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April 1,
2010
Mr. Larry
Spirgel
Assistant
Director
Division
of Corporation Finance
Securities
and Exchange Commission
Washington,
D.C. 20549
RE: ESCO
Technologies Inc.
File No. 1-10596
Form 10-K for the Fiscal Year Ended
September 30, 2009
Filed November 30, 2009
Dear Mr.
Spirgel:
The
attachment to this letter sets forth the response of ESCO Technologies Inc. (the
“Company”) to the comment letter of the Division of Corporation Finance of the
Securities and Exchange Commission (the “Commission”) dated March 4, 2010, with
respect to the above referenced filing. We have duplicated the
comments set forth in the comment letter in the attachment and have provided our
response.
The
Company hereby acknowledges that:
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the
Company is responsible for the adequacy and accuracy of the disclosure in
the filings;
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staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the
filings; and
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the
Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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If you
have any questions or if you require additional information, please do not
hesitate to contact me at 314-213-7246.
Sincerely,
/s/ Gary
E. Muenster
Gary E.
Muenster
Executive
Vice President
and Chief
Financial Officer
ESCO
Technologies Inc.
9900A
Clayton Road
St.
Louis, MO 63124
Exhibit 13. Quantitative and
Qualitative Disclosures about Market Risk (comment #1):
In
light of the magnitude of your historic foreign currency translation
adjustments, it is unclear to us whether you have material foreign currency
market risk. Please advise and if appropriate include the disclosures
required by Item 305 of Regulation S-K in future filings.
Response
The
Company is exposed to foreign currency exchange rate risk inherent in its sales
commitments, anticipated sales, and anticipated purchases denominated in
currencies other than the U.S. dollar. The significant majority of
our foreign currency transactions are entered into and settled in the respective
foreign locations’ local functional currency. When this is not
the case, 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 approximately $1
million. The Company does not have material foreign currency market
risk (e.g. net foreign currency transaction gain/loss was less than 2% of net
earnings for fiscal years 2009, 2008 and 2007) and therefore, we have not
provided the disclosures required by Item 305 of Regulation S-K.
Exhibit 13. Quantitative and
Qualitative Disclosures about Market Risk (comment #2):
Similarly,
we note that only about half of your long term debt, which carries interest at
LIBOR, is hedged by interest rate swaps that are designated as cash flow
hedges. Include in future filings quantified disclosure of interest
rate risk as required by Item 305 of Regulation S-K. Otherwise,
please explain to us how you determined that your interest rate risk exposure
was immaterial.
Response
The
Company is exposed to market risk related to (1) various interest rate swaps the
Company has entered into in order to hedge some of its exposure to variability
in future LIBOR-based interest payments on its variable debt and (2) changes in
interest rates with respect to the Company’s variable debt that is not hedged by
these instruments.
Disclosure
regarding the Company’s market risk exposure relating to the swap agreements can
be found in Item 7A of the Company’s Form 10-K for the fiscal year ended
September 30, 2009.
As of
September 30, 2009, approximately 45% of the Company’s variable debt was not
hedged by interest rate swaps. The Company has determined that the
market risk relating to interest rates with respect to its variable debt that is
not hedged is not material. Based on a sensitivity analysis as of
September 30, 2009, we estimated that if market interest rates averaged one
percentage point higher, the effect would have been less than 2% of net earnings
for the fiscal year ended September 30, 2009. In future filings, we
will include quantified disclosure of interest rate risk as required by Item 305
of Regulation S-K.
Proxy Statement Incorporated
by Reference into Part III of Form 10-K
Compensation Discussion and
Analysis (comment #3):
We
note that you only classify one person, Alyson S. Barclay, as an executive
officer of the registrant, other than your principal executive officer and
principal financial officer. Please note that the definition of
executive officer in Rule 3b-7 is fairly expansive and is intended to be read
broadly. In this regard, we note that the definition includes “any
vice president of the registrant in charge of a principal business unit,
division or function (such as sales, administration, or
finance).” Please provide us with your legal analysis as to why no
other executive is categorized as an executive officer.
Response
We
believe our designation of executive officers is consistent with the definition
of executive officers under Rule 3b-7 and that no other individuals within the
Company performed functions that would warrant their designation as executive
officers. Aside from the Chief Financial Officer and the General
Counsel, who has historically been designated as an executive officer based on
the General Counsel’s significant input and oversight of contractual
and legal matters, the Company has five other Vice Presidents, which include the
Vice President of Tax who reports to the Chief Financial Officer, the Vice
President of Human Resources, the Vice President of Planning and
Development whose responsibilities are primarily devoted to acquisitions,
the Vice President and Treasurer who reports to the Chief Financial
Officer and a Vice President who has responsibility for various special
financial projects assigned by the CEO as well as oversight responsibility for
the Company’s smallest subsidiary, TekPackaging LLC, with revenues of less than
$20 million a year. These other Vice Presidents possess great
expertise in their respective fields, but are not considered executive officers
based on the narrow scope of their responsibilities, which do not extend beyond
their specialties, and their lack of policy-making responsibilities or
authority.
In
addition to the Company’s corporate staff, the Company also analyzed the roles
and responsibilities of the senior officers at each of its larger subsidiaries,
and determined that none of these individuals should be classified as executive
officers. This conclusion was reached based on the significant
oversight and involvement in the subsidiaries’ operations by the CEO and CFO of
the Company. Unlike many other organizations, the Company’s CEO and
CFO have historically actively participated in all significant decisions
occurring at the Company’s larger subsidiaries, and in fact many internal
policies require CEO and/or CFO approval of significant subsidiary events, such
as pricing proposed on material bids, significant capital expenditures,
significant real property leases, all real property purchases, new product
development investments above a specified threshold, and the hiring, termination
or salary adjustment of senior subsidiary personnel. In addition to
this heavy involvement in subsidiary affairs, the CEO and CFO have found it
necessary to more closely manage the three subsidiaries acquired in the
last two to five years including Doble Engineering Company, Aclara RF
Systems Inc. and Aclara Software Inc. due to the need to ensure that these
businesses were effectively integrated into the Company. Over the
last eighteen months, leadership changes occurring at three of the four
Company’s subsidiaries included in the Utility Solutions Group, the Company’s
largest business segment, required the Company’s CEO to serve at times as each
of the subsidiaries’ president and/or increase his involvement in the day-to-day
management of these subsidiaries. These historical management
practices, the need to more closely manage newly acquired businesses and recent
senior personnel changes have prompted a much more hands-on management approach
by the CEO and CFO of the Company and its subsidiaries, and explain and support
the Company’s conclusion that senior subsidiary officers do not yet have the
requisite authority or responsibilities for policy- making functions since these
responsibilities continue to be maintained by the CEO, the CFO and the General
Counsel, the designated executive officers.
In an
effort to ensure the correct designation of the Company’s executive officers,
the Nominating and Corporate Governance Committee of the Company’s Board of
Directors, in February 2008, reviewed the designation, and determined that these
officers and only these officers are properly designated as the Company’s
executive officers. This conclusion was based on the extent of
oversight and involvement that the executive officers had in all significant
decisions within the Company and its subsidiaries.
In light
of the factors stated above, the Company believes at this time that its
designation of executive officers meets the SEC’s criteria. In the
future, the Company will regularly review the SEC’s criteria in light of
changing roles and responsibilities of senior Company personnel to ensure the
Company’s classification of executive officers continues to be
correct.
Cash Bonus (comment
#4):
You
disclose that one criterion under the Performance Compensation Plan was a Cash
Flow Target. Please advise whether this measure is a GAAP financial
measure. If not, disclose in future filings how any non-GAAP
financial measure is calculated from the company’s audited financial
statements. Refer to Instruction 5 to Regulation S-K Item
402(b).
Response
One of
the Company’s criteria under the Performance Compensation Plan was the
achievement of the Cash Flow Target of $100 million for fiscal year
2009. This target is defined as cash flow generated from operations
at the subsidiary level excluding corporate cash activity [debt and interest
payments, acquisitions and divestitures, tax payments, pension contributions,
stock option exercises and corporate general and administrative
expenses]. This measure is considered a non-GAAP financial
measure. In future filings, the Company will disclose how any such
target that is a non-GAAP financial measure is calculated from the Company’s
audited financial statements.
Cash Bonus (comment
#5):
When
disclosing performance targets under your cash incentive plans, please also
disclose any threshold, target and maximum levels for each performance
goal. In addition, disclose how the payout amounts are determined
across the payout range. In this regard, you disclose that the
possible payouts range from a multiplier of .20 to 2.0 times the target cash
bonus, but you do not disclose the performance levels that would result in these
payout amounts. Furthermore, it is not clear why achieving 90% of the
EPS target amount resulted in a bonus paid at a .52 multiplier or why achieving
110% of the cash flow target resulted in a bonus paid at a 2.0
multiplier. Please expand your discussion in future
filings.
Response
In future
filings, we will comply with your comment requesting further information
regarding our cash incentive plans including the disclosure of any threshold,
target and maximum levels for each performance goal and how the payout amounts
are determined across the payout range.
Cash Bonus (comment
#6):
In
future filings, please provide further discussion and analysis regarding how the
Committee arrived at the actual amounts paid under your cash incentive
plans. For example, we note from disclosure in the Summary
Compensation Table on page 15 that Mr. Richey was paid a $369,000 bonus pursuant
to the Performance Compensation Plan; however, you do not provide a clear
explanation in your compensation discussion and analysis of how the Compensation
Committee arrived at this amount. Further, we note that 30% of the
PCP was based on the achievement of individual performance criteria, but you do
not provide a robust discussion of these individual performance objectives or
how each executive officer achieved them. We also note that the
Committee authorized a one-time discretionary increase adjustment to the PCP
payments to the executive officers other than the CEO, but you do not disclose
the amount of this discretionary increase or why your CEO did not also
participate in the award.
Response
In future
filings, we will comply with your comment requesting further discussion and
analysis regarding how the Committee arrived at the actual amounts paid under
our cash incentive plans.
With
respect to the executive officers’ individual performance objectives, the
Company does not believe that they are material, and believes that their
disclosure is therefore unnecessary. Each executive officer
individually determines his or her objectives. The objectives are
focused on key, short-term strategic factors such as operational matters, legal
issues, acquisitions, divestitures, cost savings or other issues of
importance. There are no weights assigned to the specific individual
objectives. The Committee uses its subjective judgment in the
evaluation of each executive officer’s achievement of the objectives on an
overall basis at the end of the fiscal year. In exercising its
judgment, the Committee takes into account the business and economic environment
at the time the objectives were established and any relevant circumstances which
may have changed during the ensuing year.
In the
event that the Committee were again to authorize a discretionary increase
adjustment to the PCP payments to executive officers, we will disclose the
amount of such adjustments and the reason why any executive officer did not
participate in the award if such were the case (for FY 2009, the CEO elected to
not participate in the discretionary award).
Compensation Consultant and
Market Checking (comment #7):
It
appears that the Committee uses the data from compensation surveys for
benchmarking purposes. If so, you must identify the companies
used. In future filings, for purposes of Item 402(b)(2)(xiv) of
Regulation S-K, please identify the benchmarked companies. For
further guidance, please refer to Question 118.05 in our Regulation S-K
Compliance and Disclosure Interpretations, available on our website at www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
Response
As stated
in the proxy statement section referred to (pages 9 and 10), the Committee’s
compensation consultant, Towers Perrin, provided a report in September 2008
which the Committee and management used for benchmarking purposes with regard to
FY 2009 executive compensation. This report included compensation
data from two separate groups of companies. One group consisted of
the six peer companies identified in our FY 2008 annual report to stockholders
as the “2007 Peer Group”, comprising the following: Itron, Inc.,
Badger Meter, Inc., Roper Industries Inc., Tektronix Inc., Pall Corporation and
Clarcor, Inc. For many years, the Committee has utilized the data
from the peer group for compensation benchmark purposes, and, because of the
small size of the peer group and periodic changes in its composition, has also
utilized data from a second, larger group of companies. For FY 2009,
the consultant compiled this data from the second group in a composite survey
based on two separate surveys of general manufacturing companies, adjusted to
the Company’s relative size. These were commercially available
surveys, one prepared by Towers Perrin, and the other by Watson
Wyatt. The Company did not select or have any role in the selection
of these surveys or the companies included therein. There were
between 144 and 272 companies included in the composite survey, depending on the
executive officer position. For this reason, we do not believe that
it is feasible or useful to identify these benchmarked companies in future
filings.
Summary Compensation Table,
page 15 of the Proxy Statement (comment #8):
In
your response letter, please explain why you report the entire amount awarded to
the named executive officers under the Performance Compensation Plan in the
Bonus column of the Summary Compensation Table. In this regard, it
appears that the majority of this award should have been classified as an
incentive plan award and reported in the Non-Equity Incentive Plan Compensation
column, whereas the additional one-time discretionary increase amount should
have been reported in the Bonus column. Further, we note that you do
not report the PCP awards in your Grants of Plan-Based Awards table on page
16. If you will revise your disclosure in future filings to comply
with this comment, please confirm this in your response. For further
information, refer to Item 402(a)(6)(iii) of Regulation S-K and Question 119.02
of Regulation S-K’s Compliance and Disclosure Interpretations, located on our
website at http://www.sec.gov/divisions/corpfin/guidance/regs-kinterp.htm.
Response
We agree
that the majority of the PCP payments should have been included in the “Non
Equity Incentive Plan Compensation” column of the Summary Compensation Table,
and that only the one-time discretionary increase amounts should have been
reported in the “Bonus” column. We also agree that the PCP awards
should have been reported in the “Grants Of Plan-Based Awards”
table. We will revise our disclosure in future filings to comply with
this comment.