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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 DECEMBER 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 January 31, 2004
was 12,869,319.
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,
2003 2002
Net sales $ 96,396 98,289
Costs and expenses:
Cost of sales 66,270 66,557
Selling, general and
administrative expenses 18,769 18,064
Interest income (36) (111)
Other, net 614 516
--- ---
Total costs and expenses 85,617 85,026
------ ------
Earnings before income taxes 10,779 13,263
Income tax expense 4,191 4,789
----- -----
Net earnings from continuing
operations 6,588 8,474
Loss from discontinued
operations, net of tax of $656
and $719, respectively (437) (1,922)
---- ------
Net earnings $ 6,151 6,552
===== =====
Earnings (loss) per share:
Basic - Continuing operations $0.51 $0.68
- Discontinued operations (0.03) (0.16
----- -----
- Net earnings $0.48 $0.52
===== =====
Diluted - Continuing operations $0.50 $0.65
- Discontinued operations (0.04) (0.15)
----- -----
- Net earnings $0.46 $0.50
===== =====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, September 30,
2003 2003
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 37,622 31,285
Accounts receivable, less allowance for
doubtful accounts of $711 and $734,
respectively 63,019 69,379
Costs and estimated earnings on long-term
contracts, less progress billings of
$3,375 and $5,089, respectively 3,093 4,663
Inventories 52,036 48,432
Current portion of deferred tax assets 24,659 24,187
Other current assets 6,622 6,549
Current assets from discontinued operations 23,036 21,640
------ ------
Total current assets 210,087 206,135
------- -------
Property, plant and equipment, at cost 126,604 122,791
Less accumulated depreciation and amortization 54,574 51,622
------ ------
Net property, plant and equipment 72,030 71,169
Goodwill 69,081 68,653
Deferred tax assets 16,131 16,618
Other assets 14,113 14,081
Other assets from discontinued operations 15,950 16,725
------ ------
$397,392 393,381
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 7,116 10,143
Accounts payable 31,183 34,940
Advance payments on long-term contracts, less costs
incurred of $4,768 and $1,728, respectively 3,358 1,144
Accrued expenses and other current liabilities 27,985 30,013
Current liabilities from discontinued operations 9,801 9,397
----- -----
Total current liabilities 79,443 85,637
------ ------
Deferred income 3,080 3,194
Other liabilities 20,506 20,556
Long-term debt 529 490
Other liabilities from discontinued operations 9,013 8,115
----- -----
Total liabilities 112,571 117,992
------- -------
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
13,952,271 and 13,933,193 shares,
respectively 140 139
Additional paid-in capital 217,317 216,506
Retained earnings 86,442 80,292
Accumulated other comprehensive loss (2,522) (4,982)
------ ------
301,377 291,955
Less treasury stock, at cost: 1,104,077 and
1,105,052 common shares, respectively (16,556) (16,566)
------- -------
Total shareholders' equity 284,821 275,389
------- -------
$397,392 393,381
======== =======
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,
2003 2002
Cash flows from operating activities:
Net earnings $6,151 6,552
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net loss from discontinued operations 437 1,922
Depreciation and amortization 2,841 2,487
Changes in operating working capital 210 (7,226)
Effect of deferred taxes 487 1,570
Other 3,246 2,192
----- -----
Net cash provided by operating activities - 13,372 7,497
continuing operations
Net cash used by discontinued operations (517) (495)
---- ----
Net cash provided by operating activities 12,855 7,002
Cash flows from investing activities:
Acquisition of business - continuing operations - (4,000)
Acquisition of business - discontinued operations - (364)
Capital expenditures - continuing operations (2,513) (2,145)
Capital expenditures - discontinued operations (1,278) (816)
------ ----
Net cash used by investing activities (3,791) (7,325)
------ ------
Cash flows from financing activities:
Net decrease in short-term borrowings (3,000) (24)
Proceeds from long-term debt - 199
Principal payments on long-term debt (37) -
Other (including exercise of stock options) 310 497
--- ---
Net cash (used) provided by financing activities (2,727) 672
------ ---
Net increase in cash and cash equivalents 6,337 349
Cash and cash equivalents, beginning of period 31,285 24,930
------ ------
Cash and cash equivalents, end of period $37,622 25,279
======= ======
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 related notes included
in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2003. Certain prior year amounts have been reclassified to
conform to the fiscal 2004 presentation.
The results for the three-month period ended December 31, 2003 are not
necessarily indicative of the results for the entire 2004 fiscal year.
2. DISCONTINUED OPERATIONS
Microfiltration and Separations Businesses (MicroSep) - In July 2003, the
Company announced its decision to sell the MicroSep businesses in the
Filtration/Fluid Flow segment, and therefore, these businesses are recorded
as discontinued operations beginning in the fourth quarter of fiscal 2003.
The net sales from the MicroSep businesses were $11.9 million and $11.0
million for the quarters ended December 31, 2003 and 2002, respectively.
The major classes of discontinued assets and liabilities included in the
Consolidated Balance Sheets at December 31, 2003 and September 30, 2003 are
as follows (in thousands):
December 31, 2003 September 30, 2003
Assets:
Accounts receivable, net $ 11,409 10,728
Inventories 9,719 8,778
Current portion of deferred tax assets 1,375 1,379
Other current assets 533 755
--- ---
Current assets 23,036 21,640
------ ------
Net property, plant & equipment 10,687 9,096
Deferred tax assets 5,142 7,493
Other assets 121 136
--- ---
Total assets of Discontinued Operations $ 38,986 38,365
======== ======
Liabilities:
Accounts payable $ 5,229 4,522
Accrued expenses and other current
liabilities 4,572 4,875
----- -----
Current liabilities 9,801 9,397
Other liabilities 9,013 8,115
----- -----
Total liabilities of Discontinued
Operations $ 18,814 17,512
======== ======
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
December 31,
------------
2003 2002
---- ----
Weighted Average Shares
Outstanding - Basic 12,838 12,554
Dilutive Options and
Performance Shares 446 491
--- ---
Adjusted Shares- Diluted 13,284 13,045
====== ======
Options to purchase 77,250 shares of common stock at a price of $48.58 and
options to purchase approximately 44,000 shares of common stock at prices
ranging from $35.23 - $36.33 were outstanding during the three month
periods ended December 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 at various periods through 2013. Approximately 16,000 and
50,300 performance shares were excluded from the respective computation of
diluted EPS based upon the application of the treasury stock method for the
three month periods ended December 31, 2003 and 2002, respectively.
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) 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. Had compensation cost for the Company's stock
option plans and performance share plans been determined based on the fair
value at the grant date for awards outstanding during the first quarter of
fiscal 2004 and 2003 consistent with the provisions of SFAS 148, the
Company's net earnings and net earnings per share would have been as shown
in the table below:
(Unaudited)
(Dollars in thousands,
except per share amounts)
Three Months Ended
December 31,
------------
2003 2002
---- ----
Net earnings, as reported $ 6,151 6,552
Less: total stock-based
employee compensation
expense determined under
fair value based methods,
net of tax 262 618
--- ---
Pro forma net earnings $ 5,889 5,934
======= =====
Net earnings per share:
Basic - as reported $ 0.48 0.52
Basic - pro forma $ 0.46 0.47
==== ====
Diluted - as reported $ 0.46 0.50
Diluted - pro forma $ 0.44 0.45
==== ====
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 the first quarter of fiscal year 2004 and
2003, respectively: expected dividend yield of 0% in both periods; expected
volatility of 23.9% and 38.8%; risk-free interest rate of 4.3% and 3.8%;
and expected life based on historical exercise periods of 4.24 years and
4.25 years.
4. INVENTORIES
Inventories consist of the following (in thousands):
December 31, September 30,
2003 2003
---- ----
Finished goods $ 12,744 12,449
Work in process, including long- term contracts 16,278 14,611
Raw materials 23,014 21,372
------ ------
Total inventories $ 52,036 48,432
====== ======
5. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended December 31, 2003
and 2002 was $8.6 million and $7.8 million, respectively. For the three
months ended December 31, 2003, the Company's comprehensive income was
positively impacted by foreign currency translation adjustments of
approximately $2.5 million.
6. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in three
segments: Filtration/Fluid Flow, Communications and Test.
Management evaluates and measures the performance of its operating segments
based on "Net Sales" and "EBIT", which are detailed in the table below.
EBIT is defined as earnings from continuing operations before interest and
taxes. Effective October 1, 2003, corporate office operating charges are no
longer being allocated to the operating units. Previously, corporate costs
were allocated to the operating segments based on 2.5% of the segment's net
sales. The prior year period has been adjusted to reflect the change in
corporate office operating charges. "Corporate" consists of these
unallocated corporate office operating charges, which were included in the
"Other" operating segment in fiscal 2003 and prior periods. The table below
is presented for continuing operations and excludes discontinued
operations.
($ in millions) Three Months ended
December 31,
------------
NET SALES 2003 2002
--------- ---- ----
Filtration/Fluid Flow $39.9 39.2
Communications 31.4 39.5
Test 25.1 19.6
---- ----
Consolidated totals $96.4 98.3
===== ====
EBIT
Filtration/Fluid Flow $ 3.5 (1) 5.7
Communications 7.4 10.4
Test 2.2 1.3
Corporate (2.4) (4.2) (2)
---- ----
Consolidated EBIT 10.7 13.2
Add: Interest income (0.1) (0.1)
---- ----
Earnings before income
taxes $10.8 13.3
===== ====
(1) Includes $0.7 million of exit costs related to the Filtertek Puerto Rico
facility. See further discussion in Item 2 below, under "Results of
Operations - EBIT - Filtration/Fluid Flow".
(2) Includes $0.7 million of costs related to the Management Transition
Agreement (MTA) between the Company and its former Chairman.
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. The Microfiltration and Separations businesses
(MicroSep) are accounted for as discontinued operations in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Accordingly, amounts in the financial statements and related notes for all
periods shown reflect these discontinued operations.
NET SALES
Net sales decreased $1.9 million (1.9%) to $96.4 million for the first quarter
of fiscal 2004 from $98.3 million for the first quarter of fiscal 2003.
- -Filtration/Fluid Flow
Net sales increased $0.7 million (1.8%) to $39.9 million for the first quarter
of fiscal 2004 from $39.2 million for the first quarter of fiscal 2003. The
sales increase during the three month period ended December 31, 2003 as compared
to the prior year period is mainly due to the favorable impact of foreign
currency exchange rates at Filtertek's European operations and higher defense
aerospace shipments at VACCO (combined increase of $2.0 million), partially
offset by a $1.1 million decline in sales of commercial aerospace products.
- -Communications
For the first quarter of fiscal 2004, net sales of $31.4 million were $8.1
million (20.5%) lower than the $39.5 million of net sales recorded in the first
quarter of fiscal 2003. The sales decrease is the result of a decline in
shipments of Automatic Meter Reading (AMR) products to PPL Electric Utilities
Corporation (PPL) as the contract is nearing completion. Sales to PPL were $12.5
million and $22.6 million in the first quarters of fiscal 2004 and 2003,
respectively. The PPL contract is scheduled for completion in the third quarter
of fiscal 2004. The decrease in sales to PPL was partially offset by
significantly higher AMR product sales to the electric utility Co-op market and
other customers. Sales to Co-ops and other customers were $18.5 million and
$13.8 million for the first quarters of fiscal 2004 and 2003, respectively.
Sales of Comtrak's SecurVision products were $0.5 million for the first quarter
of fiscal 2004 as compared to $3.1 million for the prior year first quarter. The
decrease in sales for the quarter ended December 31, 2003 as compared to the
prior year period is due to a delay in deliveries as a result of a significant
customer requesting Comtrak to modify its software operating system to provide
enhanced "virus" protection within the product. Normal sales volumes are
anticipated to resume during the third quarter of fiscal 2004.
- -Test
Net sales increased $5.5 million (28.1%) to $25.1 million for the first quarter
of fiscal 2004 from $19.6 million for the first quarter of fiscal 2003. The net
sales increase is the result of higher sales of test chambers in Europe of
approximately $2 million, an increase in sales from the Company's Asian
operations of approximately $1 million, and the addition of the acoustics
business (acquired at the end of the first quarter of fiscal 2003), which
contributed $2 million to sales for the first quarter of fiscal 2004.
ORDERS AND BACKLOG
Backlog was $265.0 million at December 31, 2003 compared with $263.0 million at
September 30, 2003. The Company received new orders totaling $98.4 million in
the first three months of fiscal 2004. New orders of $46.9 million were received
in the first three months of fiscal 2004 related to Filtration/Fluid Flow
products, $26.5 million related to Communications products (includes $26.1
million of new orders related to AMR products, primarily for the Co-op market),
and $25.0 million related to Test products. Backlog decreased in the
Communications segment due to shipments to PPL.
COST OF SALES
Cost of sales was $66.3 million (68.7% of net sales) and $66.6 million (67.7% of
net sales) for the first quarter of fiscal 2004 and 2003, respectively. Cost of
sales as a percent of net sales increased slightly in the first quarter of
fiscal 2004 as compared to the prior year period mainly due to lower margins on
reduced sales volumes of the Company's commercial aerospace products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the first quarter of
fiscal 2004 were $18.8 million (19.5% of net sales), compared with $18.1 million
(18.4% of net sales) for the prior year period. The increase in SG&A spending in
the first three months of fiscal 2004 is mainly due to the costs associated with
research and development, engineering, and marketing within the Communications
segment to further penetrate the investor owned utility market. In addition, the
acoustics business acquired in fiscal 2003 had $0.5 million of SG&A expenses in
the first quarter of fiscal 2004. SG&A in fiscal 2004 also includes $0.3 million
of severance charges related to the closure of the Filtertek Puerto Rico
facility. The first quarter of fiscal 2003 included $0.7 million of SG&A
expenses related to the MTA.
OTHER COSTS AND EXPENSES, NET
Other costs and expenses, net, were $0.6 million for the quarter ended December
31, 2003 compared to $0.5 million for the prior year quarter. The principal
components of other costs and expenses, net, for the three months ended December
31, 2003 included $0.4 million of exit costs related to the Puerto Rico facility
and $0.2 million of amortization of identifiable intangible assets (primarily
patents and licenses). The principal component of other costs and expenses, net,
for the first three months of fiscal 2003 included $0.3 million of amortization
of patents and licenses.
EBIT
The Company evaluates the performance of its operating segments based on EBIT,
defined below. EBIT was $10.7 million (11.1% of net sales) for the first quarter
of fiscal 2004 and $13.2 million (13.4% of net sales) for the first quarter of
fiscal 2003. EBIT for the first quarter of fiscal 2004 was negatively impacted
by $0.7 million of severance and exit costs related to the Filtertek Puerto Rico
facility (Filtration/Fluid Flow segment). EBIT for the first quarter of fiscal
2003 was negatively impacted by $0.7 million of MTA costs.
This Form 10-Q contains the financial measure "EBIT", which is not calculated in
accordance with generally accepted accounting principles in the United States of
America (GAAP). EBIT provides investors and Management with an alternative
method for assessing the Company's operating results. The Company defines "EBIT"
as earnings from continuing operations before interest and taxes. Management
evaluates the performance of its operating segments based on EBIT and believes
that EBIT is useful to investors to demonstrate the operational profitability of
the Company's business segments by excluding interest and taxes, which are
generally accounted for across the entire Company on a consolidated basis. EBIT
is also one of the measures Management uses to determine resource allocations
within the Company and incentive compensation. The following table represents a
reconciliation of EBIT to net earnings from continuing operations.
Three Months ended
($ in thousands) December 31,
------------
2003 2002
---- ----
EBIT $10,743 $13,152
Add: Interest income (36) (111)
Less: Income taxes 4,191 4,789
===== =====
Net earnings from continuing
operations $ 6,588 $ 8,474
===== =====
- -Filtration/Fluid Flow
EBIT was $3.5 million and $5.7 million in the first quarters of fiscal 2004 and
2003, respectively. EBIT decreased approximately $1.6 million due to lower
shipments of commercial aerospace products and changes in the sales mix of
military aftermarket products. In addition, during the first quarter of fiscal
2004, the Company recorded $0.7 million of exit costs related to the Filtertek
Puerto Rico facility. 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 Company recorded severance costs of $0.3 million and move costs of
$0.4 million in the fiscal 2004 first quarter. The closure and relocation will
be completed in the second quarter of fiscal 2004.
- -Communications
EBIT in the first quarter of fiscal 2004 was $7.4 million as compared to $10.4
million in the prior year period. The decrease in EBIT in the first quarter of
fiscal 2004 as compared to the prior year period is due to lower shipments of
AMR equipment to PPL as the contract is nearing completion. 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.
In addition, Comtrak's EBIT decreased approximately $1 million in the first
quarter of fiscal 2004 as compared to the prior year period due to the decreased
sales as a result of the software modifications noted earlier.
- -Test
EBIT in the first quarter of fiscal 2004 was $2.2 million as compared to $1.3
million in the prior year period. Current year EBIT was positively impacted by
the increase in sales volume.
- -Corporate
Corporate costs included in EBIT were ($2.4) million and ($4.2) million for the
three-month periods ended December 31, 2003 and 2002, respectively. EBIT for the
first quarter of fiscal 2003 included $0.7 million of MTA costs. The decrease in
corporate costs for the first quarter of fiscal 2004 as compared to the prior
year period is also due to lower operating costs, such as professional fees and
headcount related costs.
INTEREST INCOME, NET
Interest income, net, was $0.1 million for the fiscal quarters ended December
31, 2003 and 2002.
INCOME TAX EXPENSE
The first quarter fiscal 2004 effective income tax rate was 38.9% compared to
36.1% in the first quarter of fiscal 2003. The increase in the effective income
tax rate in fiscal 2004 is primarily due to the timing and volume of profit
contributions of the Company's foreign operations. The Company estimates the
annual effective tax rate for fiscal 2004 to be approximately 39%, excluding the
effect of discontinued operations.
CAPITAL RESOURCES AND LIQUIDITY
Working capital increased to $130.6 million at December 31, 2003 from $120.5
million at September 30, 2003. During the first three months of fiscal 2004,
accounts receivable decreased by $6.4 million due to cash collections during the
quarter. Inventories increased by $3.6 million in the first three months of
fiscal 2004 mainly to provide safety stock to support the facility relocations
related to the Filtertek Puerto Rico move (Filtration/Fluid Flow segment) and to
support near term demand in the Test segment. In addition, accounts payable and
accrued expenses decreased by $5.8 million in the first three months of fiscal
2004 primarily due to the timing of payments.
Net cash provided by operating activities from continuing operations increased
$5.9 million to $13.4 million in the first quarter of fiscal 2004, compared to
$7.5 million in the same period of fiscal 2003, mainly due to the increased
level of operating working capital in the prior year period.
Capital expenditures from continuing operations were $2.5 million and $2.1
million in the three-month periods ended December 31, 2003 and 2002,
respectively. Major expenditures in the current period included manufacturing
equipment and facility modifications used in the Filtration/Fluid Flow
businesses. The Company has approximately $7 million in capital commitments in
the Communications segment to further differentiate its products and to further
penetrate the investor owned utility market. This amount will be spent within
the next twelve months.
At December 31, 2003, other current assets included a mortgage note receivable
of $1.8 million from the prior sale of the Riverhead, NY property, related to a
former defense subsidiary. The Company does not anticipate a loss related to
this matter.
Effective September 5, 2003, the Company amended its existing revolving credit
facility. The amended credit facility continues to have $5 million annual
reductions, a $25 million increase option through April 11, 2004 and a final
maturity and expiration of April 11, 2005. As of December 31, 2003, the Company
had not exercised the $25 million increase option and the revolving line of
credit was $65 million. At December 31, 2003, the Company had approximately
$46.1 million available to borrow under the credit facility in addition to $37.6
million cash on hand. Against the $65 million available under the revolving
credit facility at December 31, 2003, the Company had $7 million of short-term
borrowings, $8.7 million of outstanding long-term borrowings related to the Bea
acquisition (included in "Other liabilities from discontinued operations") and
outstanding letters of credit of $3.2 million. Cash flow from operations and
borrowings under the Company's bank credit facility are expected to meet the
Company's capital requirements and operational needs for the foreseeable future.
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 2003 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 Company has
certain revenue arrangements with multiple elements within the Test segment. For
such arrangements, the Company determines the fair value of each element under
the provisions of EITF 00-21, "Revenue Arrangements with Multiple Deliverables."
Revenue of each element is then recognized when the products and/or services are
delivered. Revenue arrangements with software components are recognized under
the provisions of SOP 97-2, "Software Revenue Recognition." Management believes
that all relevant criteria and conditions are considered when recognizing
revenue.
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.
Management annually reviews goodwill and other long-lived assets with indefinite
useful lives for impairment 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 for long-lived assets
with definite lives 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. 144.
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
that will affect net earnings in future years. Depending upon the performance of
the equity and bond markets in 2004, the Company could be required to record a
charge to equity.
OTHER MATTERS
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
On December 23, 2003, the FASB issued FASB Statement No. 132 (Revised 2003),
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
standard increases the existing GAAP disclosure requirements by requiring more
detailed information about pension plan assets, benefit obligations, cash flows,
benefit costs and related information. Companies will be required to segregate
plan assets by category, such as debt, equity and real estate, and to provide
certain expected rates of return and other informational disclosures. The
provisions of this standard are effective for interim periods beginning after
December 15, 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, SecurVision sales volumes, timing of facilities closures,
results of real estate sales, recovery in connection with the Riverhead, N. Y.
property note receivable, results of future closures, consolidations,
relocations, 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: the timing and terms of
the MicroSep divestiture; further weakening of economic conditions in served
markets; changes in customer demands or customer insolvencies; competition;
intellectual property rights; the performance of discontinued operations prior
to completion of the MicroSep divestiture; successful execution of planned
facility closures, sales, consolidations and relocations with regard to the
Company's Puerto Rico facility and U.K. facility; 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;
changes in foreign or U.S. business conditions affecting the distribution of
foreign earnings; costs relating to environmental matters; 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, 2003. Refer to the
Company's 2003 Annual Report on Form 10-K for further discussion about market
risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of Management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures 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 Securities Exchange
Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. There has been no change in the Company's internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during
the period covered by this report that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
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 and Incorporated by reference to
restated. Form10-K for the fiscal year
ended September 30, 2003 at
Exhibit 3.4
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)
4(f) Amendment No. 2 and Consent Incorporated by reference to
dated as of September 5, 2003 Form 10-K for the fiscal
to Credit Agreement listed as year ended September 30,
Exhibit 4(d) above. 2003, at Exhibit 4.6
31.1 Certification of Chief
Executive Officer relating to
Form 10-Q for period ended
December 31, 2003
31.2 Certification of Chief
Financial Officer relating to
Form 10-Q for period ended
December 31, 2003
32 Certification of Chief
Executive Officer and Chief
Financial Officer relating to
Form 10-Q for period ended
December 31, 2003
b) Reports on Form 8-K.
On November 20, 2003, the Company filed a Current Report on Form 8-K, dated
November 20, 2003, which reported in Item 7, Item 9 and Item 12 that the Company
has issued a press release announcing its fiscal fourth quarter and fiscal year
2003 financial and operating results.
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 10, 2004
Exhibit 31.1
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 officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 10, 2004
(s) V.L. Richey, Jr.
--------------------
V.L. Richey, Jr.
Chief Executive Officer
Exhibit 31.2
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 officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and we have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, 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 and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, 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 and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: February 10, 2004
(s) G.E. Muenster
-----------------
G.E. Muenster
Chief Financial Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of ESCO Technologies Inc. (the
"Company") on Form 10-Q for the period ended December 31, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we, V. L.
Richey, Jr., Chief Executive Officer of the Company, and G. E. Muenster, Chief
Financial Officer of the Company, certify, to the best of our knowledge,
pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley Act
of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of
operations of the Company.
Dated: February 10, 2004 /s/ V.L. Richey, Jr.
--------------------
V.L. Richey, Jr.
Chief Executive Officer
ESCO Technologies Inc.
/s/ G.E. Muenster
-----------------
G.E. Muenster
Chief Financial Officer
ESCO Technologies Inc.