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EX-32.2 - EX-32.2 - ESTERLINE TECHNOLOGIES CORPesl-ex322_7.htm
EX-32.1 - EX-32.1 - ESTERLINE TECHNOLOGIES CORPesl-ex321_6.htm
EX-31.2 - EX-31.2 - ESTERLINE TECHNOLOGIES CORPesl-ex312_9.htm
EX-31.1 - EX-31.1 - ESTERLINE TECHNOLOGIES CORPesl-ex311_10.htm
EX-11 - EX-11 - ESTERLINE TECHNOLOGIES CORPesl-ex11_8.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017.

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 1-6357

 

 

ESTERLINE TECHNOLOGIES CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

13-2595091

(State or other jurisdiction

 

(I.R.S. Employer

of incorporation or organization)

 

Identification No.)

500 108th Avenue N.E., Bellevue, Washington 98004

(Address of principal executive offices)(Zip Code)

Registrant’s telephone number, including area code (425) 453-9400

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 and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post 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 definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  (Do not check if a smaller reporting company)

  

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  

As of August 1, 2017, 29,974,898 shares of the issuer’s common stock were outstanding.


1


 

PART I – FINANCIAL INFORMATION

 

Item 1.Financial Statements

 

ESTERLINE TECHNOLOGIES CORPORATION

CONSOLIDATED BALANCE SHEET

As of June 30, 2017, and September 30, 2016

(In thousands, except share amounts)

 

 

June 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

279,398

 

 

$

258,520

 

 

Cash in escrow

 

-

 

 

 

1,125

 

 

Accounts receivable, net of allowances of $17,956 and $17,028

 

401,479

 

 

 

422,073

 

 

Inventories

 

 

 

 

 

 

 

 

Raw materials and purchased parts

 

192,492

 

 

 

177,069

 

 

Work in progress

 

183,404

 

 

 

171,515

 

 

Finished goods

 

111,804

 

 

 

101,622

 

 

 

 

487,700

 

 

 

450,206

 

 

 

 

 

 

 

 

 

 

 

Income tax refundable

 

5,569

 

 

 

5,183

 

 

Prepaid expenses

 

22,371

 

 

 

17,909

 

 

Other current assets

 

9,689

 

 

 

5,322

 

 

Current assets of businesses held for sale

 

3,868

 

 

 

15,450

 

 

Total Current Assets

 

1,210,074

 

 

 

1,175,788

 

 

 

 

 

 

 

 

 

 

 

Property, Plant and Equipment

 

842,953

 

 

 

795,790

 

 

Accumulated depreciation

 

499,871

 

 

 

457,756

 

 

 

 

343,082

 

 

 

338,034

 

 

 

 

 

 

 

 

 

 

 

Other Non-Current Assets

 

 

 

 

 

 

 

 

Goodwill

 

1,032,034

 

 

 

1,024,667

 

 

Intangibles, net

 

361,927

 

 

 

393,035

 

 

Deferred income tax benefits

 

75,387

 

 

 

75,409

 

 

Other assets

 

16,870

 

 

 

13,698

 

 

Non-current assets of businesses held for sale

 

10,257

 

 

 

11,400

 

 

Total Assets

$

3,049,631

 

 

$

3,032,031

 

 

 


2


ESTERLINE TECHNOLOGIES CORPORATION

CONSOLIDATED BALANCE SHEET

As of June 30, 2017, and September 30, 2016

(In thousands, except share amounts)

 

 

June 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable

$

128,293

 

 

$

121,816

 

 

Accrued liabilities

 

228,742

 

 

 

238,163

 

 

Current maturities of long-term debt

 

14,215

 

 

 

16,774

 

 

Federal and foreign income taxes

 

4,561

 

 

 

10,932

 

 

Current liabilities of businesses held for sale

 

471

 

 

 

10,813

 

 

Total Current Liabilities

 

376,282

 

 

 

398,498

 

 

 

 

 

 

 

 

 

 

 

Long-Term Liabilities

 

 

 

 

 

 

 

 

Credit facilities

 

65,000

 

 

 

155,000

 

 

Long-term debt, net of current maturities

 

701,024

 

 

 

698,796

 

 

Deferred income tax liabilities

 

45,357

 

 

 

53,798

 

 

Pension and post-retirement obligations

 

93,347

 

 

 

92,520

 

 

Other liabilities

 

19,388

 

 

 

21,968

 

 

Non-current liabilities of businesses held for sale

 

1,685

 

 

 

320

 

 

 

 

 

 

 

 

 

 

 

Shareholders' Equity

 

 

 

 

 

 

 

 

Common stock, par value $.20 per share, authorized 60,000,000 shares,

   issued 33,096,743 and 32,564,252 shares

 

6,619

 

 

 

6,513

 

 

Additional paid-in capital

 

734,835

 

 

 

702,610

 

 

Treasury stock at cost, repurchased 3,135,927 and 3,135,927 shares

 

(308,514

)

 

 

(308,514

)

 

Retained earnings

 

1,631,435

 

 

 

1,548,805

 

 

Accumulated other comprehensive loss

 

(328,158

)

 

 

(348,857

)

 

Total Esterline Shareholders' Equity

 

1,736,217

 

 

 

1,600,557

 

 

Noncontrolling interests

 

11,331

 

 

 

10,574

 

 

Total Shareholders' Equity

 

1,747,548

 

 

 

1,611,131

 

 

Total Liabilities and Shareholders' Equity

$

3,049,631

 

 

$

3,032,031

 

 

 


3


ESTERLINE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENT OF OPERATIONS AND

COMPREHENSIVE INCOME (LOSS)

For the Three and Nine Month Periods Ended June 30, 2017, and July 1, 2016

(Unaudited)

(In thousands, except per share amounts)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30,

 

 

July 1,

 

 

June 30,

 

 

July 1,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

$

503,753

 

 

$

517,092

 

 

$

1,470,668

 

 

$

1,448,879

 

 

Cost of Sales

 

333,124

 

 

 

343,508

 

 

 

980,073

 

 

 

981,403

 

 

 

 

170,629

 

 

 

173,584

 

 

 

490,595

 

 

 

467,476

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general & administrative

 

93,615

 

 

 

96,769

 

 

 

286,331

 

 

 

293,283

 

 

Research, development and engineering

 

27,866

 

 

 

22,211

 

 

 

75,712

 

 

 

72,760

 

 

Restructuring charges

 

-

 

 

 

559

 

 

 

-

 

 

 

2,430

 

 

Insurance recovery

 

-

 

 

 

-

 

 

 

(7,789

)

 

 

-

 

 

Total Expenses

 

121,481

 

 

 

119,539

 

 

 

354,254

 

 

 

368,473

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Earnings from Continuing Operations

 

49,148

 

 

 

54,045

 

 

 

136,341

 

 

 

99,003

 

 

Interest Income

 

(150

)

 

 

(30

)

 

 

(346

)

 

 

(211

)

 

Interest Expense

 

7,299

 

 

 

7,659

 

 

 

22,645

 

 

 

22,169

 

 

Earnings from Continuing Operations Before

   Income Taxes

 

41,999

 

 

 

46,416

 

 

 

114,042

 

 

 

77,045

 

 

Income Tax Expense

 

10,433

 

 

 

7,975

 

 

 

25,013

 

 

 

11,358

 

 

Earnings from Continuing Operations Including

   Noncontrolling Interests

 

31,566

 

 

 

38,441

 

 

 

89,029

 

 

 

65,687

 

 

Earnings Attributable to Noncontrolling Interests

 

(278

)

 

 

(395

)

 

 

(1,069

)

 

 

(781

)

 

Earnings from Continuing Operations Attributable to

   Esterline, Net of Tax

 

31,288

 

 

 

38,046

 

 

 

87,960

 

 

 

64,906

 

 

Loss from Discontinued Operations Attributable to

   Esterline, Net of Tax

 

(815

)

 

 

(8,690

)

 

 

(6,185

)

 

 

(15,493

)

 

Net Earnings Attributable to Esterline

$

30,473

 

 

$

29,356

 

 

$

81,775

 

 

$

49,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) Per Share Attributable to Esterline - Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

1.05

 

 

$

1.30

 

 

$

2.96

 

 

$

2.19

 

 

Discontinued operations

 

(0.03

)

 

 

(0.30

)

 

 

(0.21

)

 

 

(0.52

)

 

Earnings (Loss) Per Share - Basic

$

1.02

 

 

$

1.00

 

 

$

2.75

 

 

$

1.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (Loss) Per Share Attributable to Esterline - Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

$

1.04

 

 

$

1.28

 

 

$

2.94

 

 

$

2.18

 

 

Discontinued operations

 

(0.03

)

 

 

(0.29

)

 

 

(0.21

)

 

 

(0.52

)

 

Earnings (Loss) Per Share - Diluted

$

1.01

 

 

$

0.99

 

 

$

2.73

 

 

$

1.66

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Earnings

$

30,473

 

 

$

29,356

 

 

$

81,775

 

 

$

49,413

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Fair Value of Derivative Financial Instruments

 

11,966

 

 

 

888

 

 

 

11,271

 

 

 

16,989

 

 

Income Tax Expense (Benefit)

 

3,575

 

 

 

68

 

 

 

3,094

 

 

 

4,562

 

 

 

 

8,391

 

 

 

820

 

 

 

8,177

 

 

 

12,427

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in Pension and Post-Retirement Obligations

 

536

 

 

 

1,163

 

 

 

4,132

 

 

 

3,351

 

 

Income Tax Expense (Benefit)

 

284

 

 

 

(47

)

 

 

1,536

 

 

 

793

 

 

 

 

252

 

 

 

1,210

 

 

 

2,596

 

 

 

2,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign Currency Translation Adjustment

 

46,764

 

 

 

(26,044

)

 

 

9,926

 

 

 

(34,259

)

 

Comprehensive Income (Loss)

$

85,880

 

 

$

5,342

 

 

$

102,474

 

 

$

30,139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


4


ESTERLINE TECHNOLOGIES CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

For the Nine Month Periods Ended June 30, 2017, and July 1, 2016

(Unaudited)

(In thousands)

 

 

June 30,

 

 

July 1,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

Cash Flows Provided (Used) by Operating Activities

 

 

 

 

 

 

 

 

Net earnings including noncontrolling interests

$

82,844

 

 

$

50,194

 

 

Adjustments to reconcile net earnings including noncontrolling interests to net cash

   provided (used) by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

77,005

 

 

 

73,272

 

 

Deferred income taxes

 

(11,303

)

 

 

(17,545

)

 

Share-based compensation

 

7,549

 

 

 

11,501

 

 

Excess tax benefits from share-based compensation

 

-

 

 

 

(496

)

 

Gain on sale of discontinued operations

 

(793

)

 

 

-

 

 

Loss on assets held for sale

 

3,537

 

 

 

7,895

 

 

Working capital changes:

 

 

 

 

 

 

 

 

Accounts receivable

 

22,769

 

 

 

(14,435

)

 

Inventories

 

(31,547

)

 

 

(18,249

)

 

Prepaid expenses

 

(4,153

)

 

 

1,886

 

 

Other current assets

 

(263

)

 

 

8

 

 

Accounts payable

 

3,867

 

 

 

9,554

 

 

Accrued liabilities

 

(15,911

)

 

 

(11,296

)

 

Federal and foreign income taxes

 

(6,305

)

 

 

11,264

 

 

Other liabilities

 

2,292

 

 

 

737

 

 

Other, net

 

9,283

 

 

 

14,322

 

 

 

 

138,871

 

 

 

118,612

 

 

 

 

 

 

 

 

 

 

 

Cash Flows Provided (Used) by Investing Activities

 

 

 

 

 

 

 

 

Purchase of capital assets

 

(42,153

)

 

 

(58,547

)

 

Escrow deposit

 

-

 

 

 

(1,125

)

 

Proceeds from sale of discontinued operations

 

600

 

 

 

3,654

 

 

 

 

(41,553

)

 

 

(56,018

)

 

 

 

 

 

 

 

 

 

 

Cash Flows Provided (Used) by Financing Activities

 

 

 

 

 

 

 

 

Proceeds provided by stock issuance under employee stock plans

 

26,901

 

 

 

4,679

 

 

Withholding taxes on restricted stock units vested

 

(1,115

)

 

 

-

 

 

Excess tax benefits from share-based compensation

 

-

 

 

 

496

 

 

Shares repurchased

 

-

 

 

 

(18,735

)

 

Repayment of long-term credit facilities

 

(95,000

)

 

 

(20,000

)

 

Repayment of long-term debt

 

(12,872

)

 

 

(9,331

)

 

Proceeds from issuance of long-term credit facilities

 

5,000

 

 

 

30,000

 

 

 

 

(77,086

)

 

 

(12,891

)

 

 

 

 

 

 

 

 

 

 

Effect of Foreign Exchange Rates on Cash and Cash Equivalents

 

646

 

 

 

(3,213

)

 

Net Increase (Decrease) in Cash and Cash Equivalents

 

20,878

 

 

 

46,490

 

 

 

 

 

 

 

 

 

 

 

Cash and Cash Equivalents - Beginning of Year

 

258,520

 

 

 

191,355

 

 

Cash and Cash Equivalents - End of Period

$

279,398

 

 

$

237,845

 

 

 

 

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

 

 

 

Cash paid for interest

$

24,094

 

 

$

23,684

 

 

Cash paid for taxes

 

38,641

 

 

 

13,521

 

 


5


ESTERLINE TECHNOLOGIES CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Nine Month Periods Ended June 30, 2017, and July 1, 2016

Note 1 – Basis of Presentation

The consolidated balance sheet as of June 30, 2017, the consolidated statement of operations and comprehensive income (loss) for the three and nine month periods ended June 30, 2017, and July 1, 2016, and the consolidated statement of cash flows for the nine month periods ended June 30, 2017, and July 1, 2016, are unaudited but, in the opinion of management, all of the necessary adjustments, consisting of normal recurring accruals, have been made to present fairly the financial statements referred to above in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, the above statements do not include all of the footnotes required for complete financial statements.  The results of operations and cash flows for the interim periods presented are not necessarily indicative of results that can be expected for the full year.

The notes to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2016, provide a summary of significant accounting policies and additional financial information that should be read in conjunction with this Form 10-Q.

The timing of the Company’s revenues is impacted by the purchasing patterns of customers and, as a result, revenues are not generated evenly throughout the year.  Moreover, the Company’s first fiscal quarter, October through December, includes significant holiday periods in both Europe and North America, resulting in fewer business days.

 

 

Note 2 – Recent Accounting Pronouncements

In March 2017, the Financial Accounting Standards Board (FASB) issued new guidance on the presentation of the net periodic cost of postretirement benefit programs. The new standard requires sponsors of defined benefit postretirement plans to present the non-service cost components of net periodic benefit cost separate from the service cost component on the income statement. The new standard also requires that the non-service cost components of net periodic benefit cost no longer be capitalized within assets. The Company is evaluating the effects the standard will have on the Company’s consolidated financial statements and related disclosures beyond the change in income statement presentation. This new standard is effective for the Company in fiscal year 2019, with early adoption permitted.

In January 2017, FASB issued new guidance regarding the goodwill impairment test.  The new guidance eliminates the Step 2 valuation test when evaluating goodwill for impairment.  The new guidance requires that an entity performs its annual or interim goodwill test by comparing the fair value of the reporting unit with its carrying amount.  An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value.  The loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  The Company is evaluating the effect the updated standard will have on the Company’s consolidated financial statements and related disclosures.  The guidance will be effective for the Company in fiscal year 2021, with early adoption permitted.

In October 2016, FASB issued new guidance regarding income taxes.  The new guidance will require the tax effects of intercompany transactions, other than sales of inventory, to be recognized currently, eliminating an exception under current Generally Accepted Accounting Principles (GAAP) in which the tax effects of intra-entity asset transfers are deferred until the transferred asset is sold to a third party or otherwise recovered through use.  The Company is evaluating the effect the updated standard will have on the Company’s consolidated financial statements and related disclosures.  The guidance will be effective for the Company in fiscal year 2019, with early adoption permitted.

In August 2016, the FASB issued new guidance addressing how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The Company is evaluating the effect the updated standard will have on the Company’s consolidated financial statements and related disclosures.  The guidance will be effective for the Company in fiscal year 2019, with early adoption permitted.

In June 2016, the FASB issued a new standard on the measurement of credit losses, which will impact the Company’s measurement of trade receivables.  The new standard replaces the current incurred loss model with a forward-looking expected loss model that is likely to result in earlier recognition of losses.  The Company is evaluating the effect the updated standard will have on the Company’s consolidated financial statements and related disclosures.  The new standard is effective for the Company in fiscal year 2021, with early adoption permitted, but not earlier than in fiscal year 2020.

In March 2016, the FASB issued new guidance simplifying certain aspects of accounting for share-based payments.  The key provision of the new standard requires that excess tax benefits and shortfalls be recorded as income tax benefit or expense in the income statement, rather than in equity.  The Company adopted the new guidance during the first nine months of fiscal 2017, which

6


resulted in a $2.3 million benefit to income tax expense and a favorable impact to operating cash flows of $2.3 million.  The Company has also elected to account for forfeitures as they occur, rather than estimate expected forfeitures, which resulted in a positive cumulative effect on retained earnings of $0.9 million and a reduction of additional paid-in capital of $0.9 million.

In February 2016, the FASB issued a new lease accounting standard, which provides revised guidance on accounting for lease arrangements by both lessors and lessees.  The central requirement of the new standard is that lessees must recognize lease related assets and liabilities for all leases with a term longer than 12 months.  The Company is evaluating the effect the standard will have on the Company’s consolidated financial statements and related disclosures.  The new standard is effective for the Company in fiscal year 2020, with early adoption permitted.

In May 2014, the FASB amended requirements for 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.  The updated standard will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective, and permits the use of either the retrospective or cumulative effect transition method.  The Company is evaluating the effect the updated standard will have on the Company’s consolidated financial statements and related disclosures.  The updated standard becomes effective for the Company in the first quarter of fiscal 2019, with early adoption permitted.

Anticipated changes under the new standard include accounting for development costs and associated customer funding related to certain contracts and increased use of over-time revenue recognition based on costs incurred for certain contracts.  The new standard also significantly enhances required disclosures regarding revenue and related assets and liabilities.  The Company is in the process of evaluating changes to business processes, systems and internal controls required to implement the new accounting standard.

 

 

Note 3 – Earnings Per Share and Shareholders’ Equity

Basic earnings per share is computed on the basis of the weighted average number of shares outstanding during the year.  Diluted earnings per share includes the dilutive effect of stock options, restricted stock units and share units related to the Company’s performance share plan to the extent that performance share plan objectives are met.  Common shares issuable from stock options excluded from the calculation of diluted earnings per share because they were anti-dilutive were 605,725 and 690,475 in the three and nine month periods ending June 30, 2017.  Common shares issuable from stock options excluded from the calculation of diluted earnings per share because they were anti-dilutive were 858,000 and 745,067 in the three and nine month periods ending July 1, 2016.  Shares used for calculating earnings per share are disclosed in the following table:

 

In Thousands

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30,

 

 

July 1,

 

 

June 30,

 

 

July 1,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used for basic earnings per share

 

29,830

 

 

 

29,381

 

 

 

29,698

 

 

 

29,517

 

 

Shares used for diluted earnings per share

 

30,068

 

 

 

29,601

 

 

 

29,953

 

 

 

29,788

 

 

 

 

The authorized capital stock of the Company consists of 25,000 shares of preferred stock ($100 par value), 475,000 shares of serial preferred stock ($1.00 par value), each issuable in series, and 60,000,000 shares of common stock ($.20 par value).  As of June 30, 2017, and September 30, 2016, there were no shares of preferred stock or serial preferred stock outstanding.

On June 19, 2014, the Company’s board of directors approved a $200 million share repurchase program.  In March 2015, the Company’s board of directors approved an additional $200 million for the share repurchase program.  Under the program, the Company is authorized to repurchase up to $400 million of outstanding shares of common stock from time to time, depending on market conditions, share price and other factors.  Repurchases may be made in the open market or through private transactions, in accordance with SEC requirements.  The Company may enter into a Rule 10(b)5-1 plan designed to facilitate the repurchase of all or a portion of the repurchase amount.  The program does not require the Company to acquire a specific number of shares.  Common stock repurchased can be reissued, and accordingly, the Company accounts for repurchased stock under the cost method of accounting.

There were no shares repurchased during the nine months ended June 30, 2017.  There were 304,577 shares repurchased during the nine months ended July 1, 2016.  Since the program began, the Company has repurchased 3,135,927 shares for an aggregate purchase price of $308.5 million, with $91.5 million in shares remaining available for repurchase in the future.

7


Changes in issued and outstanding common shares are summarized as follows:

 

 

Nine Months Ended

 

 

Year Ended

 

 

 

June 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

Shares Issued:

 

 

 

 

 

 

 

 

Balance, beginning of year

 

32,564,252

 

 

 

32,378,185

 

 

Shares issued under share-based compensation plans

 

532,491

 

 

 

186,067

 

 

Balance, end of current period

 

33,096,743

 

 

 

32,564,252

 

 

 

 

 

 

 

 

 

 

 

Treasury Stock:

 

 

 

 

 

 

 

 

Balance, beginning of year

 

(3,135,927

)

 

 

(2,831,350

)

 

Shares purchased

 

-

 

 

 

(304,577

)

 

Balance, end of current period

 

(3,135,927

)

 

 

(3,135,927

)

 

 

 

 

 

 

 

 

 

 

Shares outstanding, end of period

 

29,960,816

 

 

 

29,428,325

 

 

 

 

The components of Accumulated Other Comprehensive Income (Loss):

 

In Thousands

June 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on derivative contracts

$

6,724

 

 

$

(4,547

)

 

Tax effect

 

(2,017

)

 

 

1,077

 

 

 

 

4,707

 

 

 

(3,470

)

 

 

 

 

 

 

 

 

 

 

Pension and post-retirement obligations

 

(112,214

)

 

 

(116,346

)

 

Tax effect

 

38,268

 

 

 

39,804

 

 

 

 

(73,946

)

 

 

(76,542

)

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(258,919

)

 

 

(268,845

)

 

Accumulated other comprehensive income (loss)

$

(328,158

)

 

$

(348,857

)

 

 

 

 

Note 4 – Retirement Benefits

The Company’s pension plans principally include a U.S. pension plan maintained by Esterline and a non-U.S. plan maintained by CMC Electronics, Inc. (CMC).  The Company also sponsors a number of other non-U.S. defined benefit pension plans, primarily in Belgium, France and Germany.  Components of periodic pension cost consisted of the following:

 

In Thousands

Three Months Ended

 

 

Nine Months Ended

 

 

 

June 30,

 

 

July 1,

 

 

June 30,

 

 

July 1,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Components of Net Periodic Cost

 

 

Service cost

$

3,287

 

 

$

2,871

 

 

$

10,012

 

 

$

8,773

 

 

Interest cost

 

3,838

 

 

 

4,412

 

 

 

11,293

 

 

 

13,052

 

 

Expected return on plan assets

 

(6,241

)

 

 

(6,060

)

 

 

(18,796

)

 

 

(17,964

)

 

Amortization of prior service cost

 

114

 

 

 

119

 

 

 

343

 

 

 

345

 

 

Amortization of actuarial (gain) loss

 

1,996

 

 

 

1,580

 

 

 

5,397

 

 

 

4,639

 

 

Net periodic cost (benefit)

$

2,994

 

 

$

2,922

 

 

$

8,249

 

 

$

8,845

 

 

 

 

The Company amortizes prior service cost and actuarial gains and losses from accumulated other comprehensive income to expense over the remaining service period.

 

 

Note 5 – Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  A fair value hierarchy has been established that prioritizes the inputs to valuation

8


techniques used to measure fair value.  An asset’s or liability’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.  The hierarchy of fair value measurements is described below:

Level 1 – Valuations are based on quoted prices that the Company has the ability to obtain in actively traded markets for identical assets and liabilities.  Since valuations are based on quoted prices that are readily and regularly available in an active market or exchange traded market, a valuation of these instruments does not require a significant degree of judgment.

Level 2 – Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

Level 3 – Valuations are based on model-based techniques for which some or all of the assumptions are not observable and therefore obtained from indirect market information that is significant to the overall fair value measurement and which require a significant degree of management judgment.

The following table sets forth the Company’s financial assets and liabilities that were measured at fair value on a recurring basis by level within the fair value hierarchy at June 30, 2017, and September 30, 2016.

 

In Thousands

Level 2

 

 

 

June 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

Assets:

 

 

 

 

 

 

 

 

Derivative contracts designated as hedging instruments

$

7,400

 

 

$

2,948

 

 

Derivative contracts not designated as hedging instruments

 

515

 

 

 

143

 

 

Embedded derivatives

 

1,009

 

 

 

2,485

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Derivative contracts designated as hedging instruments

$

676

 

 

$

7,828

 

 

Derivative contracts not designated as hedging instruments

 

3,840

 

 

 

6,720

 

 

Embedded derivatives

 

1,287

 

 

 

985

 

 

 

In Thousands

Level 3

 

 

 

June 30,

 

 

September 30,

 

 

 

2017

 

 

2016

 

 

Assets:

 

 

 

 

 

 

 

 

Estimated value of assets held for sale

$

14,125

 

 

$

26,850

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Estimated value of liabilities held for sale

$

2,156

 

 

$

11,133

 

 

 

The Company’s embedded derivatives are the result of entering into sales or purchase contracts that are denominated in a currency other than the Company’s functional currency or the supplier’s or customer’s functional currency.  The fair value is determined by calculating the difference between quoted exchange rates at the time the contract was entered into and the period-end exchange rate.  These contracts are categorized as Level 2 in the fair value hierarchy.

The Company’s derivative contracts consist of foreign currency exchange contracts and, from time to time, interest rate swap agreements.  These derivative contracts are over the counter, and their fair value is determined using modeling techniques that include market inputs such as interest rates, yield curves, and currency exchange rates.  These contracts are categorized as Level 2 in the fair value hierarchy.

In fiscal 2014, the Company’s board of directors approved the plan to sell certain non-core business units.  Based upon the estimated fair values, the Company adjusted the carrying value of the assets and liabilities of the businesses to fair value.  Principle assumptions used in measuring the estimated value of assets and liabilities held for sale included estimated selling price of the discontinued business, discount rates, industry growth rates, and pricing of comparable transactions in the market.  The change in the estimated value of assets and liabilities held for sale is due to disposing of a business with assets held for sale of $10.5 million and liabilities held for sale of $7.4 million at September 30, 2016.  In addition, the estimated selling price of the remaining business held for sale was reduced by $3.5 million during fiscal year 2017.  The valuations are categorized as Level 3 in the fair value hierarchy.

 

 

9


Note 6 – Derivative Financial Instruments

The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and interest rate swap contracts for the purpose of minimizing exposure to changes in foreign currency exchange rates on business transactions and interest rates, respectively.  The Company’s policy is to execute such instruments with banks the Company believes to be creditworthy and not to enter into derivative financial instruments for speculative purposes.  These derivative financial instruments do not subject the Company to undue risk, as gains and losses on these instruments generally offset gains and losses on the underlying assets, liabilities, or anticipated transactions that are being hedged.

All derivative financial instruments are recorded at fair value in the Consolidated