ITEM 1. FINANCIAL STATEMENTS
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The accompanying consolidated financial statements,
in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation
of the results for the interim periods presented. The consolidated financial statements are presented in accordance with the requirements
of Form 10-Q and consequently do not include all the disclosures required for annual financial statements by accounting principles
generally accepted in the United States of America (GAAP). For further information, refer to the consolidated financial statements
and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017.
The Company’s results for the three and six-month
periods ended March 31, 2018 are not necessarily indicative of the results for the entire 2018 fiscal year. References to the second
quarters of 2018 and 2017 represent the fiscal quarters ended March 31, 2018 and 2017, respectively.
The preparation of financial statements in conformity
with GAAP requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Actual
results could differ from those estimates.
On March 14, 2018, the Company acquired the assets
of Manta Test Systems Inc. (Manta), a North American utility solutions provider located in Mississauga, Ontario, Canada, for a
purchase price of $9.5 million in cash. Manta has annualized sales of approximately $8 million. Since the date of acquisition,
the operating results for Manta 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 $0.4 million of accounts receivable, $1.1 million
of inventory, $0.2 million of property, plant and equipment, $0.4 million of accounts payable and accrued expenses, $3.5 million
of goodwill, $1.2 million of tradenames and $3.6 million of amortizable intangible assets consisting of customer relationships
with a weighted average life of 13 years.
|
3.
|
EARNINGS PER SHARE (EPS)
|
Basic EPS is calculated using the weighted average
number of common shares outstanding during the period. Diluted EPS is calculated using the weighted average number of common shares
outstanding during the period plus shares issuable upon the assumed exercise of dilutive common share options and vesting of performance-accelerated
restricted shares (restricted shares) by using the treasury stock method. The number of shares used in the calculation of earnings
per share for each period presented is as follows (in thousands):
|
|
Three Months
Ended March 31,
|
|
|
Six Months
Ended March 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average Shares Outstanding - Basic
|
|
|
25,844
|
|
|
|
25,723
|
|
|
|
25,840
|
|
|
|
25,721
|
|
Dilutive Options and Restricted Shares
|
|
|
144
|
|
|
|
188
|
|
|
|
195
|
|
|
|
224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Shares - Diluted
|
|
|
25,988
|
|
|
|
25,911
|
|
|
|
26,035
|
|
|
|
25,945
|
|
|
4.
|
SHARE-BASED COMPENSATION
|
The Company provides compensation benefits to certain
key employees under several share-based plans providing for performance-accelerated restricted shares (restricted shares), and
to non-employee directors under a non-employee directors compensation plan.
Performance-Accelerated Restricted Share Awards
Compensation expense related to the restricted share
awards was $1.0 million and $2.1 million for the three and six-month periods ended March 31, 2018, respectively, and $1.2 million
and $2.4 million for the corresponding periods of 2017. There were 221,024 non-vested shares outstanding as of March 31, 2018.
Non-Employee Directors Plan
Compensation expense related to the non-employee
director grants was $0.3 million and $0.5 million for the three and six-month periods ended March 31, 2018, respectively, and $0.2
million and $0.5 million for the corresponding periods of 2017.
The total share-based compensation cost that has
been recognized in the results of operations and included within selling, general and administrative expenses (SG&A) was $1.3
million and $2.6 million for the three-and six-month periods ended March 31, 2018, respectively, and $1.4 million and $2.9 million
for the three and six-month periods ended March 31, 2017. The total income tax benefit recognized in results of operations for
share-based compensation arrangements was $0.4 million and $0.7 million for the three and six-month periods ended March 31, 2018,
respectively, and $0.5 million and $1.1 million for the three and six-month periods ended March 31, 2017, respectively. As of
March 31, 2018, there was $4.3 million of total unrecognized compensation cost related to share-based compensation arrangements.
That cost is expected to be recognized over a remaining weighted-average period of 1.5 years.
Inventories consist of the following:
(In thousands)
|
|
March 31,
2018
|
|
|
September 30,
2017
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
32,140
|
|
|
|
28,127
|
|
Work in process
|
|
|
50,658
|
|
|
|
43,750
|
|
Raw materials
|
|
|
54,231
|
|
|
|
52,638
|
|
Total inventories
|
|
$
|
137,029
|
|
|
|
124,515
|
|
|
6.
|
GOODWILL AND OTHER INTANGIBLE
ASSETS
|
Included on the Company’s Consolidated Balance
Sheets at March 31, 2018 and September 30, 2017 are the following intangible assets gross carrying amounts and accumulated amortization:
(Dollars in thousands)
|
|
March 31,
2018
|
|
|
September 30,
2017
|
|
Goodwill
|
|
$
|
382,141
|
|
|
|
377,879
|
|
|
|
|
|
|
|
|
|
|
Intangible assets with determinable lives:
|
|
|
|
|
|
|
|
|
Patents
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
972
|
|
|
|
928
|
|
Less: accumulated amortization
|
|
|
764
|
|
|
|
750
|
|
Net
|
|
$
|
208
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
Capitalized software
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
66,349
|
|
|
|
63,007
|
|
Less: accumulated amortization
|
|
|
37,910
|
|
|
|
34,382
|
|
Net
|
|
$
|
28,439
|
|
|
|
28,625
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
186,002
|
|
|
|
181,891
|
|
Less: accumulated amortization
|
|
|
42,490
|
|
|
|
37,364
|
|
Net
|
|
$
|
143,512
|
|
|
|
144,527
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
5,276
|
|
|
|
5,373
|
|
Less: accumulated amortization
|
|
|
1,725
|
|
|
|
1,383
|
|
Net
|
|
$
|
3,551
|
|
|
|
3,990
|
|
Intangible assets with indefinite lives:
|
|
|
|
|
|
|
|
|
Trade names
|
|
$
|
173,921
|
|
|
|
173,813
|
|
The changes in the carrying amount of goodwill attributable
to each business segment for the six months ended March 31, 2018 is as follows:
(Dollars in millions)
|
|
USG
|
|
|
Test
|
|
|
Filtration
|
|
|
Packaging
|
|
|
Total
|
|
Balance as of September 30, 2017
|
|
|
250.2
|
|
|
|
34.1
|
|
|
|
73.7
|
|
|
|
19.9
|
|
|
|
377.9
|
|
Acquisition activity
|
|
|
3.7
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3.7
|
|
Foreign currency translation
|
|
|
(0.2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
0.7
|
|
|
|
0.5
|
|
Balance as of March 31, 2018
|
|
$
|
253.7
|
|
|
|
34.1
|
|
|
|
73.7
|
|
|
|
20.6
|
|
|
|
382.1
|
|
|
7.
|
BUSINESS SEGMENT INFORMATION
|
The Company is organized based on the products
and services that it offers, and classifies its business operations in four reportable segments for financial reporting
purposes: 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), Westland Technologies Inc. (Westland), Mayday Manufacturing Co. and its affiliate Hi-Tech Metals,
Inc. (collectively referred to as Mayday). The companies within this segment primarily design and manufacture specialty
filtration products, including hydraulic filter elements used in commercial aerospace applications, unique filter mechanisms
used in micro-propulsion devices for satellites and custom designed filters for manned and unmanned aircraft; manufacture
elastomeric-based signature reduction solutions for the U.S. Navy; and manufacture landing gear components for the aerospace
and defense industry. The Test segment’s operations consist primarily of ETS-Lindgren Inc. (ETS-Lindgren). ETS-Lindgren
is an industry leader in providing its customers with the ability to identify, measure and contain magnetic, electromagnetic
and acoustic energy. The USG segment’s operations consist primarily of Doble Engineering Company (Doble), Morgan
Schaffer Inc. (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 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 for the electric power industry. 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 Limited and Plastique Sp. z o.o. (together, Plastique). The
companies within this segment provide innovative solutions to the medical and commercial markets for thermoformed packages
and specialty products using a wide variety of thin gauge plastics and pulp.
Management evaluates and measures the performance
of its reportable segments based on “Net Sales” and “EBIT”, which are detailed in the table below. EBIT
is defined as earnings before interest and taxes.
|
|
Three Months
Ended March 31,
|
|
|
Six Months
Ended March 31,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
NET SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filtration
|
|
$
|
65,775
|
|
|
|
68,906
|
|
|
|
125,810
|
|
|
|
127,690
|
|
Test
|
|
|
40,805
|
|
|
|
38,367
|
|
|
|
78,334
|
|
|
|
72,194
|
|
USG
|
|
|
46,699
|
|
|
|
32,671
|
|
|
|
102,453
|
|
|
|
68,228
|
|
Technical Packaging
|
|
|
21,499
|
|
|
|
21,234
|
|
|
|
41,676
|
|
|
|
39,434
|
|
Consolidated totals
|
|
$
|
174,778
|
|
|
|
161,178
|
|
|
|
348,273
|
|
|
|
307,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filtration
|
|
$
|
11,118
|
|
|
|
11,625
|
|
|
|
20,764
|
|
|
|
22,351
|
|
Test
|
|
|
5,300
|
|
|
|
3,766
|
|
|
|
7,895
|
|
|
|
6,191
|
|
USG
|
|
|
5,626
|
|
|
|
7,434
|
|
|
|
16,277
|
|
|
|
17,108
|
|
Technical Packaging
|
|
|
1,885
|
|
|
|
2,196
|
|
|
|
2,850
|
|
|
|
3,227
|
|
Corporate (loss)
|
|
|
(8,309
|
)
|
|
|
(7,347
|
)
|
|
|
(17,180
|
)
|
|
|
(14,394
|
)
|
Consolidated EBIT
|
|
|
15,620
|
|
|
|
17,674
|
|
|
|
30,606
|
|
|
|
34,483
|
|
Less: Interest expense
|
|
|
(2,036
|
)
|
|
|
(855
|
)
|
|
|
(4,221
|
)
|
|
|
(1,539
|
)
|
Earnings before income taxes
|
|
$
|
13,584
|
|
|
|
16,819
|
|
|
|
26,385
|
|
|
|
32,944
|
|
Non-GAAP Financial Measures
The financial measure “EBIT” is presented
in the above table and elsewhere in this Report. EBIT on a consolidated basis is a non-GAAP financial measure. Management believes
that EBIT is useful in assessing the operational profitability of the Company’s business segments because it excludes interest
and taxes, which are generally accounted for across the entire Company on a consolidated basis. EBIT is also one of the measures
used by management in determining resource allocations within the Company as well as incentive compensation. A reconciliation of
EBIT to net earnings is set forth in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations
– EBIT.
The Company believes that the presentation of EBIT
provides important supplemental information to investors to facilitate comparisons with other companies, many of which use similar
non-GAAP financial measures to supplement their GAAP results. However, the Company’s non-GAAP financial measures may not
be comparable to other companies’ non-GAAP financial performance measures. Furthermore, the use of non-GAAP financial measures
is not intended to replace any measures of performance determined in accordance with GAAP.
The Company’s debt is summarized as follows:
(In thousands)
|
|
March 31,
2018
|
|
|
September 30,
2017
|
|
Total borrowings
|
|
$
|
265,000
|
|
|
|
275,000
|
|
Short-term borrowings and current portion of long-term debt
|
|
|
(20,000
|
)
|
|
|
(20,000
|
)
|
Total long-term debt, less current portion
|
|
$
|
245,000
|
|
|
|
255,000
|
|
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 JPMorgan
Chase Bank, N.A., as Administrative Agent.
At March 31, 2018, the Company had approximately
$176 million available to borrow under the Credit Facility, and a $250 million increase option, in addition to $42.9 million cash
on hand. At March 31, 2018, the Company had $265 million of outstanding borrowings under the Credit Facility in addition to outstanding
letters of credit of $9.1 million. The Company classified $20.0 million as the current portion of long-term debt as of March 31,
2018, as the Company intends to repay this amount within the next twelve month period; however, the Company has no contractual
obligation to repay such amount during the next twelve month period.
The Credit Facility requires, as determined by certain
financial ratios, a facility fee ranging from 12.5 to 27.5 basis points per year 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 the material foreign subsidiaries’ share equity. The financial covenants of the
Credit Facility include a leverage ratio and an interest coverage ratio. The weighted average interest rates were 2.99% and 2.87%
for the three and six-month periods ending March 31, 2018, respectively, and 1.89% and 1.76% for the corresponding periods of 2017.
At March 31, 2018, the Company was in compliance with all debt covenants.
The second quarter 2018 effective income tax rate
was 26.4% compared to 33.7% in the second quarter of 2017. The income tax benefit for the first six months of 2018 was $18.3 million
compared to income tax expense of $11.1 million for the first six months of 2017. The effective income tax rate for the first six
months of 2018 was (69.3%) compared to 33.6% for the first six months of 2017. H.R. 1,
Tax Cuts and Jobs Act
(“TCJA”),
was signed into law on December 22, 2017. The total impact of the TCJA in the second quarter and first six months of 2018 was a
net expense of $0.7 million and a net benefit of $24.4 million, respectively. The impacts were as follows: First, the Company’s
2018 federal statutory rate decreased from 35.0% to 24.5% which required an adjustment to the value of its deferred tax assets and
liabilities. This adjustment ($30.3 million provisional amount recorded in the first quarter of 2018) favorably impacted the year-to-date
effective tax rate by 114.9%. Second, the TCJA subjected the Company’s cumulative foreign earnings to federal income tax
($3.6 million provisional amount of which $2.9 million was recorded in the first quarter of 2018 and $0.7 million was recorded
in the second quarter of 2018) which unfavorably impacted the second quarter and year-to-date effective tax rate by 4.9% and 13.6%,
respectively.
In the first quarter of 2018, the Company recorded
a $2.3 million provisional estimate of the income tax effects of the future repatriation of the cumulative earnings of its foreign
subsidiaries which unfavorably impacted the year-to-date effective tax rate by 8.9%. An additional $7.5 million pension contribution
for the 2017 plan year was approved increasing the value of the deferred tax liability by $1.0 million (provisional amount). This
favorable adjustment, net of the $0.3 million unfavorable impact to the 2017 Domestic Production Deduction, favorably impacted
the second quarter and year-to-date effective tax rate by 5.8% and 3.0%, respectively. The income tax expense in the second quarter
and first six months of 2018 was also unfavorably impacted by the cancellation of debt income triggered by the dissolution of a
foreign subsidiary increasing the second quarter and year-to-date effective tax rate by 1.5% and 0.8%, respectively.
Staff Accounting Bulletin No. 118 (SAB 118) was issued
by the SEC effective December 22, 2017. SAB 118 allows registrants to record provisional amounts of the income tax effects of the
TCJA where the information necessary to complete the accounting under ASC Topic 740 is not available but the amounts are based
on reasonable estimates. SAB 118 permits registrants to record adjustments to its provisional amounts during the measurement period
(which cannot exceed one year).
In the first quarter of 2018, the Company recorded
reasonable estimates of the TCJA income tax effects. In the second quarter of 2018, the Company was unable to complete the accounting
under ASC Topic 740 for the change in the value of the Company’s deferred tax assets and liabilities as it needs more time
to collect and analyze information primarily related to depreciation expense, pension liability (see provisional adjustment described
above), and percentage of completion revenue recognition. The accounting for these items will be completed within the allotted
measurement period. During the second quarter of 2018, the Company collected and analyzed some of the additional information needed
to complete the accounting under ASC Topic 740 for the income tax effects of subjecting the Company’s cumulative foreign
earnings to federal income tax and as described above recorded an adjustment of $0.7 million. This amount remains provisional as
the Company needs more time to collect and analyze the remaining information to compute the cumulative balance of earnings subject
to the tax and the amount of foreign tax credit that is available to offset the tax.
Since the TCJA subjected the Company’s cumulative
foreign earnings to U.S. tax, repatriation of those earnings generally provides that no additional federal tax will be imposed.
However, the permissible amount of repatriation can be restricted by local law and a repatriation can result in tax expense due
to local country withholding tax, U.S. state tax, and changes in foreign exchange rates. The Company is evaluating these considerations
to determine the amount of its foreign subsidiaries’ cumulative earnings it intends to indefinitely reinvest.
The TCJA includes a tax on global intangible low-taxed
income (“GILTI”). The Company expects it will be subject to this tax. At its January 10, 2018 meeting, the FASB staff
indicated that companies should make and disclose a policy election as to whether they will recognize deferred taxes for basis
differences expected to reverse as GILTI or whether they will account for GILTI as period costs if and when incurred. Because there
are interpretative questions associated with the approach that involves recognizing deferred taxes, the Company is in the process
of evaluating and will make the accounting policy election during the SAB 118 measurement period.
The change in shareholders’ equity for the
first six months of 2018 is shown below (in thousands):
Balance at September 30, 2017
|
|
$
|
671,918
|
|
Net earnings
|
|
|
44,665
|
|
Other comprehensive income (loss)
|
|
|
4,280
|
|
Cash dividends
|
|
|
(4,134
|
)
|
Stock compensation plans
|
|
|
2,807
|
|
Balance at March 31, 2018
|
|
$
|
719,536
|
|
A summary of net periodic benefit expense for the
Company’s defined benefit plans for the three and six-month periods ended March 31, 2018 and 2017 is shown in the following
table. Net periodic benefit cost for each period presented is comprised of the following:
|
|
Three Months
Ended March 31,
|
|
|
Six Months
Ended March 31,
|
|
(In thousands)
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Defined benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
|
$
|
821
|
|
|
|
737
|
|
|
|
1,641
|
|
|
|
1,702
|
|
Expected return on assets
|
|
|
(975
|
)
|
|
|
(942
|
)
|
|
|
(1,950
|
)
|
|
|
(2,036
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
Actuarial loss
|
|
|
548
|
|
|
|
683
|
|
|
|
1,097
|
|
|
|
1,188
|
|
Net periodic benefit cost
|
|
$
|
394
|
|
|
|
478
|
|
|
|
788
|
|
|
|
857
|
|
|
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. During the first quarter of 2018, the Company
entered into three interest rate swaps with a notional amount of $150 million to hedge some of its exposure to variability in future
LIBOR-based interest payments on variable rate debt. In addition, the Company’s Canadian subsidiary Morgan Schaffer enters
into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars. The
Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. All derivative
instruments are reported in either accrued expenses or other receivables on the balance sheet at fair value. For derivative instruments
designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income until
recognized in earnings with the underlying hedged item. The interest rate swaps entered into during the first quarter of 2018 were
not designated as cash flow hedges and, therefore, the gain or loss on the derivative is reflected in earnings each period.
The following is a summary of the notional transaction
amounts and fair values for the Company’s outstanding derivative financial instruments by risk category and instrument type
as of March 31, 2018:
(In thousands)
|
|
Notional
amount
|
|
|
Fair
Value
(US$)
|
|
|
Float
Rate
|
|
|
Fix
Rate
|
|
Forward contracts
|
|
|
700
|
|
|
GBP
|
(18
|
)
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
|
4,500
|
|
|
USD
|
(74
|
)
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
|
200
|
|
|
EUR
|
(1
|
)
|
|
|
|
|
|
|
|
|
Interest rate swap
|
|
|
150,000
|
|
|
USD
|
233
|
|
|
|
1.84
|
%
|
|
|
1.80
|
%
|
Interest rate swap *
|
|
|
150,000
|
|
|
USD
|
525
|
|
|
|
N/A
|
|
|
|
2.09
|
%
|
Interest rate swap **
|
|
|
150,000
|
|
|
USD
|
654
|
|
|
|
N/A
|
|
|
|
2.24
|
%
|
*This swap represents a forward
contract and will be effective in November 2018.
**This swap represents a forward
contract and will be effective in November 2019.
|
13.
|
FAIR VALUE MEASUREMENTS
|
The accounting guidance establishes a three-level
hierarchy for disclosure of fair value measurements, based upon the transparency of inputs to the valuation of an asset or liability
as of the measurement date, as follows:
|
·
|
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
·
|
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
|
|
·
|
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.
|
Financial Assets and Liabilities
The Company has estimated the fair value of its financial
instruments as of March 31, 2017 and September 30, 2016 using available market information or other appropriate valuation methodologies.
The carrying amounts of cash and cash equivalents, receivables, inventories, payables, debt and other current assets and liabilities
approximate fair value because of the short maturity of those instruments.
Fair Value of Financial Instruments
The Company’s forward contracts are classified
within Level 2 of the valuation hierarchy in accordance with FASB Accounting Standards Codification (ASC) 825, as presented below
as of March 31, 2018:
(In thousands)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets (Liabilities):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts
|
|
$
|
-
|
|
|
|
1,319
|
|
|
$
|
-
|
|
|
|
1,319
|
|
Valuation was based on third party evidence of similarly
priced derivative instruments.
Nonfinancial Assets and Liabilities
The Company’s nonfinancial assets such as property,
plant and equipment, and other intangible assets are not measured at fair value on a recurring basis; however they are subject
to fair value adjustments in certain circumstances, such as when there is evidence that an impairment may exist. No impairments
were recorded during the three and six-month periods ended March 31, 2018.
|
14.
|
NEW ACCOUNTING STANDARDS
|
In March 2017, the FASB issued ASU 2017-07,
Improving
the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,
which updates ASC 715,
Compensation
– Retirement Benefits
. This update permits only the service cost component of net periodic pension and postretirement
expense to be reported with other compensation costs, while all other components are required to be reported separately in other
deductions, outside any subtotal of operating income. These updates are effective for fiscal years beginning after December 15,
2017, with early adoption permitted, and must be adopted on a retrospective basis. The updates change presentation only and will
not impact the Company’s results of operations.
In August 2017, the FASB issued ASU 2017-12,
Targeted
Improvements to Accounting for Hedge Activities,
which updates ASC 815,
Derivatives and Hedging
. This update is intended
to amend the hedge accounting model to enable entities to better align the economics of risk management activities and financial
reporting. The updates eliminate the requirement to separately measure and report hedge ineffectiveness and simplify hedge documentation
and effectiveness assessment requirements. These updates are effective for fiscal years beginning after December 15, 2018, with
early adoption permitted, and must be adopted using a modified retrospective approach. These updates are not expected to materially
impact the Company’s results of operations.
In February 2016, the FASB issued ASU No. 2016-062,
Leases (Topic 842)
, which, among other things, requires an entity to recognize lease assets and lease liabilities on the
balance sheet and disclose key information about leasing arrangements. This standard will increase an entities’ reported
assets and liabilities. The standard is effective for fiscal years beginning after December 15, 2018 and mandates a modified retrospective
transition period for all entities. The Company is currently assessing the impact of this standard on its consolidated financial
statements and related disclosures.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue
from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled
for the transfer of promised goods or services to customers. This guidance has been further clarified and amended. The new standard
will be effective for annual reporting periods beginning after December 15, 2017, and interim periods within those annual periods.
The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently in the
process of evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The
Company has selected the Cumulative Effect method of transition to the new standard.