15
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-10596
ESCO TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1554045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8888 LADUE ROAD, SUITE 200 63124-2090
ST. LOUIS, MISSOURI (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:(314) 213-7200
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 X No
The number of shares of the registrant's stock outstanding at January 31,
2003 was 12,615,442.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
December 31,
------------
2002 2001
---- ----
Net sales $ 111,799 84,336
Costs and expenses:
Cost of sales 76,877 57,457
Selling, general and 23,175 18,753
administrative
expenses
Interest expense (income) (52) 51
Other, net 1,176 315
------- ------
Total costs and expenses 101,176 76,576
------- ------
Earnings before income taxes 10,623 7,760
Income tax expense 4,071 2,988
------- -------
Net earnings $ 6,552 4,772
======= ======
Earnings per share:
Net earnings-Basic $ .52 .38
-Diluted .50 .37
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31 September 30,
2002 2002
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 25,279 24,930
Accounts receivable, less allowance for doubtful
accounts of $1,210 and $1,100, respectively 75,244 69,496
Costs and estimated earnings on long-term
contracts, less progress billings of
$5,828 and $4,541, respectively 4,589 2,951
Inventories 59,859 52,579
Current portion of deferred tax assets 21,299 22,782
Other current assets 6,800 8,650
------- -------
Total current assets 193,070 181,388
------- -------
Property, plant and equipment, at cost 125,817 121,105
Less accumulated depreciation and amortization 55,406 52,583
------- -------
Net property, plant and equipment 70,411 68,522
Goodwill 104,821 103,283
Deferred tax assets 25,380 26,950
Other assets 27,493 27,545
------- -------
$ 421,175 407,688
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 97 121
Accounts payable 42,207 39,051
Advance payments on long-term contracts, less costs
incurred of $4,135 and $3,794, respectively 2,184 2,770
Accrued expenses and other current liabilities 26,446 26,845
------- -------
Total current liabilities 70,934 68,787
------- -------
Other liabilities 25,885 24,313
Long-term debt 8,476 8,277
------- -------
Total liabilities 105,295 101,377
------- -------
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, par value $.01 per share,
authorized 10,000,000 shares -- --
Common stock, par value $.01 per share, authorized
50,000,000 shares, issued 13,662,433 and
13,601,095 shares, respectively 137 136
Additional paid-in capital 211,157 209,402
Retained earnings since elimination of deficit at
September 30, 1993 127,981 121,430
Accumulated other comprehensive loss (8,226) (9,473)
------- -------
331,049 321,495
Less treasury stock, at cost: 1,065,746 and
1,067,046 common shares, respectively (15,169) (15,184)
Total shareholders' equity 315,880 306,311
------- -------
$421,175 407,688
======= =======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
December 31,
------------
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $ 6,552 4,772
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 3,199 3,265
Changes in operating working capital (7,033) (3,386)
Effect of deferred taxes 1,570 1,418
Other 2,714 1,394
------ ------
Net cash provided by operating activities 7,002 7,463
------ ------
Cash flows from investing activities:
Capital expenditures (2,961) (3,261)
Acquisition of businesses (4,364) -
------ ------
Net cash used by investing activities (7,325) (3,261)
------ ------
Cash flows from financing activities:
Net decrease in short-term borrowings (24) (12)
Proceeds from long-term debt 199 45
Principal payments on long-term debt - (92)
Purchases of common stock into treasury - (456)
Other (including exercise of stock options) 497 30
------ ------
Net cash provided (used) by financing activities 672 (485)
------ ------
Net increase in cash and cash equivalents 349 3,717
Cash and cash equivalents, beginning of period 24,930 14,506
------ ------
Cash and cash equivalents, end of period $25,279 18,223
====== ======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements, in the opinion of
management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results for the interim
periods presented. The consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not
include all the disclosures required by accounting principles generally
accepted in the United States of America (GAAP). For further information
refer to the consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended September
30, 2002. The results for the three-month period ended December 31, 2002
are not necessarily indicative of the results for the entire 2003 fiscal
year.
2. EARNINGS PER SHARE (EPS)
Basic EPS is calculated using the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the weighted
average number of common shares outstanding during the period plus shares
issuable upon the assumed exercise of dilutive common share options and
performance-accelerated restricted shares (performance shares) by using the
treasury stock method. The number of shares used in the calculation of
earnings per share for each period presented is as follows (in thousands):
Three Months Ended
December 31,
2002 2001
Weighted Average Shares
Outstanding - Basic 12,554 12,415
Dilutive Options and
Performance Shares 491 496
Adjusted Shares- Diluted 13,045 12,911
Options to purchase 44,000 shares of common stock at prices ranging from
$35.23 - $36.33 were outstanding during the three month period ended
December 31, 2002, but were not included in the computation of diluted EPS
because the options' exercise prices were greater than the average market
price of the common shares. For the three month period ended December 31,
2001, there were no options outstanding where the exercise price was
greater than the average market price of the common shares. The options
expire in various periods through 2013. Approximately 50,300 and 153,000
performance shares were outstanding but unvested at December 31, 2002 and
2001, respectively, and therefore, were not included in the respective
computation of diluted EPS.
3. INVENTORIES
Inventories consist of the following (in thousands):
December 31, September 30,
2002 2002
Finished goods $ 14,412 12,232
Work in process, including long- term
contracts 15,820 13,439
Raw materials 29,627 26,908
Total inventories $ 59,859 52,579
The increase in inventories at December 31, 2002 of approximately $7
million is primarily due to an increase in the Company's Communications
segment inventories and the acquisition of the assets and certain
liabilities of Austin Acoustics Systems, Inc. in the Test segment.
4. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended December 31, 2002
and 2001 was $7.8 million and $3.8 million, respectively. For the three
months ended December 31, 2002, the Company's comprehensive income was
positively impacted by foreign currency translation adjustments of
approximately $1.3 million, which was partially offset by an decrease in
fair value of the Company's interest rate swaps designated as a cash flow
hedge of $0.1 million, discussed below in Item 3, Quantitative and
Qualitative Disclosures About Market Risk.
5. ACQUISITIONS
On December 31, 2002, the Company acquired the assets and certain
liabilities of Austin Acoustics Systems, Inc. (Austin Acoustics) for $4
million in cash. Austin Acoustics is a leading supplier of noise control
chambers for the test, medical and broadcast/music industries. Austin
Acoustics is headquartered in Austin, TX and has annual sales of
approximately $8 million. The assets and liabilities since the date of
acquisition are included within the Company's Test segment.
6. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in four segments:
Filtration/Fluid Flow, Communications, Test and Other.
Management evaluates and measures the performance of its operating segments
based on "Net Sales and EBIT", which are detailed in the table below. EBIT
is defined as Earnings Before Interest and Taxes.
($ in millions) Three Months ended
December 31,
------------
NET SALES 2002 2001
---- ----
Filtration/Fluid Flow $ 50.2 $ 44.4
Communications 39.5 19.3
Test 19.6 17.8
Other 2.5 2.8
----- -----
Consolidated totals $ 111.8 $ 84.3
===== =====
EBIT
Filtration/Fluid Flow $ 1.7 $ 2.3
Communications 9.4 4.4
Test 0.8 1.4
Other (1.3) (1) (0.3) (2)
---- ----
Consolidated totals $ 10.6 $ 7.8
==== ====
(1) The amount for the three month period ended December 31, 2002
consisted of $0.1 million related to Rantec and ($1.4) million related
to unallocated corporate operating charges, which includes $0.7
million of costs related to the Management Transition Agreement (MTA)
between the Company and Dennis J. Moore recorded in the first quarter
of fiscal 2003.
(2) The amount for the three month period ended December 31, 2001
consisted of $0.2 million related to Rantec and ($0.5) million related
to unallocated corporate operating charges, which includes $0.3
million of exit costs related to the Company's former joint venture in
India (Filtration/Fluid Flow segment), offset by a $0.4 million gain
from insurance proceeds related to a former subsidiary.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES
Net sales increased $27.5 million, or 32.6%, to $111.8 million for the first
quarter of fiscal 2003 from $84.3 million for the first quarter of fiscal 2002.
Filtration/Fluid Flow, Communications and Test segments each had increased sales
in the first quarter of 2003 as compared to the prior year period. The largest
increase was in the Company's Communications segment, resulting from
significantly higher shipments of Automatic Meter Reading (AMR) equipment,
primarily to PPL Electric Utilities Corporation (PPL).
FILTRATION/FLUID FLOW
Net sales increased $5.8 million, or 12.9%, to $50.2 million for the first
quarter of fiscal 2003 from $44.4 million for the first quarter of fiscal 2002.
The increase in the current quarter is mainly due to higher shipments of
automotive and aerospace products.
COMMUNICATIONS
For the first quarter of fiscal 2003, net sales of $39.5 million were $20.2
million, or 104.5%, higher than the $19.3 million of net sales recorded in the
first quarter of fiscal 2002. The increase is the result of significantly higher
shipments of AMR products. Sales to PPL were $22.6 million and $1.1 million in
the first quarter of fiscal 2003 and 2002, respectively. Sales to Wisconsin
Public Service Corporation (WPS) were $0.2 million and $4.3 million in the first
quarter of fiscal 2003 and 2002, respectively.
TEST
Net sales increased $1.8 million, or 10.0%, to $19.6 million for the first
quarter of fiscal 2003 from $17.8 million for the first quarter of fiscal 2002.
The net sales increase in the first quarter of fiscal 2003 as compared to the
prior year period is primarily due to higher sales of large EMC test chambers.
OTHER
Net sales were $2.5 million and $2.8 million for the first quarter of fiscal
2003 and 2002, respectively. The Other segment represents the net sales of
Rantec Power Systems Inc. (Rantec). The decrease in sales in the first quarter
of fiscal 2003 is mainly due to the timing of orders and delivery of low voltage
power supply products.
ORDERS AND BACKLOG
Firm order backlog was $285.7 million at December 31, 2002, compared with $293.2
million at September 30, 2002. Orders totaling $104.3 million were received in
the first three months of fiscal 2003. Approximately $56.6 million of new orders
in the first three months of fiscal 2003 related to Filtration/Fluid Flow
products, $24.6 million related to Communications products, and $20.9 million
related to Test products.
GROSS PROFIT
The Company computes gross profit as net sales less cost of sales. The gross
profit margin is the gross profit divided by net sales, expressed as a
percentage. The gross profit margin was 31.2% and 31.9% in the first quarter of
fiscal 2003 and 2002, respectively. Gross profit in the first quarter of fiscal
2003 includes $0.2 million of costs to exit the Brooklyn Park, MN facility
(Filtration/Fluid Flow segment). See "Other costs and expenses, net" discussion
below.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the first quarter of
fiscal 2003 were $23.2 million, or 20.7% of net sales, compared with $18.8
million, or 22.2% of net sales for the prior year period. The increase in SG&A
spending in the first quarter of fiscal 2003 is mainly due to the Company's
continued investments in research and development, engineering, and marketing
within the Communications and Filtration/Fluid Flow segments related to new
product development and market expansion initiatives. In addition, the
Management Transition Agreement (MTA) between the Company and Mr. Dennis J.
Moore, the Company's Chairman, added $0.7 million of SG&A expenses in the first
quarter of fiscal 2003.
OTHER COSTS AND EXPENSES, NET
Other costs and expenses, net, were $1.2 million for the quarter ended December
31, 2002 compared to $0.3 million for the prior year quarter. Principal
components of other costs and expenses, net, for the first quarter of fiscal
2003 included $0.5 million of amortization of identifiable intangible assets,
primarily patents and licenses, and $0.2 million of exit costs related to the
Brooklyn Park, MN facility (Filtration/Fluid Flow segment). The total cost to
exit the Brooklyn Park, MN facility is $0.4 million, of which $0.2 million is
recorded in Other costs and expenses, net.
Principal components of other costs and expenses, net, for the first three
months of fiscal 2002 include $0.3 million of amortization of identifiable
intangible assets, primarily patents and licenses, and $0.3 million of exit
costs related to the Company's former joint venture in India (Filtration/Fluid
Flow segment), offset by a $0.4 million gain from insurance proceeds related to
a former subsidiary.
EBIT
The Company evaluates the performance of its operating segments based on EBIT,
which the Company defines as Earnings Before Interest and Taxes. EBIT increased
$2.8 million to $10.6 million (9.5% of net sales) for the first quarter of
fiscal 2003 from $7.8 million (9.3% of net sales) for the first quarter of
fiscal 2002.
FILTRATION/FLUID FLOW
EBIT was $1.7 million and $2.3 million in the first quarter of fiscal 2003 and
2002, respectively. The decline in the first fiscal quarter of the current year
is due to investments in new product development and market expansion
initiatives, primarily in microfiltration and separations technology. In
addition, the Company incurred approximately $0.4 million of costs to exit the
Brooklyn Park, MN facility in conjunction with its plan to consolidate the
operations into its Oxnard, CA facility.
COMMUNICATIONS
First quarter EBIT of $9.4 million in fiscal 2003 was $5.0 million higher than
the $4.4 million of EBIT in the first quarter of fiscal 2002. The increase in
EBIT is the result of significantly higher shipments of AMR equipment, primarily
to PPL. The Company continues to increase its engineering and new product
development expenditures in the Communications segment in order to continue its
growth in the AMR markets, and to further differentiate its technology from the
competition.
TEST
EBIT was $0.8 million and $1.4 million in the first quarter of fiscal 2003 and
2002, respectively. The decline in EBIT in the first three months of fiscal 2003
as compared to the prior year period is due to $0.3 million of start-up costs
related to the Company's new manufacturing and sales entities in China and
Japan. EBIT was also negatively impacted by the change in product mix.
OTHER
EBIT was ($1.3) million and ($0.3) million for the three month periods ended
December 31, 2002 and 2001, respectively. EBIT for the first quarter ended
December 31, 2002 consisted of $0.1 million related to Rantec and ($1.4) million
related to unallocated corporate operating charges, which included $0.7 million
of MTA costs. EBIT for the first three months of fiscal 2002 consisted of $0.2
million related to Rantec and ($0.5) million related to unallocated corporate
operating charges, which included $0.3 million of exit costs related to the
Company's former joint venture in India (Filtration/Fluid Flow segment) which
was terminated in the first quarter of fiscal 2002.
INTEREST EXPENSE (INCOME)
Interest expense (income), net, was approximately ($0.1) million and $0.1
million for the first quarter ended December 31, 2002 and 2001, respectively.
INCOME TAX EXPENSE
The first quarter fiscal 2003 effective income tax rate was 38.3% compared to
38.5% in the first quarter of fiscal 2002. The Company estimates the annual
effective tax rate for fiscal 2003 to be approximately 38.5%.
FINANCIAL CONDITION
Working capital increased to $122.1 million at December 31, 2002 from $112.6
million at September 30, 2002. During the first quarter of fiscal 2003, accounts
receivable increased by $5.7 million due to the increase in sales, mainly within
the Company's Communications segment. Inventories increased by $7.3 million in
the first quarter of fiscal 2003 to support near term demand, mainly within the
Company's Communication segment. In addition, accounts payable, advance payments
on long-term contracts, and accrued expenses increased by $2.2 million primarily
due to the purchases of inventories and the timing of payments. The acquisition
of the assets and certain liabilities of Austin Acoustics in December 2002
contributed $1.6 million to the increase in working capital.
Net cash provided by operating activities was $7.0 million in the first quarter
of fiscal 2003 compared to net cash provided by operating activities of $7.5
million in the same period of fiscal 2002. The decrease is due to the working
capital investments noted above.
Capital expenditures were $3.0 million in the first quarter of fiscal 2003
compared with $3.3 million in the comparable period of fiscal 2002. Major
expenditures in the current period included manufacturing equipment used in the
Filtration / Fluid Flow businesses.
At December 31, 2002, accounts receivable included $1.1 million of reimbursable
costs incurred to replace certain filtration elements resulting from the receipt
of nonconforming material obtained from a supplier. The supplier has
acknowledged responsibility for this matter, has appropriate insurance coverage,
and has committed to reimburse the Company.
Other current assets included approximately $0.9 million of deferred legal costs
that have been incurred in the defense of certain revenue generating patents
used in the Company's Filtration/Fluid Flow business. The Company believes it is
probable it will prevail in this litigation. The Company's position is supported
by internal and third-party legal opinions and favorable developments in the
course of the litigation. The recovery of amounts equal to or greater than the
legal costs, while probable, is subject to the inherent risks of litigation.
Other current assets also included approximately $0.3 million of deferred legal
costs incurred to defend a customer product liability lawsuit related to the
Company's Test business. The balance at September 30, 2002, related to this
matter was $1.4 million. During the first quarter of fiscal 2003, the Company
collected $1.5 million from the insurance carrier. The remaining costs incurred
in the first quarter of fiscal 2003 are covered by and will be reimbursed
through insurance.
Effective April 5, 2002, the Company amended its existing $75 million revolving
credit facility changing the previously scheduled reductions and extending the
$25 million increase option through April 11, 2004. The amendment calls for $5
million reductions to the credit facility annually beginning in April 2002 with
the balance due upon maturity and expiration on April 11, 2005. As of December
31, 2002, the Company had not exercised the $25 million increase option and the
revolving line of credit was $70 million. At December 31, 2002, the Company had
approximately $47.8 million available to borrow under the credit facility in
addition to $25.3 million cash on hand. Against the $70 million available under
the revolving credit facility at December 31, 2002, the Company had $8.5 million
of outstanding long-term foreign borrowings and outstanding letters of credit of
$13.7 million. Cash flow from operations and borrowings under the Company's bank
credit facility are expected to provide adequate resources to meet the Company's
capital requirements and operational needs for the foreseeable future.
In December 2002, the Company paid $4 million to acquire the assets and certain
liabilities of Austin Acoustics Systems, Inc. (Austin Acoustics).
The Company continues to explore consolidation opportunities within its existing
businesses that could improve future operating earnings and enhance the
Company's competitive position. In addition, the Company continues to explore
possible divestitures of certain of its non-core businesses.
SYNTHETIC LEASE OBLIGATION
The Company has a $31.5 million obligation under a synthetic lease facility
arranged by Bank of America. For GAAP purposes, this is accounted for as an
operating lease. This obligation is secured by leases of three manufacturing
locations, two of which are located in Oxnard, CA and the other in Cedar Park,
TX, as well as a $10.6 million letter of credit issued under the Company's $70
million credit facility. The leases expire on December 29, 2005 at which time
the Company will be required to extend the leases on terms to be negotiated,
purchase the properties for $31.5 million, or refinance the obligation. The
Financial Accounting Standards Board (FASB) has issued Interpretation No. 46,
"Consolidation of Variable Interest Entities" which provides guidance related to
identifying variable interest entities and determining whether such entities
should be consolidated. The Company is currently reviewing the impact of this
new FASB interpretation and the possible consolidation of the synthetic lease
obligation.
MANAGEMENT TRANSITION AGREEMENT
On August 5, 2002, the Company entered into a Management Transition Agreement
(MTA) with Dennis J. Moore, the Company's Chairman, which provided for Mr. Moore
to receive certain compensation in conjunction with his planned retirement in
April 2003 and for consulting services after such retirement. Of the total cost
noted below, $0.7 million was expensed in SG&A during the first quarter of
fiscal 2003 and $0.7 million was recorded in the fourth quarter of fiscal 2002,
for a total of $1.4 million expensed to date. The costs associated with the MTA
are quantified below. (in millions) New Restricted Shares $ 1.2 (1) Previously
Awarded Restricted Shares and Performance Shares for $ 1.0 (1) (2) which vesting
has been accelerated Consulting Agreement $ 0.3 (3) Total $ 2.5
(1) The costs of these arrangements will be recognized over the eight-month
transition (i.e. service) period, from August 2002 through March 2003.
(2) These items were subject to remeasurement based on FASB Interpretation
(FIN) No. 44, "Accounting for Certain Transactions Involving Stock
Compensation (an Interpretation of APB Opinion No. 25)". The remeasurement
was based on the closing stock price on August 5, 2002, the date on which
the vesting of the shares was accelerated.
(3) The cost of the consulting agreement will be expensed over the twelve-month
period from April 2003 through March 2004, consistent with the period of
service.
ACQUISITIONS
On December 31, 2002, the Company acquired the assets and certain liabilities of
Austin Acoustics Systems, Inc. (Austin Acoustics) for $4 million in cash. Austin
Acoustics is a leading supplier of noise control chambers for the test, medical
and broadcast/music industries. Austin Acoustics is headquartered in Austin, TX
and has annual sales of approximately $8 million. The assets and liabilities
since the date of acquisition are included within the Company's Test segment.
SUBSEQUENT EVENT
On January 24, 2003, the Company's Filtertek Inc. subsidiary (Filtertek)
terminated its Manufacturing and Supply Agreement (Agreement) with Whatman
Hemasure Inc. (Whatman) based on Whatman's breach of its obligations under the
Agreement. The Agreement related to the parties' responsibilities concerning the
manufacture and supply of leukoreduction filters. Under the terms of the
Agreement, Filtertek's termination based on Whatman's breach entitles Filtertek
to recover its damages and certain specified costs, which include among other
costs, payment for certain equipment used in the production of leukoreduction
filters. Whatman has disputed Filtertek's allegations of breach. However,
Whatman has entered into settlement discussions with Filtertek. If the
settlement discussions do not result in an acceptable resolution, Filtertek
believes it will be successful in enforcing its contractual rights and expects
to recover an amount at least equal to the sum of its outstanding liabilities
related to the leukoreduction filters production program. Nonetheless, as a
result of the termination, Filtertek has approximately $1.6 million of
outstanding liabilities primarily related to lease obligations for that program,
which, if not recovered prior to March 31, 2003, will result in a charge to
second quarter earnings.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires Management to make estimates
and assumptions in certain circumstances that affect amounts reported in the
accompanying consolidated financial statements. In preparing these financial
statements, Management has made its best estimates and judgments of certain
amounts included in the financial statements, giving due consideration to
materiality. The Company does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or
using different assumptions related to the accounting policies described below.
However, application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from these estimates. The Company's senior
Management discusses the accounting policies described below with the Audit and
Finance Committee of the Company's Board of Directors on a periodic basis.
The following discussion of critical accounting policies is intended to bring to
the attention of readers those accounting policies which Management believes are
critical to the Consolidated Financial Statements and other financial
disclosure. It is not intended to be a comprehensive list of all significant
accounting policies that are more fully described in Note 1 of the Notes to the
Consolidated Financial Statements included in the 2002 Annual Report on Form
10-K.
The Company has identified the following areas as critical accounting policies.
Revenue Recognition
The majority of the Company's revenues are recognized when products are shipped
to or when services are performed for unaffiliated customers. Other revenue
recognition methods the Company uses include the following: Revenue on
production contracts is recorded when specific contract terms are fulfilled,
usually by delivery or acceptance. Revenues from cost reimbursement contracts
are recorded as costs are incurred, plus fees earned. Revenue under long-term
contracts, for which delivery is an inappropriate measure of performance, is
recognized on the percentage-of-completion method based upon incurred costs
compared to total estimated costs under the contract. Revenue under engineering
contracts is generally recognized as milestones are attained. The SEC's Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition" provides guidance on
the application of generally accepted accounting principles to selected revenue
recognition issues. Management believes the Company's revenue recognition policy
is in accordance with generally accepted accounting principles and SAB No. 101.
Accounts Receivable
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. This estimated allowance is based primarily
on Management's evaluation of the financial condition of the customer and
historical bad debt experience.
Inventory
Inventories are valued at the lower of cost (first-in, first-out) or market
value and have been reduced by an allowance for excess, slow-moving and obsolete
inventories. The estimated allowance is based on Management's review of
inventories on hand compared to historical usage and estimated future usage and
sales. Inventories under long-term contracts reflect accumulated production
costs, factory overhead, initial tooling and other related costs less the
portion of such costs charged to cost of sales and any unliquidated progress
payments. In accordance with industry practice, costs incurred on contracts in
progress include amounts relating to programs having production cycles longer
than one year, and a portion thereof may not be realized within one year.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred tax assets may be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance when Management
believes it is more likely than not such assets will not be recovered, taking
into consideration historical operating results, expectations of future
earnings, and the expected timing of the reversals of existing temporary
differences.
Goodwill and Other Long-Lived Assets
The Company adopted the provisions of SFAS No. 142 effective October 1, 2001.
Goodwill and other long-lived assets with indefinite useful lives are reviewed
by Management for impairment annually or whenever events or changes in
circumstances indicate the carrying amount may not be recoverable. If indicators
of impairment are present, the determination of the amount of impairment is
based on Management's judgment as to the future operating cash flows to be
generated from these assets throughout their estimated useful lives. SFAS No.
142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121.
Pension Plans and Other Postretirement Benefit Plans
The measurement of liabilities related to pension plans and other
post-retirement benefit plans is based on Management's assumptions related to
future events including interest rates, return on pension plan assets, rate of
compensation increases, and health care cost trend rates. Actual pension plan
asset performance will either decrease or increase unamortized pension losses
which will affect net earnings in future years.
Contingencies
As a normal incident of the businesses in which the Company is engaged, various
claims, charges and litigation are asserted or commenced against the Company. In
the opinion of Management, final judgments, if any, which might be rendered
against the Company in current litigation are adequately reserved, covered by
insurance, or would not have a material adverse effect on its financial
statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities," that supersedes Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and other Costs to Exit An Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No.
123," that provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS No. 148
are effective for interim periods beginning after December 15, 2002. The Company
expects the difference between diluted net earnings per share calculated using
the fair value based method of accounting and actual diluted net earnings per
share to be approximately $0.10 per share for fiscal year 2003.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities," an interpretation of ARB No. 51, which addresses
consolidation by business enterprises of variable interest entities. This
Interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among the parties involved. This Interpretation applies
immediately to variable interest entities created after January 31, 2003. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003.
FORWARD LOOKING STATEMENTS
Statements in this report that are not strictly historical are "forward looking"
statements within the meaning of the safe harbor provisions of the federal
securities laws. Forward looking statements include those relating to the
estimates made in connection with the Company's accounting policies, annual
effective tax rate, expectations of recovery from third parties, success in
ongoing litigation, and capital requirements and operational needs for the
foreseeable future. Investors are cautioned that such statements are only
predictions, and speak only as of the date of this report. 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:
further weakening of economic conditions in served markets; changes in customer
demands or customer insolvencies; competition; intellectual property rights;
consolidation of internal operations; integration of recently acquired
businesses; delivery delays or defaults by customers; termination for
convenience of customer contracts; performance issues with key suppliers and
subcontractors; collective bargaining and labor disputes; changes in laws and
regulations; litigation uncertainty; and the Company's successful execution of
internal operating plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign currency exchange rates. There has been
no material change to the Company's risks since September 30, 2002. For the
three months ended December 31, 2002, accumulated other comprehensive loss
included an after tax decrease in fair value of approximately $0.1 million
related to the Company's interest rate swaps.
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the filing date of this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's 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 defined in Rules 13a - 14(c) and
15d - 14(c) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Based upon that evaluation, the Company's Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective. 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 Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
date this evaluation was carried out, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit
Number
3(a) Restated Articles of Incorporated by reference to
Incorporation Form 10-K for the fiscal
year ended September 30,
1999 at Exhibit 3(a)
3(b) Amended Certificate of Incorporated by reference to
Designation Preferences and Form 10-Q for the fiscal
Rights of Series A quarter ended March 31, 2000
Participating Cumulative at Exhibit 4(e)
Preferred Stock of the
Registrant
3(c) Articles of Merger effective Incorporated by reference to
July 10, 2000 Form10-Q for the fiscal
quarter ended June 30, 2000
at Exhibit 3(c)
3(d) Bylaws, as amended Incorporated by reference to
Form10-Q for the fiscal
quarter ended June 30, 2000
at Exhibit 3(d)
4(a) Specimen Common Stock Incorporated by reference to
Certificate Form10-Q for the fiscal
quarter ended June 30, 2000
at Exhibit 4(a)
4(b) Specimen Rights Certificate Incorporated by reference to
Exhibit B to Exhibit 4.1 to
the Registrant's Current
Report on Form 8-K dated
February 3, 2000
4(c) Rights Agreement dated as of Incorporated by reference to
September 24, 1990 (as amended Current Report on Form 8-K
and Restated as of February 3, dated February 3, 2000, at
2000) between the Registrant Exhibit 4.1
and Registrar and Transfer
Company, as successor Rights
Agent
4(d) Amended and Restated Credit Incorporated by reference to
Agreement dated as of Form10-Q for the fiscal
February28, 2001 among the quarter ended March 31, 2001
Registrant, Bank of America, at Exhibit 4(d)
N.A., as agent, and the
lenders listed therein
4(e) Amendment No. 1 dated as of Incorporated by reference to
April 5, 2002 to Credit Form 10-Q for the fiscal
Agreement listed as Exhibit quarter ended June 30, 2002,
4(d) above. at Exhibit 4(e)
b) Reports on Form 8-K.
During the quarter ended December 31, 2002, the Company filed the following
Current Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated November 12, 2002,
which reported in "Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits" and "Item 9. Regulation FD Disclosure" that the
Company would include on its website certain information in connection with
a Company presentation, and would issue a related press release.
The Company filed a Current Report on Form 8-K, dated December 2, 2002,
which reported in "Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits" and "Item 9. Regulation FD Disclosure" that the
Company would include on its website certain information in connection with
a Company presentation.
The Company filed a Current Report on Form 8-K, dated December 26, 2002,
which in "Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits" and "Item 9. Regulation FD Disclosure" listed as exhibits the
certifications of the Company's Chief Executive Officer and Chief Financial
Officer relating to Form 10-K for the fiscal year ended September 30, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESCO TECHNOLOGIES INC.
/s/ Gary E. Muenster
Gary E. Muenster
Vice President and
Chief Financial Officer
(As duly authorized officer
and principal accounting
officer of the registrant)
Dated: February 13, 2003
CERTIFICATIONS
I, V.L. Richey, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ESCO Technologies
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit and
finance committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
(s) V.L. Richey, Jr.
V.L. Richey, Jr.
Chief Executive Officer
CERTIFICATIONS
I, G.E. Muenster, certify that:
1. I have reviewed this quarterly report on Form 10-K of ESCO Technologies
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit and
finance committee of the registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: February 13, 2003
(s) G.E. Muenster
G.E. Muenster
Vice President and Chief Financial Officer