COVID-19 TRENDS AND UNCERTAINTIES
The COVID-19 global pandemic has continued to create significant and
unprecedented challenges, and during these highly uncertain times, our top
priority remains the health and safety of our employees, customers and
suppliers, thereby securing the financial well-being of the Company and
supporting business continuity. To date, our global supply chains have not been
materially affected by the pandemic. Given our diverse portfolio of strong,
durable businesses serving non-discretionary end-markets, the strength and
resilience of our business model positions us to continue our long-term outlook.
A portion of our workforce has worked from home at times due to COVID-19,
however we have not had to redesign or design new internal controls over
financial reporting at this time. Depending on the duration of COVID-19, it may
become necessary for us to redesign or design new internal controls over
financial reporting in a future period. We do not believe such an event will
have a material impact on our business.
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. In addition, our Westland
facility had a partial shutdown of its facility for several weeks during the
first quarter of 2021 due to COVID-19. We are monitoring the impacts of COVID-19
on the fair value of assets. We determined that there was no impairment for the
three and nine months ended June 30, 2021 and the fair value of each reporting
unit substantially exceeded carrying value, with the exception of Mayday and
Westland where fair value exceeded carrying value by less than 10%. At June 30,
2021, we had $30 million and $18 million of goodwill recorded for Mayday and
Westland, respectively. The valuation methodology we use involves estimates of
discounted cash flows, which are subject to change, and if they change
negatively it could result in the need to write down those assets to fair value.
We will continue to monitor the impacts of COVID-19 on the fair value of assets.
For further discussion, refer to Management's Discussion and Analysis contained
in the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 2020.
RESULTS OF OPERATIONS
References to the third quarters of 2021 and 2020 represent the three-month
periods ended June 30, 2021 and 2020, respectively.
OVERVIEW
In the third quarter of 2021, sales, net earnings and diluted earnings per share
were $181.4 million, $14.9 million and $0.57 per share, respectively, compared
to $172.7 million, $18.7 million and $0.72 per share, respectively, in the third
quarter of 2020. In the first nine months of 2021, sales, net earnings and
diluted earnings per share from continuing operations were $510.0 million, $43.1
million and $1.65 per share, respectively, compared to $524.9 million, $47.3
million and $1.81 per share, respectively, in the first nine months of 2020. See
footnote 13, Quarterly Financial Information, for further discussion about the
impact to the first and second quarters of 2021 and the fourth quarter of 2020.
NET SALES
In the third quarter of 2021, net sales of $181.4 million were $8.7 million, or
5.0%, higher than the $172.7 million in the third quarter of 2020. In the first
nine months of 2021, net sales of $510.0 million were $14.9 million, or 2.8%,
lower than the $524.9 million in the first nine months of 2020. The increase in
net sales in the third quarter of 2021 as compared to the third quarter of 2020
was due to a $5.1 million increase in the USG segment, a $2.1 million increase
in the Test segment, and a $1.5 million increase in the Aerospace & Defense
segment. The decrease in net sales in the first nine months of 2021 as compared
to the first nine months of 2020 was due to a $21.9 million decrease in the
Aerospace & Defense segment, partially offset by a $4.5 million increase in the
Test segment and a $2.5 million increase in the USG segment.
-Aerospace & Defense (A&D)
In the third quarter of 2021, net sales of $85.6 million were $1.5 million, or
1.8%, higher than the $84.1 million in the third quarter of 2020. In the first
nine months of 2021, net sales of $234.7 million were $22.0 million, or 8.6%,
lower than the $256.7 million in the first nine months of 2020. The sales
increase in the third quarter of 2021 compared to the third quarter of 2020 was
mainly due to a $2.4 million increase in net sales at Globe, a $1.7 million
increase in net sales at VACCO and a $1.1 million increase in net sales at PTI,
partially offset by a $3.4 million decrease in net sales at Mayday driven by the
impact of the COVID-19 pandemic. The sales decrease in the first nine months of
2021 compared to the first nine months of 2020 was mainly due to an $14.9
million decrease in net sales at Mayday, a $9.4 million decrease in net sales at
Crissair, an $8.2 million decrease in net sales at PTI, and a $2.9 million
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decrease in net sales at Westland primarily driven by the impact of the COVID-19
pandemic; partially offset by a $9.5 million increase in net sales at VACCO and
a $3.9 million increase in net sales at Globe driven by an increase in navy
defense.
-USG
In the third quarter of 2021, net sales of $47.7 million were $5.1 million, or
12.0%, higher than the $42.6 million in the third quarter of 2020. In the first
nine months of 2021, net sales of $141.8 million were $2.6 million, or 1.9%,
higher than the $139.2 million in the first nine months of 2020. The increase in
the third quarter of 2021 compared to the third quarter of 2020 was mainly due
to higher service and product revenue at Doble and an increase in product sales
at NRG. The increase in the first nine months of 2021 compared to the first nine
months of 2020 was mainly due to an increase in product sales at NRG, partially
offset by lower events and service revenue at Doble primarily driven by the
impact of COVID-19.
-Test
In the third quarter of 2021, net sales of $48.1 million were $2.1 million, or
4.6%, higher than the $46.0 million in the third quarter of 2020. In the first
nine months of 2021, net sales of $133.4 million were $4.4 million, or 3.4%,
higher than the $129.0 million in the first nine months of 2020. The increase in
the third quarter of 2021 as compared to the third quarter of 2020 was primarily
due to higher sales from the Company's U.S. and European operations totaling
$7.4 million partially offset by a $5.3 million decrease in sales from the
segment's Asian operations due to the timing of test and measurement chamber
projects. The increase in the first nine months of 2021 compared to the first
nine months of 2020 was due to higher sales from the Company's European
operations totaling $6.1 million partially offset by a $1.7 million decrease in
sales from the segment's Asian and U.S. operations due to the timing of test and
measurement chamber projects.
ORDERS AND BACKLOG
Backlog was $539.0 million at June 30, 2021 compared with $539.0 million at
September 30, 2020. The Company received new orders totaling $203.8 million in
the third quarter of 2021 compared to $157.8 million in the third quarter of
2020. Of the new orders received in the third quarter of 2021, $95.1 million
related to Aerospace & Defense products, $53.2 million related to Test products,
and $55.5 million related to USG products. Of the new orders received in the
third quarter of 2020, $65.9 million related to Aerospace & Defense products,
$41.5 million related to Test products, and $50.4 million related to USG
products.
The Company received new orders totaling $537.7 million in the first nine months
of 2021 compared to $623.9 million in the first nine months of 2020. Of the new
orders received in the first nine months of 2021, $248.8 million related to
Aerospace & Defense products, $141.1 million related to Test products, and
$147.8 million related to USG products. Of the new orders received in the first
nine months of 2020, $350.9 million related to Aerospace & Defense products,
$121.8 million related to Test products, and $151.2 million related to USG
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the third quarter of
2021 were $42.9 million (23.6% of net sales), compared with $36.9 million (21.4%
of net sales) for the third quarter of 2020. For the first nine months of 2021,
SG&A expenses from continuing operations were $122.6 million (24.0% of net
sales) compared to $119.0 million (22.7% of net sales) for the first nine months
of 2020. The increase in SG&A in the third quarter and first nine months of 2021
compared to the corresponding periods of 2021 was mainly due to a $2.0 million
increase at Corporate for compensation expenses due to the transition of key
executives and a $1.0 million increase at Corporate due to acquisition costs.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets from continuing operations was $4.9 million
and $14.7 million for the third quarter and first nine months of 2021,
respectively, compared to $5.5 million and $16.6 million for the corresponding
periods of 2020. Amortization expenses consist of amortization of acquired
intangible assets from acquisitions and other identifiable intangible assets
(primarily software). The decrease in amortization expense in the third quarter
and first nine months of 2021 compared to the corresponding periods of 2020 was
mainly due to a decrease in amortization of capitalized software.
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OTHER EXPENSES (INCOME), NET
Other expenses (income), net, was $0.6 million in the third quarter of 2021
compared to other expenses (income), net, of $(0.8) million in the third quarter
of 2020. The principal component of other expenses, net, in the third quarter of
2021 was $0.5 million of facility consolidation charges for the Doble Morgan
Schaffer facility. The principal component of other income, net, in the third
quarter of 2020 was a gain on derivative instruments of $0.5 million.
Other (income) expenses, net, was $(1.3) million of income in the first nine
months of 2021 compared to other expenses, net, of $0.2 million in the first
nine months of 2020. The principal component of other (income), expenses, net,
in the first nine months of 2021 was a gain of approximately $2 million for the
final settlement on the sale of the Doble Watertown, MA building, partially
offset by facility consolidation charges for the Doble Manta and Morgan Schaffer
facilities. There were no individually significant items in other expenses, net,
in the first nine months of 2020.
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 6
to the Consolidated Financial Statements, above. EBIT was $19.4 million (10.7%
of net sales) for the third quarter of 2021 compared to $23.3 million (13.5% of
net sales) for the third quarter of 2020. For the first nine months of 2021,
EBIT was $57.1 million (11.2% of net sales) compared to $61.5 million (11.7% of
net sales) for the first nine months of 2020.
The following table presents a reconciliation of EBIT to net earnings from
continuing operations.
Three Months Ended Nine Months Ended
June 30, June 30,
(In thousands) 2021 2020 2021 2020
Consolidated EBIT $ 19,423 23,332 57,085 61,468
Less: Interest expense, net (480) (1,523) (1,453) (5,264)
Less: Income tax (4,034) (3,122) (12,501) (8,931)
Net earnings from continuing operations $ 14,909 18,687 43,131 47,273
-Aerospace & Defense
EBIT in the third quarter of 2021 was $16.7 million (19.5% of net sales)
compared to $17.4 million (20.7% of net sales) in the third quarter of 2020.
EBIT in the first nine months of 2021 was $42.0 million (17.9% of net sales)
compared to $51.7 million (20.1% of net sales) in the first nine months of 2020.
The decrease in EBIT in the third quarter of 2021 compared to the third quarter
of 2020 was mainly due to $2.1 million of pretax charges at Westland driven by
new product development challenges, increased production costs, and product
quality issues; lower sales volumes at Mayday; partially offset by an increase
in EBIT at VACCO and Globe due to the higher sales volumes as mentioned above.
The decrease in EBIT in the first nine months of 2021 compared to the first nine
months of 2020 was mainly due to $4.4 million of pretax charges at Westland
driven by new product development challenges, increased production costs, and
product quality issues; lower sales volumes at Mayday, Crissair and PTI;
partially offset by an increase in EBIT at VACCO and Globe due to the higher
sales volumes as mentioned above. In addition, EBIT in the first quarter of 2021
was negatively impacted by a $0.3 million inventory step-up charge related to
the acquisition of Advanced Technology Machining, Inc. and TECC Grinding, Inc.
(ATM).
-USG
EBIT in the third quarter of 2021 was $8.2 million (17.2% of net sales) compared
to $6.2 million (14.5% of net sales) in the third quarter of 2020. EBIT in the
first nine months of 2021 was $27.7 million (19.5% of net sales) compared to
$20.3 million (14.6% of net sales) in the first nine months of 2020. The
increase in EBIT in the third quarter of 2021 compared to the third quarter of
2020 was mainly due higher sales volumes partially offset by $0.5 million of
facility consolidation charges at its Doble Morgan Schaffer facility, and an
increase in EBIT at NRG due to higher sales volumes as mentioned above. The
increase in EBIT in the first nine months of 2021 compared to the first nine
months of 2020 was mainly due to higher EBIT at Doble driven by favorable
product mix, $2 million final settlement received on the sale of the Doble
Watertown facility, partially offset by $1.8 million of facility consolidation
charges at its Doble Manta and Morgan Schaffer facilities, and an increase in
EBIT at NRG due to higher sales volumes.
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-Test
EBIT in the third quarter of 2021 was $6.8 million (14.0% of net sales) compared
to $7.2 million (15.6% of net sales) in the third quarter of 2020. EBIT in the
first nine months of 2021 was $17.8 million (13.3% of net sales) compared to
$17.5 million (13.5% of net sales) in the first nine months of 2020. The
increase in EBIT in the first nine months of 2021 compared to the first nine
months of 2020 was primarily due to product mix and higher margins on projects
mainly from the segment's Asian operations.
-Corporate
Corporate costs included in EBIT were $12.3 million and $30.4 million in the
third quarter and first nine months of 2021, respectively, compared to $7.4
million and $28.0 million in the corresponding periods of 2020. The increase in
Corporate costs in the third quarter and first nine months of 2021 compared to
the corresponding periods of 2020 was mainly due to an increase in compensation
costs related to the transition of key executives and acquisition costs.
INTEREST EXPENSE, NET
Interest expense was $0.5 million and $1.5 million in the third quarter and
first nine months of 2021, respectively, and $1.5 million and $5.3 million in
the corresponding periods of 2020. The decrease in interest expense in the third
quarter and first nine months of 2021 compared to the corresponding periods of
2020 was mainly due to lower average outstanding borrowings and lower average
interest rates. Average outstanding borrowings were $39 million and $44 million
in the third quarter and first nine months of 2021, respectively, and $151
million and $193 million in the corresponding periods of 2020.
INCOME TAX EXPENSE
The third quarter 2021 effective income tax rate was 21.3% compared to 14.3% in
the third quarter of 2020. The effective income tax rate from continuing
operations in the first nine months of 2021 was 22.5% compared to 15.9% in the
first nine months of 2020. The income tax expense in the third quarter and first
nine months of 2021 was favorably impacted by a tax return to provision true-up
to foreign derived intangible income and other 2020 true-ups decreasing the
third quarter and year-to-date effective tax rate by 3.9% and 1.2%,
respectively.
The income tax expense in the third quarter and first nine months of 2020 was
favorably impacted mainly by the following items: 1) an increase in the
available 2019 foreign tax credit which was attributable to new information and
tax planning strategies reducing the third quarter effective tax rate and
year-to-date effective tax rate by 3.3% and 1.3%; and 2) new information and tax
planning strategies resulted in an increase in the 2020 foreign tax credit and
the catch-up of the benefit which reduced the 2020 third quarter effective tax
rate by 2.5%. The year-to-date 2020 effective tax rate was favorably impacted by
the release of a valuation allowance of $2.8 million for foreign net operating
losses decreasing the year-to-date 2020 effective tax rate by 5.1%.
CAPITAL RESOURCES AND LIQUIDITY
The Company's overall financial position and liquidity remains strong. The
effects of COVID-19 have not materially affected liquidity. Working capital from
continuing operations (current assets less current liabilities) increased to
$217.5 million at June 30, 2021 from $187.3 million at September 30, 2020.
Accounts receivable decreased by $8.7 million during this period primarily due
to a $12.6 million decrease within the Test segment due to increased focus on
collections during the period and timing of payments; partially offset by a $4.8
million increase within the USG segment due to the timing of payments.
Net cash provided by operating activities from continuing operations was $75.4
million and $53.8 million in the first nine months of 2021 and 2020,
respectively. The increase in net cash provided by operating activities from
continuing operations in the first nine months of 2021 as compared to the first
nine months of 2020 was mainly driven by lower working capital requirements.
Capital expenditures from continuing operations were $17.9 million and $28.3
million in the first nine months of 2021 and 2020, respectively. The decrease in
the first nine months of 2021 compared to the prior year period was mainly due
to the building improvement additions in 2020 at the new Doble headquarters
facility. In addition, the Company incurred expenditures for capitalized
software of $6.5 million and $6.6 million in the first nine months of 2021 and
2020, respectively.
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Credit Facility
At June 30, 2021, the Company had approximately $444 million available to borrow
under its bank credit facility, a $250 million increase option subject to lender
approval, and $78.4 million cash on hand. At June 30, 2021, the Company had $48
million of outstanding borrowings under the credit facility in addition to
outstanding letters of credit of $8.4 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.
Subsequent Events
On May 20, 2021, the Company announced it had entered into an agreement to
acquire I.S.A. Altanova Group S.R.L. (Altanova), a supplier in the field of
advanced condition assessment technologies including partial discharge
measurement and analysis, as well as test instruments for electrical apparatus.
Altanova, which will become part of the USG operating segment, had annual sales
of approximately $30 million in 2020. As of June 30, 2021, the Company had 30
million Euros held in an escrow account related to this transaction which will
be used to partially fund the acquisition. The transaction was subject to
Italian regulatory approval, which was obtained and the transaction closed on
July 29, 2021.
On August 9, 2021, the Company announced it had acquired the assets of Phenix
Technologies, Inc. (Phenix), a manufacturer of stationary and portable high
voltage, high current, high power test systems, components and solutions
supporting the electric utility industry. Phenix, which will become part of the
USG operating segment, had annual sales of approximately $25 million in 2020.
Dividends
A quarterly dividend of $0.08 per share, totaling $2.1 million, was paid on
October 15, 2020 to stockholders of record as of October 1, 2020. A quarterly
dividend of $0.08 per share, totaling $2.1 million, was paid on January 19, 2021
to stockholders of record as of January 4, 2021. A quarterly dividend of $0.08
per share, totaling $2.1 million, was paid on April 16, 2021 to stockholders of
record as of April 1, 2021. Subsequent to June 30, 2021, a quarterly dividend of
$0.08 per share, totaling $2.1 million, was paid on July 16, 2021 to
stockholders of record as of July 1, 2021.
New Share Repurchase Program
On August 5, 2021, the Company's Board of Directors adopted a new stock
repurchase program, replacing the previous program which was adopted in 2012 and
was scheduled to expire September 30, 2021. Under the new program, which is
similar to the previous one, Management may repurchase shares of its outstanding
stock in the open market and otherwise throughout the period ending September
30, 2024. The total value authorized is the lesser of $200 million or the dollar
limitation imposed by the Company's Credit Agreement. The repurchase program
does not obligate the Company to repurchase any particular amount of stock, and
it may be modified, extended, suspended or discontinued at any time. The timing
and amount of repurchases are determined by Management based on a variety of
factors such as the market price of our common stock, our corporate
requirements, and overall market conditions. Purchases of our common stock may
be made in open market transactions effected through a broker-dealer at
prevailing market prices, in block trades, or in privately negotiated
transactions. In addition, we may repurchase common stock through private or
other transactions outside of the repurchase program.
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,
2020.
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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 third quarter results, growth in sales, the effects of a widely
available COVID-19 vaccine; the continuing effects of the COVID-19 pandemic
including any impairment of the Company's assets, impacts to commercial
aerospace, military and navy markets which the Company serves, the strength of
the markets served by the Company's Test and USG segments, and the timing of the
recovery of certain end markets which the Company serves; the correction of
production issues, the effect of certain changes in the Company's internal
controls or in other factors on the effectiveness of its internal controls; the
adequacy of the Company's credit facility and the Company's ability to increase
it; the outcome of current litigation, claims and charges; cash flow; timing of
the repayment of the current portion of the Company's long-term debt; future
revenues from remaining performance obligations; fair values of reporting units;
the Company's ability to hedge against or otherwise manage market risks through
the use of derivative financial instruments; the extent to which hedging gains
or losses will be offset by losses or gains on related underlying exposures; and
any other statements contained herein which are not strictly historical. Words
such as expects, anticipates, targets, goals, projects, intends, plans,
believes, estimates, variations of such words, and similar expressions are
intended to identify such forward-looking statements.
Investors are cautioned that such statements are only predictions and speak only
as of the date of this Form 10-Q, and the Company undertakes no duty to update
them except as may be required by applicable laws or regulations. The Company's
actual results in the future may differ materially from those projected in the
forward-looking statements due to risks and uncertainties that exist in the
Company's operations and business environment, including but not limited to
those described in Item 1A, "Risk Factors," of the Company's Annual Report on
Form 10-K for the fiscal year ended September 30, 2020 and the following: the
success and timing of COVID-19 vaccines in ending the pandemic and the effects
of known or unknown COVID-19 variants; the continuing impact of the COVID-19
pandemic including labor shortages, facility closures, shelter in place policies
or quarantines, material shortages, transportation delays, termination or delays
of Company contracts and the inability of our suppliers or customers to perform,
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; 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; 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.
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