# Esco Technologies Inc: Form 10-Q for the period ended Jun 30, 2018

- Company: [Esco Technologies Inc](/companies/ese.md) (CIK 866706)
- Form: 10-Q
- Filed: 2018-08-08
- Accepted by EDGAR: Aug 8, 2018, 14:34 ET
- Period: 2018-06-30
- Accession: 0001144204-18-042749
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/866706/000114420418042749/tv499163_10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/866706/000114420418042749/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2018-04-01 to 2018-06-30 | $122.8m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2017-10-01 to 2018-06-30 | $346.9m | us-gaap:CostOfRevenue |
| Selling, general and administrative | 3 months, 2018-04-01 to 2018-06-30 | $39.9m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2017-10-01 to 2018-06-30 | $122.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Income tax | 3 months, 2018-04-01 to 2018-06-30 | $4.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2017-10-01 to 2018-06-30 | −$14.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-04-01 to 2018-06-30 | $19.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2017-10-01 to 2018-06-30 | $63.7m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.73 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2017-10-01 to 2018-06-30 | $2.45 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.73 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2017-10-01 to 2018-06-30 | $2.46 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-04-01 to 2018-06-30 | 26,050,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2017-10-01 to 2018-06-30 | 26,042,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2017-10-01 to 2018-06-30 | $53.9m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Dividends paid | 9 months, 2017-10-01 to 2018-06-30 | $6.2m | us-gaap:PaymentsOfDividends |
| Cash and equivalents | at 2018-06-30 | $43.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-06-30 | $410.0m | us-gaap:AssetsCurrent |
| Total assets | at 2018-06-30 | $1.28bn | us-gaap:Assets |
| Current liabilities | at 2018-06-30 | $200.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-06-30 | $551.7m | us-gaap:Liabilities |
| Long-term debt | at 2018-06-30 | $242.0m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-06-30 | $20.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2018-06-30 | $727.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,788 characters.

RESULTS OF OPERATIONS

References to the third quarters of 2018 and 2017 represent the three-month periods ended June 30, 2018 and 2017, respectively.

OVERVIEW

In the third quarter of 2018, sales, net earnings and diluted earnings per share were $192.2 million, $19.0 million and $0.73 per share, respectively, compared to $171.2 million, $12.6 million and $0.49 per share, respectively, in the third quarter of 2017. In the first nine months of 2018, sales, net earnings and diluted earnings per share were $540.5 million, $63.7 million and $2.45, respectively, compared to $478.7 million, $34.5 million and $1.33 per share, respectively, in the first nine months of 2017.

NET SALES

Net sales increased $21.0 million, or 12.3%, to $192.2 million in the third quarter of 2018 from $171.2 million in the third quarter of 2017. Net sales increased $61.8 million, or 12.9%, to $540.5 million in the first nine months of 2018 from $478.7 million in the first nine months of 2017. The increase in net sales in the third quarter of 2018 as compared to the third quarter of 2017 was due to a $13.4 million increase in the USG segment, a $7.5 million increase in the Test segment and a $1.6 million increase in the Technical Packaging segment, partially offset by a $1.5 million decrease in the Filtration segment. The increase in net sales in the first nine months of 2018 as compared to the corresponding prior year period was due to a $47.7 million increase in the USG segment, a $13.6 million increase in the Test segment and a $3.8 million increase in the Technical Packaging segment, partially offset by a $3.3 million decrease in the Filtration segment.

- *Filtration*

In the third quarter of 2018, net sales of $69.7 million were $1.5 million, or 2.0%, lower than the $71.2 million in the third quarter of 2017. Net sales decreased $3.3 million, or 1.7%, to $195.5 million in the first nine months of 2018 from $198.9 million in the first nine months of 2017. The sales decrease in the third quarter of 2018 compared to the third quarter of 2017 was mainly due to a $4.7 million decrease in net sales at VACCO due to lower shipments of its defense spares products and a $1.6 million decrease in net sales at PTI due to lower aerospace assembly and industrial/automotive shipments, partially offset by a $2.2 million increase in net sales at Mayday due to higher aerospace shipments, $1.8 million increase in net sales at Crissair due to higher aerospace shipments and $0.9 million increase in net sales at Westland. The sales decrease in the first nine months of 2018 compared to the first nine months of 2017 was primarily due to a $6.2 million decrease in net sales at PTI due to lower aerospace assembly and industrial/automotive shipments, a $6.0 million decrease in net sales at VACCO due to lower shipments of its defense spares products and a $3.8 million decrease in net sales at Westland due to timing of shipments on government programs, partially offset by an $12.9 million increase in net sales at Mayday and Crissair due to higher aerospace shipments.

#### -Test

In the third quarter of 2018, net sales of $45.0 million were $7.5 million, or 19.9%, higher than the $37.5 million recorded in the third quarter of 2017. Net sales increased $13.6 million, or 12.4%, to $123.4 million in the first nine months of 2018 from $109.7 million in the first nine months of 2017. The increase in the third quarter and first nine months of 2018 compared to the corresponding periods of 2017 was primarily due to higher sales from the segment’s U.S. operations due to the timing of test and measurement chamber projects.

- *Utility Solutions Group (USG)*

Net sales increased $13.4 million, or 31.9%, to $55.5 million in the third quarter of 2018 from $42.1 million in the third quarter of 2017. Net sales increased $47.7 million, or 43.2%, to $157.9 million in the first nine months of 2018 from $110.3 million in the first nine months of 2017. The increase in the third quarter of 2018 compared to the third quarter of 2017 was mainly due to the sales contributions from the NRG, Morgan Schaffer and Vanguard Instruments acquisitions. The increase in the first nine months of 2018 compared to the first nine months of 2017 was mainly due to the sales contributions from NRG, Morgan Schaffer and Vanguard Instruments and new products and software solutions at Doble.

#### -Technical Packaging

In the third quarter of 2018, net sales of $22.0 million were $1.6 million, or 7.7%, higher than the $20.4 million in the third quarter of 2017. Net sales increased $3.8 million, or 6.4%, to $63.7 million in the first nine months of 2018 from $59.8 million in the first nine months of 2017. The increase in the third quarter and first nine months of 2018 compared to the corresponding periods of 2017 was primarily due to the increase in net sales from Plastique driven by fluctuations in currency ($2.5 million for the first nine months of 2018) and increased shipments to new customers.

ORDERS AND BACKLOG

Backlog was $425.5 million at June 30, 2018 compared with $377.1 million at September 30, 2017. The Company received new orders totaling $201.1 million in the third quarter of 2018 compared to $182.2 million in the third quarter of 2017. Of the new orders received in the third quarter of 2018, $85.9 million related to Filtration products, $37.9 million related to Test products, $57.8 million related to USG products, and $19.5 million related to Technical Packaging products. Of the new orders received in the third quarter of 2017, $77.6 million related to Filtration products, $38.0 million related to Test products, $46.3 million related to USG products, and $20.3 million related to Technical Packaging products.

The Company received new orders totaling $588.9 million in the first nine months of 2018 compared to $532.0 million in the first nine months of 2017. Of the new orders received in the first nine months of 2018, $219.1 million related to Filtration products, $144.2 million related to Test products, $168.0 million related to USG products, and $57.6 million related to Technical Packaging products. Of the new orders received in the first nine months of 2017, $207.1 million related to Filtration products, $138.3 million related to Test products, $118.9 million related to USG products, and $67.7 million related to Technical Packaging products.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative (SG&A) expenses for the third quarter of 2018 were $39.9 million (20.8% of net sales), compared with $38.5 million (22.5% of net sales) for the third quarter of 2017. For the first nine months of 2018, SG&A expenses were $122.8 million (22.7% of net sales) compared to $107.1 million (22.4% of net sales) for the first nine months of 2017. The increase in SG&A in the third quarter and first nine months of 2018 compared to the corresponding periods of 2017 was mainly due to an increase in the USG segment due to the Company’s recent acquisitions (NRG, Morgan Schaffer and Vanguard Instruments) and additional sales and marketing expenses to support future revenue growth, and at Corporate (higher professional fees including acquisition expenses).

AMORTIZATION OF INTANGIBLE ASSETS

Amortization of intangible assets was $4.6 million and $13.6 million for the third quarter and first nine months of 2018, respectively, compared to $4.1 million and $11.5 million for the corresponding periods of 2017. Amortization expenses consist of amortization of acquired intangible assets from acquisitions and other identifiable intangible assets (primarily software). The increase in amortization expense in the third quarter and first nine months of 2018 compared to the corresponding periods of 2017 was mainly due to an increase in amortization of intangibles related to the Morgan Schaffer, NRG and Mayday acquisitions.

OTHER EXPENSES (INCOME), NET

Other income, net, was $0.7 million in the third quarter of 2018 compared to other expenses, net, of $1.2 million in the third quarter of 2017. The principal component in other income, net, in the third quarter of 2018 was a gain on derivative instruments of $0.5 million. There were no individually significant items in other (income) expenses, net, in the third quarter of 2017.

Other expenses, net, was $1.0 million in the first nine months of 2018 compared to other income, net, of $0.2 million in the first nine months of 2017. The principal components in other expenses, net, in the first nine months of 2018 were $2.1 million of charges primarily related to the USG segment restructuring activities, including the Doble facility consolidations, partially offset by gains on derivative instruments. The restructuring charges mainly related to severance and compensation benefits, professional fees and asset impairment charges related to abandoned assets. The principal component in other income, net, in the first nine months of 2017 was $0.4 million of income related to death benefit insurance proceeds from a former subsidiary.

EBIT

The Company evaluates the performance of its operating segments based on EBIT, and provides EBIT on a consolidated basis, which is a non-GAAP financial measure. Please refer to the discussion of non-GAAP financial measures in Note 7 to the Consolidated Financial Statements, above. EBIT was $25.6 million (13.3% of net sales) for the third quarter of 2018 compared to $18.6 million (10.9% of net sales) for the third quarter of 2017. For the first nine months of 2018, EBIT was $56.2 million (10.4% of net sales) compared to $53.1 million (11.1% of net sales) for the first nine months of 2017.

The following table presents a reconciliation of EBIT to net earnings.

*(In thousands)*

|  | Three Months Ended June 30, 2018 | 2017 | Nine Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Consolidated EBIT | $25,559 | 18,635 | 56,165 | 53,118 |
| Less: Interest expense, net | (2,243) | (1,213) | (6,464) | (2,752) |
| Plus (Less): Income tax | (4,297) | (4,777) | 13,983 | (15,837) |
| Net earnings | $19,019 | 12,645 | 63,684 | 34,529 |

- *Filtration*

EBIT in the third quarter of 2018 was $14.3 million (20.5% of net sales) compared to $11.9 million (16.8% of net sales) in the third quarter of 2017. EBIT in the first nine months of 2018 was $35.1 million (17.9% of net sales) compared to $34.3 million (17.2% of net sales) in the first nine months of 2017. The increase in EBIT in the third quarter compared to the third quarter of 2017 was mainly due to an increase at Crissair, Mayday and Westland due to higher sales volumes partially offset by a decrease in EBIT at VACCO and PTI due to the lower sales volumes mentioned above. The increase in EBIT in the first nine months of 2018 compared to the first nine months of 2017 was mainly due to an increase at Mayday and Crissair due to higher sales volumes partially offset by a decrease in EBIT at Westland, PTI and VACCO due to lower sales volumes as mentioned above. In addition, EBIT in the first nine months of 2018 included $0.5 million of restructuring charges at PTI related to the exit of the low margin industrial/automotive market, which were recorded in the second quarter of 2018. These charges consisted primarily of severance and compensation benefits and asset impairment charges.

- *Test*

EBIT in the third quarter of 2018 was $5.9 million (13.1% of net sales) compared to $4.9 million (13.0% of net sales) in the third quarter of 2017. EBIT in the first nine months of 2018 was $13.8 million (11.2% of net sales) compared to $11.1 million (10.1% of net sales) in the first nine months of 2017. The increase in EBIT in the third quarter and first nine months of 2018 compared to the corresponding prior year periods was primarily due to the increased sales volumes mainly from the segment’s U.S. operations.

- *Utility Solutions Group*

EBIT in the third quarter of 2018 was $11.5 million (20.8% of net sales) compared to $8.5 million (20.2% of net sales) in the third quarter of 2017. EBIT in the first nine months of 2018 was $27.8 million (17.6% of net sales) compared to EBIT of $25.6 million (23.2% of net sales) in the first nine months of 2017. The increase in EBIT in the third quarter and first nine months of 2018 compared to the corresponding periods of 2017 was mainly due to the higher sales volumes as well as the EBIT contribution from the recent acquisitions of NRG, Morgan Schaffer and Vanguard Instruments. In addition, EBIT in the first nine months of 2018 was negatively impacted by $1.9 million of charges recorded in the second quarter of 2018 related to closing the Doble facilities in Norway and China consisting mainly of employee severance and compensation benefits, professional fees, and asset impairment charges.

#### -Technical Packaging

EBIT in the third quarter of 2018 was $2.5 million (11.4% of net sales) compared to $2.4 million (11.9% of net sales) in the third quarter of 2017. EBIT in the first nine months of 2018 was $5.4 million (8.4% of net sales) compared to $5.7 million (9.5% of net sales) in the first nine months of 2017. The decrease in EBIT as a percent of net sales in the third quarter of 2018 and the decrease in EBIT in the first nine months of 2018 compared to the corresponding periods of 2017 was mainly due to product mix at Plastique including lower margin projects.

- *Corporate*

Corporate costs included in EBIT were $8.7 million and $25.8 million in the third quarter and first nine months of 2018, respectively, compared to $9.1 million and $23.5 million in the corresponding periods of 2017. The decrease in Corporate costs in the third quarter of 2018 compared to the third quarter of 2017 was mainly due to the $0.5 million of gains on derivative instruments recorded in the third quarter of 2018. The increase in Corporate costs in the first nine months of 2018 compared to the corresponding periods of 2017 was primarily due to higher professional fees and an increase in amortization of intangible assets related to recent acquisitions.

INTEREST EXPENSE, NET

Interest expense was $2.2 million and $6.5 million in the third quarter and first nine months of 2018, respectively, and $1.2 million and $2.8 million in the corresponding periods of 2017. The increase in interest expense in the first nine months of 2018 compared to the corresponding period of 2017 was mainly due to higher average outstanding borrowings ($263 million compared to $189 million) and higher average interest rates (2.97% vs. 1.90%) as a result of the additional borrowings to fund the Company’s recent acquisitions.

INCOME TAX EXPENSE

The third quarter 2018 effective income tax rate was 18.4% compared to 27.4% in the third quarter of 2017. The income tax benefit for the first nine months of 2018 was $14.0 million compared to income tax expense of $15.8 million for the first nine months of 2017. The effective income tax rate for the first nine months of 2018 was (28.1%) compared to 31.4% for the first nine 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 third quarter and first nine months of 2018 was a net expense of $0.1 million and a net benefit of $24.3 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 and $0.4 million provisional amount in the third quarter of 2018) favorably impacted the third quarter and year-to-date effective tax rate by 1.5% and 61.7%, respectively. Second, the TCJA subjected the Company’s cumulative foreign earnings to federal income tax ($4.1 million provisional amount of which $2.9 million was recorded in the first quarter of 2018, $0.7 million was recorded in the second quarter of 2018, and $0.5 million in the third quarter of 2018) which unfavorably impacted the third quarter and year-to-date effective tax rate by 2.1% and 8.2%, 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 4.7%. An additional $7.5 million pension contribution for the 2017 plan year was approved during the second quarter of 2018 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 year-to-date effective tax rate by 1.6%. An accounting method change was filed with the 2017 tax return which resulted in an additional deferred tax liability to be adjusted as a result of the TCJA. A favorable adjustment, net of the $0.3 million unfavorable impact to the 2017 Domestic Production deduction, favorably impacted the third quarter and year-to-date effective tax rate by 2.9% and 1.4%, respectively. The income tax expense in the third quarter and first nine months of 2018 was favorably impacted by return to provision true-ups decreasing the third quarter and year-to-date effective tax rate by 1.4% and 0.7%, respectively. In 2017, the Company elected to adopt Accounting Standards Update No. 2016-09, *Improvements to Employee Share-Based Payment Accounting*, resulting in income tax expense in the third quarter and nine months of 2017 being favorably impacted by additional tax benefits on share-based compensation that vested during the quarter decreasing the effective tax rate by 5.2% and 1.8%, respectively. Income tax expense in the third quarter and nine months of 2018 was also favorably impacted by additional tax benefits on share-based compensation that vested during the quarter decreasing the effective tax rate by 1.9% and 0.9%, 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 and second quarter of 2018, the Company recorded reasonable provisional estimates of the TCJA income tax effects. During the third quarter of 2018, the Company collected and analyzed additional information needed to compute the Company’s deferred tax assets and liabilities. However, these amounts remain provisional as the Company needs more time to collect and analyze information primarily related to the federal impact on the value of state deferred tax assets and liabilities. The income tax effects of subjecting the Company’s cumulative foreign earnings to federal income tax also remains provisional as the Company needs more time to collect and analyze 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.

TCJA moved the U.S. to a federal tax system that will no longer tax dividends from foreign corporations to U.S. corporations. The cost of transitioning to this new tax system is a deemed repatriation of cumulative foreign earnings, the “Foreign Earnings Toll Charge”, the estimated tax cost of which was recorded in the first quarter and trued up during the second and third quarters of 2018. The actual repatriation of foreign earnings triggers foreign dividend withholding taxes and U.S. state taxes, the estimated cost of which was recorded in the first quarter and trued up during the second and third quarters of 2018.

During the three-month period ended June 30, 2018, there were no material changes in the unrecognized tax benefits. The Company does not anticipate a material change in the amount of unrecognized tax benefits in the next twelve months.

CAPITAL RESOURCES AND LIQUIDITY

The Company’s overall financial position and liquidity remains strong. Working capital (current assets less current liabilities) increased to $210.0 million at June 30, 2018 from $197.8 million at September 30, 2017. Inventories increased by $21.1 million during this period mainly due to a $10.7 million increase within the Filtration segment primarily to support new aerospace platforms, a $4.3 million increase within the Test segment and a $4.2 million increase within the USG segment to support revenue growth in the fourth quarter of 2018. Costs and estimated earnings in excess of billings on long-term contracts decreased $8.1 million in the first nine months of 2018 mainly due to ETS-Lindgren ($7.3 million) related to timing of projects.

Net cash provided by operating activities was $53.9 million and $33.5 million in the first nine months of 2018 and 2017, respectively. The increase in net cash provided by operating activities in the first nine months of 2018 as compared to the first nine months of 2017 was driven by higher earnings and lower working capital requirements.

Capital expenditures were $15.5 million and $23.1 million in the first nine months of 2018 and 2017, respectively. The decrease in the first nine months of 2018 was mainly due to a decrease in machinery and equipment at Plastique ($3.6 million) and VACCO ($1.8 million). In addition, the Company incurred expenditures for capitalized software of $7.1 million and $6.2 million in the first nine months of 2018 and 2017, respectively.

#### Credit Facility

At June 30, 2018, the Company had approximately $180 million available to borrow under its bank credit facility, a $250 million increase option subject to lender approval, and $43.3 million cash on hand. At June 30, 2018, the Company had $262 million of outstanding borrowings under the credit facility in addition to outstanding letters of credit of $8.3 million. Cash flow from operations and borrowings under the Company’s credit facility are expected to meet the Company’s capital requirements and operational needs for the foreseeable future. The Company’s ability to access the additional $250 million increase option of the credit facility is subject to acceptance by participating or other outside banks.

#### New Accounting Standards

In March 2017, the FASB issued ASU 2017-07, *Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost,* which updates ASC 715, *Compensation – Retirement Benefits*. This update permits only the service cost component of net periodic pension and postretirement expense to be reported with other compensation costs, while all other components are required to be reported separately in other deductions, outside any subtotal of operating income. These updates are effective for fiscal years beginning after December 15, 2017, with early adoption permitted, and must be adopted on a retrospective basis. The updates change presentation only and will not impact the Company’s results of operations.

In August 2017, the FASB issued ASU 2017-12, *Targeted Improvements to Accounting for Hedge Activities,* which updates ASC 815, *Derivatives and Hedging*. This update is intended to amend the hedge accounting model to enable entities to better align the economics of risk management activities and financial reporting. The updates eliminate the requirement to separately measure and report hedge ineffectiveness and simplify hedge documentation and effectiveness assessment requirements. These updates are effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and must be adopted using a modified retrospective approach. These updates are not expected to materially impact the Company’s results of operations.

In February 2016, the FASB issued ASU No. 2016-062, *Leases (Topic 842)*, which, among other things, requires an entity to recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. This standard will increase an entities’ reported assets and liabilities. The standard is effective for fiscal years beginning after December 15, 2018 and mandates a modified retrospective transition period for all entities. The Company is currently assessing the impact of this standard on its consolidated financial statements and related disclosures.

In May 2014, the FASB issued ASU No. 2014-09, *Revenue from Contracts with Customers*, (ASU 2014-09) 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 has selected the cumulative effect method of transition to the new standard. Because the new standard impacts the Company’s business processes, systems and controls, we developed a project plan to guide the implementation. This project plan included analyzing the standard’s impact on our contract portfolio, comparing our historical accounting policies and practices to the requirements of the new standard, and identifying differences from applying the requirements of the new standard to our contracts. We developed internal controls to ensure that we adequately evaluated our portfolio of contracts under the five-step model to ensure proper assessment of our operating results under ASU 2014-09. We reported on the progress of the implementation to the Audit Committee and the Board of Directors on a regular basis during the project’s duration. The adoption of ASU 2014-09 will have one primary impact on our portfolio of contracts and our Consolidated Financial Statements which is that more of our contracts within our Filtration and Technical Packaging segments will recognize revenue and earnings over time as the work progresses versus at a single point of time. This standard will not change the total revenue or operating earnings recognized, only the timing of when those amounts are recognized. The Company is currently in the process of finalizing the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.

#### Acquisitions

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.

During the second quarter of 2018, the Company paid a deferred payment of $1.6 million in connection with the 2016 acquisition of Plastique.

#### Dividends

A dividend of $0.08 per share, totaling $2.1 million, was paid on April 18, 2018 to stockholders of record as of April 3, 2018. Subsequent to June 30, 2018, a quarterly dividend of $0.08 per share, totaling $2.1 million, was paid on July 19, 2018 to stockholders of record as of July 5, 2018.

OUTLOOK

Management’s current expectations for 2018 remain consistent with the details outlined in the Business Outlook presented in previous releases. Management expects 2018 GAAP EPS in the range of $3.55 to $3.65 per share and Adjusted EPS in the range of $2.65 to $2.75 per share, adjusting for the 2018 incremental net tax benefits resulting from U.S. Tax Reform and the 2018 cost reduction charges in the USG and Filtration segments.

CRITICAL ACCOUNTING POLICIES

Management has evaluated the accounting policies used in the preparation of the Company’s financial statements and related notes and believes those policies to be reasonable and appropriate. Certain of these accounting policies require the application of significant judgment by Management in selecting appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on historical experience, trends in the industry, information provided by customers and information available from other outside sources, as appropriate. The most significant areas involving Management judgments and estimates may be found in the Critical Accounting Policies section of Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017.

OTHER MATTERS

#### Contingencies

As a normal incident of the business in which the Company is engaged, various claims, charges and litigation are asserted or commenced against the Company. Additionally, the Company is currently involved in various stages of investigation and remediation relating to environmental matters. In the opinion of Management, the aggregate costs involved in the resolution of these matters, and final judgments, if any, which might be rendered against the Company, are adequately reserved, are covered by insurance, or would not have a material adverse effect on the Company’s results from operations, capital expenditures, or competitive position.

FORWARD LOOKING STATEMENTS

Statements contained in this Form 10-Q regarding future events and the Company’s future results that reflect or are based on current expectations, estimates, forecasts, projections or assumptions about the Company’s performance and the industries in which the Company operates are considered “forward-looking statements” within the meaning of the safe harbor provisions of the Federal securities laws. These include, but are not necessarily limited to, statements about: the amount and timing of future sales, revenues, cash flows, Adjusted EPS and EPS; the adequacy of the Company’s credit facility and the Company’s ability to increase it; the outcome of current litigation, claims and charges; income taxation of foreign earnings and the future repatriation, reinvestment or distribution of foreign earnings; future income tax liabilities and effective tax rate; timing of the repayment of the current portion of the Company’s long-term debt; changes in the amount of unrecognized tax benefits; the recognition and timing of costs related to share-based compensation arrangements; returns on retirement plan assets; estimates or projections made in connection with the Company’s accounting policies; market risks relating to the Company’s operations and changes in interest rates; the extent to which hedging gains or losses are offset by losses or gains on related underlying exposures; the Company’s ability to hedge against or otherwise manage them through the use of derivative financial instruments; the impact of ASU 2017-12 which amends the hedge accounting model to enable entities to better align the economics of risk management activities and financial reporting; and any other statements contained herein which are not strictly historical. Words such as expects, anticipates, targets, goals, projects, intends, plans, believes, estimates, variations of such words, and similar expressions are intended to identify such forward-looking statements.

Investors are cautioned that such statements are only predictions and speak only as of the date of this Form 10-Q, and the Company undertakes no duty to update them except as may be required by applicable laws or regulations. The Company’s actual results in the future may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company’s operations and business environment, including but not limited to those described in Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017, and the following: the impacts of natural disasters on the Company’s operations and those of the Company’s customers and suppliers; the timing and content of future contract awards or customer orders; the appropriation, allocation and availability of Government funds; the termination for convenience of Government and other customer contracts or orders; financial exposure in connection with Company guarantees of certain Aclara contracts; weakening of economic conditions in served markets; the success of the Company’s competitors; changes in customer demands or customer insolvencies; competition; intellectual property rights; technical difficulties; the availability of selected acquisitions; delivery delays or defaults by customers; performance issues with key customers, suppliers and subcontractors; material changes in the costs and availability of certain raw materials; labor disputes; final analysis of the impacts of the TCJA; changes in U.S. tax laws and regulations; other changes in laws and regulations including but not limited to changes in accounting standards and foreign taxation; changes in interest rates; costs relating to environmental matters arising from current or former facilities; uncertainty regarding the ultimate resolution of current disputes, claims, litigation or arbitration; and the integration of recently acquired businesses.

## Market risk

As filed, 1,839 characters.

Market risks relating to the Company’s operations result primarily from changes in interest rates and changes in foreign currency exchange rates. The Company is exposed to market risk related to changes in interest rates and selectively uses derivative financial instruments, including forward contracts and swaps, to manage these risks. During 2016, the Company entered into several forward contracts to purchase pounds sterling to hedge two deferred payments due in connection with the acquisition of Plastique. During the first quarter of 2018, the Company entered into three interest rate swaps with a notional amount of $150 million to hedge some of its exposure to variability in future LIBOR-based interest payments on variable rate debt. In addition, 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. All derivative instruments are reported on the balance sheet at fair value. For derivative instruments designated as cash flow hedges, the gain or loss on the respective derivative is deferred in accumulated other comprehensive income until recognized in earnings with the underlying hedged item. The interest rate swaps entered into during the first quarter of 2018 were not designated as cash flow hedges and, therefore, the gain or loss on the derivative is reflected in earnings each period. There has been no material change to the Company’s market risks since September 30, 2017. See Note 12 to the Consolidated Financial Statements in Item 1 of this Report for a summary of the Company’s outstanding derivative financial instruments as of June 30, 2018. Refer to the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017 for further discussion about market risk.

## Controls and procedures

As filed, 1,211 characters.

The Company carried out an evaluation, under the supervision and with the participation of Management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of that date. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. There has been no change in the Company’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Filed Aug 8, 2018.
Source: SEC EDGAR, the filing index for accession 0001144204-18-042749. Last ingested by Listed: Nov 10, 2026, 23:39 ET. No prices; not investment advice.