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UNITED STATES
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 JUNE 30, 2004
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
ST. LOUIS, MISSOURI 63124-2090
(Address of principal executive offices) (Zip Code)
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 common stock outstanding at July 31,
2004 was 12,970,886.
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
June 30,
--------
2004 2003
---- ----
Net sales $ 107,911 90,794
Costs and expenses:
Cost of sales 70,125 62,769
Asset impairment - 4,528
Selling, general and administrative expenses 19,670 17,438
Interest (income) expense (129) 175
Other, net 71 (1,195)
------ ------
Total costs and expenses 89,737 83,715
Earnings before income taxes 18,174 7,079
Income tax expense 6,958 2,628
------ -----
Net earnings from continuing operations 11,216 4,451
Loss from discontinued operations, net of
tax of $(527)and $(580), respectively (1,100) (1,190)
Gain on sale of discontinued operations,
net of tax benefit of $(1,153) and tax expense
of $733, respectively 1,925 894
----- ----- ---
Net gain (loss) from discontinued operations 825 (296)
Net earnings $ 12,041 4,155
====== =====
Earnings (loss) per share:
Basic - Continuing operations $ 0.87 0.35
- Discontinued operations 0.06 (0.02)
---- -----
- Net earnings $ 0.93 0.33
==== ====
Diluted - Continuing operations $ 0.84 0.34
- Discontinued operations 0.06 (0.02)
---- -----
- Net earnings $ 0.90 0.32
==== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine Months Ended
June 30,
--------
2004 2003
---- ----
Net sales $ 306,477 291,079
Costs and expenses:
Cost of sales 207,175 198,966
Asset impairment - 4,528
Selling, general and administrative expenses 57,549 53,829
Interest income (648) (94)
Other, net 1,199 1,621
------- -------
Total costs and expenses 265,275 258,850
Earnings before income taxes 41,202 32,229
Income tax expense 15,833 11,966
------ ------
Net earnings from continuing operations 25,369 20,263
Loss from discontinued operations, net of tax of (3,737) (4,819)
$(1,735) and $(1,925), respectively
Gain on sale of discontinued operations, net
of tax benefit of $(1,153) and tax expense of
$733, respectively 1,925 894
----- ---
Net loss from discontinued operations (1,812) (3,925)
Net earnings $ 23,557 16,338
====== ======
Earnings (loss) per share:
Basic - Continuing operations $ 1.97 1.60
- Discontinued operations (0.14) (0.31)
----- -----
- Net earnings $ 1.83 1.29
==== ====
Diluted - Continuing operations $ 1.91 1.55
- Discontinued operations (0.14) (0.30)
----- -----
- Net earnings $ 1.77 1.25
==== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, September 30,
2004 2003
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 57,544 31,285
Accounts receivable, net 76,922 69,379
Costs and estimated earnings on long-term
contracts, less progress billings of
$5,098 and $5,089, respectively 2,229 4,663
Inventories 46,736 48,432
Current portion of deferred tax assets 24,962 24,187
Other current assets 4,459 6,549
Current assets from discontinued operations - 21,640
------- -------
Total current assets 212,852 206,135
------- -------
Property, plant and equipment, net 71,912 71,169
Goodwill 69,002 68,653
Other assets 35,188 30,699
Other assets from discontinued operations - 16,725
------- ------
$ 388,954 393,381
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 37 10,143
Accounts payable 29,861 34,940
Advance payments on long-term contracts,
less costs incurred of $2,224 and
$1,728, respectively 2,200 1,144
Accrued expenses and other current
liabilities 29,291 30,013
Current liabilities from discontinued
operations - 9,397
------ -----
Total current liabilities 61,389 85,637
------ ------
Deferred income 2,852 3,194
Other liabilities 21,227 20,556
Long-term debt 509 490
Other liabilities from discontinued operations - 8,115
------ -----
Total liabilities 85,977 117,992
------ -------
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
14,069,955 and 13,933,193 shares,
respectively 141 139
Additional paid-in capital 218,302 216,506
Retained earnings 103,848 80,292
Accumulated other comprehensive loss (2,782) (4,982)
------- -------
319,509 291,955
Less treasury stock, at cost: 1,102,127
and 1,105,052 common shares, respectively (16,532) (16,566)
------- -------
Total shareholders' equity 302,977 275,389
------- -------
$ 388,954 393,381
======= =======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
June 30,
--------
2004 2003
---- ----
Cash flows from operating activities:
Net earnings $ 23,557 16,338
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net loss from discontinued operations, net of tax 1,812 3,925
Depreciation and amortization 8,980 8,446
Changes in operating working capital (6,843) (9,294)
Effect of deferred taxes 121 4,507
Proceeds from settlement of patent litigation - 7,300
Gain on settlement of patent litigation - (2,056)
Other 3,163 4,444
----- -----
Net cash provided by operating activities-
continuing operations 30,790 33,610
Net cash used by discontinued operations (2,735) (4,708)
------ ------
Net cash provided by operating activities 28,055 28,902
Cash flows from investing activities:
Acquisition of business - continuing operations (238) (4,000)
Acquisition of business - discontinued operations - (1,364)
Proceeds from Riverhead note receivable 2,120 -
Proceeds from divestiture of businesses 23,275 6,000
Capital expenditures - continuing operations (7,905) (7,173)
Capital expenditures - discontinued operations (1,390) (2,542)
------ ------
Net cash provided (used) by investing activities 15,862 (9,079)
------ ------
Cash flows from financing activities:
Net decrease in short-term borrowings (10,000) (86)
Proceeds from long-term debt 378 -
Principal payments on long-term debt - continuing
operations (478) (626)
Principal payments on long-term debt- discontinued
operations (9,024) -
Purchases of common stock into treasury - (1,438)
Other (including exercise of stock options) 1,466 2,789
----- -----
Net cash (used) provided by financing activities (17,658) 639
------- ---
Net increase in cash and cash equivalents 26,259 20,462
Cash and cash equivalents, beginning of period 31,285 24,930
------ ------
Cash and cash equivalents, end of period $ 57,544 45,392
====== ======
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 and nine month periods ended June 30, 2004 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 were recorded as discontinued operations beginning in the fourth
quarter of fiscal 2003. Effective April 2, 2004, the Company completed the
sale of two of its three MicroSep businesses. PTI Advanced Filtration Inc.
(Oxnard, California) and PTI Technologies Limited (Sheffield, England) were
sold to domnick hunter group plc for $18 million in cash. On June 8, 2004,
the Company completed the sale of PTI S.p.A. (Milan, Italy) to a group of
investors comprised of the subsidiary's senior management for $5.3 million.
A pretax gain of $0.8 million related to the sale of the MicroSep
businesses is reflected in the Company's fiscal 2004 third quarter results
in discontinued operations. The net sales from the MicroSep businesses were
$5.6 million and $11.5 million for the three-month periods ended June 30,
2004 and 2003, respectively and $29.4 million and $32.7 million for the
nine-month periods ended June 30, 2004 and 2003, respectively.
The major classes of discontinued assets and liabilities included in the
Consolidated Balance Sheets at September 30, 2003 are shown below (in
thousands).
September 30, 2003
------------------
Assets:
-------
Accounts receivable, net $ 10,728
Inventories 8,778
Current portion of deferred tax assets 1,379
Other current assets 755
------
Current assets 21,640
Net property, plant & equipment 9,096
Deferred tax assets 7,493
Other assets 136
------
Total assets of Discontinued Operations $ 38,365
======
Liabilities:
------------
Accounts payable $ 4,522
Accrued expenses and other current liabilities 4,875
-----
Current liabilities 9,397
Other liabilities 8,115
-----
Total liabilities of Discontinued Operations $ 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 (restricted 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 Nine Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Weighted Average Shares
Outstanding - Basic 12,938 12,717 12,885 12,634
Dilutive Options and Restricted
Shares 377 436 425 451
--- --- --- ---
Adjusted Shares- Diluted 13,315 13,153 13,310 13,085
====== ====== ====== ======
Options to purchase 110,750 shares of common stock at prices ranging from
$46.95 - $50.55 and options to purchase 2,000 shares of common stock at a
price of $36.33 were outstanding during the nine month periods ended June
30, 2004 and 2003, 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 2014. Approximately 16,000 and 51,000 restricted 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
June 30, 2004 and 2003, 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 restricted share plans been determined based on the fair
value at the grant date for awards outstanding during the three and
nine-month periods ended June 30, 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 Nine Months Ended
June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings, as reported $12,041 4,155 $ 23,557 16,338
Less: total stock-based employee
compensation expense determined
under fair value based methods,
net of tax 206 384 753 1,619
--- --- --- -----
Pro forma net earnings $11,835 3,771 $22,804 14,719
====== ===== ====== ======
Net earnings per share:
Basic - as reported $ 0.93 0.33 $ 1.83 1.29
==== ==== ==== ====
Basic - pro forma 0.91 0.30 1.77 1.17
==== ==== ==== ====
Diluted - as reported $ 0.90 0.32 1.77 1.25
==== ==== ==== ====
Diluted - pro forma 0.89 0.29 $ 1.71 1.12
==== ==== ==== ====
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 three and nine-month periods ended June
30, 2004 and 2003, respectively: expected dividend yield of 0% in both
periods; expected volatility of 16.4% and 33.8%; risk-free interest rate of
4.6% and 3.5%; and expected life based on historical exercise periods of
4.24 years and 4.04 years.
4. INVENTORIES
Inventories consist of the following (in thousands):
June 30, September 30,
2004 2003
---- ----
Finished goods $11,600 12,449
Work in process, including long
- term contracts 15,554 14,611
Raw materials 19,582 21,372
------ ------
Total inventories $46,736 48,432
======= ======
5. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended June 30, 2004 and
2003 was $11.9 million and $6.4 million, respectively. Comprehensive income
for the nine-month periods ended June 30, 2004 and 2003 was $25.8 million
and $20.0 million, respectively. For the three and nine month periods ended
June 30, 2004, the Company's comprehensive income was negatively impacted
by foreign currency translation adjustments of $0.2 million and positively
impacted by foreign currency translation adjustments of $2.1 million,
respectively.
6. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in three
segments: Filtration/Fluid Flow, Communications and Test.
Management evaluates and measures the performance of its operating segments
based on "Net Sales" and "EBIT", which are detailed in the table below.
EBIT is defined as earnings from continuing operations before interest and
taxes. Effective October 1, 2003, corporate office operating charges are no
longer being allocated to the operating units. Previously, corporate costs
were allocated to the operating segments based on 2.5% of the segment's net
sales. The prior year period has been adjusted to reflect the change in
corporate office operating charges. "Corporate" consists of those
unallocated corporate office operating charges, which were included in the
"Other" operating segment in fiscal 2003 and prior periods. The table below
is presented for continuing operations and excludes discontinued
operations.
($ in millions) Three Months ended Nine Months Ended
June 30, June 30,
-------- --------
NET SALES 2004 2003 2004 2003
--------- ---- ---- ---- ----
Filtration/Fluid Flow $ 44.0 41.6 $126.2 120.6
Communications 37.2 28.5 99.0 105.9
Test 26.7 20.7 81.3 64.6
---- ---- ---- ----
Consolidated totals $107.9 90.8 $306.5 291.1
===== ==== ===== =====
EBIT
----
Filtration/Fluid Flow $ 6.4 2.4(1) $ 14.1(2) 11.5(3)
Communications 11.7 5.5 26.3 25.7
Test 2.8 1.2(4) 8.3 4.9(4)
Corporate (2.9) (1.8) (8.1) (10.0)(5)
---- ---- ---- -----
Consolidated EBIT 18.0 7.3 40.6 32.1
Add: Interest income 0.2 (0.2) 0.6 0.1
--- ---- --- ---
Earnings before income
taxes $ 18.2 7.1 $ 41.2 32.2
==== === ==== ====
The items listed below were described in detail in previous filings.
(1) Includes $4.7 million of impairment charges and exit costs related to
the Filtertek Puerto Rico facility and a $2.1 million gain related to
the settlement of patent litigation.
(2) Includes $1.3 million of exit costs related to the Filtertek Puerto
Rico facility.
(3) Includes $4.7 million of impairment charges and exit costs related to
the Filtertek Puerto Rico facility and a $2.1 million gain related to
the settlement of patent litigation. Also, includes a $1.5 million
charge resulting from an equipment lease termination related to the
Whatman Hemasure contract dispute.
(4) Includes $0.3 million of charges related to the U.K. Test
move/restructuring.
(5) Includes $1.4 million of costs related to the Management Transition
Agreement (MTA) between the Company and its former Chairman.
7. RETIREMENT AND OTHER BENEFIT PLANS
A summary of net periodic benefit expense for the Company's defined benefit
plans and postretirement healthcare and other benefits for the three and
nine-month periods ended June 30, 2004 and 2003 are shown in the following
tables. Effective December 31, 2003, the Company's defined benefit plan (The
Retirement Plan) was frozen and no additional benefits will be accrued after
that date. Net periodic benefit cost for each period presented is comprised of
the following:
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
(Dollars in thousands) 2004 2003 2004 2003
---------------------- ---- ---- ---- ----
Defined benefit plans
Service cost $140 386 $420 1,404
Interest cost 623 563 1,868 2,054
Expected return on assets (675) (584) (2,025) (1,984)
Amortization of:
Prior service cost -- -- -- 47
Actuarial (gain) loss 100 94 300 413
Curtailment charge -- 40 -- 40
--- --- --- -----
Net periodic benefit cost $188 499 $563 1,974
==== === ==== =====
Net periodic postretirement benefit cost for each period presented is
comprised of the following:
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
(Dollars in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Service cost $ 8 5 $ 24 15
Interest cost 13 25 38 75
Amortization of actuarial gain (13) (30) (38) (90)
Settlement gain (1) -- (2,240) -- (2,240)
-- ------ -- ------
Net periodic postretirement
benefit cost $ 8 (2,240) $ 24 (2,240)
==== ====== ==== ======
(1) The settlement gain recorded in 2003 related to the sale of Rantec
Power Systems Inc.
8. ASSET IMPAIRMENT
During the third quarter of fiscal 2003, the Company recorded an asset
impairment charge of $4.5 million consisting of the following: $4.3 million,
which included a $3.5 million write down of the Filtertek Puerto Rico faciliy to
its appraised value and a $0.8 million write down of machinery and equipment to
their estimated salvage value; and a $0.2 million charge related to the U.K.
Test consolidation consisting of write-offs of leasehold improvements.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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, the MicroSep businesses are reflected as discontinued operations in
the financial statements and related notes for all periods shown. In addition,
at June 30, 2003, Rantec Power Systems Inc. was also accounted for as a
discontinued operation.
NET SALES
Net sales increased $17.1 million (18.8%) to $107.9 million for the third
quarter of fiscal 2004 from $90.8 million for the third quarter of fiscal 2003
mainly due to higher shipments of Automatic Meter Reading (AMR) equipment in the
Communications segment to electric utility cooperative customers (COOP), as well
as sales to two new investor owned utility customers (IOU's), Bangor
Hydro-Electric and Idaho Power Company. Net sales increased $15.4 million (5.3%)
to $306.5 million for the first nine months of fiscal 2004 from $291.1 million
for the first nine months of fiscal 2003 mainly driven by higher European sales
in the Test segment as a result of two large test chamber projects.
- -Filtration/Fluid Flow
Net sales increased $2.4 million (5.8%) to $44.0 million for the third quarter
of fiscal 2004 from $41.6 million for the third quarter of fiscal 2003. Net
sales increased $5.6 million (4.6%) to $126.2 million for the first nine months
of fiscal 2004 from $120.6 million for the first nine months of fiscal 2003. The
sales increase during the fiscal quarter ended June 30, 2004 as compared to the
prior year quarter is mainly due to the following: higher defense shipments at
VACCO of $1.5 million and a net sales increase at Filtertek of $1.2 million
driven by increased shipments in the commercial and automotive markets,
partially offset by lower commercial and military aerospace shipments at PTI
Technologies Inc. (PTI) of $0.3 million. The sales increase for the first nine
months of fiscal 2004 as compared to the prior year period is mainly due to the
following: higher defense shipments at VACCO of $3.5 million and a net sales
increase at Filtertek of $2.9 million primarily driven by the favorable impact
of foreign currency exchange rates, partially offset by a $0.8 million decline
in sales of commercial aerospace products at PTI.
- -Communications
For the third quarter of fiscal 2004, net sales of $37.2 million were $8.7
million, or 30.5% higher than the $28.5 million of net sales recorded in the
third quarter of fiscal 2003. Net sales of $99.0 million in the first nine
months of fiscal 2004 were $6.9 million, or 6.5% lower than the $105.9 million
recorded in the first nine months of fiscal 2003. The sales increase in the
third quarter of fiscal 2004 as compared to the prior year period is the result
of significantly higher shipments of AMR equipment to COOP customers, as well as
sales to two new IOU's, Bangor Hydro-Electric Company and Idaho Power Company.
The decrease in sales for the first nine months of fiscal 2004 as compared to
the prior year period is the result of a decline in shipments of AMR products to
PPL Electric Utilities Corporation (PPL), as the contract is nearing completion,
and reduced sales of Comtrak's SecurVision products. Sales to PPL were $0.6
million and $12.5 million in the fiscal quarters ended June 30, 2004 and 2003,
respectively, and $20.6 million and $50.4 million in the first nine months of
fiscal 2004 and 2003, respectively. The PPL contract is scheduled for completion
in the fourth quarter of fiscal 2004. The decrease in sales to PPL was partially
offset by significantly higher AMR product sales to the COOP market and other
customers. DCSI's sales to COOP's and other customers were $35.6 million and
$14.6 million in the fiscal quarters ended June 30, 2004 and 2003, respectively,
and were $76.5 million and $48.3 million for the first nine months of fiscal
2004 and 2003, respectively.
Sales of Comtrak's SecurVision products were $1.0 million for the third quarter
of fiscal 2004 as compared to $1.4 million for the prior year third quarter and
$1.9 million for the first nine months of fiscal 2004 as compared to $7.2
million for the prior year nine-month period. The decreases in sales for the
third quarter of fiscal 2004 and in the first nine months of fiscal 2004 as
compared to the prior year periods are 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. Deliveries of
Comtrak's SecurVision products are expected to resume during the fourth quarter
of fiscal 2004.
- -Test
Net sales increased $6.0 million (29.0%) to $26.7 million for the third quarter
of fiscal 2004 from $20.7 million for the third quarter of fiscal 2003. Net
sales increased $16.7 million (26.0%) to $81.3 million for the first nine months
of fiscal 2004 from $64.6 million for the first nine months of fiscal 2003. The
sales increase during the fiscal quarter ended June 30, 2004 as compared to the
prior year quarter is mainly due to two test chamber projects in Europe and one
in Asia. The sales increase for the first nine months of fiscal 2004 as compared
to the prior year period is mainly due to the following: higher European sales
of approximately $13.4 million driven primarily by two large test chamber
projects; the acoustics business (which includes results of operations for three
quarters in the current year compared to two quarters in the prior year), which
contributed $1.6 million to the increase in sales for the first nine months of
fiscal 2004; and an increase in sales from the Company's Asian operations of
approximately $1.6 million.
ORDERS AND BACKLOG
Backlog was $248.2 million at June 30, 2004 compared with $263.0 million at
September 30, 2003. The Company received new orders totaling $291.7 million in
the first nine months of fiscal 2004. New orders of $126.6 million were received
in the first nine months of fiscal 2004 related to Filtration/Fluid Flow
products, $89.2 million related to Communications products (includes $87.4
million of new orders related to AMR products, primarily for the COOP market),
and $75.9 million related to Test products. Backlog decreased overall and in the
Communications segment due to $20.6 million of shipments to PPL during the first
nine months of fiscal 2004 as the contract is nearing completion.
GROSS PROFIT
The Company computes gross profit as net sales less cost of sales less asset
impairment charges. The gross profit margin is the gross profit divided by net
sales, expressed as a percentage. The gross profit margin was 35.0% and 25.9% in
the third quarter of fiscal 2004 and 2003, respectively. The gross profit margin
was 32.4% and 30.1% for the first nine months of fiscal 2004 and 2003,
respectively. The gross profit margin in the prior year was negatively impacted
by $4.5 million of asset impairment charges, which represented 5.0% and 1.6% of
net sales for the three and nine-month periods ended June 30, 2003,
respectively. Excluding the asset impairment charges, the gross profit margin
increased by approximately 4% in the third quarter of fiscal 2004 and 0.8% in
the first nine months of fiscal 2004 as compared to the prior year periods
mainly due to higher margins on shipments of AMR equipment in the Communications
segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the third quarter of
fiscal 2004 were $19.7 million (18.2% of net sales), compared with $17.4 million
(19.2% of net sales) for the prior year period. For the first nine months of
fiscal 2004, SG&A expenses were $57.5 million (18.8% of net sales) compared with
$53.8 million (18.5% of net sales) for the prior year period. The increase in
SG&A spending in the fiscal quarter ended June 30, 2004 and in the first nine
months of fiscal 2004 as compared to the respective prior year periods 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 (Test segment)
acquired in fiscal 2003 had $1.3 million of SG&A expenses in the first nine
months of fiscal 2004 (three quarters) compared to $0.9 million in the prior
year period (two quarters). SG&A also includes severance charges related to the
closure of the Puerto Rico facility of $0.5 million in the first nine months of
fiscal 2004. The first nine months of fiscal 2003 included $1.4 million of SG&A
expenses related to the MTA, as described in previous filings.
OTHER COSTS AND EXPENSES, NET
Other costs and expenses, net, were $0.1 million for the quarter ended June 30,
2004 compared to $(1.2) million for the prior year quarter. Other costs and
expenses, net, were $1.2 million for the first nine months of fiscal 2004
compared to $1.6 million for the prior year period. The most significant item
included in other costs and expenses, net, for the three months ended June 30,
2003 was a $2.1 million gain resulting from the settlement of patent litigation
(Filtration/Fluid Flow segment). Principal components of other costs and
expenses, net, for the first nine months of fiscal 2004 included $0.9 million of
exit costs related to the Puerto Rico facility; $0.7 million of amortization of
identifiable intangible assets (primarily patents and licenses); a $0.6 million
gain from a sales and use tax refund claim related to a former defense
subsidiary (SEI) partially offset by a $0.4 million charge for settlement of a
claim involving a former defense subsidiary (Hazeltine). Principal components of
other costs and expenses, net, for the first nine months of fiscal 2003 included
the following: a $2.1 million gain resulting from the settlement of patent
litigation (Filtration/Fluid Flow segment); a $1.5 million charge resulting from
an equipment lease termination related to the previously disclosed Whatman
Hemasure contract dispute (Filtration/Fluid Flow segment) and $0.8 million of
amortization of patents and licenses.
EBIT
The Company evaluates the performance of its operating segments based on EBIT,
defined below. EBIT was $18.0 million (16.7% of net sales) for the third quarter
of fiscal 2004 and $7.3 million (8.0% of net sales) for the third quarter of
fiscal 2003. For the first nine months of fiscal 2004, EBIT was $40.6 million
(13.2% of net sales) and $32.1 million (11.0% of net sales) for the first nine
months of fiscal 2003. EBIT for the first nine months of fiscal 2004 was
negatively impacted by $1.3 million of severance and exit costs related to the
Filtertek Puerto Rico facility (Filtration/Fluid Flow segment). EBIT for the
nine-month period ended June 30, 2003 was negatively impacted by the following:
$4.7 million of impairment charges and exit costs related to the Filtertek
Puerto Rico facility (Filtration/Fluid Flow segment); a $1.5 million charge
resulting from an equipment lease termination related to the Whatman Hemasure
contract dispute (Filtration/Fluid Flow segment); and $1.4 million of MTA costs.
This Form 10-Q contains the financial measure "EBIT", which is not calculated in
accordance with generally accepted accounting principles in the United States of
America (GAAP). EBIT provides investors and Management with an alternative
method for assessing the Company's operating results. The Company defines "EBIT"
as earnings from continuing operations before interest and taxes. Management
evaluates the performance of its operating segments based on EBIT and believes
that EBIT is useful to investors to demonstrate the operational profitability of
the Company's business segments by excluding interest and taxes, which are
generally accounted for across the entire Company on a consolidated basis. EBIT
is also one of the measures Management uses to determine resource allocations
within the Company and incentive compensation. The following table represents a
reconciliation of EBIT to net earnings from continuing operations.
Three Months ended Nine Months ended
($ in thousands) June 30, June 30,
-------- --------
2004 2003 2004 2003
---- ---- ---- ----
EBIT $18,045 7,254 $40,554 32,135
Interest income / (expense) 129 (175) 648 94
Less: Income taxes 6,958 2,628 15,833 11,966
----- ----- ------ ------
Net earnings from continuing
operations $11,216 4,451 $25,369 20,263
======= ===== ======= ======
- -Filtration/Fluid Flow
EBIT was $6.4 million and $2.4 million in the third quarters of fiscal 2004 and
2003, respectively, and $14.1 million and $11.5 million in the first nine months
of fiscal 2004 and 2003, respectively. For the third quarter of fiscal 2004 as
compared to the prior year quarter, EBIT increased $4.0 million due to the
following: a $0.8 million increase at VACCO due to higher defense shipments; a
$2.7 million increase at Filtertek (which resulted from $4.7 million of
impairment charges and exit costs recorded in the third quarter of fiscal 2003
and a $2.1 million gain related to the settlement of patent litigation recorded
in the third quarter of fiscal 2003); and a $0.5 million increase at PTI. For
the first nine months of fiscal 2004 as compared to the prior year period, EBIT
increased $2.6 million due to the following: a $2.2 million increase at VACCO
due to higher defense shipments; a $1.7 million increase at Filtertek, (which
included $1.3 million of exit costs related to the Puerto Rico facility in the
current year; $4.7 million of impairment charges and exit costs recorded in the
third quarter of fiscal 2003 and a $2.1 million gain related to the settlement
of patent litigation recorded in the third quarter of fiscal 2003); and a $1.3
million decrease at PTI due to lower shipments of aerospace products. The
closure and relocation of the Puerto Rico facility was completed in March 2004.
- -Communications
EBIT in the third quarter of fiscal 2004 was $11.7 million as compared to $5.5
million in the prior year period. For the first nine months of fiscal 2004, EBIT
was $26.3 million as compared to $25.7 million in the prior year period. The
increase in EBIT in the third quarter of fiscal 2004 and in the first nine
months of fiscal 2004 as compared to the prior year periods is mainly due to the
increases in sales volumes, product cost reductions and the favorable sales mix
resulting from additional sales to the COOP market. In addition, the fiscal 2003
third quarter included sales of lower margin commercial and industrial meter
modules. 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, EBIT related to Comtrak decreased approximately $0.4 million in the
third quarter of fiscal 2004 and $2.3 million in the first nine months of fiscal
2004 as compared to the respective prior year periods due to the decreased sales
as a result of the software modifications noted earlier.
- -Test
EBIT in the third quarter of fiscal 2004 was $2.8 million as compared to $1.2
million in the prior year period. For the first nine months of fiscal 2004, EBIT
increased $3.4 million to $8.3 million from $4.9 million in fiscal 2003. The
increases in EBIT in fiscal 2004 as compared to the prior year periods are
mainly due to the increases in sales volumes driven by two projects in Europe.
The fiscal 2003 amounts included $0.3 million of costs associated with the U.K.
facility consolidation.
- -Corporate
Corporate costs included in EBIT were ($2.9) million and ($8.1) million for the
three and nine-month periods ended June 30, 2004, respectively, compared to
($1.8) million and ($10.0) million for the respective prior year periods. EBIT
for the first nine months of fiscal 2003 included $1.4 million of MTA costs. The
increase in corporate costs for the three months ended June 30, 2004 as compared
to the prior year period is mainly due to increased compensation costs, a $0.4
million charge for settlement of a claim involving a former defense subsidiary
partially offset by a $0.6 million gain from a sales and use tax refund claim
involving a former defense subsidiary. The decrease in corporate costs for the
first nine months of fiscal 2004 as compared to the prior year period is due to
lower operating costs, including personnel related costs.
INTEREST INCOME, NET
Interest income, net, was $0.1 million and $0.6 million for the three and
nine-month periods ended June 30, 2004, respectively, compared to interest
expense of $0.2 million and interest income of $0.1 million for the respective
prior year periods. The increase in interest income for the third quarter of
fiscal 2004 and in the first nine months of fiscal 2004 as compared to the
respective prior year periods is due to higher average cash balances on hand in
fiscal 2004 and the interest received on the collection of the Riverhead, NY
property note receivable during the second quarter of fiscal 2004.
INCOME TAX EXPENSE
The third quarter fiscal 2004 effective income tax rate was 38.3% compared to
37.1% in the third quarter of fiscal 2003. The effective income tax rate in the
first nine months of fiscal 2004 was 38.4% compared to 37.1% in the prior year
period. The increase in the effective income tax rate in the first nine months
of 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 38.5%, excluding the effect of
discontinued operations.
CAPITAL RESOURCES AND LIQUIDITY
Working capital increased to $151.5 million at June 30, 2004 from $120.5 million
at September 30, 2003. During the first nine months of fiscal 2004, cash
increased $26.2 million and accounts receivable increased by $7.5 million due to
timing of sales. Inventories decreased by $1.7 million in the first nine months
of fiscal 2004 mainly due to the PPL contract as it nears completion. In
addition, accounts payable and accrued expenses decreased by $5.8 million in the
first nine months of fiscal 2004 primarily due to the timing of payments.
Net cash provided by operating activities from continuing operations decreased
$0.8 million to $28.1 million in the first nine months of fiscal 2004, compared
to $28.9 million in the same period of fiscal 2003. The prior year period
included $7.3 million received from the patent litigation settlement, as
described in previous filings.
Capital expenditures from continuing operations were $7.9 million and $7.2
million in the first nine months of fiscal 2004 and 2003, respectively. Major
expenditures in the current period included manufacturing equipment and facility
modifications used in the Filtration/Fluid Flow businesses.
The Company has approximately $4 million in commitments in the Communications
segment to further differentiate its products and to further penetrate the
investor owned utility market. This amount is expected to be spent within the
next twelve months.
Effective April 2, 2004, the Company completed the sale of two of its three
MicroSep businesses. PTI Advanced Filtration Inc. (Oxnard, California) and PTI
Technologies Limited (Sheffield, England) were sold to domnick hunter group plc
for $18 million in cash. On June 8, 2004, the Company completed the sale of PTI
S.p.A. (Milan, Italy) to a group of investors comprised of the subsidiary's
senior management for $5.3 million. A pretax gain of $0.8 million related to the
sale of the MicroSep businesses is reflected in the Company's fiscal 2004 third
quarter results in discontinued operations. The income tax benefit reflected on
the gain on sale of discontinued operations in fiscal 2004 of $1.2 million is
due to the reversal of a portion of the valuation allowance which was
established in fiscal 2003 related to the portion of the tax benefits on the
loss that the Company believed was more likely than not to be realized from the
sale of the MicroSep businesses. Upon completion of the sale of these
businesses, the Company determined that a portion of the previously established
valuation allowance was no longer required.
The closure and relocation of the Filtertek Puerto Rico facility was completed
in March 2004. The Puerto Rico facility is included in property, plant and
equipment with a carrying value of $3.6 million at June 30, 2004. The facility
continues to be actively marketed for sale.
On February 18, 2004, the Company received $2.1 million as final payment on the
note receivable from the sale of the Riverhead, NY property and recorded the
excess over book value of $0.3 million as interest income.
At June 30, 2004, the Company's revolving line of credit was $60 million. The
Company is in the process of establishing a new credit facility which is
expected to be finalized by September 30, 2004. At June 30, 2004, the Company
had approximately $56.7 million available to borrow under the credit facility in
addition to $57.5 million cash on hand. Against the $60 million available under
the revolving credit facility at June 30, 2004, the Company had outstanding
letters of credit of $3.3 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.
STOCK REPURCHASE PROGRAM
In August 2004, the Company's Board of Directors approved the extension of the
previously authorized (February 2001) open market repurchase program of up to
1.1 million shares, which is subject to market conditions and other factors and
covers the period ending September 30, 2006. During the first nine months of
fiscal 2004, the Company has not repurchased any shares under this program.
CRITICAL ACCOUNTING POLICIES
Management has evaluated the accounting policies used in the preparation of the
Company's financial statements and related notes and believes those policies to
be reasonable and appropriate. Certain of these accounting policies require the
application of significant judgment by management in selecting appropriate
assumptions for calculating financial estimates. By their nature, these
judgments are subject to an inherent degree of uncertainty. These judgments are
based on historical experience, trends in the industry, information provided by
customers and information available from other outside sources, as appropriate.
The most significant areas involving management judgments and estimates may be
found in the Critical Accounting Policies Section of Management's Discussion and
Analysis and in Note 1 to the Consolidated Financial Statements contained in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2003, at Exhibit 13.
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
In May 2004, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) No. FAS 106-2, "Accounting and Disclosure Requirements Related to
the Medicare Prescription Drug, Improvement and Modernization Act ("the Act") of
2003 which supersedes FSP FAS 106-1 of the same title. The Staff Position
clarifies the accounting for the benefits attributable to new government
subsidies for companies that provide prescription drug benefits to retirees.
This FSP is effective for the first interim or annual periods beginning after
June 15, 2004. In accordance with FSP 106-1, the Company elected to defer
accounting for the economic benefits of the new Medicare Act. The Company does
not expect that the adoption of FSP 106-2 will have a material impact on its
results of operations or financial position.
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 or projections made in connection with the Company's accounting
policies, annual effective tax rate, SecurVision products sales volumes, timing
of Communications segment commitments and expenditures, continued growth in the
AMR markets, the sale of real estate in Puerto Rico, finalization of a new
credit facility, outcome of current claims and litigation, impact of the Act,
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: weakening of economic conditions in
served markets; changes in customer demands or customer insolvencies;
competition; intellectual property rights; successful execution of the planned
sale of the Company's Puerto Rico facility; ability to obtain a new credit
facility on commercially reasonable terms or at all; 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 were effective as of that date. 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 has materially
affected, or is 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
3.1 Restated Articles of Incorporated by reference to Form
Incorporation 10-K for the fiscal year ended
September 30, 1999, at Exhibit 3(a)
3.2 Amended Certificate of Incorporated by reference to Form
Designation Preferences and 10-Q for the fiscal quarter ended
Rights of Series A March 31, 2000, at Exhibit 4(e)
Participating Cumulative
Preferred Stock of the
Registrant
3.3 Articles of Merger effective Incorporated by reference to Form10-Q
July 10, 2000 for the fiscal quarter ended June 30,
2000, at Exhibit 3(c)
3.4 Bylaws, as amended and Incorporated by reference to Form10-K
restated. for the fiscal year ended September
30, 2003, at Exhibit 3.4
4.1 Specimen Common Stock Incorporated by reference to Form10-Q
Certificate for the fiscal quarter ended June 30,
2000, at Exhibit 4(a)
4.2 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
4.3 Rights Agreement dated as of Incorporated by reference to Current
September 24, 1990 (as amended Report on Form 8-K dated February 3,
and Restated as of February 3, 2000, at Exhibit 4.1
2000) between the Registrant
and Registrar and Transfer
Company, as successor Rights
Agent
4.4 Amended and Restated Credit Incorporated by reference to Form10-Q
Agreement dated as of for the fiscal quarter ended March
February28, 2001 among the 31, 2001, at Exhibit 4(d)
Registrant, Bank of America,
N.A., as agent, and the lenders
listed therein
4.5 Amendment No. 1 dated as of Incorporated by reference to Form
April 5, 2002 to Credit 10-Q for the fiscal quarter ended
Agreement listed as Exhibit 4.4 June 30, 2002, at Exhibit 4(e)
above.
4.6 Amendment No. 2 and Consent Incorporated by reference to Form
dated as of September 5, 2003 10-K for the fiscal year ended
to Credit Agreement listed as September 30, 2003, at Exhibit 4.6
Exhibit 4.4 above.
10.1 Second Amendment to Employment
Agreement with V.L. Richey, Jr.
(identical document with C.J.
Kretschmer)
10.2 Second Amendment to Employment
Agreement with G.E. Muenster
(identical document with A.S.
Barclay)
10.3 Notice of Award - restricted
stock award to V.L. Richey, Jr.
(identical documents except for
number of shares awarded for:
C.J. Kretschmer - 4,750 shares;
G.E. Muenster - 2,400 shares:
A.S. Barclay - 1,800 shares)
31.1 Certification of Chief
Executive Officer relating to
Form 10-Q for period ended June
30, 2004
31.2 Certification of Chief
Financial Officer relating to
Form 10-Q for period ended June
30, 2004
32 Certification of Chief
Executive Officer and Chief
Financial Officer relating to
Form 10-Q for period ended June
30, 2004
b) Reports on Form 8-K.
During the quarter ended June 30, 2004, the Company filed the following
Current Reports on Form 8-K:
On April 5, 2004, the Company filed a Current Report on Form 8-K, dated
April 2, 2004, which reported in Item 5 that the Company completed the sale
of 100% of the capital stock of two indirect wholly-owned subsidiaries, PTI
Advanced Filtration Inc. and PTI Technologies Limited, to domnick hunter
holdings, inc. and domnick hunter limited, respectively, for a purchase
price of $18 million in cash.
On May 11, 2004, the Company filed a Current Report on Form 8-K, dated May
11, 2004, which reported in Item 7, Item 9 and Item 12 that the Company was
issuing a press release that date announcing its fiscal 2004 second quarter
and first six months' financial and operating results, which would be
included on its website, and that a related conference call would be held.
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: August 11, 2004
Exhibit 10.1
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of the 5th day of May, 2004, between ESCO
Technologies Inc. ("Company") and Victor L. Richey ("Executive").
WITNESSETH:
WHEREAS, the Company and the Executive entered into an Employment Agreement
as of the 3rd day of November, 1999 ("Agreement"), which Agreement was amended
as of the 9th day of August, 2001; and
WHEREAS, the parties retained the right to amend the Agreement pursuant to
Article 15 thereof; and
WHEREAS, the parties desire to again amend the Agreement effective as of
May 5th, 2004. NOW, THEREFORE, effective as of May 5th, 2004, the Agreement is
amended as follows:
1. The following is added at the end of Paragraph 1: This Agreement shall
automatically be renewed for a one year period commencing November 1, 2004
and for a one year period on each November 1 anniversary thereafter, unless
one party gives the other party at least six months advance written notice
that the Agreement will not be renewed.
2. Subparagraph (1) of Paragraph 9.a is revised to read as follows: The
Company shall continue to pay the Executive his base salary at the rate in
effect at the date of such termination of employment for 24 months
following such termination ("Severance Period").
3. The first sentence of Subparagraph (2) of Paragraph 9.a is revised to read
as follows: As a supplement to the payment of the Executive's base salary
under subparagraph a, above, the Company shall also pay the Executive his
PCP Percentage (as hereinafter defined) for 24 months following such
termination.
4. The following sentence is added immediately above the signature line: THIS
CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY
THE PARTIES.
IN WITNESS WHEREOF, the foregoing Agreement was executed effective as of
May 5th, 2004.
ESCO TECHNOLOGIES INC.
By: /s/D.J. Hanlon /s/Victor L. Richey
-------------------
Executive
Exhibit 10.2
SECOND AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AGREEMENT entered into as of the 5th day of May, 2004, between ESCO
Technologies inc. ("Company") and Gary E. Muenster ("Executive").
WITNESSETH:
WHEREAS, the Company and the Executive entered into an Employment Agreement
as of the 3rd day of November, 1999 ("Agreement"), which Agreement was amended
as of the 9th day of August, 2001; and
WHEREAS, the parties retained the right to amend the Agreement pursuant to
Article 15 thereof; and
WHEREAS, the parties desire to amend the Agreement effective as of May 5th,
2004;
NOW, THEREFORE, effective as of May 5th, 2004, the Agreement is amended as
follows:
1. The following is added at the end of Paragraph 1:
This Agreement shall automatically be renewed for a 1 year period
commencing November 1, 2004 and for 1 year periods on each November 1
anniversary thereafter. Unless one party gives the other party at least 6 months
advance written notice that the Agreement will not be renewed.
2. The following sentence is added immediately above the signature line:
THIS CONTRACT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
IN WITNESS WHEREOF, the foregoing Amended was executed effective as of May
5th 2004.
ESCO TECHNOLOGIES INC.
By: /s/ Deborah J. Hanlon /s/ G.E. Muenster
-----------------
Gary E. Muenster
Exhibit 10.3
NOTICE OF AWARD
To: Victor L. Richey, Jr.
From: Human Resources and Compensation Committee of the Board of
Directors ("Committee")
Subject: ESCO Technologies Inc. 2001 Stock Incentive Plan ("Plan")
-Evergreen III May, 2004
1. Award. The Committee has awarded to you 6,000 shares of
Performance-Accelerated Restricted Stock under the terms of the Plan
("Award"). The Award is subject to all of the terms of the Plan, a copy of
which has been delivered to you.
2. Terms. The following are the terms of the Award:
Notwithstanding (b), below if, during the Period of the Award, the Average
Value Per Share of Company Stock reaches the amount set forth in column (A), a
percentage of the Award will be accelerated equal to the amount set forth under
column (B) subject to the limitations set forth in (c) and provided you comply
with the terms of the remainder of this Notice of Award.
A B
If the Average Value The Cumulative
Per Share of Company Percent of Award
Stock reaches: Accelerated shall be:
-------------- ----------------------
$52.00 or more 100%
$48.00 50%
$40.00 0%
(b) If you are still employed on September 30, 2008 you will earn 100% of
the portion of the Award not yet accelerated provided you comply with
the requirements of paragraph 3.
(c) The following additional terms will apply to the Award:
(i) No portion of this Award may be accelerated prior to October 1,
2005. One hundred percent (100%) of the total Award may be
accelerated by the end of the Fiscal Year ending
September 30, 2006.
(ii) Once a portion of the Award is accelerated under subparagraph
(a), you must remain employed with the Company or a subsidiary of
the Company until the March 31st following the end of the Fiscal
Year in which that portion of the Award is accelerated. If you
terminate employment (voluntarily or involuntarily) prior to such
time, you will forfeit that portion of the Award. Provided,
however, that if your employment is terminated on account of
death, or total and permanent disability the foregoing employment
requirement shall not apply.
(iii)If there is a Change of Control (as defined in the Plan) and you
are employed by the Company on the date of the Change of Control,
the employment requirement of subparagraph (ii) shall cease to
apply to the portion of the Award which is accelerated or earned
and the number of shares representing that portion of the Award
which is accelerated or earned as of the date of the Change of
Control shall be distributed to you. In addition, the portion of
the Award which is not yet accelerated or earned shall be
determined and distributed to you at the end of the Fiscal Year
in which the Change of Control occurred provided you are still
employed on such date, in lieu of all other provisions of this
Award. If you are not employed by the Company as of the end of
the foregoing Fiscal Year, no such distribution will be made;
provided, however, that if you are involuntarily terminated for
reasons other than Cause or if you terminate for Good Reason the
remaining shares not yet accelerated or earned shall be
distributed in full upon such termination of employment.
(a) Notwithstanding the foregoing provisions of this subparagraph (iii),
in the event a certified public accounting firm designated by the
Committee (the "Accounting Firm") determines that any payment (whether
paid or payable pursuant to the terms of this Award or otherwise and
each such payment hereinafter defined as a "Payment" and all Payments
in the aggregate hereinafter defined as the "Aggregate Payment"),
would subject you to tax under Section4999 of the Internal Revenue
Code of 1986 ("Code") then such Accounting Firm shall determine
whether some amount of payments would meet the definition of a
"Reduced Amount". If the Accounting Firm determines that there is a
Reduced Amount, payments shall be reduced so that the Aggregate
Payments shall equal such Reduced Amount. For purposes of this
subparagraph, the "Reduced Amount" shall be the largest Aggregate
Payment which (a) is less than the sum of all Payments and (b) results
in aggregate Net After Tax Receipts which are equal to or greater than
the Net After Tax Receipts which would result if Payments were made
without regard to this subsection (e). "Net After Tax Receipt" means
the Present Value (defined under Section 280G(d)(4) of the Code) of a
Payment net of all taxes imposed on you under Section 1 and 4999 of
the Code by applying the highest marginal rate under Section 1 of the
Code.
(b) As a result of the uncertainty in the application of Section 4999 of
the Code at the time of the initial determination of the Accounting
Firm hereunder, it is possible that Payments will be made by the
Company which should not have been made (the "Overpayments") or that
additional Payments which the Company has not made could have been
made (the "Underpayments"), in each case consistent with the
calculations of the Accounting Firm. In the event that the Accounting
Firm, based either upon (A) the assertion of a deficiency by the
Internal Revenue Service against the Company or you which the
Accounting Firm believes has a high probability of success or (B)
controlling precedent or other substantial authority, determines that
an Overpayment has been made, any such Overpayment shall be treated
for all purposes as a loan to you which you shall repay to the Company
together with interest at the applicable Federal rate provided for in
Section 7872(f)(2)(A) of the Code; provided, however, that no amount
shall be payable by you to the Company if and to the extent such
payment would not reduce the amount which is subject to taxation under
Section 1 and Section 4999 of the Code or if the period of limitations
for assessment of tax has expired. In the event that the Accounting
Firm, based upon controlling precedent or other substantial authority,
determines that an Underpayment has occurred, any such Underpayment
shall be promptly paid by the Company to you together with interest at
the applicable Federal rate provided for in Section 7872(f)(2)(A) of
the Code.
3. Share Ownership Requirements.......You must own directly or beneficially
Company Stock in the amount of 50 % of the number of shares covered by the
Award (hereinafter referred to as "Minimum Required Shares") and provide
proof of ownership satisfactory to the Committee of that number of shares
as of April 30, 2005. You must also notify the Company at any time during
the Period of the Award on or after April 30, 2005 if you sell or otherwise
transfer such shares and your total share ownership is less than the
Minimum Required Shares. If, at any time during the Period of the Award on
or after April 30, 2005, you own zero shares, 100% of the Award not yet
accelerated will be forfeited. If, at any time during the Period of the
Award on or after April 30, 2005, you own some shares but less than the
Minimum Required Shares, you will forfeit a pro rata portion of the Award
not yet accelerated based upon the ratio of the number of shares you own to
the Minimum Required Shares.
4. Definitions. For purposes of the Award, the following terms shall have the
following meanings:
(a) "Average Value Per Share" shall mean the average for any consecutive
30 day trading period in which Company Stock is traded of the daily
closing prices of Company Stock on the New York Stock Exchange.
(b) "Cause" shall mean:
(i) The willful and continued failure to substantially perform your
duties with the Company or one of its subsidiaries (other than
any such failure resulting from incapacity due to physical or
mental illness), after a written demand for such performance is
delivered to you by ESCO's Board of Directors or their delegate
which specifically identifies the manner in which such ESCO's
Board of Directors or their delegate believes that you have not
substantially performed your duties; or
(ii) The willful engaging in (A)illegal conduct (other than minor
traffic offenses), or (B)conduct which is in breach of your
fiduciary duty to the Company or one of its subsidiaries and
which is demonstrably injurious to the Company or one of its
subsidiaries, any of their reputations, or any of their business
prospects. For purposes of this subparagraph (ii) and
subparagraph (i) above, no act or failure to act on your part
shall be considered "willful" unless it is done, or omitted to be
done, by you in bad faith or without reasonable belief that your
action or omission was in the best interests of the Company or
one of its subsidiaries. Any act, or failure to act, based upon
authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company or based upon the advice of
counsel for the Company shall be conclusively presumed to be
done, or omitted to be done, by you in good faith and in the best
interests of the Company or one of its subsidiaries;
The cessation of your employment shall not be deemed to be for "Cause"
unless and until there shall have been delivered to you a written notice that in
the Board of Directors' or their delegate's opinion you are guilty of the
conduct described in subparagraph (i) or (ii) above, and specifying the
particulars thereof in detail.
(c) "Company Stock" shall mean common stock of the Company.
(d) "Fiscal Year" shall mean the fiscal year of the Company which, as of
the date hereof, is the twelve month period commencing October 1 and
ending September 30.
(e) Good Reason" shall mean:
(i) Requiring you to be based at any office or location more than 50
miles from your office or location as of the date of the Change
of Control;
(ii) The assignment to you of any duties inconsistent in any respect
with your position (including status, offices, titles and
reporting requirements), authority, duties or responsibilities as
of the date of the Change of Control or in conjunction with a
Change in Control any action by the Company or any of its
subsidiaries which results in a diminution in such position,
authority, duties or responsibilities, excluding for this purpose
an action taken by the Company or one of its subsidiaries, to
which you object in writing by notice to the Company within 10
business days after you receive actual notice of such action,
which is remedied by the Company or one of its subsidiaries
promptly but in any event no later than 5 business days after you
provided such notice, or
(iii)The reduction in your total compensation and benefits below the
level in effect as of the date of the Change of Control.
(f) "Period of the Award" means the period commencing October 1, 2005 and
ending on September 30, 2008.
5. Parallel Incentive. The Committee may, but is not obligated to, authorize a
payment of a portion of the Award based upon its discretionary evaluation
of the Company's financial performance during the Period of the Award even
if the foregoing objectives are not fully met. Examples of performance
measures the Committee may consider include, but are not limited to, cash
flow, earnings, sales and margins.
6. Medium of Payment. The Committee shall direct that any distribution shall
be made in accordance with the terms of the Plan.
7. Restrictions. You agree that for the period ending two (2) years after the
expiration of the Period of the Award, you will not, as an individual or as
a partner, employee, agent, advisor, consultant or in any other capacity of
or to any person, firm, corporation or other entity, directly or
indirectly, other than as a 2% or less shareholder of a publicly traded
corporation, do any of the following:
(a) carry on any business or become involved in any business activity,
which is (i) competitive with the business of the Company (or a
subsidiary or joint venture of the Company), as presently conducted
and as said business may evolve in the ordinary course, and (ii) a
business or business activity in which you were engaged in the course
of your employment with the Company (or a subsidiary or joint venture
of the Company);
(b) hire, or assist anyone else to hire, any employee of the Company (or
any subsidiary or joint venture of the Company), or seek to persuade,
or assist anyone else to seek to persuade, any employee of the Company
(or any subsidiary or joint venture of the Company), to discontinue
employment with the Company (or any subsidiary or joint venture of the
Company);
(c) induce or attempt to induce, or assist anyone else to induce or
attempt to induce, any customer of the Company (or any subsidiary or
joint venture of the Company), to discontinue its business with the
Company (or with any subsidiary or joint venture of the Company), or
disclose to anyone else any confidential information relating to the
identities, preferences, and/or requirements of any such customer; or
(d) engage in any other conduct inimical, contrary or harmful to the
interests of the Company (or any subsidiary or joint venture of the
Company), including, but not limited to, conduct related to your
employment, or violation of any Company policy.
In the event of a breach or threatened breach of this Paragraph 7 the
Company shall be entitled, in addition to any other legal or equitable remedies
it may have, to temporary, preliminary and permanent injunctive relief
restraining such breach or threatened breach. You hereby expressly acknowledge
that the harm which might result as a result of any noncompliance by you would
be largely irreparable, and you agree that if there is a question as to the
enforceability of any of the provisions of this Agreement, you will abide by the
Agreement until after the question has been resolved by a final judgment of a
court of competent jurisdiction.
8. Choice of Law. This Agreement shall be construed and administered in
accordance with the laws of the State of Missouri without regard to the
principles of conflicts of law which might otherwise apply. Any litigation
concerning any aspect of this Agreement shall be conducted in the State or
Federal Courts in the State of Missouri.
9. Amendment. The Award may be amended by written consent between the Company
and you.
Executed this 21st day of June, 2004.
ESCO TECHNOLOGIES INC. AGREED TO AND ACCEPTED:
By: /s/ Deborah J. Hanlon /s/ Victor L. Richey, Jr.
-------------------------
Vice President
Participant
ATTEST: /s/ Alyson S. Barclay
Secretary
`
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: August 11, 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: August 11, 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 June 30, 2004 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: August 11, 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.