Attached files
file | filename |
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10-K - FORM 10-K - ESCO TECHNOLOGIES INC | c54835e10vk.htm |
EX-10.55 - EX-10.55 - ESCO TECHNOLOGIES INC | c54835exv10w55.htm |
EX-23 - EX-23 - ESCO TECHNOLOGIES INC | c54835exv23.htm |
EX-31.2 - EX-31.2 - ESCO TECHNOLOGIES INC | c54835exv31w2.htm |
EX-31.1 - EX-31.1 - ESCO TECHNOLOGIES INC | c54835exv31w1.htm |
EX-21 - EX-21 - ESCO TECHNOLOGIES INC | c54835exv21.htm |
EX-32 - EX-32 - ESCO TECHNOLOGIES INC | c54835exv32.htm |
Exhibit
13
MANAGEMENTS DISCUSSION AND ANALYSIS
The following discussion should be read in
conjunction with the Consolidated Financial
Statements and Notes thereto. The years 2009, 2008
and 2007 represent the fiscal years ended September
30, 2009, 2008 and 2007, respectively, and are used
throughout the document.
Introduction
ESCO Technologies Inc. and its wholly owned
subsidiaries (ESCO, the Company) are organized into
three reportable operating segments: Utility
Solutions Group (USG), RF Shielding and Test (Test),
and Filtration/Fluid Flow (Filtration). The Companys
business segments are comprised of the following
primary operating entities:
| USG: Aclara Power-Line Systems Inc. (Aclara PLS), Aclara RF Systems Inc. (Aclara RF), Aclara Software Inc. (Aclara Software), and Doble Engineering Company (Doble), | |
| Test: EMC Group companies consisting primarily of ETS-Lindgren L.P. (ETS) and Lindgren R.F. Enclosures, Inc. (Lindgren), and | |
| Filtration: PTI Technologies Inc. (PTI), VACCO Industries (VACCO), and TekPackaging L.L.C. (TekPack). |
USG: The Aclara Group is a proven supplier of
special purpose fixed-network communications systems
for electric, gas and water utilities, including
hardware and software to support advanced metering
applications. Aclaras STAR® Network system and
TWACS® technology provide advanced radio-frequency
(RF) and power-line (PLS) based fixed-network
technologies proven to meet the wide-ranging data
communications requirements of utilities worldwide.
Aclara Software applications add value across the
utility enterprise, addressing meter and energy data
management, distribution planning and operations,
customer service and revenue management. Doble
provides high-end, intelligent diagnostic test
solutions for the electric power delivery industry
and is a leading supplier of partial discharge
testing instruments used to assess the integrity of
high voltage power delivery equipment.
Test: The EMC Group is an industry leader in
providing its customers with the ability to identify,
measure and contain magnetic, electromagnetic and
acoustic energy.
Filtration: The companies within this segment design
and manufacture specialty filtration products
including hydraulic filter elements used in
commercial aerospace applications, unique filter
mechanisms used in micro propulsion devices for
satellites and custom designed filters for manned
and unmanned aircraft.
ESCO continues to operate
with meaningful growth prospects in its primary
served markets and with considerable financial
flexibility. The Company continues to focus on new
products that incorporate proprietary design and
process technologies. Management is committed to
delivering shareholder value through internal
growth, ongoing performance improvement initiatives,
and selective acquisitions.
Highlights of 2009 Continuing Operations
| Sales, net earnings and diluted earnings per share were $619.1 million, $49.3 million and $1.86 per share, respectively. | |
| Net cash provided by operating activities was $77.5 million. | |
| At September 30, 2009, cash on hand was $44.6 million; outstanding debt was $180.5 million, for a net debt position of $130.6 million (including acquisition escrow). | |
| Favorable settlement of uncertain tax positions in the fourth quarter positively affected EPS for the quarter and the full year by $0.19, related to the disposition of a portion of the MicroSep business in 2004. | |
| The Company received $80.0 million of orders in 2009 and recorded $106.2 million in sales to Pacific Gas & Electric Company (PG&E) related to its AMI deployment. | |
| The Company received $37.4 million in orders and recorded $18.2 million in sales to New York City related to their fixed-network water AMI project. | |
| The Company received $12.4 million in orders and recorded $10.6 million in sales to Idaho Power Company for its Aclara PLS TWACS® AMI deployment. | |
| In September 2009, the Company acquired a minority equity interest in Firetide, Inc. and its technology will be used in Aclaras Smart Communications Network solution. |
Dividends
Subsequent to September 30, 2009, the Company
announced it will initiate a quarterly cash
dividend payable at an annual rate of $0.32 per
share. The first quarterly dividend of $0.08 per
share will be paid on January 19, 2010 to
stockholders of record as of January 4, 2010.
Results of Continuing Operations
NET SALES
Change | Change | |||||||||||||||||||
Fiscal year ended | 2009 | 2008 | ||||||||||||||||||
(Dollars in millions) | 2009 | 2008 | 2007 | vs. 2008 | vs. 2007 | |||||||||||||||
USG |
$ | 374.0 | 352.7 | 190.3 | 6.0 | % | 85.3 | % | ||||||||||||
Test |
138.4 | 144.8 | 141.5 | (4.4 | )% | 2.3 | % | |||||||||||||
Filtration |
106.7 | 116.1 | 105.6 | (8.1 | )% | 9.9 | % | |||||||||||||
Total |
$ | 619.1 | 613.6 | 437.4 | 0.9 | % | 40.3 | % | ||||||||||||
USG
The 6.0% or $21.3 million increase in net sales
in 2009 as compared to the prior year was due to:
a $48.8 million increase in net sales from Aclara
RF primarily due to higher gas product
ESCO TECHNOLOGIES INC. 10 2009 ANNUAL REPORT
MANAGEMENTS DISCUSSION AND ANALYSIS
AMI deliveries at PG&E and the shipment of water AMI
products for the New York City water project; a $9.9
million increase in net sales from Doble reflecting
the impact of a full twelve months of operations
versus ten months in the prior year; a $3.9 million
increase in net sales at Aclara Software; partially
offset by a $41.3 million decrease in net sales at
Aclara PLS.
The $41.3 million decrease in Aclara
PLSs net sales in 2009 compared to 2008 was mainly
due to: a $31.9 million decrease in sales to PG&E
for the electric AMI
deployment (2008 sales included $31.3 million of
revenue recognized that had been deferred from prior
year periods), and an $11.6 million decrease in
sales to the Puerto Rico Electric Power Authority
(PREPA), partially offset by a $10.2 million
increase in sales to Idaho Power Company.
The Companys total sales to PG&E were $106.2
million in 2009 (representing approximately 17% of
the Companys consolidated net sales) and $110.2
million in 2008 (representing approximately 18% of
the Companys consolidated net sales).
The 85.3% or $162.4 million increase in net sales
in 2008 as compared to 2007 was due to: the
acquisition of Doble with sales of $74.3 million; a
$55.4 million increase in sales from Aclara RF
primarily due to higher gas and electric AMI
deliveries at PG&E; and a $31.7 million increase in
sales from Aclara PLS.
The $31.7 million increase
in Aclara PLSs net sales in 2008 compared to 2007
was mainly due to: a $34.0 million increase in
sales to PG&E for the electric AMI deployment (due
to the recognition of previously deferred revenue
from the hardware, program management and software
provided to PG&E), a $16.8 million increase in
sales to PREPA, partially offset by a $18.4 million
decrease in sales to other investor owned utilities
(IOU) customers, such as Duke Energy and Oncor
Electric.
Test
The net sales decrease of $6.4 million or 4.4% in
2009 as compared to the prior year was mainly due to:
a $7.2 million decrease in net sales from the
segments European operations due to the timing of
large chamber deliveries to the international
wireless and electronics end-markets, a decrease in
component shipments and unfavorable foreign currency
impacts; and a $3.2 million decrease in net sales
from the segments Asian operations due to a decrease
in large chamber deliveries to the international
wireless and electronics end-markets. This decrease
was partially offset by a $4.0 million increase in
net sales from the segments U.S. operations driven
by the timing of domestic chamber deliveries.
The net sales increase of $3.3 million or 2.3% in 2008 as
compared to 2007 was mainly due to the timing of test
chamber sales and sales of components resulting in: a
$5.2 million increase in net sales from the segments
European operations; a $2.7 million increase in net
sales from the segments Asian operations; partially
offset by a $4.6 million decrease in net sales from
the segments U.S. operations.
Filtration
Net sales in 2009 decreased $9.4 million or 8.1%
compared to the prior year primarily due to: a $12.4
million decrease in net sales at PTI due to lower
commercial aerospace shipments; a $2.1 million
decrease in net sales at TekPack due to lower sales
to commercial customers; partially offset by a $5.1
million increase in net sales at VACCO driven by
higher military/defense aircraft product shipments.
Net sales in 2008 increased $10.5 million or 9.9%
compared to the prior year primarily due to a $5.5
million increase in commercial aerospace shipments at
PTI and a $3.5 million increase in net sales at VACCO
driven by higher space product shipments.
PACIFIC GAS & ELECTRIC
In November 2005, Aclara RF entered into a contract
(the Aclara RF Contract) to provide equipment,
software and services to PG&E in support of the gas
utility portion of PG&Es AMI project. The total
anticipated contract revenue
from the gas portion of the Aclara RF Contract from
commencement through the five-year full deployment is
expected to be up to approximately $225 million of
which $190 million has been recorded to date through
September 30, 2009. The current outlook for 2010 PG&E
gas product sales is expected to be approximately $40
million as compared to $98 million in 2009. Equipment
is purchased only upon issuance of purchase orders
and release authorizations, and PG&E continues to
have the right to purchase products or services from
other suppliers.
The Aclara RF Contract also provided PG&E the right
to purchase an RF fixed-network electric product
from Aclara RF. The Company has received $11 million
of orders to date through September 30, 2009 related
to the electric portion of the Aclara RF Contract.
During 2009, PG&E completed its evaluation and
selection of a competing electric product and
notified Aclara RF that no further electric product
orders would be received. PG&E and Aclara RF are in
the final stages of a settlement of certain claims
raised by PG&E connected with delivery of the
electric product. The Company does not expect the
settlement will have an impact to the Companys
earnings.
ORDERS AND BACKLOG
New orders received in 2009 were $634.0 million,
resulting in order backlog of $299.4 million at
September 30, 2009 as compared to order backlog of
$284.5 million at September 30, 2008. In 2009, the
Company recorded $363.2 million of new orders related
to USG products, $122.8 million related to Test
products, and $148.0 million related to Filtration
products.
In 2008, the Company recorded $365.3
million of new orders related to USG products
(including $7.0 million of Doble acquired backlog),
$154.5 million related to Test products, and $113.2
million related to Filtration products.
ESCO TECHNOLOGIES INC. 11 2009 ANNUAL REPORT
MANAGEMENTS DISCUSSION AND ANALYSIS
The Company received orders for gas and electric AMI
products totaling $80.0 million, $111.8 million and
$49.1 million from PG&E during 2009, 2008 and 2007,
respectively. Cumulative-to-date orders from PG&E for
the gas AMI deployment total 3.5 million units and
$199 million through September 30, 2009.
2009
Aclara RF received $37.4 million in entered orders
from the City of New York for its fixed-network
AMI water project during 2009. Cumulative-to-date
orders total 493,000 units and $39.1 million
through September 30, 2009.
In August 2009, VACCO received $32.2 million in
multi-year fluid flow product orders for the Navys
Virginia Class submarine.
In August 2009,
TekPackaging LLC was awarded a five-year production
contract with an initial purchase order received for
$11.7 million. The total value of purchase orders
anticipated under this contract is between $40
million to $50 million.
Aclara PLS recorded $12.4
million in entered orders from Idaho Power Company
during 2009.
Aclara PLS recorded $10.2 million and $22.4 million
in entered orders from PREPA during 2009 and 2008,
respectively.
In March 2009, Aclara Software
received an order for approximately $5.0 million
from the City of Tallahassee, Florida for a
system-wide implementation of its
Meter Data Management System (MDMS) and ENERGYprism®
AMI software applications.
2008
In July 2008, ETS-Lindgren signed a $16.7 million
contract with the National Automotive Testing and
R&D Infrastructure Project (NATRIP) in India to
provide two automotive chambers.
In July 2008, Aclara RF was selected by the City of
New York to provide its fixed-network AMI solution
for the citys entire water service territory. The
total value of purchase orders anticipated to be
issued under this contract is $68.3 million.
In
July 2008, Aclara PLSs TWACS® AMI product was
selected by Idaho Power Company for its entire
electric service territory. The total value of
purchase orders anticipated to be issued under this
contract is $25 million.
In December 2007, Aclara
PLS signed a contract with PREPA for a total value
of $35 million for the purchase of Aclara PLS TWACS
AMI products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses
(SG&A) were $152.4 million, or 24.6% of net sales
in 2009, $147.3 million, or 24.0% of net sales in
2008, and $108.2 million, or 24.7% of net sales
in 2007.
The increase in SG&A expenses in 2009 as compared to
the prior year was primarily due to a $5.0 million
increase related to Doble, reflecting a full year
versus ten months in the prior year.
The increase in SG&A expenses in 2008 as compared
to 2007 was primarily due to: $24.8 million of SG&A
expenses related to Doble and an approximately
$12.0 million increase in SG&A expenses related to
Aclara mainly due to an increase in sales,
marketing, and engineering head count.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $19.2 million
in 2009, $17.0 million in 2008 and $10.2 million in
2007. The Company recorded $12.2 million and $11.0
million in 2009 and 2008, respectively, related to
Aclara PLSs TWACS NG capitalized software.
Amortization of intangible assets included $4.7
million and $4.2 million of amortization of acquired
intangible assets related to the Companys
acquisitions in 2009 and 2008, respectively. The
amortization of acquired intangible assets related
to the Companys acquisitions is included in the
Corporate operating segments results. The remaining
amortization expenses consist of other identifiable
intangible assets (primarily software, patents and
licenses). Effective in fiscal year 2010, the
Company has re-evaluated the economic useful life of
its TWACS NG capitalized software as a result of the
successful acceptance in the international markets
and concluded the remaining TWACS NG asset value of
$44 million has an expected remaining useful life of
ten years (compared to its previous useful life of
seven years).
OTHER EXPENSES, NET
Other expenses, net, were $4.5 million, $0.2 million
and $2.8 million in 2009, 2008 and 2007,
respectively. The principal item included in other
expenses, net, in 2009 consisted of $2.3 million of
facility exit/relocation charges incurred in
connection with the move of the Aclara RF facility
consisting of leasehold improvement write-offs,
lease contract termination costs and physical move
costs. There were no
other individually significant items included in
other expenses, net, in 2009 or 2008. Other
expenses, net, in 2007 consisted primarily of: $2.6
million of expenses within the Test segment related
to an adverse arbitration award related to the
delivery and installation contract completed in 2005
for a shielded communication room in an
international location; partially offset by $0.6
million of royalty income.
EARNINGS BEFORE INTEREST AND TAXES (EBIT)
The Company evaluates the performance of its
operating segments based on EBIT, which the Company
defines as earnings before interest and taxes.
EBIT is not a defined GAAP measure. However, the
Company believes that EBIT provides investors and
Management with a valuable and alternative method for
assessing the Companys operating results.
ESCO TECHNOLOGIES INC. 12 2009 ANNUAL REPORT
MANAGEMENTS DISCUSSION AND ANALYSIS
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 Companys 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 and
incentive compensation.
EBIT
Change | Change | |||||||||||||||||||
Fiscal year ended | 2009 | 2008 | ||||||||||||||||||
(Dollars in millions) | 2009 | 2008 | 2007 | vs. 2008 | vs. 2007 | |||||||||||||||
USG |
$ | 62.5 | 66.6 | 22.6 | (6.2 | )% | 194.7 | % | ||||||||||||
% of net sales |
16.7 | % | 18.9 | % | 11.9 | % | (2.2 | )% | 7.0 | % | ||||||||||
Test |
14.1 | 13.9 | 14.4 | 1.4 | % | (3.5 | )% | |||||||||||||
% of net sales |
10.2 | % | 9.6 | % | 10.2 | % | 0.6 | % | (0.6 | )% | ||||||||||
Filtration |
18.1 | 21.2 | 18.4 | (14.6 | )% | 15.2 | % | |||||||||||||
% of net sales |
17.0 | % | 18.3 | % | 17.4 | % | (1.3 | )% | 0.8 | % | ||||||||||
Corporate |
(24.1 | ) | (20.6 | ) | (17.4 | ) | 17.0 | % | 18.4 | % | ||||||||||
Total |
$ | 70.6 | 81.1 | 38.0 | (12.9 | )% | 113.4 | % | ||||||||||||
% of net sales |
11.4 | % | 13.2 | % | 8.7 | % | (1.8 | )% | 4.5 | % | ||||||||||
The reconciliation of EBIT to a GAAP financial measure is as follows:
(Dollars in millions) | 2009 | 2008 | 2007 | |||||||||
EBIT |
$ | 70.6 | 81.1 | 38.0 | ||||||||
Less: Interest expense |
(7.4 | ) | (9.8 | ) | | |||||||
Add: Interest income |
| | 0.7 | |||||||||
Less: Income taxes |
(13.9 | ) | (23.7 | ) | (7.9 | ) | ||||||
Net earnings from
continuing operations |
$ | 49.3 | 47.6 | 30.8 | ||||||||
USG
The $4.1 million decrease in EBIT in 2009 as compared
to 2008 was due to: a decrease in EBIT from the
Aclara Group due to lower margins on product sales, a
$2.3 million charge related to the Aclara RF facility
relocation, mentioned in other expenses, net, above
and an increase in amortization for the TWACS NG
capitalized software. Additionally, 2008 included
$15.0 million of EBIT associated with the PG&E/Aclara
PLS deferred revenue recognized in 2008.
The $44.0 million increase in EBIT in 2008 as
compared to 2007 was due to: the EBIT contribution
from Doble; and an increase in EBIT from Aclara
related to the increased sales volumes.
Test
The $0.2 million increase in EBIT in 2009 as
compared to the prior year was due to a reduction of
the segments SG&A expenses.
The $0.5 million
decrease in EBIT in 2008 as compared to the prior
year was mainly due to: a decrease in EBIT from the
Companys U.S. operations due to changes in product
mix and $0.9 million of non-recurring costs
associated with the facility consolidation in
Austin, Texas that was completed in January 2008;
partially offset by a $1.2 million increase in EBIT
from the Companys European and Asian operations
related to the increased sales volumes.
Filtration
EBIT decreased $3.1 million in 2009 as compared to
2008 due to: lower commercial aerospace shipments at
PTI; and an increase in research and development
costs and higher bid and proposal costs incurred in
the pursuit of a significant number of Space related
projects at VACCO.
EBIT increased $2.8 million in 2008 as compared to
2007 mainly due to: higher commercial aerospace
shipments at PTI; and an increase at TekPack due to
higher commercial product shipments.
Corporate
Corporate operating charges included in consolidated
EBIT increased by $3.5 million in 2009 as compared to
2008 primarily due to: a $0.9 million increase in
share-based compensation expense; and a $0.5 million
increase in amortization of acquired intangible
assets.
Corporate operating charges included in
consolidated EBIT increased by $3.2 million in 2008
as compared to 2007 mainly due to: a $2.1 million
increase in amortization of acquired intangible
assets primarily due to the 2008 acquisition of Doble
and a $0.6 million decrease in royalty income.
The Reconciliation to Consolidated Totals
(Corporate) in Note 15 to the Consolidated Financial
Statements represents Corporate office operating
charges.
INTEREST EXPENSE (INCOME), NET
Interest
expense was $7.4 million in 2009 compared to
interest expense of $9.8 million in 2008 and interest
income of $0.7 million in 2007, respectively. The
decrease in interest expense in 2009 as compared to
2008 was due to favorable interest rates and lower
outstanding borrowings under the revolving credit
facility. The increase in interest expense in 2008 as
compared to 2007 was due to the outstanding
borrowings under the revolving credit facility
related to the Doble acquisition.
INCOME TAX EXPENSE
The 2009 effective tax rate from continuing
operations was 22.0% compared to 33.3% in 2008 and
20.3% in 2007. The decrease in the 2009 effective
tax rate as compared to the prior year was due
primarily to the decrease in uncertain tax positions
(tax liabilities) for the fiscal years 2003 through
2007, of which $3.5 million or 5.5% is the result of
the closing of a U.S. taxing authoritys examination
of the Companys research credit claims; and $5.0
million or 7.9% is the result of the confirmation of
the Companys tax position for the deduction of
losses realized on the disposition
ESCO TECHNOLOGIES INC. 13 2009 ANNUAL REPORT
MANAGEMENTS DISCUSSION AND ANALYSIS
of a portion of the MicroSep business in 2004. The
overall decrease in uncertain tax positions reduced
2009 income tax expense by $8.6 million and the
effective tax rate by 13.6%; the impact of an export
incentive reduced 2008 income tax expense by $1.6
million and the effective tax rate by 2.2%.
The increase in the 2008 effective tax rate as
compared to 2007 was due to lower tax credits in 2008
as compared to 2007. The research tax credit reduced
2008 income tax expense by $1.0 million and the
effective tax rate by 1.4%; the impact of an export
incentive reduced 2008 income tax expense by $1.6
million and the effective tax rate by 2.2%; the
impact of the domestic production deduction reduced
2008 income tax expense by $0.8 million and the
effective tax rate by 1.1%. The research tax credit
reduced 2007 income tax expense by $4.4 million and
the 2007 effective tax rate by 11.4% as a result of
the cumulative effect of research credits for years
2006 and 2007 being realized.
Capital Resources and Liquidity
Working capital from continuing operations (current
assets less current liabilities) increased to $116.2
million at September 30, 2009 from $100.6 million at
September 30, 2008.
The $26.1 million decrease in
accounts receivable at September 30, 2009 is mainly
due to: approximately $13.0 million related to the
Test segment and approximately $9.0 million related
to the USG segment, both driven by timing and volume
of sales and increased cash collections. The $17.0
million increase in inventories at September 30, 2009
is mainly due to an increase of $15.0 million in the
USG segment inventories to shorten lead times.
Net cash provided by operating activities from
continuing operations was $77.5 million, $77.1
million and $45.2 million in 2009, 2008 and 2007,
respectively. The increase in 2008 as compared to
2007 is related to an increase in pretax earnings
and improvements in operating working capital
requirements.
Capital expenditures from continuing operations were
$9.3 million, $16.7 million and $12.4 million in
2009, 2008 and 2007, respectively. The decrease in
2009 as compared to 2008 was primarily due to the
ETS Austin, TX facility expansion that occurred
during 2008 within the Test segment and a decrease
in facility expansion costs at Aclara PLS. There
were no commitments outstanding that were considered
material for capital expenditures at September 30,
2009.
DIVESTITURES
On March 13, 2009, the Company completed the sale
of the business and most of the assets of Comtrak
for $3.1 million, net, of cash. This business is
reflected as a discontinued operation in the
financial statements and related notes for all
periods presented. Comtraks operations were
previously included within the Companys Utility
Solutions Group segment. A pretax loss of $1.2
million related to the sale and its 2009 results
of operations are reflected in the Companys
fiscal 2009 results in discontinued operations.
On November 25, 2007, the Company completed the sale
of the filtration portion of Filtertek Inc.
(Filtertek) to Illinois Tool Works Inc. for $74.4
million, net. The TekPack division of Filtertek
was not
included in the transaction. The Filtertek
businesses are accounted for as discontinued
operations in the financial statements and related
notes for all periods presented. A pretax loss of
$0.2 million related to Filtertek is reflected in
the Companys fiscal 2008 results in discontinued
operations. Filterteks operations were included
within the Companys Filtration segment prior to
divestiture. The operations of the TekPack
business are reflected in continuing operations
and continue to be included in the Filtration
segment.
ACQUISITIONS
2009
On September 21, 2009, the Company acquired a
minority interest in Firetide, Inc. for $4 million
in cash. Firetide, Inc. is a provider of wireless
infrastructure mesh network management systems which
will enable communications with other Smart Grid
assets and this technology will be used in Aclaras
Smart Communications Network solution. This
investment is accounted for under the cost method
and is classified as a long-term other asset on the
Companys consolidated balance sheet as of September
30, 2009.
On July 2, 2009, the Company acquired certain assets
of Complus Systems Pvt Ltd. (Complus) in India for
approximately $1.2 million in cash and formed a new
Indian entity. The entity will operate as ETS-India
and its operating results, since the date of
acquisition, are included within the Test segment.
2008
On November 30, 2007, the Company acquired the
capital stock of Doble for a purchase price of
approximately $328 million, net of cash acquired.
Doble, headquartered in Watertown, Massachusetts, is
a worldwide leader in providing high-end intelligent
diagnostic test solutions for the electric utility
industry. The acquisition aligns with the Companys
long-term growth strategy of expanding its products
and services in the utility industry. The operating
results for Doble, since the date of acquisition, are
included within the USG segment.
On July 31, 2008, the Company acquired the capital
stock of LDIC GmbH and LDIC AG (collectively LDIC)
for a purchase price of approximately $13 million,
net of cash acquired. LDIC, with operations in
Germany and Switzerland, is a manufacturer of
partial
ESCO TECHNOLOGIES INC. 14 2009 ANNUAL REPORT
MANAGEMENTS DISCUSSION AND ANALYSIS
discharge diagnostic testing instruments and systems
serving the international electric utility industry.
The operating results for LDIC, since the date of
acquisition, are included within Doble in the USG
segment.
All of the Companys acquisitions have been accounted
for using the purchase method of accounting, and
accordingly, the respective purchase prices were
allocated to the assets (including intangible assets)
acquired and liabilities assumed based on estimated
fair values at the date of acquisition. The financial
results from these acquisitions have been included in
the Companys financial statements from the date of
acquisition.
BANK CREDIT FACILITY
At September 30, 2009, the Company had approximately
$193 million available to borrow comprised of:
approximately $143 million available under its
credit facility, plus a $50 million increase option,
in addition to $44.6 million cash on hand. At
September 30, 2009, the Company had outstanding
borrowings of $180.5 million, and outstanding
letters of credit of $7.2 million. The Company
classified $50 million as the current portion on
long-term debt as of September 30, 2009, as the
Company intends to repay this amount within the next
twelve months; however, the Company has no
contractual obligation to repay such amount during
the next twelve months. As of September 30, 2009,
the Company was in compliance with all bank
covenants. Cash flow from operations and borrowings
under the bank credit facility are expected to
provide adequate resources to meet the Companys
capital requirements and operational needs for the
foreseeable future.
The credit facility requires, as determined by
certain financial ratios, a facility fee ranging from
15 to 25 basis points per annum on the unused
portion. The terms of the facility provide that
interest on borrowings may be calculated at a spread
over the LIBOR or based on the prime rate, at the
Companys election. The credit facility is secured by
the unlimited guaranty of the Companys material
domestic subsidiaries and a 65% pledge of the
material foreign subsidiaries share equity. The
financial covenants of the credit facility include a
leverage ratio and an interest coverage ratio.
OUTLOOK 2010
During 2010, the Company anticipates gas AMI product
deliveries to PG&E will be significantly lower than
the quantities delivered in 2009 as the contract is
entering the latter stages of deployment. The
current outlook for 2010 PG&E gas product sales is
expected to be approximately $40 million as compared
to $98 million in 2009. As a result, Management
expects 2010 consolidated revenues to decrease
approximately three to five percent and EBIT to
decline marginally compared to 2009. In addition,
the 2010 effective tax rate is projected to be
approximately 38%. Given the PG&E project wind-down
and higher effective tax rate, Management expects
EPS to be lower in 2010 as compared to 2009. On a
quarterly basis, the Company expects 2010 revenues
and EPS to be heavily second half weighted as they
were in 2009 and 2008.
CONTRACTUAL OBLIGATIONS
The following table shows the Companys contractual
obligations as of September 30, 2009:
(Dollars in millions) | Payments due by period | |||||||||||||||||||
Less | More | |||||||||||||||||||
Contractual | than | 1 to 3 | 3 to 5 | than | ||||||||||||||||
Obligations | Total | 1 year | years | years | 5 years | |||||||||||||||
Long-Term Debt
Obligation |
$ | 180.5 | 50.0 | | 130.5 | | ||||||||||||||
Estimated Interest
Payments(1) |
5.6 | 2.7 | 2.9 | | | |||||||||||||||
Operating Lease
Obligations |
29.6 | 7.4 | 11.8 | 5.2 | 5.2 | |||||||||||||||
Purchase Obligations(2) |
| | | | | |||||||||||||||
Total |
$ | 215.7 | 60.1 | 14.7 | 135.7 | 5.2 | ||||||||||||||
(1) | Estimated interest payments for the Companys debt obligations were calculated based on Managements determination of the estimated applicable interest rates and payment dates. | |
(2) | A purchase obligation is defined as a legally binding and enforceable agreement to purchase goods and services that specifies all significant terms. Since the Companys purchase orders can be cancelled, they are not included in the table above. |
As of September 30, 2009, the Company had $3.3
million of liabilities for uncertain tax positions.
The unrecognized tax benefits have been excluded from
the table above due to uncertainty as to the amounts
and timing of settlement with taxing authorities.
The
Company has no off balance sheet arrangements
outstanding at September 30, 2009.
SHARE REPURCHASES
In August 2009, the Companys Board of Directors
extended its previously authorized open market
common stock repurchase program of the Companys
shares at a value not to exceed $30 million,
subject to market conditions and other factors
which covers the period through September 30, 2010.
There were no stock repurchases during 2009 or
2008. The Company repurchased $10 million or
265,000 shares in 2007 under a previously
authorized program.
ESCO TECHNOLOGIES INC. 15 2009 ANNUAL REPORT
MANAGEMENTS DISCUSSION AND ANALYSIS
PENSION FUNDING REQUIREMENTS
The minimum cash funding requirements related to
the Companys defined benefit pension plans are
approximately $1.3 million in 2010, approximately
$3.0 million in 2011 and approximately $3.5 million
in 2012.
OTHER
Management believes that, for the periods presented,
inflation has not had a material effect on the
Companys results of operations.
The Company is
currently involved in various stages of investigation
and remediation relating to environmental matters.
Based on current information available, Management
does not believe the aggregate costs involved in the
resolution of these matters will have a material
adverse effect on the Companys operating results,
capital expenditures or competitive position.
Market Risk Analysis
MARKET RISK EXPOSURE
Market risks relating to the Companys operations
result primarily from changes in interest rates and
changes in foreign currency exchange rates. The
Company is exposed to market risk related to changes
in interest rates and selectively uses derivative
financial instruments, including forward contracts
and swaps, to manage these risks. During 2009, the
Company entered into two $40 million one-year forward
interest rate swaps effective October 5, 2009, to
hedge some of its exposure to variability in future
LIBOR-based interest payments on variable rate debt.
In addition, during 2008, the Company entered into a
two-year amortizing interest rate swap to hedge some
of its exposure to variability in future LIBOR-based
interest payments on variable rate debt. The swap
notional amount for the first year was $175 million
amortizing to $100 million in the second year. All
derivative instruments are reported on the balance
sheet at fair value. The derivative instrument is
designated as a cash flow hedge and the gain or loss
on the derivative is deferred in
accumulated other comprehensive income until
recognized in earnings with the underlying hedged
item. Based on the interest rate swaps outstanding,
the interest rates on approximately 50% of the
Companys total borrowings were effectively fixed as
of September 30, 2009. The following is a summary of
the notional transaction amounts and fair values for
the Companys outstanding derivative financial
instruments by risk category and instrument type, as
of September 30, 2009.
Notional | Average | Average | Fair | |||||||||||||
(Dollars in thousands) | Amount | Rec Rate | Pay Rate | Value | ||||||||||||
Interest rate swap |
$ | 100,000 | 0.31 | % | 3.99 | % | $ | (685 | ) | |||||||
Interest rate swaps* |
$ | 80,000 | N/A | 1.52 | % | $ | (778 | ) | ||||||||
* | These swaps represent forward-starting swaps and will be effective in October 2009. |
The Company is also subject to foreign currency
exchange rate risk inherent in its sales commitments,
anticipated sales, anticipated purchases and assets
and liabilities denominated in currencies other than
the U.S. dollar. The foreign currency most
significant to the Companys operations is the Euro.
Net sales to customers outside of the United States
were $110.7 million, $130.9 million, and $85.5
million in 2009, 2008 and 2007, respectively. The
Company hedges certain foreign currency commitments
by purchasing foreign currency forward contracts. The
estimated fair value of open forward contracts at
September 30, 2009 was not material.
Critical Accounting Policies
The preparation of financial statements in conformity
with GAAP requires Management to make estimates and
assumptions in certain circumstances that affect
amounts reported in the accompanying Consolidated
Financial Statements. In preparing these financial
statements, Management has made its best estimates
and judgments of certain amounts included in the
Consolidated Financial Statements, giving due
consideration to materiality. The Company does not
believe there is a great likelihood that materially
different amounts would be reported under different
conditions or using different assumptions related to
the accounting policies described below. However,
application of these accounting policies involves the
exercise of judgment and use of assumptions as to
future uncertainties and, as a result, actual results
could differ from these estimates. The Companys
senior Management discusses the critical accounting
policies described below with the Audit and Finance
Committee of the Companys Board of Directors on a
periodic basis.
The following discussion of critical accounting
policies is intended to bring to the attention of
readers those accounting policies which Management
believes are critical to the Consolidated Financial
Statements and other financial disclosure. It is not
intended to be a comprehensive list of all
significant accounting policies that are more fully
described in Note 1 of Notes to Consolidated
Financial Statements.
REVENUE RECOGNITION
USG Segment: Within the USG segment, approximately
96% of the segments revenue arrangements
(approximately 60% of consolidated revenues) contain
software components. Revenue under these
arrangements is recognized in accordance with FASB
ASC Subtopic 985-605, Software Revenue Recognition. The
application of software revenue recognition requires
judgment, including the determination of whether a
software arrangement includes multiple elements and
estimates of the fair value of the elements, or
vendor-specific objective evidence of fair value
(VSOE). Changes to the elements in a software
arrangement, and the ability to identify VSOE for
those elements could materially impact the amount of
earned and/or deferred revenue. There have
ESCO TECHNOLOGIES INC. 16 2009 ANNUAL REPORT
MANAGEMENTS DISCUSSION AND ANALYSIS
been no material changes to these estimates for the
financial statement periods presented and the Company
believes that these estimates generally should not be
subject to significant variation in the future. The
remaining 4% of the segments revenues represent
products sold under a single element arrangement and
are recognized when services are performed for
unaffiliated customers or when products are delivered
(when title and risk of ownership transfers).
Test
Segment: Within the Test segment, approximately 40%
of revenues (approximately 10% of consolidated
revenues) are recognized when products are delivered
(when title and risk of ownership transfers) or when
services are performed for unaffiliated customers.
Certain arrangements contain multiple elements which
are accounted for under the provisions of FASB ASC
Subtopic 605-25, Revenue Recognition:
Multiple-Element Arrangements. The application of the
applicable guidance requires judgment as to whether
the deliverables can be divided into more than one
unit of accounting and whether the separate units of
accounting have value to the customer on a
stand-alone basis. Changes to these elements could
affect the timing of revenue recognition. There have
been no material changes to these elements for the
financial statement periods presented.
Approximately 60% of the segments revenues
(approximately 15% of consolidated revenues) are
recorded under the percentage-of-completion
provisions of FASB ASC Subtopic 605-35, Revenue
Recognition: Construction-Type and Production-Type
Contracts due to the complex nature of the
enclosures that are designed and produced under
these contracts. As discussed above, this method of
accounting involves the use of various estimating
techniques to project costs at completion, which are
based on Managements judgment and the Companys
substantial experience in developing these types of
estimates. Changes in underlying assumptions/
estimates may adversely or positively affect
financial performance. Due to the nature of these
contracts and the operating units cost estimating
process, the Company believes that these estimates
generally should not be subject to significant
variation in the future. There have been no material
changes to these estimates for the financial
statement periods presented. The Company regularly
reviews its contract estimates to assess revisions
in contract values and estimated costs at
completion.
Filtration Segment: Within the Filtration segment,
approximately 60% of segment revenues (approximately
10% of consolidated revenues) are recognized when
products are delivered (when title and risk of
ownership transfers) or when services are performed
for unaffiliated customers.
Approximately 40% of segment revenues
(approximately 5% of consolidated revenues) are
recorded under the percentage-of-completion
provisions of FASB ASC Subtopic 605-35, Revenue
Recognition: Construction-Type and
Production-Type Contracts because the Company
manufactures complex products for aerospace and
military customers under production contracts.
The percentage-of-completion method of accounting
involves the use of various estimating techniques
to project costs at completion. These estimates
involve various assumptions and projections
relative to the outcome of future events over a
period of several years, including future labor
productivity and availability, the nature and
complexity of the work to be performed,
availability of materials, the impact of delayed
performance, and the timing of product
deliveries. These estimates are based on
Managements judgment and the Companys
substantial experience in developing these types
of estimates. Changes in underlying
assumptions/estimates may adversely affect
financial performance if they increase estimated
project costs at completion, or positively affect
financial performance if they decrease estimated
project costs at completion. Due to the nature of
these contracts and the operating units cost
estimating process, the Company believes that
these estimates generally should not be subject
to significant variation in the future. There
have been no material changes to these estimates
for the financial statement periods presented.
The Company regularly reviews its estimates to
assess revisions in contract values and estimated
costs at completion.
INVENTORY
Inventories are valued at the lower of cost
(first-in, first-out) or market value. Management
regularly reviews inventories on hand compared to
historical usage and estimated future usage and
sales. Inventories under long-term contracts reflect
accumulated production costs, factory overhead,
initial tooling and other related costs less the
portion of such costs charged to cost of sales and
any unliquidated progress payments. In accordance
with industry practice, costs incurred on contracts
in progress include amounts relating to programs
having production cycles longer than one year, and a
portion thereof may not be realized within one year.
INCOME TAXES
The Company operates in numerous taxing jurisdictions
and is subject to examination by various U.S.
Federal, state and foreign jurisdictions for various
tax periods. Additionally, the Company has retained
tax liabilities and the rights to tax refunds in
connection with various divestitures of businesses in
prior years. The Companys income tax positions are
based on research and interpretations of the income
tax laws and rulings in each of the jurisdictions in
which the Company does business. Due to the
subjectivity of interpretations of laws and rulings
in each jurisdiction, the differences and interplay
in tax laws between those jurisdictions, as well as
the inherent uncertainty in estimating the final
resolution of complex tax audit matters, Managements
estimates of income tax liabilities may differ from
actual payments or assessments.
ESCO TECHNOLOGIES INC. 17 2009 ANNUAL REPORT
MANAGEMENTS DISCUSSION AND ANALYSIS
Management regularly assesses the Companys position
with regard to tax exposures and records liabilities
for these uncertain tax positions and related
interest and penalties, if any, according to the
principles of FASB ASC Topic 740, Income Taxes (ASC
740). The Company has recorded an accrual that
reflects the recognition and measurement process for
the financial statement recognition and measurement
of a tax position taken or expected to be taken on a
tax return based upon ASC 740. Additional future
income tax expense or benefit may be recognized once
the positions are effectively settled. It is the
Companys policy to follow FASB ASC 740-10-45-20 and
record the tax effects of changes in the opening
balance of unrecognized tax benefits in net earnings
from continuing operations.
At the end of each interim reporting period,
Management estimates the effective tax rate expected
to apply to the full fiscal year. The estimated
effective tax rate contemplates the expected
jurisdiction where income is earned, as well as tax
planning strategies. Current and projected growth in
income in higher tax jurisdictions may result in an
increasing effective tax rate over time. If the
actual results differ from Managements estimates,
Management may have to adjust the effective tax rate
in the interim period if such determination is made.
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities
are recognized for the future tax consequences
attributable to differences between the financial
statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the
years in which those temporary differences are
expected to be recovered or settled. Deferred tax
assets may be reduced by a valuation allowance if it
is more likely than not that some portion of the
deferred tax assets will not be realized. The effect
on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that
includes the enactment date. The Company regularly
reviews its deferred tax assets for recoverability
and establishes a valuation allowance when Management
believes it is more likely than not such assets will
not be recovered, taking into consideration
historical operating results, expectations of future
earnings, tax planning strategies, and the expected
timing of the reversals of existing temporary
differences.
GOODWILL AND OTHER LONG-LIVED ASSETS
In accordance with FASB ASC Topic 350, Intangibles
Goodwill and Other (ASC 350), Management annually
reviews goodwill and other long-lived assets with
indefinite useful lives for impairment or whenever
events or changes in circumstances indicate the
carrying amount may not be recoverable. If the
Company determines that the carrying value of the
long-lived asset may not be recoverable, a permanent
impairment charge is recorded for the amount by which
the carrying value of the long-lived asset exceeds
its fair value. Fair value is measured based on a
discounted cash flow method using a discount rate
determined by Management to be commensurate with the
risk inherent in the Companys current business
model. The estimates of cash flows and discount rate
are subject to change due to the economic
environment, including such factors as interest
rates, expected market returns and volatility of
markets served. Management believes that the
estimates of future cash flows and fair value are
reasonable; however, changes in estimates could
result in impairment charges. At September 30, 2009,
the Company
has determined that no reporting units are at risk of
material goodwill impairment. Intangible assets with
estimable useful lives are amortized over their
respective estimated useful lives to their estimated
residual values, and reviewed annually for
impairment.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
The measurement of liabilities related to pension
plans and other post-retirement benefit plans is
based on Managements assumptions related to future
events including interest rates, return on pension
plan assets, rate of compensation increases, and
health care cost trend rates. Actual pension plan
asset performance will either decrease or increase
unamortized pension losses that will affect net
earnings in future years. Depending upon the
performance of the equity and bond markets in 2010,
the Company could be required to record a charge to
equity. In addition, if the discount rate was
decreased by 25 basis points from 5.5% to 5.25%, the
projected benefit obligation for the defined benefit
plan would increase by approximately $2.1 million and
result in an additional after-tax charge to
shareholders equity of approximately $1.3 million.
The discount rate used in measuring the Companys
pension and postretirement welfare obligations was
developed by matching yields of actual high-quality
corporate bonds to expected future pension plan cash
flows (benefit payments). Over 400 Aa-rated,
non-callable bonds with a wide range of maturities
were used in the analysis. After using the bond
yields to determine the present value of the plan
cash flows, a single representative rate that
resulted in the same present value was developed.
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 are adequately reserved, covered by
insurance, or otherwise are not likely to have a
material adverse effect on its financial condition
or results of operation.
ESCO TECHNOLOGIES INC. 18 2009 ANNUAL REPORT
MANAGEMENTS DISCUSSION AND ANALYSIS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Companys operations
result primarily from changes in interest rates and
changes in foreign currency exchange rates. The
Company is exposed to market risk related to changes
in interest rates and selectively uses derivative
financial instruments, including forward contracts
and swaps, to manage these risks. During 2009, the
Company entered into two $40 million one-year forward
interest rate swaps effective October 5, 2009, to
hedge some of its exposure to variability in future
LIBOR-based interest payments on variable rate debt.
In addition, during 2008, the Company entered into a
two-year amortizing interest rate swap to hedge some
of its exposure to variability in future LIBOR-based
interest payments on variable rate debt. The swap
notional amount for the first year was $175 million
amortizing to $100 million in the second year. All
derivative
instruments are reported on the balance sheet at fair
value. The derivative instrument is designated as a
cash flow hedge and the gain or loss on the
derivative is deferred in accumulated other
comprehensive income until recognized in earnings
with the underlying hedged item. See further
discussion in Managements Discussion and Analysis
Market Risk Analysis regarding the Companys
market risks.
CONTROLS AND PROCEDURES
The Company carried out an evaluation under the
supervision of and with the participation of
Management, including the Companys Chief Executive
Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the
Companys disclosure controls and procedures as of
the end of the period covered by this report. Based
upon that evaluation, the Companys Chief Executive
Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures are
effective. Disclosure controls and procedures are
controls and procedures that are designed to ensure
that information required to be disclosed in Company
reports filed or submitted under the Securities
Exchange Act of 1934 is recorded, processed,
summarized and reported within time periods specified
in the Securities and Exchange Commissions rules and
forms. There have been no significant changes in the
Companys internal controls or in other factors
during the period covered by this report that have
materially affected, or are reasonably likely to
materially affect, the Companys internal control
over financial reporting.
New Accounting Pronouncements
In October 2009, the Financial Accounting Standards
Board (FASB) issued Update No. 2009-13,
Multiple-Deliverable Revenue Arrangements (ASU
2009-13) and Update No. 2009-14, Certain Revenue
Arrangements That Include Software Elements (ASU
2009-14) consensuses of the FASB Emerging Issues
Task Force. ASU 2009-13 applies to
multiple-deliverable revenue arrangements that are
currently within the scope of Subtopic 605-25 and
provides two significant changes: (i) requires an
entity to allocate revenue in an arrangement using
estimated selling prices of deliverables if a vendor
does not have vendor-specific objective evidence or
third-party evidence of selling price and (ii)
eliminates the residual method to allocate the
arrangement consideration. The consensus also expands
the disclosure requirements for multiple-deliverable
revenue arrangements. ASU 2009-14 removes tangible
products from the scope of the software revenue
guidance and provides guidance on determining whether
software deliverables in an arrangement that includes
a tangible product are within the scope of the
software revenue guidance. These consensuses should
be applied on a prospective basis for revenue
arrangements entered into in fiscal years beginning
on or after June 15, 2010 with earlier application
permitted. The Company is currently assessing the
impact of this new guidance on its Consolidated
Financial Statements and related disclosures.
On July 1, 2009, the Company adopted FASB ASC
105-10 (ASC 105-10) which established the FASB
Accounting Standards Codification (the
Codification) as the source of authoritative
accounting principles recognized by the FASB to be
applied in the preparation of financial statements
in conformity with GAAP. Rules and interpretive
releases of the SEC under authority of Federal
securities laws are also sources of authoritative
GAAP for nongovernmental entities. The adoption of
this Statement did not have a
material impact on the Companys Consolidated
Financial Statements.
Effective April 1, 2009, the Company adopted the new
accounting guidance for subsequent events as
codified in FASB ASC 855, Subsequent Events. The new
guidance establishes general standards of accounting
for and disclosure of events that occur after the
balance sheet date but before financial statements
are issued or are available to be issued. This new
guidance was effective for interim and annual
financial periods ending after June 15, 2009. The
Company has evaluated subsequent events or
transactions that occurred after the balance sheet
date of September 30, 2009 up through November 30,
2009, which is the date the accompanying
Consolidated Financial Statements were issued.
ESCO TECHNOLOGIES INC. 19 2009 ANNUAL REPORT
MANAGEMENTS DISCUSSION AND ANALYSIS
Forward-Looking Information
Statements regarding future events and the Companys
future results that are based on current
expectations, estimates, forecasts and projections
about the Companys performance and the industries in
which the Company operates, 2010 revenues, EBIT, EPS,
adequacy of the Companys credit facilities and
future cash flows, estimates of anticipated contract
costs and revenues, the anticipated total value of
the Aclara RF Contract with PG&E and with the City of
New York, the anticipated total value of Aclara PLSs
contract with Idaho Power Company, the anticipated
total value of TekPackagings recently received five
year production contract, the outcome of current
litigation, claims and charges, the anticipated
timing and amount of lost deferred tax assets,
continued reinvestment of foreign earnings, the
timing, total value and period of performance of
contracts awarded to the Company, the accuracy of the
Companys estimates utilized in software revenue
recognition, the accuracy of the Companys estimates
utilized to project costs at completion in the Test
segment and Filtration segment, income tax
liabilities, the effective tax rate, the amount,
timing and ability to use net research tax credits,
the timing and amount of the reduction of
unrecognized tax benefits, repayment of debt within
the next twelve months, the recognition of costs
related to share-based compensation arrangements,
future costs relating to environmental matters, share
repurchases, investments, sustained performance
improvement, performance improvement initiatives,
growth opportunities, new product development, the
Companys ability to increase shareholder value,
acquisitions, and the beliefs and assumptions of
Management contained in the letter To Our
Shareholders (pages 1-2), and Managements Discussion
and
Analysis and other statements contained herein which
are not strictly historical are considered
forward-looking statements within the meaning of
the safe harbor provisions of the Federal securities
laws. Words such as expects, anticipates, targets,
goals, projects, intends, plans, believes,
estimates, variations of such words, and similar
expressions are intended to identify such
forward-looking statements. Investors are cautioned
that such statements are only predictions, speak
only as of the date of this report, and the Company
undertakes no duty to update. The Companys
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 Companys operations and business environment
including, but not limited to those described under
Item 1A. Risk Factors in the Companys Annual
Report on Form 10-K for the fiscal year ended
September 30, 2009 and the following: the timing and
content of purchase order releases under the PG&E
contract; termination for convenience of customer
contracts; timing and magnitude of future contract
awards; weakening of economic conditions in served
markets; the success of the Companys competitors;
changes in customer demands or customer
insolvencies; competition; intellectual property
rights; technical difficulties; the availability of
selected acquisitions; delivery delays or defaults
by customers; performance issues with key customers,
suppliers and subcontractors; material changes in
the costs of certain raw materials; labor disputes;
changes in laws and regulations including but not
limited to changes in accounting standards and
taxation requirements; costs relating to
environmental matters; litigation uncertainty; and
the Companys successful execution of internal
operating plans.
ESCO TECHNOLOGIES INC. 20 2009 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts) | ||||||||||||
Years ended September 30, | 2009 | 2008 | 2007 | |||||||||
Net sales |
$ | 619,064 | 613,566 | 437,375 | ||||||||
Costs and expenses: |
||||||||||||
Cost of sales |
372,351 | 367,951 | 278,108 | |||||||||
Selling, general and administrative expenses |
152,397 | 147,324 | 108,207 | |||||||||
Amortization of intangible assets |
19,214 | 17,044 | 10,243 | |||||||||
Interest expense (income), net |
7,450 | 9,808 | (677 | ) | ||||||||
Other expenses, net |
4,480 | 161 | 2,834 | |||||||||
Total costs and expenses |
555,892 | 542,288 | 398,715 | |||||||||
Earnings before income tax |
63,172 | 71,278 | 38,660 | |||||||||
Income tax expense |
13,867 | 23,709 | 7,854 | |||||||||
Net earnings from continuing operations |
$ | 49,305 | 47,569 | 30,806 | ||||||||
Earnings (loss) from discontinued operations, net of tax of
$568 in 2009, $229 in 2008 and $1,161 in 2007 |
135 | (282 | ) | 2,907 | ||||||||
Loss on sale of discontinued operations, net of tax of $905 in 2009,
$157 in 2008 |
(32 | ) | (576 | ) | | |||||||
Net earnings (loss) from discontinued operations |
103 | (858 | ) | 2,907 | ||||||||
Net earnings |
$ | 49,408 | 46,711 | 33,713 | ||||||||
Earnings (loss) per share: |
||||||||||||
Basic: |
||||||||||||
Continuing operations |
$ | 1.88 | 1.84 | 1.19 | ||||||||
Discontinued operations |
| (0.04 | ) | 0.11 | ||||||||
Net earnings |
$ | 1.88 | 1.80 | 1.30 | ||||||||
Diluted: |
||||||||||||
Continuing operations |
1.86 | 1.81 | 1.17 | |||||||||
Discontinued operations |
| (0.03 | ) | 0.11 | ||||||||
Net earnings |
$ | 1.86 | 1.78 | 1.28 | ||||||||
Average common shares outstanding (in thousands): |
||||||||||||
Basic |
26,216 | 25,909 | 25,865 | |||||||||
Diluted |
26,560 | 26,315 | 26,387 | |||||||||
See accompanying Notes to Consolidated Financial Statements.
ESCO TECHNOLOGIES INC. 21 2009 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) | ||||||||
Years ended September 30, | 2009 | 2008 | ||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 44,630 | 28,667 | |||||
Accounts receivable, less allowance for doubtful accounts of
$1,457 and $1,050 in 2009 and 2008, respectively |
108,620 | 134,710 | ||||||
Costs and estimated earnings on long-term contracts, less progress
billings of $19,861 and $34,978 in 2009 and 2008, respectively |
10,758 | 9,095 | ||||||
Inventories |
82,020 | 65,019 | ||||||
Current portion of deferred tax assets |
20,417 | 15,368 | ||||||
Other current assets |
13,750 | 14,888 | ||||||
Current assets from discontinued operations |
| 2,889 | ||||||
Total current assets |
280,195 | 270,636 | ||||||
Property, plant and equipment: |
||||||||
Land and land improvements |
4,996 | 5,342 | ||||||
Buildings and leasehold improvements |
49,181 | 47,829 | ||||||
Machinery and equipment |
71,773 | 63,995 | ||||||
Construction in progress |
2,290 | 2,344 | ||||||
128,240 | 119,510 | |||||||
Less accumulated depreciation and amortization |
58,697 | 47,157 | ||||||
Net property, plant and equipment |
69,543 | 72,353 | ||||||
Goodwill |
330,719 | 328,878 | ||||||
Intangible assets, net |
221,600 | 236,192 | ||||||
Other assets |
21,630 | 17,665 | ||||||
Other assets from discontinued operations |
| 2,349 | ||||||
$ | 923,687 | 928,073 | ||||||
See accompanying Notes to Consolidated Financial Statements.
ESCO TECHNOLOGIES INC. 22 2009 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands) | ||||||||
Years ended September 30, | 2009 | 2008 | ||||||
LIABILITIES AND SHAREHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Current maturities of long-term debt |
$ | 50,000 | 50,000 | |||||
Accounts payable |
47,218 | 48,982 | ||||||
Advance payments on long-term contracts, less costs incurred
of $17,484 and $7,880 in 2009 and 2008, respectively |
2,840 | 7,467 | ||||||
Accrued salaries |
20,465 | 20,409 | ||||||
Current portion of deferred revenue |
20,215 | 18,226 | ||||||
Accrued other expenses |
23,247 | 22,058 | ||||||
Current liabilities from discontinued operations |
| 1,541 | ||||||
Total current liabilities |
163,985 | 168,683 | ||||||
Pension obligations |
27,483 | 12,172 | ||||||
Deferred tax liabilities |
78,471 | 83,515 | ||||||
Other liabilities |
5,941 | 11,816 | ||||||
Long-term debt |
130,467 | 183,650 | ||||||
Total liabilities |
406,347 | 459,836 | ||||||
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 29,771,103 and 29,465,154 shares in 2009 and 2008, respectively |
298 | 295 | ||||||
Additional paid-in capital |
265,794 | 254,240 | ||||||
Retained earnings |
322,878 | 273,470 | ||||||
Accumulated other comprehensive (loss) income, net of tax |
(11,598 | ) | 556 | |||||
577,372 | 528,561 | |||||||
Less treasury stock, at cost (3,357,046 and 3,375,106 common shares in
2009 and 2008, respectively) |
(60,032 | ) | (60,324 | ) | ||||
Total shareholders equity |
517,340 | 468,237 | ||||||
$ | 923,687 | 928,073 | ||||||
See accompanying Notes to Consolidated Financial Statements.
ESCO TECHNOLOGIES INC. 23 2009 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
Accumulated | ||||||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||||||
Common Stock | Paid-In | Retained | Comprehensive | Treasury | ||||||||||||||||||||||||
(In thousands) | Shares | Amount | Capital | Earnings | Income (Loss) | Stock | Total | |||||||||||||||||||||
Balance, September 30, 2006 |
29,031 | $ | 290 | 236,390 | 193,046 | (2,070 | ) | (51,222 | ) | 376,434 | ||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net earnings |
| | | 33,713 | | | 33,713 | |||||||||||||||||||||
Translation adjustments |
| | | | 4,252 | | 4,252 | |||||||||||||||||||||
Minimum pension liability,
net of tax of $(1,622) |
| | | | 3,558 | | 3,558 | |||||||||||||||||||||
Comprehensive income |
41,523 | |||||||||||||||||||||||||||
SFAS 158 adjustment, net of tax of $(358) |
| | | | 563 | | 563 | |||||||||||||||||||||
Stock options and stock compensation
plans, net of tax benefit of $(828) |
129 | 2 | 6,741 | | | 227 | 6,970 | |||||||||||||||||||||
Purchases into treasury |
| | | | | (10,007 | ) | (10,007 | ) | |||||||||||||||||||
Balance, September 30, 2007 |
29,160 | 292 | 243,131 | 226,759 | 6,303 | (61,002 | ) | 415,483 | ||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net earnings |
| | | 46,711 | | | 46,711 | |||||||||||||||||||||
Translation adjustments |
| | | | (869 | ) | | (869 | ) | |||||||||||||||||||
Net unrecognized actuarial loss,
net of tax of $2,506 |
| | | | (4,043 | ) | | (4,043 | ) | |||||||||||||||||||
Interest rate swap, net of tax of $512 |
(835 | ) | (835 | ) | ||||||||||||||||||||||||
Comprehensive income |
40,964 | |||||||||||||||||||||||||||
Stock options and stock compensation
plans, net of tax benefit of $(845) |
305 | 3 | 11,109 | | | 678 | 11,790 | |||||||||||||||||||||
Balance, September 30, 2008 |
29,465 | 295 | 254,240 | 273,470 | 556 | (60,324 | ) | 468,237 | ||||||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net earnings |
| | | 49,408 | | | 49,408 | |||||||||||||||||||||
Translation adjustments |
| | | | (707 | ) | | (707 | ) | |||||||||||||||||||
Net unrecognized actuarial loss,
net of tax of $7,488 |
| | | | (11,393 | ) | | (11,393 | ) | |||||||||||||||||||
Interest rate swap, net of tax of $62 |
| | | | (54 | ) | | (54 | ) | |||||||||||||||||||
Comprehensive income |
37,254 | |||||||||||||||||||||||||||
Stock options and stock compensation
plans, net of tax benefit of $(325) |
306 | 3 | 11,554 | | | 292 | 11,849 | |||||||||||||||||||||
Balance, September 30, 2009 |
29,771 | $ | 298 | 265,794 | 322,878 | (11,598 | ) | (60,032 | ) | 517,340 | ||||||||||||||||||
See accompanying Notes to Consolidated Financial Statements.
ESCO TECHNOLOGIES INC. 24 2009 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands) | ||||||||||||
Years ended September 30, | 2009 | 2008 | 2007 | |||||||||
Cash flows from operating activities: |
||||||||||||
Net earnings |
$ | 49,408 | 46,711 | 33,713 | ||||||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||||||
Net (earnings) loss from discontinued operations, net of tax |
(103 | ) | 858 | (2,907 | ) | |||||||
Depreciation and amortization |
30,267 | 27,067 | 16,308 | |||||||||
Stock compensation expense |
4,866 | 3,990 | 4,834 | |||||||||
Changes in current assets and liabilities |
1,566 | (12,154 | ) | (26,384 | ) | |||||||
Effect of deferred taxes on tax provision |
(2,543 | ) | 12,349 | 13,759 | ||||||||
Change in deferred revenue and costs, net |
1,781 | (3,284 | ) | 9,339 | ||||||||
Pension contributions |
(1,997 | ) | (531 | ) | | |||||||
Change in uncertain tax positions |
(5,700 | ) | 2,335 | (1,281 | ) | |||||||
Other |
(71 | ) | (270 | ) | (2,158 | ) | ||||||
Net cash provided by operating activities continuing operations |
77,474 | 77,071 | 45,223 | |||||||||
Net earnings (loss) from discontinued operations, net of tax |
103 | (858 | ) | 2,907 | ||||||||
Net cash provided (used) by discontinued operations |
39 | 673 | (5,564 | ) | ||||||||
Net cash provided (used) by operating activities discontinued operations |
142 | (185 | ) | (2,657 | ) | |||||||
Net cash provided by operating activities |
77,616 | 76,886 | 42,566 | |||||||||
Cash flows from investing activities: |
||||||||||||
Acquisition of businesses, net of cash acquired |
(6,442 | ) | (345,395 | ) | (8,250 | ) | ||||||
Proceeds from sale of marketable securities |
| 4,966 | | |||||||||
Change in restricted cash (acquisition escrow) |
2,189 | (6,841 | ) | | ||||||||
Capital expenditures |
(9,255 | ) | (16,669 | ) | (12,408 | ) | ||||||
Additions to capitalized software |
(5,004 | ) | (10,488 | ) | (28,555 | ) | ||||||
Net cash used by investing activities continuing operations |
(18,512 | ) | (374,427 | ) | (49,213 | ) | ||||||
Capital expenditures discontinued operations |
| (1,140 | ) | (7,095 | ) | |||||||
Proceeds from divestiture of business, net discontinued operations |
3,100 | 74,370 | | |||||||||
Net cash provided (used) by investing activities discontinued operations |
3,100 | 73,230 | (7,095 | ) | ||||||||
Net cash used by investing activities |
(15,412 | ) | (301,197 | ) | (56,308 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Proceeds from long-term debt |
32,000 | 304,157 | | |||||||||
Principal payments on long-term debt |
(85,183 | ) | (71,197 | ) | | |||||||
Debt issuance costs |
| (2,965 | ) | | ||||||||
Net (decrease) increase in short-term borrowings discontinued operations |
| (2,844 | ) | 2,844 | ||||||||
Purchases of common stock into treasury |
| | (10,007 | ) | ||||||||
Excess tax benefit from stock options exercised |
782 | 737 | 73 | |||||||||
Proceeds from exercise of stock options |
6,621 | 6,384 | 1,843 | |||||||||
Other |
247 | 338 | (173 | ) | ||||||||
Net cash (used) provided by financing activities |
(45,533 | ) | 234,610 | (5,420 | ) | |||||||
Effect of exchange rate changes on cash and cash equivalents |
(708 | ) | (270 | ) | 981 | |||||||
Net increase (decrease) in cash and cash equivalents |
15,963 | 10,029 | (18,181 | ) | ||||||||
Cash and cash equivalents at beginning of year |
28,667 | 18,638 | 36,819 | |||||||||
Cash and cash equivalents at end of year |
$ | 44,630 | 28,667 | 18,638 | ||||||||
Changes in current assets and liabilities: |
||||||||||||
Accounts receivable, net |
$ | 26,090 | (32,688 | ) | (15,424 | ) | ||||||
Costs and estimated earnings on long-term contracts, net |
(1,663 | ) | 2,425 | (10,175 | ) | |||||||
Inventories |
(17,001 | ) | 443 | (12,007 | ) | |||||||
Other current assets |
(714 | ) | 4,777 | (4,926 | ) | |||||||
Accounts payable |
(1,764 | ) | 1,163 | 13,050 | ||||||||
Advance payments on long-term contracts, net |
(4,627 | ) | 3,716 | (3,959 | ) | |||||||
Accrued expenses |
1,245 | 8,010 | 7,057 | |||||||||
$ | 1,566 | (12,154 | ) | (26,384 | ) | |||||||
Supplemental cash flow information: |
||||||||||||
Interest paid |
$ | 7,425 | 9,233 | 109 | ||||||||
Income taxes paid (including state, foreign & AMT) |
22,144 | 7,004 | 3,731 | |||||||||
See accompanying Notes to Consolidated Financial Statements.
ESCO TECHNOLOGIES INC. 25 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
A. PRINCIPLES OF CONSOLIDATION
The Consolidated Financial Statements
include the accounts of ESCO Technologies Inc.
(ESCO) and its wholly owned subsidiaries (the
Company). All significant intercompany
transactions and accounts have been eliminated in
consolidation.
B. BASIS OF PRESENTATION
Fair values of the Companys financial
instruments are estimated by reference to quoted
prices from market sources and financial
institutions, as well as other valuation
techniques. The estimated fair value of each class
of financial instruments approximated the related
carrying value at September 30, 2009 and 2008.
The business and most of the assets of Comtrak
Technologies, LLC (Comtrak) were sold during the
second quarter of fiscal 2009. In addition, the
Filtertek businesses (excluding TekPackaging LLC)
were sold during fiscal 2008. Comtrak and Filtertek
are accounted for as discontinued operations in
accordance with accounting principles generally
accepted in the United States of America (GAAP).
C. NATURE OF OPERATIONS
The Company has three reportable segments:
Utility Solutions Group (USG), RF Shielding and Test
(Test), and Filtration/Fluid Flow (Filtration).
USG: The Aclara Group is a proven supplier of special
purpose fixed-network communications systems for
electric, gas and water utilities, including hardware
and software to support advanced metering
applications. Doble provides high-end, intelligent,
diagnostic test solutions for the electric power
delivery industry.
Test: The EMC Group is an industry
leader in providing its customers with the ability to
identify, measure and contain magnetic,
electromagnetic and acoustic energy.
Filtration: The companies within this segment
design and manufacture specialty filtration
products including hydraulic filter elements used
in commercial aerospace applications, unique filter
mechanisms used in micro propulsion devices for
satellites and custom designed filters for manned
and unmanned aircraft.
D. USE OF ESTIMATES
The preparation of financial statements in
conformity with GAAP requires Management to make
estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the
financial statements and the reported amounts of
revenues and expenses during the reporting periods.
The Company regularly evaluates the estimates and
assumptions related to the allowance for doubtful
trade receivables, inventory obsolescence, warranty
reserves, value of equity-based awards, goodwill and
purchased intangible asset valuations, asset
impairments, employee benefit plan liabilities,
income tax liabilities and assets and related
valuation allowances, uncertain tax positions, and
litigation and other loss contingencies. Actual
results could differ from those estimates.
E. REVENUE RECOGNITION
USG Segment: Within the USG segment,
approximately 96% of the segments revenue
arrangements (approximately 60% of consolidated
revenues) contain software components. Revenue under
these arrangements is recognized in accordance with
FASB ASC Subtopic 985-605, Software Revenue
Recognition. The segments software revenue
arrangements within the Aclara Group generally
include multiple products and services, or elements
consisting of meter and substation hardware, meter
reading system software, program management support
during the deployment period and software support
(post-contract customer support, PCS). These
arrangements typically require the Company to deliver
software at the inception of the arrangement while
the hardware and program management support are
delivered over the contractual deployment period.
Software support is provided during deployment and
subsequent thereto. The software element included in
such arrangements is essential to the functionality
of the hardware and, therefore, the hardware is
considered to be software-related. Hardware is
considered a specified element in the software
arrangement and vendor-specific objective evidence of
fair value (VSOE) has been established for this
element. VSOE for the hardware element is determined
based on the price when sold separately to customers.
These revenue arrangements are divided into separate
units of accounting if the delivered item(s) has
value to the customer on a stand-alone basis, there
is objective and reliable evidence of the fair value
of the undelivered item(s) and delivery/performance
of the undelivered item(s) is probable. For multiple
element arrangements, revenue is allocated to the
individual elements based on VSOE of the individual
elements.
The application of these principles
requires judgment, including the determination of
whether a software arrangement includes multiple
elements and estimates of the fair value of the
elements. The VSOE of the fair value of undelivered
elements is determined based on the historical
evidence of stand-alone sales of these elements to
customers. Hardware revenues are generally recognized
at the time of shipment or receipt by customer
depending upon contract terms. VSOE generally does
not exist for the software element; therefore, the
Company uses the residual method to recognize revenue
when VSOE exists for all other undelivered elements.
Under the residual method, the fair value of the
undelivered elements is deferred and the remaining
portion of the arrangement fee is recognized as
revenue.
ESCO TECHNOLOGIES INC. 26 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The applicable guidance requires the seller
of software that includes post-contract customer
support (PCS) to establish VSOE of the undelivered
element of the contract in order to account
separately for the PCS revenue. The Company
determines VSOE by a consistent pricing of PCS and
PCS renewals as a percentage of the software
license fees or by reference to contractual
renewals, when the renewal terms are substantive.
Revenues for PCS are recognized ratably over the
maintenance term specified in the contract
(generally in 12 monthly increments). Revenues for
program management support are recognized when
services have been provided. The Company determines
VSOE for program management support based on hourly
rates when services are performed separately.
Approximately 4% of segment revenues are recognized
when services are performed for unaffiliated
customers or when products are delivered (when title
and risk of ownership transfers).
Test Segment: Within the Test segment, approximately
40% of revenues (approximately 10% of consolidated
revenues) are recognized when products are delivered
(when title and risk of ownership transfers) or when
services are performed for unaffiliated customers.
Certain arrangements contain multiple elements which
are accounted for under the provisions of FASB ASC
Subtopic 605-25, Revenue Recognition:
Multiple-Element Arrangements. The multiple elements
generally consist of materials and installation
services used in the construction and installation of
standard shielded enclosures to measure and contain
magnetic and electromagnetic energy. The installation
process does not involve changes to the features or
capabilities of the equipment and does not require
proprietary information about the equipment in order
for the installed equipment to perform to
specifications. There is objective and reliable
evidence of fair value for each of the units of
accounting, and as a result, the arrangement revenue
is allocated to the separate units of accounting
based on their relative fair values. Typically, fair
value is the price of the deliverable when it is
regularly sold on a stand-alone basis.
Approximately 60% of the segments revenues
(approximately 15% of consolidated revenues) are
recorded under the percentage-of-completion
provisions of FASB ASC Subtopic 605-35, Revenue
Recognition: Construction-Type and Production-Type
Contracts due to the complex nature of the enclosures
that are designed and produced under these contracts.
Products accounted for under this Subtopic include
the construction and installation of complex test
chambers to a buyers specifications that provide its
customers with the ability to measure and contain
magnetic, electromagnetic and acoustic energy. As
discussed above, for arrangements that are accounted
for under this Subtopic, the Company estimates profit
as the difference between total estimated revenue and
total estimated cost of a contract and recognizes
these revenues and costs based on either (a) units
delivered or (b) contract milestones.
If a reliable measure of output cannot be established
(which applies in less than 10% of Test segment
revenues or 2% of consolidated revenues), input
measures (e.g., costs incurred) are used to recognize
revenue. Given the nature of the Companys operations
related to these contracts, costs incurred represent
an appropriate measure of progress towards
completion.
The percentage-of-completion method of accounting
involves the use of various techniques to estimate
expected costs at completion. These estimates are
based on Managements judgment and the Companys
substantial experience in developing these types of
estimates.
Filtration Segment: Within the Filtration segment,
approximately 60% of revenues (approximately 10% of
consolidated revenues) are recognized when products
are delivered (when title and risk of ownership
transfers) or when services are performed for
unaffiliated customers.
Approximately 40% of segment revenues (approximately
5% of consolidated revenues) are recorded under the
percentage-of-completion provisions of FASB ASC
Subtopic 605-35, Revenue Recognition: Construction-Type and
Production-Type Contracts. Products accounted for
under this Subtopic include the design, development
and manufacture of complex fluid control products,
quiet valves, manifolds and systems primarily for the
aerospace and military markets. For arrangements that
are accounted for under this Subtopic, the Company
estimates profit as the difference between total
estimated revenue and total estimated cost of a
contract and recognizes these revenues and costs
based on units delivered. The
percentage-of-completion method of accounting
involves the use of various techniques to estimate
expected costs at completion.
F. CASH AND CASH EQUIVALENTS
Cash equivalents include temporary
investments that are readily convertible into
cash, such as money market funds.
G. ACCOUNTS RECEIVABLE
Accounts receivable have been reduced by an
allowance for amounts that the Company estimates are
uncollectible in the future. This estimated
allowance is based on Managements evaluation of the
financial condition of the customer and historical
write-off experience.
H. COSTS AND ESTIMATED EARNINGS ON LONG-TERM CONTRACTS
Costs and estimated earnings on long-term
contracts represent unbilled revenues, including
accrued profits, accounted for under the
percentage-of-completion method, net of progress
billings.
ESCO TECHNOLOGIES INC. 27 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I. INVENTORIES
Inventories are valued at the lower of cost
(first-in, first-out) or market value. Inventories
under long-term contracts reflect accumulated
production costs, factory overhead, initial tooling
and other related costs less the portion of such
costs charged to cost of sales and any unliquidated
progress payments. In accordance with industry
practice, costs incurred on contracts in progress
include amounts relating to programs having
production cycles longer than one year, and a portion
thereof will not be realized within one year.
J. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at
cost. Depreciation and amortization are computed
primarily on a straight-line basis over the
estimated useful lives of the assets: buildings,
10-40 years; machinery and equipment, 3-10 years;
and office furniture and equipment, 3-10 years.
Leasehold improvements are amortized over the
remaining term of the applicable lease or their
estimated useful lives, whichever is shorter.
K. GOODWILL AND OTHER LONG-LIVED ASSETS
Goodwill represents the excess of purchase
costs over the fair value of net identifiable assets
acquired in business acquisitions. The Company
accounts for goodwill as required by FASB ASC Topic
350, Intangibles Goodwill & Other. Management
annually reviews goodwill and other long-lived assets
with indefinite useful lives for impairment or
whenever events or changes in circumstances indicate
the carrying amount may not be recoverable. If the
Company determines that the carrying value of the
long-lived asset may not be recoverable, a permanent
impairment charge is recorded for
the amount by which the carrying value of the
long-lived asset exceeds its fair value.
Fair value is measured based on a discounted cash
flow method using a discount rate determined by
Management to be commensurate with the risk
inherent in the Companys current business model.
Other intangible assets represent costs allocated
to identifiable intangible assets, principally
capitalized software, patents, trademarks, and
technology rights. See Note 4 regarding goodwill
and other intangible assets activity.
L. CAPITALIZED SOFTWARE
The costs incurred for the development of
computer software that will be sold, leased, or
otherwise marketed are charged to expense when
incurred as research and development until
technological feasibility has been established for
the product. Technological feasibility is typically
established upon completion of a detailed program
design. Costs incurred after this point are
capitalized on a project-by-project basis in
accordance with FASB ASC Topic 985, Software.
Capitalized costs primarily consist of external
development costs. Upon general release of the
product to customers, the Company ceases
capitalization and begins amortization, which is
calculated on a project-by-project basis as the
greater of (1) the ratio of current gross revenues
for a product to the total of current and
anticipated future gross revenues for the product
or (2) the straight-line method over the estimated
economic life of the product. The Company generally
amortizes the software development costs over a
three-to-seven year period based upon the estimated
future economic life of the product. Factors
considered in determining the estimated future
economic life of the product include anticipated
future revenues, and changes in software and
hardware technologies. Management annually reviews
the carrying values of capitalized costs for
impairment or whenever events or changes in
circumstances indicate the carrying amount may not
be recoverable. If expected cash flows are
insufficient to recover the carrying amount of the
asset, then an impairment loss is recognized to
state the asset at its net realizable value.
M. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS
TO BE DISPOSED OF
Recoverability of assets to be held and used is
measured by a comparison of the carrying amount of an
asset to future cash flows expected to be generated
by the asset. If such assets are considered to be
impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets
to be disposed of are reported at the lower of the
carrying amount or fair value less costs to dispose.
N. INCOME TAXES
Income taxes are accounted for under the asset
and liability method. Deferred tax assets and
liabilities are recognized for the future tax
consequences attributable to differences between the
financial statement carrying amounts of existing
assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary
differences are expected to be recovered or settled.
Deferred tax assets may be reduced by a valuation
allowance if it is more likely than not that some
portion or all of the deferred tax assets will not be
realized. The effect on deferred tax assets and
liabilities of a change in tax rates is
recognized in income in the period that includes the
enactment date. The Company regularly reviews its
deferred tax assets for recoverability and
establishes a valuation allowance when Management
believes it is more likely than not such assets will
not be recovered, taking into consideration
historical operating results, expectations of future
earnings, tax planning strategies, and the expected
timing of the reversals of existing temporary
differences.
ESCO TECHNOLOGIES INC. 28 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
O. RESEARCH AND DEVELOPMENT COSTS
Company-sponsored research and development
costs include research and development and bid and
proposal efforts related to the Companys products
and services. Company-sponsored product development
costs are charged to expense when incurred.
Customer-sponsored research and development costs
incurred pursuant to contracts are accounted for
similar to other program costs. Customer-sponsored
research and development costs refer to certain
situations whereby customers provide funding to
support specific contractually defined research and
development costs.
P. FOREIGN CURRENCY TRANSLATION
The financial statements of the Companys
foreign operations are translated into U.S. dollars
in accordance with FASB ASC Topic 830, Foreign
Currency Matters. The resulting translation
adjustments are recorded as a separate component of
accumulated other comprehensive income.
Q. EARNINGS PER SHARE
Basic earnings per share is calculated using
the weighted average number of common shares
outstanding during the period. Diluted earnings per
share 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 using the
treasury stock method.
The number of shares used in the calculation of
earnings per share for each year presented is as
follows:
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Weighted Average Shares
Outstanding Basic |
26,216 | 25,909 | 25,865 | |||||||||
Dilutive Options and Performance-Accelerated Restricted Stock |
344 | 406 | 522 | |||||||||
Adjusted Shares Diluted |
26,560 | 26,315 | 26,387 | |||||||||
Options to purchase 605,186 shares at prices
ranging from $35.69-$54.88 were outstanding during
the year ended September 30, 2009, but were not
included in the respective computation of diluted EPS
because the options exercise price was greater than
the average market price of the common shares.
Options to purchase 542,689 shares at prices ranging
from $35.69-$54.88 were outstanding during the year
ended September 30, 2008, but were not included in
the respective computation of diluted EPS because the
options exercise price was greater than the average
market price of the common shares. Options to
purchase 602,731 shares at prices ranging from
$36.07-$54.88 were outstanding
during the year ended September 30, 2007, but were
not included in the respective computation of diluted
EPS because the options exercise price was greater
than the average market price of the common shares.
These options expire in various periods through 2013.
Approximately 180,000, 140,000 and 76,000 restricted
shares were outstanding but unearned at September 30,
2009, 2008 and 2007, respectively, and, therefore,
were not included in the respective years
computations of diluted EPS.
R. SHARE-BASED COMPENSATION
The Company provides compensation benefits to
certain key employees under several share-based
plans providing for employee stock options and/or
performance-accelerated restricted shares
(restricted shares), and to non-employee directors
under a non-employee directors compensation plan.
S. COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive loss of
$(11.6) million at September 30, 2009 as shown on
the consolidated balance sheet, net of tax,
consisted of $(17.9) million related to a pension
net actuarial loss; $7.2 million related to
currency translation adjustments; and $(0.9)
million related to interest rate swaps. Accumulated
other comprehensive income of $0.6 million at
September 30, 2008 consisted of $7.9 million
related to currency translation adjustments; $(6.5)
million related to the pension net actuarial loss;
and $(0.8) million related to interest rate swaps.
T. DEFERRED REVENUE AND COSTS
Deferred revenue and costs are recorded for
products or services that have not been provided but
have been invoiced under contractual agreements or
paid for by a customer, or when products or services
have been provided but the criteria for revenue
recognition have not been met. If there is a customer
acceptance provision or there is uncertainty about
customer acceptance, revenue and costs are deferred
until the customer has accepted the product or
service.
U. DERIVATIVE FINANCIAL INSTRUMENTS
All derivative financial instruments are
reported on the balance sheet at fair value. The
accounting for changes in fair value of a
derivative instrument depends on whether it has
been designated and qualifies as a hedge and on the
type of hedge. For each derivative instrument
designated as a cash flow hedge, the effective
portion of the gain or loss on the derivative is
deferred in accumulated other comprehensive income
until recognized in earnings with the underlying
hedged item. For each derivative instrument
designated as a fair value hedge, the gain or loss
on the derivative and the offsetting gain or loss
on the hedged item are recognized immediately in
earnings. Regardless of type, a fully effective
hedge will result in no net earnings impact while
the derivative is outstanding. To the extent that
any hedge is ineffective at offsetting cash flow or
fair value changes in the underlying hedged item,
there could be a net earnings impact.
ESCO TECHNOLOGIES INC. 29 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
V. NEW ACCOUNTING STANDARDS
In October 2009, the Financial Accounting
Standards Board (FASB) issued Update No. 2009-13,
Multiple-Deliverable
Revenue Arrangements (ASU 2009-13) and Update No.
2009-14, Certain Revenue Arrangements That Include
Software Elements (ASU 2009-14) consensuses of the
FASB Emerging Issues Task Force. ASU 2009-13 applies
to multiple-deliverable revenue arrangements that are
currently within the scope of Subtopic 605-25 and
provides two significant changes: (i) requires an
entity to allocate revenue in an arrangement using
estimated selling prices of deliverables if a vendor
does not have vendor-specific objective evidence or
third-party evidence of selling price and (ii)
eliminates the residual method to allocate the
arrangement consideration. The consensus also expands
the disclosure requirements for multiple-deliverable
revenue arrangements. ASU 2009-14 removes tangible
products from the scope of the software revenue
guidance and provides guidance on determining whether
software deliverables in an arrangement that includes
a tangible product are within the scope of the
software revenue guidance. These consensuses should
be applied on a prospective basis for revenue
arrangements entered into in fiscal years beginning
on or after June 15, 2010 with earlier application
permitted. The Company is currently assessing the
impact of this new guidance on its Consolidated
Financial Statements and related disclosures.
On July 1, 2009, the Company adopted FASB ASC
105-10 (ASC 105-10) which established the FASB
Accounting Standards Codification (the
Codification) as the source of authoritative
accounting principles recognized by the FASB to be
applied in the preparation of financial statements
in conformity with GAAP. Rules and interpretive
releases of the SEC under authority of Federal
securities laws are also sources of authoritative
GAAP for nongovernmental entities. The adoption of
this Statement did not have a material impact on
the Companys Consolidated Financial Statements.
Effective April 1, 2009, the Company adopted the new
accounting guidance for subsequent events as
codified in FASB ASC 855, Subsequent Events. The new
guidance establishes general standards of accounting
for and disclosure of events that occur after the
balance sheet date but before financial statements
are issued or are available to be issued. This new
guidance was effective for interim and annual
financial periods ending after June 15, 2009. The
Company has evaluated subsequent events or
transactions that occurred after the balance sheet
date of September 30, 2009 up through November 30,
2009, which is the date the accompanying
Consolidated Financial Statements were issued.
2. Divestitures
On March 13, 2009, the Company completed the
sale of the business and most of the assets of
Comtrak Technologies, LLC (Comtrak) for $3.1 million,
net, of cash (referred to as the Comtrak sale).
This business is reflected as a discontinued
operation in the financial statements and related
notes for all periods presented. Comtraks operations
were previously included within the Companys Utility
Solutions Group segment. A pretax loss of $1.2
million related to the sale and its 2009 results of
operations are reflected in the Companys fiscal 2009
results in discontinued operations. Comtraks net
sales were $3.4 million, $10.3 million, and $7.3
million for the years ended September 30, 2009, 2008
and 2007, respectively. The pretax loss from
Comtraks operations was $0.3 million and $0.6
million for the years ended September 30, 2008 and
2007, respectively.
On November 25, 2007, the Company completed the sale
of the filtration portion of Filtertek Inc.
(Filtertek) to Illinois Tool Works Inc. for $74.4
million, net. The TekPack division of Filtertek was
not included in the transaction. Accordingly, the
Filtertek businesses are reflected as discontinued
operations in the financial statements and related
notes for all periods presented. A pretax loss of
$0.2 million related to Filtertek is reflected in the
Companys fiscal 2008 results in discontinued
operations. Filterteks net sales were $13.7 million
for the two-month period ended November 25, 2007.
Filterteks net sales and pretax earnings were $82.8
million and $4.7 million, respectively, for the year
ended September 30, 2007. Filterteks operations were
included within the Companys Filtration segment
prior to divestiture. The operations of the TekPack
business are reflected in continuing operations and
continue to be included in the Filtration segment.
3. Acquisitions
2009
On September 21, 2009, the Company acquired
a minority equity interest in Firetide, Inc. for
$4 million in cash. Firetide, Inc. is a provider
of wireless infrastructure mesh network management
systems which will enable communications with
other Smart Grid assets and this technology will
be used in Aclaras Smart Communications Network
solution. This investment is accounted for under
the cost method and is classified as a long-term
other asset on the Companys consolidated balance
sheet as of September 30, 2009.
On July 2, 2009, the Company acquired certain assets of Complus Systems Pvt Ltd. (Complus) in India
for approximately $1.2 million in cash and formed a new Indian entity. The entity will operate as
ETS-India and its operating results, since the date of acquisition, are included within the Test
segment.
ESCO TECHNOLOGIES INC. 30 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2008
On November 30, 2007, the Company acquired the
capital stock of Doble for a purchase price of
approximately $328 million, net of cash acquired.
Doble, headquartered in Watertown, Massachusetts, is
a worldwide leader in providing high-end intelligent
diagnostic test solutions for the electric utility
industry. The acquisition aligns with the Companys
long-term growth strategy of expanding its products
and services in the utility industry. The operating
results for Doble, since the date of acquisition, are
included within the USG segment.
The purchase price allocation was as follows:
(In thousands)
Net tangible assets |
$ | 44,498 | ||
Identifiable intangible assets: |
||||
Trade names |
112,290 | |||
Customer relationships |
52,510 | |||
Software and databases |
3,790 | |||
Total identifiable intangible assets |
168,590 | |||
Goodwill |
192,203 | |||
Long-term deferred tax liabilities |
(67,830 | ) | ||
Total cash consideration |
$ | 337,461 | ||
Reconciliation of purchase price: |
||||
Total cash consideration |
$ | 337,461 | ||
Less: cash acquired |
(9,639 | ) | ||
Purchase price |
$ | 327,822 | ||
The identifiable intangible assets consisting
of customer relationships will be amortized on a
straight-line basis over twenty years and the
software and databases will be amortized on a
straight-line basis over five years. The
identifiable intangible asset consisting of trade
names has an indefinite life and is not subject to
amortization.
Pro Forma Results
The following pro forma financial information
for the years ended September 30, 2008 and 2007
presents the combined results of operations of ESCO
and Doble as if the acquisition had occurred on
October 1, 2006. The pro forma financial information
for the periods presented excludes the Comtrak
business which was sold in March 2009 and the
Filtertek business which was sold in November 2007.
The combined results of operations have been
adjusted for the impact of certain
acquisition-related items, including additional
amortization of identifiable intangible assets,
additional financing expenses and other direct
costs. The impact of pro forma adjustments are
tax-effected at the expected future consolidated
corporate tax rate.
The unaudited pro forma financial information is not
intended to represent, or be indicative of, the
Companys consolidated results of operations or
financial condition that would have been reported
had the acquisition been completed as of the
beginning of each of the periods presented. This
information is provided for illustrative purposes
only and is not necessarily indicative of the
Companys future consolidated results of operations
or financial condition.
(In millions, except per share data)
(Unaudited)
(Unaudited)
Pro Forma Results | FY 2008 | FY 2007 | ||||||
Net sales
|
$ | 629.8 | 516.9 | |||||
Net earnings from continuing operations
|
$ | 47.1 | 34.8 | |||||
Net earnings per share |
||||||||
Basic
|
$ | 1.82 | 1.34 | |||||
Diluted
|
$ | 1.79 | 1.31 | |||||
On July 31, 2008, the Company acquired the
capital stock of LDIC GmbH and LDIC AG (collectively
LDIC) for a purchase price of approximately $13
million, net of cash acquired. LDIC, with operations
in Germany and Switzerland, is a manufacturer of
partial discharge diagnostic testing instruments and
systems serving the international electric utility
industry. The operating results for LDIC since the
date of acquisition are included within Doble in the
USG segment. The Company recorded approximately $8
million of goodwill as a result of the transaction,
$2.5 million of trade names and $1.5 million of
amortizable identifiable intangible assets consisting
of customer relationships which are being amortized
on a straight-line basis over seven years. In
connection with the acquisition, the Company has $5.2
million of cash in an escrow account to be earned by
the sellers if the future target revenues are
achieved. The $5.2 million is classified as
restricted cash and is included in Other assets on
the Companys consolidated balance sheet at September
30, 2009.
2007
On August 10, 2007, the Company acquired the
assets and certain liabilities of Wintec, LLC
(Wintec) for a purchase price of $6 million and
recorded approximately $5 million of goodwill in
connection with the transaction. The operating
results for Wintec, since the date of acquisition,
are included within VACCO in the Filtration segment.
All of the Companys acquisitions have been accounted
for using the purchase method of accounting and
accordingly, the respective purchase prices were
allocated to the assets (including intangible assets)
acquired and liabilities assumed based on estimated
fair values at the date of acquisition. The financial
results from these acquisitions have been included in
the Companys financial statements from the date of
acquisition. Pro forma financial information related
to the Companys acquisitions, excluding Doble, was
not presented as it was not significant to the
Companys results of operations. None of the goodwill
recorded as part of the acquisitions mentioned above
is expected to be deductible for U.S. Federal or
state income tax purposes.
ESCO TECHNOLOGIES INC. 31 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Goodwill and Other Intangible Assets
Included on the Companys Consolidated
Balance Sheets at September 30, 2009 and 2008 are
the following intangible assets gross carrying
amounts and accumulated amortization:
(Dollars in millions) | 2009 | 2008 | ||||||
Goodwill |
$ | 330.7 | 328.9 | |||||
Intangible assets with determinable lives: |
||||||||
Patents |
||||||||
Gross carrying amount |
$ | 13.6 | 13.6 | |||||
Less: accumulated amortization |
13.1 | 12.8 | ||||||
Net |
$ | 0.5 | 0.8 | |||||
Capitalized software |
||||||||
Gross carrying amount |
$ | 93.7 | 88.6 | |||||
Less: accumulated amortization |
41.9 | 26.8 | ||||||
Net |
$ | 51.8 | 61.8 | |||||
Customer Relationships |
||||||||
Gross carrying amount |
$ | 54.0 | 54.0 | |||||
Less: accumulated amortization |
5.0 | 2.2 | ||||||
Net |
$ | 49.0 | 51.8 | |||||
Other |
||||||||
Gross carrying amount |
$ | 10.2 | 10.0 | |||||
Less: accumulated amortization |
7.5 | 6.5 | ||||||
Net |
$ | 2.7 | 3.5 | |||||
Intangible assets with indeterminable lives: |
||||||||
Trade names |
$ | 117.6 | 118.3 | |||||
The Company performed its annual evaluation of
goodwill and intangible assets for impairment during
the fourth quarter of fiscal 2009 and concluded no
impairment existed at September 30, 2009.
The changes
in the carrying amount of goodwill attributable to
each business segment for the years ended September
30, 2009 and 2008 are as follows:
(Dollars in millions) | USG | Test | Filtration | Total | ||||||||||||
Balance as of |
||||||||||||||||
September 30, 2007 |
$ | 75.4 | 29.1 | 45.0 | 149.5 | |||||||||||
Divestiture |
| | (24.7 | ) | (24.7 | ) | ||||||||||
Acquisitions |
203.7 | 0.4 | | 204.1 | ||||||||||||
Balance as of |
||||||||||||||||
September 30, 2008 |
279.1 | 29.5 | 20.3 | 328.9 | ||||||||||||
Acquisitions |
0.8 | 1.0 | | 1.8 | ||||||||||||
Balance as of |
||||||||||||||||
September 30, 2009 |
$ | 279.9 | 30.5 | 20.3 | 330.7 | |||||||||||
Amortization expense related to intangible
assets with determinable lives was $19.2 million,
$17.0 million and $10.2 million in 2009, 2008 and
2007, respectively. The increase in amortization
expense in 2009 as compared to the prior years was
mainly due to the Companys TWACS NG software and the
purchase accounting intangible assets. The Company
recorded $12.2 million, $11.0 million and $6.2
million of amortization expense related to Aclara
PLSs TWACS NG software in 2009, 2008 and 2007,
respectively. Patents are amortized over the life of
the patents, generally 17 years. Capitalized software
is amortized over the estimated useful life
of the software, generally three to seven years.
Intangible asset amortization for fiscal years 2010
through 2014 is estimated at approximately $11
million declining to $9.5 million per year. The
decrease in expected intangible asset amortization in
2010 as compared to 2009 is related to the TWACS NG
software.
5. Accounts Receivable
Accounts receivable, net of the allowance
for doubtful accounts, consist of the following at
September 30, 2009 and 2008:
(Dollars in thousands) | 2009 | 2008 | ||||||
Commercial |
$ | 104,409 | 126,134 | |||||
U.S. Government and prime contractors |
4,211 | 8,576 | ||||||
Total |
$ | 108,620 | 134,710 | |||||
6. Inventories
Inventories consist of the following at
September 30, 2009 and 2008:
(Dollars in thousands) | 2009 | 2008 | ||||||
Finished goods |
$ | 38,153 | 19,865 | |||||
Work in process including
long-term contracts |
16,433 | 15,736 | ||||||
Raw materials |
27,434 | 29,418 | ||||||
Total |
$ | 82,020 | 65,019 | |||||
7. Property, Plant and Equipment
Depreciation expense of property, plant and
equipment from continuing operations for the years
ended September 30, 2009, 2008 and 2007 was $11.1
million, $10.0 million and $6.3 million,
respectively.
The Company leases certain real property, equipment
and machinery under noncancelable operating leases.
Rental expense under these operating leases for the
years ended September 30, 2009, 2008 and 2007 was
$8.0 million, $7.8 million and $6.6 million,
respectively.
ESCO TECHNOLOGIES INC. 32 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Future aggregate minimum lease payments under
operating leases that have initial or remaining
noncancelable lease terms in excess of one year as
of September 30, 2009 are:
(Dollars in thousands) | ||||
Years ending September 30: | ||||
2010 |
$ | 7,401 | ||
2011 |
6,179 | |||
2012 |
5,580 | |||
2013 |
3,239 | |||
2014 and thereafter |
7,168 | |||
Total |
$ | 29,567 | ||
8. Income Tax Expense
Total income tax expense for the years ended
September 30, 2009, 2008 and 2007 was allocated as
follows:
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Income tax expense from
continuing operations |
$ | 13,867 | 23,709 | 7,854 | ||||||||
Discontinued operations |
(1,473 | ) | 386 | 1,161 | ||||||||
Total income tax expense |
$ | 12,394 | 24,095 | 9,015 | ||||||||
The components of income from continuing
operations before income taxes consisted of the
following for the years ended September 30:
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
United States |
$ | 60,477 | 66,723 | 34,543 | ||||||||
Foreign |
2,695 | 4,555 | 4,117 | |||||||||
Total income before income taxes |
$ | 63,172 | 71,278 | 38,660 | ||||||||
The principal components of income tax expense
from continuing operations for the years ended
September 30, 2009, 2008 and 2007 consist of:
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Federal |
||||||||||||
Current (including Alternative
Minimum Tax) |
$ | 10,425 | 463 | (5,820 | ) | |||||||
Deferred |
(1,666 | ) | 16,820 | 9,831 | ||||||||
State and local: |
||||||||||||
Current |
4,683 | 2,788 | 992 | |||||||||
Deferred |
(421 | ) | 2,139 | 1,916 | ||||||||
Foreign: |
||||||||||||
Current |
1,179 | 1,234 | 1,106 | |||||||||
Deferred |
(333 | ) | 265 | (171 | ) | |||||||
Total |
$ | 13,867 | 23,709 | 7,854 | ||||||||
The actual income tax expense from continuing
operations for the years ended September 30, 2009,
2008 and 2007 differs from the expected tax expense
for those years (computed by applying the U.S.
Federal corporate statutory rate) as follows:
2009 | 2008 | 2007 | ||||||||||
Federal corporate statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State and local, net of Federal benefits |
4.4 | 2.5 | 2.8 | |||||||||
Foreign |
(0.2 | ) | (0.3 | ) | (1.3 | ) | ||||||
Research credit |
(7.5 | ) | (1.4 | ) | (11.4 | ) | ||||||
Export Incentive |
| (2.2 | ) | | ||||||||
Domestic production deduction |
(1.8 | ) | (1.1 | ) | | |||||||
Share-based compensation |
0.4 | 0.7 | 3.6 | |||||||||
Change in tax contingencies |
| | (5.8 | ) | ||||||||
Change in uncertain tax positions |
(7.9 | ) | (0.3 | ) | | |||||||
Release of valuation allowance |
| | (2.0 | ) | ||||||||
Other, net |
(0.4 | ) | 0.4 | (0.6 | ) | |||||||
Effective income tax rate |
22.0 | % | 33.3 | % | 20.3 | % | ||||||
The tax effects of temporary differences that
give rise to significant portions of the deferred tax
assets and liabilities at September 30, 2009 and 2008
are presented below.
(Dollars in thousands) | 2009 | 2008 | ||||||
Deferred tax assets: |
||||||||
Inventories, long-term contract accounting,
contract cost reserves and others
|
$ | 4,017 | 1,964 | |||||
Pension and other postretirement benefits
|
11,421 | 4,393 | ||||||
Net operating loss carryforward domestic
|
1,516 | 1,429 | ||||||
Net operating loss carryforward foreign
|
1,468 | 3,950 | ||||||
Capital loss carryforward
|
254 | 8,297 | ||||||
Other compensation-related costs
and other cost accruals
|
11,761 | 10,830 | ||||||
Research credit carryforward
|
5,843 | 10,020 | ||||||
Total deferred tax assets
|
36,280 | 40,883 | ||||||
Deferred tax liabilities: |
||||||||
Plant and equipment, depreciation methods,
acquisition asset allocations, and other
|
(92,708 | ) | (96,783 | ) | ||||
Net deferred tax liabilities before
valuation allowance
|
(56,428 | ) | (55,900 | ) | ||||
Less valuation allowance
|
(1,626 | ) | (12,247 | ) | ||||
Net deferred tax liabilities
|
$ | (58,054 | ) | (68,147 | ) | |||
ESCO TECHNOLOGIES INC. 33 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2009, the Company has
established a valuation allowance of $0.3 million
against the capital loss carryforward generated in
2008, as such loss carryforward may not be realized
in future periods. The Company reduced the valuation
allowance by $7.3 million in fiscal 2009 as a result
of the expiration of a capital loss carryforward. In
addition, the Company has established a valuation
allowance against certain net operating loss (NOL)
carryforwards in foreign jurisdictions which may not
be realized in future periods. The valuation
allowance established against the foreign NOL
carryforwards was $1.4 million and $3.9 million at
September 30, 2009 and 2008, respectively. The
decrease is mainly a result of the legal dissolution
of foreign entities with NOL carryforwards. The
Company classifies its valuation allowance related
to deferred taxes on a pro rata basis.
The Company expects the net research tax credits
related to fiscal year 2009 to be approximately
$0.7 million. The expiration of the research
credits is between 2026 and 2029. The Company
anticipates being able to utilize the research
credits to reduce future Federal income tax cash
payments. Research credits of $3.5 million were
included in the fiscal 2009 provision as a result
of a decrease in the Companys tax positions for
the fiscal years 2000 through 2007.
No deferred taxes have been provided on the
accumulated unremitted earnings of $29.5 million for
the Companys foreign subsidiaries as of September
30, 2009. The Companys intention is to reinvest
these earnings indefinitely. In the event these
foreign entities earnings were distributed, it is
estimated that U.S. taxes, net of available foreign
tax credits, of approximately $5.1 million would be
due, which would correspondingly reduce the
Companys net earnings.
As of September 30, 2009, the Company had $3.3
million of unrecognized benefits (see table
below), of which $3.2 million, net of Federal
benefit, if recognized, would affect the Companys
effective tax rate.
A reconciliation of the Companys unrecognized tax
benefits for the year ended September 30, 2009 is
presented in the table below:
(Dollars in millions) | ||||
Balance as of October 1, 2008 |
$ | 13.0 | ||
Increases related to prior year tax positions |
0.2 | |||
Decreases related to prior year tax positions |
(10.0 | ) | ||
Increases related to current year tax positions |
0.9 | |||
Decreases related to settlements with taxing authorities |
(0.7 | ) | ||
Lapse of statute of limitations |
(0.1 | ) | ||
Balance as of September 30, 2009 |
$ | 3.3 | ||
The $10.0 million decrease related to prior
year tax positions was primarily the result of the
closing of a U.S. taxing authoritys examination of
the Companys research credit claims and the
confirmation of the Companys tax position for the
deduction of losses realized on the disposition of
a portion of the MicroSep business in 2004. It is
the Companys policy to record the tax effects of
changes in the opening balance of unrecognized tax
benefits in net earnings from continuing
operations.
The Company anticipates a $0.2 million reduction in
the amount of unrecognized tax benefits in the next
twelve months as a result of a lapse of the
applicable statute of limitations. The Companys
policy is to include interest related to unrecognized
tax benefits in income tax expense and penalties in
operating expense. As of September 30, 2009, the
Company had accrued interest related to uncertain tax
positions of $0.1 million, net of Federal income tax
benefit, on its consolidated balance sheet. No
penalties have been accrued.
The principal
jurisdictions for which the Company files income tax
returns are U.S. Federal and the various city, state,
and international locations where the Company has
operations. Due to the timing of the utilization of
the Companys net operating loss, the 1994 through
2008 U.S. Federal tax years remain subject to income
tax examination. In the fourth quarter of 2009, the
Internal Revenue Service (IRS) completed its
examination of the Companys U.S. income tax returns
for the periods ended September 30, 2003 through
September 30, 2007; and the Company and the IRS
reached mutual agreement of the adjustments to those
returns. Various state tax years from 2004 through
2008 remain subject to income tax examinations. The
Company is subject to income tax in many
jurisdictions outside the United States, none of
which is individually material to the Companys
financial position, statements of cash flows, or
results of operations.
9. Debt
Debt consists of the following at September 30, 2009 and 2008:
(Dollars in thousands) | 2009 | 2008 | ||||||
Revolving credit facility,
including current portion |
$ | 180,467 | 233,650 | |||||
Current portion of long-term debt |
(50,000 | ) | (50,000 | ) | ||||
Total long-term debt,
less current portion |
$ | 130,467 | 183,650 | |||||
ESCO TECHNOLOGIES INC. 34 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2009, the Company had
approximately $193 million available to borrow
comprised of: approximately $143 million available
under the credit facility, plus a $50 million
increase option, in addition to $44.6 million cash on
hand. The Company classified $50 million as the
current portion on long-term debt as of September 30,
2009, as the Company intends to repay this amount
within the next twelve months; however, the Company
has no contractual obligation to repay such amount
during the next twelve months. The credit facility
has a maturity date of November 30, 2012.
The credit facility requires, as determined by
certain financial ratios, a facility fee ranging from
15 to 25 basis points per annum on the unused
portion. The terms of the facility provide that
interest on borrowings may be calculated at a
spread over the London Interbank Offered Rate (LIBOR)
or based on the prime rate, at the Companys
election. The facility is secured by the unlimited
guaranty of the Companys material domestic
subsidiaries and a 65% pledge of the material foreign
subsidiaries share equity. The financial covenants
of the credit facility include a leverage ratio and
an interest coverage ratio. During 2009 and 2008, the
maximum aggregate short-term borrowings at any
month-end were $225.7 million and $274.7 million,
respectively; the average aggregate short-term
borrowings outstanding based on month-end balances
were $210.8 million and $249.8 million, respectively;
and the weighted average interest rates were 3.26%,
4.75%, and 6.24% for 2009, 2008 and 2007,
respectively. The letters of credit issued and
outstanding under the credit facility totaled $7.2
million and $6.6 million at September 30, 2009, and
2008, respectively.
10. Capital Stock
The 29,771,103 and 29,465,154 common shares as
presented in the accompanying Consolidated Balance
Sheets at September 30, 2009 and 2008 represent the
actual number of shares issued at the respective
dates. The Company held 3,357,046 and 3,375,106
common shares in treasury at September 30, 2009 and
2008, respectively.
In August 2009, the Companys Board of Directors
authorized an open market common stock repurchase
program of the Companys shares at a value not to
exceed $30 million, subject to market conditions and
other factors which covers the period through
September 30, 2010. There were no stock repurchases
during 2009 or 2008. The Company repurchased $10
million or 265,000 shares during 2007.
11. Share-Based Compensation
The Company provides compensation benefits to
certain key employees under several share-based
plans providing for employee stock options and/or
performance-accelerated restricted shares
(restricted shares), and to non-employee directors
under a non-employee directors compensation plan.
During fiscal 2004, the Board of Directors
authorized and the shareholders approved, the 2004
Incentive Compensation Plan, which states, in part,
that on February 5, 2004, there shall be 2,000,000
shares added to the authorized shares allocated for
the grant of stock options, stock appreciation
rights, performance-accelerated restricted stock, or
other full value awards. Of these, shares up to
600,000 may be utilized for performance-accelerated
restricted stock or other full value awards. At
September 30, 2009, the maximum number of full value
shares available for issue under the 2004 Incentive
Compensation Plan and the 2001 Stock Incentive Plan
was 600,000 and 89,708 shares, respectively.
Stock Option Plans
The Companys stock option awards are generally
subject to graded vesting over a three-year service
period. All outstanding options were granted at
prices equal to fair market value at the date of
grant. The options granted prior to September 30,
2003 have a ten-year contractual life from date of
issuance, expiring in various periods through 2013.
Beginning in fiscal 2004, the options granted have a
five-year contractual life from date of issuance. The
Company recognizes compensation cost on a
straight-line basis over the requisite service period
for the entire award.
The fair value of each option award is estimated as
of the
date of grant using the Black-Scholes option pricing
model. The weighted average assumptions for the
periods indicated are noted below. Expected
volatility is based on historical volatility of
ESCOs stock calculated over the expected term of
the option. For fiscal years 2009 and 2008, the
Company utilized historical company data to develop
its expected term assumption. For fiscal year 2007,
the expected term was calculated using the
simplified method for plain-vanilla options. The
risk-free rate for the expected term of the option
is based on the U.S. Treasury yield curve in effect
at the date of grant. 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 2009, 2008 and 2007, respectively:
expected dividend yield of 0% in all periods;
expected volatility of 39.3%, 34.8% and 27.3%;
risk-free interest rate of 1.9%, 2.9% and 4.6%; and
expected term of 3.8 years, 3.8 years and 3.5 years.
ESCO TECHNOLOGIES INC. 35 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding stock options awarded under the option plans is as follows:
FY2009 | FY2008 | FY2007 | ||||||||||||||||||||||
Estimated | Estimated | Estimated | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Shares | Avg. Price | Shares | Avg. Price | Shares | Avg. Price | |||||||||||||||||||
October 1, |
1,139,201 | $ | 30.40 | 1,558,941 | $ | 30.35 | 1,387,348 | $ | 26.60 | |||||||||||||||
Granted |
129,300 | $ | 37.42 | 16,000 | $ | 35.82 | 296,280 | $ | 45.71 | |||||||||||||||
Exercised |
(336,876 | ) | $ | 22.85 | (295,339 | ) | $ | 24.83 | (101,683 | ) | $ | 21.56 | ||||||||||||
Cancelled |
(39,799 | ) | $ | 45.03 | (140,401 | ) | $ | 42.22 | (23,004 | ) | $ | 40.59 | ||||||||||||
September 30, |
891,826 | $ | 33.63 | 1,139,201 | $ | 30.40 | 1,558,941 | $ | 30.35 | |||||||||||||||
At September 30, |
||||||||||||||||||||||||
Reserved for future grant |
935,345 | 1,010,014 | 878,238 | |||||||||||||||||||||
Exercisable |
683,192 | $ | 31.61 | 884,812 | $ | 26.25 | 951,066 | $ | 21.99 | |||||||||||||||
The aggregate intrinsic value of options exercised
during 2009, 2008 and 2007 was $5.2 million, $5.5
million and $2.4 million, respectively. The aggregate
intrinsic value of stock options outstanding and
exercisable at September 30, 2009 was $7.9 million.
The weighted-average contractual life of stock
options outstanding at September 30, 2009 was 2.1
years. The weighted-average fair value of stock
options per share granted in 2009, 2008, and 2007 was
$12.11, $10.98, and $12.25, respectively.
Summary information regarding stock options
outstanding at September 30, 2009 is presented
below:
Options Outstanding | ||||||||||||
Weighted- | ||||||||||||
Average | Weighted | |||||||||||
Number | Remaining | Average | ||||||||||
Range of | Outstanding at | Contractual | Exercise | |||||||||
Exercise Prices | Sept. 30, 2009 | Life | Price | |||||||||
$7.09 - $13.64 |
143,492 | 1.6 years | $ | 11.08 | ||||||||
$14.52 - $32.32 |
137,158 | 2.9 years | $ | 15.01 | ||||||||
$35.18 - $42.99 |
349,661 | 2.2 years | $ | 40.26 | ||||||||
$43.83 - $54.88 |
261,515 | 2.0 years | $ | 46.91 | ||||||||
891,826 | 2.1 years | $ | 33.63 | |||||||||
Exercisable Options Outstanding | ||||||||
Weighted | ||||||||
Number | Average | |||||||
Range of | Exercisable at | Exercise | ||||||
Exercise Prices | Sept. 30, 2009 | Price | ||||||
$7.09 - $13.64 |
143,492 | $ | 11.08 | |||||
$14.52 - $32.32 |
135,608 | $ | 14.86 | |||||
$35.18 - $42.99 |
215,458 | $ | 42.04 | |||||
$43.83 - $54.88 |
188,634 | $ | 47.35 | |||||
683,192 | $ | 31.61 | ||||||
Performance-accelerated Restricted Share Awards
The performance-accelerated restricted shares
(restricted shares) have a five-year term with
accelerated vesting if certain performance targets
are achieved. In these cases, if it is probable that
the performance condition will be met, the Company
recognizes compensation cost on a straight-line
basis over the shorter performance period;
otherwise, it will recognize compensation cost over
the longer service period. Compensation cost for the
majority of the outstanding restricted share awards
is being recognized over the longer performance
period as it is not probable the performance
condition will be met. The restricted share award
grants were valued at the stock price on the date of
grant. Pretax compensation expense related to the
restricted share awards was $2.8 million, $1.2
million and $1.5 million for fiscal years ended
September 30, 2009, 2008 and 2007, respectively.
The following summary presents information regarding
outstanding restricted share awards as of September
30, 2009 and changes during the period then ended:
Weighted | ||||||||
Shares | Avg. Price | |||||||
Nonvested at October 1, 2008 |
202,895 | $ | 41.15 | |||||
Granted |
98,459 | $ | 37.35 | |||||
Cancelled |
(1,000 | ) | $ | 30.39 | ||||
Nonvested at September 30, 2009 |
300,354 | $ | 39.94 | |||||
Non-Employee Directors Plan
The non-employee directors compensation plan provides
to each non-employee director a retainer of 800
common shares per quarter. Compensation expense
related to the non-employee director grants was $0.7
million, $0.7 million and $0.8 million for the years
ended September 30, 2009, 2008 and 2007, respectively.
ESCO TECHNOLOGIES INC. 36 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total share-based compensation cost that has been
recognized in results of operations and included
within SG&A (continuing operations) was $4.9 million,
$4.0 million and $4.8 million for the years ended
September 30, 2009, 2008 and 2007, respectively. The
total income tax benefit recognized in results of
operations for share-based compensation arrangements
was $1.7 million, $1.1 million and $1.2 million for
the years ended September 30, 2009, 2008 and 2007,
respectively. The Company has elected to use tax law
ordering rules when calculating the income tax
benefit associated with its share-based payment
arrangements. In addition, the Company elected to use
the simplified method of calculating the pool of
excess tax benefits available to absorb tax
deficiencies recognized. As of September 30, 2009,
there was $7.9 million of total unrecognized
compensation cost related to share-based compensation
arrangements. That cost is expected to be recognized
over a weighted-average period of 2.4 years.
12. Retirement and Other Benefit Plans
Substantially all domestic employees are covered by a
defined contribution pension plan maintained by the
Company. Effective December 31, 2003, the Companys
defined benefit plan was frozen and no additional
benefits will be accrued after that date. As a
result, the accumulated benefit obligation and
projected benefit obligation are equal. These frozen
retirement income benefits are provided to employees
under defined benefit pay-related and flat-dollar
plans, which are noncontributory. In conjunction with
the acquisition of Doble, the Company assumed
responsibility for their defined benefit plan and has
frozen the plan effective December 31, 2008 and no
additional benefits will be accrued after that date.
The annual contributions to the defined benefit
retirement plans equal or exceed the minimum funding
requirements of the Employee Retirement Income
Security Act or applicable local regulations. In
addition to providing retirement income benefits, the
Company provides unfunded postretirement health and
life insurance benefits to certain retirees. To
qualify, an employee must retire at age 55 or later
and the employees age plus service must equal or
exceed 75. Retiree contributions are defined as a
percentage of medical premiums. Consequently, retiree
contributions increase with increases in the medical
premiums. The life insurance plans are
noncontributory and provide coverage of a flat dollar
amount for qualifying retired employees. Effective
December 31, 2004, no new retirees are eligible for
life insurance benefits.
The Company adopted Statement of Financial Accounting
Standards No. 158, Employers Accounting for Defined
Benefit Pension and Other Postretirement Plans (now
codified as ASC 715, Compensation Retirement
Benefits), as of September 30, 2007. As a result of
adopting this Standard, the Company recorded a pretax
credit of $0.9 million to accumulated other
comprehensive income in equity as of September 30,
2007.
The Company uses a measurement date of September 30
for its pension and other postretirement benefit
plans. The Company has an accrued benefit liability
of $0.7 million and $0.6 million at September 30,
2009 and 2008, respectively, related to its other
postretirement benefit obligations. All other
information related to its postretirement benefit
plans is not considered material to the Companys
results of operations or financial condition.
The following tables provide a reconciliation of the
changes in the pension plans and fair value of
assets over the two-year period ended September 30,
2009, and a statement of the funded status as of
September 30, 2009 and 2008:
Pension Benefits | ||||||||
(Dollars in millions) | 2009 | 2008 | ||||||
Reconciliation of benefit obligation |
||||||||
Net benefit obligation at beginning of year |
$ | 59.7 | 46.2 | |||||
Service cost |
0.4 | 0.6 | ||||||
Interest cost |
4.2 | 3.8 | ||||||
Actuarial (gain) loss |
13.9 | (7.1 | ) | |||||
Acquisitions |
| 18.8 | ||||||
Settlements |
(0.3 | ) | | |||||
Gross benefits paid |
(3.0 | ) | (2.6 | ) | ||||
Net benefit obligation at end of year |
$ | 74.9 | 59.7 | |||||
Pension Benefits | ||||||||
(Dollars in millions) | 2009 | 2008 | ||||||
Reconciliation of fair value of plan assets |
||||||||
Fair value of plan assets at beginning of year |
$ | 48.0 | 38.2 | |||||
Actual return on plan assets |
(0.8 | ) | (9.6 | ) | ||||
Employer contributions |
2.6 | 0.8 | ||||||
Gross benefits paid |
(3.0 | ) | (2.6 | ) | ||||
Acquisitions |
| 21.2 | ||||||
Settlements |
(0.3 | ) | | |||||
Fair value of plan assets at end of year |
$ | 46.5 | 48.0 | |||||
Pension Benefits | ||||||||
(Dollars in millions) | 2009 | 2008 | ||||||
Funded Status |
||||||||
Funded status at end of year |
$ | (28.4 | ) | (11.7 | ) | |||
Unrecognized prior service cost |
| | ||||||
Unrecognized net actuarial (gain) loss |
| | ||||||
Accrued benefit cost |
(28.4 | ) | (11.7 | ) | ||||
Amounts recognized in the Balance Sheet
consist of: |
||||||||
Noncurrent asset |
| 1.6 | ||||||
Current liability |
(1.0 | ) | (1.3 | ) | ||||
Noncurrent liability |
(27.4 | ) | (11.9 | ) | ||||
Accumulated other comprehensive income
(before tax effect) |
30.5 | 11.7 | ||||||
Amounts recognized in Accumulated Other
Comprehensive Income consist of: |
||||||||
Net actuarial loss |
30.4 | 11.6 | ||||||
Prior service cost |
0.1 | 0.1 | ||||||
Accumulated Other Comprehensive Income |
$ | 30.5 | 11.7 | |||||
ESCO TECHNOLOGIES INC. 37 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table provides the components of net
periodic benefit cost for the plans for the years
ended September 30, 2009, 2008 and 2007:
Pension Benefits | ||||||||||||
(Dollars in millions) | 2009 | 2008 | 2007 | |||||||||
Service cost |
$ | 0.4 | 0.6 | | ||||||||
Interest cost |
4.2 | 3.8 | 2.7 | |||||||||
Expected return on plan assets |
(4.3 | ) | (4.3 | ) | (2.8 | ) | ||||||
Net actuarial loss |
0.2 | 0.2 | 0.4 | |||||||||
Net periodic benefit cost |
0.5 | 0.3 | 0.3 | |||||||||
Defined contribution plans |
4.4 | 4.2 | 3.6 | |||||||||
Total |
$ | 4.9 | 4.5 | 3.9 | ||||||||
The discount rate used in measuring the Companys
pension obligations was developed by matching yields
of actual high-quality corporate bonds to expected
future pension plan cash flows (benefit payments).
Over 400 Aa-rated, non-callable bonds with a wide
range of maturities were used in the analysis. After
using the bond yields to determine the present value
of the plan cash flows, a single representative rate
that resulted in the same present value was
developed. The expected long-term rate of return on
plan assets assumption was determined by reviewing
the actual investment return of the plans since
inception and evaluating those returns in relation to
expectations of various investment organizations to
determine whether long-term future returns are
expected to differ significantly from the past.
The following weighted-average assumptions were
used to determine the net periodic benefit cost
for the pension plans:
2009 | 2008 | 2007 | ||||||||||
Discount rate |
7.25 | % | 6.25 | % | 5.75 | % | ||||||
Rate of increase in
compensation levels |
N/A | N/A | N/A | |||||||||
Expected long-term rate of
return on assets |
8.25 | % | 8.25 | % | 8.25 | % | ||||||
The following weighted-average assumptions were used
to determine the net periodic benefit obligations
for the pension plans:
2009 | 2008 | |||||||
Discount rate |
5.5 | % | 7.25 | % | ||||
Rate of increase in
compensation levels |
N/A | N/A | ||||||
The assumed rate of increase in compensation levels
is not applicable in 2009, 2008 and 2007 as the
plan was frozen.
The asset allocation for the
Companys pension plans at the end of 2009 and
2008, the Companys acceptable range and the target
allocation for 2010, by asset category, follows:
Target | Acceptable | Percentage of Plan | ||||||||||||||
Allocation | Range | Assets at Year-end | ||||||||||||||
Asset Category | 2010 | 2009 | 2008 | |||||||||||||
Equity securities |
60 | % | 50-70 | % | 61 | % | 62 | % | ||||||||
Fixed income |
40 | % | 30-50 | % | 36 | % | 36 | % | ||||||||
Cash/cash equivalents |
0 | % | 0-5 | % | 3 | % | 2 | % | ||||||||
The Companys pension plan assets are managed by
outside investment managers and assets are rebalanced
when the target ranges are exceeded. Pension plan
assets consist principally of marketable securities
including common stocks, bonds, and interest-bearing
deposits. The Companys investment strategy with
respect to pension assets is to achieve a total rate
of return (income and capital appreciation) that is
sufficient to accomplish the purpose of providing
retirement benefits to all eligible and future
retirees of the pension plan. The Company regularly
monitors performance and compliance with investment
guidelines.
EXPECTED CASH FLOWS
Information about the expected cash flows for the
pension and other postretirement benefit plans
follows:
Pension | Other | |||||||
(Dollars in millions) | Benefits | Benefits | ||||||
Expected Employer Contributions 2010 |
$ | 3.5 | 0.1 | |||||
Expected Benefit Payments
|
||||||||
2010 |
4.2 | 0.1 | ||||||
2011 |
3.4 | 0.1 | ||||||
2012 |
3.5 | 0.1 | ||||||
2013 |
3.8 | 0.1 | ||||||
2014 |
3.6 | 0.1 | ||||||
2015-2020 |
$ | 22.9 | 0.4 | |||||
13. Derivative Financial Instruments
Market risks relating to the Companys operations
result primarily from changes in interest rates and
changes in foreign currency exchange rates. The
Company is exposed to market risk related to
changes in interest rates and selectively uses
derivative financial instruments, including
forward contracts and swaps, to manage
ESCO TECHNOLOGIES INC. 38 2009 ANNUAL REPORT
NOTES TO CONOLIDATED FINANCIAL STATEMENTS
these risks. During 2009, the Company entered
into two $40 million one-year forward interest rate
swaps effective October 5, 2009, to hedge some of its
exposure to variability in future LIBOR-based
interest payments on variable rate debt. In addition
during 2008, the Company entered into a two-year
amortizing interest rate swap to hedge some of its
exposure to variability in future LIBOR-based
interest payments on variable rate debt. The swap
notional amount for the first year was $175 million
amortizing to $100 million in the second year. All
derivative instruments are reported on the balance
sheet at fair value. The derivative instrument is
designated as a cash flow hedge and the gain or loss
on the derivative is deferred in accumulated other
comprehensive income until recognized in earnings
with the underlying hedged item. Including the impact
of interest rate swaps outstanding, the interest
rates on approximately 50% of the Companys total
borrowings were effectively fixed as of September 30,
2009. The following is a summary of the notional
transaction amounts and fair values for the Companys
outstanding derivative financial instruments by risk
category and instrument type, as of September 30,
2009.
Notional | Average | Average | Fair | |||||||||||||
(Dollars in thousands) | Amount | Rec Rate | Pay Rate | Value | ||||||||||||
Interest rate swap |
$ | 100,000 | 0.31 | % | 3.99 | % | $ | (685 | ) | |||||||
Interest rate swaps* |
$ | 80,000 | N/A | 1.52 | % | $ | (778 | ) |
* | These swaps represent forward-starting swaps and will be effective in October 2009. |
FAIR VALUE OF FINANCIAL INSTRUMENTS
Effective in fiscal 2009, the Company adopted
the guidance in SFAS 157, now codified as FASB ASC
825, Financial Instruments, which defines fair value
in generally accepted accounting principles and
expands disclosures about fair value measurements.
At September 30, 2009, the Companys financial
statements included a liability of $1.5 million
classified within accrued other expenses on the
Companys consolidated balance sheet, and
accumulated other comprehensive loss of $(0.9)
million (net of deferred income tax effects of $0.6
million) relating to the fair value of the interest
rate swaps.
FASB ASC 825 establishes a three-level hierarchy
for disclosure of fair value measurements, based
upon the transparency of inputs to the valuation of
an asset or liability as of the measurement date,
as follows:
Level 1: Inputs to the valuation
methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets.
Level 2: Inputs to the valuation methodology include
quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for
the asset or liability, either directly or
indirectly, for substantially the full term of the
financial instrument.
Level 3: Inputs to the valuation methodology are
unobservable and significant to the fair value
measurement.
The Companys interest rate swaps are valued using a
present value calculation based on an implied
forward LIBOR curve (adjusted for the Companys
credit risk) and are classified within Level 2 of
the valuation hierarchy, as presented below as of
September 30, 2009:
(Dollars in thousands) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
Liabilities |
||||||||||||||||
Interest rate swaps |
$ | | $ | 1,463 | $ | | $ | 1,463 |
14. Other Financial Data
Items charged to operations during the years
ended September 30, 2009, 2008 and 2007 included the
following:
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Salaries and wages
(including fringes) |
$ | 153,416 | 144,199 | 111,746 | ||||||||
Maintenance and repairs |
3,807 | 3,356 | 3,019 | |||||||||
Research and development
(R&D) costs: |
||||||||||||
Company-sponsored |
31,974 | 32,955 | 23,471 | |||||||||
Customer-sponsored |
2,937 | 5,293 | 3,718 | |||||||||
Total R&D |
$ | 34,911 | 38,248 | 27,189 | ||||||||
Other engineering costs |
14,370 | 8,644 | 7,764 | |||||||||
Total R&D and other
engineering costs |
$ | 49,281 | 46,892 | 34,953 | ||||||||
As a % of net sales |
8.0 | % | 7.6 | % | 8.0 | % | ||||||
A reconciliation of the changes in accrued product warranty
liability for the years ended September 30, 2009, 2008, and 2007
is as follows:
(Dollars in thousands) | 2009 | 2008 | 2007 | |||||||||
Balance as of October 1 |
$ | 2,788 | 1,445 | 1,390 | ||||||||
Additions charged to expense |
4,086 | 3,387 | 1,769 | |||||||||
Deductions |
(2,504 | ) | (2,044 | ) | (1,714 | ) | ||||||
Balance as of September 30 |
$ | 4,370 | 2,788 | 1,445 | ||||||||
ESCO TECHNOLOGIES INC. 39 2009 ANNUAL REPORT
NOTES TO CONOLIDATED FINANCIAL STATEMENTS
15. Business Segment Information
The Company is organized based on the products
and services it offers. Under this organizational
structure, the Company has three reporting segments:
Utility Solutions Group (USG), RF Shielding and Test
(Test) and Filtration/Fluid Flow (Filtration).
The USG segments operations consist of: Aclara
Power-Line Systems Inc. (Aclara PLS); Aclara RF
Systems Inc. (Aclara RF); Aclara Software Inc.
(Aclara Software) and Doble Engineering Company
(Doble). The Aclara Group is a proven supplier of
special purpose fixed-network communications systems
for electric, gas and water utilities, including
hardware and software to support advanced metering
applications. Aclaras STAR® Network system and
TWACS® technology provide advanced radio-frequency
(RF) and power-line (PLS) based fixed-network
technologies proven to meet the wide-ranging data
communications requirements of utilities worldwide.
Aclara Software applications add value across the
utility enterprise, addressing meter and energy data
management, distribution planning and operations,
customer service and revenue management. Doble
provides high-end, intelligent diagnostic test
solutions for the electric power delivery industry
and is a leading supplier of partial discharge
testing instruments used to assess the integrity of
high voltage power delivery equipment.
Test segment operations represent the EMC Group,
consisting primarily of ETS-Lindgren L.P. (ETS) and
Lindgren R.F. Enclosures, Inc. (Lindgren). The EMC
Group is an industry leader in providing its
customers with the ability to identify, measure and
contain magnetic, electromagnetic and acoustic
energy. The EMC Group also manufactures radio
frequency (RF) shielding products and components used
by manufacturers of medical equipment, communications
systems, electronic products, and shielded rooms for
high security data processing and secure
communication.
The Filtration segments operations
consist of: PTI Technologies Inc., VACCO Industries
and TekPackaging LLC. The companies within this
segment design and manufacture specialty filtration
products including hydraulic filter elements used in
commercial aerospace applications, unique filter
mechanisms used in micro propulsion devices for
satellites and custom designed filters for manned and
unmanned aircraft.
Accounting policies of the segments are the same as
those described in the summary of significant
accounting policies in Note 1 to the Consolidated
Financial Statements. The operating units within each
reporting segment have been aggregated because of
similar economic characteristics and meet the other
aggregation criteria of FASB ASC 280.
The Company evaluates the performance of its
operating units based on EBIT, which is defined as:
Earnings Before Interest and Taxes. Intersegment
sales and transfers are not significant. Segment
assets consist primarily of customer receivables,
inventories, capitalized software and fixed assets
directly associated with the production processes of
the segment. Segment depreciation and amortization is
based upon the direct assets listed above.
Information in the tables below is presented on a
Continuing Operations basis and excludes Discontinued
Operations.
NET SALES
(Dollars in millions) | ||||||||||||
Year ended September 30, | 2009 | 2008 | 2007 | |||||||||
Utility Solutions |
$ | 374.0 | 352.7 | 190.3 | ||||||||
Test |
138.4 | 144.8 | 141.5 | |||||||||
Filtration |
106.7 | 116.1 | 105.6 | |||||||||
Consolidated totals |
$ | 619.1 | 613.6 | 437.4 | ||||||||
One customer (PG&E) exceeded 10% of sales in
2009 with sales of $106.2 million and in 2008 with
sales of $110.2 million.
No customers exceeded 10% of net sales in 2007.
EBIT
(Dollars in millions) | ||||||||||||
Year ended September 30, | 2009 | 2008 | 2007 | |||||||||
Utility Solutions |
$ | 62.5 | 66.6 | 22.6 | ||||||||
Test |
14.1 | 13.9 | 14.4 | |||||||||
Filtration |
18.1 | 21.2 | 18.4 | |||||||||
Reconciliation to consolidated
totals (Corporate) |
(24.1 | ) | (20.6 | ) | (17.4 | ) | ||||||
Consolidated EBIT |
70.6 | 81.1 | 38.0 | |||||||||
Less: interest expense |
(7.4 | ) | (9.8 | ) | | |||||||
Add: interest income |
| | 0.7 | |||||||||
Earnings before income tax |
$ | 63.2 | 71.3 | 38.7 | ||||||||
ESCO TECHNOLOGIES INC. 40 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IDENTIFIABLE ASSETS
(Dollars in millions) | ||||||||||||
Year ended September 30, | 2009 | 2008 | 2007 | |||||||||
Utility Solutions |
$ | 193.2 | 198.3 | 143.5 | ||||||||
Test |
69.4 | 84.2 | 72.0 | |||||||||
Filtration |
61.7 | 59.7 | 56.2 | |||||||||
Corporate |
599.4 | 585.9 | 304.4 | |||||||||
Consolidated totals |
$ | 923.7 | 928.1 | 576.1 | ||||||||
Corporate assets consist primarily of
goodwill, deferred taxes, acquired intangible
assets and cash balances.
CAPITAL EXPENDITURES
(Dollars in millions) | ||||||||||||
Year ended September 30, | 2009 | 2008 | 2007 | |||||||||
Utility Solutions |
$ | 6.2 | 9.0 | 7.0 | ||||||||
Test |
1.5 | 5.9 | 4.0 | |||||||||
Filtration |
1.6 | 1.6 | 1.4 | |||||||||
Corporate |
| 0.2 | | |||||||||
Consolidated totals |
$ | 9.3 | 16.7 | 12.4 | ||||||||
In addition to the above amounts, the Company
incurred expenditures for capitalized software of
$5.0 million, $10.5 million and $28.6 million in
2009, 2008 and 2007, respectively.
DEPRECIATION AND AMORTIZATION
(Dollars in millions) | ||||||||||||
Year ended September 30, | 2009 | 2008 | 2007 | |||||||||
Utility Solutions |
$ | 20.5 | 18.0 | 10.1 | ||||||||
Test |
2.2 | 1.8 | 1.3 | |||||||||
Filtration |
2.7 | 2.8 | 2.8 | |||||||||
Corporate |
4.9 | 4.5 | 2.1 | |||||||||
Consolidated totals |
$ | 30.3 | 27.1 | 16.3 | ||||||||
GEOGRAPHIC INFORMATION
Net sales
(Dollars in millions) | ||||||||||||
Year ended September 30, | 2009 | 2008 | 2007 | |||||||||
United States |
$ | 508.4 | 482.7 | 351.9 | ||||||||
Far East |
48.4 | 55.5 | 38.0 | |||||||||
Europe |
28.2 | 34.4 | 21.1 | |||||||||
Other |
34.1 | 41.0 | 26.4 | |||||||||
Consolidated totals |
$ | 619.1 | 613.6 | 437.4 | ||||||||
Long-lived assets
(Dollars in millions) | ||||||||||||
Year ended September 30, | 2009 | 2008 | 2007 | |||||||||
United States |
$ | 62.3 | 66.2 | 46.0 | ||||||||
Europe |
3.2 | 3.5 | 2.0 | |||||||||
Other |
4.0 | 2.7 | 1.9 | |||||||||
Consolidated totals |
$ | 69.5 | 72.4 | 49.9 | ||||||||
Net sales are attributed to countries based on
location of customer. Long-lived assets are
attributed to countries based on location of the
asset.
16. Commitments and Contingencies
At September 30, 2009, the Company had $7.2
million in letters of credit outstanding as
guarantees of contract performance. As a normal
incidence of the businesses in
which the Company is engaged, various claims, charges
and litigation are asserted or commenced against the
Company. With respect to claims and litigation
asserted or commenced against the Company, it is the
opinion of Management that final judgments, if any,
which might be rendered against the Company are
adequately reserved, covered by insurance, or are not
likely to have a material adverse effect on its
financial condition or results of operation.
ESCO TECHNOLOGIES INC. 41 2009 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. Quarterly Financial Information (Unaudited)
First | Second | Third | Fourth | Fiscal | ||||||||||||||||
(Dollars in thousands, except per share amounts) | Quarter | Quarter | Quarter | Quarter | Year | |||||||||||||||
2009 |
||||||||||||||||||||
Net sales |
$ | 147,357 | 154,156 | 148,102 | 169,449 | 619,064 | ||||||||||||||
Net earnings from continuing operations |
5,840 | 10,605 | 11,093 | 21,767 | 49,305 | |||||||||||||||
Net earnings (loss) from discontinued operations |
(20 | ) | (209 | ) | 332 | | 103 | |||||||||||||
Net earnings |
5,820 | 10,396 | 11,425 | 21,767 | 49,408 | |||||||||||||||
Basic earnings (loss) per share: |
||||||||||||||||||||
Net earnings from continuing operations |
0.22 | 0.41 | 0.42 | 0.83 | 1.88 | |||||||||||||||
Net earnings (loss) from discontinued operations |
| (0.01 | ) | 0.02 | | | ||||||||||||||
Net earnings |
0.22 | 0.40 | 0.44 | 0.83 | 1.88 | |||||||||||||||
Diluted earnings (loss) per share: |
||||||||||||||||||||
Net earnings from continuing operations |
0.22 | 0.40 | 0.42 | 0.82 | 1.86 | |||||||||||||||
Net earnings (loss) from discontinued operations |
| (0.01 | ) | 0.01 | | | ||||||||||||||
Net earnings |
$ | 0.22 | 0.39 | 0.43 | 0.82 | 1.86 | ||||||||||||||
2008 |
||||||||||||||||||||
Net sales |
$ | 135,272 | 134,400 | 151,351 | 192,543 | 613,566 | ||||||||||||||
Net earnings from continuing operations |
8,734 | 6,561 | 12,401 | 19,873 | 47,569 | |||||||||||||||
Net earnings (loss) from discontinued operations |
(5,918 | ) | (479 | ) | 907 | 4,632 | (858 | ) | ||||||||||||
Net earnings |
2,816 | 6,082 | 13,308 | 24,505 | 46,711 | |||||||||||||||
Basic earnings (loss) per share: |
||||||||||||||||||||
Net earnings from continuing operations |
0.34 | 0.25 | 0.48 | 0.76 | 1.84 | |||||||||||||||
Net earnings (loss) from discontinued operations |
(0.24 | ) | (0.01 | ) | 0.03 | 0.18 | (0.04 | ) | ||||||||||||
Net earnings |
0.10 | 0.24 | 0.51 | 0.94 | 1.80 | |||||||||||||||
Diluted earnings (loss) per share: |
||||||||||||||||||||
Net earnings from continuing operations |
0.33 | 0.25 | 0.47 | 0.75 | 1.81 | |||||||||||||||
Net earnings (loss) from discontinued operations |
(0.22 | ) | (0.02 | ) | 0.03 | 0.18 | (0.03 | ) | ||||||||||||
Net earnings |
$ | 0.11 | 0.23 | 0.50 | 0.93 | 1.78 | ||||||||||||||
See Notes 2 and 3 of Notes to Consolidated Financial Statements for discussion of divestiture
and acquisition activity.
See Note 8 of Notes to Consolidated Financial Statements for discussion of the favorable settlement
of uncertain tax positions in the 2009 fourth quarter that positively affected EPS by $0.19 related
to the disposition of a portion of the MicroSep business in 2004.
ESCO TECHNOLOGIES INC. 42 2009 ANNUAL REPORT
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Companys Management is responsible for
establishing and maintaining adequate internal
control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of
1934). Our internal control over financial
reporting is designed to provide reasonable
assurance regarding the reliability of financial
reporting and the preparation of financial
statements for external purposes in accordance with
generally accepted accounting principles in the
United States of America.
Because of its inherent limitations, any system of
internal control over financial reporting, no matter
how well designed, may not prevent or detect
misstatements due to the possibility that a control
can be circumvented or overridden or that
misstatements due to error or fraud may occur that
are not detected. Also, because of changes in
conditions, internal control effectiveness may vary
over time.
Management assessed the effectiveness of the
Companys internal control over financial reporting
as of September 30, 2009 using criteria
established in Internal Control
Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission
(COSO) and concluded that the Company maintained
effective internal control over financial reporting
as of September 30, 2009 based on these criteria.
Our internal control over financial reporting as of
September 30, 2009, has been audited by KPMG LLP, an
independent registered public accounting firm, as
stated in their report which is included herein.
Victor L. Richey
|
Gary E. Muenster | |
Chairman, Chief Executive
Officer and President
|
Executive Vice President, and Chief Financial Officer |
ESCO TECHNOLOGIES INC. 44 2009 ANNUAL REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
ESCO Technologies Inc.:
We have audited the accompanying consolidated balance
sheets of ESCO Technologies Inc. and subsidiaries
(the Company) as of September 30, 2009 and 2008, and
the related consolidated statements of operations,
shareholders equity and cash flows for each of the
years in the three-year period ended September 30,
2009. We also have audited ESCO Technologies Inc.s
internal control over financial reporting as of
September 30, 2009, based on criteria established in
Internal Control Integrated Framework issued by
the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). ESCO Technologies Inc.s
management is responsible for these Consolidated
Financial Statements, for maintaining effective
internal control over financial reporting, and for
its assessment of the effectiveness of internal
control over financial reporting, included in the
accompanying
Managements Report on Internal Control Over
Financial Reporting. Our responsibility is to express
an opinion on these Consolidated Financial Statements
and an opinion on ESCO Technologies Inc.s internal
control over financial reporting based on our audits.
We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight
Board (United States). Those standards require that
we plan and perform the audits to obtain reasonable
assurance about whether the financial statements are
free of material misstatement and whether effective
internal control over financial reporting was
maintained in all material respects. Our audits of
the Consolidated Financial Statements included
examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements,
assessing the accounting principles used and
significant estimates made by management, and
evaluating the overall financial statement
presentation. Our audit of internal control over
financial reporting included obtaining an
understanding of internal control over financial
reporting, assessing the risk that a material
weakness exists, and testing and evaluating the
design and operating effectiveness of internal
control based on the assessed risk. Our audits also
included performing such other
procedures as we considered necessary in the
circumstances. We believe that our audits provide a
reasonable basis for our opinions.
A companys
internal control over financial reporting is a
process designed to provide reasonable assurance
regarding the reliability of financial reporting and
the preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles. A companys internal control
over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary
to permit preparation of financial statements in
accordance with generally accepted accounting
principles, and that receipts and expenditures of the
company are being made only in accordance with
authorizations of management and directors of the
company; and (3) provide reasonable assurance
regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the
risk that controls may become inadequate because of
changes in conditions, or that the degree of
compliance with the policies or procedures may
deteriorate.
In our opinion, the Consolidated Financial Statements
referred to above present fairly, in all material
respects, the financial position of ESCO Technologies
Inc. and subsidiaries as of September 30, 2009 and
2008, and the results of their operations and their
cash flows for each of the years in the three-year
period ended September 30, 2009, in conformity with
U.S. generally accepted accounting principles. Also
in our opinion, ESCO Technologies Inc. maintained, in
all material respects, effective internal control
over financial reporting as of September 30, 2009,
based on criteria established in Internal Control
Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
As discussed in Note 12 to the Consolidated Financial
Statements, the Company adopted Statement of
Financial Accounting Standards 158,
Employers Accounting for Defined Benefit Pension
and Other Postretirement Plans (now codified as ASC
715, Compensation Retirement Benefits), as of
September 30, 2007.
St. Louis, Missouri
November 30, 2009
ESCO TECHNOLOGIES INC. 45 2009 ANNUAL REPORT
FIVE-YEAR FINANCIAL SUMMARY
(Dollars in millions, except per share amounts) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
For years ended September 30: |
||||||||||||||||||||
Net sales |
$ | 619.1 | 613.6 | 437.4 | 374.8 | 334.3 | ||||||||||||||
Net earnings from continuing operations |
49.3 | 47.6 | 30.8 | 29.4 | 36.1 | |||||||||||||||
Net earnings (loss) from discontinued operations |
0.1 | (0.9 | ) | 2.9 | 1.9 | 7.3 | ||||||||||||||
Net earnings |
49.4 | 46.7 | 33.7 | 31.3 | 43.5 | |||||||||||||||
Earnings (loss) per share: |
||||||||||||||||||||
Basic: |
||||||||||||||||||||
Continuing operations |
$ | 1.88 | 1.84 | 1.19 | 1.14 | 1.42 | ||||||||||||||
Discontinued operations |
| (0.04 | ) | 0.11 | 0.08 | 0.29 | ||||||||||||||
Net earnings |
$ | 1.88 | 1.80 | 1.30 | 1.22 | 1.71 | ||||||||||||||
Diluted: |
||||||||||||||||||||
Continuing operations |
$ | 1.86 | 1.81 | 1.17 | 1.11 | 1.37 | ||||||||||||||
Discontinued operations |
| (0.03 | ) | 0.11 | 0.08 | 0.29 | ||||||||||||||
Net earnings |
$ | 1.86 | 1.78 | 1.28 | 1.19 | 1.66 | ||||||||||||||
As of September 30: |
||||||||||||||||||||
Working capital from continuing operations |
116.2 | 100.6 | 118.2 | 108.6 | 180.9 | |||||||||||||||
Total assets |
923.7 | 928.1 | 576.1 | 488.7 | 423.8 | |||||||||||||||
Total debt |
180.5 | 233.7 | | | | |||||||||||||||
Shareholders equity |
$ | 517.3 | 468.2 | 415.5 | 376.4 | 331.0 | ||||||||||||||
See Notes 2 and 3 of Notes to Consolidated Financial Statements for discussion of divestiture and
acquisition activity.
COMMON STOCK MARKET PRICE
ESCOs common stock and associated preferred stock purchase rights (subsequently referred to
as common stock) are listed on the New York Stock Exchange under the symbol ESE. The following
table summarizes the high and low prices of the common stock for each quarter of fiscal 2009 and
2008.
2009 | 2008 | |||||||||||||||
Quarter | High | Low | High | Low | ||||||||||||
First |
$ | 49.20 | 24.84 | $ | 41.86 | 32.64 | ||||||||||
Second |
42.87 | 29.04 | 43.56 | 32.65 | ||||||||||||
Third |
45.99 | 36.70 | 52.11 | 38.72 | ||||||||||||
Fourth |
46.87 | 35.44 | 54.06 | 38.85 | ||||||||||||
ESCO TECHNOLOGIES INC. 46 2009 ANNUAL REPORT
SHAREHOLDERS SUMMARY
SHAREHOLDERS ANNUAL MEETING
The Annual Meeting of the Shareholders of ESCO
Technologies Inc. will be held at 9:30 a.m.
Thursday, February 4, 2010, at the Companys
Corporate Headquarters, 9900A Clayton Road, St.
Louis, Missouri 63124. You may access this Annual
Report as well as the Notice of the meeting and the
Proxy Statement on the Companys Annual Meeting web
site at http://www.cfpproxy.com/5157.
CERTIFICATIONS
Pursuant to New York Stock Exchange (NYSE)
requirements, the Company submitted to the NYSE the
annual certifications, dated February 17, 2009 and
February 29, 2008, by the Companys chief executive
officer that he was not aware of any violations by
the Company of NYSEs corporate governance listing
standards. In addition, the Company filed with the
Securities and Exchange Commission the
certifications by the Companys chief executive
officer and chief financial officer required under
Section 302 of the Sarbanes-Oxley Act of 2002 as
exhibits to the Companys Forms 10-K for its fiscal
years ended September 30, 2009 and September 30,
2008.
10-K REPORT
A copy of the Companys 2009 Annual Report on
Form 10-K filed with the Securities and Exchange
Commission is
available to shareholders without charge. Direct your
written request to Patricia K. Moore, Director of
Investor Relations, ESCO Technologies Inc., 9900A
Clayton Road, St. Louis, Missouri 63124.
The Form
10-K is also available on the Companys web site at
www.escotechnologies.com.
INVESTOR RELATIONS
Additional investor-related information may be
obtained by contacting the Director of Investor
Relations at (314) 213-7277 or toll free at (888)
622-3726. Information is also available through the
Companys web site at www.escotechnologies.com or
via e-mail to pmoore@escotechnologies.com.
TRANSFER AGENT AND REGISTRAR
Shareholder inquiries concerning lost
certificates, transfer of shares or address changes
should be directed to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
1 (800) 368-5948
E-mail: info@rtco.com
10 Commerce Drive
Cranford, NJ 07016-3572
1 (800) 368-5948
E-mail: info@rtco.com
CAPITAL STOCK INFORMATION
ESCO Technologies Inc. common stock shares
(symbol ESE) are listed on the New York Stock
Exchange. There were approximately 2,400 holders
of record of shares of common stock at November 6,
2009.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
10 South Broadway, Suite 900
St. Louis, Missouri 63102
10 South Broadway, Suite 900
St. Louis, Missouri 63102
ESCO TECHNOLOGIES INC. 48 2009 ANNUAL REPORT