Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer”, “accelerated filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Aggregate market value of the Common Stock held by non-affiliates
of the registrant as of the close of trading on March 31, 2017, the last business day of the registrant’s most recently completed
second fiscal quarter: approximately $1,455,041,000.*
* Based on the New York Stock Exchange closing price.
For purpose of this calculation only, without determining whether the following are affiliates of the registrant, the registrant
has assumed that (i) its directors and executive officers are affiliates, and (ii) no party who has filed a Schedule 13D or 13G
is an affiliate.
Number of shares of Common Stock outstanding at November 6, 2017:
25,835,902
Part III of this Report incorporates by reference certain portions
of the registrant’s definitive Proxy Statement for its 2018 Annual Meeting of Shareholders, which the registrant currently
anticipates first sending to shareholders on or about December 14, 2017 (hereinafter, the “2017 Proxy Statement”).
Statements contained in this Form 10-K regarding future events and
the Company’s future results that are based on current expectations, estimates, forecasts and projections 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 include, without limitation, statements about: the
adequacy of the Company’s buildings, machinery and equipment; the adequacy of the Company’s credit facilities and future
cash flows; the outcome of litigation, claims and charges; future costs relating to environmental matters; continued reinvestment
of foreign earnings and the resulting U.S. tax liability in the event such earnings are repatriated; repayment of debt within the
next twelve months; the outlook for 2018 and beyond, including amounts, timing and sources of 2018 sales, revenues, sales growth,
EBIT, EBITDA, EBIT margins and EPS; interest on Company debt obligations; the ability of expected hedging gains or losses to be
offset by losses or gains on related underlying exposures; the Company’s ability to increase shareholder value; acquisitions;
income tax expense and the Company’s expected effective tax rate; minimum cash funding required by, expected benefits payable
from, and Management’s assumptions about future events which could affect liability under, the Company’s defined benefit
plans and other postretirement benefit plans; the recognition of unrecognized compensation costs related to share-based compensation
arrangements; the Company’s exposure to market risk related to interest rates and to foreign currency exchange risk; the
likelihood of future variations in the Company’s assumptions or estimates used in recording contracts and expected costs
at completion under the percentage of completion method; the Company’s estimates and assumptions used in the preparation
of its financial statements; cost and estimated earnings on long-term contracts; valuation of inventories; estimates of uncollectible
accounts receivable; the risk of goodwill impairment; the Company’s estimates utilized in software revenue recognition, non-cash
depreciation and the amortization of intangible assets; the valuation of deferred tax assets; estimates of future cash flows and
fair values in connection with the risk of goodwill impairment; amounts of NOL not realizable and the timing and amount of the
reduction of unrecognized tax benefits; the effects of implementing recently issued accounting pronouncements; 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-K, and the Company undertakes no duty to update the information in this Form 10-K
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 herein under “Item 1A, Risk Factors,” and the
following: Aclara’s continuing ability to perform contracts guaranteed by the Company; the impacts of labor disputes, civil
disorder, wars, elections, political changes, terrorist activities or natural disasters on the Company’s operations and those
of the Company’s customers and suppliers; the timing and content of future customer orders; the appropriation and allocation
of government funds; the termination for convenience of government and other customer contracts; the timing and magnitude of future
contract awards; weakening of economic conditions in served markets; the success of the Company’s competitors; changes in
customer demands or customer insolvencies; competition; intellectual property rights; technical difficulties; the availability
of selected acquisitions; delivery delays or defaults by customers; performance issues with key customers, suppliers and subcontractors;
material changes in the costs of certain raw materials; material changes in the cost of credit; changes in laws and regulations
including but not limited to changes in accounting standards and taxation requirements; costs relating to environmental matters;
litigation uncertainty; and the Company’s successful execution of internal restructuring and other plans.
PART I
Item 1. Business
The Company
The Registrant, ESCO Technologies Inc. (ESCO), is a producer of
engineered products and systems sold to customers worldwide, primarily for utility, industrial, aerospace and commercial applications.
ESCO conducts its business through a number of wholly-owned direct and indirect subsidiaries. ESCO and its subsidiaries are referred
to in this Report as “the Company.”
ESCO was incorporated in Missouri in August 1990 as a wholly owned
subsidiary of Emerson Electric Co. (Emerson) to be the indirect holding company for several Emerson subsidiaries, which were primarily
in the defense business. Ownership of the Company was spun off by Emerson to its shareholders on October 19, 1990, through a special
distribution. Since that time, through a series of acquisitions and divestitures, the Company has shifted its primary focus from
defense contracting to the production and supply of engineered products and systems marketed to utility, industrial, aerospace
and commercial users.
The Company’s fiscal year ends September 30. Throughout this
document, unless the context indicates otherwise, references to a year (for example 2017) refer to the Company’s fiscal year
ending on September 30 of that year.
The Company is organized based on the products and services it offers,
and classifies its business operations in segments for financial reporting purposes. As a result of the acquisitions of Plastique
and Fremont discussed in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
beginning in the second quarter of 2016 Management expanded the presentation of its reporting segments to include a fourth segment,
Technical Packaging. Prior period segment amounts have been reclassified to conform to the current period presentation.
The Company’s four segments, together with the significant
domestic and foreign operating subsidiaries within each segment during 2017, are as follows:
Filtration/Fluid Flow (Filtration):
PTI Technologies Inc. (PTI)
VACCO Industries (VACCO)
Crissair, Inc. (Crissair)
Westland Technologies, Inc. (Westland)
Mayday Manufacturing Co. (Mayday)
Hi-Tech Metals, Inc. (Hi-Tech)
RF Shielding and Test (Test):
ETS-Lindgren Inc.
Except as the context otherwise indicates, the term “ETS-Lindgren”
as used herein includes ETS-Lindgren Inc. and the Company’s other Test segment subsidiaries.
Utility Solutions Group (USG):
Doble Engineering Company
Morgan Schaffer Ltd. (Morgan Schaffer)
NRG Systems, Inc. (NRG)
Except as the context otherwise indicates, the term “Doble”
as used herein includes Doble Engineering Company and the Company’s USG subsidiaries other than Morgan Schaffer and NRG.
Technical Packaging:
Thermoform Engineered Quality LLC (TEQ)
Plastique Limited
Plastique Sp. z o.o.
Plastique Limited and Plastique Sp. z o.o. are referred
to together herein as “Plastique.”
The Company’s operating subsidiaries are engaged primarily
in the research, development, manufacture, sale and support of the products and systems described below. Their respective businesses
are subject to a number of risks and uncertainties, including without limitation those discussed in Item 1A, “Risk Factors.”
See also Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and
“Forward-Looking Information.”
ESCO is continually seeking ways to save costs, streamline its business
processes and enhance the branding of its products and services. In October 2015 the Company announced several restructuring and
realignment actions involving the Test and USG segments which were completed during 2016, including closing ETS-Lindgren’s
operating subsidiaries in Germany and the United Kingdom and consolidating their operations into other existing Test facilities;
eliminating certain underperforming product line offerings in Test primarily related to lower margin international shielding end
markets; reducing headcount in Test’s U.S. business; and closing Doble’s Brazil operating office and consolidating
Doble’s South American sales and support activities.
ESCO is also continually seeking opportunities to supplement
its growth by making strategic acquisitions. During 2017, the Company acquired Mayday, a leading manufacturer of
mission-critical bushings, pins, sleeves and precision-tolerance machined components for landing gear, rotor heads, engine
mounts, flight controls, and actuation systems for the aerospace and defense industries; Hi-Tech, a full-service metal
processor offering aerospace original equipment manufacturers (“OEMs”) and Tier 1 suppliers a large portfolio of
processing services including anodizing, cadmium and zinc-nickel plating, organic coatings, non-destructive testing, and heat
treatment; NRG, the global market leader in the design and manufacture of decision support tools for the renewable energy
industry, primarily wind; and the assets of Morgan Schaffer Inc., which designs, develops, manufactures and markets an
integrated offering of dissolved gas analysis, oil testing, and data management solutions which enhance the ability of
electric utilities to accurately monitor the health of critical power transformers. In August 2017, the Company acquired the
assets of Vanguard Instruments Company (Vanguard Instruments), a test equipment provider serving the global electric utility
market. More information about these 2017 acquisitions as well as the Company’s acquisition activity during 2016 and
2015 is provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and in Note 2 to the Consolidated Financial Statements included herein.
Products
The Company’s principal products are described below. See
Note 13 to the Consolidated Financial Statements included herein for financial information regarding business segments and 10%
customers.
Filtration
The Filtration segment accounted for approximately 41%, 36% and
37% of the Company’s total revenue in 2017, 2016 and 2015, respectively.
PTI is a leading supplier of filtration and fluid control products
serving the commercial aerospace, military aerospace and various industrial markets. Products include filter elements, manifolds,
assemblies, modules, indicators and other related components. All products must meet stringent qualification requirements and withstand
severe operating conditions. Product applications include: hydraulic, fuel, cooling and air filtration systems for fixed wing and
rotary aircraft, mobile transportation and construction equipment, aircraft engines and stationary plant equipment. PTI supplies
products worldwide to OEMs and the U.S. government under long term contracts, and to the commercial and military aftermarket through
distribution channels.
VACCO supplies filtration and fluid control products including valves,
manifolds, filters, regulators and various other components for use in the space, military aerospace, defense missile systems,
U.S. Navy and commercial industries. Applications include aircraft fuel and de-icing systems, missiles, satellite propulsion systems,
satellite launch vehicles and other space transportation systems such as the Space Launch System. VACCO also utilizes its multi-fab
technology and capabilities to produce products for use in space and U.S. Navy applications.
Crissair supplies a wide variety of custom and standard valves,
actuators, manifolds and other various components to the aerospace, defense, automotive and commercial industries. Product applications
include hydraulic, fuel and air filtration systems for commercial and military fixed wing and rotary aircraft, defense missile
systems and commercial engines. Crissair supplies products worldwide to OEMs and to the U.S. Government under long term contracts
and to the commercial aftermarket through distribution channels.
Westland is a leading designer and manufacturer of elastomeric-based
signature reduction solutions to enhance U.S. Navy maritime survivability. Westland’s products include complex tiles and
other shock and vibration dampening systems that reduce passive acoustic signatures and/or modify signal (radar, infrared, acoustical,
sonar) emission and reflection to reduce or obscure a vessel’s signature. Westland’s products are used on the majority
of the U.S. Naval fleet including submarines, surface ships and aircraft carriers.
Mayday is a manufacturer of mission-critical bushings, pins, sleeves
and precision-tolerance machined components for landing gear, rotor heads, engine mounts, flight controls, and actuation systems
for the aerospace and defense industry.
Hi-Tech is a full-service metal processor offering aerospace
OEM’s and Tier 1 suppliers a large portfolio of processing services including anodizing, cadmium and zinc-nickel
plating, organic coatings, non-destructive testing, and heat treatment. Its portfolio includes over 100 OEM processing
approvals.
Test
The Test segment accounted for approximately 23%, 28% and 33% of
the Company’s total revenue in 2017, 2016 and 2015, respectively.
ETS-Lindgren designs and manufactures products to measure and contain
magnetic, electromagnetic and acoustic energy. It supplies customers with a broad range of isolated environments and turnkey systems,
including RF test facilities, acoustic test enclosures, RF and magnetically shielded rooms, secure communication facilities, RF
measurement systems and broadcast and recording studios. Many of these facilities include proprietary features such as shielded
doors and windows. ETS-Lindgren also provides the design, program management, installation and integration services required to
successfully complete these types of facilities.
ETS-Lindgren also supplies customers with a broad range of components
including RF absorptive materials, RF filters, active compensation systems, antennas, antenna masts, turntables and electric and
magnetic probes, RF test cells, proprietary measurement software and other test accessories required to perform a variety of tests.
ETS-Lindgren offers a variety of services including calibration for antennas and field probes, chamber certification, field surveys,
customer training and a variety of product tests. ETS-Lindgren’s test labs are accredited by the following organizations:
American Association for Laboratory Accreditation, National Voluntary Laboratory Accreditation Program and CTIA-The Wireless Association
Accredited Test Lab. ETS-Lindgren serves the acoustics, medical, health and safety, electronics, wireless communications, automotive
and defense markets.
USG
The USG segment accounted for approximately 24%, 22% and 23% of
the Company’s total revenue in 2017, 2016 and 2015, respectively.
Doble develops, manufactures, and delivers diagnostic testing solutions
for electrical equipment comprising the electric power grid, and enterprise management systems, that are designed to optimize electrical
power assets and system performance, minimize risk and improve operations. It combines three core elements for customers –
diagnostic test and monitoring instruments, expert consulting, and testing services – and provides access to its large reserve
of related empirical knowledge. Doble flagship solutions include protection diagnostics with the Doble Protection Suite and F6000
series, the M4100 and new transformational patent-pending technology of the M7100 Doble Tester, the dobleARMS® asset risk management
system, and the Enoserv PowerBase® and DUCe compliance tools for the North American Electric Reliability Corporation Critical
Infrastructure Protection plan (NERC CIP), a set of requirements designed to secure the assets required for operating North America’s
bulk electric system. Doble has seven offices in the United States and nine international offices.
Morgan Schaffer designs, develops, manufactures and markets an integrated
offering of dissolved gas analysis, oil testing, and data management solutions which enhance the ability of electric utilities
to accurately monitor the health of critical power transformers.
NRG is the global market leader in the design and manufacture of
decision support tools for the renewable energy industry, primarily wind.
Technical Packaging
The Technical Packaging segment accounted for approximately 12%,
13% and 7% of the Company’s total revenue in 2017, 2016 and 2015, respectively. Prior to 2016 the Technical Packaging business
was included in the Filtration segment.
TEQ produces highly engineered thermoformed products and packaging
materials for medical, pharmaceutical, retail, food and electronic applications. Through its alliance partner program, TEQ also
provides its clients with a total packaging solution including engineering services and testing, sealing equipment and tooling,
contract manufacturing, and packing.
Plastique, with locations in the UK and Poland, designs and manufactures
plastic and pulp fibre packaging for customers in the personal care, household products, pharmaceutical, food and broader retail
markets. Through its Fibrepak brand, Plastique became the first European manufacturer of smooth-surfaced press-to-dry pulp packaging,
a sustainable alternative to plastic packaging.
Marketing and Sales
The Company’s products generally are distributed to customers
through a domestic and foreign network of distributors, sales representatives, direct sales teams and in-house sales personnel.
The Company’s sales to international customers accounted for
approximately $183 million (27%), $168 million (29%) and $152 million (28%) of the Company’s total revenue in 2017, 2016
and 2015, respectively. See Note 13 to the Consolidated Financial Statements included herein for financial information regarding
geographic areas. See also Item 1A, “Risk Factors,” for a discussion of risks of the Company’s international
operations.
Some of the Company’s products are sold directly or indirectly
to the U.S. Government under contracts with the Army, Navy and Air Force and subcontracts with prime contractors of such entities.
Direct and indirect sales to the U.S. Government, primarily related to the Filtration segment, accounted for approximately 20%,
14% and 15% of the Company’s total revenue in 2017, 2016 and 2015, respectively.
Intellectual Property
The Company owns or has other rights in various forms of intellectual
property (i.e., patents, trademarks, service marks, copyrights, mask works, trade secrets and other items). As a major supplier
of engineered products to industrial and commercial markets, the Company emphasizes developing intellectual property and protecting
its rights therein. However, the scope of protection afforded by intellectual property rights, including those of the Company,
is often uncertain and involves complex legal and factual issues. Some intellectual property rights, such as patents, have only
a limited term. Also, there can be no assurance that third parties will not infringe or design around the Company’s intellectual
property. Policing unauthorized use of intellectual property is difficult, and infringement and misappropriation are persistent
problems for many companies, particularly in some international markets. In addition, the Company may not elect to pursue an unauthorized
user due to the high costs and uncertainties associated with litigation. Further, there can be no assurance that courts will ultimately
hold issued patents or other intellectual property valid and enforceable. See Item 1A, “Risk Factors.”
A number of products in the Filtration segment are based on patented
or otherwise proprietary technology that sets them apart from the competition, such as VACCO’s proprietary quieting technology,
Westland’s signature reduction solutions, and Mayday’s and Hi-Tech’s business solutions software.
In the Test segment, patent protection has been sought for significant
inventions. Examples of such inventions include novel designs for window and door assemblies used in shielded enclosures and anechoic
chambers, improved acoustic techniques for sound isolation and a variety of unique antennas. In addition, the Test segment holds
a number of patents, and has patents pending, on products used to perform wireless device testing.
In the USG segment, the segment policy is to seek patent and/or
other forms of intellectual property protection on new and improved products, components of products and methods of operation for
its businesses, as such developments are made. Doble is pursuing patent protection on improvements to its line of diagnostic equipment
and NERC CIP compliance tools. Doble also holds an extensive library of apparatus performance information useful to Doble employees
and to entities that generate, distribute or consume electric energy. Doble makes part of this library available to registered
users via an Internet portal. NRG is pursuing patent protection on its upcoming line of bat deterrent systems, which are expected
to reduce bat mortality at windfarms.
The Technical Packaging segment emphasizes advanced manufacturing
technology and methods. For example, the TEQ 3-in-1 tooling system, with an added stacking tool, provides a competitive edge over
traditional thermoform tooling; and Plastique’s “Cure-In-The-Mold” technology produces high-quality, smooth-surface,
thin-wall packaging products which may be made from sustainable virgin crop fibers or virgin pulp. The segment’s intellectual
property consists chiefly of trade secrets and proprietary technology embodied in products for which the Company is the only approved
source, such as the TEQconnex
TM
and TEQethelyene
TM
single polymer sterile barrier medical packaging systems
for which TEQ owns the validation studies required to register the package with the FDA.
The Company considers its patents and other intellectual property
to be of significant value in each of its segments.
Backlog
Total Company backlog of firm orders at September 30, 2017 was $377.1
million, representing an increase of $50.9 million (16%) from the backlog of $326.2 million on September 30, 2016. The backlog
at September 30, 2017 and September 30, 2016, respectively, by segment, was: $203.1 million and $195.8 million for Filtration;
$114.8 million and $77.0 million for Test; $35.6 million and $33.7 million for USG; and $23.6 million and $19.7 million for Technical
Packaging. The Company estimates that as of September 30, 2017 domestic customers accounted for approximately 73% of the Company’s
total firm orders and international customers accounted for approximately 27%. Of the total Company backlog at September 30, 2017,
approximately 79% is expected to be completed in the fiscal year ending September 30, 2018.
Purchased Components and Raw Materials
The Company’s products require a wide variety of components
and materials. Although the Company has multiple sources of supply for most of its materials requirements, certain components and
raw materials are supplied by sole source vendors, and the Company’s ability to perform certain contracts depends on their
performance. In the past, these required raw materials and various purchased components generally have been available in sufficient
quantities. However, the Company does have some risk of shortages of materials or components due to reliance on sole or limited
sources of supply. See Item 1A, “Risk Factors.”
The Filtration segment purchases supplies from a wide array of
vendors. In most instances, multiple vendors of raw materials are screened during a qualification process to ensure that
there will not be an interruption of supply should one of them underperform or discontinue operations. Nonetheless, in some
situations, there is a risk of shortages due to reliance on a limited number of suppliers or because of price fluctuations
due to the nature of the raw materials. For example, aerospace-grade titanium and gaseous helium, important raw materials for
our Filtration segment subsidiaries, may at times be in short supply.
The Test segment is a vertically integrated supplier of electro-magnetic
(EM) shielding and RF absorbing products, producing most of its critical RF components. This segment purchases significant quantities
of raw materials such as polyurethane foam, polystyrene beads, steel, aluminum, copper, nickel and wood. Accordingly, it is subject
to price fluctuations in the worldwide raw materials markets, although ETS-Lindgren has long-term contracts with a number of its
suppliers of certain raw materials.
The USG segment manufactures electronic instrumentation through
a network of regional contract manufacturers under long term contracts. In general, USG purchases the same kinds of component parts
as do other electronic products manufacturers, and purchases only a limited amount of raw materials.
The Technical Packaging segment selects suppliers initially on the
basis of their ability to meet requirements, and then conducts ongoing evaluations and ratings of the supplier’s performance
based on a documented evaluation process. The segment purchases raw materials according to a documented and controlled process
assuring that purchased materials meet defined specifications. Thermoplastics represent the largest percentage of raw material
spend, with purchase prices subject to fluctuation depending on petrochemical industry pricing and capacity in the plastic resin
market.
Competition
Competition in the Company’s major markets is broadly based
and global in scope. Competition can be particularly intense during periods of economic slowdown, and this has been experienced
in some of our markets. Although the Company is a leading supplier in several of the markets it serves, it maintains a relatively
small share of the business in many of the other markets it serves. Individual competitors range in size from annual revenues of
less than $1 million to billion-dollar enterprises. Because of the specialized nature of the Company’s products, its competitive
position with respect to its products cannot be precisely stated. In the Company’s major served markets, competition is driven
primarily by quality, technology, price and delivery performance. See also Item 1A, “Risk Factors.”
Primary competitors of the Filtration segment include Pall Corporation,
Moog, Inc., Sofrance, CLARCOR Inc., PneuDraulics, Marotta Controls and Parker Hannifin.
The Test segment is a global leader in EM shielding. Significant
competitors in this market include Rohde & Schwarz GMBH, Microwave Vision SA (MVG), TDK RF Solutions Inc., Albatross GmbH,
IMEDCO AG and Cuming Microwave Corporation.
S
ignificant competitors of the USG segment include OMICRON
electronics Corp., Megger Group Limited, Vaisala and Qualitrol Company LLC (a subsidiary of Danaher Corporation).
Significant Competitors of the Technical Packaging segment include
Nelipak Corporation, Prent Corporation, Placon Corporation and Sonoco /Alloyd.
Research and Development
Research and development and the Company’s technological expertise
are important factors in the Company’s business. Research and development programs are designed to develop technology for
new products or to extend or upgrade the capability of existing products, and to enhance their commercial potential. The Company
performs research and development at its own expense, and also engages in research and development funded by customers.
Total Company-sponsored research and development expenses were
approximately $15.5 million, $12.9 million and $16.7 million for 2017, 2016 and 2015, respectively. In addition, the Company
spent approximately $8.3 million, $7.0 million and $6.8 million on customer-sponsored research and development in 2017, 2016
and 2015, respectively, all of which was fully or substantially reimbursed. These amounts exclude certain engineering
costs primarily associated with product line extensions, modifications and maintenance, which amounted to approximately
$10.4 million, $8.2 million and $8.2 million for 2017, 2016 and 2015, respectively.
Environmental Matters
The Company is involved in various stages of investigation and cleanup
relating to environmental matters. It is very difficult to estimate the potential costs of such matters and the possible impact
of these costs on the Company at this time due in part to: the uncertainty regarding the extent of pollution; the complexity and
changing nature of Government laws and regulations and their interpretations; the varying costs and effectiveness of alternative
cleanup technologies and methods; the uncertain level of insurance or other types of cost recovery; the uncertain level of the
Company’s responsibility for any contamination; the possibility of joint and several liability with other contributors under
applicable law; and the ability of other contributors to make required contributions toward cleanup costs. Based on information
currently available, the Company does not believe that the aggregate costs involved in the resolution of any of its environmental
matters will have a material adverse effect on the Company’s financial condition or results of operations.
Government Contracts
The Company contracts with the U.S. Government and subcontracts
with prime contractors of the U.S. Government. Although VACCO and Westland have a number of “cost-plus” Government
contracts, the Company’s Government contracts also include firm fixed-price contracts under which work is performed and paid
for at a fixed amount without adjustment for the actual costs experienced in connection with the contracts. All Government prime
contracts and virtually all of the Company’s Government subcontracts provide that they may be terminated at the convenience
of the Government or the customer. Upon such termination, the Company is normally entitled to receive equitable compensation from
the customer. See “Marketing and Sales” in this Item 1, and Item 1A, “Risk Factors,” for additional information
regarding Government contracts and related risks.
Discontinued Operations
During 2014, the Company sold that portion of the Company’s
USG segment represented by Aclara Technologies LLC and two related entities (together, Aclara), a leading supplier of data communications
systems and related software used by electric, gas and water utilities in support of their advanced metering infrastructure deployments,
typically encompassing the utility’s entire service area. Aclara’s largest contracts, such as those with Pacific Gas & Electric Company and Southern California Gas Co., each involve several million end points. However, the purchase price was
not finally determined until 2015. Prior to the sale Aclara constituted a component of the Company with operations and cash flows
that were clearly distinguishable, operationally and for financial reporting purposes, from the rest of the entity. Accordingly,
for financial reporting purposes Aclara is reflected for 2015 as discontinued operations. Unless otherwise specifically stated,
all operating results presented in this report are exclusive of discontinued operations.
Employees
As of September 30, 2017, the Company employed 3,254 persons, including
3,029 full time employees. Of the Company’s full-time employees, 2,352 were located in the United States and 677 were located
in 17 foreign countries.
Financing
For information about the Company’s credit facility, see Item
7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations
–
Bank Credit Facility,” and Note 8 to the Consolidated Financial Statements included herein, which are incorporated into this
Item by reference.
Additional Information
The information set forth in Item 1A, “Risk
Factors,” is incorporated in this Item by reference.
The Company makes available free of charge on or through its website,
www.escotechnologies.com
, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended,
as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange
Commission. Information contained on the Company’s website is not incorporated into this Report.
Executive Officers of the Registrant
The following sets forth certain information as of November 1, 2017
with respect to the Company’s executive officers. These officers are elected annually to terms which expire at the first
meeting of the Board of Directors after the next Annual Meeting of Stockholders.
Name
|
|
Age
|
|
Position(s)
|
Victor L. Richey
|
|
60
|
|
Chairman of the Board of Directors and Chief Executive Officer since April 2003; President since October 2006 *
|
|
|
|
|
|
Gary E. Muenster
|
|
57
|
|
Executive Vice President and Chief Financial Officer since February 2008; Director since February 2011
|
|
|
|
|
|
Alyson S. Barclay
|
|
58
|
|
Senior Vice President, Secretary and General Counsel since November 2008
|
* Mr. Richey also serves as Chairman
of the Executive Committee of the Board of Directors.
There are no family relationships among any of the executive officers
and directors.
Item 1A. Risk Factors
This Form 10-K, including Item 1, “Business,” Item 2,
“Properties,” Item 3, “Legal Proceedings,” Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and Item 7A, “Quantitative and Qualitative Disclosures About Market
Risk,” contains “forward-looking statements” within the meaning of the safe harbor provisions of the federal
securities laws, as described under “Forward-Looking Statements” above.
In addition to the risks and uncertainties discussed in that section
and elsewhere in this Form 10-K, the following important risk factors could cause actual results and events to differ materially
from those contained in any forward-looking statements, or could otherwise adversely affect the Company’s business, operating
results or financial condition:
Our sales of products to the Government depend upon continued
Government funding.
Sales to the U.S. Government and its prime contractors and subcontractors
represent a significant portion of our business. Over the past three fiscal years, from 14% to 20% of our revenues from continuing
operations have been generated from sales to the U.S. Government or its contractors, primarily within our Filtration segment. These
sales are dependent on government funding of the underlying programs, which is generally subject to annual Congressional appropriations.
There could be reductions or terminations of, or delays in, the government funding on programs which apply to us or our customers.
These funding effects could adversely affect our sales and profit, and could bring about a restructuring of our operations, which
could result in an adverse effect on our financial condition or results of operations. A significant part of VACCO’s and
Westland’s sales involve major U.S. Government programs such as NASA’s Space Launch System (SLS) and the U.S. Navy’s
submarine program. A reduction or delay in Government spending on these programs could have a significant adverse impact on our
financial results which could extend for more than a single year.
Negative worldwide economic conditions and related credit
shortages could result in a decrease in our sales and an increase in our operating costs, which could adversely affect our business
and operating results.
If there is a worsening of global and U.S. economic and financial
market conditions and additional tightening of global credit markets, many of our customers may further delay or reduce their purchases
of our products. During 2016, the government of Saudi Arabia announced several austerity programs which may impact future business
in that country; although their impact is still unknown it could be significant and could adversely affect future extensions of
Doble’s current multi-year project there involving the national power grid. Uncertainties in the global economy may cause
the utility industry and commercial market customers to experience shortages in available credit, which could limit capital spending.
To the extent this problem affects our customers, our sales and profits could be adversely affected. Likewise,
if our suppliers face challenges in obtaining credit, they may have to increase their prices or become unable to continue to offer
the products and services we use to manufacture our products, which could have an adverse effect on our business, results of operations
and financial condition.
Our quarterly results may fluctuate substantially.
We have experienced variability in quarterly results and believe
our quarterly results will continue to fluctuate as a result of many factors, including the size and timing of customer orders,
governmental approvals and funding levels, changes in existing taxation rules or practices, the gain or loss of significant customers,
timing and levels of new product developments, shifts in product or sales channel mix, increased competition and pricing pressure,
and general economic conditions.
A significant part of our manufacturing operations depends
on a small number of third-party suppliers.
A significant part of our manufacturing operations relies on a small
number of third-party manufacturers to supply component parts or products. For example, Doble has arrangements with four manufacturers
which produce and supply substantially all of its end-products. One of these suppliers produces more than 50% of Doble’s
products from a single location within the United States. A significant disruption in the supply of those products could negatively
affect the timely delivery of products to customers as well as future sales, which could increase costs and reduce margins.
Certain of our other businesses are dependent upon sole source or
a limited number of third-party manufacturers of parts and components. Many of these suppliers are small businesses. Since alternative
supply sources are limited, there is an increased risk of adverse impacts on our production schedules and profits if our suppliers
were to default in fulfilling their price, quality or delivery obligations. In addition, some of our customers or potential customers
may prefer to purchase from a supplier which does not have such a limited number of sources of supply.
Increases in prices of raw material and components, and decreased
availability of such items, could adversely affect our business.
The cost of raw materials and product components is a major element
of the total cost of many of our products. For example, our Test segment’s critical components rely on purchases of raw materials
from third parties. Increases in the prices of raw materials (such as steel, copper, nickel, zinc, wood and petrochemical products)
could have an adverse impact on our business by, among other things, increasing costs and reducing margins. Aerospace-grade titanium
and gaseous helium, important raw materials for our Filtration segment, may at times be in short supply. Further, many of Doble’s
items of equipment which are provided to its customers for their use are in the maturity of their life cycles, which creates the
risk that replacement components may be unavailable or available only at increased costs.
In addition, our reliance on sole or limited sources of supply of
raw materials and components in each of our segments could adversely affect our business, as described in the preceding Risk Factor.
Weather-created disruptions in supply, in addition to affecting costs, could impact our ability to procure an adequate supply of
these raw materials and components, and delay or prevent deliveries of products to our customers.
Our international operations expose us to fluctuations in
currency exchange rates that could adversely affect our results of operations and cash flows.
We have significant manufacturing and sales activities in foreign
countries, and our domestic operations have sales to foreign customers. Our financial results may be affected by fluctuations in
foreign currencies and by the translation of the financial statements of our foreign subsidiaries from local currencies into U.S.
dollars. In addition, a rise in the dollar against foreign currencies could make our products more expensive for foreign customers
and cause them to reduce the volume of their purchases.
Failure or delay in new product development could reduce our
future sales.
Much of our business is dependent on the continuous development
of new products and technologies to meet the changing needs of our markets on a cost-effective basis. Many of these markets are
highly technical from an engineering standpoint, and the relevant technologies are subject to rapid change. If we fail to timely
enhance existing products or develop new products as needed to meet market or competitive demands, we could lose sales opportunities,
which would adversely affect our business. In addition, in some existing contracts with customers, we have made commitments to
develop and deliver new products. If we fail to meet these commitments, the default could result in the imposition on us of contractual
penalties including termination. Our inability to enhance existing products in a timely manner could make our products less competitive,
while our inability to successfully develop new products may limit our growth opportunities. Development of new products and product
enhancements may also require us to make greater investments in research and development than we now do, and the increased costs
associated with new product development and product enhancements could adversely affect our operating results. In addition, our
costs of new product development may not be recoverable if demand for our products is not as great as we anticipate it to be.
Changes in testing standards could adversely impact our Test
and USG segments’ sales.
A significant portion of the business of our Test and USG segments
involves sales to technology customers who need to have a third party verify that their products meet specific international and
domestic test standards. If regulatory agencies were to eliminate or reduce certain domestic or international test standards, or
if demand for product testing from these customers were to decrease for some other reason, our sales could be adversely affected.
For example, if Wi-Fi technology in mobile phones were to be superseded by a new communications technology, then there might be
no need for certain testing on mobile phones; or if a regulatory authority were to relax the test standards for certain electronic
devices because they were determined not to interfere with the broadcast spectrum, our sales of certain testing products could
be significantly reduced.
The end of customer product life cycles could negatively affect
our Filtration segment’s results.
Many of our Filtration segment products are sold to be components
in our customers’ end-products. If a customer discontinues a certain end-product line, our ability to continue to sell those
components will be reduced or eliminated. The result could be a significant decrease in our sales. For example, a substantial portion
of PTI’s revenue is generated from commercial aviation aftermarket sales. As certain aircraft are retired and replaced by
newer aircraft, there could be a corresponding decrease in sales associated with our current products. Such a decrease could adversely
affect our operating results.
Product defects could result in costly fixes, litigation and
damages.
Our business exposes us to potential product liability risks that
are inherent in the design, manufacture and sale of our products and the products of third-party vendors which we use or resell.
If there are claims related to defective products (under warranty or otherwise), particularly in a product recall situation, we
could be faced with significant expenses in replacing or repairing the product. For example, the Filtration segment obtains raw
materials, machined parts and other product components from suppliers who provide certifications of quality which we rely on. Should
these product components be defective and pass undetected into finished products, or should a finished product contain a defect,
we could incur significant costs for repairs, re-work and/or removal and replacement of the defective product. In addition, if
a dispute over product claims cannot be settled, arbitration or litigation may result, requiring us to incur attorneys’ fees
and exposing us to the potential of damage awards against us.
We may not be able to identify suitable acquisition candidates
or complete acquisitions successfully, which may inhibit our rate of growth.
As part of
our growth strategy, we plan to continue to pursue acquisitions of other companies, assets and product lines that either complement
or expand our existing business. However, we may be unable to implement this strategy if we are unable to identify suitable acquisition
candidates or consummate future acquisitions at acceptable prices and terms. We expect to face competition for acquisition candidates
which may limit the number of acquisition opportunities available to us and may result in higher acquisition prices. As a result,
we may be limited in the number of acquisitions which we are able to complete and we may face difficulties in achieving the profitability
or cash flows needed to justify our investment in them.
Our acquisitions of other companies carry risk.
Acquisitions of other companies involve numerous risks, including
difficulties in the integration of the operations, technologies and products of the acquired companies, the potential exposure
to unanticipated and undisclosed liabilities, the potential that expected benefits or synergies are not realized and that operating
costs increase, the potential loss of key personnel, suppliers or customers of acquired businesses and the diversion of Management’s
time and attention from other business concerns. Although we attempt to identify and evaluate the risks inherent in any acquisition,
we may not properly ascertain or mitigate all such risks, and our failure to do so could have a material adverse effect on our
business.
We may incur significant costs, experience short term inefficiencies,
or be unable to realize expected long term savings from facility consolidations and other business reorganizations.
We periodically assess the cost and operational structure of our
facilities in order to manufacture and sell our products in the most efficient manner, and based on these assessments, we may from
time to time reorganize, relocate or consolidate certain of our facilities. These actions may require us to incur significant costs
and may result in short term business inefficiencies as we consolidate and close facilities and transition our employees; and in
addition, we may not achieve the expected long term benefits. Any or all of these factors could result in an adverse impact on
our operating results, cash flows and financial condition.
The trading price of our common stock continues to be volatile
and may result in investors selling shares of our common stock at a loss.
The trading price of our common stock is volatile and subject to
wide fluctuations in price in response to various factors, many of which are beyond our control, including those described in this
section and including but not limited to: actual or anticipated variations in our quarterly operating results; changes in financial
estimates by securities analysts that cover our stock or our failure to meet those estimates; substantial sales of our common stock
by our existing shareholders; and general stock market conditions. In recent years the stock markets in general have experienced
dramatic price and volume fluctuations, which may continue indefinitely, and changes in industry, general economic or market conditions
could harm the price of our stock regardless of our operating performance.
The Company has guaranteed certain Aclara contracts.
In the normal course of business during the time that Aclara was
our subsidiary, we agreed to provide guarantees of Aclara’s performance under certain real property leases, certain vendor
contacts, and certain large, long-term customer contracts for the delivery, deployment and performance of AMI systems such as those
described under “Discontinued Operations” in Item 1. In connection with the sale of Aclara, we agreed to remain a guarantor
of Aclara’s performance of these contracts. If Aclara were to fail to perform any of these guaranteed contracts, the other
party to the contract could seek damages from us resulting from the non-performance, and if we were determined to be liable for
these damages they could have a material adverse effect on our business, operating results or financial condition. Although we
would be entitled to seek indemnification from Aclara for these damages, our ability to recover would be subject to Aclara’s
financial position at that time.
We may not realize as revenue the full amounts reflected in
our backlog.
As of September 30, 2017 our twelve-month backlog was approximately
$299 million, which represents confirmed orders we believe will be recognized as revenue within the next twelve months. There can
be no assurance that our customers will purchase all the orders represented in our backlog, particularly as to contracts which
are subject to the U.S. Government’s ability to modify or terminate major programs or contracts, and if and to the extent
that this occurs, our future revenues could be materially reduced.
Economic, political and other risks of our international operations,
including terrorist activities, could adversely affect our business.
In 2017, approximately 27% of our net sales were to customers outside
the United States. An economic downturn or an adverse change in the political situation in certain foreign countries in which we
do business could cause a decline in revenues and adversely affect our financial condition. For example, our Test segment does
significant business in Asia, and changes in the Asian political climate or political changes in specific Asian countries could
negatively affect our business; several of our subsidiaries are based in Europe and could be negatively impacted by weakness in
the European economy; Doble’s and Plastique’s UK-based businesses could be adversely affected by Brexit; and Doble’s
future business in Saudi Arabia as well as elsewhere in the Middle East could be adversely affected by government austerity programs,
continuing political unrest, wars and terrorism in the region.
Our international sales are also subject to other risks inherent
in foreign commerce, including currency fluctuations and devaluations, differences in foreign laws, uncertainties as to enforcement
of contract rights, and difficulties in negotiating and resolving disputes with our foreign customers.
Our governmental sales and our international and export operations
are subject to special U.S. and foreign government laws and regulations which may impose significant compliance costs, create reputational
and legal risk, and impair our ability to compete in international markets.
The international scope of our operations subjects us to a complex
system of commercial and trade regulations around the world, and our foreign operations are governed by laws and business practices
that often differ from those of the U.S. In addition, laws such as the U.S. Foreign Corrupt Practices Act and similar laws in other
countries increase the need for us to manage the risks of improper conduct not only by our own employees but by distributors and
contractors who may not be within our direct control. Many of our exports are of products which are subject to U.S. Government
regulations and controls such as the U.S. International Traffic in Arms Regulations (ITAR), which impose certain restrictions on
the U.S. export of defense articles and services, and these restrictions are subject to change from time to time, including changes
in the countries into which our products may lawfully be sold.
If we were to fail to comply with these laws and regulations we
could be subject to significant fines, penalties and other sanctions including the inability to continue to export our products
or to sell our products to the U.S. Government or to certain other customers. In addition, some of these regulations may be viewed
as too restrictive by our international customers, who may elect to develop their own domestic products or procure products from
other international suppliers which are not subject to comparable export restrictions; and the laws, regulations or policies of
certain other countries may also favor their own domestic suppliers over foreign suppliers such as the Company.
Despite our efforts, we may be unable to adequately protect
our intellectual property.
Much of our business success depends on our ability to protect and
freely utilize our various intellectual properties, including both patents and trade secrets. Despite our efforts to protect our
intellectual property, unauthorized parties or competitors may copy or otherwise obtain and use our products and technology, particularly
in foreign countries such as China where the laws may not protect our proprietary rights as fully as in the United States. Our
current and future actions to enforce our proprietary rights may ultimately not be successful; or in some cases we may not elect
to pursue an unauthorized user due to the high costs and uncertainties associated with litigation. We may also face exposure to
claims by others challenging our intellectual property rights. Any or all of these actions may divert our resources and cause us
to incur substantial costs.
Disputes with contractors could adversely affect our Test
segment’s results.
A major portion of our Test segment’s business involves working
in conjunction with general contractors to produce complex building components constructed on-site, such as electronic test chambers,
secure communication rooms and MRI facilities. If there are performance problems caused by either us or a contractor, they could
result in cost overruns and may lead to a dispute as to which party is responsible. The resolution of such disputes can involve
arbitration or litigation, and can cause us to incur significant expense including attorneys’ fees. In addition, these disputes
could result in a reduction in revenue, a loss on a particular project, or even a significant damages award against us.
Environmental or regulatory requirements could increase our
expenses and adversely affect our profitability.
Our operations and properties are subject to U.S. and foreign environmental
laws and regulations governing, among other things, the generation, storage, emission, discharge, transportation, treatment and
disposal of hazardous materials and the clean-up of contaminated properties. These regulations, and changes to them, could increase
our cost of compliance, and our failure to comply could result in the imposition of significant fines, suspension of production,
alteration of product processes, cessation of operations or other actions which could materially and adversely affect our business,
financial condition and results of operations.
We are currently involved as a responsible party in several ongoing
investigations and remediations of contaminated third-party owned properties. In addition, environmental contamination may be discovered
in the future on properties which we formerly owned or operated and for which we could be legally responsible. Future costs associated
with these situations, including ones which may be currently unknown to us, are difficult to quantify but could have a significant
effect on our financial condition. See Item 1, “Business
–
Environmental Matters” for a discussion of these factors.
We are or may become subject to legal proceedings that could
adversely impact our operating results.
We are, and will likely be in the future, a party to a number of
legal proceedings and claims involving a variety of matters, including environmental matters such as those described in the preceding
risk factor and disputes over the ownership or use of intellectual property. Given the uncertainties inherent in litigation, including
but not limited to the possible discovery of facts adverse to our position, adverse rulings by a court or adverse decisions by
a jury, it is possible that such proceedings could result in a liability that we may have not adequately reserved for, that may
not be adequately covered by insurance, or that may otherwise have a material adverse effect on our financial condition or results
of operations.
The loss of specialized key employees could affect our performance
and revenues.
There is a risk of our losing key employees having engineering and
technical expertise to other employers. For example, our USG segment relies heavily on engineers with significant experience and
reputation in the utility industry to furnish expert consulting services and support to customers. There is a current trend of
a shortage of these qualified engineers because of hiring competition from other companies in the industry. Loss of these employees
to other employers could reduce the segment’s ability to provide services and negatively affect our revenues.
Our decentralized organizational structure presents certain
risks.
We are a relatively decentralized company in comparison with some
of our peers. This decentralization necessarily places significant control and decision-making powers in the hands of local management,
which present various risks, including the risk that we may be slower or less able to identify or react to problems affecting a
key business than we would in a more centralized management environment. We may also be slower to detect or react to compliance
related problems (such as an employee undertaking activities prohibited by applicable law or by our internal policies), and Company-wide
business initiatives may be more challenging and costly to implement, and the risks of noncompliance or failures higher, than they
would be under a more centralized management structure. Depending on the nature of the problem or initiative in question, such
noncompliance or failure could materially adversely affect our business, financial condition or result of operations.
Provisions in our articles of incorporation, bylaws and Missouri
law could make it more difficult for a third party to acquire us and could discourage acquisition bids or a change of control,
and could adversely affect the market price of our common stock.
Our articles of incorporation and bylaws contain certain provisions
which could discourage potential hostile takeover attempts, including: a limitation on the shareholders’ ability to call
special meetings of shareholders; advance notice requirements to nominate candidates for election as directors or to propose matters
for action at a meeting of shareholders; a classified board of directors, which means that approximately one-third of our directors
are elected each year; and the authority of our board of directors to issue, without shareholder approval, preferred stock with
such terms as the board may determine. In addition, the laws of Missouri, in which we are incorporated, require a two-thirds vote
of outstanding shares to approve mergers or certain other major corporate transactions, rather than a simple majority as in some
other states such as Delaware. These provisions could impede a merger or other change of control not approved by our board of directors,
which could discourage takeover attempts and in some circumstances reduce the market price of our common stock.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The Company believes its buildings, machinery and equipment have
been generally well maintained, are in good operating condition and are adequate for the Company’s current production requirements
and other needs.
The Company’s principal manufacturing facilities and other
materially important properties, including those described in the table below, comprise approximately 1,644,000 square feet of
floor space, of which approximately 888,000 square feet are owned and approximately 756,000 square feet are leased. Leased facilities
of less than 10,000 square feet are not included in the table. See also Notes 14 and 15 to the Consolidated Financial Statements
included herein.
Location
|
|
Approx.
Sq. Ft.
|
|
Owned / Leased (with
Expiration Date)
|
|
Principal Use(s)
|
|
Operating
Segment
|
Modesto, CA
|
|
181,500
|
|
Leased (9/30/2023)
|
|
Manufacturing, Office, Engineering
|
|
Filtration
|
|
|
|
|
|
|
|
|
|
Denton, TX
|
|
145,000
|
|
Leased (9/30/2029, plus options)
|
|
Manufacturing, Warehouse, Office, Engineering
|
|
Filtration
|
|
|
|
|
|
|
|
|
|
Cedar Park, TX
|
|
130,000
|
|
Owned
|
|
Manufacturing, Warehouse, Office, Engineering
|
|
Test
|
|
|
|
|
|
|
|
|
|
Oxnard, CA
|
|
127,400
|
|
Owned
|
|
Manufacturing, Warehouse, Office, Engineering
|
|
Filtration
|
|
|
|
|
|
|
|
|
|
South El Monte, CA
|
|
100,100
|
|
Owned
|
|
Manufacturing, Warehouse, Office, Engineering
|
|
Filtration
|
|
|
|
|
|
|
|
|
|
Durant, OK
|
|
100,000
|
|
Owned
|
|
Manufacturing, Warehouse, Office, Engineering
|
|
Test
|
|
|
|
|
|
|
|
|
|
Huntley, IL
|
|
86,000
|
|
Owned
|
|
Manufacturing, Warehouse, Office, Engineering
|
|
Technical Packaging
|
|
|
|
|
|
|
|
|
|
Watertown, MA
|
|
82,100
|
|
Owned
|
|
Manufacturing, Office, Engineering
|
|
USG
|
|
|
|
|
|
|
|
|
|
Valencia, CA
|
|
79,300
|
|
Owned
|
|
Manufacturing, Office, Engineering
|
|
Filtration
|
|
|
|
|
|
|
|
|
|
Hinesburg, VT
|
|
77,000
|
|
Leased (5/31/2029)
|
|
Manufacturing, Warehouse, Office, Engineering
|
|
USG
|
|
|
|
|
|
|
|
|
|
South El Monte, CA
|
|
64,200
|
|
Leased (6/30/2019 & 6/30/2022)
|
|
Manufacturing, Warehouse, Office
|
|
Filtration
|
|
|
|
|
|
|
|
|
|
Eura, Finland
|
|
41,500
|
|
Owned
|
|
Manufacturing, Warehouse, Office, Engineering
|
|
Test
|
|
|
|
|
|
|
|
|
|
Fremont, IN
|
|
39,800
|
|
Owned
|
|
Manufacturing, Warehouse, Office, Engineering
|
|
Technical Packaging
|
|
|
|
|
|
|
|
|
|
Beijing, China
|
|
33,300
|
|
Leased (12/31/2019)
|
|
Manufacturing, Engineering
|
|
Test
|
|
|
|
|
|
|
|
|
|
Minocqua, WI
|
|
35,400
|
|
Owned
|
|
Manufacturing, Office, Engineering
|
|
Test
|
|
|
|
|
|
|
|
|
|
LaSalle (Montreal), Quebec
|
|
35,200
|
|
Leased (8/31/2021)
|
|
Manufacturing, Office, Engineering
|
|
USG
|
|
|
|
|
|
|
|
|
|
Dabrowa, Poland
|
|
34,000
|
|
Owned
|
|
Manufacturing, Office, Engineering
|
|
Technical Packaging
|
|
|
|
|
|
|
|
|
|
Poznan, Poland
|
|
32,000
|
|
Owned
|
|
Manufacturing, Office, Engineering
|
|
Technical Packaging
|
|
|
|
|
|
|
|
|
|
Ontario, CA
|
|
26,900
|
|
Leased (8/29/2020)
|
|
Manufacturing, Office, Engineering
|
|
USG
|
|
|
|
|
|
|
|
|
|
Nottingham, England
|
|
23,900
|
|
Leased (7/31/2019)
|
|
Manufacturing, Office, Engineering
|
|
Technical Packaging
|
|
|
|
|
|
|
|
|
|
St. Louis, MO
|
|
21,500
|
|
Leased (8/31/2020 plus options)
|
|
ESCO Corporate Office
|
|
Corporate
|
|
|
|
|
|
|
|
|
|
Tunbridge Wells, England
|
|
14,400
|
|
Leased (7/31/2019)
|
|
Manufacturing, Office
|
|
Technical Packaging
|
|
|
|
|
|
|
|
|
|
Morrisville, NC
|
|
11,600
|
|
Leased (8/31/2019)
|
|
Office, Manufacturing
|
|
USG
|
|
|
|
|
|
|
|
|
|
Huntley, IL
|
|
11,500
|
|
Leased (12/31/2018)
|
|
Manufacturing
|
|
Filtration
|
|
|
|
|
|
|
|
|
|
Marlborough, MA
|
|
11,200
|
|
Leased (6/30/2020)
|
|
Office, Engineering
|
|
USG
|
|
|
|
|
|
|
|
|
|
Wood Dale, IL
|
|
10,700
|
|
Leased (3/31/2019)
|
|
Office
|
|
Test
|
Item 3. Legal Proceedings
As a normal incident of the businesses in which the Company is
engaged, various claims, charges and litigation are asserted or commenced from time to time against the Company. With respect
to claims and litigation currently asserted or commenced against the Company, it is the opinion of Management that final
judgments, if any, which might be rendered against the Company are adequately reserved for, are covered by insurance, or are
not likely to have a material adverse effect on the Company’s financial condition or results of operations.
Nevertheless, given the uncertainties of litigation, it is possible that such claims, charges and litigation could have a
material adverse impact on the Company; see Item 1A, “Risk Factors.”
Item 4. Mine Safety Disclosures
Not applicable.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Summary of Significant Accounting Policies
|
|
A.
|
Principles of Consolidation
|
The Consolidated Financial Statements include the accounts of ESCO
Technologies Inc. (ESCO) and its wholly owned subsidiaries (the Company). All significant intercompany transactions and accounts
have been eliminated in consolidation.
The Company’s fiscal year ends September 30. Throughout these
Consolidated Financial Statements, unless the context indicates otherwise, references to a year (for example 2017) refer to the
Company’s fiscal year ending on September 30 of that year. Certain prior period amounts have been reclassified to conform
to the current period presentation.
The Company
accounts for shipping and handling costs on a gross basis and they are included in net sales. The Company accounts for taxes collected
from customers and remitted to governmental authorities on a net basis and they are excluded from net sales.
Aclara is reflected as discontinued operations in the consolidated
financial statements and related notes for fiscal 2015, in accordance with accounting principles generally accepted in the United
States of America (GAAP).
The Company is organized based on the products and services it offers,
and classifies its business operations in segments for financial reporting purposes. Under the current organization structure,
the Company has four segments for financial reporting purposes: Filtration/Fluid Flow (Filtration), RF Shielding and Test (Test),
Utility Solutions Group (USG) and Technical Packaging.
Filtration:
The companies within this segment primarily design and manufacture specialty filtration products including hydraulic filter elements
and fluid control devices used in commercial aerospace applications, unique filter mechanisms used in micro-propulsion devices
for satellites, custom designed filters for manned aircraft and submarines, elastomeric-based signature reduction solutions to
enhance U.S. Navy maritime survivability, precision-tolerance machined components for the aerospace and defense industry, and metal
processing services.
Test:
ETS-Lindgren Inc. provides its customers with the ability to identify, measure and contain magnetic, electromagnetic and acoustic
energy.
USG:
The companies within this segment provide high-end, intelligent, diagnostic test and data management solutions for the electric
power delivery industry, and decision support tools for the renewable energy industry, primarily wind.
Technical Packaging:
The companies within this segment provide innovative solutions to the medical and commercial
markets for thermoformed and precision molded pulp fiber packages and specialty products using a wide variety of thin gauge plastics
and pulp.
The preparation of financial statements in conformity with GAAP
requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual results
could differ from those estimates.
Filtration:
Within the Filtration segment, approximately 86% of revenues (approximately 36% of consolidated revenues) are recognized when products
are delivered (when title and risk of ownership transfers) or when services are performed for unaffiliated customers.
Approximately 14% of the segment’s revenues (approximately 6% of
consolidated revenues) are recorded under the percentage-of-completion method. The majority of these contracts are
cost-reimbursable contracts which provide for the payment of allowable costs incurred during the performance of the contract
plus an incentive fee. The remainder of the contracts are fixed-price contracts. Products accounted for under this guidance
include the design, development and manufacture of complex fluid control products, quiet valves, manifolds and systems
primarily for the aerospace and military markets. For fixed-price contracts that are accounted for under this guidance, the
Company estimates profit as the difference between total estimated revenue and total estimated cost of a contract and
recognizes these revenues and costs based on units delivered. The percentage-of-completion method of accounting involves the
use of various techniques to estimate expected costs at completion. These estimates are based on Management’s judgment
and the Company’s substantial experience in developing these types of estimates.
Test:
Within the Test segment, approximately 30% of revenues (approximately 7% of consolidated revenues) are recognized when products
are delivered (when title and risk of ownership transfers) or when services are performed for unaffiliated customers.
Approximately 70% of the segment’s revenues (approximately
16% of consolidated revenues) are recorded under the percentage-of-completion method due to the complex nature of the enclosures
that are designed and produced under these contracts. Products accounted for under this guidance include the construction and installation
of complex test chambers to a buyer’s specifications that provide its customers with the ability to measure and contain magnetic,
electromagnetic and acoustic energy. As discussed above, for arrangements that are accounted for under this guidance, the Company
estimates profit as the difference between total estimated revenue and total estimated cost of a contract and recognizes these
revenues and costs based primarily on contract milestones. The percentage-of-completion method of accounting involves the use of
various techniques to estimate expected costs at completion. These estimates are based on Management’s judgment and the Company’s
substantial experience in developing these types of estimates.
USG
:
Within the USG segment, approximately 78% of revenues (approximately 18% of consolidated revenues) are recognized
when products are delivered (when title and risk of ownership transfers), or when services are performed for unaffiliated
customers. Approximately 22% of the segment’s revenues (approximately 5% of consolidated revenues) are recognized on a
straight-line basis over the lease term.
Technical Packaging:
Within the Technical Packaging segment, 100% of revenues (approximately 12% of consolidated revenues)
are recognized when products are delivered (when title and risk of ownership transfers) or when services are performed for unaffiliated
customers.
|
F.
|
Cash and Cash Equivalents
|
Cash equivalents include temporary investments that are readily
convertible into cash, such as money market funds, with original maturities of three months or less.
Accounts receivable have been reduced by an allowance for amounts
that the Company estimates are uncollectible in the future. This estimated allowance is based on Management’s evaluation
of the financial condition of the customer and historical write-off experience.
|
H.
|
Costs and Estimated Earnings on Long-Term Contracts
|
Costs and estimated earnings on long-term contracts represent unbilled
revenues, including accrued profits, accounted for under the percentage-of-completion method, net of progress billings.
Inventories are valued at the lower of cost (first-in, first-out)
or market value. Inventories are regularly reviewed for excess quantities and obsolescence based upon historical experience, specific
identification of discontinued items, future demand, and market conditions. Inventories under long-term contracts reflect accumulated
production costs, factory overhead, initial tooling and other related costs less the portion of such costs charged to cost of sales.
|
J.
|
Property, Plant and Equipment
|
Property, plant and equipment are recorded at cost. Depreciation
and amortization are computed primarily on a straight-line basis over the estimated useful lives of the assets: buildings, 10-40
years; machinery and equipment, 3-10 years; and office furniture and equipment, 3-10 years. Leasehold improvements are amortized
over the remaining term of the applicable lease or their estimated useful lives, whichever is shorter. Long-lived tangible assets
are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets may
not be recoverable. Impairment losses are recognized based on fair value.
Lease agreements are evaluated to determine whether they are capital
or operating leases in accordance with ASC 840,
Leases
(ASC 840). When any one of the four test criteria in ASC 840 is met,
the lease then qualifies as a capital lease. Capital leases are capitalized at the lower of the net present value of the total
amount payable under the leasing agreement (excluding finance charges) or the fair market value of the leased asset. Capital lease
assets are depreciated on a straight-line basis, over a period consistent with the Company’s normal depreciation policy for
tangible fixed assets. The Company allocates each lease payment between a reduction of the lease obligation and interest expense
using the effective interest method. Rent expense for operating leases, which may include free rent or fixed escalation amounts
in addition to minimum lease payments, is recognized on a straight-line basis over the duration of the lease term. Capital lease
obligations are included within other long-term liabilities (long-term portion) and accrued other expenses (current portion).
|
L.
|
Goodwill and Other Long-Lived Assets
|
Goodwill represents the excess of purchase price over the fair value
of net identifiable assets acquired in business acquisitions. Management annually reviews goodwill and other long-lived assets
with indefinite useful lives for impairment or whenever events or changes in circumstances indicate the carrying amount may not
be recoverable. If the Company determines that the carrying value of the long-lived asset may not be recoverable, a permanent impairment
charge is recorded for the amount by which the carrying value of the long-lived asset exceeds its fair value. Fair value is measured
based on a discounted cash flow method using a discount rate determined by Management to be commensurate with the risk inherent
in the Company’s current business model.
Other intangible assets represent costs allocated to identifiable
intangible assets, principally customer relationships, capitalized software, patents, trademarks, and technology rights. Intangible
assets with estimable useful lives are amortized over their respective estimated useful lives to their estimated residual values,
and are reviewed for impairment whenever events or changes in business circumstances indicate the carrying value of the assets
may not be recoverable. See Note 3 regarding goodwill and other intangible assets activity.
The costs incurred for the development of computer software that
will be sold, leased, or otherwise marketed are charged to expense when incurred as research and development until technological
feasibility has been established for the product. Technological feasibility is typically established upon completion of a detailed
program design. Costs incurred after this point are capitalized on a project-by-project basis. Capitalized costs consist of internal
and external development costs. Upon general release of the product to customers, the Company ceases capitalization and begins
amortization, which is calculated on a project-by-project basis as the greater of (1) the ratio of current gross revenues for a
product to the total of current and anticipated future gross revenues for the product or (2) the straight-line method over the
estimated economic life of the product. The Company generally amortizes the software development costs over a three-to-seven year
period based upon the estimated future economic life of the product. Factors considered in determining the estimated future economic
life of the product include anticipated future revenues, and changes in software and hardware technologies. Management annually
reviews the carrying values of capitalized costs for impairment or whenever events or changes in circumstances indicate the carrying
amount may not be recoverable. If expected cash flows are insufficient to recover the carrying amount of the asset, then an impairment
loss is recognized to state the asset at its net realizable value.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets may be reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment date. The Company regularly reviews its
deferred tax assets for recoverability and establishes a valuation allowance when Management believes it is more likely than not
such assets will not be recovered, taking into consideration historical operating results, expectations of future earnings, tax
planning strategies, and the expected timing of the reversals of existing temporary differences.
|
O.
|
Research and Development Costs
|
Company-sponsored research and development costs include research
and development and bid and proposal efforts related to the Company’s products and services. Company-sponsored product development
costs are charged to expense when incurred. Customer-sponsored research and development costs incurred pursuant to contracts are
accounted for similarly to other program costs. Customer-sponsored research and development costs refer to certain situations whereby
customers provide funding to support specific contractually defined research and development costs. Total Company and customer-sponsored
research and development expenses were approximately $14.0 million, $12.2 million and $18.1 million for 2017, 2016 and 2015, respectively.
These expense amounts exclude certain engineering costs primarily associated with product line extensions, modifications and maintenance,
which amounted to approximately $10.4 million, $8.2 million and $8.2 million for 2017, 2016 and 2015, respectively.
|
P.
|
Foreign Currency Translation
|
The financial statements of the Company’s foreign operations
are translated into U.S. dollars in accordance with FASB ASC Topic 830,
Foreign Currency Matters
. The resulting translation
adjustments are recorded as a separate component of accumulated other comprehensive income.
Basic earnings per share is calculated using the weighted average
number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number
of common shares outstanding during the period plus shares issuable upon the assumed exercise of dilutive common share options
and vesting of performance-accelerated restricted shares using the treasury stock method. There are no anti-dilutive shares.
The number of shares used in the calculation of earnings per share
for each year presented is as follows:
(in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Weighted Average Shares Outstanding — Basic
|
|
|
25,774
|
|
|
|
25,762
|
|
|
|
26,077
|
|
Performance- Accelerated Restricted Stock
|
|
|
221
|
|
|
|
206
|
|
|
|
188
|
|
Shares — Diluted
|
|
|
25,995
|
|
|
|
25,968
|
|
|
|
26,265
|
|
|
R.
|
Share-Based Compensation
|
The Company provides compensation benefits to certain key employees
under several share-based plans providing for employee stock options and/or performance-accelerated restricted shares (restricted
shares), and to non-employee directors under a non-employee directors compensation plan. Share-based payment expense is measured
at the grant date based on the fair value of the award and is recognized on a straight-line basis over the requisite service period
(generally the vesting period of the award).
|
S.
|
Accumulated Other Comprehensive Loss
|
Accumulated other comprehensive loss of $(27.3) million at September
30, 2017 consisted of $(28.9) million related to the pension net actuarial loss; $1.7 million related to currency translation adjustments;
and $(0.1) million related to forward exchange contracts. Accumulated other comprehensive loss of $(39.3) million at September
30, 2016 consisted of $(34.5) million related to the pension net actuarial loss; $(4.7) million related to currency translation
adjustments; and $(0.1) million related to forward exchange contracts.
|
T.
|
Deferred Revenue And Costs
|
Deferred revenue and costs are recorded when products or services
have been provided or cash has been received but the criteria for revenue recognition have not been met. If there is a customer
acceptance provision or there is uncertainty about customer acceptance, revenue and costs are deferred until the customer has accepted
the product or service.
|
U.
|
Derivative Financial Instruments
|
All derivative financial instruments are reported on the balance
sheet at fair value. The accounting for changes in fair value of a derivative instrument depends on whether it has been designated
and qualifies as a hedge and on the type of hedge. For each derivative instrument designated as a cash flow hedge, the effective
portion of the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings
with the underlying hedged item. For each derivative instrument designated as a fair value hedge, the gain or loss on the derivative
and the offsetting gain or loss on the hedged item are recognized immediately in earnings. Regardless of type, a fully effective
hedge will result in no net earnings impact while the derivative is outstanding. To the extent that any hedge is ineffective at
offsetting cash flow or fair value changes in the underlying hedged item, there could be a net earnings impact.
|
V.
|
Fair Value Measurements
|
Fair value is defined as the price at which an asset could be exchanged
in a current transaction between knowledgeable, willing parties or the amount that would be paid to transfer a liability to a new
obligor, not the amount that would be paid to settle the liability with the creditor. Where available, fair value is based on observable
market prices or parameters or derived from such prices or parameters. Where observable prices or inputs are not available, valuation
models are applied. These valuation techniques involve some level of Management estimation and judgment, the degree of which is
dependent on the price transparency for the instruments or market and the instruments’ complexity.
The accounting guidance establishes a three-level hierarchy for
disclosure of fair value measurements, based upon the transparency of inputs to the valuation of an asset or liability as of the
measurement date, as follows:
Level 1 – Inputs to the valuation methodology are
quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 –Inputs to the valuation methodology include
quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument.
Level 3 – Inputs to the valuation methodology are
unobservable and significant to the fair value measurement.
Financial Assets and Liabilities
The Company has estimated the fair value of its financial instruments
as of September 30, 2017 using available market information or other appropriate valuation methodologies. The carrying amounts
of cash and cash equivalents, receivables, inventories, payables and other current assets and liabilities approximate fair value
because of the short maturity of those instruments. The carrying amounts due under the revolving credit facility approximate fair
value as the interest on outstanding borrowings is calculated at a spread over the London Interbank Offered Rate (LIBOR) or based
on the prime rate, at the Company’s election.
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 2017.
|
W.
|
New Accounting Standards
|
In January 2017, the FASB issued Accounting Standards Update (ASU)
No. 2017-04,
Simplifying the Test for Goodwill Impairment
(ASU 2017-04), which eliminates Step 2 from the goodwill impairment
test. Under the amendments in this update, an entity should recognize an impairment charge for the amount by which the carrying
amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill
allocated to that reporting unit. The new standard is effective for fiscal years beginning after December 15, 2019. Early
adoption is permitted for interim or annual goodwill impairment test performed on testing dates after January 1, 2017. The Company
adopted this standard in the fourth quarter of 2017 with its annual goodwill impairment tests. The adoption of ASU 2017-04 did
not have an impact on the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-09,
Improvements
to Employee Share-Based Payment Accounting
, which simplified the income tax consequences, accounting for forfeitures and classification
on the Statements of Consolidated Cash Flows. The Company adopted this standard in the current year resulting in the income tax
expense in the third quarter and fiscal year 2017 being favorably impacted by additional tax benefits on share-based compensation
that vested during the third quarter of 2017 decreasing the effective tax rate by 5.1% and 1.1%, respectively.
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 new standard will increase an entity’s reported assets and liabilities.
The new 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 new standard on its consolidated financial statements
and related disclosures.
In November 2015, the FASB issued ASU No. 2015-17,
Balance Sheet
Classification of Deferred Taxes
, which requires entities to present deferred tax assets and deferred tax liabilities as noncurrent
in a classified balance sheet. This new standard is effective for annual periods beginning after December 15, 2016. The Company
adopted this standard during the fourth quarter of 2016 and applied it on a prospective basis.
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 calculating 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.
2017
On August 30, 2017, the Company acquired the assets of Vanguard
Instruments Company (Vanguard Instruments), a test equipment provider serving the global electric utility market, located in Ontario,
California, for a purchase price of $36.0 million in cash. Vanguard Instruments has annualized sales of approximately $14 million.
Since the date of acquisition, the operating results for Vanguard Instruments have been included as a product line of Doble within
the Company’s USG segment. Based on the preliminary purchase price allocation, the Company recorded approximately $1.8 million
of accounts receivable, $2.1 million of inventory, $0.3 million of property, plant and equipment, $0.2 million of accounts
payable and accrued expenses, $10.7 million of goodwill, $3.2 million of tradenames and $18.0 million of amortizable intangible
assets consisting of customer relationships with a weighted average life of 15 years.
On May 25, 2017, the Company acquired the assets of Morgan
Schaffer Inc. (Morgan Schaffer), a global utilities provider located in Montreal, Quebec, Canada, for a purchase price of
$48.8 million in cash. Morgan Schaffer has annualized sales of approximately $25 million. It designs, develops, manufactures
and markets an integrated offering of dissolved gas analysis, oil testing, and data management solutions which enhance the
ability of electric utilities to accurately monitor the health of critical power transformers. Since the date of acquisition,
the operating results for Morgan Schaffer have been included in the Company’s USG segment. Based on the preliminary
purchase price allocation, the Company recorded approximately $2.5 million of accounts receivable, $5.2 million of inventory,
$1.7 million of property, plant and equipment, $0.4 million of other assets, $4.9 million of accounts payable and accrued
expenses, $4.8 million of goodwill, $35.6 million of trade names and $3.6 million of amortizable intangible assets consisting
of customer relationships and developed technology with a weighted average life of approximately 10 years.
On May 8, 2017, the Company acquired NRG Systems, Inc. (NRG),
located in Hinesburg, Vermont, for a purchase price of $38.6 million in cash. NRG is the global market leader in the design
and manufacture of decision support tools for the renewable energy industry, primarily wind. NRG has annualized sales of
approximately $45 million. Since the date of acquisition, the operating results for NRG have been included in the
Company’s USG segment. Based on the preliminary purchase price allocation, the Company recorded approximately $1.5
million of cash, $4.1 million of accounts receivable, $5.1 million of inventory, $1.0 million of other assets, $9.4 million
of property, plant and equipment (including a capital lease), $4.1 million of accounts payable and accrued expenses, $9.7
million of lease liability, $8.0 million of goodwill, $8.1 million of trade names and $17.2 million of amortizable intangible
assets consisting of customer relationships with a weighted average life of approximately 14 years.
On November 7, 2016, the Company acquired aerospace suppliers Mayday
Manufacturing Co. (Mayday) and its affiliate, Hi-Tech Metals, Inc. (Hi-Tech), which share a state-of-the-art, expandable 130,000
square foot facility in Denton, Texas, for a purchase price of approximately $75 million in cash. Mayday is a leading manufacturer
of mission-critical bushings, pins, sleeves and precision-tolerance machined components for landing gear, rotor heads, engine mounts,
flight controls and actuation systems for the aerospace and defense industry. Hi-Tech is a full-service metal processor offering
aerospace OEM’s and Tier 1 suppliers a large portfolio of processing services including anodizing, cadmium and zinc-nickel
plating, organic coatings, non-destructive testing and heat treatment. Mayday and Hi-Tech together have annual sales of approximately
$40 million. Since the date of acquisition, the consolidated operating results for Mayday and Hi-Tech have been included in the
Company’s Filtration segment. Based on the purchase price allocation, the Company recorded approximately $7.3 million of
accounts receivable, $10.6 million of inventory, $16.6 million of property, plant and equipment (including a capital lease), $10.1
million of lease liability, $15.6 million of deferred tax liabilities, $30.2 million of goodwill, $4.8 million of trade names and $32.8 million of amortizable identifiable intangible assets consisting primarily of customer relationships
with a weighted-average life of approximately 20 years.
2016
On September 2, 2016, the Company acquired the stock of Westland
Technologies, Inc. (Westland), located in Modesto, California, for a purchase price of approximately $41 million in cash. Westland
is a market leader in the design, development and manufacture of elastomeric-based signature reduction solutions which enhance
U.S. Naval maritime platform survivability. Westland has annual sales of approximately $25 million. Since the date of acquisition,
the operating results for Westland have been included within the Company’s Filtration segment. Based on the purchase price
allocation, the Company recorded tangible assets, net, of $5.5 million, deferred tax liabilities of $9.5 million, goodwill of $17.9
million, and $28.3 million of identifiable intangible assets primarily consisting of customer relationships.
On January 29, 2016, the Company acquired Plastique Limited and
Plastique Sp. z o.o. (together, Plastique), headquartered in Tunbridge Wells, England with manufacturing locations in Nottingham,
England and Poznan, Poland, for a purchase price of approximately $31.6 million (of which $2.7 million is due over the next two
years, one payment in January 2018 and one in January 2019). Plastique is a market leader in the development and manufacture of
highly-technical thermoformed plastic and precision molded pulp fiber packaging primarily serving pharmaceutical, personal care,
and various specialty end markets. Since the date of acquisition, the operating results for Plastique have been included within
the Company’s Technical Packaging segment. Plastique has annual sales of approximately $35 million. Based on the purchase
price allocation, the Company recorded tangible assets, net, of $9.6 million, goodwill of $10.2 million, and $11.9 million of identifiable
intangible assets primarily consisting of customer relationships.
On October 16, 2015, the Company acquired the stock of Fremont Plastics,
Inc. (Fremont) for a purchase price of $10.5 million in cash. The Company also purchased for $2 million Fremont’s real property
located in Fremont, Indiana. Fremont was a developer, manufacturer, promoter and seller of high quality sterile-ready and non-sterile
thin gauge thermoformed medical plastic packaging products. Immediately following the closing of the transaction, Fremont was merged
into TEQ, and therefore since the date of acquisition the operating results for Fremont have been included as part of TEQ.
2015
On January 28, 2015, the Company acquired the assets of Enoserv
LLC (Enoserv), headquartered in Tulsa, Oklahoma, for $20.5 million in cash. Enoserv provides utility customers with high quality,
user-friendly multi-platform software and has annual revenues of approximately $8 million. Since the date of acquisition the operating
results for Enoserv have been included as part of Doble within the Company’s USG segment. Based on the purchase price allocation,
the Company recorded approximately $10.0 million of goodwill and $9.0 million of amortizable identifiable intangible assets consisting
primarily of customer relationships and developed technology.
All of the Company’s acquisitions have been accounted for
using the purchase method of accounting and accordingly, the respective purchase prices were allocated to the assets (including
intangible assets) acquired and liabilities assumed based on estimated fair values at the date of acquisition. The financial results
from these acquisitions have been included in the Company’s financial statements from the date of acquisition.
Unaudited pro forma sales and earnings before tax were
$746.0 million and $84.5 million, respectively, for 2017, and $695.0 million and $76.2 million, respectively, for 2016. These
pro forma amounts reflect the Company’s consolidated results of operations as if the 2017 acquisitions of Vanguard
Instruments, Morgan Schaffer, NRG and Mayday had occurred on October 1, 2015. The pro forma financial information was
prepared based on historical financial information and has been adjusted to give effect to pro forma adjustments that are (i)
directly attributable to the above acquisitions, (ii) factually supportable and (iii) expected to have a continuing impact on
the combined results. The pro forma information uses estimates and assumptions based on information available at the
time. Management believes the estimates and assumptions to be reasonable; however, actual results may differ significantly
from this pro forma information. The pro forma information is not intended to reflect the actual results that would have
occurred had the companies actually been combined during the periods presented. The pro forma results for the years ended
September 30, 2017 and 2016 primarily include additional amortization expense related to the fair value of acquired
identifiable intangible assets and additional interest expense related to the incremental debt issued in conjunction with the
2017 acquisitions. The pro forma results for the year ended September 30, 2017 also included non-recurring adjustments of
$3.8 million related to additional costs of goods sold due to the increase of inventory to fair value at the acquisition date
in connection with the preliminary purchase accounting for inventory.
The goodwill recorded for the Mayday, Westland, Plastique and
Fremont acquisitions mentioned above is not expected to be deductible for U.S. Federal or state income tax purposes. The
goodwill recorded for the Vanguard Instruments, NRG and Enoserv acquisitions mentioned above is expected to be deductible for
U.S. Federal and state income tax purposes. The goodwill recorded for the Morgan Schaffer acquisition is expected to be
deductible for Canadian income tax purposes.
|
3.
|
Goodwill and Other Intangible Assets
|
Included on the Company’s Consolidated Balance Sheets at September
30, 2017 and 2016 are the following intangible assets gross carrying amounts and accumulated amortization:
(Dollars in millions)
|
|
2017
|
|
|
2016
|
|
Goodwill
|
|
$
|
377.9
|
|
|
|
323.6
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with determinable lives:
|
|
|
|
|
|
|
|
|
Patents
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
1.0
|
|
|
|
1.0
|
|
Less: accumulated amortization
|
|
|
0.8
|
|
|
|
0.8
|
|
Net
|
|
$
|
0.2
|
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Capitalized software
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
63.0
|
|
|
|
54.0
|
|
Less: accumulated amortization
|
|
|
34.4
|
|
|
|
26.7
|
|
Net
|
|
$
|
28.6
|
|
|
|
27.3
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
181.9
|
|
|
|
111.9
|
|
Less: accumulated amortization
|
|
|
37.4
|
|
|
|
28.6
|
|
Net
|
|
$
|
144.5
|
|
|
|
83.3
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
5.4
|
|
|
|
2.8
|
|
Less: accumulated amortization
|
|
|
1.4
|
|
|
|
0.9
|
|
Net
|
|
$
|
4.0
|
|
|
|
1.9
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
Trade names
|
|
$
|
173.8
|
|
|
|
119.1
|
|
The Company performed its annual evaluation of goodwill and intangible
assets for impairment during the fourth quarter of 2017 and concluded no impairment existed at September 30, 2017 and there
are no accumulated impairment losses as of September 30, 2017.
The changes in the carrying amount of goodwill attributable to each
business segment for 2017 and 2016 are as follows:
(Dollars in millions)
|
|
Filtration
|
|
|
Test
|
|
|
USG
|
|
|
Technical
Packaging
|
|
|
Total
|
|
Balance as of September 30, 2015
|
|
$
|
26.0
|
|
|
|
34.2
|
|
|
|
226.2
|
|
|
|
4.8
|
|
|
|
291.2
|
|
Acquisition activity
|
|
|
17.9
|
|
|
|
–
|
|
|
|
–
|
|
|
|
14.5
|
|
|
|
32.4
|
|
Foreign currency translation and other
|
|
|
–
|
|
|
|
(0.1
|
)
|
|
|
–
|
|
|
|
0.1
|
|
|
|
–
|
|
Balance as of September 30, 2016
|
|
|
43.9
|
|
|
|
34.1
|
|
|
|
226.2
|
|
|
|
19.4
|
|
|
|
323.6
|
|
Acquisition activity
|
|
|
29.8
|
|
|
|
–
|
|
|
|
23.6
|
|
|
|
–
|
|
|
|
53.4
|
|
Foreign currency translation and other
|
|
|
–
|
|
|
|
–
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
|
0.9
|
|
Balance as of September 30, 2017
|
|
$
|
73.7
|
|
|
|
34.1
|
|
|
|
250.2
|
|
|
|
19.9
|
|
|
|
377.9
|
|
Amortization expense related to intangible assets with determinable
lives was $16.3 million, $11.6 million and $8.9 million in 2017, 2016 and 2015, respectively. Patents are amortized over the life
of the patents, generally 17 years. Capitalized software is amortized over the estimated useful life of the software, generally
three to seven years. Customer relationships are generally amortized over fifteen to twenty years. Intangible asset amortization
for fiscal years 2018 through 2022 is estimated at approximately $20 million per year.
Accounts receivable, net of the allowance for doubtful accounts,
consist of the following at September 30, 2017 and 2016:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Commercial
|
|
$
|
152,265
|
|
|
|
112,280
|
|
U.S. Government and prime contractors
|
|
|
8,315
|
|
|
|
9,206
|
|
Total
|
|
$
|
160,580
|
|
|
|
121,486
|
|
Inventories consist of the following at September 30, 2017 and 2016:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Finished goods
|
|
$
|
28,127
|
|
|
|
20,502
|
|
Work in process
|
|
|
43,750
|
|
|
|
37,922
|
|
Raw materials
|
|
|
52,638
|
|
|
|
47,118
|
|
Total
|
|
$
|
124,515
|
|
|
|
105,542
|
|
One of the Company’s directors is an officer at a customer
of the Company’s subsidiary Doble. Doble sells products, leases equipment and provides testing services to the customer in
the ordinary course of Doble’s business. The total amount of these sales were approximately $3.6 million, $1.4 million and
$0.8 million during fiscal 2017, 2016 and 2015, respectively. All transactions between Doble and the customer are intended to be
and have been consistent with Doble’s normal commercial terms offered to its customers, and the Company’s Board of
Directors has determined that the relationship between the Company and the customer is not material and did not impair either the
Company’s or the director’s independence.
Total income tax expense (benefit) for 2017, 2016 and 2015 was allocated
to income tax expense as follows:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Income tax expense from Continuing Operations
|
|
$
|
26,450
|
|
|
|
22,538
|
|
|
|
19,785
|
|
Income tax expense from Discontinued Operations
|
|
|
–
|
|
|
|
–
|
|
|
|
390
|
|
Total income tax expense
|
|
$
|
26,450
|
|
|
|
22,538
|
|
|
|
20,175
|
|
The components of income from continuing operations before income
taxes for 2017, 2016 and 2015 consisted of the following:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
72,353
|
|
|
|
62,353
|
|
|
|
56,661
|
|
Foreign
|
|
|
7,800
|
|
|
|
6,067
|
|
|
|
4,860
|
|
Total income before income taxes
|
|
$
|
80,153
|
|
|
|
68,420
|
|
|
|
61,521
|
|
The principal components of income tax expense (benefit) from continuing
operations for 2017, 2016 and 2015 consist of:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
21,448
|
|
|
|
19,236
|
|
|
|
11,906
|
|
Deferred
|
|
|
628
|
|
|
|
(909
|
)
|
|
|
5,406
|
|
State and local:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,795
|
|
|
|
1,674
|
|
|
|
867
|
|
Deferred
|
|
|
(49
|
)
|
|
|
(222
|
)
|
|
|
16
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
4,450
|
|
|
|
1,899
|
|
|
|
1,525
|
|
Deferred
|
|
|
(1,822
|
)
|
|
|
860
|
|
|
|
65
|
|
Total
|
|
$
|
26,450
|
|
|
|
22,538
|
|
|
|
19,785
|
|
The actual income tax expense (benefit) from continuing operations
for 2017, 2016 and 2015 differs from the expected tax expense for those years (computed by applying the U.S. Federal corporate
statutory rate) as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Federal corporate statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
State and local, net of Federal benefits
|
|
|
2.4
|
|
|
|
2.0
|
|
|
|
1.2
|
|
Foreign
|
|
|
(0.1
|
)
|
|
|
(1.0
|
)
|
|
|
(1.5
|
)
|
Research credit
|
|
|
(1.1
|
)
|
|
|
(2.5
|
)
|
|
|
(1.8
|
)
|
Domestic production deduction
|
|
|
(2.7
|
)
|
|
|
(2.8
|
)
|
|
|
(2.6
|
)
|
Change in uncertain tax positions
|
|
|
–
|
|
|
|
–
|
|
|
|
(0.2
|
)
|
Executive compensation
|
|
|
(0.1
|
)
|
|
|
0.9
|
|
|
|
0.9
|
|
Valuation allowance
|
|
|
(0.3
|
)
|
|
|
1.8
|
|
|
|
1.0
|
|
Other, net
|
|
|
(0.1
|
)
|
|
|
(0.5
|
)
|
|
|
0.2
|
|
Effective income tax rate
|
|
|
33.0
|
%
|
|
|
32.9
|
%
|
|
|
32.2
|
%
|
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 2017 and 2016 are presented below:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Inventories
|
|
$
|
9,639
|
|
|
|
7,553
|
|
Pension and other postretirement benefits
|
|
|
11,345
|
|
|
|
13,978
|
|
Net operating and capital loss carryforwards — domestic
|
|
|
501
|
|
|
|
372
|
|
Net operating loss carryforward — foreign
|
|
|
4,486
|
|
|
|
4,991
|
|
Other compensation-related costs and other cost accruals
|
|
|
12,104
|
|
|
|
13,678
|
|
State credit carryforward
|
|
|
2,098
|
|
|
|
1,944
|
|
Total deferred tax assets
|
|
|
40,173
|
|
|
|
42,516
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
(4,874
|
)
|
|
|
(15,528
|
)
|
Acquisition assets
|
|
|
(91,752
|
)
|
|
|
(69,934
|
)
|
Depreciation, software amortization
|
|
|
(24,092
|
)
|
|
|
(20,285
|
)
|
Net deferred tax liabilities before valuation allowance
|
|
|
(80,545
|
)
|
|
|
(63,231
|
)
|
Less valuation allowance
|
|
|
(4,440
|
)
|
|
|
(5,711
|
)
|
Net deferred tax liabilities
|
|
$
|
(84,985
|
)
|
|
|
(68,942
|
)
|
The Company has a foreign net operating loss (NOL)
carryforward of $18.2 million at September 30, 2017, which reflects tax loss carryforwards in Germany, India, Finland, China,
South Africa, Japan, Canada and the United Kingdom. $15.0 million of the tax loss carryforwards have no expiration date while
the remaining $3.2 million will expire between 2019 and 2038. The Company has deferred tax assets related to state
NOL carryforwards of $0.5 million at September 30, 2017 which expire between 2025 and 2037. The Company also has net
state research and other credit carryforwards of $2.1 million of which $1.7 million expires between 2025 and 2037. The
remaining $0.4 million does not have an expiration date.
The valuation allowance for deferred tax assets as of September
30, 2017 and 2016 was $4.4 million and $5.7 million, respectively. The net change in the total valuation allowance for each of
the years ended September 30, 2017 and 2016 was a decrease of $1.3 million and an increase of $1.6 million, respectively. The Company
has established a valuation allowance against state credit carryforwards of $0.4 million and $0.6 million at September 30, 2017
and 2016. In addition, the Company has established a valuation allowance against state NOL carryforwards that are not expected
to be realized in future periods of $0.4 million and $0.3 million at September 30, 2017 and 2016. Lastly, the Company has established
a valuation allowance against certain NOL carryforwards in foreign jurisdictions which may not be realized in future periods. The
valuation allowance established against the foreign NOL carryforwards was $3.7 million and $4.8 million at September 30, 2017 and
2016, respectively.
ETS-Lindgren Oy, Finland, has recorded a deferred tax asset of $0.3
million reflecting the benefit of $2.8 million in loss carryforwards, which expire in varying amounts between 2024 and 2027. Realization
is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not
assured, Management believes it is more likely than not that all of the deferred tax asset will be realized. The amount of the
deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.
The Company’s foreign subsidiaries have accumulated unremitted
earnings of $48.9 million and cash of $28.4 million at September 30, 2017. No deferred taxes have been provided on these accumulated
unremitted earnings because these funds are not needed to meet the liquidity requirements of the Company’s U.S. operations
and it is the Company’s intention to indefinitely reinvest these earnings in continuing international operations. In the
event these foreign entities’ earnings were distributed, it is estimated that U.S. taxes, net of available foreign tax credits,
of approximately $6.9 million would be due, which would correspondingly reduce the Company’s net earnings. No significant
portion of the Company’s foreign subsidiaries’ earnings was taxed at a very low tax rate.
The Company had $0.1 million of unrecognized benefits as of both
September 30, 2017 and 2016, which, if recognized, would affect the Company’s effective tax rate. The Company does not anticipate
a material change in the amount of unrecognized tax benefits in the next 12 months. The Company’s policy is to include
interest related to unrecognized tax benefits in income tax expense and penalties in operating expense. As of September 30, 2017,
2016 and 2015, the Company had zero accrued interest related to uncertain tax positions on its Consolidated Balance Sheets. No
significant penalties have been accrued.
The principal jurisdictions for which the Company files income tax
returns are U.S. Federal and the various city, state, and international locations where the Company has operations. The U.S.
Federal tax years for the periods ended September 30, 2014 and forward remain subject to income tax examination. Various state
tax years for the periods ended September 30, 2013 and forward remain subject to income tax examinations. The Company is subject
to income tax in many jurisdictions outside the United States, none of which is individually significant.
Debt consists of the following at September 30, 2017 and 2016:
(Dollars in thousands)
|
|
2017
|
|
|
2016
|
|
Revolving credit facility, including current portion
|
|
$
|
275,000
|
|
|
|
110,000
|
|
Current portion of long-term debt
|
|
|
(20,000
|
)
|
|
|
(20,000
|
)
|
Total long-term debt, less current portion
|
|
$
|
255,000
|
|
|
|
90,000
|
|
The Company’s existing credit facility (“the Credit
Facility”) matures December 21, 2020. The Credit Facility includes a $450 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 nine banks led by JP Morgan Chase
Bank, N.A., as Administrative Agent.
At September 30, 2017, the Company had approximately $166 million
available to borrow under the Credit Facility, plus the $250 million increase option, in addition to $45.5 million cash on
hand. The Company classified $20.0 million as the current portion of long-term debt as of September 30, 2017, as the Company
intends to repay this amount within the next twelve months; however, the Company has no contractual obligation to repay such amount
during the next twelve months.
The Credit Facility requires, as determined by certain financial
ratios, a facility fee ranging from 12.5 to 27.5 basis points per annum on the unused portion. The terms of the facility provide
that interest on borrowings may be calculated at a spread over the London Interbank Offered Rate (LIBOR) or based 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 its material foreign subsidiaries’ share equity. The financial covenants of the Credit Facility
include a leverage ratio and an interest coverage ratio. As of September 30, 2017, the Company was in compliance with all bank
covenants.
During 2017 and 2016, the maximum aggregate short-term borrowings
at any month-end were $298 million and $110 million, respectively, and the average aggregate short-term borrowings outstanding
based on month-end balances were $211.3 million and $89.2 million, respectively. The weighted average interest rates were 2.09%,
1.58% and 1.27% for 2017, 2016 and 2015, respectively. The letters of credit issued and outstanding under the Credit Facility totaled
$9.7 million and $4.9 million at September 30, 2017 and 2016, respectively.
The 30,468,824 and 30,364,183 common shares as presented in the
accompanying Consolidated Balance Sheets at September 30, 2017 and 2016 represent the actual number of shares issued at the respective
dates. The Company held 4,635,622 and 4,647,322 common shares in treasury at September 30, 2017 and 2016, respectively.
In August 2012, the Company’s Board of Directors authorized
a common stock repurchase program under which the Company may repurchase shares of its stock from time to time in its discretion,
in the open market or otherwise, up to a maximum total repurchase amount of $100 million (or such lesser amount as may be permitted
under the Company’s bank credit agreements). This program has been repeatedly extended by the Company’s Board of Directors
and is currently scheduled to expire September 30, 2019. There were no share repurchases in 2017. The Company repurchased approximately
120,000 shares for $4.3 million in 2016 and 517,000 shares for $18.2 million in 2015.
|
10.
|
Share-Based Compensation
|
The Company provides compensation benefits to certain key employees
under several share-based plans providing for performance-accelerated restricted share unit (PARS) awards, and to non-employee
directors under a non-employee directors compensation plan. The Company has no stock options currently outstanding. As of September
30, 2017, the Company had 1,072,401 shares available for future issuance under equity compensation plans.
Performance-Accelerated Restricted Share Unit Awards
A PARS award represents the right to receive a specified number
of shares of Company common stock if and when the award vests. A PARS award is not stock and does not give the recipient any rights
as a shareholder until it vests and is paid out in shares of stock. PARS awards currently outstanding have a five-year vesting
period, with accelerated vesting if certain targets based on market conditions are achieved. In these cases, if it is probable
that the performance condition will be met, the Company recognizes compensation cost on a straight-line basis over the shorter
performance period; otherwise, it will recognize compensation cost over the longer service period. Compensation cost for the majority
of the outstanding PARS awards is being recognized over the shorter performance period as it is probable the performance condition
will be met. The PARS award grants were valued at the stock price on the date of grant. Pretax compensation expense related to
the PARS awards for continuing operations was $4.4 million, $3.9 million and $4.0 million for 2017, 2016 and 2015, respectively.
The following summary presents information regarding outstanding
PARS awards as of the specified dates, and changes during the specified periods:
|
|
FY 2017
|
|
|
FY 2016
|
|
|
FY 2015
|
|
|
|
Shares
|
|
|
Estimated
Weighted
Avg. Price
|
|
|
Shares
|
|
|
Estimated
Weighted
Avg. Price
|
|
|
Shares
|
|
|
Estimated
Weighted
Avg. Price
|
|
Nonvested at October 1,
|
|
|
427,438
|
|
|
$
|
35.40
|
|
|
|
326,536
|
|
|
$
|
35.29
|
|
|
|
332,340
|
|
|
$
|
32.23
|
|
Granted
|
|
|
110,422
|
|
|
|
51.16
|
|
|
|
120,902
|
|
|
|
35.75
|
|
|
|
123,501
|
|
|
|
34.33
|
|
Vested
|
|
|
(202,035
|
)
|
|
|
35.78
|
|
|
|
(8,000
|
)
|
|
|
36.06
|
|
|
|
(129,305
|
)
|
|
|
26.66
|
|
Cancelled
|
|
|
–
|
|
|
|
–
|
|
|
|
(12,000
|
)
|
|
|
35.47
|
|
|
|
–
|
|
|
|
–
|
|
Nonvested at September 30,
|
|
|
335,825
|
|
|
$
|
40.35
|
|
|
|
427,438
|
|
|
$
|
35.40
|
|
|
|
326,536
|
|
|
$
|
35.29
|
|
Non-Employee Directors Plan
In 2017 the non-employee directors compensation plan provided to
each non-employee director a retainer of 900 common shares per quarter. Non-employee director grants were valued at the stock price
on the date of grant and were issued from the Company’s treasury stock. Compensation expense related to the non-employee
director grants was $1.0 million, $0.8 million and $0.8 million for 2017, 2016 and 2015, respectively.
Total Share-Based Compensation
The total share-based compensation cost that has been recognized
in results of operations and included within SG&A from continuing operations was $5.4 million, $4.7 million and $4.8 million
for 2017, 2016 and 2015, respectively. The total income tax benefit recognized in results of operations for share-based compensation
arrangements was $1.8 million, $1.3 million and $1.6 million for 2017, 2016 and 2015, respectively. As of September 30, 2017, there
was $6.3 million of total unrecognized compensation cost related to share-based compensation arrangements. That cost is expected
to be recognized over a weighted-average period of 1.5years.
|
11.
|
Retirement and Other Benefit Plans
|
Substantially all domestic employees were covered by a defined contribution
pension plan maintained by the Company. Effective December 31, 2003, the Company’s defined benefit plan was frozen and no
additional benefits have been accrued after that date. As a result, the accumulated benefit obligation and projected benefit obligation
are equal. These frozen retirement income benefits are provided to employees under defined benefit pay-related and flat-dollar
plans, which are noncontributory. The annual contributions to the defined benefit retirement plan equal or exceed the minimum funding
requirements of the Employee Retirement Income Security Act. In addition to providing retirement income benefits, the Company provides
unfunded postretirement health and life insurance benefits to certain retirees. To qualify, an employee must retire at age 55 or
later and the employee’s age plus service must equal or exceed 75. Retiree contributions are defined as a percentage of medical
premiums. Consequently, retiree contributions increase with increases in the medical premiums. The life insurance plans are noncontributory
and provide coverage of a flat dollar amount for qualifying retired employees. Effective December 31, 2004, no new retirees were
eligible for life insurance benefits.
The Company uses a measurement date of September 30 for its pension
and other postretirement benefit plans. The Company has an accrued benefit liability of $0.6 million and $0.7 million at September
30, 2017 and 2016, respectively, related to its other postretirement benefit obligations. All other information related to its
postretirement benefit plans is not considered material to the Company’s results of operations or financial condition.
The following tables provide a reconciliation of the changes in
the pension plans and fair value of assets over the two-year period ended September 30, 2017, and a statement of the funded status
as of September 30, 2017 and 2016:
(Dollars in millions)
|
|
|
|
|
|
|
Reconciliation of benefit obligation
|
|
2017
|
|
|
2016
|
|
Net benefit obligation at beginning of year
|
|
$
|
100.6
|
|
|
|
93.6
|
|
Interest cost
|
|
|
3.2
|
|
|
|
3.9
|
|
Actuarial (gain) loss
|
|
|
(4.1
|
)
|
|
|
11.1
|
|
Gross benefits paid
|
|
|
(4.4
|
)
|
|
|
(7.8
|
)
|
Settlements
|
|
|
–
|
|
|
|
(0.2
|
)
|
Net benefit obligation at end of year
|
|
$
|
95.3
|
|
|
|
100.6
|
|
(Dollars in millions)
|
|
|
|
|
|
|
Reconciliation of fair value of plan assets
|
|
2017
|
|
|
2016
|
|
Fair value of plan assets at beginning of year
|
|
$
|
60.6
|
|
|
|
63.0
|
|
Actual return on plan assets
|
|
|
5.9
|
|
|
|
5.1
|
|
Employer contributions
|
|
|
2.9
|
|
|
|
0.5
|
|
Gross benefits paid
|
|
|
(4.4
|
)
|
|
|
(7.8
|
)
|
Settlements
|
|
|
–
|
|
|
|
(0.2
|
)
|
Fair value of plan assets at end of year
|
|
$
|
65.0
|
|
|
|
60.6
|
|
(Dollars in millions)
|
|
|
|
|
|
|
Funded Status
|
|
2017
|
|
|
2016
|
|
Funded status at end of year
|
|
$
|
(30.3
|
)
|
|
|
(40.0
|
)
|
Accrued benefit cost
|
|
|
(30.3
|
)
|
|
|
(40.0
|
)
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Balance Sheet consist of:
|
|
|
|
|
|
|
|
|
Current liability
|
|
|
(0.2
|
)
|
|
|
(0.2
|
)
|
Noncurrent liability
|
|
|
(30.1
|
)
|
|
|
(39.8
|
)
|
Accumulated other comprehensive (income)/loss (before tax effect)
|
|
|
47.4
|
|
|
|
56.0
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive (income)/loss consist of:
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
47.4
|
|
|
|
56.0
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (income)/loss (before tax effect)
|
|
$
|
47.4
|
|
|
|
56.0
|
|
The estimated amount that will be amortized from accumulated other
comprehensive (income) loss into net periodic benefit cost (income) in 2018 is $2.3 million.
The following table provides the components of net periodic benefit
cost for the plans for 2017, 2016 and 2015:
(Dollars in millions)
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Service cost
|
|
$
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Interest cost
|
|
|
3.2
|
|
|
|
3.9
|
|
|
|
3.8
|
|
Expected return on plan assets
|
|
|
(3.9
|
)
|
|
|
(4.4
|
)
|
|
|
(4.5
|
)
|
Net actuarial loss
|
|
|
2.6
|
|
|
|
2.0
|
|
|
|
1.8
|
|
Net periodic benefit cost
|
|
|
1.9
|
|
|
|
1.5
|
|
|
|
1.1
|
|
Defined contribution plans
|
|
|
6.3
|
|
|
|
5.2
|
|
|
|
5.0
|
|
Total
|
|
$
|
8.2
|
|
|
|
6.7
|
|
|
|
6.1
|
|
The discount rate used in measuring the Company’s pension
obligations was developed by matching yields of actual high-quality corporate bonds to expected future pension plan cash flows
(benefit payments). Over 400 Aa-rated, non-callable bonds with a wide range of maturities were used in the analysis. After using
the bond yields to determine the present value of the plan cash flows, a single representative rate that resulted in the same present
value was developed. The expected long-term rate of return on plan assets assumption was determined by reviewing the actual investment
return of the plans since inception and evaluating those returns in relation to expectations of various investment organizations
to determine whether long-term future returns are expected to differ significantly from the past.
The following weighted-average assumptions were used to determine
the net periodic benefit cost for the pension plans:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Discount rate
|
|
|
3.25
|
%
|
|
|
4.25
|
%
|
|
|
4.25
|
%
|
Rate of increase in compensation levels
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Expected long-term rate of return on assets
|
|
|
3.25
|
%
|
|
|
6.75
|
%
|
|
|
6.75
|
%
|
The following weighted-average assumptions were used to determine
the net periodic benefit obligations for the pension plans:
|
|
2017
|
|
|
2016
|
|
Discount rate
|
|
|
3.65
|
%
|
|
|
3.25
|
%
|
Rate of increase in compensation levels
|
|
|
N/A
|
|
|
|
N/A
|
|
The assumed rate of increase in compensation levels is not applicable
in 2017, 2016 and 2015 as the plan was frozen in earlier years.
The asset allocation for the Company’s pension plans at the
end of 2017 and 2016, and the Company’s acceptable range and the target allocation for 2018, by asset category, are as follows:
|
|
Target
Allocation
|
|
|
Acceptable
|
|
|
Percentage of Plan Assets at
Year-end
|
|
Asset Category
|
|
2018
|
|
|
Range
|
|
|
2017
|
|
|
2016
|
|
Return seeking
|
|
|
60
|
%
|
|
|
55-65%
|
|
|
|
62
|
%
|
|
|
59
|
%
|
Liability hedging
|
|
|
40
|
%
|
|
|
35-45%
|
|
|
|
35
|
%
|
|
|
38
|
%
|
Cash/cash equivalents
|
|
|
–
|
|
|
|
0-5%
|
|
|
|
3
|
%
|
|
|
3
|
%
|
The Company’s pension plan assets are managed by outside investment
managers and assets are rebalanced when the target ranges are exceeded. Pension plan assets consist principally of funds which
invest in marketable securities including common stocks, bonds, and interest-bearing deposits. The Company’s investment strategy
with respect to pension assets is to achieve a total rate of return (income and capital appreciation) that is sufficient to accomplish
the purpose of providing retirement benefits to all eligible and future retirees of the pension plan. The Company regularly monitors
performance and compliance with investment guidelines.
Fair Value of Financial Measurements
The fair values of the Company’s defined benefit plan investments
as of September 30, 2017 and 2016, by asset category, were as follows:
(Dollars in millions)
|
|
2017
|
|
|
2016
|
|
Investments at fair value:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1.9
|
|
|
|
1.6
|
|
Common and preferred stock funds:
|
|
|
|
|
|
|
|
|
Domestic large capitalization
|
|
|
10.6
|
|
|
|
8.9
|
|
Domestic small-/mid-capitalization
|
|
|
3.3
|
|
|
|
2.7
|
|
International funds
|
|
|
14.3
|
|
|
|
12.3
|
|
Fixed income funds
|
|
|
30.7
|
|
|
|
30.6
|
|
Real estate investment funds
|
|
|
4.2
|
|
|
|
4.5
|
|
Total investments at fair value
|
|
$
|
65.0
|
|
|
|
60.6
|
|
The following methods were used to estimate the fair value of each
class of financial instrument:
Cash
and cash equivalents
:
The carrying value of cash represents fair value as it consists of actual currency.
Investment
Funds
:
The fair value of the investment funds, which offer daily redemptions, is determined based on the published
net asset value of the funds as a practical expedient for fair value.
Expected Cash Flows
Information about the expected cash flows for the pension and other
postretirement benefit plans follows:
(Dollars in millions)
|
|
Pension
Benefits
|
|
|
Other
Benefits
|
|
Expected Employer Contributions — 2018
|
|
$
|
3.0
|
|
|
|
0.1
|
|
Expected Benefit Payments:
|
|
|
|
|
|
|
|
|
2018
|
|
|
4.9
|
|
|
|
0.1
|
|
2019
|
|
|
5.1
|
|
|
|
0.1
|
|
2020
|
|
|
5.7
|
|
|
|
0.1
|
|
2021
|
|
|
5.4
|
|
|
|
0.1
|
|
2022
|
|
|
5.6
|
|
|
|
0.1
|
|
2023-2027
|
|
$
|
29.5
|
|
|
|
0.3
|
|
|
12.
|
Derivative Financial Instruments
|
Market risks relating to the Company’s operations result primarily
from changes in interest rates and changes in foreign currency exchange rates. The Company is exposed to market risk related to
changes in interest rates and selectively uses derivative financial instruments, including forward contracts and swaps, to manage
these risks. 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. In addition, the Company’s Canadian subsidiary Morgan Schaffer
enters into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars.
The Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The
amounts ultimately recognized may differ for open positions, which remain subject to ongoing market price fluctuations until settlement.
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 fair value of the foreign currency derivative
is classified in accrued expenses on the Company’s Consolidated Balance Sheets. The forward contracts listed below will be
recognized within the next twelve months except for 700 GBP which will be recognized in 2019. The following is a summary of the
notional transaction amounts and fair values for the Company’s outstanding derivative financial instruments as of September 30,
2017.
(In thousands)
|
|
Notional Amount
(Currency)
|
|
Fair Value
(US$)
|
|
Forward contracts
|
|
1,859 GBP
|
|
|
(173
|
)
|
Forward contracts
|
|
3,250 USD
|
|
|
149
|
|
Forward contracts
|
|
200 EUR
|
|
|
(5
|
)
|
Fair value of financial instruments
The Company’s forward contracts are classified within Level
2 of the valuation hierarchy in accordance with FASB Accounting Standards Codification (ASC) 825, as presented below as of September
30, 2017:
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
$
|
–
|
|
|
|
(29
|
)
|
|
|
–
|
|
|
|
(29
|
)
|
Valuation was based on third party evidence of similarly priced
derivative instruments. There are no master netting arrangements with financial parties.
|
13.
|
Business Segment Information
|
The Company is organized based on the products and services it offers,
and classifies its business operations in segments for financial reporting purposes. Currently, the Company has four reporting
segments: Filtration/Fluid Flow (Filtration), RF Shielding and Test (Test), Utility Solutions Group (USG) and Technical Packaging.
The Filtration segment’s operations consist of: PTI Technologies
Inc. (PTI), VACCO Industries (VACCO), Crissair, Inc. (Crissair), Mayday Manufacturing Co. (Mayday), Hi-Tech Metals, Inc. (Hi-Tech)
and Westland Technologies, Inc. (Westland). PTI, VACCO and Crissair design and manufacture specialty filtration products including
hydraulic filter elements and fluid control devices used in commercial aerospace applications, unique filter mechanisms used in
micro-propulsion devices for satellites and custom designed filters for manned aircraft and submarines. Mayday designs and manufactures
mission-critical bushings, pins, sleeves and precision-tolerance machined components for landing gear, rotor heads, engine mounts,
flight controls, and actuation systems for the aerospace and defense industries. Hi-Tech is a full-service metal processor offering
aerospace OEM’s and Tier 1 suppliers, a large portfolio of processing services including anodizing, cadmium and zinc-nickel
plating, organic coatings, non-destructive testing, and heat treatment. Westland designs, develops and manufactures elastomeric-based
signature reduction solutions for U.S. naval vessels.
The Test segment’s operations consist of ETS-Lindgren Inc.
and related subsidiaries (ETS-Lindgren). ETS-Lindgren is an industry leader in providing its customers with the ability to identify,
measure and contain magnetic, electromagnetic and acoustic energy. ETS-Lindgren also manufactures radio frequency shielding products
and components used by manufacturers of medical equipment, communications systems, electronic products, and shielded rooms for
high-security data processing and secure communication.
The USG segment’s operations consist of Doble Engineering
Company and related subsidiaries (Doble), Morgan Schaffer Ltd. (Morgan Schaffer), and NRG Systems, Inc. (NRG). Doble provides high-end,
intelligent diagnostic test solutions for the electric power delivery industry and is a leading supplier of power factor and partial
discharge testing instruments used to assess the integrity of high-voltage power delivery equipment. Morgan Schaffer provides an
integrated offering of dissolved gas analysis, oil testing, and data management solutions which enhance the ability of electric
utilities to accurately monitor the health of critical power transformers. NRG designs and manufactures decision support tools
for the renewable energy industry, primarily wind.
The Technical Packaging segment’s operations consist of Thermoform
Engineered Quality LLC (TEQ) and Plastique.
The companies
within this segment provide innovative solutions to the medical and commercial markets for thermoformed and precision molded pulp
fiber packages and specialty products using a wide variety of thin gauge plastics and pulp.
Accounting policies of the segments are the same as those described
in the summary of significant accounting policies in Note 1 to the Consolidated Financial Statements. The operating units within
each reporting segment have been aggregated because of similar economic characteristics and meet the other aggregation criteria
of FASB ASC 280.
The Company evaluates the performance of its operating units based
on EBIT, which is defined as earnings before interest and taxes. EBIT on a consolidated basis is a non-GAAP financial measure;
see “Non-GAAP Financial Measures” in Item 7, “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.” Intersegment sales and transfers are not significant. Segment assets consist primarily of customer
receivables, inventories, capitalized software and fixed assets directly associated with the production processes of the segment.
Segment depreciation and amortization is based upon the direct assets listed above.
Net Sales
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Filtration
|
|
$
|
279.5
|
|
|
|
207.8
|
|
|
|
196.7
|
|
Test
|
|
|
160.9
|
|
|
|
161.5
|
|
|
|
177.6
|
|
USG
|
|
|
162.4
|
|
|
|
127.8
|
|
|
|
123.6
|
|
Technical Packaging
|
|
|
82.9
|
|
|
|
74.4
|
|
|
|
39.4
|
|
Consolidated totals
|
|
$
|
685.7
|
|
|
|
571.5
|
|
|
|
537.3
|
|
No customer exceeded 10% of sales in 2017 or 2016.
EBIT
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Filtration
|
|
$
|
52.2
|
|
|
|
45.2
|
|
|
|
41.7
|
|
Test
|
|
|
19.5
|
|
|
|
13.9
|
|
|
|
9.5
|
|
USG
|
|
|
36.6
|
|
|
|
31.1
|
|
|
|
29.6
|
|
Technical Packaging
|
|
|
8.5
|
|
|
|
9.6
|
|
|
|
4.9
|
|
Reconciliation to consolidated totals (Corporate)
|
|
|
(32.1
|
)
|
|
|
(30.1
|
)
|
|
|
(23.4
|
)
|
Consolidated EBIT
|
|
|
84.7
|
|
|
|
69.7
|
|
|
|
62.3
|
|
Less: interest expense
|
|
|
(4.6
|
)
|
|
|
(1.3
|
)
|
|
|
(0.8
|
)
|
Earnings before income tax
|
|
$
|
80.1
|
|
|
|
68.4
|
|
|
|
61.5
|
|
Identifiable Assets
(Dollars in millions)
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
|
2016
|
|
Filtration
|
|
$
|
194.2
|
|
|
|
143.5
|
|
Test
|
|
|
132.2
|
|
|
|
110.9
|
|
USG
|
|
|
175.5
|
|
|
|
85.4
|
|
Technical Packaging
|
|
|
47.1
|
|
|
|
40.9
|
|
Corporate – Goodwill
|
|
|
377.9
|
|
|
|
323.6
|
|
Corporate – Other assets
|
|
|
333.5
|
|
|
|
274.1
|
|
Consolidated totals
|
|
$
|
1,260.4
|
|
|
|
978.4
|
|
Corporate assets consist primarily of goodwill, deferred taxes,
acquired intangible assets and cash balances.
Capital Expenditures
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Filtration
|
|
$
|
10.2
|
|
|
|
3.3
|
|
|
|
5.0
|
|
Test
|
|
|
4.5
|
|
|
|
3.3
|
|
|
|
3.1
|
|
USG
|
|
|
7.6
|
|
|
|
3.3
|
|
|
|
3.3
|
|
Technical Packaging
|
|
|
7.4
|
|
|
|
3.9
|
|
|
|
1.0
|
|
Corporate
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Consolidated totals
|
|
$
|
29.7
|
|
|
|
13.8
|
|
|
|
12.4
|
|
In addition to the above amounts, the Company incurred expenditures
for capitalized software of $9.0 million, $8.7 million and $6.9 million in 2017, 2016 and 2015, respectively.
Depreciation and Amortization
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Filtration
|
|
$
|
6.6
|
|
|
|
4.0
|
|
|
|
3.8
|
|
Test
|
|
|
3.6
|
|
|
|
3.6
|
|
|
|
3.1
|
|
USG
|
|
|
9.8
|
|
|
|
8.1
|
|
|
|
6.2
|
|
Technical Packaging
|
|
|
3.5
|
|
|
|
2.9
|
|
|
|
1.4
|
|
Corporate
|
|
|
8.7
|
|
|
|
5.0
|
|
|
|
4.1
|
|
Consolidated totals
|
|
$
|
32.2
|
|
|
|
23.6
|
|
|
|
18.6
|
|
Depreciation expense of property, plant and equipment was $15.9
million, $11.9 million and $9.7 million for 2017, 2016 and 2015, respectively.
Geographic Information
Net Sales
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
United States
|
|
$
|
503.1
|
|
|
|
403.6
|
|
|
|
385.5
|
|
Asia
|
|
|
69.8
|
|
|
|
68.1
|
|
|
|
70.4
|
|
Europe
|
|
|
75.4
|
|
|
|
71.6
|
|
|
|
46.6
|
|
Canada
|
|
|
22.2
|
|
|
|
12.9
|
|
|
|
11.6
|
|
India
|
|
|
4.8
|
|
|
|
2.9
|
|
|
|
4.3
|
|
Other
|
|
|
10.4
|
|
|
|
12.4
|
|
|
|
18.9
|
|
Consolidated totals
|
|
$
|
685.7
|
|
|
|
571.5
|
|
|
|
537.3
|
|
Long-Lived Assets
(Dollars in millions)
|
|
|
|
|
|
|
Year ended September 30,
|
|
2017
|
|
|
2016
|
|
United States
|
|
$
|
111.5
|
|
|
|
79.9
|
|
Europe
|
|
|
16.8
|
|
|
|
11.7
|
|
Other
|
|
|
4.4
|
|
|
|
0.8
|
|
Consolidated totals
|
|
$
|
132.7
|
|
|
|
92.4
|
|
Net sales are attributed to countries based on location of customer.
Long-lived assets are attributed to countries based on location of the asset.
|
14.
|
Commitments and Contingencies
|
The Company leases certain real property, equipment and machinery
under non-cancelable operating leases. Rental expense under these operating leases was $6.8 million, $6.0 million and $5.2 million
for 2017, 2016 and 2015, respectively. Future aggregate minimum lease payments under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of September 30, 2017, are:
(Dollars in thousands)
|
|
|
|
Years ending September 30:
|
|
|
|
2018
|
|
|
6,361
|
|
2019
|
|
|
5,340
|
|
2020
|
|
|
3,733
|
|
2021
|
|
|
2,653
|
|
2022 and thereafter
|
|
|
3,647
|
|
Total
|
|
$
|
21,734
|
|
At September 30, 2017, the Company had $9.7 million in letters of
credit outstanding as guarantees of contract performance. As a normal incident of the businesses in which the Company is engaged,
various claims, charges and litigation are asserted or commenced from time to time against the Company. Additionally, the Company
is currently involved in various stages of investigation and remediation relating to environmental matters. It is the opinion of
Management that the aggregate costs involved in the resolution of these matters, and final judgments, if any, which might be rendered
against the Company are adequately accrued, are covered by insurance or are not likely to have a material adverse effect on the
Company’s results from continuing operations, capital expenditures or competitive position.
The Company leases certain real property, equipment and
machinery under capital leases, primarily associated with the 2017 acquisitions of NRG and Mayday. The facility leases expire
in 2029 and the machinery leases expire in 2020. As of September 30, 2017, the net carrying value and accumulated
depreciation of the assets under capital leases recorded by the Company were $16.1 million and $0.8 million, respectively.
Capital lease obligations are included within other long-term liabilities (long-term portion) and accrued other expenses
(current portion). Remaining payments due on the Company’s capital lease obligations as of September 30, 2017, are:
(Dollars in thousands)
|
|
|
|
Years ending September 30:
|
|
|
|
2018
|
|
$
|
1,883
|
|
2019
|
|
|
1,922
|
|
2020
|
|
|
1,914
|
|
2021
|
|
|
1,858
|
|
2022 and thereafter
|
|
|
15,977
|
|
Total minimum lease payments
|
|
|
23,554
|
|
Less: amounts representing interest
|
|
|
4,233
|
|
Present value of net minimum lease payments
|
|
|
19,321
|
|
Current portion of capital lease obligations
|
|
|
1,370
|
|
Non-current portion of capital lease obligations
|
|
$
|
17,951
|
|
|
16.
|
Quarterly Financial Information (Unaudited)
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Fiscal
|
|
(Dollars in thousands, except per share amounts)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
146,368
|
|
|
|
161,178
|
|
|
|
171,189
|
|
|
|
207,005
|
|
|
|
685,740
|
|
Net earnings
|
|
|
10,727
|
|
|
|
11,157
|
|
|
|
12,645
|
|
|
|
19,174
|
|
|
|
53,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
0.42
|
|
|
|
0.43
|
|
|
|
0.49
|
|
|
|
0.74
|
|
|
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
0.41
|
|
|
|
0.43
|
|
|
|
0.49
|
|
|
|
0.74
|
|
|
|
2.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.08
|
|
|
|
0.08
|
|
|
|
0.08
|
|
|
|
0.08
|
|
|
|
0.32
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
132,833
|
|
|
|
138,930
|
|
|
|
140,191
|
|
|
|
159,505
|
|
|
|
571,459
|
|
Net earnings
|
|
|
8,829
|
|
|
|
8,610
|
|
|
|
11,528
|
|
|
|
16,915
|
|
|
|
45,882
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
0.34
|
|
|
|
0.33
|
|
|
|
0.45
|
|
|
|
0.66
|
|
|
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
0.34
|
|
|
|
0.33
|
|
|
|
0.44
|
|
|
|
0.65
|
|
|
|
1.77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.08
|
|
|
|
0.08
|
|
|
|
0.08
|
|
|
|
0.08
|
|
|
|
0.32
|
|
MANAGEMENT’S
STATEMENT OF FINANCIAL RESPONSIBILITY
The Company’s Management is responsible for the fair presentation
of the Company’s financial statements in accordance with accounting principles generally accepted in the United States of
America, and for their integrity and accuracy. Management is confident that its financial and business processes provide accurate
information on a timely basis.
Management, with the oversight of ESCO’s Board of Directors,
has established and maintains a strong ethical climate in which the Company’s affairs are conducted. Management also has
established an effective system of internal controls that provide reasonable assurance as to the integrity and accuracy of the
financial statements, and responsibility for the Company’s assets. KPMG LLP, the Company’s independent registered public
accounting firm, reports directly to the Audit and Finance Committee of the Board of Directors. The Audit and Finance Committee
has established policies consistent with corporate reform laws for auditor independence. In accordance with corporate governance
listing requirements of the New York Stock Exchange:
|
·
|
A majority of Board members are independent of the Company and its
Management.
|
|
·
|
All members of the key Board committees — the Audit and Finance,
the Human Resources and Compensation and the Nominating and Corporate Governance Committees — are independent.
|
|
·
|
The independent members of the Board meet regularly without the presence
of Management.
|
|
·
|
The Company has a clear code of ethics and a conflict of interest
policy to ensure that key corporate decisions are made by individuals who do not have a financial interest in the outcome, separate
from their interest as Company officials.
|
|
·
|
The charters of the Board committees clearly establish their respective
roles and responsibilities.
|
|
·
|
The Company has a Corporate Ethics Committee, ethics officers at each
operating location and an ombudsman hot line available to all domestic employees and all foreign employees have local ethics officers
and access to the Company’s ombudsman.
|
The Company has a strong financial team, from its executive leadership
to each of its individual contributors. Management monitors compliance with its financial policies and practices over critical
areas including internal controls, financial accounting and reporting, accountability, and safeguarding of its corporate assets.
The internal audit function maintains oversight over the key areas of the business and financial processes and controls, and reports
directly to the Audit and Finance Committee. Additionally, all employees are required to adhere to the ESCO Code of Business Conduct
and Ethics, which is monitored by the Corporate Ethics Committee.
Management is dedicated to ensuring that the standards of financial
accounting and reporting that are established are maintained. The Company’s culture demands integrity and a commitment to
strong internal practices and policies.
The Consolidated Financial Statements have been audited by KPMG
LLP, whose report is included herein.
November 29, 2017
/s/Victor L. Richey
|
/s/Gary E. Muenster
|
|
|
Victor L. Richey
|
Gary E. Muenster
|
Chairman, Chief Executive Officer
|
Executive Vice President
|
and President
|
and Chief Financial Officer
|
MANAGEMENT’S
REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company’s Management is responsible for establishing and
maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act
of 1934). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles in the United States of America.
Because of its inherent limitations, any system of internal control
over financial reporting, no matter how well designed, may not prevent or detect misstatements due to the possibility that a control
can be circumvented or overridden or that misstatements due to error or fraud may occur that are not detected. Also, because of
changes in conditions, internal control effectiveness may vary over time.
Management assessed the effectiveness of the Company’s internal
control over financial reporting as of September 30, 2017, using criteria established in
Internal Control — Integrated
Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and concluded that the
Company maintained effective internal control over financial reporting as of September 30, 2017, based on these criteria.
Our internal control over financial reporting as of September 30,
2017, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in its report which is included
herein.
We acquired NRG Systems, Inc. (NRG) on May 8, 2017, and the assets
of Morgan Schaffer Inc. (Morgan Schaffer) on May 25, 2017 and Vanguard Instruments Company (Vanguard Instruments) on August 30,
2017. NRG, Morgan Schaffer and Vanguard Instruments had total assets representing 11.6 percent of consolidated assets, and total
sales representing 3.6 percent of consolidated net sales, as of and for the year ended September 30, 2017. We excluded from our
assessment of the effectiveness of our internal control over financial reporting as of September 30, 2017 internal control over
financial reporting associated with NRG, Morgan Schaffer and Vanguard Instruments.
November 29, 2017
/s/
Victor L. Richey
|
/s/
Gary E. Muenster
|
|
|
Victor L. Richey
|
Gary E. Muenster
|
Chairman, Chief Executive Officer
|
Executive Vice President
|
and President
|
and Chief Financial Officer
|