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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 MARCH 31, 2003
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
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No___
The number of shares of the registrant's stock outstanding at April 30, 2003 was
12,697,087.
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
March 31,
---------
2003 2002
---- ----
Net sales $ 112,197 85,096
Costs and expenses:
Cost of sales 77,336 57,022
Selling, general and administrative
expenses 22,786 19,417
Interest expense (income) (23) 59
Other, net 2,559 585
----- ---
Total costs and expenses 102,658 77,083
------- ------
Earnings before income taxes 9,539 8,013
Income tax expense 3,879 3,004
----- -----
Net earnings from continuing
operations 5,660 5,009
Earnings (loss) from
discontinued operations, net of tax (29) 184
--- ---
Net earnings $ 5,631 5,193
===== =====
Earnings per share:
Basic - Continuing operations $0.45 $0.40
- Discontinued operations - 0.02
---- ----
- Net earnings $0.45 $0.42
===== =====
Diluted - Continuing operations $0.43 $0.38
- Discontinued operations - 0.02
---- ----
- Net earnings $0.43 $0.40
===== =====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Six Months Ended
March 31,
---------
2003 2002
---- ----
Net sales $ 221,484 166,675
Costs and expenses:
Cost of sales 152,462 112,753
Selling, general and administrative
expenses 45,351 37,412
Interest expense (income) (78) 107
Other, net 3,727 874
----- ---
Total costs and expenses 201,462 151,146
------- -------
Earnings before income taxes 20,022 15,529
Income tax expense 7,852 5,824
----- -----
Net earnings from continuing
operations 12,170 9,705
Earnings (loss) from discontinued
operations, net of tax 13 260
-- ---
Net earnings $ 12,183 9,965
======== =====
Earnings per share:
Basic - Continuing operations $0.97 $0.78
- Discontinued operations - 0.02
---- ----
- Net earnings $0.97 $0.80
===== =====
Diluted - Continuing operations $0.93 $0.75
- Discontinued operations - 0.02
---- ----
- Net earnings $0.93 $0.77
===== =====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, September 30,
2003 2002
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 29,657 25,160
Accounts receivable, less allowance for doubtful
accounts of $1,138 and $1,018, respectively 78,034 67,347
Costs and estimated earnings on long-term
contracts, less progress billings of
$10,425 and $4,541, respectively 4,793 2,951
Inventories 63,464 50,991
Current portion of deferred tax assets 20,038 22,796
Other current assets 7,511 8,500
Current assets from discontinued operations 3,540 3,643
----- -----
Total current assets 207,037 181,388
------- -------
Property, plant and equipment, at cost 125,303 117,031
Less accumulated depreciation and amortization 56,860 50,777
------ ------
Net property, plant and equipment 68,443 66,254
Goodwill 105,078 103,283
Deferred tax assets 24,062 26,950
Other assets 26,077 26,219
Other assets from discontinued operations 3,411 3,858
----- -----
$434,108 407,952
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 67 121
Accounts payable 47,680 38,364
Advance payments on long-term contracts, less costs
incurred of $1,312 and $3,770, respectively 908 2,706
Accrued expenses and other current liabilities 28,593 26,287
Current liabilities from discontinued operations 785 1,309
--- -----
Total current liabilities 78,033 68,787
------ ------
Other liabilities 24,271 24,313
Long-term debt 8,086 8,277
Other liabilities from discontinued operations 1,092 647
----- ---
Total liabilities 111,482 102,024
------- -------
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 13,712,591 and
13,601,095 shares, respectively 137 136
Additional paid-in capital 212,090 209,019
Retained earnings since elimination of deficit
at September 30, 1993 133,613 121,430
Accumulated other comprehensive loss (8,060) (9,473)
------ ------
337,780 321,112
Less treasury stock, at cost: 1,064,446 and
1,067,046 common shares, respectively (15,184) (15,154)
Total shareholders' equity 322,626 305,928
------- -------
$434,108 407,952
======== =======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
March 31,
---------
2003 2002
---- ----
Cash flows from operating activities:
Net earnings $12,183 9,965
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 7,031 5,848
Net earnings from discontinued operations (13) (260)
Changes in operating working capital (8,843) (4,954)
Effect of deferred taxes 2,888 2,544
Other 2,683 815
----- ---
Net cash provided by operating activities
- continuing operations 15,929 13,958
Net cash (used) provided by
discontinued operations (384) 62
---- ---
Net cash provided by operating
activities 15,545 14,020
Cash flows from investing activities:
Capital expenditures (5,899) (5,908)
Acquisition of businesses (5,364) (9,546)
Capital expenditures of discontinued operations (119) (232)
---- ----
Net cash used by investing activities (11,382) (15,686)
------- -------
Cash flows from financing activities:
Net decrease in short-term borrowings (54) (12)
Proceeds from long-term debt - 45
Principal payments on long-term debt (626) (299)
Purchases of common stock into treasury - (456)
Other (including exercise of stock options) 1,014 110
----- ---
Net cash provided (used) by financing activities 334 (612)
--- ----
Net increase (decrease) in cash and cash equivalents 4,497 (2,278)
Cash and cash equivalents, beginning of period 25,160 15,125
------ ------
Cash and cash equivalents, end of period $29,657 12,847
======= ======
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. Certain prior year amounts have been reclassified to conform to
the fiscal 2003 presentation.
The results for the three and six month periods ended March 31, 2003 are
not necessarily indicative of the results for the entire 2003 fiscal year.
2. DISCONTINUED OPERATIONS
In February 2003, the Board of Directors approved the plan to dispose of
the Rantec Power Systems Inc. (Rantec) subsidiary under the terms outlined
by Management. Rantec was previously reported in the "Other" segment. At
March 31, 2003, Rantec is accounted for as a discontinued operation in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets" and, accordingly, amounts in the financial statements
and related notes for all periods shown, reflect discontinued operations
presentation. The net sales from the discontinued operation were $2.9
million and $3.1 million for the second quarters ended March 31, 2003 and
2002, respectively and $5.4 million and $5.9 million for the six-month
periods ending March 31, 2003 and 2002, respectively. The major classes of
discontinued assets and liabilities included in the Consolidated Balance
Sheets are as follows:
(in thousands) March 31, 2003 September 30, 2002
-------------- ------------------
Assets:
Cash and cash equivalents (float) $ (162) (230)
Accounts receivable, less allowance
for doubtful accounts 1,499 2,149
Inventories 2,203 1,724
----- -----
Current assets 3,540 3,643
----- -----
Net property, plant & equipment 2,208 2,268
Other assets 1,203 1,590
----- -----
Total Assets of Discontinued
Operations 6,951 7,501
===== =====
Liabilities:
Accounts payable 381 687
Accrued expenses and other current
liabilities 404 622
--- ---
Current liabilities 785 1,309
--- -----
Other liabilities 1,092 647
----- ---
Total Liabilities of Discontinued
Operations $1,877 1,956
====== =====
Effective April 11, 2003, the Company completed the sale of Rantec to an
entity owned by a group of investors primarily comprised of the
subsidiary's management. Rantec, a manufacturer of power supplies for
commercial and military applications, is located in Los Osos, California.
The Company received $6 million from the buyer at closing. An additional
$0.7 million will be paid by the buyer in equal installments during the
nine months following the sale. The Company is also entitled to contingent
consideration of up to $6.4 million over the next ten years, based on the
future operating results of Rantec. A pretax gain of $1.5 million to $2.0
million related to the sale will be reflected in the Company's fiscal 2003
third quarter results in discontinued operations.
3. EARNINGS PER SHARE (EPS)
Basic EPS is calculated using the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the weighted
average number of common shares outstanding during the period plus shares
issuable upon the assumed exercise of dilutive common share options and
vesting of performance-accelerated restricted shares (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 Six Months Ended
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Weighted Average Shares
Outstanding - Basic 12,627 12,477 12,590 12,448
Dilutive Options and
Performance Shares 445 586 466 545
--- --- --- ---
Adjusted Shares- Diluted 13,072 13,063 13,056 12,993
====== ====== ====== ======
Options to purchase 76,500 shares of common stock at prices ranging from
$34.58 - $36.33 and options to purchase approximately 40,500 shares of
common stock at prices ranging between $32.54 - $35.93 were outstanding
during the six month periods ended March 31, 2003 and 2002, respectively,
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. The options expire in various periods through 2013.
Approximately 52,000 and 118,000 performance shares were outstanding but
unvested at March 31,2003 and 2002, respectively, and therefore, were not
included in the respective computation of diluted EPS.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation- Transition and Disclosure, an Amendment of FASB Statement
No. 123," (SFAS 148) 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 123, "Accounting for Stock-Based
Compensation" (SFAS 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 Company previously adopted the disclosure-only
provisions of SFAS 123. Under APB 25, no compensation cost was recognized
for the Company's stock option plans. The following table illustrates the
effect on net earnings and net earnings per share if the company had
applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation.
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Six Months
Ended Ended
March 31, March 31,
2003 2003
---- ----
Net earnings, as reported $5,631 $12,183
------ -------
Pro forma net earnings $5,014 $10,948
====== =======
Net earnings per share:
Basic - as reported $0.45 $0.97
Basic - pro forma $0.40 $0.87
Diluted - as reported $0.43 $0.93
Diluted - pro forma $0.38 $0.84
===== =====
Pro forma net earnings per share, based on the provisions of SFAS 148, were
impacted by the Management Transition Agreement (MTA) between the Company
and its former Chairman by $0.02 and $0.04 per share for the three and
six-month periods ended March 31, 2003, respectively, and are included in
the amounts noted above. The fair value of each option grant is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants in 2003: expected
dividend yield of 0%; expected volatility of 38.8%; risk-free interest rate
of 3.8%; and expected life based on historical exercise periods of 4.25
years. The Company has not included the comparable disclosures for the
prior year periods as the Company was not able to generate the quarterly
data for the prior years from its database because this information was
kept previously only for the entire fiscal year and not by quarter. The
Company estimates that for the three and six-month periods ended March 31,
2002, the pro forma diluted net earnings per share impact would have been
approximately $0.04 per quarter.
4. INVENTORIES
Inventories consist of the following (in thousands):
March 31, September 30,
2003 2002
---- ----
Finished goods $18,884 12,164
Work in process, including long- term contracts 14,899 12,505
Raw materials 29,681 26,322
------ ------
Total inventories $63,464 50,991
======= ======
The $12.5 million increase in inventories at March 31, 2003 is primarily
due to an increase in the Company's Communications segment inventories of
approximately $7 million, mainly related to PPL Electric Utilities
Corporation (PPL), and an increase in the Company's Filtration/Fluid Flow
segment inventories of approximately $5 million. The acoustics business
contributed $1.0 million to the increase in inventories at March 31, 2003.
5. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2003 and
2002 was $5.8 million and $5.1 million, respectively. Comprehensive income
for the six-month periods ended March 31, 2003 and 2002 was $13.6 million
and $8.9 million, respectively. For the six months ended March 31, 2003,
the Company's comprehensive income was positively impacted by foreign
currency translation adjustments of approximately $1.4 million, which was
partially offset by a 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.
6. ACQUISITIONS
On December 31, 2002, the Company acquired the assets and certain
liabilities of Austin Acoustics Systems, Inc. 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, liabilities and results of operations since the date
of acquisition are included within the Company's Test segment.
7. TERMINATION OF WHATMAN HEMASURE INC. MANUFACTURING AND SUPPLY AGREEMENT
On January 24, 2003, the Company's Filtertek Inc. subsidiary (Filtertek)
terminated its Manufacturing and Supply Agreement (MSA) with Whatman
Hemasure Inc. (Whatman) based on Whatman's breach of its obligations under
the MSA. The MSA related to the parties' responsibilities concerning the
manufacture and supply of leukocyte filters. Under the terms of the MSA,
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 leukocyte
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 leukocyte filters production program.
Nonetheless, as a result of the termination, Filtertek recorded a $1.5
million charge primarily related to the fair value of the remaining lease
obligations for that program during the second quarter of fiscal 2003. Any
recovery will be recorded as a gain in the period a settlement is reached
or a final judgment under litigation is rendered.
8. SYNTHETIC LEASE OBLIGATION
The Company has a $31.5 million obligation under a synthetic lease facility
arranged by Bank of America. For GAAP purposes, prior to the adoption of
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities"
(FIN 46), 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 (Filtration/Fluid Flow segment) and the other in
Cedar Park, TX, (Test segment) 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.
FIN 46 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
consolidation of the synthetic lease obligation. Upon consolidation, the
Company expects to record property, plant & equipment of $29.2 million,
long-term debt of $31.5 million and a non-cash after-tax charge reported as
a cumulative effect of a change in accounting principle of approximately
$1.4 million during the fiscal 2003 fourth quarter.
9. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in three
segments: Filtration/Fluid Flow, Communications and Test.
Management evaluates and measures the performance of its operating segments
based on "Net Sales" and "EBIT", which are detailed in the table below.
EBIT is defined as earnings from continuing operations before interest and
taxes. Corporate costs are allocated to the operating segments based on
2.5% of net sales. "Other" consists of unallocated corporate operating
charges. The table below is presented for continuing operations and
excludes discontinued operations (Rantec).
($ in millions) Three Months ended Six Months ended
March 31, March 31,
NET SALES 2003 2002 2003 2002
--------- ---- ---- ---- ----
Filtration/Fluid Flow $ 50.1 $ 48.0 $100.2 $ 92.4
Communications 37.8 20.4 77.4 39.8
Test 24.3 16.7 43.9 34.5
---- ---- ---- ----
Consolidated totals $112.2 $ 85.1 $221.5 $166.7
====== ====== ====== ======
EBIT
Filtration/Fluid Flow $ - (1) $ 3.1 $ 1.7 (1) $ 5.4
Communications 8.8 4.9 18.2 9.2
Test 1.8 0.9 2.6 2.3
Other (1.1)(2) (0.8) (2.6)(3) (1.3)
---- ---- ---- ----
Consolidated totals $ 9.5 $ 8.1 $ 19.9 $ 15.6
====== ====== ====== ======
(1) Includes the charge of $1.5 million resulting from an equipment lease
termination related to the Whatman MSA dispute discussed in Note 7
above. See further discussion in Item 2 below, under "Results of
Operations - EBIT - Filtration/Fluid Flow".
(2) Unallocated corporate operating charges for the three month period
ended March 31, 2003 include $0.7 million of costs related to the MTA.
(3) Unallocated corporate operating charges for the six-month period ended
March 31, 2003 include $1.4 million of costs related to the MTA.
10. RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
EBIT
----
Three Months ended Six Months ended
($ in thousands) March 31, March 31,
------------------- -----------------
2003 2002 2003 2002
EBIT $ 9,516 $ 8,072 $19,944 $15,636
Interest expense (income) (23) 59 (78) 107
Less: Income taxes 3,879 3,004 7,852 5,824
===== ===== ===== =====
Net earnings from continuing
operations $ 5,660 $ 5,009 $12,170 $ 9,705
======= ======= ======= =======
This Form 10-Q contains the financial measure "EBIT" which is not calculated in
accordance with generally accepted accounting principles in the United States of
America (GAAP). EBIT provides investors and management with an alternative
method for assessing the Company's operating results in a manner that is focused
on the performance of the Company's ongoing operations. The Company defines
"EBIT" as earnings from continuing operations before interest and taxes. The
Company's management evaluates the performance of its operating segments based
on EBIT and believes that EBIT is useful to investors to demonstrate the
operational profitability of the Company's business segments by excluding
interest and taxes, which are generally accounted for across the entire Company
on a consolidated basis. EBIT is also one of the measures used by management in
determining resource allocations within the Company and incentive compensation.
11. SUBSEQUENT EVENTS
In May 2003, the Company committed to plans to proceed with the closure of the
Filtertek manufacturing operation in Puerto Rico. The manufacturing will be
moved to existing facilities in Hebron, IL and Juarez, Mexico. The closure will
result in a fiscal 2003 third quarter charge between $3.0 million to $4.0
million primarily related to the write down of the Puerto Rico facility to its
appraised value. The move costs are expected to be between $1.5 million and $2.0
million and will be incurred over the next twelve months. When the closure and
relocation is completed in fiscal 2004, Management expects this action to result
in at least $2.0 million of annual cost savings.
In May 2003, the Company committed to plans to restructure its Test operations
in the U.K. and centralize the management of the European Test operations. The
European consolidation will result in a fiscal 2003 second-half pretax charge
between $0.3 million and $0.6 million. The costs primarily relate to severance,
write-offs of leasehold improvements, and moving costs. The consolidation will
be complete in fiscal 2003.
At March 31, 2003, other current assets included approximately $1.1 million of
deferred legal costs that were incurred in the defense of certain revenue
generating patents used in the Company's Filtration/Fluid Flow business. During
the third quarter of fiscal 2003, the Company reached a settlement in the
defense of these revenue generating patents. Under the agreement, the Company is
to receive approximately $7.3 million by June 30, 2003. The Company anticipates
a gain on the settlement of approximately $2.1 million to $2.3 million, to be
recorded during the third quarter of fiscal 2003. The remaining unrealized gain
will be recognized in pretax income over the remaining eight years of the
patent.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION RESULTS OF OPERATIONS
The following discussion refers to the Company's results from continuing
operations, except where noted. At March 31, 2003, Rantec Power Systems Inc.
(Rantec) is accounted for as a discontinued operation in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and,
accordingly, amounts in the financial statements and related notes for all
periods shown, reflect discontinued operations presentation.
NET SALES
Net sales increased $27.1 million, or 31.8%, to $112.2 million for the second
quarter of fiscal 2003 from $85.1 million for the second quarter of fiscal 2002.
Net sales increased $54.8 million, or 32.9%, to $221.5 million for the first six
months of fiscal 2003 from $166.7 million for the prior year period.
Filtration/Fluid Flow, Communications and Test segments each had increased sales
in the second quarter of 2003 and the first six months of fiscal 2003 as
compared to the prior year periods. 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 $2.1 million, or 4.3%, to $50.1 million for the second
quarter of fiscal 2003 from $48.0 million for the second quarter of fiscal 2002.
Net sales increased $7.8 million, or 8.4%, to $100.2 million for the first six
months of fiscal 2003 from $92.4 million for the first six months of fiscal
2002. Sales increased during the first six months of fiscal 2003 mainly due to
higher product shipments from the Company's Filtertek subsidiary.
- -COMMUNICATIONS
For the second quarter of fiscal 2003, net sales of $37.8 million were $17.4
million, or 85.3% higher than the $20.4 million of net sales recorded in the
second quarter of fiscal 2002. Net sales of $77.4 million in the first six
months of fiscal 2003 were $37.6 million, or 94.5% higher than the $39.8 million
recorded in the first six months of fiscal 2002. The increases are the result of
significantly higher shipments of AMR products, primarily to PPL. Sales to PPL
were $15.2 million and $3.4 million in the second quarter of fiscal 2003 and
2002, respectively, and $37.8 million and $4.5 million during the first six
months of fiscal 2003 and 2002, respectively. In addition, sales to electric
utility cooperatives (Co-ops) remain strong in fiscal 2003.
Sales of the Company's SecurVision products were $2.7 million for the second
quarter of fiscal 2003 as compared to $0.4 million for the prior year second
quarter and $5.8 million for the first six months of fiscal 2003 as compared to
$1.6 million for the prior year six month period.
- -TEST
Net sales increased $7.7 million, or 46.0%, to $24.3 million for the second
quarter of fiscal 2003 from $16.7 million for the second quarter of fiscal 2002.
Net sales increased $9.4 million, or 27.4%, to $43.9 million for the first six
months of fiscal 2003 from $34.5 million for the first six months of fiscal
2002. The increases in net sales are the result of higher sales of large EMC
test chambers, an increase in sales from the Company's Asian operations, and the
addition of the acoustics business at the end of the first quarter of fiscal
2003, which contributed $2.4 million to sales for the first six months of fiscal
2003.
ORDERS AND BACKLOG
Backlog was $268.2 million at March 31, 2003 (excluding $6.0 million of backlog
related to Rantec), compared with $293.2 million at September 30, 2002. Orders
from continuing operations totaling $204.4 million were received in the first
six months of fiscal 2003. New orders of $109.4 million were received in the
first six months of fiscal 2003 related to Filtration/Fluid Flow products, $46.8
million related to Communications products, and $48.2 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 31.1% and 33.0% in the second quarter of
fiscal 2003 and 2002, respectively. The gross profit margin was 31.2% and 32.4%
for the first six months of fiscal 2003 and 2002, respectively. The gross profit
margin in the 2003 period was negatively impacted by changes in sales mix. In
addition, gross profit in the first quarter of fiscal 2003 included $0.2 million
of costs to exit the Brooklyn Park, MN facility (Filtration/Fluid Flow segment).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the second quarter of
fiscal 2003 were $22.8 million, or 20.3% of net sales, compared with $19.4
million, or 22.8% of net sales for the prior year period. For the first six
months of fiscal 2003, SG&A expenses were $45.4 million, or 20.5% of net sales,
compared with $37.4 million, or 22.4% of net sales for the prior year period.
The increase in SG&A spending in the first six months 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.
The Company's investments in the Microfiltration and Separations business
currently are significantly dilutive to earnings. The MTA added $1.4 million of
SG&A expenses in the first six months of fiscal 2003. In addition, the fiscal
2003 acquisition of the acoustics business and the fiscal 2002 acquisition of
technology from North Carolina Separations Research Technology (NC SRT), added
$1.2 million of SG&A expenses in the first six months of fiscal 2003.
OTHER COSTS AND EXPENSES, NET
Other costs and expenses, net, were $2.6 million for the quarter ended March 31,
2003 compared to $0.6 million for the prior year quarter. Other costs and
expenses, net, were $3.7 million for the first six months of fiscal 2003
compared to $0.9 million for the prior year period. Principal components of
other costs and expenses, net, for the first six months of fiscal 2003 included
a $1.5 million charge resulting from an equipment lease termination related to
the previously disclosed Whatman MSA dispute (Filtration/Fluid Flow segment);
$1.0 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 six months
of fiscal 2002 include $0.6 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 was $9.5
million (8.5% of net sales) for the second quarter of fiscal 2003 and $8.1
million (9.5% of net sales) for the second quarter of fiscal 2002. For the first
six months of fiscal 2003, EBIT was $19.9 million (9.0% of net sales) and $15.6
million (9.4% of net sales) for the first six months of fiscal 2002. EBIT for
the first six months of fiscal 2003 was negatively impacted by the following: a
$1.5 million charge resulting from an equipment lease termination related to the
Whatman MSA dispute (Filtration/Fluid Flow segment); $1.4 million in MTA costs;
$0.4 million of exit costs related to the Brooklyn Park, MN facility
(Filtration/Fluid Flow segment); and the continuing investment in
Microfiltration and Separations. Refer to Note 10 "Reconciliation of Non-GAAP
Financial Measures" of the Notes to Consolidated Financial Statements for the
reconciliation of EBIT from continuing operations to net earnings from
continuing operations.
- -FILTRATION/FLUID FLOW
EBIT was zero and $3.1 million in the second quarter of fiscal 2003 and 2002,
respectively, and $1.7 million and $5.4 million in the first six months of
fiscal 2003 and 2002, respectively. During the second quarter of fiscal 2003,
the Company incurred a $1.5 million charge resulting from an equipment lease
termination related to the Whatman MSA dispute. In addition, the decline in EBIT
in the first six months of fiscal 2003 as compared to the prior year period is
due to continuing investments in the Microfiltration and Separations business
and the costs related to establishing a new German sales and support operation.
Also, during the first quarter of fiscal 2003, 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. The Company is considering a wide range of alternatives to deal with
the performance of the Microfiltration and Separations business. The actions
being considered may result in a material charge to future earnings.
On January 24, 2003, the Company's Filtertek Inc. subsidiary (Filtertek)
terminated its Manufacturing and Supply Agreement (MSA) with Whatman Hemasure
Inc. (Whatman) based on Whatman's breach of its obligations under the MSA. The
MSA related to the parties' responsibilities concerning the manufacture and
supply of leukocyte filters. Under the terms of the MSA, 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 leukocyte 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 leukocyte filters production program.
Nonetheless, as a result of the termination, Filtertek recorded a $1.5 million
charge primarily related to the fair value of the remaining lease obligations
for that program during the second quarter of fiscal 2003. Any recovery will be
recorded as a gain in the period a settlement is reached or a final judgment
under litigation is rendered.
- -COMMUNICATIONS
Second quarter EBIT of $8.8 million in fiscal 2003 was $3.9 million higher than
the $4.9 million of EBIT in the second quarter of fiscal 2002. For the first six
months of fiscal 2003, EBIT increased by $9.0 million to $18.2 million from $9.2
million in 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 in the second quarter of fiscal 2003 of $1.8 million was $0.9 million
higher than the $0.9 million in the prior year period. For the first six months
of fiscal 2003, EBIT increased $0.3 million to $2.6 million from $2.3 million in
fiscal 2002. The increases in EBIT as compared to the prior year periods are
mainly due to an increase in chamber sales during the first six months of fiscal
2003. The contribution from the increased sales was partially offset by the
investments to expand the Company's presence in China and Japan.
- -OTHER
Other consists of unallocated corporate operating charges. EBIT was ($1.1)
million and ($2.5) million for the three and six-month periods ended March 31,
2003, respectively, compared to ($0.8) million and ($1.3) million for the
respective prior year periods. EBIT for the first six months of fiscal 2003
included $1.4 million of MTA costs. EBIT for the first six months of fiscal 2002
included $0.3 million of exit costs related to the Company's former joint
venture in India.
INTEREST EXPENSE (INCOME)
Interest expense (income), net, was approximately ($0.1) million and $0.1
million for the first six months of fiscal 2003 and 2002, respectively.
INCOME TAX EXPENSE
The second quarter fiscal 2003 effective income tax rate was 40.7% compared to
37.5% in the second quarter of fiscal 2002. The effective income tax rate in the
first six months of fiscal 2003 was 39.2% compared to 37.5% in the prior year
period. The increase in the effective income tax rate in fiscal 2003 is
primarily due to an increase in certain tax exposure accruals related to the
spin-off of the Company in 1990. The Company estimates the annual effective tax
rate for fiscal 2003 to be approximately 39.5%.
FINANCIAL CONDITION
Working capital increased to $129.0 million at March 31, 2003 from $112.6
million at September 30, 2002. During the first six months of fiscal 2003,
accounts receivable increased by $10.7 million due to the increase in sales,
mainly within the Company's Communications segment. Inventories increased by
$12.5 million in the first quarter of fiscal 2003 to support near term demand,
mainly within the Company's Communication segment. The acoustics business
contributed $1.3 million and $1.0 million to the increase in accounts receivable
and inventories, respectively, at March 31, 2003. In addition, accounts payable
and accrued expenses increased by $11.6 million primarily due to the purchases
of inventories and the timing of payments.
Net cash provided by operating activities from continuing operations was $15.9
million in the first six months of fiscal 2003 compared to net cash provided by
operating activities from continuing operations of $14.0 million in the same
period of fiscal 2002.
Capital expenditures from continuing operations were $5.9 million in both the
first six months of fiscal 2003 and in the comparable period of fiscal 2002.
Major expenditures in the current period included manufacturing equipment used
in the Filtration / Fluid Flow businesses. The Company has capital commitments
of approximately $2.3 million in the second half of fiscal 2003 related to a new
facility in the Communications segment.
At March 31, 2003, accounts receivable included $1.3 million of reimbursable
costs incurred to replace certain filtration elements resulting from the receipt
of nonconforming material obtained from a supplier. A formal settlement was
reached in March 2003.
At March 31, 2003, other current assets include a mortgage note receivable of
$1.8 million related to the prior sale of the Riverhead, NY property, related to
a former defense subsidiary. The property was sold in December 1999 for $2.6
million, with $0.5 million received as a down payment and the remaining $2.1
million financed under the mortgage note. Through March 31, 2003, the buyer has
paid additional principal and interest payments totaling $0.8 million. However,
currently, the buyer is in default with the provisions of the note receivable
and the Company has begun foreclosure proceedings on the property. A recent
independent appraisal indicates the value of the property is greater than $5
million, therefore, the Company does not anticipate a loss related to this
matter.
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 March 31,
2003, the Company had not exercised the $25 million increase option and the
revolving line of credit was $70 million. At March 31, 2003, the Company had
approximately $48.2 million available to borrow under the credit facility in
addition to $29.7 million cash on hand. Against the $70 million available under
the revolving credit facility at March 31, 2003, the Company had $7.9 million of
outstanding long-term foreign borrowings and outstanding letters of credit of
$13.9 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. In March 2003, the Company paid $1
million related to the technology acquired from NC SRT under the terms of the
acquisition agreement.
SUBSEQUENT EVENTS
In May 2003, the Company committed to plans to proceed with the closure of the
Filtertek manufacturing operation in Puerto Rico. The manufacturing will be
moved to existing facilities in Hebron, IL and Juarez, Mexico. The closure will
result in a fiscal 2003 third quarter charge between $3.0 million to $4.0
million primarily related to the write down of the Puerto Rico facility to its
appraised value. The move costs are expected to be between $1.5 million and $2.0
million and will be incurred over the next twelve months. When the closure and
relocation is completed in fiscal 2004, Management expects this action to result
in at least $2.0 million of annual cost savings.
In May 2003, the Company committed to plans to restructure its Test operations
in the U.K. and centralize the management of the European Test operations. The
European consolidation will result in a fiscal 2003 second-half pretax charge
between $0.3 million and $0.6 million. The costs primarily relate to severance,
write-offs of leasehold improvements, and moving costs. The consolidation will
be complete in fiscal 2003.
At March 31, 2003, other current assets included approximately $1.1 million of
deferred legal costs that were incurred in the defense of certain revenue
generating patents used in the Company's Filtration/Fluid Flow business. During
the third quarter of fiscal 2003, the Company reached a settlement in the
defense of these revenue generating patents. Under the agreement, the Company is
to receive approximately $7.3 million by June 30, 2003. The Company anticipates
a gain on the settlement of approximately $2.1 million to $2.3 million, to be
recorded during the third quarter of fiscal 2003. The remaining unrealized gain
will be recognized in pretax income over the remaining eight years of the
patent.
SYNTHETIC LEASE OBLIGATION
The Company has a $31.5 million obligation under a synthetic lease facility
arranged by Bank of America. For GAAP purposes, prior to the adoption of FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46),
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
(Filtration/Fluid Flow segment) and the other in Cedar Park, TX, (Test segment)
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.
FIN 46 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
consolidation of the synthetic lease obligation. Upon consolidation, the Company
expects to record property, plant & equipment of $29.2 million, long-term debt
of $31.5 million and a non-cash after-tax charge reported as a cumulative effect
of a change in accounting principle of approximately $1.4 million during the
fiscal 2003 fourth quarter.
MANAGEMENT TRANSITION AGREEMENT
On August 5, 2002, the Company entered into the MTA with Dennis J. Moore, the
Company's former 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 $2.5 million total cost
related to the MTA, $1.4 million was expensed in SG&A during the first six
months of fiscal 2003 and $0.7 million was recorded in the fourth quarter of
fiscal 2002, for a total of $2.1 million expensed to date. The remaining cost of
the MTA relates to the $0.3 million consulting agreement which will be expensed
over the twelve-month period from April 2003 through March 2004, consistent with
the period of service.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America 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. The Company has
adopted the provisions of SFAS No. 146.
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
has adopted the provisions of SFAS No. 148, see Note 3 "Earnings Per Share" for
the disclosure related to the three and six-month periods ending March 31, 2003.
In December 2002, the Emerging Issues Task Force issued EITF 00-21, "Revenue
Arrangements with Multiple Deliverables." This issue addresses certain aspects
of the accounting by a vendor for arrangements under which is will perform
multiple revenue-generating activities. In some arrangements, the different
revenue-generating activities (deliverables) are sufficiently separable, and
there exists sufficient evidence of their fair values to separately account for
some or all of the deliverables (that is, there are separate units of
accounting). This issue addresses when and, if so, how an arrangement involving
multiple deliverables should be divided into separate units of accounting. This
issue does not change otherwise applicable revenue recognition criteria. This
issue is applicable for revenue arrangements beginning in the fourth quarter of
fiscal 2003. The Company does not expect the adoption of EITF 00-21 to have a
material impact on the Company's results of operations.
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. Upon consolidation, the
Company expects to record property, plant & equipment of $29.2 million,
long-term debt of $31.5 million and an after-tax charge reported as a cumulative
effect of a change in accounting principle of approximately $1.4 million during
the fiscal 2003 fourth quarter.
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, continued
strength of Co-op sales, recovery in connection with foreclosure proceedings,
success in ongoing litigation, the Company's ability to negotiate a successful
settlement and/or enforce the terms of the MSA, results of future closures,
consolidations and relocations, the associated costs and resulting savings to be
achieved, results to be achieved from future Filtration initiatives, future
fiscal 2003 gains/charges 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; the
Company's successful exploitation of acquired intellectual property rights; the
success of future Filtration initiatives adopted by Management; successful
execution of planned facility closures consolidations and relocations with
regard to the Company's Puerto Rico facility and U.K. facility; the impact of
FASB Interpretation No. 46; consolidation of internal operations; integration of
recently acquired businesses; delivery delays or defaults by customers;
termination for convenience of customer contracts; timing and magnitude of
future contract awards; performance issues with key suppliers and
subcontractors; collective bargaining and labor disputes; changes in laws and
regulations including changes in accounting standards and taxation requirements;
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 six
months ended March 31, 2003, 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Company's shareholders was held on Thursday, February
6, 2003, to vote on the election of three directors. The voting for directors
was as follows:
Broker
For Withheld Non-Votes
--- -------- ---------
C. J. Kretschmer 10,894,082 500,135 0
J. M. McConnell 11,279,241 114,976 0
D. C. Trauscht 11,046,466 347,751 0
The terms of W. S. Antle III, D.J. Moore, V. L. Richey, Jr., L. W. Solley,
J. M. Stolze and J. D. Woods continued after the meeting.
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)
99.1 Certification of Chief
Executive Officer relating to
Form 10-Q for period ended
March 31, 2003
99.2 Certification of Chief
Financial Officer relating to
Form 10-Q for period ended
March 31, 2003
b) Reports on Form 8-K.
During the quarter ended March 31, 2003, the Company filed the following
Current Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated January 13, 2003,
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 February 6, 2003,
which in "Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits" and "Item 9. Regulation FD Disclosure" listed as an exhibit
certain information to be included on the Company's website and presented
at the Company's Annual Meeting of Stockholders on February 6, 2003.
The Company filed a Current Report on Form 8-K, dated February 13, 2003,
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-Q for the period ended December 31, 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: May 14, 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: May 14, 2003
--------------------
/s/ V.L. Richey, Jr.
V.L. Richey, Jr.
Chairman and Chief Executive Officer
CERTIFICATIONS
I, G.E. Muenster, 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: May 14, 2003
-----------------
/s/ G.E. Muenster
G.E. Muenster
Vice President and Chief Financial Officer