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March 27, 2006
Mr. Joseph Foti
Senior Assistant Chief Accountant
Division of Corporation Finance
Securities and Exchange Commission
100F Street, N.E.
Washington, D.C. 20549
RE: ESCO Technologies Inc.
File No. 1-10596
Form 10-K for the Fiscal Year Ended September 30, 2005
Form 10-Q for the Quarter Ended December 31, 2005
Dear Mr. Foti:
The attachment to this letter sets forth the response of ESCO Technologies Inc.
(the "Company") to the comment of the Division of Corporation Finance of the
Securities and Exchange Commission (the "Commission") dated March 7, 2006, with
respect to the above referenced filings. We have duplicated the comment set
forth in the comment letter in the attachment and have provided our response.
If you have any questions or if you require additional information, please do
not hesitate to contact me at 314-213-7246.
Sincerely,
/c/ Gary E. Muenster
Gary E. Muenster
Senior Vice President
and Chief Financial Officer
ESCO Technologies Inc.
9900A Clayton Road
St. Louis, MO 63124
Comment #1 - Summary of Significant Accounting Policies:
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We have read your proposed revision to the revenue recognition footnote in
response to our prior comment number two; however, we believe there are a few
items under your Communications Segment disclosure which require further
clarification. With respect to your software revenue arrangements, please tell
us and revise your footnote to disclose whether the hardware element included in
such arrangements is essential to the functionality of the software and if so,
disclose whether VSOE has been established for the hardware. If VSOE has not
been established, then please explain how the lack of VSOE affects the timing of
your revenue recognition in light of the hardware, among other elements other
than the software itself, is delivered over the contractual deployment period as
noted in your response. Please describe whether such hardware is considered a
specified element in the software arrangement and if so, disclose how VSOE has
been established for the hardware element.
If the hardware element is not essential to the functionality of the software,
then describe how the Company accounts for the revenue associated with the
hardware element in such arrangements.
Response
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As suggested by the Staff, Management will revise future filings to clarify our
revenue recognition policy to provide additional information with respect to the
hardware element included in our software revenue arrangements. Our proposed
addition to our revenue recognition policy (within the Communications segment)
in our Summary of Significant Accounting Policies in future filings is provided
below.
With respect to the Company's software revenue arrangements, the hardware
element included in such arrangements is essential to the functionality of the
software and therefore, considered to be software-related. Hardware is
considered a specified element in the software arrangement and VSOE has been
established for this element. VSOE for the hardware element is determined based
on the price when sold separately to customers.
Comment #2 - Management's Discussion and Analysis, Results of Operations, Net
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Sales:
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Reference is made to your discussion surrounding net sales of the Company's
Communications Segment. You indicate that the decrease in the first quarter of
fiscal 2006 is primarily due to lower shipments of $11 million in AMR product as
compared to the same period in fiscal 2005, and further, $9.9 million of the $11
million decrease was due to lower AMR product sales to the COOP market as a
result of a weakness in orders. Please tell us and revise future filings to
disclose whether you expect this trend to continue in the future. If so, please
also disclose whether it will have a material adverse impact to your future
results of operations and financial statements as a whole, and to the extent
possible, please quantify the impact. If you believe this trend will not
continue or have a material adverse effect, then please discuss the reasons why.
Response
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As suggested by the Staff, Management will revise future filings to disclose
that it does not expect this sales decrease to continue in the future and the
reasons why. The decline in orders during the second half of fiscal 2005 was due
in part to changes in the competitive landscape and the Company's efforts in
responding to requests for proposals in its pursuit of several large investor
owned utility customers. First quarter fiscal 2006 orders from the COOP market
were higher than each quarter in fiscal 2005 and second quarter fiscal 2006
orders are expected to be consistent with first quarter levels.
Comment #3 - Capitalized Software Costs:
- ----------------------------------------
In view of the significant amount of capitalized software costs included in
other assets within your balance sheets, and your disclosure in the capital
resources and liquidity section indicating that you expect to incur additional
software costs with respect to TNG in the future, please tell us and revise your
significant accounting policies in future filings to include the Company's
policy for capitalizing software development costs in accordance with SFAS No.
86. Your revised disclosure should include, but not be limited to, when the
Company begins the capitalization of software costs; that is, when it has
determined that technological feasibility has been established and describe the
type of costs that are capitalized prior to general release of the software
product. Also, we note that you amortize such costs generally over the useful
life of 3-7 years, please explain to us how you determined the period over which
you expect to receive future benefits from these assets and explain why you
believe the useful life being used is appropriate. Furthermore, please review
your notes in future filings to comply with all disclosure requirements under
paragraphs 11 and 12 of SFAS No. 86 and provide us with your planned revisions.
We may have further comment upon receipt of your response.
Response
- --------
As suggested by the Staff, Management will revise future filings to describe the
capitalized software costs in accordance with SFAS No. 86. In addition, we will
revise our notes to the financial statements in future filings to comply with
the disclosure requirements under paragraphs 11 and 12 of SFAS No. 86 to include
the following information: (a) unamortized computer software costs included in
each balance sheet presented; and (b) the total amount charged to expense in
each income statement presented for amortization of capitalized computer
software costs and for amounts written down to net realizable value. Our
proposed revision to our Summary of Significant Accounting Policies in future
filings is provided below.
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 SFAS No. 86, "Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed." Costs that
are capitalized 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. The carrying values of capitalized costs are evaluated
for impairment on an annual basis to determine if circumstances exist which
indicate the carrying value of the asset 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.