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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 DECEMBER 31, 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 January 31,
2005 was 12,609,659.
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,
------------
2004 2003
---- ----
Net sales $ 104,375 96,396
Costs and expenses:
Cost of sales 68,509 66,270
Selling, general and administrative expenses 19,813 18,769
Interest income (481) (36)
Other (income) expenses, net (453) 614
---- ---
Total costs and expenses 87,388 85,617
Earnings before income taxes 16,987 10,779
Income tax expense 6,464 4,191
----- -----
Net earnings from continuing operations 10,523 6,588
Loss from discontinued operations, net of tax benefit of
$(656) in fiscal 2004 - (437)
- ----- ---- --- ----
Net earnings $ 10,523 6,151
====== =====
Earnings (loss) per share:
Basic - Continuing operations $ 0.82 0.51
- Discontinued operations - (0.03)
---- -----
- Net earnings $ 0.82 0.48
==== ====
Diluted - Continuing operations $ 0.80 0.50
- Discontinued operations - (0.04)
---- -----
- Net earnings $ 0.80 0.46
==== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, September 30,
2004 2004
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 60,357 72,281
Accounts receivable, net 69,248 77,729
Costs and estimated earnings on long-term
contracts, less progress billings of
$1,703 and $2,210, respectively 2,957 2,476
Inventories 48,204 44,287
Current portion of deferred tax assets 22,320 27,810
Other current assets 8,408 8,947
----- -----
Total current assets 211,494 233,530
Property, plant and equipment, net 69,496 69,103
Goodwill 69,437 68,949
Other assets 31,185 30,858
------ ------
$381,612 402,440
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 126 151
Accounts payable 28,598 32,455
Advance payments on long-term contracts, less costs
incurred of $9,627 and $8,017, respectively 3,303 4,305
Accrued salaries
8,048 11,896
Accrued taxes 3,072 4,454
Accrued other expenses 13,772 15,061
------ ------
Total current liabilities 56,919 68,322
------ ------
Deferred income 2,623 2,738
Pension obligations 13,905 13,899
Other liabilities 9,580 9,497
Long-term debt 407 368
--- ---
Total liabilities 83,434 94,824
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 14,184,571 and 14,148,902
shares, respectively 142 142
Additional paid-in capital 223,247 221,711
Retained earnings 126,486 115,963
Accumulated other comprehensive loss (279) (3,698)
---- ------
349,596 334,118
Less treasury stock, at cost: 1,591,413 and 1,257,352
common shares, respectively (51,418) (26,502)
------- -------
Total shareholders' equity 298,178 307,616
------- -------
$381,612 402,440
======== =======
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,
------------
2004 2003
---- ----
Cash flows from operating activities:
Net earnings $10,523 6,151
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net loss from discontinued operations, net of tax - 437
Depreciation and amortization 3,119 2,841
Changes in operating working capital (1,265) 210
Effect of deferred taxes 1,122 487
Other 781 3,246
--- -----
Net cash provided by operating activities-
continuing operations 14,280 13,372
Net cash used by discontinued operations - (517)
--- ----
Net cash provided by operating activities 14,280 12,855
Cash flows from investing activities:
Capital expenditures- continuing operations (2,013) (2,513)
Capital expenditures- discontinued operations - (1,278)
----- -----
Net cash used by investing activities (2,013) (3,791)
Cash flows from financing activities:
Net decrease in short-term borrowings - (3,000)
Principal payments on long-term debt (42) (37)
Purchases of common stock into treasury
(24,928) -
Other (including exercise of stock options) 779 310
--- ---
Net cash used by financing activities (24,191 (2,727)
------- ------
Net (decrease) increase in cash and cash equivalents (11,924) 6,337
Cash and cash equivalents, beginning of period 72,281 31,285
------ ------
Cash and cash equivalents, end of period $ 60,357 37,622
====== ======
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, 2004.
The results for the three month period ended December 31, 2004 are not
necessarily indicative of the results for the entire 2005 fiscal year.
2. DISCONTINUED OPERATIONS - 2004
Microfiltration and Separations Businesses (MicroSep) - The MicroSep
businesses consisted of PTI Advanced Filtration Inc., PTI Technologies
Limited, and PTI S.p.A. Effective April 2, 2004, the Company completed the
sale of PTI Advanced Filtration Inc. (Oxnard, California) and PTI
Technologies Limited (Sheffield, England) 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. An after-tax loss of $0.4 million
related to the MicroSep businesses is reflected in the Company's fiscal
2004 first quarter results in discontinued operations.
3. EARNINGS PER SHARE (EPS)
Basic EPS is calculated using the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the weighted
average number of common shares outstanding during the period plus shares
issuable upon the assumed exercise of dilutive common share options and
vesting of performance-accelerated restricted shares (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
December 31,
------------
2004 2003
---- ----
Weighted Average Shares
Outstanding - Basic 12,793 12,838
Dilutive Options and Restricted
Shares 411 446
--- ---
Adjusted Shares- Diluted 13,204 13,284
====== ======
Options to purchase 1,500 shares of common stock at a price of $77.71 and
options to purchase 77,250 shares of common stock at a price of $48.58 were
outstanding during the three month periods ended December 31, 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
2013. Approximately 27,000 and 16,000 performance-accelerated 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 December 31, 2004 and 2003, respectively.
Had compensation cost for the Company's stock option plans and
performance-accelerated restricted share plans been determined based on the
fair value at the grant date for awards outstanding during the three month
periods ended December 31, 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,
------------
2004 2003
---- ----
Net earnings, as reported $10,523 6,151
Add: stock-based employee compensation
expense included in reported net
earnings, net of tax 369 274
Less: total stock-based employee
compensation expense determined
under fair value based methods,
net of tax (918) (536)
---- ----
Pro forma net earnings $ 9,974 5,889
===== =====
Net earnings per share:
Basic - as reported $ 0.82 0.48
Basic - pro forma 0.78 0.46
==== ====
Diluted - as reported $ 0.80 0.46
Diluted - pro forma 0.76 0.44
==== ====
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 month periods ended December 31,
2004 and 2003, respectively: expected dividend yield of 0% in both periods;
expected volatility of 28.3% and 23.9%; risk-free interest rate of 3.6% and
4.3%; and expected life based on historical exercise periods of 4.21 years
and 4.24 years.
4. INVENTORIES
Inventories consist of the following (in thousands):
December 31, September 30,
2004 2004
---- ----
Finished goods $ 13,758 11,444
Work in process, including long- term contracts 13,704 13,759
Raw materials 20,742 19,084
------ ------
Total inventories $ 48,204 44,287
========= ======
5. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended December 31, 2004
and 2003 was $13.9 million and $8.6 million, respectively. For the three
month periods ended December 31, 2004 and 2003, the Company's comprehensive
income was positively impacted by foreign currency translation adjustments
of $3.4 million and $2.5 million, respectively.
6. BUSINESS SEGMENT INFORMATION
The Company is organized based on the types of products and services that
it offers. Under this organizational structure, the Company operates in
three segments: Filtration/Fluid Flow, Communications and Test.
Management evaluates and measures the performance of its operating segments
based on "Net Sales" and "EBIT", which are detailed in the table below.
EBIT is defined as earnings from continuing operations before interest and
taxes. "Corporate" consists of unallocated corporate office operating
charges. The table below is presented for continuing operations and
excludes discontinued operations.
($ in thousands) Three Months ended
December 31,
------------
NET SALES 2004 2003
--------- ---- ----
Filtration/Fluid Flow $ 44,004 39,909
Communications 33,533 31,414
Test 26,838 25,073
------ ------
Consolidated totals $104,375 96,396
======== ======
EBIT
Filtration/Fluid Flow $ 7,059 3,511 (1)
Communications 9,622 7,367
Test 2,082 2,197
Corporate (2,257) (2,332)
------ ------
Consolidated EBIT 16,506 10,743
Add: Interest income (481) (36)
---- ---
Earnings before income
taxes $ 16,987 10,779
====== ======
(1) Includes $0.7 million of exit costs related to the Filtertek
Puerto Rico facility described in detail in previous filings.
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 month
periods ended December 31, 2004 and 2003 are shown in the following tables.
Effective December 31, 2003, the Company's defined benefit 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
December 31,
------------
(Dollars in thousands) 2004 2003
---------------------- ---- ----
Defined benefit plans
Service cost $ - 140
Interest cost 663 623
Expected return on assets (713) (675)
Amortization of:
Actuarial loss 125 100
--- ---
Net periodic benefit cost $ 75 188
==== ===
Net periodic postretirement benefit cost for each period presented is
comprised of the following:
Three Months Ended
December 31,
------------
(Dollars in thousands) 2004 2003
---------------------- ---- ----
Service cost $ 8 5
Interest cost 10 8
Amortization of actuarial gain (8) (13)
-- ---
Net periodic postretirement
benefit cost $ 10 -
==== ===
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (R), "Share-Based Payment" (SFAS No. 123 (R)). This Statement
replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes APB No. 25, "Accounting for Stock Issued to Employees." SFAS 123
(R) requires all stock-based compensation to be recognized as an expense in
the financial statements and that such cost be measured according to the
fair value of stock options. SFAS 123 (R) will be effective for quarterly
periods beginning after June 15, 2005. The Company plans to adopt the
provisions of this Statement in the fourth quarter of fiscal 2005 on a
prospective basis. The Company currently provides the pro forma disclosures
required by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," on a quarterly basis (see "Note 3 - Earnings
Per Share").
In December 2004, the FASB issued FASB Staff Position FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004 (FSP 109-2)." The
American Jobs Creation Act of 2004, (the "Act") provides for a special
one-time deduction of 85 percent of certain foreign earnings repatriated
into the U.S. from non-U.S. subsidiaries through September 30, 2006. The
Company is currently evaluating the merits of repatriating funds under the
Act. The range of reasonably possible amounts of unremitted earnings that
are being considered for repatriation is between zero and $27.6 million,
which would require the Company to pay income taxes in the range of zero to
$2.0 million. Federal income taxes on the repatriated amounts would be
based on the 5.25% effective statutory rate as provided in the Act, plus
applicable withholding taxes. To date, the Company has not provided for
income taxes on unremitted earnings generated by non-U.S. subsidiaries
given the Company's historical intent to permanently invest these earnings
abroad. As a result, additional taxes will be required to be recorded for
any funds repatriated under the Act. The Company expects to complete its
evaluation of the repatriation provision of the Act by September 30, 2006.
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), which were sold in the third quarter of fiscal 2004, 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 fiscal 2004.
NET SALES
Net sales increased $8.0 million (8.3%) to $104.4 million for the
first quarter of fiscal 2005 from $96.4 million for the first quarter of fiscal
2004, primarily due to increases across all three operating segments including a
favorable foreign currency impact which contributed $1.5 million to the increase
in sales. On a segment basis, for the first quarter of fiscal 2005,
Filtration/Fluid Flow sales increased 10%, Communications sales increased 7%,
and Test sales increased 7% from the prior year period.
- -Filtration/Fluid Flow
Net sales increased $4.1 million (10.3%) to $44.0 million for the first quarter
of fiscal 2005 from $39.9 million for the first quarter of fiscal 2004. The
sales increase during the fiscal quarter ended December 31, 2004 as compared to
the prior year quarter is mainly due to the following: higher commercial and
military aerospace shipments at PTI Technologies Inc. (PTI) of $2.3 million, a
net sales increase at Filtertek of $1.1 million driven by favorable foreign
currency rates related to its European operations, and higher defense shipments
at VACCO of $0.7 million.
- -Communications
For the first quarter of fiscal 2005, net sales of $33.5 million were $2.1
million, or 6.7%, higher than the $31.4 million of net sales recorded in the
first quarter of fiscal 2004. The sales increase in the first quarter of fiscal
2005 as compared to the prior year period is the result of higher shipments of
Comtrak's SecurVision video security products, which generated $7.1 million in
sales during the first quarter of fiscal 2005 compared to $0.5 million in the
prior year period. This increase in Comtrak's shipments was the result of
additional deliveries which had been previously delayed by the customer who had
required a modification of the products to provide enhanced "virus" protection.
DCSI's sales of automatic meter reading (AMR) equipment to electric utility
customers were $26.4 million in the first quarter of fiscal 2005 compared to
$31.0 million in the prior year period. Sales to PPL Electric Utilities
Corporation (PPL) decreased approximately $11.5 million in the first quarter of
fiscal 2005 compared to the prior year period due to the wind-down of the PPL
contract. Sales to PPL were $1.0 million and $12.5 million in the fiscal
quarters ended December 31, 2004 and 2003, respectively. The decrease in sales
to PPL was partially offset by higher AMR product sales to the electric utility
cooperative (COOP) market and other customers. DCSI's sales to COOP's and other
customers were $25.4 million and $18.5 million in the fiscal quarters ended
December 31, 2004 and 2003, respectively.
- -Test
Net sales increased $1.7 million (6.8%) to $26.8 million for the first quarter
of fiscal 2005 from $25.1 million for the first quarter of fiscal 2004. The
sales increase during the fiscal quarter ended December 31, 2004 as compared to
the prior year quarter is primarily due to the completion of several test
chamber installations, higher antenna and other component sales, and the
completion of additional government shielding projects.
ORDERS AND BACKLOG
Backlog was $246.4 million at December 31, 2004 compared with $249.1 million at
September 30, 2004. The Company received new orders totaling approximately $102
million in the first quarter of fiscal 2005. New orders of $39.2 million were
received in the first quarter of fiscal 2005 related to Filtration/Fluid Flow
products, $35.3 million related to Communications products (includes $30.7
million of new orders related to AMR products), and $27.1 million related to
Test products.
GROSS PROFIT
The Company computes gross profit as net sales less cost of sales. The gross
profit margin is the gross profit divided by net sales, expressed as a
percentage. The gross profit margin was 34.4% and 31.3% in the first quarter of
fiscal 2005 and 2004, respectively. This increase of 3.1% was mainly due to
higher margins on shipments of AMR equipment and SecurVision products in the
Communications segment. In addition, the prior year first quarter gross profit
margin in the Filtration/Fluid Flow segment was negatively impacted by the exit
and move costs incurred and the inefficiencies being absorbed at Filtertek as a
result of operating in both the Puerto Rico and Juarez, Mexico facilities. The
closure and relocation of the Filtertek Puerto Rico facility was completed in
March 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the first quarter of
fiscal 2005 were $19.8 million (19.0% of net sales), compared with $18.8 million
(19.5% of net sales) for the prior year period. The increase in SG&A spending in
the fiscal quarter ended December 31, 2004 as compared to the prior year period
is mainly due to the costs associated with marketing, project management and new
product development within the Communications segment to further penetrate the
investor owned utility market.
OTHER (INCOME) EXPENSES, NET
Other (income) expenses, net, were $(0.5) million for the quarter ended December
31, 2004 compared to $0.6 million for the prior year quarter. Principal
components of other (income) expenses, net, for the first quarter of fiscal 2005
included $(0.6) million of royalty income and $0.2 million of amortization
expense of identifiable intangible assets (primarily patents, licenses and
software). Principal components of other (income) expenses, net, for the first
quarter of fiscal 2004 included the following: $0.4 million of exit costs
related to the Filtertek Puerto Rico facility and $0.2 million of amortization
of identifiable intangible assets (primarily patents and licenses).
EBIT
The Company evaluates the performance of its operating segments based on EBIT,
defined below. EBIT was $16.5 million (15.8% of net sales) for the first quarter
of fiscal 2005 and $10.7 million (11.1% of net sales) for the first quarter of
fiscal 2004. EBIT for the first quarter of fiscal 2004 was negatively impacted
by $0.7 million of severance and exit costs related to the Filtertek Puerto Rico
facility (Filtration/Fluid Flow segment).
This Form 10-Q contains the financial measure "EBIT", which is not calculated in
accordance with generally accepted accounting principles in the United States of
America (GAAP). EBIT provides investors and Management with an alternative
method for assessing the Company's operating results. The Company defines "EBIT"
as earnings from continuing operations before interest and taxes. Management
evaluates the performance of its operating segments based on EBIT, and believes
that EBIT is useful to investors to demonstrate the operational profitability of
the Company's business segments by excluding interest and taxes, which are
generally accounted for across the entire Company on a consolidated basis. EBIT
is also one of the measures Management uses to determine resource allocations
within the Company and incentive compensation. The following table represents a
reconciliation of EBIT to net earnings from continuing operations.
Three Months ended
($ in thousands) December 31,
------------
2004 2003
---- ----
EBIT $16,506 10,743
Interest income 481 36
Less: Income taxes 6,464 4,191
----- -----
Net earnings from continuing
operations $10,523 6,588
======= =====
- -Filtration/Fluid Flow
EBIT was $7.1 million (16.0% of net sales) and $3.5 million (8.8% of net sales)
in the first quarters of fiscal 2005 and 2004, respectively. This increase of
$3.6 million was due to the following: a $1.8 million increase at Filtertek,
which included $0.6 million of cost reimbursement from a medical device customer
related to a shortfall between their actual purchases versus the minimum
contractually guaranteed amount (the first quarter of fiscal 2004 included $0.7
million of exit costs related to the Puerto Rico facility); a $1.1 million
increase at PTI due to higher commercial and military aerospace shipments; and a
$0.7 million increase at VACCO due to higher defense shipments.
- -Communications
EBIT in the first quarter of fiscal 2005 was $9.6 million (28.7% of net sales)
as compared to $7.4 million (23.5% of net sales) in the prior year period. The
increase in EBIT margin in the first quarter of fiscal 2005 as compared to the
prior year period is mainly due to the additional shipments of Comtrak's
SecurVision products, as well as the favorable sales mix of AMR products
resulting from additional sales to the COOP market, and cost reductions realized
on certain AMR components. The Company will continue to increase its engineering
and new product development expenditures in the Communications segment in order
to continue its growth in the AMR markets, and to further differentiate its
technology from the competition.
- -Test
EBIT in the first quarter of fiscal 2005 was $2.1 million (7.8% of net sales) as
compared to $2.2 million (8.8% of net sales) in the prior year period. This
decrease in EBIT is mainly the result of approximately $0.3 million in
installation cost overruns incurred on certain government shielding projects
being installed in challenging areas throughout the world, as well as increased
costs of steel and copper.
- -Corporate
Corporate costs included in EBIT were ($2.3) million for the three month period
ended December 31, 2004 compared to ($2.4) million for the prior year period.
INTEREST INCOME, NET
Interest income, net was $0.5 million for the three month period ended December
31, 2004 compared to interest income of $0.1 million for the prior year period.
This increase in interest income is mainly due to a tax refund of lookback
interest and higher average cash balances on hand in fiscal 2005.
INCOME TAX EXPENSE
The first quarter fiscal 2005 effective income tax rate was 38.1% compared to
38.9% in the first quarter of fiscal 2004. The decrease in the effective income
tax rate in the first quarter of fiscal 2005 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 2005 to be approximately 38%.
CAPITAL RESOURCES AND LIQUIDITY
Working capital decreased to $154.6 million at December 31, 2004 from $165.2
million at September 30, 2004. During the first three months of fiscal 2005,
cash decreased $11.9 million due to the $24.9 million share repurchase,
partially offset by cash generated from operations. Accounts receivable
decreased by $8.5 million due to timing of sales and collections. Inventories
increased by $3.9 million in the first three months of fiscal 2005, of which
$2.0 million related to the Test segment due to the timing of sales and $1.1
million was to build safety stock within the Communications segment. In
addition, accounts payable and accrued expenses decreased by $10.4 million in
the first three months of fiscal 2005, primarily due to the timing of vendor
payments and payroll periods.
Net cash provided by operating activities from continuing operations increased
to $14.3 million in the first three months of fiscal 2005, compared to $13.4
million in the same period of fiscal 2004.
Capital expenditures from continuing operations were $2.0 million and $2.5
million in the first quarter of fiscal 2005 and 2004, respectively. Major
expenditures in the current period included manufacturing equipment and facility
modifications used in the Filtration/Fluid Flow businesses.
The Company has approximately $1.5 million in commitments outstanding 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
during fiscal 2005.
The closure and relocation of the Filtertek Puerto Rico facility was completed
in March 2004. The Puerto Rico facility is included in other current assets with
a carrying value of $3.6 million at December 31, 2004. The facility continues to
be actively marketed for sale.
In October 2004, the Company entered into a new $100 million five-year revolving
bank credit facility with a $50 million increase option, which replaced its
then-existing credit facility. At December 31, 2004, the Company had
approximately $98.6 million available to borrow under the credit facility in
addition to $60.4 million cash on hand. Against the $100 million available under
the revolving credit facility at December 31, 2004, the Company had outstanding
letters of credit of $1.4 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 quarter of fiscal
2005, the Company repurchased 335,036 shares under this program for a total of
$24.9 million and has approximately 575,000 shares remaining under this program
at December 31, 2004.
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,
2004, 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.
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, timing of Communications segment
commitments and expenditures, outcome of current claims and litigation, future
cash flow, 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; delivery delays or
defaults by customers; termination for convenience of customer contracts; timing
and magnitude of future contract awards; performance issues with key suppliers,
customers 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, 2004. Refer to the
Company's 2004 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
c) Stock Repurchase Program
Total Number Maximum Number
of Shares of Shares that
Purchased as May Yet Be
Total Number Average Price Part of Publicly Purchased Under
of Shares Paid Announced Plans the Plans or
Period Purchased per Share or Programs Programs
- ------ ---------- ---------- -------- --------
Oct. 1-31, 2004 0 $0.00 0 911,519
Nov. 1-30, 2004 138,936 $72.03 138,936 772,583
Dec. 1-31, 2004 196,100 $76.09 196,100 576,483
------- ------ -------
Total 335,036 $74.40 335,036
ITEM 5. OTHER INFORMATION
a) On October 4 and November 10, 2004, the Human Resources and Compensation
Committee of the Company's Board of Directors took certain actions in respect of
director and executive compensation. These actions are being reported as a
result of recent SEC staff interpretations. See Exhibits 10.1 through 10.7 of
this Form 10-Q.
ITEM 6. EXHIBITS
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 Form
July 10, 2000 10-Q for the fiscal quarter ended
June 30, 2000, at Exhibit 3(c)
3.4 Bylaws, as amended and restated. Incorporated by reference to Form
10-K 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 Current
Report on Form 8-K dated February 3,
2000, at Exhibit B to Exhibit 4.1
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 Credit Agreement dated as of Incorporated by reference to Form10-K
October 6, 2004, among the for the fiscal year ended September
Registrant, Wells Fargo Bank, 30, 2004, at Exhibit 4.4
N.A., as agent, and the lenders
listed therein
10.1 Summary of Non-Employee
Directors' Compensation
10.2 Performance Compensation Plan
Amended and Restated as of
November 25, 2002
10.3 2005 Performance Measures and
Evaluation Criteria under
Performance Compensation Plan
10.4 Awards to Executive Officers
Not Reported on Form 8-K,
October 4, 2004
10.5 Form of Notice of
Award-Performance-Accelerated
Restricted-Stock under 2001
Stock Incentive Plan
10.6 Form of Incentive Stock Option
Agreement under 2004 Incentive
Compensation Plan
10.7 Form of Nonqualified Stock
Option Agreement under 2004
Incentive Compensation Plan
10.8 Form of Incentive Stock Option
Agreement under 2001 Stock
Incentive Plan
10.9 Form of Nonqualified Stock
Option Agreement under 2001
Stock Incentive Plan
31.1 Certification of Chief
Executive Officer relating to
Form 10-Q for period ended
December 31, 2004
31.2 Certification of Chief
Financial Officer relating to
Form 10-Q for period ended
December 31, 2004
32 Certification of Chief
Executive Officer and Chief
Financial Officer relating to
Form 10-Q for period ended
December 31, 2004
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 8, 2005