UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, |
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM |
COMMISSION FILE NUMBER 1-10596
ESCO TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
MISSOURI | 43-1554045 |
(State or other jurisdiction of | (I.R.S. Employer |
incorporation or organization) | Identification No.) |
| |
9900A CLAYTON ROAD | |
ST. LOUIS, MISSOURI | 63124-1186 |
(Address of principal executive offices) | (Zip Code) |
(314) 213-7200
(Registrant’s telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.01 per share | | ESE | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesx No¨
Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yesx No¨
Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
Emerging growth company | ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨☐ Nox☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class | Shares outstanding at January 31, | |
Common stock, $.01 par value per share | 25,798,271 |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended December 31, | ||||||||
2017 | 2016 | |||||||
Net sales | $ | 173,495 | 146,368 | |||||
Costs and expenses: | ||||||||
Cost of sales | 111,736 | 92,914 | ||||||
Selling, general and administrative expenses | 42,154 | 33,762 | ||||||
Amortization of intangible assets | 4,446 | 3,649 | ||||||
Interest expense, net | 2,185 | 684 | ||||||
Other expenses (income), net | 173 | (766 | ) | |||||
Total costs and expenses | 160,694 | 130,243 | ||||||
Earnings before income taxes | 12,801 | 16,125 | ||||||
Income tax (benefit) expense | (21,870 | ) | 5,398 | |||||
Net earnings | $ | 34,671 | 10,727 | |||||
Earnings per share: | ||||||||
Basic - Net earnings | $ | 1.34 | 0.42 | |||||
Diluted - Net earnings | $ | 1.33 | 0.41 |
| | | | | |
| | Three Months Ended | |||
| | December 31, | |||
|
| 2023 |
| 2022 | |
Net sales | | $ | 218,314 | | 205,501 |
Costs and expenses: | | | | | |
Cost of sales | | | 134,151 | | 126,383 |
Selling, general and administrative expenses | | | 53,968 | | 51,302 |
Amortization of intangible assets | | | 7,868 | | 6,861 |
Interest expense, net | | | 2,667 | | 1,658 |
Other expenses, net | | | 206 | | 398 |
Total costs and expenses | | | 198,860 | | 186,602 |
| | | | | |
Earnings before income taxes | | | 19,454 | | 18,899 |
Income tax expense | | | 4,285 | | 4,172 |
Net earnings | | $ | 15,169 | | 14,727 |
| | | | | |
Earnings per share: | | | | | |
Basic - Net earnings | | $ | 0.59 | | 0.57 |
| | | | | |
Diluted - Net earnings | | $ | 0.59 | | 0.57 |
See accompanying notes to consolidated financial statements.
2
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
(Dollars in thousands)
Three Months Ended December 31, | ||||||||
2017 | 2016 | |||||||
Net earnings | $ | 34,671 | 10,727 | |||||
Other comprehensive income (loss), net of tax: | ||||||||
Foreign currency translation adjustments | 1,288 | (4,363 | ) | |||||
Net unrealized gain (loss) on derivative instruments | 17 | (133 | ) | |||||
Total other comprehensive income (loss), net of tax | 1,305 | (4,496 | ) | |||||
Comprehensive income | $ | 35,976 | 6,231 |
| | | | | |
| | Three Months Ended | |||
| | December 31, | |||
|
| 2023 |
| 2022 | |
Net earnings | | $ | 15,169 |
| 14,727 |
Other comprehensive income (loss), net of tax: | |
| |
| |
Foreign currency translation adjustments | |
| 9,414 |
| 11,513 |
Total other comprehensive income (loss), net of tax | |
| 9,414 |
| 11,513 |
Comprehensive income | | $ | 24,583 |
| 26,240 |
See accompanying notes to consolidated financial statements.
3
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
December 31, 2017 | September 30, 2017 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 41,600 | 45,516 | |||||
Accounts receivable, net | 148,502 | 160,580 | ||||||
Costs and estimated earnings on long-term contracts, less progress billings of $45,134 and $64,099, respectively | 39,045 | 47,286 | ||||||
Inventories | 130,579 | 124,515 | ||||||
Other current assets | 13,301 | 14,895 | ||||||
Total current assets | 373,027 | 392,792 | ||||||
Property, plant and equipment, net of accumulated depreciation of $106,791 and $99,650, respectively | 132,790 | 132,748 | ||||||
Intangible assets, net of accumulated amortization of $78,325 and $73,879, respectively | 347,578 | 351,134 | ||||||
Goodwill | 378,510 | 377,879 | ||||||
Other assets | 5,843 | 5,891 | ||||||
Total assets | $ | 1,237,748 | 1,260,444 | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Current maturities of long-term debt | $ | 20,000 | 20,000 | |||||
Accounts payable | 48,766 | 54,789 | ||||||
Advance payments on long-term contracts, less costs incurred of $53,206 and $59,772, respectively | 28,966 | 22,451 | ||||||
Accrued salaries | 21,824 | 32,259 | ||||||
Current portion of deferred revenue | 25,447 | 28,583 | ||||||
Accrued other expenses | 33,029 | 36,887 | ||||||
Total current liabilities | 178,032 | 194,969 | ||||||
Pension obligations | 30,268 | 30,223 | ||||||
Deferred tax liabilities | 57,877 | 86,378 | ||||||
Other liabilities | 24,502 | 21,956 | ||||||
Long-term debt | 240,000 | 255,000 | ||||||
Total liabilities | 530,679 | 588,526 | ||||||
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 30,468,824 and 30,468,824 shares, respectively | 305 | 305 | ||||||
Additional paid-in capital | 290,984 | 289,785 | ||||||
Retained earnings | 549,322 | 516,718 | ||||||
Accumulated other comprehensive loss, net of tax | (26,003 | ) | (27,308 | ) | ||||
814,608 | 779,500 | |||||||
Less treasury stock, at cost: 4,632,922 and 4,635,622 common shares, respectively | (107,539 | ) | (107,582 | ) | ||||
Total shareholders’ equity | 707,069 | 671,918 | ||||||
Total liabilities and shareholders’ equity | $ | 1,237,748 | 1,260,444 |
| | | | | | |
| | December 31, | | September 30, | ||
|
| 2023 |
| 2023 | ||
ASSETS |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 51,396 |
| | 41,866 |
Accounts receivable, net of allowance for credit losses of $2,274 and $2,264, respectively | |
| 194,395 |
| | 198,557 |
Contract assets, net | |
| 138,393 |
| | 138,633 |
Inventories | |
| 202,577 |
| | 184,067 |
Other current assets | |
| 16,441 |
| | 17,972 |
Total current assets | |
| 603,202 |
| | 581,095 |
Property, plant and equipment, net of accumulated depreciation of $180,909 and $174,698, respectively | |
| 159,262 |
| | 155,484 |
Intangible assets, net of accumulated amortization of $212,750 and $204,881, respectively | |
| 422,053 |
| | 392,124 |
Goodwill | |
| 537,601 |
| | 503,177 |
Operating lease assets | | | 38,685 | | | 39,839 |
Other assets | |
| 11,723 |
| | 11,495 |
Total assets | | $ | 1,772,526 | | | 1,683,214 |
| |
| |
| | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| |
| | |
Current liabilities: | |
| |
| | |
Current maturities of long-term debt and short-term borrowings | | $ | 20,000 | | | 20,000 |
Accounts payable | |
| 77,960 | | | 86,973 |
Contract liabilities, net | |
| 121,149 | | | 112,277 |
Accrued salaries | |
| 33,944 | | | 43,814 |
Accrued other expenses | |
| 51,640 | | | 51,587 |
Total current liabilities | |
| 304,693 | | | 314,651 |
Deferred tax liabilities | |
| 83,802 | | | 75,531 |
Non-current operating lease liabilities | | | 35,709 | | | 36,554 |
Other liabilities | |
| 42,228 | | | 43,336 |
Long-term debt | |
| 152,000 | | | 82,000 |
Total liabilities | |
| 618,432 | | | 552,072 |
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 30,800,586 and 30,781,699 shares, respectively | |
| 308 | | | 308 |
Additional paid-in capital | |
| 305,283 | | | 304,850 |
Retained earnings | |
| 1,002,420 | | | 989,315 |
Accumulated other comprehensive loss, net of tax | |
| (14,555) | | | (23,969) |
| |
| 1,293,456 | | | 1,270,504 |
Less treasury stock, at cost: 4,995,414 and 4,995,414 common shares, respectively | |
| (139,362) | | | (139,362) |
Total shareholders’ equity | |
| 1,154,094 | | | 1,131,142 |
Total liabilities and shareholders’ equity | | $ | 1,772,526 | | | 1,683,214 |
See accompanying notes to consolidated financial statements.
4
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended December 31, | ||||||||
2017 | 2016 | |||||||
Cash flows from operating activities: | ||||||||
Net earnings | $ | 34,671 | 10,727 | |||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 9,226 | 7,088 | ||||||
Stock compensation expense | 1,353 | 1,437 | ||||||
Changes in assets and liabilities | 4,507 | (2,053 | ) | |||||
Effect of deferred taxes | (28,501 | ) | (1,393 | ) | ||||
Change in deferred revenue and costs, net | (3,099 | ) | (333 | ) | ||||
Pension contributions | (360 | ) | - | |||||
Other | - | 263 | ||||||
Net cash provided by operating activities | 17,797 | 15,736 | ||||||
Cash flows from investing activities: | ||||||||
Acquisition of business, net of cash acquired | (233 | ) | (75,000 | ) | ||||
Additions to capitalized software | (2,083 | ) | (1,433 | ) | ||||
Capital expenditures | (3,606 | ) | (6,989 | ) | ||||
Net cash used by investing activities | (5,922 | ) | (83,422 | ) | ||||
Cash flows from financing activities: | ||||||||
Proceeds from long-term debt | 15,000 | 90,000 | ||||||
Principal payments on long-term debt | (30,000 | ) | (20,000 | ) | ||||
Dividends paid | (2,067 | ) | (2,057 | ) | ||||
Other | 17 | (134 | ) | |||||
Net cash (used) provided by financing activities | (17,050 | ) | 67,809 | |||||
Effect of exchange rate changes on cash and cash equivalents | 1,259 | (2,193 | ) | |||||
Net decrease in cash and cash equivalents | (3,916 | ) | (2,070 | ) | ||||
Cash and cash equivalents, beginning of period | 45,516 | 53,825 | ||||||
Cash and cash equivalents, end of period | $ | 41,600 | 51,755 | |||||
Supplemental cash flow information: | ||||||||
Interest paid | $ | 2,053 | 509 | |||||
Income taxes paid (including state and foreign) | 1,025 | 1,026 |
| | | | | |
| | Three Months Ended | |||
| | December 31, | |||
|
| 2023 |
| 2022 | |
Cash flows from operating activities: |
| |
|
|
|
Net earnings | | $ | 15,169 |
| 14,727 |
Adjustments to reconcile net earnings to net cash provided by operating activities: | |
| |
| |
Depreciation and amortization | |
| 13,452 | | 12,367 |
Stock compensation expense | |
| 2,180 |
| 1,860 |
Changes in assets and liabilities | |
| (22,539) |
| (36,920) |
Effect of deferred taxes | | | 484 | | (1,042) |
Net cash provided (used) by operating activities | |
| 8,746 |
| (9,008) |
Cash flows from investing activities: | |
| |
| |
Acquisition of business, net of cash acquired | |
| (56,179) |
| — |
Additions to capitalized software | |
| (2,942) |
| (2,795) |
Capital expenditures | | | (7,848) | | (4,791) |
Net cash used by investing activities | |
| (66,969) |
| (7,586) |
Cash flows from financing activities: | |
| |
| |
Proceeds from long-term debt and short-term borrowings | |
| 99,000 |
| 17,000 |
Principal payments on long-term debt and short-term borrowings | |
| (29,000) | | (38,000) |
Dividends paid | | | (2,064) | | (2,067) |
Purchases of common stock into treasury | |
| — |
| (4,147) |
Other | |
| (1,432) |
| (2,412) |
Net cash provided (used) by financing activities | | | 66,504 | | (29,626) |
Effect of exchange rate changes on cash and cash equivalents | | | 1,249 | | 418 |
Net increase (decrease) in cash and cash equivalents | | | 9,530 | | (45,802) |
Cash and cash equivalents, beginning of period | | | 41,866 | | 97,724 |
Cash and cash equivalents, end of period | | $ | 51,396 | | 51,922 |
| |
| |
| |
Supplemental cash flow information: | |
| |
| |
Interest paid | | $ | 2,520 |
| 1,875 |
Income taxes paid | |
| 246 |
| 200 |
See accompanying notes to consolidated financial statements.
5
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION |
The accompanying consolidated financial statements, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required for annual financial statements by accounting principles generally accepted in the United States of America (GAAP). For further information, refer to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017.
The Company’s results for the three-month periodsperiod ended December 31, 20172023 are not necessarily indicative of the results for the entire 20182024 fiscal year. References to the first quarters of 20182024 and 20172023 represent the fiscal quarters ended December 31, 20172023 and 2016,2022, respectively.
The preparation of financial statements in conformity with GAAP requires Managementmanagement to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results could differ from those estimates.
2. EARNINGS PER SHARE (EPS) |
Basic EPS is calculated using the weighted average number of common shares outstanding during the period. Diluted EPS is calculated using the weighted average number of common shares outstanding during the period plus shares issuable upon the assumed exercise of dilutive common share options and vesting of performance-accelerated restricted shares (restricted shares)stock unit awards and time - vested restricted stock unit awards by 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 period presented is as follows (in thousands):
| | | | |
|
| Three Months | ||
| | Ended December 31, | ||
|
| 2023 |
| 2022 |
Weighted Average Shares Outstanding — Basic |
| 25,797 |
| 25,863 |
Dilutive Restricted Shares | | 49 | | 80 |
Adjusted Shares — Diluted |
| 25,846 |
| 25,943 |
Three Months Ended December 31, | ||||||||
2017 | 2016 | |||||||
Weighted Average Shares Outstanding - Basic | 25,836 | 25,720 | ||||||
Dilutive Options and Restricted Shares | 244 | 259 | ||||||
Adjusted Shares - Diluted | 26,080 | 25,979 |
3. ACQUISITION
On November 9, 2023, the Company acquired MPE Limited (MPE), based in the United Kingdom, for a purchase price of approximately $56.2 million, net of cash acquired. MPE is a leading global manufacturer of high-performance EMC/EMP filters and capacitor products for military, utility, telecommunication, and other critical infrastructure applications. Since the date of acquisition, the operating results for the MPE business have been included as part of ETS-Lindgren in the Test segment. The acquisition date fair value of the assets acquired and liabilities assumed primarily were as follows: approximately $0.4 million of accounts receivable, $1.1 million of inventory, $1.7 million of property, plant and equipment, $0.7 million of accounts payable and accrued expenses, $7.8 million of deferred tax liabilities, and $31.1 million of identifiable intangible assets, mainly consisting of customer relationships totaling $29.1 million. The acquired goodwill of $30.3 million related to excess value associated with opportunities to expand the services and products that the Company can offer to its customers. The Company does not anticipate that the goodwill will be deductible for tax purposes. 4. SHARE-BASED COMPENSATION |
The Company provides compensation benefits to certain key employees under several share-based plans providing for performance-accelerated and/or time-vested restricted shares (restricted shares),stock unit awards, and to non-employee directors under a non-employee directorsseparate compensation plan.
Performance-Accelerated Restricted Stock Unit (PARS) Awards, Time-Vested Restricted Stock Unit (RSU) Awards, and Performance Share Unit (PSU) Awards
Compensation expense related to the restricted sharethese awards was $1.1$1.9 million and $1.2$1.6 million for the three-month periods ended December 31, 20172023 and 2016,2022, respectively. There were 337,325234,036 non-vested shares outstanding as of December 31, 2017.2023.
6
Non-Employee Directors Plan
Compensation expense related to the non-employee director grants was $0.3 million and $0.2$0.3 million for the three-month periods ended December 31, 20172023 and 2016,2022, respectively.
The total share-based compensation cost that has been recognized in the results of operations and included within selling, general and administrative expenses (SG&A) was $1.4$2.2 million and $1.4$1.9 million for the three -monththree-month periods ended December 31, 20172023 and 2016,2022, respectively. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $0.4$0.2 million and $0.5$0.1 million for the three-month periods ended December 31, 20172023 and 2016,2022, respectively. As of December 31, 2017,2023 there was $5.3$15.5 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected to be recognized over a remaining weighted-average period of 1.32.0 years.
5. INVENTORIES |
Inventories consist of the following:
| | | | | | ||||||||
| | December 31, | | September 30, | |||||||||
(In thousands) | December 31, 2017 | September 30, 2017 |
| 2023 |
| 2023 | |||||||
Finished goods | $ | 29,013 | 28,127 | | $ | 37,996 |
| 34,577 | |||||
Work in process | 46,668 | 43,750 | |
| 54,656 |
| 42,178 | ||||||
Raw materials | 54,898 | 52,638 | |
| 109,925 |
| 107,312 | ||||||
Total inventories | $ | 130,579 | 124,515 | | $ | 202,577 |
| 184,067 |
6. | GOODWILL AND OTHER INTANGIBLE ASSETS |
Included on the Company’s Consolidated Balance Sheets at December 31, 20172023 and September 30, 20172023 are the following intangible assets gross carrying amounts and accumulated amortization:amortization from continuing operations:
| | | | | | ||||||||
|
| December 31, |
| September 30, | |||||||||
(Dollars in thousands) | December 31, 2017 | September 30, 2017 |
| 2023 |
| 2023 | |||||||
Goodwill | $ | 378,510 | 377,879 | | $ | 537,601 |
| 503,177 | |||||
| |
| | | | ||||||||
Intangible assets with determinable lives: | |
| | | | ||||||||
Patents | |
| | | | ||||||||
Gross carrying amount | $ | 928 | 928 | | $ | 2,517 | | 2,516 | |||||
Less accumulated amortization | 757 | 750 | |||||||||||
Less: accumulated amortization | |
| 1,253 | | 1,218 | ||||||||
Net | $ | 171 | 178 | | $ | 1,264 | | 1,298 | |||||
| |
| | | | ||||||||
Capitalized software | |
| | | | ||||||||
Gross carrying amount | $ | 63,842 | 63,007 | | $ | 125,237 | | 121,883 | |||||
Less accumulated amortization | 36,081 | 34,382 | |||||||||||
Less: accumulated amortization | |
| 83,709 | | 80,774 | ||||||||
Net | $ | 27,761 | 28,625 | | $ | 41,528 | | 41,109 | |||||
| |
| | | | ||||||||
Customer relationships | |
| | | | ||||||||
Gross carrying amount | $ | 182,266 | 181,891 | | $ | 328,624 | | 296,927 | |||||
Less accumulated amortization | 39,922 | 37,364 | |||||||||||
Less: accumulated amortization | |
| 117,755 | | 113,311 | ||||||||
Net | $ | 142,344 | 144,527 | | $ | 210,869 | | 183,616 | |||||
| |
| | | | ||||||||
Other | |
| | | | ||||||||
Gross carrying amount | $ | 5,336 | 5,373 | | $ | 15,216 | | 14,232 | |||||
Less accumulated amortization | 1,565 | 1,383 | |||||||||||
Less: accumulated amortization | |
| 10,033 | | 9,578 | ||||||||
Net | $ | 3,771 | 3,990 | | $ | 5,183 | | 4,654 | |||||
Intangible assets with indefinite lives: | |
| | | | ||||||||
Trade names | $ | 173,531 | 173,813 | | $ | 163,209 | | 161,447 |
7
The changes in the carrying amount of goodwill attributable to each business segment for the three months ended December 31, 2017 is2023 are as follows:
(Dollars in millions) | USG | Test | Filtration | Packaging | Total | |||||||||||||||
Balance as of September 30, 2017 | 250.2 | 34.1 | 73.7 | 19.9 | 377.9 | |||||||||||||||
Acquisition activity – working capital adj | 0.2 | - | - | - | 0.2 | |||||||||||||||
Foreign currency translation and other | - | - | - | 0.4 | 0.4 | |||||||||||||||
Balance as of December 31, 2017 | $ | 250.4 | 34.1 | 73.7 | 20.3 | 378.5 |
| | | | | | | | | | |
| | | | | | | | Aerospace | | |
(Dollars in millions) |
| USG |
| Test |
| & Defense |
| Total | ||
Balance as of September 30, 2023 | | $ | 353.6 |
| | 34.0 |
| 115.6 |
| 503.2 |
Acquisition activity | | | — | | | 30.3 | | — | | 30.3 |
Foreign currency translation | | | 3.3 | | | 0.8 | | — | | 4.1 |
Balance as of December 31, 2023 | | $ | 356.9 | | | 65.1 | | 115.6 | | 537.6 |
7. BUSINESS SEGMENT INFORMATION |
The Company is organized based on the products and services that it offers and classifies its business operations in fourthree reportable segments for financial reporting purposes: Filtration/Fluid Flow (Filtration), RF Shielding and Test (Test)Aerospace & Defense (A&D), Utility Solutions Group (USG) and Technical Packaging.RF Test & Measurement (Test). The FiltrationA&D segment’s operations consist of PTI Technologies Inc. (PTI), VACCO Industries (VACCO), Crissair, Inc. (Crissair), Westland Technologies Inc. (Westland),Globe Composite Solutions, LLC (Globe) and Mayday Manufacturing Co. and its affiliate Hi-Tech Metals, Inc. (collectively referred to as Mayday)(Mayday). The companies within this segment primarily design and manufacture specialty filtration, fluid control and naval products, including hydraulic filter elements and fluid control devices used in commercial aerospace applications,and defense applications; unique filter mechanisms used in micro-propulsion devices for satellites, and custom designed filters for manned aircraft and unmanned aircraft; manufacture elastomeric-basedsubmarines, products and systems to reduce vibration and/or acoustic signatures and otherwise reduce or obscure a vessel’s signature, reduction solutions for theand other communications, sealing, surface control and hydrodynamic related applications to enhance U.S. Navy; and manufacture landing gearNavy maritime survivability; precision-tolerance machined components for the aerospace and defense industry. The Test segment’s operations consist primarily of ETS-Lindgren Inc. (ETS-Lindgren). ETS-Lindgren is an industry leaderindustry; metal processing services; and miniature electro-explosive devices utilized in providing its customers with the ability to identify, measuremission-critical defense and contain magnetic, electromagnetic and acoustic energy. aerospace applications.
The USG segment’s operations consist primarily of Doble Engineering Company (Doble),and related subsidiaries including Morgan Schaffer Inc. (Morgan Schaffer)and Altanova (collectively, Doble), and NRG Systems, Inc. (NRG). Doble provides high-end, intelligentis an industry leader in the development, manufacture and delivery of diagnostic testtesting and data management solutions for thethat enable electric power delivery industry and is a leading supplier of partial discharge testing instruments usedgrid operators to assess the integrity of high voltage power delivery equipment. Morgan SchafferIt combines three core elements for customers – diagnostic test and condition monitoring instruments, expert consulting, and testing services – and provides an integrated offeringaccess to its large reserve of dissolved gas analysis, oil testing,related empirical knowledge. NRG is a global market leader in the design and data management solutions for the electric power industry. NRG designs and manufacturesmanufacture of decision support tools for the renewable energy industry, primarily wind. wind and solar.
The Technical PackagingTest segment’s operations consist primarily of Thermoform Engineered Quality LLC (TEQ)ETS-Lindgren Inc. and Plastique Limitedrelated subsidiaries (ETS-Lindgren). ETS-Lindgren is an industry leader in designing and Plastique Sp. z o.o. (together, Plastique). The companies within this segment provide innovative solutionsmanufacturing products and systems to measure and control RF and acoustic energy. It serves the acoustics, medical, health and commercialsafety, electronics, wireless communications, automotive and defense markets, for thermoformed packagessupplying a broad range of turnkey systems, including RF test facilities and specialty products usingmeasurement systems, acoustic test enclosures, RF and magnetically shielded rooms and secure communication facilities, and providing the design, program management, installation and integration services required to successfully complete these types of facilities. It also provides a widebroad range of components including RF absorptive materials, filters, antennas, field probes, test cells, proprietary measurement software and other test accessories required to perform a variety of thin gauge plasticstests and pulp.measurements, and offers a variety of services including calibration and product tests.
8
Management evaluates and measures the performance of its reportable segments based on “Net Sales” and “EBIT”, which are detailed in the table below. EBIT is defined as earnings before interest and taxes.
| | | | | | ||||||||
| | Three Months | |||||||||||
| | Ended December 31, | |||||||||||
(In thousands) | Three Months Ended December 31, |
| 2023 |
| 2022 | ||||||||
2017 | 2016 | ||||||||||||
NET SALES | | | | | | ||||||||
Filtration | $ | 60,035 | 58,785 | ||||||||||
Aerospace & Defense | | $ | 94,733 | | 82,983 | ||||||||
USG | | | 82,984 | | 71,045 | ||||||||
Test | 37,530 | 33,827 | | | 40,597 | | 51,473 | ||||||
Consolidated totals | | $ | 218,314 | | 205,501 | ||||||||
| | | | | | ||||||||
EBIT | | | | | | ||||||||
Aerospace & Defense | | $ | 16,663 | | 12,536 | ||||||||
USG | 55,754 | 35,556 | | | 17,625 | | 16,131 | ||||||
Technical Packaging | 20,176 | 18,200 | |||||||||||
Consolidated totals | $ | 173,495 | 146,368 | ||||||||||
EBIT | |||||||||||||
Filtration | $ | 9,645 | 10,726 | ||||||||||
Test | 2,596 | 2,425 | | | 1,779 | | 5,411 | ||||||
USG | 10,651 | 9,674 | |||||||||||
Technical Packaging | 965 | 1,031 | |||||||||||
Corporate (loss) | (8,871 | ) | (7,047 | ) | | | (13,946) | | (13,521) | ||||
Consolidated EBIT | 14,986 | 16,809 | | | 22,121 | | 20,557 | ||||||
Less: Interest expense, net | (2,185 | ) | (684 | ) | |||||||||
Less: Interest expense | | | (2,667) | | (1,658) | ||||||||
Earnings before income taxes | $ | 12,801 | 16,125 | | $ | 19,454 | | 18,899 |
Non-GAAP Financial Measures
The financial measure “EBIT” is presented in the above table and elsewhere in this Report. EBIT on a consolidated basis is a non-GAAP financial measure. Management believes that EBIT is useful in assessing the operational profitability of the Company’s business segments because it excludes interest and taxes, which are generally accounted for across the entire Company on a consolidated basis. EBIT is also one of the measures used by management in determining resource allocations within the Company as well as incentive compensation. A reconciliation of EBIT to GAAP net earnings is set forth in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations – EBIT.
The Company believes that the presentation of EBIT provides important supplemental information to investors to facilitate comparisons with other companies, many of which use similar non-GAAP financial measures to supplement their GAAP results. However, the Company’s non-GAAP financial measures may not be comparable to other companies’ non-GAAP financial performance measures. Furthermore, the use of non-GAAP financial measures is not intended to replace any measures of performance determined in accordance with GAAP.
8. DEBT |
The Company’s debt is summarized as follows:
| | | | | | ||||||||
|
| December 31, | | September 30, | |||||||||
(In thousands) | December 31, 2017 | September 30, 2017 |
| 2023 |
| 2023 | |||||||
Total borrowings | $ | 260,000 | 275,000 | | $ | 172,000 | | 102,000 | |||||
Short-term borrowings and current portion of long-term debt | (20,000 | ) | (20,000 | ) | |||||||||
Current portion of long-term debt | | | (20,000) | | (20,000) | ||||||||
Total long-term debt, less current portion | $ | 240,000 | 255,000 | | $ | 152,000 | | 82,000 |
The Company’s existing credit facility (“the Credit Facility”) matures December 21, 2020. The Credit Facility includes a $450$500 million revolving line of credit as well as provisions allowing for the increase of the credit facility commitment amount by an additional $250 million, if necessary, with the consent of the lenders. The bank syndication supporting the facility is comprised of a diverse group of nineseven banks led by JPMorganJP Morgan Chase Bank, N.A., as Administrative Agent.
administrative agent, Bank of America, N.A., as syndication agent, and Commerce Bank and TD Bank, N.A. as co-documentation agents. The Credit Facility matures August 30, 2028, with balance due by this date.
At December 31, 2017,2023, the Company had approximately $181$322 million available to borrow under the Credit Facility, and aplus the $250 million increase option subject to the lenders’ consent, in addition to $41.6$51.4 million cash on hand. At December 31, 2017, the Company had $260 million of outstanding borrowings under the Credit Facility in addition to outstanding letters of credit of $9.0 million. The Company classified $20.0$20 million as the current portion of long-term debt as of December 31, 2017,2023, as the Company intends to repay this amount within the next twelve month period;months; however, the Company has no contractual obligation to repay such amount during the next twelve month period.months. The letters of credit issued and outstanding under the Credit Facility totaled $5.8 million at December 31, 2023.
9
Interest on borrowings under the Credit Facility is calculated at a spread over either an Adjusted Term SOFR Rate, Adjusted EURIBOR Rate, Adjusted CDOR Rate, Alternate Base Rate or Daily Simple RFR, at the Company’s election. The Credit Facility also requires as determined by certain financial ratios, a facility fee ranging from 12.5 to 27.525 basis points per yearannum on the unused portion. The terms ofinterest rate spreads and the facility provide that interest on borrowings may be calculated at a spread over the London Interbank Offered Rate (LIBOR)fee are subject to increase or baseddecrease depending on the prime rate, at the Company’s election. The facility is secured by the unlimited guaranty of the Company’s material domestic subsidiaries and a 65% pledge of the material foreign subsidiaries’ share equity. The financial covenants of the Credit Facility include a leverage ratio and an interest coverage ratio. The weighted average interest rates were 2.74%6.8% and 1.61%4.6% for the three-month periods ending December 31, 20172023 and 2016,2022, respectively. AtAs of December 31, 2017,2023, the Company was in compliance with all debt covenants.
9. INCOME TAX EXPENSE
IncomeThe first quarter 2024 effective income tax benefitrate was 22.0% compared to 22.1% in the first quarter of 2018 was $21.9 million compared to income tax expense of $5.4 million2023. There were no significant changes in the first quarter of 2017. The first quarter 2018 effective income tax rate was (170.8%) compared to 33.5% inbetween the first quarter of 2017. H.R. 1,Tax Cuts and Jobs Act (“TCJA”), was signed into law on December 22, 2017. The total impact of the TCJA in the first quarter of 2018 was a net benefit of $25.1 million. The impacts were as follows: First, the Company’s 2018 federal statutory rate dropped from 35.0% to 24.5% which requires an adjustment to the value of its deferred tax assets and liabilities since the first quarter of 2018 is the period that includes the enactment date. This adjustment ($30.3 million provisional amount) favorably impacted the first quarter effective tax rate by 236.8%. Second, the TCJA subjects the Company’s cumulative foreign earnings to federal income tax ($2.9 million provisional amount) which unfavorably impacted the first quarter effective tax rate by 22.8%. The Company also recorded a $2.3 million provisional estimate of the income tax effects of the future repatriation of the cumulative earnings of its foreign subsidiaries which unfavorably impacted the first quarter effective tax rate by 18.3%.periods.
Staff Accounting Bulletin No. 118 (SAB 118) was issued by the SEC effective December 22, 2017. SAB 118 allows registrants to record provisional amounts of the income tax effects of the TCJA where the information necessary to complete the accounting under ASC Topic 740 is not available but the amounts are based on reasonable estimates. SAB 118 permits registrants to record adjustments to its provisional amounts during the measurement period (which cannot exceed one year).
The Company was able to determine reasonable estimates of the TCJA income tax effects. However, the Company was unable to complete the accounting under ASC Topic 740 for the change in the value of the Company’s deferred tax assets and liabilities as it needs more time to collect and analyze information primarily related to depreciation expense, pension liability, and percentage of completion revenue recognition. The Company was also unable to complete the accounting under ASC Topic 740 for the income tax effects of subjecting the Company’s cumulative foreign earnings to federal income tax as it needs more time to collect and analyze information to compute the cumulative balance of earnings subject to the tax and the amount of foreign tax credit that is available to offset the tax.
Since the TCJA subjected the Company’s cumulative foreign earnings to U.S. tax, repatriation of those earnings generally provides that no additional federal tax will be imposed. However, the permissible amount of repatriation can be restricted by local law and a repatriation can result in tax expense due to local country withholding tax, U.S. state tax, and changes in foreign exchange rates. The Company is evaluating these considerations to determine the amount of its foreign subsidiaries’ cumulative earnings it intends to indefinitely reinvest.
The TCJA includes a tax on global intangible low-taxed income (“GILTI”). The Company expects it will be subject to this tax. At its January 10, 2018 meeting, the FASB staff indicated that companies should make and disclose a policy election as to whether they will recognize deferred taxes for basis differences expected to reverse as GILTI or whether they will account for GILTI as period costs if and when incurred. Because there are interpretative questions associated with the approach that involves recognizing deferred taxes, the Company will undertake an evaluation of these questions and make the accounting policy election during the SAB 118 measurement period.
10. SHAREHOLDERS’ EQUITY |
The change in shareholders’ equity for the first three months of 2018ended December 31, 2023 and 2022 is shown below (in thousands):
Balance at September 30, 2017 | $ | 671,918 | ||
Net earnings | 34,671 | |||
Other comprehensive income | 1,305 | |||
Cash dividends | (2,067 | ) | ||
Stock compensation plans | 1,242 | |||
Balance at December 31, 2017 | $ | 707,069 |
| | | | | |
| | Three Months Ended December 31, | |||
|
| 2023 |
| 2022 | |
Common stock | | | | | |
Beginning balance | | $ | 308 | | 307 |
Stock plans | | | — | | — |
Ending balance | | | 308 | | 307 |
| | | | | |
Additional paid-in-capital | | | | | |
Beginning balance | | | 304,850 | | 301,553 |
Stock plans | | | 433 | | (856) |
Ending balance | | | 305,283 | | 300,697 |
| | | | | |
Retained earnings | | | | | |
Beginning balance | | | 989,315 | | 905,022 |
Net earnings common stockholders | | | 15,169 | | 14,727 |
Dividends paid | | | (2,064) | | (2,067) |
Ending balance | | | 1,002,420 | | 917,682 |
| | | | | |
Accumulated other comprehensive income (loss) | | | | | |
Beginning balance | | | (23,969) | | (31,764) |
Foreign currency translation | | | 9,414 | | 11,513 |
Ending balance | | | (14,555) | | (20,251) |
| | | | | |
Treasury stock | | | | | |
Beginning balance | | | (139,362) | | (126,961) |
Share repurchases | | | — | | (5,076) |
Ending balance | | | (139,362) | | (132,037) |
| | | | | |
Total equity | | $ | 1,154,094 | | 1,066,398 |
A summary of net periodic benefit expense for the Company’s defined benefit plans for the three-month periods ended December 31, 2017 and 2016 is shown in the following table. Net periodic benefit cost for each period presented is comprised of the following:
Three Months Ended December 31, | ||||||||
(In thousands) | 2017 | 2016 | ||||||
Defined benefit plans | ||||||||
Interest cost | $ | 820 | 965 | |||||
Expected return on assets | (975 | ) | (1,094 | ) | ||||
Amortization of: | ||||||||
Prior service cost | - | 3 | ||||||
Actuarial loss | 549 | 505 | ||||||
Net periodic benefit cost | $ | 394 | 379 |
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. During 2016, the Company entered into several forward contracts to purchase pounds sterling (GBP) to hedge two deferred payments due in connection with the acquisition of Plastique. During the first quarter of 2018, the Company entered into three interest rate swaps with a notional amount of $150 million to hedge some of its exposure to variability in future LIBOR-based interest payments on variable rate debt. In addition, the Company’s Canadian subsidiary Morgan Schaffer enters into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars. The Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. All derivative instruments are reported in either accrued expenses or other receivables on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. The interest rate swaps entered into during the first quarter of 2018 were not designated as cash flow hedges and, therefore, the gain or loss on the derivative is reflected in earnings each period.
The following is a summary of the notional transaction amounts and fair values for the Company’s outstanding derivative financial instruments by risk category and instrument type as of December 31, 2017:
(In thousands) | Notional amount | Fair Value (US$) | Float Rate | Fix Rate | ||||||||||||||
Forward contracts | 1,859 | GBP | (156 | ) | ||||||||||||||
Forward contracts | 5,250 | USD | 33 | |||||||||||||||
Forward contracts | 200 | EUR | (10 | ) | ||||||||||||||
Interest rate swap | 150,000 | USD | (80 | ) | 1.51 | % | 1.80 | % | ||||||||||
Interest rate swap * | 150,000 | USD | 28 | N/A | 2.09 | % | ||||||||||||
Interest rate swap ** | 150,000 | USD | (20 | ) | N/A | 2.24 | % |
*This swap represents a forward contract and will be effective in November 2018.
**This swap represents a forward contract and will be effective in November 2019.
11. FAIR VALUE MEASUREMENTS |
The accounting guidance establishes a three-level hierarchy for disclosure of fair value measurements, based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date, as follows:
● | Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets. |
● | Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument. |
10
● | Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
Financial Assets and Liabilities
The Company has estimated the fair value of its financial instruments as of December 31, 20172023 and September 30, 20172023 using available market information or other appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, receivables, inventories, payables, debt and other current assets and liabilities approximate fair value because of the short maturity of those instruments.
Fair Value of Financial Instruments
The Company’s forward contracts and interest rate swaps are classified within Level 2 of the valuation hierarchy in accordance with FASB Accounting Standards Codification (ASC) 825, as presented below as of December 31, 2017:and are immaterial.
(In thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liabilities: | ||||||||||||||||
Forward contracts and swaps | $ | - | (205 | ) | $ | - | (205 | ) |
Valuation was based on third party evidence of similarly priced derivative instruments.
Nonfinancial Assets and Liabilities
The Company’s nonfinancial assets such as property, plant and equipment, and other intangible assets are not measured at fair value on a recurring basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence that an impairment may exist. No impairments were recorded during the three-month period ended December 31, 2017.2023.
12. REVENUES
Disaggregation of Revenues
Revenues by customer type, geographic location, and revenue recognition method for the three-month period ended December 31, 2023 are presented in the table below as the Company deems it best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected by economic factors. The table below also includes a reconciliation of the disaggregated revenue within each reportable segment.
| | | | | | | | | | | | |
| | Aerospace | | | | | | | | | | |
(In thousands) |
| & Defense |
| USG |
| Test |
| Total | ||||
Customer type: |
| |
|
| |
|
| |
|
| |
|
Commercial | | $ | 37,209 | | $ | 81,469 | | $ | 35,087 | | $ | 153,765 |
Government | | | 57,524 | | | 1,515 | | | 5,510 | | | 64,549 |
Total revenues | | $ | 94,733 | | $ | 82,984 | | $ | 40,597 | | $ | 218,314 |
| | | | | | | | | | | | |
Geographic location: | | | | | | | | | | | | |
United States | | $ | 79,901 | | $ | 55,961 | | $ | 22,252 | | $ | 158,114 |
International | | | 14,832 | | | 27,023 | | | 18,345 | | | 60,200 |
Total revenues | | $ | 94,733 | | $ | 82,984 | | $ | 40,597 | | $ | 218,314 |
| | | | | | | | | | | | |
Revenue recognition method: | | | | | | | | | | | | |
Point in time | | $ | 39,465 | | $ | 66,703 | | $ | 7,980 | | $ | 114,148 |
Over time | | | 55,268 | | | 16,281 | | | 32,617 | | | 104,166 |
Total revenues | | $ | 94,733 | | $ | 82,984 | | $ | 40,597 | | $ | 218,314 |
11
Revenues by customer type, geographic location, and revenue recognition method for the three-month period ended December 31, 2022 are presented in the table below:
| | | | | | | | | | | | |
| | Aerospace | |
| | |
| | |
| | |
(In thousands) |
| & Defense |
| USG |
| Test |
| Total | ||||
Customer type: | | | | | | | | | | | | |
Commercial | | $ | 36,740 | | $ | 70,162 | | $ | 45,992 | | $ | 152,894 |
Government | | | 46,243 | | | 883 | | | 5,481 | | | 52,607 |
Total revenues | | $ | 82,983 | | $ | 71,045 | | $ | 51,473 | | $ | 205,501 |
| | | | | | | | | | | | |
Geographic location: | | | | | | | | | | | | |
United States | | $ | 68,934 | | $ | 46,379 | | $ | 27,503 | | $ | 142,816 |
International | | | 14,049 | | | 24,666 | | | 23,970 | | | 62,685 |
Total revenues | | $ | 82,983 | | $ | 71,045 | | $ | 51,473 | | $ | 205,501 |
| | | | | | | | | | | | |
Revenue recognition method: | | | | | | | | | | | | |
Point in time | | $ | 33,604 | | $ | 56,031 | | $ | 9,101 | | $ | 98,736 |
Over time | | | 49,379 | | | 15,014 | | | 42,372 | | | 106,765 |
Total revenues | | $ | 82,983 | | $ | 71,045 | | $ | 51,473 | | $ | 205,501 |
Revenue Recognition
Payment terms with our customers vary by the type and location of the customer and the products or services offered. Arrangements with customers that include payment terms extending beyond one year are not significant. The transaction price for these contracts reflects our estimate of returns and discounts, which are based on historical, current and forecasted information to determine the expected amount to which we will be entitled in exchange for transferring the promised goods or services to the customer. The realization of variable consideration occurs within a short period of time from product delivery; therefore, the time value of money effect is not significant. We primarily provide standard warranty programs for products in our commercial businesses for periods that typically range from one to two years. These assurance-type programs typically cannot be purchased separately and do not meet the criteria to be considered a performance obligation. Under the typical payment terms of our long term fixed price contracts, the customer pays us either performance-based or progress payments. Performance-based payments represent interim payments based on quantifiable measures of performance or on the achievement of specified events or milestones. Progress payments are interim payments of costs incurred as the work progresses.
For our overtime revenue recognized using the output method of costs incurred, contract cost is estimated utilizing current contract specifications and expected engineering requirements. Contract costs typically are incurred over a period of several months to one or more years, and the estimation of these costs requires judgment. Our cost estimation process is based on the professional knowledge and experience of engineers and program managers along with finance professionals. We review and update our projections of costs quarterly or more frequently when circumstances significantly change. In addition, in the USG segment, we recognize revenue as a series of distinct services based on each day of providing services (straight-line over the contract term) for certain of our USG segment contracts. Under the typical payment terms of our service contracts, the customer pays us in advance of when services are performed. In addition, in the Test segment, we use milestones to measure progress for our Test segment contracts because it best depicts the transfer of control to the customer that occurs as we incur costs on our contracts.
Remaining Performance Obligations
Remaining performance obligations, which is the equivalent of backlog, represent the expected transaction price allocated to contracts that the Company expects to recognize as revenue in future periods when the Company performs under the contracts. These remaining obligations include amounts that have been formally appropriated under contracts with the U.S. Government, and exclude unexercised contract options and potential orders under ordering-type contracts such as Indefinite Delivery, Indefinite Quantity contracts. At December 31, 2023, the Company had $847.8 million in remaining performance obligations of which the Company expects to recognize revenues of approximately 66% in the next twelve months.
12
Contract assets, contract liabilities and accounts receivable
Assets and liabilities related to contracts with customers are reported on a contract-by-contract basis at the end of each reporting period. At December 31, 2023, contract assets, contract liabilities and accounts receivable totaled $138.4 million, $131.9 million and $194.4 million, respectively. During the first quarter of 2024, the Company recognized approximately $24.4 million in revenues that were included in the contract liabilities balance at September 30, 2023. At September 30, 2023, contract assets, contract liabilities and accounts receivable totaled $138.6 million, $123.1 million and $198.6 million, respectively.
13. LEASES
The Company determines at lease inception whether an arrangement that provides control over the use of an asset is a lease. The Company recognizes at lease commencement a right-of-use (ROU) asset and lease liability based on the present value of the future lease payments over the lease term. The Company has elected not to recognize a ROU asset and lease liability for leases with terms of 12 months or less. Certain of the Company’s leases include options to extend the term of the lease for up to 20 years. When it is reasonably certain that the Company will exercise the option, Management includes the impact of the option in the lease term for purposes of determining total future lease payments. As most of the Company’s lease agreements do not explicitly state the discount rate implicit in the lease, Management uses the Company’s incremental borrowing rate on the commencement date to calculate the present value of future payments based on the tenor of each arrangement.
The Company’s leases for real estate commonly include escalating payments. These variable lease payments are included in the calculation of the ROU asset and lease liability. In addition to the present value of the future lease payments, the calculation of the ROU asset also includes any deferred rent, lease pre-payments and initial direct costs of obtaining the lease.
In March 2017,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 ROU assets and lease liabilities and expensed as incurred.
The Company’s leases are for office space, manufacturing facilities, and machinery and equipment.
The components of lease costs are shown below:
| | | | | | |
| | Three Months Ended | | Three Months Ended | ||
| | December 31, | | December 31, | ||
(Dollars in thousands) |
| 2023 |
| 2022 | ||
Finance lease cost | | | | | | |
Amortization of right-of-use assets | | $ | 393 | | | 393 |
Interest on lease liabilities | | | 223 | | | 236 |
Operating lease cost | | | 1,864 | | | 1,645 |
Total lease costs | | $ | 2,480 | | | 2,274 |
Additional information related to leases are shown below:
| | | | | | | |
|
| Three Months Ended |
| Three Months Ended |
| ||
| | December 31, | | December 31, |
| ||
(Dollars in thousands) | | 2023 | | 2022 |
| ||
Cash paid for amounts included in the measurement of lease liabilities | | | | | | | |
Operating cash flows from operating leases | | $ | 1,819 | | | 1,601 | |
Operating cash flows from finance leases | | | 223 | | | 236 | |
Financing cash flows from finance leases | | | 355 | | | 327 | |
Right-of-use assets obtained in exchange for lease liabilities | | | | | | | |
Operating leases | | $ | — | | | 13,964 | |
Weighted-average remaining lease term | | | | | | | |
Operating leases | | | 11.1 | years | | 11.6 | years |
Finance leases | | | 11.1 | years | | 11.7 | years |
Weighted-average discount rate | | | | | | | |
Operating leases | | | 4.5 | % | | 4.4 | % |
Finance leases | | | 4.7 | % | | 4.6 | % |
13
The following is a reconciliation of future undiscounted cash flows to the operating and finance lease liabilities, and the related ROU assets, presented on the Consolidated Balance Sheet on December 31, 2023:
| | | | | |
(Dollars in thousands) | | Operating |
| Finance | |
Years Ending September 30: |
| Leases |
| Leases | |
2024 (excluding the three months ended December 31, 2023) | | $ | 5,044 | | 1,634 |
2025 | | | 5,684 | | 2,233 |
2026 | | | 4,472 | | 2,297 |
2027 | | | 4,265 | | 2,356 |
2028 and thereafter | | | 32,991 | | 16,470 |
Total minimum lease payments | | | 52,456 | | 24,990 |
Less: amounts representing interest | | | 11,869 | | 6,010 |
Present value of net minimum lease payments | | $ | 40,587 | | 18,980 |
Less: current portion of lease obligations | | | 4,878 | | 1,348 |
Non-current portion of lease obligations | | $ | 35,709 | | 17,632 |
| | | | | |
ROU assets | | $ | 38,685 | | 14,799 |
Operating lease liabilities are included on the Consolidated Balance Sheet in accrued other expenses (current portion) and as a caption on the Consolidated Balance Sheet (long-term portion). Finance lease liabilities are included on the Consolidated Balance Sheet in accrued other expenses (current portion) and other liabilities (long-term portion). Operating lease ROU assets are included as a caption on the Consolidated Balance Sheet and finance lease ROU assets are included in Property, plant and equipment on the Consolidated Balance sheet.
14. RECENT ACCOUNTING PRONOUNCEMENTS
In November 2023, the FASB issued ASU 2017-07,2023-07, “Improving the Presentation of Net Periodic Pension CostSegment Reporting (Topic 280): Improvements to Reportable Segment Disclosures,” which expands annual and Net Periodic Postretirement Benefit Cost, which updates ASC 715,Compensation – Retirement Benefits. This update permits only the service cost component of net periodic pension and postretirement expense to be reported with other compensation costs, while all other components are required to be reported separately in other deductions, outside any subtotal of operating income. These updatesinterim disclosure requirements for reportable segments, primarily through enhanced disclosures about significant expenses. The new segment disclosures are effective for fiscal years beginning after December 15, 2017, with early adoption permitted,2023, and must be adopted oninterim periods within fiscal years beginning after December 15, 2024. Management will review the extent of new disclosures necessary in the coming quarters, prior to implementation in our fiscal year 2025. Other than additional disclosure, we do not expect a retrospective basis. The updates change presentation only and will not impact the Company’s resultsto our consolidated statements of operations.
operations, financial position, or cash flows.
In August 2017,December 2023, the FASB issued ASU 2017-12,2023-09, “TargetedIncome Taxes (Topic 740): Improvements to Accounting for Hedge Activities,Income Tax Disclosures,” which provides qualitative and quantitative updates ASC 815,Derivativesto the rate reconciliation and Hedging.income taxes paid disclosures. This update is intended to amend the hedge accounting model to enable entities to better align the economics of risk management activities and financial reporting. The updates eliminate the requirement to separately measure and report hedge ineffectiveness and simplify hedge documentation and effectiveness assessment requirements. These updates areASU will be effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. These updates are not expected to materially impact2024. Management will review the Company’s resultsextent of operations.
In February 2016, the FASB issued ASU No. 2016-062,Leases (Topic 842), which, among other things, requires an entity to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. This standard will increase an entities’ reported assets and liabilities. The standard is effective for fiscal years beginning after December 15, 2018 and mandates a modified retrospective transition period for all entities. The Company is currently assessing the impact of this standard on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance has been further clarified and amended. The new standard will be effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currentlydisclosures necessary in the processcoming quarters, prior to implementation in our fiscal year 2026. Other than additional disclosure, we do not expect a change to our consolidated statements of evaluating the effect that ASU 2014-09 will have on its consolidatedoperations, financial statements and related disclosures. The Company has selected the Cumulative Effect method of transition to the new standard.position, or cash flows.
14
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
References to the first quarters of 20182024 and 20172023 represent the three-month periods ended December 31, 20172023 and 2016,2022, respectively.
OVERVIEW
In the first quarter of 2018, sales,Sales, net earnings and diluted earnings per share were $173.5$218.3 million, $34.7$15.2 million and $1.33 per share, respectively, compared to $146.4 million, $10.7 million and $0.41$0.59 per share, respectively, in the first quarter of 2017. The increase in net earnings2024 compared to $205.5 million, $14.7 million and diluted earnings$0.57 per share, respectively, in the first quarter of 2018 as compared to the first quarter of 2017 was mainly due to the $25.1 million net tax benefit the Company recorded as a result of theTax Cuts and Jobs Act that was signed into law on December 22, 2017.
2023.
NET SALES
Net sales increased $27.1$12.8 million, or 18.5%6.2%, to $173.5$218.3 million in the first quarter of 20182024 from $146.4$205.5 million in the first quarter of 2017.2023. The increase in net sales in the first quarter of 20182024 as compared to the first quarter of 20172023 was due to a $20.2$12.0 million increase in the USG segment, a $3.7and an $11.7 million increase in the TestAerospace & Defense segment, partially offset by a $2.0$10.9 million increasedecrease in the Technical Packaging segment and a $1.2 million increase in the FiltrationTest segment.
-FiltrationAerospace & Defense (A&D)
In the first quarter of 2018, netNet sales of $60.0 million were $1.2 million, or 2.1%, higher than net sales of $58.8$94.7 million in the first quarter of 2017.2024 were $11.7 million, or 14.1%, higher than the $83.0 million in the first quarter of 2023. The sales increase in the first quarter of 20182024 compared to the first quarter of 20172023 was mainlyprimarily due to the $5.7an approximately $7.0 million sales contributions from the Company’s acquisition ofincrease in aerospace shipments at Mayday, Crissair and PTI, and a $2.2$4.7 million increase in net sales at VACCO due to higher shipments of its space products, partially offsetGlobe driven mainly by a $3.9 million decrease in sales at Westland due to timing of orders, a $2.2 million decrease in sales at PTI due to lower aerospace assembly and industrial/automotive shipments and a $0.6 million decrease in sales at Crissair due to lower aerospace shipments.the CMT acquisition.
--TestUSG
In the first quarter of 2018, netNet sales of $37.5$83.0 million were $3.7 million, or 10.9%, higher than the $33.8 million recorded in the first quarter of 2017.2024 were $12.0 million, or 16.9% higher than the $71.0 million in the first quarter of 2023. The increase in the first quarter of 20182024 compared to the first quarter of 20172023 was mainly due to a $7.6 million increase in net sales at Doble driven by higher sales of offline testing products and services and a $4.4 million increase in net sales at NRG driven by continued strength in the renewables end-market.
-Test
Net sales of $40.6 million in the first quarter of 2024 were $10.9 million, or 21.2%, lower than the $51.5 million in the first quarter of 2023. The decrease in the first quarter of 2024 compared to the first quarter of 2023 was primarily due to higher$7.5 million of lower sales from the segment’s U.S.U.S operations and $3.4 million of lower sales from the segment’s Asian and European operations, all due to the timing of test and measurement chamber projects.
ORDERS AND BACKLOG
-Utility Solutions Group (USG)
Net sales increased $20.2Backlog was $847.8 million or 56.8%, to $55.8at December 31, 2023 compared with $772.4 million at September 30, 2023. The Company received new orders totaling $293.7 million in the first quarter of 2018 from $35.62024 compared to $228.9 million in the first quarter of 2017. The increase in the first quarter of 2018 compared to the first quarter of 2017 was mainly driven by the $19 million sales contribution from the NRG, Morgan Schaffer and Vanguard acquisitions and new products and software solutions at Doble.
-Technical Packaging
In the first quarter of 2018, net sales of $20.2 million were $2.0 million, or 10.9% higher than the $18.2 million recorded in the first quarter of 2017. The increase in the first quarter of 2018 compared to the first quarter of 2017 was mainly due to a $1.1 million increase in net sales at TEQ due to higher shipments to medical customers and a $0.9 million increase in net sales at Plastique.
ORDERS AND BACKLOG
Backlog was $404.1 million at December 31, 2017 compared with $377.1 million at September 30, 2017. The Company received new orders totaling $200.5 million in the first quarter of 2018 compared to $182.9 million in the first quarter of 2017.2023. Of the new orders received in the first quarter of 2018, $65.42024, $171.5 million related to FiltrationAerospace & Defense products, $58.3 million related to Test products, $57.6$77.0 million related to USG products, and $19.2$45.2 million related to Technical PackagingTest products. Of the new orders received in the first quarter of 2017, $67.52023, $97.3 million related to FiltrationAerospace & Defense products, $56.0 million related to Test products, $39.5$80.2 million related to USG products, and $19.9$51.4 million related to Technical Packaging products
Test products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the first quarter of 2018 were $42.2$54.0 million (24.3% of net sales), compared with $33.8 million (23.1%(24.7% of net sales) for the first quarter of 2017.2024, compared with $51.3 million (25.0% of net sales) for the first quarter of 2023. The increase in SG&A expenses in the first quarter of 20182024 compared to the first quarter of 20172023 was mainly due to an increase inwithin the USG and FiltrationA&D segments due to the Company’s recent acquisitions,higher sales, inflationary impacts and additional sales and marketing expenses at Doble to support future revenue growth.
acquisition impacts.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $4.4$7.9 million and $3.6$6.9 million for the first quartersquarter of 20182024 and 2017,2023, respectively. Amortization expenses consist of amortization of acquired intangible assets from acquisitions and other identifiable intangible assets (primarily
15
software). The increase in amortization expense in the first quarter of 20182024 compared to the first quarter of 20172023 was mainly due to an increase in amortization of intangiblescapitalized software and amortization of intangible assets related to the Morgan Schaffer, NRG,MPE and MaydayCMT acquisitions.
OTHER EXPENSES, (INCOME), NET
Other expenses, net, were $0.2 million in the first quarter of 20182024 compared to other income, net, of $0.8$0.4 million in the first quarter of 2017.2023. There were no individually significant items in other expenses, net, in the first quarter of 2018.2024. The principal component of other income,expenses, net, in the first quarter of 2017 was $0.42023 included approximately $0.2 million of income related to death benefit insurance proceeds from a former subsidiary.
restructuring charges within the A&D segment.
EBIT
The Company evaluates the performance of its operating segments based on EBIT, and provides EBIT on a consolidated basis, which is a non-GAAP financial measure. Please refer to the discussion of non-GAAP financial measures in Note 67 to the Consolidated Financial Statements, above. EBIT was $15.0$22.1 million (8.6%(10.1% of net sales) for the first quarter of 20182024 compared to $16.8$20.6 million (11.5%(10.0% of net sales) for the first quarter of 2017.
2023.
The following table presents a reconciliation of EBIT to net earnings.a GAAP financial measure:
| | | | | | | ||||||||
| | Three Months Ended | ||||||||||||
| | December 31, | ||||||||||||
(In thousands) | Three Months Ended December 31, |
| 2023 |
| 2022 | |||||||||
2017 | 2016 | |||||||||||||
Net earnings | | $ | 15,169 | | | 14,727 | ||||||||
Plus: Interest expense, net | |
| 2,667 | | | 1,658 | ||||||||
Plus: Income tax expense | |
| 4,285 | | | 4,172 | ||||||||
Consolidated EBIT | $ | 14,986 | 16,809 | | $ | 22,121 | | | 20,557 | |||||
Less: Interest expense, net | (2,185 | ) | (684 | ) | ||||||||||
Plus (Less): Income tax | 21,870 | (5,398 | ) | |||||||||||
Net earnings | $ | 34,671 | 10,727 |
-–Filtration
Aerospace & Defense
EBIT in the first quarter of 2018 was $9.6$16.7 million (16.1% of net sales) compared to $10.7 million (18.2%(17.6% of net sales) in the first quarter of 2017. The decrease in EBIT dollars and as a percent of net sales in the first quarter of 20182024 compared to the first quarter of 2017 was mainly due to lower sales volumes at Westland, PTI and Crissair, partially offset by an increase in EBIT at Mayday and VACCO due to increased sales volumes at these subsidiaries.
-Test
EBIT in the first quarter of 2018 was $2.6$12.5 million (6.9% of net sales) compared to $2.4 million (7.2%(15.1% of net sales) in the first quarter of 2017. EBIT increased in the first quarter of 2018 compared to the first quarter of 2017 primarily due to increased sales volumes.
-Utility Solutions Group
EBIT in the first quarter of 2018 was $10.7 million (19.1% of net sales) compared to $9.7 million (27.1% of net sales) in the first quarter of 2017.2023. The increase in EBIT in the first quarter of 20182024 compared to the first quarter of 20172023 was mainly due to higher sales volumes as well as the EBIT contribution from NRG (May 8, 2017 acquisition), Morgan Schaffer (May 25, 2017 acquisition) and Vanguard (August 30, 2017 acquisition). The decrease in EBIT as a percent of net sales in the first quarter of 2018 compared to the first quarter of 2017 was primarily due to the change in product mix as a result of the recent acquisitions of NRG, Morgan Schaffer and Vanguard.at Mayday, Crissair & Globe mentioned above.
--Technical PackagingUSG
EBIT in the first quarter of 2018 was $1.0$17.6 million (4.8% of net sales) compared to $1.0 million (5.7%(21.2% of net sales) in the first quarter of 2017. The decrease in EBIT as a percent2024 compared to $16.1 million (22.7% of net salessales) in the first quarter of 20182023. The increase in EBIT in the first quarter of 2024 compared to the first quarter of 20172023 was mainly due to product mixthe higher sales volumes at Plastique.
both Doble and NRG in the first quarter of 2024.
-CorporateTest
EBIT was $1.8 million (4.4% of net sales) in the first quarter of 2024 compared to $5.4 million (10.5% of net sales) in the first quarter of 2023. The decrease in EBIT in the first quarter of 2024 compared to the first quarter of 2023 was primarily driven by the lower sales volumes from the segment’s U.S. and Asian operations. In addition, EBIT in the first quarter of 2024 was negatively impacted by $0.3 million of inventory step-up charges related to the MPE acquisition.
–Corporate
Corporate costs included in EBIT were $8.9$13.9 million and $7.0$13.5 million in the first quarter of 20182024 and 2017,2023, respectively. The increase in Corporate costs in the first quarter of 20182024 compared to the first quarter of 20172023 was primarilymainly due to higher professional fees and an increase in amortization of intangible assetsshare based compensation costs and costs related to recent acquisitions.
the MPE acquisition.
INTEREST EXPENSE, NET
Interest expense net was $2.2$2.7 million and $0.7$1.7 million in the first quarter of 20182024 and 2017,2023, respectively. The increase in interest expense in the first quarter of 20182024 as compared to the first quarter of 20172023 was mainly due to higher average outstanding borrowings ($265.7 million compared to $160.3 million) and higher average interest rates (2.7% vs. 1.6%) as a result of the additional borrowings to fund the Company’s 2017 acquisitions.
INCOME TAX EXPENSE
Income tax benefit(6.8% in the first quarter of 2018 was $21.9 million2024 compared to income tax expense of $5.4 million4.6% in the first quarter of 2017. 2023) and higher average outstanding borrowings.
16
INCOME TAX EXPENSE
The first quarter 2018 effective income tax rate was (170.8%) compared to 33.5%22.0% in the first quarter of 2017. H.R. 1,Tax Cuts and Jobs Act (“TCJA”), was signed into law on December 22, 2017. The total impact of the TCJA2024 compared to 22.1% in the first quarter of 2018 was a net benefit of $25.1 million. The impacts were as follows: First, the Company’s 2018 federal statutory rate dropped from 35.0% to 24.5% which requires an adjustment to the value of its deferred tax assets and liabilities since the first quarter of 2018 is the period that includes the enactment date. This adjustment ($30.3 million provisional amount) favorably impacted the first quarter effective tax rate by 236.8%. Second, the TCJA subjects the Company’s cumulative foreign earnings to federal income tax ($2.9 million provisional amount) which unfavorably impacted the first quarter effective tax rate by 22.8%. The Company also recorded a $2.3 million provisional estimate of the income tax effects of the future repatriation of the cumulative earnings of its foreign subsidiaries which unfavorably impacted the first quarter effective tax rate by 18.3%.
The Company was able to determine reasonable estimates of the TCJA income tax effects. However, the Company was unable to complete the accounting under ASC Topic 740 for the change in the value of the Company’s deferred tax assets and liabilities as it needs more time to collect and analyze information primarily related to depreciation expense, pension liability, and percentage of completion revenue recognition. The Company was also unable to complete the accounting under ASC Topic 740 for the income tax effects of subjecting the Company’s cumulative foreign earnings to federal income tax as it needs more time to collect and analyze information to compute the cumulative balance of earnings subject to the tax and the amount of foreign tax credit that is available to offset the tax.
Since the TCJA subjected the Company’s cumulative foreign earnings to U.S. tax, repatriation of those earnings generally provides that no additional federal tax will be imposed. However, the permissible amount of repatriation can be restricted by local law and a repatriation can result in tax expense due to local country withholding tax, U.S. state tax, and changes in foreign exchange rates. The Company is evaluating these considerations to determine the amount of its foreign subsidiaries’ cumulative earnings it intends to indefinitely reinvest.
The TCJA includes a tax on global intangible low-taxed income (“GILTI”). The Company expects it will be subject to this tax. At its January 10, 2018 meeting, the FASB staff indicated that companies should make and disclose a policy election as to whether they will recognize deferred taxes for basis differences expected to reverse as GILTI or whether they will account for GILTI as period costs if and when incurred. Because there are interpretative questions associated with the approach that involves recognizing deferred taxes, the Company will undertake an evaluation of these questions and make the accounting policy election during the SAB 118 measurement period.
During the three-month period ended December 31, 2017, there2023. There were no materialsignificant changes in the unrecognizedeffective income tax benefits. The Company does not anticipate a material change inrate between the amount of unrecognized tax benefits in the next twelve months.
TCJA moved the U.S. to a federal tax system that will no longer tax dividends from foreign corporations to U.S. corporations. The cost of transitioning to this new tax system is a deemed repatriation of cumulative foreign earnings, the “Foreign Earnings Toll Charge”, the estimated tax cost of which was recorded in the first quarter of 2018. The actual repatriation of foreign earnings triggers foreign dividend withholding taxes and U.S. state taxes, the estimated cost of which was recorded in the first quarter of 2018.
periods.
CAPITAL RESOURCES AND LIQUIDITY
The Company’s overall financial position and liquidity remainsremain strong. Working capital (current assets less current liabilities) decreasedincreased to $195.0$298.5 million at December 31, 20172023 from $197.8$266.4 million at September 30, 2017. Accounts receivable decreased $12.1 million primarily related to an $11.9 million decrease within the Filtration segment due to timing of collections and lower sales volumes in the first quarter of 2018 compared to the fourth quarter of 2017.2023. Inventories increased by $6.1$18.5 million during this period mainly due to a $3.3$9.1 million increase within the FiltrationAerospace & Defense segment, a $7.5 million increase within the USG segment and a $1.9 million increase within the Test segment primarily from an increase in work in process inventories due to support new aerospace platforms.
timing of manufacturing existing orders. Accrued salaries decreased by $9.9 million during this period due to timing of salaries and bonus payments.
Net cash provided by operating activities was $17.8$8.7 million and $15.7net cash used by operating activities was $(9.0) million in the first quarters of 2024 and 2023, respectively. The increase in net cash provided by operating activities in the first quarter of 20182024 as compared to the first quarter of 2023 was mainly driven by an increase in contract liabilities and 2017, respectively.
lower accounts receivable balances due to timing of collections.
Capital expenditures were $3.6$7.8 million and $7.0$4.8 million in the first quarters of 2024 and 2023, respectively. The increase in the first quarter of 2018 and 2017, respectively. The decrease in the first quarter of 20182024 was mainly due to an increase in building improvements and machinery and& equipment additions at VACCO ($1.7 million) and Plastique ($1.3 million) duringwithin the first quarter of 2017.A&D segment. In addition, the Company incurred expenditures for capitalized software of $2.1approximately $2.9 million and $1.4$2.8 million in the first quarterquarters of 20182024 and 2017,2023, respectively.
Acquisition
On November 9, 2023, the Company acquired MPE Limited (MPE), based in the United Kingdom, for a purchase price of approximately $56.2 million, net of cash acquired. MPE is a leading global manufacturer of high-performance EMC/EMP filters and capacitor products for military, utility, telecommunication, and other critical infrastructure applications. Since the date of acquisition, the operating results for the MPE business have been included as part of ETS-Lindgren in the Test segment.
Credit Facility
At December 31, 2017,2023, the Company had approximately $181$322 million available to borrow under its Credit Facility,bank credit facility, a $250 million increase option, and $41.6$51.4 million cash on hand. At December 31, 2017,2023, the Company had $260.0$172 million of outstanding borrowings under the Credit Facilitycredit facility in addition to outstanding letters of credit of $9.0$5.8 million. Cash flow from operations and borrowings under the Company’s Credit Facilitycredit facility are expected to meet the Company’s capital requirements and operational needs for the foreseeable future. The Company’s ability to access the additional $250 million increase option of the credit facility is subject to acceptance by participating or other outside banks.
New Accounting Standards
In March 2017, the FASB issued ASU 2017-07,Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which updates ASC 715,Compensation – Retirement Benefits. This update permits only the service cost component of net periodic pension and postretirement expense to be reported with other compensation costs, while all other components are required to be reported separately in other deductions, outside any subtotal of operating income. These updates are effective for fiscal years beginning after December 15, 2017, with early adoption permitted, and must be adopted on a retrospective basis. The updates change presentation only and will not impact the Company’s results of operations.
In August 2017, the FASB issued ASU 2017-12,Targeted Improvements to Accounting for Hedge Activities, which updates ASC 815,Derivatives and Hedging. This update is intended to amend the hedge accounting model to enable entities to better align the economics of risk management activities and financial reporting. The updates eliminate the requirement to separately measure and report hedge ineffectiveness and simplify hedge documentation and effectiveness assessment requirements. These updates are effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. These updates are not expected to materially impact the Company’s results of operations.
In February 2016, the FASB issued ASU No. 2016-062,Leases (Topic 842), which, among other things, requires an entity to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. This standard will increase an entities’ reported assets and liabilities. The standard is effective for fiscal years beginning after December 15, 2018 and mandates a modified retrospective transition period for all entities. The Company is currently assessing the impact of this standard on its consolidated financial statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09,Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. This guidance has been further clarified and amended. The new standard will be effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently in the process of evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has selected the Cumulative Effect method of transition to the new standard.
Dividends
A dividend of $0.08 per share, totaling $2.1 million, was paid on October 17, 20172023 to stockholders of record as of October 3, 2017. Following the end of the first quarter, the2023. Subsequent to December 31, 2023, a quarterly dividend of $0.08 per share, ortotaling $2.1 million, was paid on January 19, 20182024 to stockholders of record as of January 4, 2018.
OUTLOOK
Management projects 2018 GAAP EPS to be in the range of $3.55 to $3.65 per share and Adjusted EPS to be in the range of $2.65 to $2.75 per share, reflecting the profit contributions from the recent acquisitions, additional depreciation and amortization charges, higher interest costs, the discrete cost reduction charges in USG and Filtration described below and, adjusting for the first quarter 2018 one-time / incremental net tax benefits resulting from U.S. Tax Reform and the cost reduction charges described below. Management expects the 2018 second quarter GAAP EPS to be in the range of $0.30 to $0.35 per share (including approximately $2 million to $3 million of pretax charges in the USG and Filtration segments relating to certain cost reduction initiatives) and Adjusted EPS to be in the range of $0.38 to $0.43 per share.
2024.
CRITICAL ACCOUNTING POLICIES
Management has evaluated the accounting policies used in the preparation of the Company’s financial statements and related notes and believes those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by Management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving Management judgments and estimates may be found in the Critical Accounting Policies section of Management’s Discussion and Analysis.Analysis and in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
17
OTHER MATTERS
Contingencies
As a normal incident of the business in which the Company is engaged, various claims, charges and litigation are asserted or commenced against the Company. Additionally, the Company is currently involved in various stages of investigation and remediation relating to environmental matters. In the opinion of Management, the aggregate costs involved in the resolution of these matters, and final judgments, if any, which might be rendered against the Company, are adequately reserved, are covered by insurance, or would not have a material adverse effect on the Company’s results from operations, capital expenditures, or competitive position.
FORWARD LOOKING STATEMENTS
Statements contained in this Form 10-Q regarding future events and the Company’s future results that reflect or are based on current expectations, estimates, forecasts, projections or assumptions about the Company’s performance and the industries in which the Company operates are considered “forward-looking statements” within the meaning of the safe harbor provisions of the Federal securities laws. These may include, but are not necessarily limited to, statements about: the amountstrength of certain end markets served by the Company, and the timing of future sales, revenues, cash flows, Adjusted EPS and EPS;the recovery of certain end markets which the Company serves; the adequacy of the Company’s credit facility and the Company’s ability to increase it; the outcome of current litigation, claims and charges; adjustments to the values of deferred tax assets and liabilities; income taxation of foreign earnings and the future repatriation, reinvestment or distribution of foreign earnings; future income tax liabilities and effective tax rate; timing of the repayment of the current portion of the Company’s long-term debt; changes infuture revenues from remaining performance obligations; fair values of reporting units; the amountdeductibility of unrecognized tax benefits;goodwill; estimates and assumptions that affect the reported amounts of assets and liabilities; the recognition and timing of costscompensation cost related to share-based compensation arrangements; returns on retirement plan assets; estimates or projections made in connection with the Company’s accounting policies; market risks relating to the Company’s operations and changes in interest rates and the Company’s ability to hedge against or otherwise manage themmarket risks through the use of derivative financial instruments; the extent to which hedging gains or losses will be offset by losses or gains on related underlying exposures; and any other statements contained herein which are not strictly historical. Words such as expects, anticipates, targets, goals, projects, intends, plans, believes, estimates, variations of such words, and similar expressions are intended to identify such forward-looking statements.
Investors are cautioned that such statements are only predictions and speak only as of the date of this Form 10-Q, and the Company undertakes no duty to update them except as may be required by applicable laws or regulations. The Company’s actual results in the future may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company’s operations and business environment, including but not limited to those described in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017,2023, and the following: the impacts of climate change and related regulation of greenhouse gases; the impacts of labor disputes, civil disorder, wars, elections, political changes, tariffs and trade disputes, terrorist activities, cyberattacks or natural disasters on the Company’s operations and those of the Company’s customers and suppliers; disruptions in manufacturing or delivery arrangements due to shortages or unavailability of materials or components; or supply chain disruptions; inability to access work sites; the timing and content of future contract awards or customer orders; the timely appropriation, allocation and availability of Government funds; the termination for convenience of Government and other customer contracts or orders; financial exposure in connection with Company guarantees of certain Aclara contracts; weakening of economic conditions in served markets; the success of the Company’s competitors; changes in customer demands or customer insolvencies; competition; intellectual property rights; technical difficulties;difficulties or data breaches; the availability of selectselected acquisitions; delivery delays or defaults by customers; performance issues with key customers, suppliers and subcontractors; material changes in the costs and availability of certain raw materials; labor disputes; final analysis of the impacts of the TCJA;material changes in U.S. tax laws and regulations; otherthe cost of credit; changes in laws and regulations including but not limited to changes in accounting standards and foreign taxation; changes in interest rates; costs relating to environmental matters arising from current or former facilities; uncertainty regarding the ultimate resolution of current disputes, claims, litigation or arbitration; and the integration and performance of recently acquired businesses.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks. During 2016, the Company entered into several forward contracts to purchase pounds sterling to hedge two deferred payments due in connection with the acquisition of Plastique. During the first quarter of 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, theThe Company’s Canadian subsidiary Morgan Schaffer enters into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars. All derivative instruments are reported on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the respective derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. The interest rate swaps entered into during the first quarter of 2018 were not designated as cash flow hedges and, therefore, the gain or loss on the derivative is reflected in earnings each period. There has been no material change to the Company’s market risks since September 30, 2017. See Note 12 to the Consolidated Financial Statements in Item 1 of this Report for a summary of the Company’s outstanding derivative financial instruments as of December 31, 2017. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017 for further discussion about market risk.2023.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the participation of Management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of that date. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The Company did not repurchase any shares during the first quarter of 2024.
ITEM 5. OTHER INFORMATION
During the first quarter of fiscal 2024, no director or officer (as defined in Securities and Exchange Commission Rule 16a-1(f)) of the Company adopted or terminated:
(i) | Any contract, instruction or written plan for the purchase or sale of Company securities intended to satisfy the affirmative defense conditions of SEC Rule 10b5-1(c) (a “Rule 10b5-1 trading arrangement”); or |
(ii) | Any “non-Rule 10b5-1 trading arrangement” as defined in Item 408(c) of SEC Regulation S-K. |
19
ITEM 6. EXHIBITS