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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(MARK ONE)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED  JUNE 30, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______

COMMISSION FILE NUMBER 1-10596

ESCO TECHNOLOGIES INC.

(Exact name of registrant as specified in its charter)

MISSOURI

43-1554045

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

 

 

9900A CLAYTON ROAD

 

ST. LOUIS, MISSOURI

63124-1186

(Address of principal executive offices)

 (Zip Code)

(314) 213-7200

(Registrant’s telephone number, including area code)

Securities registered pursuant to section 12(b) of the Act:

    

    

Name of each exchange

Title of each class

Trading Symbol(s)

on which registered

Common Stock, par value $0.01 per share

ESE

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

 

Shares outstanding at July 31, 2020

Common stock, $.01 par value per share

 

26,037,714

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)

Three Months Ended

June 30, 

    

2020

    

2019

Net sales

$

172,665

 

178,259

Costs and expenses:

 

 

Cost of sales

 

107,686

 

105,036

Selling, general and administrative expenses

 

36,936

 

41,226

Amortization of intangible assets

 

5,535

 

4,445

Interest expense, net

 

1,523

 

1,878

Other (income) expenses, net

 

(824)

 

2,007

Total costs and expenses

 

150,856

 

154,592

 

 

Earnings before income taxes

 

21,809

 

23,667

Income tax expense

 

3,122

 

4,622

Earnings from continuing operations

18,687

19,045

Earnings from discontinued operations, net of tax expense of $203

1,022

Net earnings

$

18,687

 

20,067

 

 

Earnings per share:

 

 

Basic - Continuing operations

$

0.72

0.73

- Discontinued operations

0.04

- Net earnings

$

0.72

 

0.77

Diluted - Continuing operations

$

0.72

0.73

- Discontinued operations

 

 

0.04

- Net earnings

$

0.72

 

0.77

See accompanying notes to consolidated financial statements.

2

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in thousands, except per share amounts)

Nine Months Ended

June 30, 

    

2020

    

2019

    

Net sales

$

524,885

 

512,867

Costs and expenses:

 

 

Cost of sales

 

327,655

 

311,037

Selling, general and administrative expenses

 

119,023

 

119,093

Amortization of intangible assets

 

16,565

 

13,216

Interest expense, net

 

5,264

 

5,586

Other expenses (income), net

 

174

 

(3,350)

Total costs and expenses

 

468,681

 

445,582

Earnings before income taxes

 

56,204

 

67,285

Income tax expense

 

8,931

 

13,068

Earnings from continuing operations

47,273

54,217

(Loss) earnings from discontinued operations, net of tax expense of $269 and $255

(601)

1,964

Gain on sale of discontinued operations, net of tax expense of $23,734

76,614

Earnings from discontinued operations

76,013

1,964

Net earnings

$

123,286

 

56,181

Earnings per share:

 

 

  

Basic - Continuing operations

$

1.82

 

2.09

- Discontinued operations

2.92

0.08

- Net earnings

$

4.74

 

2.17

Diluted - Continuing operations

$

1.81

 

2.07

- Discontinued operations

2.91

0.08

- Net earnings

$

4.72

 

2.15

See accompanying notes to consolidated financial statements.

3

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands)

Three Months Ended

Nine Months Ended

June 30, 

June 30, 

2020

    

2019

2020

    

2019

Net earnings

$

18,687

 

20,067

123,286

 

56,181

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

2,802

 

1,840

 

(160)

 

(2,013)

 

Net unrealized (loss) gain on derivative instruments

 

 

(7)

 

 

94

 

Total other comprehensive income (loss), net of tax

 

2,802

 

1,833

 

(160)

 

(1,919)

 

Comprehensive income

$

21,489

 

21,900

123,126

 

54,262

 

See accompanying notes to consolidated financial statements.

4

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands)

June 30, 

September 30, 

    

2020

    

2019

ASSETS

 

  

 

  

Current assets:

 

  

 

  

Cash and cash equivalents

$

104,739

 

61,808

Accounts receivable, net

 

138,080

 

158,715

Contract assets

 

101,533

 

110,211

Inventories, net

 

152,264

 

124,956

Other current assets

 

16,868

 

14,190

Assets of discontinued operations – current

25,314

Total current assets

 

513,484

 

495,194

Property, plant and equipment, net of accumulated depreciation of $127,311 and $113,520, respectively

 

141,461

 

127,843

Intangible assets, net of accumulated amortization of $123,812 and $107,247, respectively

 

370,100

 

381,605

Goodwill

 

389,942

 

390,256

Operating lease assets

18,351

Other assets

 

11,247

 

4,445

Assets of discontinued operations - other

67,377

Total assets

$

1,444,585

 

1,466,720

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

Current liabilities:

 

 

Current maturities of long-term debt and short-term borrowings

$

21,577

 

20,000

Accounts payable

 

54,305

 

63,800

Contract liabilities

 

87,421

 

81,177

Accrued salaries

 

29,137

 

37,194

Accrued other expenses

 

49,975

 

37,947

Liabilities of discontinued operations - current

11,517

Total current liabilities

 

242,415

 

251,635

Pension obligations

 

13,114

 

22,682

Deferred tax liabilities

 

65,954

 

60,856

Non-current operating lease liabilities

14,357

Other liabilities

 

35,288

 

36,326

Long-term debt

 

130,000

 

265,000

Liabilities of discontinued operations - other

3,999

Total liabilities

 

501,128

 

640,498

Shareholders’ equity:

 

 

Preferred stock, par value $.01 per share, authorized 10,000,000 shares

 

 

Common stock, par value $.01 per share, authorized 50,000,000 shares, issued 30,645,625 and 30,596,940 shares, respectively

 

307

 

306

Additional paid-in capital

 

292,631

 

292,408

Retained earnings

 

801,787

 

684,741

Accumulated other comprehensive loss, net of tax

 

(44,134)

 

(43,974)

 

1,050,591

 

933,481

Less treasury stock, at cost: 4,607,911 and 4,615,627 common shares, respectively

 

(107,134)

 

(107,259)

Total shareholders’ equity

 

943,457

 

826,222

Total liabilities and shareholders’ equity

$

1,444,585

 

1,466,720

See accompanying notes to consolidated financial statements.

5

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands)

Nine Months Ended

June 30, 

2020

    

2019

Cash flows from operating activities:

 

  

 

  

 

Net earnings

$

123,286

 

56,181

Earnings from discontinued operations

(76,013)

(1,964)

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

Depreciation and amortization

 

31,066

 

25,802

Stock compensation expense

 

4,184

 

3,685

Changes in assets and liabilities

 

(20,926)

 

(42,528)

Change in property, plant and equipment due to gain on sale of building

(8,922)

Pension contributions

(10,000)

(2,500)

Effect of deferred taxes

 

2,155

 

1,983

Net cash provided by operating activities – continuing operations

53,752

31,737

Net cash (used) provided by operating activities – discontinued operations

(14,737)

5,304

Net cash provided by operating activities

 

39,015

 

37,041

Cash flows from investing activities:

 

 

  

Proceeds from sale of building and land

 

 

17,201

Additions to capitalized software

(6,564)

(6,207)

Capital expenditures

(28,291)

(15,280)

Net cash used by investing activities – continuing operations

(34,855)

(4,286)

Proceeds from sale of discontinued operations

183,812

Acquisition of business – discontinued operations

(937)

Capital expenditures – discontinued operations

(1,728)

(11,177)

Net cash provided (used) by investing activities – discontinued operations

182,084

(12,114)

Net cash provided (used) by investing activities

 

147,229

 

(16,400)

Cash flows from financing activities:

 

 

  

Proceeds from long-term debt and short-term borrowings

 

11,577

 

32,000

Principal payments on long-term debt

 

(145,000)

 

(35,000)

Dividends paid

 

(6,240)

 

(6,227)

Other

 

(3,127)

 

(3,230)

Net cash used by financing activities – continuing operations

(142,790)

(12,457)

Net cash (used) provided by financing activities – discontinued operations

(2,140)

921

Net cash used by financing activities

(144,930)

(11,536)

Effect of exchange rate changes on cash and cash equivalents

 

1,617

 

(626)

Net increase in cash and cash equivalents

 

42,931

 

8,479

Cash and cash equivalents, beginning of period

 

61,808

 

30,477

Cash and cash equivalents, end of period

$

104,739

 

38,956

Supplemental cash flow information:

 

 

  

Interest paid

$

4,669

 

5,556

Income taxes paid (including state and foreign)

 

23,435

 

18,513

See accompanying notes to consolidated financial statements.

6

ESCO TECHNOLOGIES INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.    BASIS OF PRESENTATION

The accompanying consolidated financial statements, in the opinion of management, include all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required for annual financial statements by accounting principles generally accepted in the United States of America (GAAP). For further information, refer to the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2019. Certain 2019 amounts have been reclassified to conform with the 2020 presentation.

The Company’s results for the three-month period ended June 30, 2020 are not necessarily indicative of the results for the entire 2020 fiscal year. References to the third quarters of 2020 and 2019 represent the fiscal quarters ended June 30, 2020 and 2019, 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.

Beginning in the first quarter of 2020, Management has renamed the Filtration / Fluid Flow (Filtration) segment as Aerospace & Defense (A&D) to better reflect the composition of the segment’s products, end markets and customer characteristics. The A&D segment’s individual legal and operating entities, historical financial results, and management structure are unchanged from what was formerly presented as Filtration.

2.    TECHNICAL PACKAGING DIVESTITURE

On December 31, 2019, the Company completed the sale of its Technical Packaging business segment, consisting of the Company's wholly-owned subsidiaries Thermoform Engineered Quality LLC, Plastique Ltd. and Plastique sp. z o.o. (the "Technical Packaging Business"), to Sonoco Plastics, Inc. and Sonoco Holdings, Inc. ("Buyers"), two wholly-owned subsidiaries of Sonoco Products Company, pursuant to the Equity Purchase Agreement entered into on November 15, 2019. 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. Results of operations, financial position and cash flows for the Technical Packaging business is reflected as discontinued operations in the consolidated financial statements and related notes for all periods presented.

Net sales from the Technical Packaging business were zero and $16.5 million in the third quarter and first nine months of 2020, respectively, compared to $21.5 million and $63.4 million in the corresponding periods of 2019. The Company received net proceeds from the sale of approximately $184 million and recorded a $76.6 million after-tax gain on the sale in the first quarter of 2020. The Company finalized the working capital adjustment and paid $0.2 million to the buyer during the third quarter of 2020.

7

The major classes of assets and liabilities of the Technical Packaging business included in the Consolidated Balance Sheet at September 30, 2019 are shown below (in millions).

    

September 30, 2019

Assets:

 

  

Accounts receivable, net

 

$

15.7

Contract assets, net

 

5.1

Inventories

 

3.9

Other current assets

 

0.6

Current assets

 

25.3

Property, plant & equipment, net

 

33.6

Intangible assets, net

 

11.4

Goodwill

 

19.0

Other assets

 

3.4

Total assets

 

$

92.7

Liabilities:

 

Accounts payable

 

$

7.6

Accrued expenses and other current liabilities

 

3.9

Current liabilities

 

11.5

Other liabilities

 

4.0

Total liabilities

 

$

15.5

3.    ACCOUNTING STANDARDS UPDATE

In February 2016, the FASB issued ASU No. 2016-062, "Leases" (ASU 2016-062) which supersedes ASC 840, "Leases" and creates a new topic, ASC 842, "Leases." Subsequent to the issuance of ASU 2016-062, ASC 842 was amended by various updates that amend and clarify the impact and implementation of the aforementioned update. Effective October 1, 2019, the Company adopted these updates using the optional transition method. These updates require lessees to recognize a lease liability and a lease asset for all leases, including operating leases, with a term greater than 12 months on its balance sheet. Upon initial application, the provisions of these updates are required to be applied using the modified retrospective method, which requires retrospective adoption to each prior reporting period presented with the cumulative effect of adoption recorded to the earliest reporting period presented. An optional transition method can be utilized which requires retrospective adoption beginning on the date of adoption with the cumulative effect of initially applying these updates recognized at the date of initial adoption. The standard also provided several optional practical expedients for use in transition. The Company elected to use what the FASB has deemed the “package of practical expedients,” which allowed the Company not to reassess previous conclusions regarding lease identification, lease classification and the accounting treatment for initial direct costs. These updates also expand the required quantitative and qualitative disclosures surrounding leases. The adoption resulted in the addition of "right of use" assets and lease liabilities of approximately $20 million in the consolidated balance sheet, with no significant change to the Company’s consolidated statements of operations or cash flows. Refer to Note 16 for further discussion.

4.    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

Nine Months Ended

    

June 30, 

June 30, 

2020

    

2019

    

2020

    

2019

Weighted Average Shares Outstanding - Basic

 

26,031

 

25,971

 

26,002

 

25,935

 

Dilutive Options and Restricted Shares

103

138

128

155

Adjusted Shares - Diluted

 

26,134

 

26,109

 

26,130

 

26,090

 

8

5.    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 $3.2 million for the three and nine-month periods ended June 30, 2020, respectively, and $1.1 million and $3.1 million for the corresponding periods in 2019. There were 221,024 non-vested shares outstanding as of June 30, 2020.

Non-Employee Directors Plan

Compensation expense related to the non-employee director grants was $0.3 million and $1.0 million for the three and nine-month periods ended June 30, 2020, respectively, and $0.3 million and $0.8 million for the corresponding periods in 2019.

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 $4.2 million for the three and nine-month periods ended June 30, 2020, respectively, and $1.3 million and $3.9 million for the corresponding periods in 2019. The total income tax benefit recognized in results of operations for share-based compensation arrangements was $0.2 million and $0.9 million for the three and nine-month periods ended June 30, 2020, respectively, and $0.2 million and $0.8 million for the corresponding periods in 2019. As of June 30, 2020, there was $9.2 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 2.2 years.

6.    INVENTORIES

Inventories, net, from continuing operations consist of the following:

    

June 30, 

    

September 30, 

(In thousands)

2020

2019

Finished goods

$

26,706

 

23,550

Work in process

 

43,569

 

26,407

Raw materials

 

81,989

 

74,999

Total inventories

$

152,264

 

124,956

9

7.    GOODWILL AND OTHER INTANGIBLE ASSETS

Included on the Company’s Consolidated Balance Sheets at June 30, 2020 and September 30, 2019 are the following intangible assets gross carrying amounts and accumulated amortization from continuing operations:

    

June 30, 

    

September 30, 

(Dollars in thousands)

    

2020

    

2019

Goodwill

$

389,942

    

390,256

 

  

Intangible assets with determinable lives:

 

  

Patents

 

  

Gross carrying amount

$

2,079

1,945

Less: accumulated amortization

 

832

748

Net

$

1,247

1,197

 

  

Capitalized software

 

  

Gross carrying amount

$

85,528

78,962

Less: accumulated amortization

 

55,315

48,530

Net

$

30,213

30,432

 

  

Customer relationships

 

  

Gross carrying amount

$

227,095

227,225

Less: accumulated amortization

 

64,562

55,326

Net

$

162,533

171,899

 

  

Other

 

  

Gross carrying amount

$

5,129

5,441

Less: accumulated amortization

 

3,105

2,645

Net

$

2,024

2,796

Intangible assets with indefinite lives:

 

  

Trade names

$

174,083

175,281

The changes in the carrying amount of goodwill attributable to each business segment for the nine months ended June 30, 2020 is as follows on a continuing operations basis:

Aerospace

(Dollars in millions)

    

USG

    

 Test

    

& Defense

    

Total

Balance as of September 30, 2019

$

254.0

 

34.1

 

102.2

 

390.3

Foreign currency translation

(0.3)

(0.1)

(0.4)

Balance as of June 30, 2020

$

253.7

34.0

102.2

389.9

The economic uncertainty, changes in the propensity for the general public to travel by air, and reductions in demand for commercial aircraft as a result of the COVID-19 pandemic have adversely impacted net sales and operating results in certain of our Aerospace and Defense reporting units and was determined to be an event and change in circumstances that required a quantitative review of goodwill and other intangible assets for impairment. The determination of the fair value of reporting units is based, among other things, on estimates of future operating performance of the reporting unit being valued. The Company's methodology includes the use of an income approach that discounts future net cash flows to their present value at a rate that reflects the Company's cost of capital. These estimated fair values are based on estimates of future cash flows of the businesses. Factors affecting these future cash flows include the continued market demand for, and acceptance of, the products and services offered by the businesses, the development of new products and services by the businesses and the underlying cost of development, the future cost structure of the businesses and future technological changes. The Company also incorporates market multiples for comparable companies in determining the fair value of its reporting units where applicable. The quantitative review determined that there was no impairment during the three and nine months ended June 30, 2020. Due to similar and other challenges in our NRG reporting unit, a quantitative review of goodwill and other intangible assets for impairment was performed. The Company determined that there was no impairment during the three and nine months ended June 30, 2020.

10

8.    BUSINESS SEGMENT INFORMATION

The Company is organized based on the products and services that it offers, and classifies its continuing business operations in three reportable segments for financial reporting purposes: Aerospace & Defense (formerly called Filtration/Fluid Flow), RF Shielding and Test (Test), and Utility Solutions Group (USG). The Aerospace & Defense 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) and Globe Composite Solutions, LLC (Globe). The companies within this segment primarily design and manufacture specialty filtration and naval 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; products and systems to reduce vibration and/or acoustic signatures and otherwise reduce or obscure a vessel’s signature, and other communications, sealing, surface control and hydrodynamic related applications to enhance U.S. Navy maritime survivability; precision-tolerance machined components for the aerospace and defense industry; and metal processing services.

The 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. 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 primarily of Doble Engineering Company (Doble), Morgan Schaffer Inc. (Morgan Schaffer), and NRG Systems, Inc. (NRG). Doble provides high-end, intelligent, diagnostic test and data management 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.

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 from continuing operations before interest and taxes. The table below is presented on the basis of continuing operations and excludes discontinued operations.

Three Months Ended

Nine Months Ended

June 30, 

June 30, 

(In thousands)

    

2020

    

2019

    

2020

2019

NET SALES

  

  

  

  

Aerospace & Defense

$

84,072

83,067

256,707

228,769

Test

46,016

42,298

128,999

126,459

USG

42,577

52,894

139,179

157,639

Consolidated totals

$

172,665

178,259

524,885

512,867

EBIT

Aerospace & Defense

$

17,409

19,039

51,658

47,092

Test

7,177

5,927

17,483

14,791

USG

6,156

10,148

20,310

40,461

Corporate (loss)

(7,410)

(9,569)

(27,983)

(29,473)

Consolidated EBIT

23,332

25,545

61,468

72,871

Less: Interest expense

(1,523)

(1,878)

(5,264)

(5,586)

Earnings before income taxes

$

21,809

23,667

56,204

67,285

11

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 from continuing operations 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.

9.    DEBT

The Company’s debt is summarized as follows:

    

June 30, 

September 30, 

(In thousands)

2020

    

2019

Total borrowings

$

151,577

 

285,000

Current portion of long-term debt and short-term borrowings

 

(21,577)

 

(20,000)

Total long-term debt, less current portion

$

130,000

 

265,000

On September 27, 2019, the Company entered into a new five-year credit facility (“the Credit Facility”), modifying its previous credit facility which would have matured December 21, 2020. The Credit Facility includes a $500 million revolving line of credit, as well as provisions allowing for 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 eight banks led by JP Morgan Chase Bank, N.A., as Administrative Agent. The Credit Facility matures September 27, 2024.

At June 30, 2020, the Company had approximately $340 million available to borrow under the Credit Facility, plus the $250 million increase option, subject to lender approval, in addition to $104.7 million cash on hand. The Company classified $20.0 million as the current portion of long-term debt as of June 30, 2020, 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 letters of credit issued and outstanding under the Credit Facility totaled $9.9 million at June 30, 2020.

Interest on borrowings under the Credit Facility is calculated at a spread over either the London Interbank Offered Rate (LIBOR ), the New York Federal Reserve Bank Rate or the prime rate, depending on various factors. The Credit Facility also requires a facility fee ranging from 10 to 25 basis points per annum on the unused portion. The Credit Facility is secured by the unlimited guaranty of the Company’s direct and indirect material U.S. subsidiaries and the pledge of 100% of the equity interests of its direct and indirect material foreign subsidiaries. The financial covenants of the Credit Facility include a leverage ratio and an interest coverage ratio. The weighted average interest rates were 3.24% and 3.22% for the three and nine-month periods ending June 30, 2020, respectively , and 3.21% and 3.22% for the three and nine-month periods ending June 30, 2019. As of June 30, 2020, the Company was in compliance with all covenants.

12

10.  INCOME TAX EXPENSE

The third quarter 2020 effective income tax rate from continuing operations was 14.3% compared to 19.5% in the third quarter of 2019. The effective income tax rate in the first nine months of 2020 was 15.9% compared to 19.4% for the first nine months of 2019. The income tax expense in the third quarter and first nine months of 2020 was favorably impacted by the following items: 1) additional tax benefits on share-based compensation that vested during the quarter decreasing the third quarter and year-to-date effective tax rate by 1.4% and 0.6%, respectively; 2) research credits and other 2019 tax return to provision true-ups decreasing the third quarter and year-to-date effective tax rate by 1.6% and 0.6%, respectively; and 3) an increase in the available 2019 and 2020 foreign tax credit which was attributable to new information and tax planning strategies, for which the combined effect was a 6.3% reduction in the third quarter effective tax rate and a 2.4% reduction in the year-to-date effective tax rate. The income tax expense was favorably impacted in the second quarter of 2020 by the release of a valuation allowance of $2.8 million for foreign net operating losses decreasing the year-to-date effective tax rate by 5.1%.

The income tax expense in the third quarter and first nine months of 2019 was favorably impacted by tax planning strategies to increase the foreign tax credits claimed retrospectively. The Company reduced the valuation allowance for excess foreign tax credits by $2.4 million ($2.3 million in the second quarter of 2019 and $0.1 million in the third quarter of 2019) and recorded an amended return receivable of $0.3 million ($0.2 million in the second quarter of 2019 and $0.1 million in the third quarter of 2019) which favorably impacted the third quarter and year-to-date effective tax rate of 2019 by 1.4% and 4.3%, respectively. Income tax expense in the third quarter and first nine months of 2019 was also favorably impacted by additional tax benefits on share-based compensation that vested during the quarter decreasing the effective tax rate by 1.8% and 0.6%, respectively. A non-automatic accounting method change filed with the 2018 tax return was approved by the Internal Revenue Service during the third quarter of 2019 and favorably impacted the third quarter and year-to-date effective tax rate by 1.1% and 0.4%, respectively.

13

11.  SHAREHOLDERS’ EQUITY

The change in shareholders’ equity for the first three and nine months of 2020 and 2019 is shown below (in thousands):

Three Months Ended June 30, 

Nine Months Ended June 30, 

    

2020

    

2019

    

2020

    

2019

Common stock

Beginning balance

306

305

306

305

Stock plans

1

1

1

1

Ending balance

307

306

307

306

Additional paid-in-capital

Beginning balance

294,787

293,612

292,408

291,190

Stock plans

(2,156)

(2,408)

223

14

Ending balance

292,631

291,204

292,631

291,204

Retained earnings

Beginning balance

785,184

643,018

684,741

606,836

Net earnings common stockholders

18,687

20,067

123,286

56,181

Dividends paid

(2,084)

(2,082)

(6,240)

(6,227)

Adoption of accounting standards updates

4,213

Ending balance

801,787

661,003

801,787

661,003

Accumulated other comprehensive income (loss)

Beginning balance

(46,936)

(35,280)

(43,974)

(31,528)

Foreign currency translation

2,802

1,840

(160)

(2,013)

Pension

Forward exchange contracts

(7)

94

Ending balance

(44,134)

(33,447)

(44,134)

(33,447)

Treasury stock

Beginning balance

(107,134)

(107,259)

(107,259)

(107,394)

Issued under stock plans

125

135

Ending balance

(107,134)

(107,259)

(107,134)

(107,259)

Total equity

943,457

811,807

943,457

811,807

12.  RETIREMENT PLANS

A summary of net periodic benefit expense for the Company’s defined benefit plans for the three and nine-month periods ended June 30, 2020 and 2019 is shown in the following table. Net periodic benefit cost for each period presented is comprised of the following:

    

Three Months Ended

Nine Months Ended

    

June 30, 

June 30, 

(In thousands)

2020

    

2019

    

2020

    

2019

Defined benefit plans

Interest cost

$

616

 

875

 

2,264

 

2,626

Expected return on assets

 

(1,067)

 

(1,086)

 

(3,149)

 

(3,259)

Amortization of:

Prior service cost

Actuarial loss

 

715

 

487

 

1,801

 

1,461

Net periodic benefit cost

$

264

 

276

 

916

 

828

14

13.  DERIVATIVE FINANCIAL INSTRUMENTS

Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks. In 2018, the Company entered into 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, of which one swap is outstanding as of June 30, 2020. In addition, the Company’s Canadian subsidiary Morgan Schaffer enters into foreign exchange contracts to manage foreign currency risk as a portion of their revenue is denominated in U.S. dollars. The Company expects hedging gains or losses to be essentially offset by losses or gains on the related underlying exposures. The amounts ultimately recognized may differ for open positions, which remain subject to ongoing market price fluctuations until settlement. All derivative instruments are reported in either accrued expenses or other assets on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. The interest rate swaps entered into during 2018 were not designated as cash flow hedges and, therefore, the gain or loss on the derivative is reflected in earnings each period.

The following is a summary of the notional transaction amounts and fair values for the Company’s outstanding derivative financial instruments by risk category and instrument type as of June 30, 2020:

Notional

Fair Value

(In thousands)

    

amount

    

(US$)

    

Fix Rate

 

Forward contracts

 

5,000

USD  

(106)

 

  

Interest rate swap

 

150,000

USD  

(1,485)

 

2.24

%

14.  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 June 30, 2020 and September 30, 2019 using available market information or other appropriate valuation methodologies. The carrying amounts of cash and cash equivalents, receivables, inventories, payables, debt and other current assets and liabilities approximate fair value because of the short maturity of those instruments.

Fair Value of Financial Instruments

The Company’s forward contracts and interest rate swaps are classified within Level 2 of the valuation hierarchy in accordance with FASB Accounting Standards Codification (ASC) 825, as presented below as of June 30, 2020:

(In thousands)

    

Level 1

    

Level 2

    

Level 3

    

Total

Assets (Liabilities):

Forward contracts and interest rate swaps

$

 

(1,591)

 

$

 

(1,591)

Valuation was based on third party evidence of similarly priced derivative instruments.

15

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. As more fully described in note 7, events and changes in circumstances for the NRG reporting unit and certain reporting units in our Aerospace & Defense segment resulting from the COVID-19 pandemic required that the property, plant and equipment, and other intangible assets of those businesses be reviewed for impairment. No impairments were recorded during the three and nine-month periods ended June 30, 2020.

15.  REVENUES

Disaggregation of Revenues

Revenues by customer type, geographic location, and revenue recognition method for the three and nine-month periods ended June 30, 2020 are presented in the tables below as the Company deems it best depicts how the nature, amount, timing and uncertainty of net sales and cash flows are affected by economic factors. The table below also include a reconciliation of the disaggregated revenue within each reportable segment on a continuing operations basis.

Three Months Ended June 30, 2020

    

Aerospace

    

    

    

(In thousands)

& Defense

Test

USG

Total

Customer type:

 

  

 

  

 

  

 

  

 

Commercial

$

37,485

$

38,737

$

39,740

$

115,962

U.S. Government

 

46,587

7,279

2,837

 

56,703

Total revenues

$

84,072

$

46,016

$

42,577

$

172,665

 

 

Geographic location:

 

 

United States

$

73,476

$

19,441

$

26,499

$

119,416

International

 

10,596

26,575

16,078

 

53,249

Total revenues

$

84,072

$

46,016

$

42,577

$

172,665

 

 

Revenue recognition method:

 

 

Point in time

$

36,461

$

9,138

$

27,765

$

73,364

Over time

 

47,611

36,878

14,812

 

99,301

Total revenues

$

84,072

$

46,016

$

42,577

$

172,665

Nine Months Ended June 30, 2020

    Aerospace

    

    

    

(In thousands)

    

& Defense

    

Test

    

USG

    

Total

Customer type:

 

  

 

  

 

  

 

  

 

Commercial

$

130,817

$

107,931

$

135,711

$

374,459

U.S. Government

 

125,890