortization, which is calculated on a project-by-project basis as the greater of (1) the ratio of current gross revenues for a product to the total of current and anticipated future gross revenues for the product or (2) the straight-line method over the estimated economic life of the product. The CompanyWe generally amortizes theamortize software development costs over a three-to-seventhree-to-seven year period based upon the estimated future economic life of the product. Factors consideredwe consider in determining the estimated future economic life of the product include anticipated future revenues, and changes in software and hardware technologies. Management annually reviews the carrying values of capitalized costs for impairment or whenever events or changes in circumstances indicate the carrying amount may not be recoverable. If expected cash flows are insufficient to recover the carrying amount of the asset, then we recognize an impairment loss is recognized to state the asset at its net realizable value.
M. Income Taxes IncomeWe account for income taxes are accounted for under the asset and liability method. DeferredWe recognize deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. DeferredWe measure deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. DeferredWe may reduce deferred tax assets may be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. TheWe recognize the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The CompanyWe regularly reviews itsreview our deferred tax assets for recoverability and establishesestablish a valuation allowance when Management believes it is more likely than not such assets will not be recovered, taking into consideration historical operating results, expectations of future earnings, tax planning strategies, and the expected timing of the reversals of existing temporary differences. Our policy is to include interest related to unrecognized tax benefits in income tax expense and penalties in operating expense.
N. Research and Development Costs Company-sponsored research and development costs include research and development and bid and proposal efforts related to the Company’sour products and services. We charge Company-sponsored product development costs are charged to expense when incurred. Customer-sponsored research and development costs incurred pursuant to contracts are accounted for similarly to other program costs. Customer-sponsored research and development costs refer to certain situations whereby customers provide funding to support specific contractually defined research and development costs. We account for customer-sponsored research and development costs incurred pursuant to contracts similarly to other program costs. Total Company and customer-sponsored research and development expenses were approximately $14.5$15.4 million, $13.1$13.3 million and $14.0$12.1 million for 2019, 20182021, 2020 and 2017, respectively. These expense amounts exclude certain engineering costs primarily associated with product line extensions, modifications and maintenance, which amounted to approximately $15.8 million, $13.1 million and $10.4 million for 2019, 2018 and 2017, respectively. O. Foreign Currency Translation TheWe translate the financial statements of the Company’sour foreign operations are translated into U.S. dollars in accordance with FASB ASC Topic 830, Foreign Currency Matters. TheWe record the resulting translation adjustments are recorded as a separate component of accumulated other comprehensive income.
P. Earnings Per Share BasicWe calculate basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. DilutedWe calculate diluted earnings per share is calculated using the weighted average number of common shares outstanding during the period plus shares issuable upon the assumed exercise of dilutive common share options and vesting of performance-accelerated restricted shares using the treasury stock method. There are no anti-dilutive shares.
issuable upon the assumed exercise of dilutive vesting of unvested restricted units (restricted shares) using the treasury stock method. There are no anti-dilutive shares. The number of shares used in the calculation of earnings per share for each year presented is as follows: | | | | | | | | | | | | | (in thousands) | | 2019 | | 2018 | | 2017 | | 2021 | | 2020 | | 2019 | Weighted Average Shares Outstanding — Basic | | 25,946 | | 25,874 | | 25,774 | | 26,046 | | 26,010 | | 25,946 | Performance- Accelerated Restricted Stock | | 151 | | 184 | | 221 | | Dilutive Restricted Shares | | | 179 | | 125 | | 151 | Shares — Diluted | | 26,097 | | 26,058 | | 25,995 | | 26,225 | | 26,135 | | 26,097 |
Q. Share-Based Compensation The Company providesWe provide compensation benefits to certain key employees under several share-based plans providing for employeeperformance-accelerated, performance-based and/or time-vested restricted stock options and/or performance-accelerated restricted shares (restricted shares),unit awards, and to non-employee directors under a separate compensation plan for non-employee directors compensation plan. Share-baseddirectors. We measure share-based payment expense is measured at the grant date based on the fair value of the award and is recognizedrecognize it on a straight-line basis over the requisite service period (generally the vesting period of the award).
R. Accumulated Other Comprehensive Loss Accumulated other comprehensive loss of $(44.0)$(2.2) million at September 30, 20192021 consisted of $(37.0) million related to the pension actuarial loss; and $(7.0) million related to currency translation adjustments. Accumulated other comprehensive loss of $(31.5)$(3.7) million at September 30, 20182020 consisted of $(30.9) million related to the pension net actuarial loss; $(0.5) million related to currency translation adjustments; and $(0.1) million related to forward exchange contracts.adjustments. S.Deferred Revenue and Costs Deferred revenue and costs are recorded when products or services have been provided or cash has been received but the criteria for revenue recognition have not been met. If there is a customer acceptance provision or there is uncertainty about customer acceptance, revenue and costs are deferred until the customer has accepted the product or service.
T. Derivative Financial Instruments
AllWe report all derivative financial instruments are reported on the balance sheet at fair value. The accounting for changes in fair value of a derivative instrument depends on whether it has been designated and qualifies as a hedge and on the type of hedge. For each derivative instrument designated as a cash flow hedge, we defer the effective portion of the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. For each derivative instrument designated as a fair value hedge, the gain or loss on the derivative and the offsetting gain or loss on the hedged item are recognized immediately in earnings. Regardless of type, a fully effective hedge will result in no net earnings impact while the derivative is outstanding. To the extent that any hedge is ineffective at offsetting cash flow or fair value changes in the underlying hedged item, there could be a net earnings impact.
U.T. Fair Value Measurements
Fair value is defined as the price at which an asset could be exchanged in a current transaction between knowledgeable, willing parties or the amount that would be paid to transfer a liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Where available, we base fair value is based on observable market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, we apply valuation models are applied.models. These valuation techniques involve some level of Management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. The accounting guidance establishes a three-level hierarchy for disclosure of fair value measurements, based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, as follows: Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2 –Inputs– Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. Level 3 – Inputs to the valuation methodology are unobservable and significant to the fair value measurement. Financial Assets and Liabilities The Company hasWe have estimated the fair value of itsour financial instruments as of September 30, 20192021 using available market information or other appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, receivables, inventories, payables and other current assets and liabilities approximate fair value because of the short maturity of those instruments. The carrying amounts due under the revolving credit facility approximate fair value as the interest on outstanding borrowings is calculated at a spread over the London Interbank Offered Rate (LIBOR) or based on the prime rate, at the Company’sour election.
Nonfinancial Assets and Liabilities The Company’sOur nonfinancial assets such as property, plant and equipment, inventories, and other intangible assets are not measured at fair value on a recurring basis; however they are subject to fair value adjustments in certain circumstances, such as when there is evidence that an impairment may exist. NaN impairments were recorded during 2019.
V.New Accounting Standards
Leases
In February 2016, the FASB issued ASU No. 2016-062, "Leases" (ASU 2016-02) which supersedes ASC 840, "Leases" and creates a new topic, ASC 842, "Leases." Subsequent to the issuance of ASU 2016-02, ASC 842 was amended by various updates that amend and clarify the impact and implementation of the aforementioned update. These updates require lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. Upon initial application, the provisions of these updates are required to be applied using the modified retrospective method which requires retrospective adoption to each prior reporting period presented with the cumulative effect of adoption recorded to the earliest reporting period presented. An optional transition method can be utilized which requires retrospective adoption beginning on the date of adoption with the cumulative effect of initially applying these updates recognized at the date of initial adoption. These updates also expand the required quantitative and qualitative disclosures surrounding leases. These updates are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with earlier application permitted. We adopted these updates on October 1, 2019 using the optional transition method. The adoption resulted in the addition of "right of use" assets and lease liabilities of approximately $25 million to our consolidated balance sheet, with no significant change to our consolidated statements of operations or cash flows. The updates will also have an impact on our accounting policies, internal controls and disclosures related to leases.
Other Standards
In January 2018, the FASB issued ASU No. 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which gives entities the option to reclassify to retained earnings the tax effects resulting from the Act related to items in accumulated other comprehensive income (loss) (AOCI) that the FASB refers to as having been stranded in AOCI. This new standard is effective for annual periods beginning after December 15, 2018. The Company adopted this ASU in the fourth quarter of 2018 and, as a result of adopting this standard, it reclassified $6.3 million from AOCI to retained earnings.
In January 2017, the FASB issued Accounting Standards Update (ASU) No. 2017-04, Simplifying the Test for Goodwill Impairment (ASU 2017-04), which eliminates Step 2 from the goodwill impairment test. Under the amendments in this update, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The new standard is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. The Company adopted this standard in the fourth quarter of 2017 with its annual goodwill impairment tests. The adoption of ASU 2017-04 did not have an impact on the Company’s consolidated financial statements.2021.
2.Acquisitions 20192021
On July 2, 2019August 9, 2021 we acquired the Company acquired Globe Composite Solutions, LLC,assets of Phenix Technologies, Inc. (Phenix), for a purchase price of approximately $95$47.2 million net of cash acquired. Globe,in cash. Phenix, based in Stoughton, Massachusetts,Accident, Maryland, is a well-established, vertically integrated supplierleading designer and manufacturer of mission-critical composite-based productshigh voltage, high current, high power test systems and components and solutions for navy, defense,supporting the electric utility industry, high voltage test laboratories, and industrial customers, Globe has annualized sales of approximately $37 million.field service organizations worldwide. Since the date of acquisition, the operating results for Globethe Phenix business have been included inas part of the Company’s FiltrationUSG segment. Based onThe acquisition date fair value of the preliminary purchase price allocation, the Company recordedassets acquired and liabilities assumed were as follows: approximately $3.5$2.6 million of accounts receivable, $3.5$5.8 million of inventory, $6.3$8.0 million of property, plant and equipment, $10.5$6.2 million of accounts payable and accrued expenses, and advance payments, $28.5 million of goodwill, $3.7 million offor tradenames, and $59.7 million of amortizable intangible assets consisting mainly of $56.7$9.6 million of customer relationships withand $0.5 million of miscellaneous items. The tradename was determined to have an indefinite useful life and the customer relationships were determined to have a weighted averageuseful life of 20 years and $2.8 million of customer contract assets. The final working capital adjustment is due in January 2020.13 years. The acquired goodwill of $23.2 million relates to excess value associated with the opportunities to expand the services and marketsproducts that the Company can offer to its customers. The Company estimates approximately $25$20 million of the goodwill will be deductible for tax purposes.
2018 The allocation of the purchase price to acquired assets and assumed liabilities is preliminary as we are in the process of obtaining additional information necessary to identify and determine the fair value of all acquired assets and assumed liabilities and calculate a final residual.
On March 14, 2018, the CompanyJuly 29, 2021 we acquired the assets of Manta Test Systems Inc. (Manta)I.S.A. – Altanova Group S.r.l., a North American utility solutions provider located(Altanova), headquartered in Mississauga, Ontario, Canada,Taino, Italy, for a purchase price of $9.5approximately $115 million, net of cash acquired. Altanova is a supplier of diagnostic products, monitoring systems and services related to power generation, transmission and distribution networks, renewable energy and storage, and process industries to customers in cash.more than 100 countries. Since the date of acquisition, the operating results for Mantathe Altanova business have been included as a product linepart of Doble within the Company’s USG segment. Based onThe acquisition date fair value of the purchase price allocation, the Company recorded approximately $0.4assets acquired and liabilities assumed were as follows: $9.7 million of accounts receivable, $1.1$5.6 million of inventory, $0.2$1.2 million of property, plant and equipment, $0.4$8.0 million of other assets, $12.8 million of accounts payable and accrued expenses, $3.5 million of goodwill, $1.2 million of tradenames and $3.5 million of amortizable intangible assets consisting of customer relationships with a weighted average life of 13 years. 2017
On August 30, 2017, the Company acquired the assets of Vanguard Instruments Company (Vanguard Instruments), a test equipment provider serving the global electric utility market, located in Ontario, California, for a purchase price of $36.0 million in cash. Since the date of acquisition, the operating results for Vanguard Instruments have been included as a product line of Doble within the Company’s USG segment. Based on the purchase price allocation, the Company recorded approximately $1.8 million of accounts receivable, $2.1 million of inventory, $0.3 million of property, plant and equipment, $0.2 million of accounts payable and accrued expenses, $10.7 million of goodwill, $3.2 million of tradenames and $18.0 million of amortizable intangible assets consisting of customer relationships with a weighted average life of 15 years.
On May 25, 2017, the Company acquired the assets of Morgan Schaffer Inc. (Morgan Schaffer), a global utilities provider located in Montreal, Quebec, Canada, for a purchase price of $48.8 million in cash. Since the date of acquisition, the operating results for Morgan Schaffer have been included in the Company’s USG segment. Based on the purchase price allocation, the Company recorded approximately $2.5 million of accounts receivable, $5.2 million of inventory, $1.7 million of property, plant and equipment, $0.4$6.9 million of other assets, $4.9 million of accounts payable and accrued expenses, $4.8 million of goodwill, $35.6 million of trade names and $3.6 million of amortizable intangible assets consisting of customer relationships and developed technology with a weighted average life of approximately 10 years.
On May 8, 2017, the Company acquired NRG Systems, Inc. (NRG), located in Hinesburg, Vermont, for a purchase price of $38.6 million in cash (net of cash acquired). NRG is a global market leader in the design and manufacture of decision support tools for the renewable energy industry, primarily wind. Since the date of acquisition, the operating results for NRG have been included in the Company’s USG segment. Based on the purchase price allocation, the Company recorded approximately $1.5 million of cash, $4.1 million of accounts receivable, $5.1 million of inventory, $0.4 million of other assets, $9.4 million of property, plant and equipment (including a capital lease), $4.3 million of accounts payable and accrued expenses, $8.9 million of long-term lease liability, $7.5 million of goodwill, $8.1 million of trade names and $17.2 million of amortizable intangible assets consisting of customer relationships with a weighted average life of approximately 14 years.
On November 7, 2016, the Company acquired aerospace suppliers Mayday Manufacturing Co. (Mayday) and its affiliate, Hi-Tech Metals, Inc. (Hi-Tech), which share a state-of-the-art, expandable 130,000 square foot facility in Denton, Texas, for a purchase price of approximately $75 million in cash. Since the date of acquisition, the consolidated operating results for Mayday and Hi-Tech have been included in the Company’s Filtration segment. Based on the purchase price allocation, the Company recorded approximately $7.4 million of accounts receivable, $11.0 million of inventory, $0.3 million of other assets, $16.6 million of property, plant and equipment (including a capital lease), $2.8 million of accounts payable and accrued expenses, $9.5 million of long-term lease liability, $15.7liabilities, $16.4 million of deferred tax liabilities, $30.1$50.5 million of goodwill, $4.8 million of trade names and $32.8 million of amortizable identifiable intangible assets consisting primarily of customer relationships withand $4.3 million of tradenames. The tradename was determined to have a weighted-averageuseful life of approximately 20ten years and the customer relationships were determined to have a useful life of twenty years.
All The acquired goodwill of $71.9 million relates to the excess value associated with opportunities to expand the services and products that the Company can offer to its customers, access to new markets, and synergies anticipated by combining Altanova with existing USG businesses. The Company does not expect the goodwill will be deductible for tax purposes. The allocation of the Company’s acquisitions have beenpurchase price to acquired assets and assumed liabilities is preliminary as we are in the process of obtaining additional information necessary to identify and determine the fair value of all acquired assets and assumed liabilities and calculate a final residual.
We accounted for these acquisitions using the purchase method of accounting, and accordingly, we allocated the respective purchase prices were allocated to the assets (including intangible assets) acquired and liabilities assumed based on estimated fair values at the date of acquisition. We have included the financial results from these acquisitions in our financial statements from the date of acquisition. 3.Technical Packaging Divestiture In December 2019, we completed the sale of our Technical Packaging business segment, consisting of our wholly-owned subsidiaries Thermoform Engineered Quality LLC, Plastique Ltd. and Plastique sp. z o.o. (the “Technical Packaging Business”), to Sonoco values atPlastics, Inc. and Sonoco Holdings, Inc. (“Buyers”), 2 wholly-owned subsidiaries of Sonoco Products Company (NYSE:SON). The companies within this segment provide innovative solutions to the datemedical and commercial markets for thermoformed packages and specialty products using a wide variety of acquisition. Thethin gauge plastics and pulp. Results of operations, financial results from these acquisitions have been includedposition and cash flows for the Technical Packaging business are reflected as discontinued operations in the Company’s financial statementsConsolidated Financial Statements and related notes for all periods presented.
Net sales from the dateTechnical Packaging business were $16.5 million and $86.9 million in 2020 and 2019, respectively. Pretax (loss) earnings from the Technical Packaging business was $(0.3) million and $4.3 million in 2020 and 2019, respectively. We received net proceeds from the sale of acquisition. The goodwillapproximately $184 million and recorded for$76.5 million after-tax net earnings on the Mayday acquisition mentioned above is not expectedsale in 2020. We finalized a contractual working capital adjustment and paid $0.2 million to be deductible for U.S. Federal or state income tax purposes. The goodwill recorded for the Globe, Vanguard Instruments and NRG acquisitions mentioned above is expected to be deductible for U.S. Federal and state income tax purposes. The goodwill recorded forbuyer during the Manta and Morgan Schaffer acquisitions is expected to be deductible for Canadian income tax purposes.third quarter of 2020.
3.4. Goodwill and Other Intangible Assets
Included on the Company’s Consolidated Balance Sheets at September 30, 20192021 and 20182020 are the following intangible assets gross carrying amounts and accumulated amortization: | | | | | | | | | | | (Dollars in millions) | | 2019 | | 2018 | | (Dollars in thousands) | | | 2021 | | 2020 | Goodwill | | $ | 409.2 | | 381.7 | | $ | 504,853 | | 408,063 | | | | | | | | | | | | Intangible assets with determinable lives: | | | | | | | | | | | Patents | | | | | | | | | | | Gross carrying amount | | $ | 2.1 | | 1.8 | | $ | 2,131 | | 2,092 | Less: accumulated amortization | | | 0.9 | | 0.8 | | | 972 | | 858 | Net | | $ | 1.2 | | 1.0 | | $ | 1,159 | | 1,234 | | | | | | | | | | | | Capitalized software | | | | | | | | | | | Gross carrying amount | | $ | 79.7 | | 71.3 | | $ | 93,671 | | 84,888 | Less: accumulated amortization | | | 49.2 | | 41.6 | | | 63,740 | | 57,302 | Net | | $ | 30.5 | | 29.7 | | $ | 29,931 | | 27,586 | | | | | | | | | | | | Customer Relationships | | | | | | | | | | | Gross carrying amount | | $ | 241.3 | | 185.3 | | $ | 288,530 | | 227,178 | Less: accumulated amortization | | | 59.0 | | 47.8 | | | 80,882 | | 67,643 | Net | | $ | 182.3 | | 137.5 | | $ | 207,648 | | 159,535 | | | | | | | | | | | | Other | | | | | | | | | | | Gross carrying amount | | $ | 5.3 | | 5.5 | | $ | 8,680 | | 5,156 | Less: accumulated amortization | | | 2.6 | | 2.0 | | | 4,298 | | 3,260 | Net | | $ | 2.7 | | 3.5 | | $ | 4,382 | | 1,896 | Intangible assets with indefinite lives: | | | | | | | | | | | Trade names | | $ | 176.3 | | 173.7 | | $ | 166,130 | | 156,381 |
The CompanyWe performed itsour annual evaluation of goodwill and intangible assets for impairment during the fourth quarter of 20192021 and concluded that 0 impairment existed at September 30, 2019 and there are2021. There were 0 accumulated impairment losses as of September 30, 2019.
The changes in the carrying amount of goodwill attributable to each business segment for 2019 and 2018 are as follows:
| | | | | | | | | | | | (Dollars in millions) | | Filtration | | Test | | USG | | Technical Packaging | | Total | Balance as of September 30, 2017 | | $ | 73.7 | | 34.1 | | 250.2 | | 19.9 | | 377.9 | Acquisition activity | | | — | | — | | 3.9 | | — | | 3.9 | Foreign currency translation and other | | | — | | — | | — | | (0.1) | | (0.1) | Balance as of September 30, 2018 | | | 73.7 | | 34.1 | | 254.1 | | 19.8 | | 381.7 | Acquisition activity | | | 28.5 | | — | | — | | — | | 28.5 | Foreign currency translation and other | | | — | | — | | (0.1) | | (0.9) | | (1.0) | Balance as of September 30, 2019 | | $ | 102.2 | | 34.1 | | 254.0 | | 18.9 | | 409.2 |
Amortization expense related to intangible assets with determinable lives was $19.5 million, $18.3 million and $16.3 million in 2019, 2018 and 2017, respectively. Patents are amortized over the life of the patents, generally 17 years. Capitalized software is amortized over the estimated useful life of the software, generally three to seven years. Customer relationships are generally amortized over2021.
The changes in the carrying amount of goodwill attributable to each business segment for 2021 and 2020 are as follows: fifteen
| | | | | | | | | | | (Dollars in millions) | | A&D | | Test | | USG | | Total | Balance as of September 30, 2019 | | $ | 102.2 | | | 34.1 | | 254.0 | | 390.3 | Out-of-period adjustment | | | — | | | — | | 18.0 | | 18.0 | Foreign currency translation and other | | | (0.1) | | | — | | (0.1) | | (0.2) | Balance as of September 30, 2020 | | $ | 102.1 | | | 34.1 | | 271.9 | | 408.1 | Acquisition activity | | | 2.2 | | | — | | 95.2 | | 97.4 | Foreign currency translation and other | | | — | | | — | | (0.6) | | (0.6) | Balance as of September 30, 2021 | | $ | 104.3 | | | 34.1 | | 366.5 | | 504.9 |
Amortization expense related to intangible assets with determinable lives was $20.8 million, $21.8 million and $18.5 million in 2021, 2020 and 2019, respectively. Patents are amortized over the life of the patents, generally ten to twenty years. Intangible asset amortizationCapitalized software is amortized over the estimated useful life of the software, generally three to seven years. Customer relationships are generally amortized over thirteen to twenty years. As of September 30, 2020, we reclassified $18.0 million from Morgan Schaffer’s tradename to goodwill to correct a misclassification that originated in the original accounting for the acquisition in fiscal years 2020 through 2024 is estimated at approximately $22 million per year.2017. Management has determined that the effect of this misclassification was not material to the current or any prior periods and it had no impact on our total assets, results of operations or cash flows for any period. 4.5. Accounts Receivable
Accounts receivable, net of the allowance for doubtful accounts, consistfrom continuing operations consisted of the following at September 30, 20192021 and 2018:2020: | | | | | | | | | | | (Dollars in thousands) | | 2019 | | 2018 | | 2021 | | 2020 | Commercial | | $ | 153,265 | | 146,049 | | $ | 128,952 | | 121,924 | U.S. Government and prime contractors | | | 21,162 | | 17,691 | | | 17,389 | | 22,158 | Total | | $ | 174,427 | | 163,740 | | $ | 146,341 | | 144,082 |
5.6. Inventories, Net
Inventories, consistnet, from continuing operations consisted of the following at September 30, 20192021 and 2018:2020: | | | | | | | | | | | (Dollars in thousands) | | 2019 | | 2018 | | 2021 | | 2020 | Finished goods | | $ | 23,550 | | 26,678 | | $ | 32,998 | | 28,435 | Work in process | | | 26,407 | | 47,765 | | | 34,201 | | 29,864 | Raw materials | | | 78,868 | | 60,973 | | | 79,949 | | 76,997 | Total | | $ | 128,825 | | 135,416 | | $ | 147,148 | | 135,296 |
6.Related Parties
One of the Company’s directors is an officer at a customer of the Company’s subsidiary Doble. Doble sells products, rents equipment and provides testing services to the customer in the ordinary course of Doble’s business. The total amount of these sales were approximately $3.3 million, $2.1 million and $3.6 million during fiscal 2019, 2018 and 2017, respectively. All transactions between Doble and the customer are intended to be and have been consistent with Doble’s normal commercial terms offered to its customers, and the Company’s Board of Directors has determined that the relationship between the Company and the customer is not material and did not impair either the Company’s or the director’s independence.
7. Income Tax Expense The components of income before income taxes for 2019, 2018 and 2017 consisted of the following:
| | | | | | | | (Dollars in thousands) | | 2019 | | 2018 | | 2017 | United States | | $ | 93,654 | | 80,994 | | 72,353 | Foreign | | | 8,562 | | 7,029 | | 7,800 | Total income before income taxes | | $ | 102,216 | | 88,023 | | 80,153 |
The principal components ofWe allocated total income tax expense (benefit) for the years ended September 30, 2021, 2020 and 2019 2018 and 2017 consist of:to income tax expense as follows:
| | | | | | | | (Dollars in thousands) | | 2019 | | 2018 | | 2017 | Federal: | | | | | | | | Current | | $ | 14,097 | | 9,174 | | 21,448 | Deferred | | | 1,020 | | (22,943) | | 628 | State and local: | | | | | | | | Current | | | 3,189 | | 2,121 | | 1,795 | Deferred | | | 204 | | 2,972 | | (49) | Foreign: | | | | | | | | Current | | | 2,493 | | 2,233 | | 4,450 | Deferred | | | 174 | | 2,330 | | (1,822) | Total | | $ | 21,177 | | (4,113) | | 26,450 |
| | | | | | | | (Dollars in thousands) | | 2021 | | 2020 | | 2019 | Income tax expense from continuing operations | | $ | 17,175 | | 13,510 | | 20,388 | Income tax expense from discontinued operations | | | 0 | | 23,501 | | 789 | Total income tax expense (benefit) | | $ | 17,175 | | 37,011 | | 21,177 |
The components of income from continuing operations before income taxes for 2021, 2020 and 2019 consisted of the following: | | | | | | | | (Dollars in thousands) | | 2021 | | 2020 | | 2019 | United States | | $ | 70,214 | | 23,951 | | 87,150 | Foreign | | | 10,457 | | 12,455 | | 10,727 | Total income before income taxes | | $ | 80,671 | | 36,406 | | 97,877 |
The principal components of income tax expense (benefit) from continuing operations for 2021, 2020 and 2019 consist of: | | | | | | | | (Dollars in thousands) | | 2021 | | 2020 | | 2019 | Federal: | | | | | | | | Current | | $ | 14,807 | | 10,495 | | 13,888 | Deferred | | | (1,598) | | 1,311 | | 250 | State and local: | | | | | | | | Current | | | 2,257 | | 1,984 | | 3,039 | Deferred | | | (786) | | (932) | | 98 | Foreign: | | | | | | | | Current | | | 2,922 | | 2,875 | | 2,439 | Deferred | | | (427) | | (2,223) | | 674 | Total | | $ | 17,175 | | 13,510 | | 20,388 |
The actual income tax expense (benefit) from continuing operations for 2019, 20182021, 2020 and 20172019 differs from the expected tax expense for those years (computed by applying the U.S. Federal corporate statutory rate) as follows: | | | | | | | | | | | | | | | | | 2019 | | 2018 | | 2017 | | | 2021 | | 2020 | | 2019 | | Federal corporate statutory rate | | 21.0 | % | 24.5 | % | 35.0 | % | | 21.0 | % | 21.0 | % | 21.0 | % | State and local, net of Federal benefits | | 3.3 | | 3.0 | | 2.4 | | | 1.9 | | 2.3 | | 3.2 | | Foreign | | 0.7 | | 0.6 | | (0.1) | | | (0.4) | | 1.3 | | 0.6 | | Research credit | | (0.9) | | (1.6) | | (1.1) | | | (0.9) | | (3.7) | | (0.8) | | Domestic production deduction | | — | | (1.1) | | (2.7) | | | Change in uncertain tax positions | | (0.1) | | (0.1) | | — | | | 0 | | 0 | | (0.1) | | Executive compensation | | 0.3 | | (0.1) | | (0.1) | | | 0.9 | | 1.6 | | 0.3 | | Valuation allowance | | (2.4) | | 3.0 | | (0.3) | | | 0 | | (6.8) | | (2.4) | | GILTI and FDII | | (0.8) | | — | | — | | | (1.3) | | (2.1) | | (0.6) | | Tax reform – impact on U.S. deferred tax assets and liabilities | | (0.3) | | (37.2) | | — | | | 0 | | 0 | | (0.3) | | Tax reform – transition tax | | (0.1) | | 1.5 | | — | | | 0 | | 0 | | (0.1) | | Tax reform – taxes related to foreign unremitted earnings | | — | | 2.8 | | — | | | Pension plan termination charge | | | 0 | | 23.4 | | 0 | | Other, net | | — | | — | | (0.1) | | | 0.1 | | 0.1 | | 0 | | Effective income tax rate | | 20.7 | % | (4.7) | % | 33.0 | % | | 21.3 | % | 37.1 | % | 20.8 | % |
On December 22, 2017, President Trump signed into law new tax legislation commonly referred to as the Tax Cut and Jobs Act (the “TCJA”). Provisions under the TCJA that became effective for the Company in the current fiscal year include a further reduction in the U.S. statutory rate to 21%, a new minimum tax on global intangible low-taxed income (“GILTI”), the benefitF-23
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at September 30, 20192021 and 20182020 are presented below: | | | | | | | | | | | (Dollars in thousands) | | 2019 | | 2018 | | 2021 | | 2020 | Deferred tax assets: | | | | | | | | | | | Inventories | | $ | 5,089 | | 5,834 | | $ | 4,267 | | 5,007 | Pension and other postretirement benefits | | | 5,533 | | 3,969 | | | 859 | | 842 | Timing differences related to revenue recognition | | | | 9,365 | | 4,936 | Lease liabilities | | | | 7,614 | | 5,220 | Net operating and capital loss carryforwards — domestic | | | 617 | | 639 | | | 542 | | 563 | Net operating loss carryforward — foreign | | | 3,766 | | 4,603 | | | 4,279 | | 3,678 | Foreign tax credit carryforward | | | — | | 2,377 | | Other compensation-related costs and other cost accruals | | | 7,952 | | 7,048 | | | 8,174 | | 8,953 | State credit carryforward | | | 1,914 | | 2,103 | | | 2,639 | | 2,366 | Foreign credit carryforward | | | | 192 | | 0 | Total deferred tax assets | | | 24,871 | | 26,573 | | | 37,931 | | 31,565 | | | | | | | | | | | | Deferred tax liabilities: | | | | | | | | | | | Timing differences related to revenue recognition | | | (1,508) | | — | | ROU assets | | | | (7,614) | | (5,220) | Goodwill | | | (2,673) | | (969) | | | (13,746) | | (7,878) | Acquisition assets | | | (60,224) | | (62,841) | | Acquisition intangible assets | | | | (62,052) | | (52,682) | Depreciation, software amortization | | | (20,161) | | (19,584) | | | (22,418) | | (21,283) | Net deferred tax liabilities before valuation allowance | | | (59,695) | | (56,821) | | | (67,899) | | (55,498) | Less valuation allowance | | | (4,520) | | (7,144) | | | (2,011) | | (1,932) | Net deferred tax liabilities | | $ | (64,215) | | (63,965) | | $ | (69,910) | | (57,430) |
The Company hasWe had a foreign net operating loss (NOL) carryforward of $16.6$15.5 million at September 30, 2019,2021, which reflects tax loss carryforwards in Germany, Finland, South Africa, Japan, Canada, NorwayJapan and the United Kingdom. Approximately $16.0$13.3 million of the tax loss carryforwards have no expiration date while the remaining $0.6$2.1 million will expire between 20272031 and 2039. The Company has2041. We had net foreign credit carryforwards of $0.2 million, of which all expire in 2041.We had deferred tax assets related to state NOL carryforwards of $0.6$0.5 million at September 30, 20192021 which expire between 20272025 and 2039. The Company2041. We also hashad net state research and other credit carryforwards of $1.9$2.6 million of which $1.4$1.9 million expires between 20252022 and 2037.2041. The remaining $0.5$0.8 million does not have an expiration date.
The valuation allowance for deferred tax assets as of September 30, 20192021 and 20182020 was $4.5$2.0 million and $7.1$1.9 million, respectively. The net change in the total valuation allowance for each of the years ended September 30, 20192021 and 20182020 was an increase of $0.1 million and a decrease of $2.6 million, and an increase of $2.7 million, respectively. The Company has established a valuation allowance for excess foreign tax credits that are not expected to be utilized in future periods of $0 and $2.4 million at September 30, 2019 and 2018, respectively. The Company hasrespectively.We established a valuation allowance against state credit carryforwards of $0.4$0.6 million at both September 30 2019of both 2021 and 2018.2020. In addition, the Company haswe established a valuation allowance against state NOL carryforwards that are not expected to be realized in future periods of $0.6$0.5 million at both September 30 2019of both 2021 and 2018.2020, respectively. Lastly, the Company haswe established a valuation allowance against certain NOL carryforwards in foreign jurisdictions which may not be realized in future periods of $3.6$0.9 million and $3.8$0.8 million at September 30, 20192021 and 2018,2020, respectively. On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act, which made comprehensive changes to U.S. federal income tax laws by moving from a global to a modified territorial tax regime. As a result, cash repatriated to the U.S. is generally no longer subject to U.S. federal income tax. NaN provision is made for foreign withholding any applicable U.S. income taxes on the undistributed earnings of non-U.S. where these earnings are considered indefinitely invested or otherwise retained for continuing international operations. Determination of the amount of taxes that might be paid on these undistributed earnings if eventually remitted is not practicable.
The Company had $0 and $0.1 million of unrecognized tax benefits as of September 30, 2019 and 2018, respectively, which, if recognized, would affect the Company’s effective tax rate. The Company’s policy is to include interest related to unrecognized tax benefits in income tax expense and penalties in operating expense. As of September 30, 2019, 2018 and 2017, the Company had 0 accrued interest related to uncertain tax positions on its Consolidated Balance Sheets. NaN penalties have been accrued.
The principal jurisdictions for which the Company files income tax returns are U.S. Federal and the various city, state, and international locations where the Company has operations. The U.S. Federal tax years for the periods ended September 30, 2016 and forward remain subject to income tax examination. Various state tax years for the periods ended September 30, 2015 and forward remain subject to income tax examinations. The Company is subject to income tax in many jurisdictions outside the United States, none of which is individually significant.
8. Debt Debt consists of the following at September 30, 20192021 and 2018:2020: | | | | | | | | | | | (Dollars in thousands) | | 2019 | | 2018 | | 2021 | | 2020 | Revolving credit facility, including current portion | | $ | 286,261 | | 220,000 | | Current portion of long-term debt | | | (21,261) | | (20,000) | | Total borrowings | | | $ | 154,000 | | 62,368 | Current portion of long-term debt and short-term borrowings | | | | (20,000) | | (22,368) | Total long-term debt, less current portion | | $ | 265,000 | | 200,000 | | $ | 134,000 | | 40,000 |
On September 27, 2019, the Company entered into a new five-year credit facility (“the Credit Facility"), modifying its previous credit facility which would have matured December 21, 2020. The Credit Facility includes a $500 million revolving line of credit as well as provisions allowing for thean increase of the credit facility commitment amount by an additional $250 million, if necessary, with the consent of the lenders. The bank syndication supporting the facility is comprised of a diverse group of eight banks led by JP Morgan Chase Bank, N.A., as Administrative Agent. The Credit Facility matures September 27, 2024.
Interest on borrowings under the Credit Facility is calculated at a spread over either the London Interbank Offered Rate (LIBOR), the New York Federal Reserve Bank Rate, or the prime rate, or the London Interbank Offered Rate (LIBOR), depending on various factors. The Credit Facility also requires a facility fee ranging from 10 to 25 basis points per annum on the unused portion. The interest rate spreads and the facility fee are subject to increase or decrease depending on the Company's leverage ratio. The Credit Facility is secured by the unlimited guaranty of the Company'sour direct and indirect material U.S. subsidiaries and the pledge of 100% of the equity interests of itsour direct and indirect material foreign subsidiaries. The financial covenants of the Credit Facility include a leverage ratio and an interest coverage ratio. As of September 30, 2019, the Company was2021, we were in compliance with all covenants. At September 30, 2019, the Company2021, we had approximately $207$337 million available to borrow under the Credit Facility, plus the $250 million increase option subject to the lenders’ consent, in addition to $61.8$56.2 million cash on hand. The CompanyWe classified $21.3$20 million as the current portion of long-term debt as of September 30, 2019,2021, as the Company intendswe intend to repay this amount within the next twelve months; however, the Company haswe have no contractual obligation to repay such amount during the next twelve months. During 20192021 and 2018, the2020, our maximum aggregate short-term borrowings at any month-end were $308$174 million and $271$281 million, respectively, and the average aggregate short-term borrowings outstanding based on month-end balances were $236.4$71.3 million and $258.8$175.6 million, respectively. The weighted average interest rates were 3.21%1.20%, 3.03%3.20% and 2.09%3.21% for 2021, 2020 and 2019, 2018 and 2017, respectively. As of September 30, 2021, the interest rate on our debt was 1.06%. The letters of credit issued and outstanding under the Credit Facility totaled $8.2$8.5 million and $7.8$9.9 million at September 30, 20192021 and 2018,2020, respectively. 9. Capital Stock The 30,596,94030,666,173 and 30,534,78630,645,625 common shares as presented in the accompanying Consolidated Balance Sheets at September 30, 20192021 and 20182020 represent the actual number of shares issued at the respective dates. The CompanyWe held 4,615,627 and 4,623,9584,604,741and 4,607,911 common shares in treasury at September 30, 20192021 and 2018,2020, respectively. In August 2012, the Company’sour Board of Directors authorizedapproved a common stock repurchase program under which the Company mayauthorizing us to repurchase shares of itsour stock from time to time in itsManagement’s discretion, in the open market or otherwise, up to a maximum total repurchase amount of $100 million (or such lesserthe maximum amount as may be permitted under the Company’sour bank credit agreements)agreements, if less). This program has beenAfter being repeatedly extended by the Company’s Board of Directors, andthis program expired September 30, 2021. In August 2021, our Board of Directors approved a new common stock repurchase program authorizing us to repurchase shares of our stock from time to time in Management’s discretion, in the open market or otherwise, up to a maximum total repurchase amount of $200 million (or the maximum amount permitted under our bank credit agreements, if less). This program is currently scheduled to expire September 30, 2021. There were 0 share repurchases2024. We did 0t repurchase any shares in 2019, 20182021, 2020, or 2017. At September 30, 2019, approximately $50.4 million remained available for repurchases under the program.2019. 10. Share-Based Compensation The Company providesWe provide compensation benefits to certain key employees under several share-based plans providing for performance-accelerated and/or time-vested restricted sharestock unit (PARS) awards, and to non-employee directors under a separate compensation plan for non-employee directors compensation plan. The Company has 0 stock options currently outstanding.directors. As of September 30, 2019, the Company's2021, our equity compensation plans had a total of 844,029712,092 shares authorized and available for future issuance.
Performance-Accelerated Restricted ShareStock Unit (PARS) Awards and Time-Vested Restricted Stock Unit (RSU) Awards A PARS award represents the right to receive a specified number of shares of Company common stock if and when the award vests. A PARS award is not stock and does not give the recipient any rights as a shareholder until it vests and is paid out in shares of stock. PARS awards currently outstanding have a five-year vesting period, with accelerated vesting if certain targets based on market conditions are achieved. In these cases, if it is probable that the performance condition will be met, the Company recognizes compensation cost on a straight-line basis over the shorter performance period; otherwise, it will recognize compensation cost over the longer service period. Compensation cost for the outstanding PARS awards is being recognized over the shorter performance period, as it is probable the performance condition will be met. The PARS award grants were valued at the stock price on the date of grant. The terms of the RSU awards are similar to those of the PARS awards, but without any provision for acceleration of the vesting date. Each RSU represents the right to receive one share of Company common stock if the recipient remains continuously employed by the Company until the award vests, in this case 3 ½ years after the effective award date. The RSU award grants were valued at the stock price on the date of grant. Pretax compensation expense related to the PARSPARS/RSU awards for continuing operations was $5.6 million, $4.3 million $4.1 million and $4.4$4.0 million for 2021, 2020 and 2019, 2018 and 2017, respectively. The following summary presents information regarding outstanding PARSPARS/RSU awards as of the specified dates, and changes during the specified periods: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | FY 2019 | | FY 2018 | | FY 2017 | | FY 2021 | | FY 2020 | | FY 2019 | | | | | Estimated | | | | Estimated | | | | Estimated | | | | Estimated | | | | Estimated | | | | Estimated | | | | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | | Shares | | Avg. Price | | Shares | | Avg. Price | | Shares | | Avg. Price | | Shares | | Avg. Price | | Shares | | Avg. Price | | Shares | | Avg. Price | Nonvested at October 1, | | 315,544 | | $ | 47.23 | | 335,825 | | $ | 40.35 | | 427,438 | | $ | 35.40 | | 220,300 | | $ | 66.55 | | 281,004 | | $ | 59.72 | | 315,544 | | $ | 47.23 | Granted | | 84,862 | | | 74.77 | | 104,320 | | | 56.06 | | 110,422 | | | 51.16 | | 51,476 | | | 108.05 | | 45,723 | | | 74.80 | | 84,862 | | | 74.77 | Vested | | (113,402) | | | 37.00 | | (121,301) | | | 35.59 | | (202,035) | | | 35.78 | | (35,753) | | | 64.40 | | (89,822) | | | 50.51 | | (113,402) | | | 37.00 | Cancelled | | (6,000) | | | 45.20 | | (3,300) | | | 53.86 | | — | | | — | | (9,318) | | | 70.50 | | (16,605) | | | 60.48 | | (6,000) | | | 45.20 | Nonvested at September 30, | | 281,004 | | $ | 59.72 | | 315,544 | | $ | 47.23 | | 335,825 | | $ | 40.35 | | 226,705 | | $ | 76.15 | | 220,300 | | $ | 66.55 | | 281,004 | | $ | 59.72 |
Compensation Plan for Non-Employee Directors Through the first quarter of 2018 the Company's Compensation Plan for Non-Employee Directors providedIn addition to an annual cash retainer, we provide each non-employee director a retainer of 900 common shares per quarter. Beginning in the second quarter of 2018, the quarterly retainer was replaced bywith an annual retainer of Company stockequity award having a grant date market value of $180,000. Non-employee director grants were valued at$180,000, based on the NYSE closing price of the Company’s stock on the date of grant and were issued fromgrant. For calendar years prior to 2021, the Company’s treasury stock.award consisted of actual shares of Company stock, but beginning in January 2021, the award has been in the form of Restricted Stock Units, each of which represents the right to receive one share of Company stock at the end of a one-year vesting period. At the end of the vesting period, each award will be converted into the right to receive the same number of actual shares of common stock, plus additional shares representing the value of the quarterly dividends which would have accrued on the underlying shares during the vesting period. Compensation expense related to the non-employee director grants was $1.3 million, $1.3 million and $1.1 million $1.1 millionfor 2021, 2020 and $1.0 million for 2019, 2018 and 2017, respectively.
Total Share-Based Compensation The total share-based compensation cost that has been recognized in results of operations and included within SG&A from continuing operations was $5.4$6.9 million, $5.2$5.6 million and $5.4$5.1 million for 2019, 20182021, 2020 and 2017,2019, respectively. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $1.4 million, $1.2 million and $1.1 million $1.3 millionfor 2021, 2020 and $1.8 million for 2019, 2018 and 2017, respectively. As of September 30, 2019,2021, there was $9.6$7.9 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a weighted-average period of 2.01.6 years. 11. Retirement and Other Benefit Plans Formerly, substantially all our domestic employees were covered by a defined benefit pension plan (the Plan) maintained by the Company. Effective December 31, 2003, the Company’s defined benefit planThe Plan was frozen in 2003 and no additional benefits have been accrued aftersince that date. AsOn November 14, 2019, our Board of Directors approved a result,resolution to terminate the accumulated benefit obligation and projected benefit obligation are equal. These frozen retirement income benefits are provided to employees under defined benefit pay-related and flat-dollar plans, which are noncontributory. The annual contributionsPlan effective as of February 29, 2020. In connection with the termination, we contributed $25.7 million of cash to the defined benefit retirementPlan during 2020, settled approximately $32.4 million of Plan liabilities during 2020 through lump-sum payments from existing plan equal or exceedassets to eligible participants who elected to receive them, and recorded approximately $40.6 million of charges associated with these settlements. During 2020, we settled approximately $69.1 million of Plan liabilities by entering into an agreement to purchase annuities from a third party insurance company . This agreement covered active and former employees and their beneficiaries, with the minimum funding requirements ofinsurance company assuming the Employee Retirement Income Security Act. Subsequent to September 30, 2019, the Company announced that it plans to terminate and annuitize the defined benefit pension plan during fiscal 2020. In addition to providing retirement income benefits, the Company provides unfunded postretirement health and life insurance benefits to certain retirees. To qualify, an employee must retire at age 55 or later and the employee’s age plus service must equal or exceed 75. Retiree contributions are defined as a percentage of medical premiums. Consequently, retiree contributions increase with increases in the medical premiums. The life insurance plans are noncontributory and provide coverage of a flat dollar amountfuture annuity payments for qualifying retired employees. Effective December 31, 2004, no new retirees were eligible for life insurance benefits. In addition, substantiallythese individuals. Substantially all our domestic employees are covered by a defined contribution plan maintained by the Company. The Company uses In addition, we offer unfunded post-retirement pre-Medicare health insurance benefits to a measurement datesmall number of September 30 for its pensioneligible retirees and other postretirement benefit plans. The Company has an accrued benefit liabilityemployees. We formerly provided unfunded post-retirement life insurance to qualifying retired employees who retired before 2005, but ceased providing this coverage on July 31, 2020. There was no financial impact of $0.6 million and $0.5 million at September 30, 2019 and 2018, respectively, related to its other postretirement benefit obligations. All other information related to its postretirement benefit plans is not considered material to the Company’s results of operations or financial condition.
The following tables provide a reconciliation of the changesthis plan in the pension plans and fair value of assets over the two-year period ended September 30, 2019, and a statement of the funded status as of September 30, 2019 and 2018:2021.
| | | | | | (Dollars in millions) | | | | | | Reconciliation of benefit obligation | | 2019 | | 2018 | Net benefit obligation at beginning of year | | $ | 89.8 | | 95.3 | Interest cost | | | 3.7 | | 3.4 | Actuarial loss (gain) | | | 11.3 | | (4.3) | Gross benefits paid | | | (4.7) | | (4.6) | Settlements | | | — | | — | Net benefit obligation at end of year | | $ | 100.1 | | 89.8 |
| | | | | | (Dollars in millions) | | | | | | Reconciliation of fair value of plan assets | | 2019 | | 2018 | Fair value of plan assets at beginning of year | | $ | 73.3 | | 65.0 | Actual return on plan assets | | | 5.9 | | 2.7 | Employer contributions | | | 2.7 | | 10.2 | Gross benefits paid | | | (4.7) | | (4.6) | Settlements | | | — | | — | Fair value of plan assets at end of year | | $ | 77.2 | | 73.3 |
12.Business Segment Information
| | | | | | (Dollars in millions) | | | | | | Funded Status | | 2019 | | 2018 | Funded status at end of year | | $ | (22.9) | | (16.5) | Accrued benefit cost | | | (22.9) | | (16.5) | | | | | | | Amounts recognized in the Balance Sheet consist of: | | | | | | Current liability | | | (0.2) | | (0.2) | Noncurrent liability | | | (22.7) | | (16.3) | Accumulated other comprehensive (income)/loss (before tax effect) | | | 49.6 | | 41.9 | | | | | | | Amounts recognized in accumulated other comprehensive (income)/loss consist of: | | | | | | Net actuarial loss | | | 49.6 | | 41.9 | | | | | | | Accumulated other comprehensive (income)/loss (before tax effect) | | $ | 49.6 | | 41.9 |
We are organized based on the products and services we offer, and we classify our continuing business operations in 3 reportable segments for financial reporting purposes: Aerospace & Defense (A&D), Utility Solutions Group (USG) and RF Shielding and Test (Test). In addition, for reporting certain financial information we treat Corporate activities as a separate segment. The former Technical Packaging segment was divested in December 2019 and is reflected as discontinued operations for 2020.
The estimated amount that will be amortized from accumulatedA&D segment’s operations consist of PTI Technologies Inc. (PTI), VACCO Industries (VACCO), Crissair, Inc. (Crissair), Mayday Manufacturing Co. (Mayday), Hi-Tech Metals, Inc. (Hi-Tech), Westland Technologies, Inc. (Westland), and Globe Composite Solutions, LLC (Globe).The companies within this segment primarily design and manufacture specialty filtration, fluid control and naval products, including hydraulic filter elements and fluid control devices used in aerospace and defense applications, unique filter mechanisms used in micro-propulsion devices for satellites, custom designed filters for manned aircraft and submarines, products and systems to reduce vibration and/or acoustic signatures and otherwise reduce or obscure a vessel’s signature, and other comprehensive (income) loss into net periodic benefit cost (income) in 2020 is $2.7 million.communications, sealing, surface control and hydrodynamic related applications to enhance U.S. Navy maritime survivability; precision-tolerance machined components for the aerospace and defense industry; and metal processing services. The following tableUSG segment’s operations consist of Doble Engineering Company and related subsidiaries including Morgan Schaffer and Altanova (collectively, Doble), and NRG Systems, Inc. (NRG). Doble is an industry leader in the development, manufacture and delivery of diagnostic testing and data management solutions that enable electric power grid operators to assess the integrity of high-voltage power delivery equipment. It combines three core elements for customers – diagnostic test and condition monitoring instruments, expert consulting, and testing services – and provides access to its large reserve of related empirical knowledge. NRG is a global market leader in the design and manufacture of decision support tools for the renewable energy industry, primarily wind and solar. The recent acquisition of Altanova not only complements our existing products and services but its strong market share in Europe and Asia provides a significant international platform for our USG segment. The Test segment’s operations consist of ETS-Lindgren Inc. and related subsidiaries (ETS-Lindgren). ETS-Lindgren is an industry leader in designing and manufacturing products which provide its customers with the ability to identify, measure and contain magnetic, electromagnetic and acoustic energy. It supplies its customers with a broad range of isolated environments and turnkey systems, including RF test facilities, acoustic test enclosures, RF and magnetically shielded rooms, secure communication facilities, RF measurement systems and broadcast and recording studios. Many of these facilities include proprietary features such as shielded doors and windows. ETS-Lindgren also provides the componentsdesign, program management, installation and integration services required to successfully complete these types of net periodic benefit cost for the plans for 2019, 2018 and 2017:
| | | | | | | | (Dollars in millions) | | 2019 | | 2018 | | 2017 | Service cost | | $ | — | | — | | — | Interest cost | | | 3.7 | | 3.4 | | 3.2 | Expected return on plan assets | | | (4.4) | | (3.8) | | (3.9) | Net actuarial loss | | | 2.1 | | 2.3 | | 2.6 | Net periodic benefit cost | | | 1.4 | | 1.9 | | 1.9 | Defined contribution plans | | | 7.3 | | 7.1 | | 6.3 | Total | | $ | 8.7 | | 9.0 | | 8.2 |
The discount rate used in measuring the Company’s pension obligations was developed by matching yields of actual high-quality corporate bonds to expected future pension plan cash flows (benefit payments). Over 400 Aa-rated, non-callable bondsfacilities. ETS-Lindgren also supplies customers with a widebroad range of maturities were usedcomponents including RF absorptive materials, RF filters, active compensation systems, antennas, antenna masts, turntables and electric and magnetic probes, RF test cells, proprietary measurement software and other test accessories required to perform a variety of tests. ETS-Lindgren offers a variety of services including calibration for antennas and field probes, chamber certification, field surveys, customer training and a variety of product tests. ETS-Lindgren serves the acoustics, medical, health and safety, electronics, wireless communications, automotive and defense markets.
Accounting policies of the segments are the same as those described in the analysis. After usingsummary of significant accounting policies in Note 1 to the bond yields to determineConsolidated Financial Statements. The operating units within each reporting segment have been aggregated because of similar economic characteristics and meet the present valueother aggregation criteria of the plan cash flows, a single representative rate that resulted in the same present value was developed. The expected long-term rate of return on plan assets assumption was determined by reviewing the actual investment return of the plans since inception and evaluating those returns in relation to expectations of various investment organizations to determine whether long-term future returns are expected to differ significantly from the past. The following weighted-average assumptions were used to determine the net periodic benefit cost for the pension plans:
| | | | | | | | | | 2019 | | 2018 | | 2017 | | Discount rate | | 4.15 | % | 3.65 | % | 3.25 | % | Rate of increase in compensation levels | | N/A | | N/A | | N/A | | Expected long-term rate of return on assets | | 6.00 | % | 6.00 | % | 6.25 | % |
FASB ASC 280.
The following weighted-average assumptions were used to determine the net periodic benefit obligations for the pension plans:
| | | | | | | | 2019 | | 2018 | | Discount rate | | 3.05 | % | 4.15 | % | Rate of increase in compensation levels | | N/A | | N/A | |
The assumed rate of increase in compensation levels is not applicable in 2019, 2018 and 2017 as the plan was frozen in earlier years.
The asset allocation for the Company’s pension plans at the end of 2019 and 2018, and the Company’s acceptable range and the target allocation for 2020, by asset category, are as follows:
| | | | | | | | | | | | Target | | | | Percentage of Plan Assets at | | | | Allocation | | Acceptable | | Year-end | | Asset Category | | 2020 | | Range | | 2019 | | 2018 | | Return seeking | | 53 | % | 48%-58 | % | 41 | % | 44 | % | Liability hedging | | 47 | % | 42%-52 | % | 56 | % | 54 | % | Cash/cash equivalents | | 0 | % | 0%-10 | % | 3 | % | 2 | % |
The Company’s pension plan assets are managed by outside investment managers and assets are rebalanced when the target ranges are exceeded. Pension plan assets consist principally of funds which invest in marketable securities including common stocks, bonds, and interest-bearing deposits. The Company’s investment strategy with respect to pension assets is to achieve a total rate of return (income and capital appreciation) that is sufficient to accomplish the purpose of providing retirement benefits to all eligible and future retirees of the pension plan. The Company regularly monitors performance and compliance with investment guidelines.
Fair Value of Financial Measurements
The fair values of the Company’s defined benefit plan investments as of September 30, 2019 and 2018, by asset category, were as follows:
| | | | | | (Dollars in millions) | | 2019 | | 2018 | Investments at fair value: | | | | | | Cash and cash equivalents | | $ | 2.1 | | 2.1 | Common and preferred stock funds: | | | | | | Domestic large capitalization | | | 8.8 | | 8.7 | Domestic small-/mid-capitalization | | | 2.4 | | 2.7 | International funds | | | 10.6 | | 10.8 | Fixed income funds | | | 49.7 | | 45.6 | Real estate investment funds | | | 3.6 | | 3.4 | Total investments at fair value | | $ | 77.2 | | 73.3 |
The following methods were used to estimate the fair value of each class of financial instrument:
Cash and cash equivalents: The carrying value of cash represents fair value as it consists of actual currency.
Investment Funds: The fair value of the investment funds, which offer daily redemptions, is determined based on the published net asset value of the funds as a practical expedient for fair value.
As of September 30, 2019, the fair values of the investments were classified within the valuation hierarchy under ASC 825 as follows: $44.9 million within Level 0, $13.0 million within Level 1 and $19.3 million within Level 2.
Expected Cash Flows
Information about the expected cash flows for the pension and other postretirement benefit plans follows:
| | | | | | | | Pension | | Other | (Dollars in millions) | | Benefits | | Benefits | Expected Employer Contributions — 2020 | | $ | 0.7 | | 0.1 | Expected Benefit Payments: | | | | | | 2020 | | | 5.8 | | 0.1 | 2021 | | | 5.5 | | 0.1 | 2022 | | | 5.7 | | 0.1 | 2023 | | | 5.8 | | 0.1 | 2024 | | | 5.9 | | 0.1 | 2025‑2029 | | $ | 30.2 | | 0.2 |
12.Derivative Financial Instruments
Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks. In 2018, the Company entered into 3 interest rate swaps with a notional amount of $150 million to hedge its exposure to variability in future LIBOR-based interest payments on variable rate debt. In addition, the Company’s Canadian subsidiary Morgan Schaffer enters into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars. The Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized may differ for open positions, which remain subject to ongoing market price fluctuations until settlement. All derivative instruments are reported in either accrued expenses or other assets on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. The interest rate swaps entered into during 2018 were not designated as cash flow hedges and, therefore, the gain or loss on the derivative is reflected in earnings each period. The following is a summary of the notional transaction amounts and fair values for the Company’s outstanding derivative financial instruments as of September 30, 2019.
| | | | | | | | | | Notional Amount | | Fair Value | | | | (In thousands) | | (Currency) | | (US$) | | Fix Rate | | Forward contracts | | 5,750 | USD | (35) | | | | Interest rate swap | | 150,000 | USD | (19) | | 2.09 | % | Interest rate swap * | | 150,000 | USD | (1,143) | | 2.24 | % |
* This swap represents a forward contract and will be effective in November 2019.
Fair Value of Financial Instruments
The Company’s forward contracts are classified within Level 2 of the valuation hierarchy in accordance with ASC 825, as presented below as of September 30, 2019:
| | | | | | | | | | (In thousands) | | Level 1 | | Level 2 | | Level 3 | | Total | Asset: | | | | | | | | | | Forward contracts | | $ | — | | (1,197) | | — | | (1,197) |
Valuation was based on third party evidence of similarly priced derivative instruments. There are no master netting arrangements with financial parties.
13.Business Segment Information
The Company is organized based on the products and services it offers, and classifies its business operations in 4 reportable segments for financial reporting purposes: Filtration/Fluid Flow (Filtration), Utility Solutions Group (USG), RF Shielding and Test (Test) and Technical Packaging.
The Filtration segment’s operations consist of PTI Technologies Inc. (PTI), VACCO Industries (VACCO), Crissair, Inc. (Crissair), Mayday Manufacturing Co. (Mayday), Hi-Tech Metals, Inc. (Hi-Tech), Westland Technologies, Inc. (Westland), and Globe Composite Solutions, LLC (Globe). PTI, VACCO and Crissair design and manufacture specialty filtration products, including hydraulic filter elements and fluid control devices used in commercial aerospace applications, unique filter mechanisms used in micro-propulsion devices for satellites and custom designed filters for manned aircraft and submarines. Mayday designs and manufactures mission-critical bushings, pins, sleeves and precision-tolerance machined components for landing gear, rotor heads, engine mounts, flight controls, and actuation systems for the aerospace and defense industries. Hi-Tech is a full-service metal processor offering aerospace OEM’s and Tier 1 suppliers, a large portfolio of processing services including anodizing, cadmium and zinc-nickel plating, organic coatings, non-destructive testing, and heat treatment. Westland designs, develops and manufactures elastomeric-based signature reduction solutions for U.S. naval vessels.
Globe supplies navy, defense, and industrial customers with mission-critical composite-based products and solutions for acoustic, signature-reduction, communications, sealing, vibration-reducing, surface control, and hydrodynamic-related applications.
The USG segment’s operations consist of Doble Engineering Company and related subsidiaries (Doble), Morgan Schaffer Ltd. (Morgan Schaffer), and NRG Systems, Inc. (NRG). Doble provides high-end, intelligent diagnostic test solutions for the electric power delivery industry and is a leading supplier of power factor and partial discharge testing instruments used to assess the integrity of high-voltage power delivery equipment. Morgan Schaffer provides an integrated offering of dissolved gas analysis, oil testing, and data management solutions which enhance the ability of electric utilities to accurately monitor the health of critical power transformers. NRG designs and manufactures decision support tools for the renewable energy industry, primarily wind.
The Test segment's operations consist of ETS-Lindgren Inc. and related subsidiaries (ETS-Lindgren). ETS-Lindgren is an industry leader in providing its customers with the ability to identify, measure and contain magnetic, electromagnetic and acoustic energy. ETS-Lindgren also manufactures radio frequency shielding products and components used by manufacturers of medical equipment, communications systems, electronic products, and shielded rooms for high-security data processing and secure communication.
The Technical Packaging segment’s operations consist of Thermoform Engineered Quality LLC (TEQ), Plastique Limited and Plastique sp. z o.o. The companies within this segment provide innovative solutions to the medical and commercial markets for thermoformed and precision molded pulp fiber packages and specialty products using a wide variety of thin gauge plastics and pulp.
Accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to the Consolidated Financial Statements. The operating units within each reporting segment have been aggregated because of similar economic characteristics and meet the other aggregation criteria of FASB ASC 280.
The Company evaluatesWe evaluate the performance of itsour operating units based on EBIT, which is defined as earnings before interest and taxes. EBIT on a consolidated basis is a non-GAAP financial measure; see “Non-GAAP Financial Measures” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”measure. Intersegment sales and transfers are not significant. Segment assets consist primarily of customer receivables, inventories, capitalized software and fixed assets directly associated with the production processes of the segment. Segment depreciation and amortization is based upon the direct assets listed above. The tables below are presented on the basis of continuing operations and exclude discontinued operations.
Net Sales | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in millions) | | | | | | | | | | | | | | | Year ended September 30, | | 2019 | | 2018 | | 2017 | | 2021 | | 2020 | | 2019 | Filtration | | $ | 325.8 | | 286.8 | | 279.5 | | A&D | | | $ | 314.8 | | 351.9 | | 325.7 | USG | | | 211.9 | | 214.0 | | 162.4 | | | 202.9 | | 191.7 | | 211.9 | Test | | | 188.4 | | 182.9 | | 160.9 | | | 197.7 | | 186.9 | | 188.4 | USG | | | — | | | | | | Technical Packaging | | | 86.9 | | 87.9 | | 82.9 | | Consolidated totals | | $ | 813.0 | | 771.6 | | 685.7 | | $ | 715.4 | | 730.5 | | 726.0 |
NoNaN customer exceeded 10% of sales in 2021 or 2019 or 2018.and 1 customer exceeded 10% of sales in 2020.
EBIT | | | | | | | | (Dollars in millions) | | | | | | | | Year ended September 30, | | 2021 | | 2020 | | 2019 | A&D | | $ | 56.5 | | 69.9 | | 70.1 | USG | | | 40.9 | | 24.4 | | 52.2 | Test | | | 27.6 | | 27.2 | | 25.6 | Reconciliation to consolidated totals (Corporate) | | | (42.1) | | (78.4) | | (41.9) | Consolidated EBIT | | | 82.9 | | 43.1 | | 106.0 | Less: interest expense | | | (2.2) | | (6.7) | | (8.1) | Earnings before income tax | | $ | 80.7 | | 36.4 | | 97.9 |
Identifiable Assets | | | | | | (Dollars in millions) | | | | | | Year ended September 30, | | 2021 | | 2020 | A&D | | $ | 270.0 | | 276.2 | USG | | | 197.5 | | 144.8 | Test | | | 153.6 | | 153.0 | Corporate | | | 956.2 | | 796.2 | Consolidated totals | | $ | 1,577.3 | | 1,370.2 |
Corporate consists primarily of deferred taxes, acquired intangible assets including goodwill and cash balances. Capital Expenditures | | | | | | | | (Dollars in millions) | | | | | | | | Year ended September 30, | | 2021 | | 2020 | | 2019 | A&D | | $ | 10.4 | | 15.9 | | 11.7 | USG | | | 11.6 | | 12.4 | | 8.5 | Test | | | 4.7 | | 3.6 | | 4.0 | Corporate | | | 0 | | 0.2 | | 0 | Consolidated totals | | $ | 26.7 | | 32.1 | | 24.2 |
In addition to the above amounts, we incurred expenditures for capitalized software of $8.8 million, $9.0 million and $8.4 million in 2021, 2020 and 2019, respectively. EBIT
| | | | | | | | (Dollars in millions) | | | | | | | | Year ended September 30, | | 2019 | | 2018 | | 2017 | Filtration | | $ | 70.1 | | 58.7 | | 52.2 | USG | | | 52.2 | | 43.2 | | 36.6 | Test | | | 25.6 | | 23.8 | | 19.5 | USG | | | — | | | | | Technical Packaging | | | 5.9 | | 8.1 | | 8.5 | Reconciliation to consolidated totals (Corporate) | | | (43.2) | | (37.0) | | (32.1) | Consolidated EBIT | | | 110.6 | | 96.8 | | 84.7 | Less: interest expense | | | (8.4) | | (8.8) | | (4.6) | Earnings before income tax | | $ | 102.2 | | 88.0 | | 80.1 |
Identifiable Assets
| | | | | | | | (Dollars in millions) | | | | | | | | Year ended September 30, | | 2019 | | 2018 | | | Filtration | | $ | 260.3 | | 204.7 | | | USG | | | 190.0 | | 176.9 | | | Test | | | 154.2 | | 138.3 | | | USG | | | — | | | | | Technical Packaging | | | 59.1 | | 50.9 | | | Corporate – Goodwill | | | 409.2 | | 381.7 | | | Corporate – Other assets | | | 393.9 | | 312.6 | | | Consolidated totals | | $ | 1,466.7 | | 1,265.1 | | |
Corporate assets consist primarily of goodwill, deferred taxes, acquired intangible assets and cash balances.
Capital Expenditures
| | | | | | | | (Dollars in millions) | | | | | | | | Year ended September 30, | | 2019 | | 2018 | | 2017 | Filtration | | $ | 11.7 | | 7.0 | | 10.2 | USG | | | 8.5 | | 5.2 | | 7.6 | Test | | | 4.0 | | 3.0 | | 4.5 | USG | | | — | | | | | Technical Packaging | | | 13.0 | | 5.4 | | 7.4 | Corporate | | | — | | — | | — | Consolidated totals | | $ | 37.2 | | 20.6 | | 29.7 |
In addition to the above amounts, the Company incurred expenditures for capitalized software of $8.4 million, $9.5 million and $9.0 million in 2019, 2018 and 2017, respectively.
Depreciation and Amortization
| | | | | | | | | | | | | | | (Dollars in millions) | | | | | | | | | | | | | | | Year ended September 30, | | 2019 | | 2018 | | 2017 | | 2021 | | 2020 | | 2019 | Filtration | | $ | 8.3 | | 7.6 | | 6.6 | | A&D | | | $ | 10.4 | | 9.4 | | 8.3 | USG | | | 11.3 | | 11.0 | | 9.8 | | | 13.5 | | 14.4 | | 11.3 | Test | | | 5.1 | | 4.5 | | 3.6 | | | 5.2 | | 5.0 | | 5.1 | USG | | | — | | | | | | Technical Packaging | | | 4.1 | | 4.1 | | 3.5 | | Corporate | | | 11.3 | | 10.6 | | 8.7 | | | 12.9 | | 12.5 | | 11.3 | Consolidated totals | | $ | 40.1 | | 37.8 | | 32.2 | | $ | 42.0 | | 41.3 | | 36.0 |
Depreciation expense of property, plant and equipment was $20.6$21.2 million, $19.4$19.5 million and $15.9$16.5 million for 2021, 2020 and 2019, 2018 and 2017, respectively. Geographic Information Net Sales | | | | | | | | | | | | | | | (Dollars in millions) | | | | | | | | | | | | | | | Year ended September 30, | | 2019 | | 2018 | | 2017 | | 2021 | | 2020 | | 2019 | United States | | $ | 583.0 | | 536.7 | | 503.1 | | $ | 517.0 | | 529.4 | | 537.2 | Asia | | | 88.3 | | 94.5 | | 69.8 | | | 92.3 | | 96.3 | | 86.2 | Europe | | | 82.8 | | 85.0 | | 75.4 | | | 53.5 | | 51.3 | | 45.0 | Canada | | | 33.2 | | 30.3 | | 22.2 | | | 27.0 | | 31.7 | | 33.0 | India | | | 11.7 | | 9.4 | | 4.8 | | | 12.4 | | 10.3 | | 11.7 | Other | | | 14.0 | | 15.7 | | 10.4 | | | 13.2 | | 11.5 | | 12.9 | Consolidated totals | | $ | 813.0 | | 771.6 | | 685.7 | | $ | 715.4 | | 730.5 | | 726.0 |
Long-Lived Assets | | | | | | | | | | | | | (Dollars in millions) | | | | | | | | | | | | | Year ended September 30, | | 2019 | | 2018 | | | | 2021 | | 2020 | United States | | $ | 140.0 | | 113.2 | | | | $ | 141.0 | | 131.5 | Europe | | | 16.6 | | 17.1 | | | | Mexico | | | | 3.8 | | 3.1 | Other | | | 4.9 | | 4.7 | | | | | 9.5 | | 5.3 | Consolidated totals | | $ | 161.5 | | 135.0 | | | | $ | 154.3 | | 139.9 |
NetWe attribute net sales are attributed to countries based on the location of the customer. Long-livedWe attribute long-lived assets are attributed to countries based on the location of the asset.
14.13. Commitments and Contingencies
The Company leases certain real property, equipment and machinery under non-cancelable operating leases. Rental expense under these operating leases was $6.4 million, $6.9 million and $6.8 million for 2019, 2018 and 2017, respectively. Future aggregate minimum lease payments under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2019, are:
| | | | (Dollars in thousands) | | | | Years ending September 30: | | | | 2020 | | $ | 6,405 | 2021 | | | 5,279 | 2022 | | | 4,592 | 2023 | | | 3,567 | 2024 and thereafter | | | 10,197 | Total | | $ | 30,040 |
At September 30, 2019, the Company2021, we had $8.2$8.5 million in letters of credit outstanding as guarantees of contract performance. The Company also had a commitment to purchase the NRG building for approximately $10 million, which closed in the first quarter of fiscal 2022. As a normal incident of the businesses in which the Company iswe are engaged, various claims, charges and litigation are asserted or commenced from time to time against the Company.us. Additionally, the Company iswe are currently involved in various stages of investigation and remediation relating to environmental matters. It is the opinion of Management that the aggregate costs involved in the resolution of these matters, and final judgments, if any, which might be rendered against the Companyus are adequately accrued, are covered by insurance or are not likely to have a material adverse effect on our financial results as the Company’s results from continuing operations, capital expenditures or competitive position.estimated exposure to loss is not material. 14.Leases Effective October 1, 2019 we adopted ASC 842, Leases. We determine at lease inception whether an arrangement that provides control over the use of an asset is a lease. We recognize at lease commencement a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term. We have elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less. Certain of our leases include options to extend the term of the lease for up to 20 years. 15.Capital LeasesWhen it is reasonably certain that we will exercise the option, Management includes the impact of the option in the lease term for purposes of determining total future lease payments. As most of our lease agreements do not explicitly state the discount rate implicit in the lease, Management uses our incremental borrowing rate on the commencement date to calculate the present value of future payments based on the tenor of each arrangement.
Our leases for real estate commonly include escalating payments. We include these variable lease payments in the calculation of our ROU asset and lease liability. In addition to the present value of the future lease payments, the calculation of the ROU asset also includes any deferred rent, lease pre-payments and initial direct costs of obtaining the lease. In addition to the base rent, real estate leases typically contain provisions for common-area maintenance and other similar services, which are considered non-lease components for accounting purposes. Non-lease components are excluded from our ROU assets and lease liabilities and expensed as incurred. Our leases are for office space, manufacturing facilities, and machinery and equipment. The Companycomponents of lease costs are shown below: | | | | | | | | | Year Ended | | Year Ended | | | September 30, | | September 30, | (Dollars in thousands) | | 2021 | | 2020 | Finance lease cost: | | | | | | | Amortization | | $ | 2,413 | | $ | 2,056 | Interest on lease liabilities | | | 1,235 | | | 971 | Operating lease cost | | | 5,879 | | | 5,284 | Total lease cost | | $ | 9,527 | | $ | 8,311 |
Additional information related to leases certain real property, equipmentis shown below: | | | | | | | | | | Year Ended | | Year Ended | | | | September 30, | | September 30, | | (Dollars in thousands) | | 2021 | | 2020 | | Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | Operating cash flows from operating leases | | $ | 5,504 | | $ | 5,223 | | Operating cash flows from finance leases | | | 1,228 | | | 971 | | Financing cash flows from finance leases | | | 1,757 | | | 1,547 | | | | | | | | | | Right-of-use assets obtained in exchange for operating lease liabilities | | $ | 15,609 | | $ | 26,244 | | | | | | | | | | Weighted-average remaining lease term: | | | | | | | | Operating leases | | | 10.3 | yrs. | | 6.0 | yrs. | Finance leases | | | 11.7 | yrs. | | 12.5 | yrs. | Weighted-average discount rate: | | | | | | | | Operating leases | | | 3.1 | % | | 3.1 | % | Finance leases | | | 4.2 | % | | 4.3 | % |
The table below is a reconciliation of future undiscounted cash flows to the operating and machinery under capital leases, primarily associated with the new Doble building in Marlborough, Massachusettsfinance lease liabilities, and the 2017 acquisitionsrelated ROU assets, presented on our Consolidated Balance Sheet on September 30, 2021: | | | | | | (Dollars in thousands) | | Operating | | Finance | Years Ending September 30: | | Leases | | Leases | 2022 | | $ | 5,448 | | 3,153 | 2023 | | | 4,679 | | 3,235 | 2024 | | | 4,032 | | 3,319 | 2025 | | | 3,654 | | 3,399 | 2026 and thereafter | | | 20,453 | | 25,516 | Total minimum lease payments | | | 38,266 | | 38,622 | Less: amounts representing interest | | | 5,691 | | 9,092 | Present value of net minimum lease payments | | $ | 32,575 | | 29,530 | Less: current portion of lease obligations | | | 4,543 | | 2,180 | Non-current portion of lease obligations | | | 28,032 | | 27,350 | ROU assets | | $ | 31,846 | | 24,964 |
The table below is a reconciliation of NRGfuture undiscounted cash flows to the operating and Mayday. The Doble facilityfinance lease expires in 2036, the NRG and Mayday facility leases expire in 2029,liabilities, and the machinery leases expire in 2020. As ofrelated ROU assets, presented on our Consolidated Balance Sheet on September 30, 2019,2020: | | | | | | | | (Dollars in thousands) | | Operating | | Finance | | Years Ending September 30: | | Leases | | Leases | | 2021 | | $ | 5,614 | | | 2,930 | | 2022 | | | 4,985 | | | 3,011 | | 2023 | | | 3,984 | | | 3,094 | | 2024 | | | 2,438 | | | 3,177 | | 2025 and thereafter | | | 6,984 | | | 28,323 | | Total minimum lease payments | | | 24,005 | | | 40,535 | | Less: amounts representing interest | | | 2,211 | | | 10,270 | | Present value of net minimum lease payments | | $ | 21,794 | | | 30,265 | | Less: current portion of lease obligations | | | 5,009 | | | 1,937 | | Non-current portion of lease obligations | | | 16,785 | | | 28,328 | | | | | | | | | | ROU assets | | $ | 21,390 | | | 26,164 | |
We include operating and finance lease liabilities in the net carrying value and accumulated depreciation of the assets under capital leases recorded by the Company were $28.4 million and $3.5 million, respectively. Capital lease obligations are included within other long-term liabilities (long-term portion) andConsolidated Balance Sheet in accrued other expenses (current portion) and other liabilities (long-term portion). Remaining payments dueWe include operating lease ROU assets as a caption on the Company’s capitalConsolidated Balance Sheet and include finance lease obligations as of September 30, 2019, are:ROU assets in Property, plant and equipment on the Consolidated Balance Sheet. | | | | (Dollars in thousands) | | | | Years ending September 30: | | | | 2020 | | $ | 2,518 | 2021 | | | 2,930 | 2022 | | | 3,012 | 2023 | | | 3,094 | 2024 and thereafter | | | 31,499 | Total minimum lease payments | | | 43,053 | Less: amounts representing interest | | | 11,241 | Present value of net minimum lease payments | | | 31,812 | Current portion of capital lease obligations | | | 1,832 | Non-current portion of capital lease obligations | | $ | 29,980 |
16.15. Revenues
(a) | Disaggregation of Revenues |
OurThe tables below present our revenues by customer type, geographic location, and revenue recognition method for the yearyears ended September 30, 2019 are presented in the table below2021 and 2020, as the Company deems itwe believe this presentation best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected by economic factors. The table belowtables also includesinclude a reconciliation of the disaggregated revenue within our reportable segments.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended September 30, 2019 | | | | | | | | | | | Technical | | | | Year Ended September 30, 2021 | | | | | | | | | | | | | (In thousands) | | Filtration | | USG | | Test | | Packaging | | Total | | A&D | | USG | | Test | | Total | Customer type: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Commercial | | $ | 180,356 | | $ | 207,666 | | $ | 168,201 | | $ | 86,599 | | $ | 642,822 | | $ | 130,217 | | | 199,111 | | | 177,601 | | | 506,929 | Government | | | 145,379 | | | 4,249 | | | 20,193 | | | 327 | | | 170,148 | | | 184,607 | | | 3,797 | | | 20,107 | | | 208,511 | Total revenues | | $ | 325,735 | | $ | 211,915 | | $ | 188,394 | | $ | 86,926 | | $ | 812,970 | | $ | 314,824 | | | 202,908 | | | 197,708 | | | 715,440 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | | | | | | | | | | | | | | | | United States | | $ | 274,446 | | $ | 150,381 | | $ | 112,358 | | $ | 45,787 | | $ | 582,972 | | $ | 275,976 | | | 140,545 | | | 100,438 | | | 516,959 | International | | | 51,289 | | | 61,534 | | | 76,036 | | | 41,139 | | | 229,998 | | | 38,848 | | | 62,363 | | | 97,270 | | | 198,481 | Total revenues | | $ | 325,735 | | $ | 211,915 | | $ | 188,394 | | $ | 86,926 | | $ | 812,970 | | $ | 314,824 | | | 202,908 | | | 197,708 | | | 715,440 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Revenue recognition method: | | | | | | | | | | | | | | | | | | | | | | | | | | | | Point in time | | $ | 164,224 | | $ | 164,126 | | $ | 36,787 | | $ | — | | $ | 365,137 | | $ | 136,449 | | | 153,163 | | | 40,609 | | | 330,221 | Over time | | | 161,511 | | | 47,789 | | | 151,607 | | | 86,926 | | | 447,833 | | | 178,375 | | | 49,745 | | | 157,099 | | | 385,219 | Total revenues | | $ | 325,735 | | $ | 211,915 | | $ | 188,394 | | $ | 86,926 | | $ | 812,970 | | $ | 314,824 | | | 202,908 | | | 197,708 | | | 715,440 |
| | | | | | | | | | | | | Year Ended September 30, 2020 | | | | | | | | | | | (In thousands) | | A&D | | USG | | Test | | Total | Customer type: | | | | | | | | | | | | | Commercial | | $ | 169,484 | | | 184,906 | | | 158,420 | | | 512,810 | Government | | | 182,392 | | | 6,797 | | | 28,472 | | | 217,661 | Total revenues | | $ | 351,876 | | | 191,703 | | | 186,892 | | | 730,471 | | | | | | | | | | | | | | Geographic location: | | | | | | | | | | | | | United States | | $ | 302,711 | | | 134,601 | | | 92,105 | | | 529,417 | International | | | 49,165 | | | 57,102 | | | 94,787 | | | 201,054 | Total revenues | | $ | 351,876 | | | 191,703 | | | 186,892 | | | 730,471 | | | | | | | | | | | | | | Revenue recognition method: | | | | | | | | | | | | | Point in time | | $ | 160,402 | | | 144,192 | | | 33,482 | | | 338,076 | Over time | | | 191,474 | | | 47,511 | | | 153,410 | | | 392,395 | Total revenues | | $ | 351,876 | | | 191,703 | | | 186,892 | | | 730,471 |
(b) | Remaining Performance Obligations |
Our remaining performance obligations, which is the equivalent of our backlog, represent the expected transaction price allocated to our contracts that we expect to recognize as revenue in future periods when we perform under the contracts. These remaining obligations include amounts that have been formally appropriated under contracts with the U.S. Government, and exclude unexercised contract options and potential orders under ordering-type contracts such as Indefinite Delivery, Indefinite Quantity contracts. At September 30, 2019,2021, we had $475$592 million in remaining performance obligations of which we expect to recognize revenues of 90%75% in the next twelve months. (c) | Contract assets and contract liabilities |
AssetsWe report assets and liabilities related to our contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. At September 30, 2019,2021, our contract assets and contract liabilities totaled $115.3$93.8 million and $81.2 million, respectively. Upon adoption of ASC 606 on October 1, 2018, contract assets and liabilities related to our contracts with customers were $87 million and $51$108.8 million, respectively. During 2019,2021, we recognized approximately $40$82 million in revenues that were included in the contract liabilities balance at the adoption date.
(d) | Reconciliation of ASC 606 to Prior Accounting Standards |
The amount by which each financial statement line item is affected in 2019 as a result of applying the new accounting standard as discussed in Note 2 is presented below:September 30, 2020.
| | | | | | | | | | | | September 30, 2019 | | | | | | Effect of the | | | | | | | | | adoption of | | Under Prior | (In thousands) | | As Reported | | ASC 606 | | Accounting | Consolidated Balance Sheets | | | | | | | | | | Contract assets (1) | | $ | 115,310 | | $ | (39,055) | | $ | 76,255 | Inventories | | | 128,825 | | | 34,065 | | | 162,890 | Total current assets | | | 495,194 | | | (4,990) | | | 490,204 | Total assets | | | 1,466,720 | | | (4,990) | | | 1,461,730 | Contract liabilities (2) | | | 81,177 | | | 2,870 | | | 84,047 | Total current liabilities | | | 251,635 | | | 2,870 | | | 254,505 | Deferred tax liabilities | | | 64,855 | | | (658) | | | 64,197 | Total liabilities | | | 640,498 | | | 2,212 | | | 642,710 | Retained earnings | | | 684,741 | | | (7,202) | | | 677,539 | Total shareholders’ equity | | | 826,222 | | | (7,202) | | | 819,020 | Total liabilities and shareholders’ equity | | $ | 1,466,720 | | | (4,990) | | | 1,461,730 |
| (1) | Previously “cost and estimated earnings on long-term contracts” |
| (2) | Previously “advance payments on long-term contracts” and “current portion of deferred revenue” |
| | | | | | | | | | | | Year ended | | | September 30, 2019 | | | | | | Effect of the | | | | | | | | | adoption of | | Under Prior | (In thousands, except per share amounts) | | As Reported | | ASC 606 | | Accounting | Consolidated Statements of Operations | | | | | | | | | | Net sales | | $ | 812,970 | | $ | (5,598) | | $ | 807,372 | Cost of sales | | | 508,521 | | | (6,658) | | | 501,863 | Total costs and expenses | | | 710,754 | | | (6,658) | | | 704,096 | Earnings before income tax | | | 102,216 | | | 1,060 | | | 103,276 | Income tax expense | | | 21,177 | | | 255 | | | 21,432 | Net earnings | | | 81,039 | | | 805 | | | 81,844 | Earnings per share: | | | | | | | | | | Basic: | | | | | | | | | | Net earnings | | $ | 3.12 | | $ | 0.03 | | $ | 3.15 | Diluted: | | | | | | | | | | Net earnings | | $ | 3.10 | | $ | 0.03 | | $ | 3.13 | Consolidated Statements of Comprehensive Income | | | | | | | | | | Net earnings | | $ | 81,039 | | $ | 805 | | $ | 81,844 | Comprehensive income | | | 68,593 | | | 805 | | | 69,398 | Consolidated Statements of Cash flows | | | | | | | | | | Net earnings | | $ | 81,039 | | $ | 805 | | $ | 81,844 | Adjustments to reconcile net earnings to net cash provided by operating activities: | | | | | | | | | | Change in assets and liabilities | | $ | (9,944) | | | (805) | | $ | (10,749) | Net cash provided by operating activities | | | 105,137 | | | — | | | 105,137 |
17. Subsequent Event
On November 15, 2019 the Company, through its wholly owned subsidiaries ESCO Technologies Holding LLC and ESCO UK Holding Company I Ltd., entered into an agreement to sell its Technical Packaging business segment, consisting of Thermoform Engineered Quality LLC, Plastique Ltd. and Plastique sp. z o.o., to subsidiaries of Sonoco Products Company (NYSE: SON) for a cash purchase price of $187 million, plus or minus certain customary adjustments based on working capital and other typical post-closing adjustments specified in the sale agreement. Closing of the transaction is subject to specified representations, warranties, covenants and conditions customary in agreements of this kind and scope. The buyers have agreed to waive any post-closing claims against the sellers for indemnity under the representations and warranties in the sale agreement (except in the event of fraud) and intend to obtain a Representation and Warranty Insurance policy to provide coverage in the event of a breach by the sellers.
The Company expects to finalize the sale upon receipt of regulatory clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and similar foreign regulations, and upon satisfaction or waiver of the conditions to Closing specified in the Agreement. The Company expects the Closing to occur in late 2019 or early 2020.
The Technical Packaging business segment will be reported as discontinued operations in 2020.
The Company intends to use the proceeds from the sale to pay down debt and for other corporate purposes, including funding, terminating and annuitizing the Company’s defined benefit pension plan, which has been frozen since 2003, during fiscal 2020.
18.Quarterly Financial Information (Unaudited)
| | | | | | | | | | | | First | | Second | | Third | | Fourth | (Dollars in thousands, except per share amounts) | | Quarter | | Quarter | | Quarter | | Quarter | 2019 | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 182,597 | | 193,949 | | 199,766 | | 236,658 | Net earnings | | | 17,317 | | 18,797 | | 20,067 | | 24,858 | | | | | | | | | | | Earnings per share: | | | | | | | | | | Basic | | $ | 0.67 | | 0.73 | | 0.77 | | 0.96 | Diluted | | | 0.66 | | 0.72 | | 0.77 | | 0.95 | | | | | | | | | | | Dividends declared per common share | | $ | 0.08 | | 0.08 | | 0.08 | | 0.08 | | | | | | | | | | | Common stock price per share: | | | | | | | | | | High | | $ | 71.47 | | 71.29 | | 82.70 | | 85.86 | Low | | | 59.00 | | 62.91 | | 67.43 | | 73.04 | | | | | | | | | | | 2018 | | | | | | | | | | | | | | | | | | | | Net sales | | $ | 173,495 | | 174,778 | | 192,223 | | 231,086 | Net earnings | | | 34,671 | | 9,994 | | 19,019 | | 28,452 | | | | | | | | | | | Earnings per share: | | | | | | | | | | Basic | | $ | 1.34 | | 0.39 | | 0.73 | | 1.10 | Diluted | | | 1.33 | | 0.38 | | 0.73 | | 1.09 | | | | | | | | | | | Dividends declared per common share | | $ | 0.08 | | 0.08 | | 0.08 | | 0.08 | | | | | | | | | | | Common stock price per share: | | | | | | | | | | High | | $ | 65.95 | | 66.80 | | 60.25 | | 70.20 | Low | | | 51.55 | | 57.15 | | 54.35 | | 57.00 |
MANAGEMENT’S STATEMENT OF FINANCIAL RESPONSIBILITY The Company’s Management is responsible for the fair presentation of the Company’s financial statements in accordance with accounting principles generally accepted in the United States of America, and for their integrity and accuracy. Management is confident that its financial and business processes provide accurate information on a timely basis. Management, with the oversight of ESCO’s Board of Directors, has established and maintains a strong ethical climate in which the Company’s affairs are conducted. Management also has established an effective system of internal controls that provide reasonable assurance as to the integrity and accuracy of the financial statements, and responsibility for the Company’s assets. KPMG LLP, the Company’s independent registered public accounting firm, reports directly to the Audit and Finance Committee of the Board of Directors. The Audit and Finance Committee has established policies consistent with corporate reform laws for auditor independence. In accordance with corporate governance listing requirements of the New York Stock Exchange: | ● | A majority of Board members are independent of the Company and its Management. |
| ● | All members of the key Board committees — the Audit and Finance, the Human Resources and Compensation and the Nominating and Corporate Governance Committees — are independent. |
| ● | The independent members of the Board meet regularly without the presence of Management. |
| ● | The Company has a clear code of ethics and a conflict of interest policy to ensure that key corporate decisions are made by individuals who do not have a financial interest in the outcome, separate from their interest as Company officials. |
| ● | The charters of the Board committees clearly establish their respective roles and responsibilities. |
| ● | The Company has a Corporate Ethics Committee, ethics officers at each operating location and an ombudsman hot line available to all domestic employees and all foreign employees have local ethics officers and access to the Company’s ombudsman. |
The Company has a strong financial team, from its executive leadership to each of its individual contributors. Management monitors compliance with its financial policies and practices over critical areas including internal controls, financial accounting and reporting, accountability, and safeguarding of its corporate assets. The internal audit function maintains oversight over the key areas of the business and financial processes and controls, and reports directly to the Audit and Finance Committee. Additionally, all employees are required to adhere to the ESCO Code of Business Conduct and Ethics, which is monitored by the Corporate Ethics Committee. Management is dedicated to ensuring that the standards of financial accounting and reporting that are established are maintained. The Company’s culture demands integrity and a commitment to strong internal practices and policies. The Consolidated Financial Statements have been audited by KPMG LLP, whose report is included herein. | | | November 29, 20192021 |
| | | | | /s/Victor L. Richey | | /s/Gary E. Muenster |
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| Christopher L. Tucker
| Victor L. Richey | | Gary E. MuensterChristopher L. Tucker
| Chairman, Chief Executive Officer | | ExecutiveSenior Vice President
| and President | | and Chief Financial Officer |
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America.
Because of its inherent limitations, any system of internal control over financial reporting, no matter how well designed, may not prevent or detect misstatements due to the possibility that a control can be circumvented or overridden or that misstatements due to error or fraud may occur that are not detected. Also, because of changes in conditions, internal control effectiveness may vary over time.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2019, using criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and concluded that the Company maintained effective internal control over financial reporting as of September 30, 2019, based on these criteria.
Our internal control over financial reporting as of September 30, 2019, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report which is included herein.
We acquired Globe Composite Solutions, LLC (Globe) on July 2, 2019. Globe had total assets representing 7.0 percent of consolidated assets, and total net sales representing 1.1 percent of consolidated net sales, as of and for the year ended September 30, 2019. We excluded from our assessment of the effectiveness of our internal control over financial reporting as of September 30, 2019 internal control over financial reporting associated with Globe.
| | | November 29, 2019
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| /s/Victor L. Richey
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| /s/Gary E. Muenster
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| Victor L. Richey
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| Gary E. Muenster
| Chairman, Chief Executive Officer
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors ESCO Technologies Inc.: Opinion on Internal Control Over Financial Reporting We have audited ESCO Technologies Inc. and subsidiaries’ (the Company) internal control over financial reporting as of September 30, 2019,2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weaknesses, described below, on the achievement of the objectives of the control criteria, the Company has not maintained in all material respects, effective internal control over financial reporting as of September 30, 2019,2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of September 30, 20192021 and 2018,2020, the related consolidated statements of operations, comprehensive income, (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended September 30, 2019,2021, and the related notes (collectively, the consolidated financial statements), and our report dated November 29, 20192021 expressed an unqualified opinion on those consolidated financial statements. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis. A material weakness related to an ineffective risk assessment process resulted in the ineffective design of certain controls over revenue recognition, and the accumulation of inventory costs and the determination of inventory carrying values at a reporting unit has been identified and included in management’s assessment. The material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2021 consolidated financial statements, and this report does not affect our report on those consolidated financial statements. The Company acquired I.S.A. – Altanova Group (Altanova) on July 29, 2021, and the assets of Phenix Technologies (Phenix) on August 9, 2021, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2021, Altanova’s and Phenix’s internal control over financial reporting associated with total assets representing 12.2 percent of consolidated assets, and total sales representing 0.6 percent of consolidated net sales, included in the consolidated financial statements of ESCO Technologies Inc. and subsidiaries as of and for the year ended September 30, 2021. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Altanova and Phenix. Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. The Company acquired Globe Composite Solutions, LLC (Globe) during the year ended September 30, 2019, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of September 30, 2019, Globe’s internal control over financial reporting associated with total assets representing 7.0 percent of consolidated assets, and total sales representing 1.1 percent of consolidated net sales, included in the consolidated financial statements of ESCO Technologies Inc. and subsidiaries as of and for the year ended September 30, 2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of Globe.
Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. | | /s/ KPMG LLP | | | | St. Louis, Missouri | | November 29, 20192021 | |
EXHIBITS The following exhibits are submitted with and attached to this Form 10-K; exhibit numbers correspond to the exhibit table in Item 601 of Regulation S-K. For a complete list of exhibits including those incorporated by reference, see Item 15(a)(3) of this Form 10-K, above. * Filed with the Securities and Exchange Commission but not included in the Company’s Annual Report to Shareholders; the Exhibit may be viewed and copied on the SEC’s website or a printed copy may be obtained from the Company on request.
** Furnished (and not filed) herewith pursuant to Item 601(b)(32)(ii) of Regulation S-K.
*** Exhibits 101 and 104 to this report consist of documents formatted in XBRL (Extensible Business Reporting Language); a and filed with the Securities and Exchange Commission; they are not included in printed copy is not included.copies of this Report.
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