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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-10596
ESCO TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1554045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8888 LADUE ROAD, SUITE 200
ST. LOUIS, MISSOURI 63124-2090
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (314) 213-7200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No _____
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No___
The number of shares of the registrant's common stock outstanding at April 30,
2005 was 12,708,021.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
March 31,
---------
2005 2004
---- ----
Net sales $ 106,160 102,171
Costs and expenses:
Cost of sales 68,989 70,781
Selling, general and administrative expenses 21,269 19,111
Interest income (303) (483)
Other (income) expense, net (236) 513
------- -----
Total costs and expenses 89,719 89,922
Earnings before income taxes 16,441 12,249
Income tax expense 6,014 4,684
-------- --------
Net earnings from continuing operations 10,427 7,565
Loss from discontinued operations, net of tax
benefit of $(551) in 2004 - (2,200)
--------- ---------
Net earnings $ 10,427 5,365
====== =====
Earnings (loss) per share:
Basic - Continuing operations $ 0.83 0.59
- Discontinued operations - (0.17)
------ --------
- Net earnings $ 0.83 0.42
==== ====
Diluted - Continuing operations $ 0.80 0.57
- Discontinued operations - (0.17)
------ ------
- Net earnings $ 0.80 0.40
==== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Six Months Ended
March 31,
---------
2005 2004
---- ----
Net sales $ 210,535 198,567
Costs and expenses:
Cost of sales 137,498 137,051
Selling, general and administrative
expenses 41,082 37,880
Interest income (783) (519)
Other (income) expense, net (690) 1,127
---- -----
Total costs and expenses 177,107 175,539
Earnings before income taxes 33,428 23,028
Income tax expense 12,479 8,875
------ -----
Net earnings from continuing operations 20,949 14,153
Loss from discontinued operations, net of tax
benefit of $(1,208) in 2004 - (2,637)
---- ------
Net earnings $ 20,949 11,516
====== ======
Earnings (loss) per share:
Basic - Continuing operations $ 1.65 1.10
- Discontinued operations - (0.20)
----- -----
- Net earnings $ 1.65 0.90
==== ====
Diluted - Continuing operations $ 1.60 1.06
- Discontinued operations - (0.19)
----- -----
- Net earnings $ 1.60 0.87
==== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, September 30,
2005 2004
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 74,567 72,281
Accounts receivable, net 72,624 77,729
Costs and estimated earnings on long-term
contracts, less progress billings of
$4,867 and $2,210, respectively 2,680 2,476
Inventories 49,498 44,287
Current portion of deferred tax assets 21,057 27,810
Other current assets 8,933 8,947
----- -----
Total current assets 229,359 233,530
Property, plant and equipment, net 68,919 69,103
Goodwill 69,215 68,949
Other assets 29,860 30,858
------ ------
$ 397,353 402,440
========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 79 151
Accounts payable 31,610 32,455
Advance payments on long-term contracts, less costs
incurred of $8,722 and $8,017, respectively 3,325 4,305
Accrued salaries 9,350 11,896
Accrued taxes 2,286 4,454
Accrued other expenses 13,640 15,061
------ ------
Total current liabilities 60,290 68,322
------ ------
Deferred income 2,509 2,738
Pension obligations 13,904 13,899
Other liabilities 10,571 9,497
Long-term debt 386 368
--- ---
Total liabilities 87,660 94,824
Shareholders' equity:
Preferred stock, par value $.01 per share, authorized
10,000,000 shares - -
Common stock, par value $.01 per share, authorized
50,000,000 shares, issued 14,255,019 and 14,148,902
shares, respectively 143 142
Additional paid-in capital 225,892 221,711
Retained earnings 136,912 115,963
Accumulated other comprehensive loss (1,849) (3,698)
------ ------
361,098 334,118
Less treasury stock, at cost: 1,590,213 and
1,257,352 common shares, respectively (51,405) (26,502)
------- -------
Total shareholders' equity 309,693 307,616
------- -------
$ 397,353 402,440
========== =======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
March 31,
---------
2005 2004
---- ----
Cash flows from operating activities:
Net earnings $ 20,949 11,516
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net loss from discontinued operations, net of tax - 2,637
Depreciation and amortization 6,080 5,904
Changes in operating working capital (1,504) 2,309
Effect of deferred taxes 3,246 186
Other 337 1,768
--- -----
Net cash provided by operating activities-
continuing operations 29,108 24,320
------ ------
Net cash used by discontinued operations - (2,246)
----- ------
Net cash provided by operating activities 29,108 22,074
Cash flows from investing activities:
Proceeds from Riverhead note receivable - 2,120
Capital expenditures - continuing operations (4,568) (4,803)
Capital expenditures - discontinued operations - (1,379)
----- -----
Net cash used by investing activities (4,568) (4,062)
Cash flows from financing activities:
Net decrease in short-term borrowings - (9,635)
Proceeds from long-term debt - 378
Principal payments on long-term debt (81) (76)
Purchases of common stock into treasury (24,928) -
Other (including exercise of stock options) 2,755 708
----- ---
Net cash used by financing activities (22,254) (8,625)
------- ------
Net increase in cash and cash equivalents 2,286 9,387
Cash and cash equivalents, beginning of period 72,281 31,285
------ ------
Cash and cash equivalents, end of period $ 74,567 40,672
======== ======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements, in the opinion of
management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results for the interim
periods presented. The consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not
include all the disclosures required by accounting principles generally
accepted in the United States of America (GAAP). For further information
refer to the consolidated financial statements and related notes included
in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2004.
The results for the three and six-month periods ended March 31, 2005 are
not necessarily indicative of the results for the entire 2005 fiscal year.
2. DISCONTINUED OPERATIONS - 2004
Microfiltration and Separations Businesses (MicroSep) The MicroSep
businesses consisted of PTI Advanced Filtration Inc., PTI Technologies
Limited, and PTI S.p.A. Effective April 2, 2004, the Company completed the
sale of PTI Advanced Filtration Inc. (Oxnard, California) and PTI
Technologies Limited (Sheffield, England) to domnick hunter group plc for
$18 million in cash. On June 8, 2004, the Company completed the sale of PTI
S.p.A. (Milan, Italy) to a group of investors comprised of the subsidiary's
senior management for $5.3 million. An after-tax loss of $2.2 million and
$2.6 million related to the MicroSep businesses is reflected in the
Company's fiscal 2004 results from discontinued operations for the three
and six-month periods ended March 31, 2004, respectively.
3. EARNINGS PER SHARE (EPS)
Basic EPS is calculated using the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the weighted
average number of common shares outstanding during the period plus shares
issuable upon the assumed exercise of dilutive common share options and
vesting of performance-accelerated restricted shares (restricted shares) by
using the treasury stock method. The number of shares used in the
calculation of earnings per share for each period presented is as follows
(in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2005 2004 2005 2004
---- ---- ---- ----
Weighted Average Shares
Outstanding - Basic 12,633 12,874 12,722 12,857
Dilutive Options and Restricted
Shares 384 451 396 448
--- --- --- ---
Adjusted Shares- Diluted 13,017 13,325 13,118 13,305
====== ====== ====== ======
Options to purchase 1,500 shares of common stock at a price of $77.71 and
options to purchase 104,050 shares of common stock at prices ranging from
$45.36 - $48.58 were outstanding during the six-month periods ended March
31, 2005 and 2004, respectively, but were not included in the computation
of diluted EPS because the options' exercise prices were greater than the
average market price of the common shares. The options expire at various
periods through 2013. Approximately 24,000 and 16,000 restricted shares
were excluded from the respective computation of diluted EPS based upon the
application of the treasury stock method for the three month periods ended
March 31, 2005 and 2004, respectively.
Had compensation cost for the Company's stock option plans and restricted
share plans been determined based on the fair value at the grant date for
awards outstanding during the three and six-month periods ended March 31,
2005 and 2004 consistent with the provisions of SFAS 148, the Company's net
earnings and net earnings per share would have been as shown in the table
below:
(Unaudited)
(Dollars in thousands, except per
share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2005 2004 2005 2004
---- ---- ---- ----
Net earnings, as reported $10,427 5,365 $20,949 11,516
Add: stock-based employee compensation
expense included in reported net
earnings, net of tax 381 418 750 875
Less: total stock-based employee
compensation expense determined
under fair value based methods,
net of tax (927) (704) (1,844) (1,423)
---- ---- ------ ------
Pro forma net earnings $ 9,881 5,079 $19,855 10,968
======= ===== ======= ======
Net earnings per share:
Basic - as reported $ 0.83 0.42 $ 1.65 0.90
Basic - pro forma 0.78 0.39 1.56 0.85
==== ==== ==== ====
Diluted - as reported $ 0.80 0.40 $1.60 0.87
Diluted - pro forma 0.76 0.38 1.52 0.82
==== ==== ==== ====
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in the three and six-month periods ended March
31, 2005 and 2004, respectively: expected dividend yield of 0% in both
periods; expected volatility of 20.3% and 20.0%; risk-free interest rate of
4.2% and 3.8%; and expected life based on historical exercise periods of
4.25 years and 4.22 years.
4. INVENTORIES
Inventories consist of the following (in thousands):
March 31, September 30,
2005 2004
---- ----
Finished goods $12,607 11,444
Work in process, including long- term
contracts 15,116 13,759
Raw materials 21,775 19,084
------ ------
Total inventories $ 49,498 44,287
========= ======
5. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2005 and
2004 was $8.9 million and $5.2 million, respectively. Comprehensive income
for the six-month periods ended March 31, 2005 and 2004 was $22.8 million
and $13.8 million, respectively. For the three and six-month periods ended
March 31, 2005, the Company's comprehensive income was negatively impacted
by foreign currency translation adjustments of $1.6 million and positively
impacted by foreign currency translation adjustments of $1.8 million,
respectively. For the three and six-month periods ended March 31, 2004, the
Company's comprehensive income was positively impacted by foreign currency
translation adjustments of $2.5 million and $2.3 million, respectively.
6. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in three
segments: Filtration/Fluid Flow, Communications and Test.
Management evaluates and measures the performance of its operating segments
based on "Net Sales" and "EBIT", which are detailed in the table below.
EBIT is defined as earnings from continuing operations before interest and
taxes. The table below is presented for continuing operations and excludes
discontinued operations.
($ in thousands) Three Months ended Six Months Ended
March 31, March 31,
--------- ---------
NET SALES 2005 2004 2005 2004
---- ---- ---- ----
Filtration/Fluid Flow $ 40,975 42,219 $ 84,979 82,128
Communications 36,085 30,359 69,618 61,773
Test 29,100 29,593 55,938 54,666
------ ------ ------ ------
Consolidated totals $106,160 102,171 $210,535 198,567
======== ======= ======== =======
EBIT
Filtration/Fluid Flow $ 5,041 4,147(1) $ 12,100 7,658(2)
Communications 10,632 7,245 20,254 14,612
Test 3,338 3,277 5,420 5,474
Corporate (2,873) (2,903) (5,129) (5,235)
------ ------ ------ ------
Consolidated EBIT 16,138 11,766 32,645 22,509
Add: Interest income 303 483 783 519
--- --- --- ---
Earnings before income
taxes $ 16,441 12,249 $ 33,428 23,028
======== ====== ======== ======
(1) Includes $0.6 million of exit costs related to the Filtertek
Puerto Rico facility.
(2) Includes $1.3 million of exit costs related to the Filtertek
Puerto Rico facility.
7. RETIREMENT AND OTHER BENEFIT PLANS
A summary of net periodic benefit expense for the Company's defined
benefit plans and postretirement healthcare and other benefits for the
three and six-month periods ended March 31, 2005 and 2004 are shown in
the following tables. Effective December 31, 2003, the Company's
defined benefit plan was frozen and no additional benefits will be
accrued after that date. Net periodic benefit cost for each period
presented is comprised of the following:
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
(Dollars in thousands) 2005 2004 2005 2004
---- ---- ---- ----
Defined benefit plans
Service cost $ - 140 $ - 280
Interest cost 663 623 1,325 1,245
Expected return on assets (713) (675) (1,425) (1,350)
Amortization of:
Prior service cost - - - -
Actuarial (gain) loss 125 100 250 200
--- --- --- ---
Net periodic benefit cost $ 75 188 $ 150 375
===== === ====== ===
Net periodic postretirement (retiree and medical) benefit cost for each period
presented is comprised of the following:
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
(Dollars in thousands)
2005 2004 2005 2004
---- ---- ---- ----
Service cost $ 8 11 $15 16
Interest cost 10 17 20 25
Amortization of actuarial gain (2) (12) (9) (25)
-- --- -- ---
Net periodic postretirement
benefit cost $16 16 $26 16
=== == === ==
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (R), "Share-Based Payment" (SFAS No. 123 (R)). This Statement
replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and
supersedes APB No. 25,"Accounting for Stock Issued to Employees." SFAS 123
(R) requires all stock-based compensation to be recognized as an expense in
the financial statements and that such cost be measured according to the
fair value of stock options. SFAS 123 (R) will be effective for the first
annual period beginning after June 15, 2005. The Company plans to adopt the
provisions of this Statement in the first quarter of fiscal 2006 on a
prospective basis. The Company currently provides the pro forma disclosures
required by SFAS No. 148, "Accounting for Stock-Based Compensation-
Transition and Disclosure," on a quarterly basis (see "Note 3 - Earnings
Per Share").
In December 2004, the FASB issued FASB Staff Position FAS 109-2,
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004 (FSP 109-2)." The
American Jobs Creation Act of 2004, (the "Act") provides for a special
one-time deduction of 85 percent of certain foreign earnings repatriated
into the U.S. from non-U.S. subsidiaries through September 30, 2006. The
Company is currently evaluating the merits of repatriating funds under the
Act. The range of reasonably possible amounts of unremitted earnings that
are being considered for repatriation is between zero and $29.4 million,
which would require the Company to pay income taxes in the range of zero to
$2.1 million. Federal income taxes on the repatriated amounts would be
based on the 5.25% effective statutory rate as provided in the Act, plus
applicable withholding taxes. To date, the Company has not provided for
income taxes on unremitted earnings generated by non-U.S. subsidiaries
given the Company's historical intent to permanently invest these earnings
abroad. As a result, additional taxes may be required to be recorded for
any funds repatriated under the Act. The Company expects to complete its
evaluation of the repatriation provision of the Act by September 30, 2006.
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion refers to the Company's results from continuing
operations, except where noted. The Microfiltration and Separations businesses
(MicroSep), which were sold in the third quarter of fiscal 2004, are accounted
for as discontinued operations in accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." Accordingly, the MicroSep
businesses are reflected as discontinued operations in the financial statements
and related notes for fiscal 2004.
NET SALES
Net sales increased $4.0 million (3.9%) to $106.2 million for the second quarter
of fiscal 2005 from $102.2 million for the second quarter of fiscal 2004. Net
sales increased $11.9 million (6.0%) to $210.5 million for the first six months
of fiscal 2005 from $198.6 million for the first six months of fiscal 2004. The
sales increase for the second quarter of fiscal 2005 and in the first six months
of fiscal 2005 as compared to the prior year periods is primarily due to an
increase in sales within the Communications segment.
- -Filtration/Fluid Flow
Net sales decreased $1.2 million (2.8%) to $41.0 million for the second quarter
of fiscal 2005 from $42.2 million for the second quarter of fiscal 2004. Net
sales increased $2.9 million (3.5%) to $85.0 million for the first six months of
fiscal 2005 from $82.1 million for the first six months of fiscal 2004. The
sales decrease during the fiscal quarter ended March 31, 2005 as compared to the
prior year quarter is mainly due to the following: lower defense shipments at
VACCO of $1.1 million; a net sales decrease at Filtertek of $0.9 million driven
by lower automotive shipments; partially offset by higher commercial and
military aerospace shipments at PTI of $0.8 million. The sales increase for the
first six months of fiscal 2005 as compared to the prior year period is mainly
due to an increase in shipments of commercial and military aerospace products at
PTI of $3.0 million.
- -Communications
For the second quarter of fiscal 2005, net sales of $36.1 million were $5.7
million, or 18.8% higher than the $30.4 million of net sales recorded in the
second quarter of fiscal 2004. Net sales of $69.6 million in the first six
months of fiscal 2005 were $7.8 million, or 12.6% higher than the $61.8 million
recorded in the first six months of fiscal 2004. The sales increase in the
second quarter of fiscal 2005 as compared to the prior year period was the
result of higher shipments of Comtrak's SecurVision video security products
(which represented $3.1 million of the sales increase) and higher shipments of
automatic meter reading (AMR) equipment to the electric utility cooperative
(COOP) market and other customers (which represented $2.6 million of the sales
increase). The increase in sales in the first six months of fiscal 2005 as
compared to the prior year period was the result higher shipments of Comtrak's
video security products, which contributed $9.7 million to the sales increase,
partially offset by a decrease in sales of AMR equipment of $1.9 million.
Comtrak's sales were $3.5 million for the second quarter of fiscal 2005 as
compared to $0.4 million for the prior year second quarter and $10.6 million for
the first six months of fiscal 2005 as compared to $0.9 million for the prior
year six-month period.
The decrease in sales of AMR equipment for the first six months of fiscal 2005
as compared to the prior year period is due to the wind-down of the PPL Electric
Utilities Corporation (PPL) contract. Sales to PPL were $0.4 million and $7.4
million in the fiscal quarters ended March 31, 2005 and 2004, respectively, and
$1.4 million and $19.9 million in the first six months of fiscal 2005 and 2004,
respectively. The decrease in sales to PPL was partially offset by higher AMR
product sales to the COOP market and other customers. DCSI's sales to COOP's and
other customers were $32.2 million and $22.5 million in the fiscal quarters
ended March 31, 2005 and 2004, respectively, and were $57.6 million and $41.0
million for the first six months of fiscal 2005 and 2004, respectively.
- -Test
Net sales decreased $0.5 million (1.7%) to $29.1 million for the second quarter
of fiscal 2005 from $29.6 million for the second quarter of fiscal 2004. Net
sales increased $1.2 million (2.2%) to $55.9 million for the first six months of
fiscal 2005 from $54.7 million for the first six months of fiscal 2004. The
sales decrease during the fiscal quarter ended March 31, 2005 as compared to the
prior year quarter is mainly due to a decrease in sales from the Company's
European operations of approximately $3.7 million due to the completion of two
large test chamber projects. This decrease was partially offset by an increase
in sales from the Company's U.S. operations of approximately $2.0 million
(driven by the increase of government shielding projects), an increase in sales
from the Company's Asian operations of approximately $1.3 million and an
increase in sales of antennas and other components. The sales increase for the
first six months of fiscal 2005 as compared to the prior year period is mainly
due to additional test chamber installations, component sales, and government
shielding projects.
ORDERS AND BACKLOG
Backlog was $253.9 million at March 31, 2005 compared with $249.1 million at
September 30, 2004. The Company received new orders totaling $215.4 million in
the first six months of fiscal 2005. New orders of $99.8 million were received
in the first six months of fiscal 2005 related to Filtration/Fluid Flow
products, $62.7 million related to Communications products (includes $55.7
million of new orders related to AMR products), and $53.0 million related to
Test products. The new orders received in the Filtration/Fluid Flow segment
include a $15.9 million multi-year order for quiet valves and manifold
assemblies used on the Virginia Class Submarine.
GROSS PROFIT
The Company computes gross profit as net sales less cost of sales. The gross
profit margin is the gross profit divided by net sales, expressed as a
percentage. The gross profit margin was 35.0% and 30.7% in the second quarter of
fiscal 2005 and 2004, respectively. The gross profit margin was 34.7% and 31.0%
for the first six months of fiscal 2005 and 2004, respectively. The increase in
gross profit margins in the second quarter of fiscal 2005 and the first six
months of fiscal 2005 was mainly due to higher margins on shipments in the
Communications segment due to the favorable sales mix of AMR products resulting
from additional sales to the COOP market, and additional shipments of Comtrak's
products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the second quarter of
fiscal 2005 were $21.3 million (20.0% of net sales), compared with $19.1 million
(18.7% of net sales) for the prior year period. For the first six months of
fiscal 2005, SG&A expenses were $41.1 million (19.5% of net sales) compared with
$37.9 million (19.1% of net sales) for the prior year period. The increase in
SG&A spending in the fiscal quarter ended March 31, 2005 and in the first six
months of fiscal 2005 as compared to the respective prior year periods is due to
increased personnel costs ($2.1 million and $2.8 million, respectively)
associated with marketing, project management and new product development within
the Communications segment to further penetrate the investor owned utility
market.
OTHER (INCOME) EXPENSES, NET
Other (income) expenses, net, were $(0.2) million for the quarter ended March
31, 2005 compared to $0.5 million for the prior year quarter. Other (income)
expenses, net, were $(0.7) million for the first six months of fiscal 2005
compared to $1.1 million for the prior year period. Principal components of
other (income) expenses, net, for the first six months of fiscal 2005 included
$1.2 million of royalty income partially offset by $0.5 million of amortization
expense of identifiable intangible assets (primarily patents, licenses and
software). Principal components of other (income) expenses, net, for the first
six months of fiscal 2004 included $0.9 million of exit costs related to the
Filtertek Puerto Rico facility and $0.5 million of amortization of identifiable
intangible assets (primarily patents, licenses and software).
EBIT
The Company evaluates the performance of its operating segments based on EBIT,
defined below. EBIT was $16.1 million (15.2% of net sales) for the second
quarter of fiscal 2005 and $11.8 million (11.5% of net sales) for the second
quarter of fiscal 2004. For the first six months of fiscal 2005, EBIT was $32.6
million (15.5% of net sales) and $22.5 million (11.3% of net sales) for the
first six months of fiscal 2004. EBIT for the first six months of fiscal 2004
was negatively impacted by $1.3 million of severance and exit costs related to
the Filtertek Puerto Rico facility (Filtration/Fluid Flow segment).
This Form 10-Q contains the financial measure"EBIT", which is not calculated in
accordance with generally accepted accounting principles in the United States of
America (GAAP). EBIT provides investors and Management with an alternative
method for assessing the Company's operating results. The Company defines "EBIT"
as earnings from continuing operations before interest and taxes. Management
evaluates the performance of its operating segments based on EBIT and believes
that EBIT is useful to investors to demonstrate the operational profitability of
the Company's business segments by excluding interest and taxes, which are
generally accounted for across the entire Company on a consolidated basis. EBIT
is also one of the measures Management uses to determine resource allocations
within the Company and incentive compensation. The following table represents a
reconciliation of EBIT to net earnings from continuing operations.
Three Months ended Six Months ended
($ in thousands) March 31, March 31,
--------- ---------
2005 2004 2005 2004
---- ---- ---- ----
EBIT $16,138 11,766 $32,645 22,509
Interest income / (expense) 303 483 783 519
Less: Income taxes 6,014 4,684 12,479 8,875
----- ----- ------ -----
Net earnings from continuing
operations $10,427 7,565 $20,949 14,153
======= ===== ======= ======
- -Filtration/Fluid Flow
EBIT was $5.0 million (12.3% of net sales) and $4.2 million (10.0% of net sales)
in the second quarters of fiscal 2005 and 2004, respectively, and $12.1 million
(14.2% of net sales) and $7.7 million (9.4% of net sales) in the first six
months of fiscal 2005 and 2004, respectively. For the second quarter of fiscal
2005 as compared to the prior year quarter, EBIT increased $0.8 million due to
the following: a $1.0 million increase at Filtertek due to improved operating
efficiencies, which included $0.3 million of cost reimbursement mentioned below,
and royalty income from license agreements; a $0.6 million increase at PTI due
to higher aerospace sales; partially offset by a $0.8 million decrease at VACCO
due to lower defense shipments. For the first six months of fiscal 2005 as
compared to the prior year period, EBIT increased $4.4 million due to the
following: a $2.8 million increase at Filtertek, which included $0.9 million of
cost reimbursement from a medical device customer related to a shortfall between
its actual purchases versus the minimum contractually guaranteed amount (the
first six months of fiscal 2004 included $1.3 million of exit costs related to
the Puerto Rico facility); and a $1.6 million increase at PTI due to higher
shipments of aerospace products.
- -Communications
EBIT in the second quarter of fiscal 2005 was $10.6 million (29.5% of net sales)
as compared to $7.2 million (23.9% of net sales) in the prior year period. For
the first six months of fiscal 2005, EBIT was $20.3 million (29.1% of net sales)
as compared to $14.6 million (23.7% of net sales) in the prior year period. The
increase in EBIT in the second quarter of fiscal 2005 and in the first six
months of fiscal 2005 as compared to the prior year periods is mainly due to the
additional shipments of Comtrak's products, as well as the favorable sales mix
of AMR products resulting from additional sales to the COOP market, and cost
reductions realized on certain AMR components. The Company expects to continue
to increase its engineering and new product development expenditures in the
Communications segment in order to continue its growth in the AMR markets, and
to further differentiate its technology from the competition.
- -Test
EBIT in the second quarter of fiscal 2005 was $3.3 million (11.5% of net sales)
as compared to $3.3 million (11.1% of net sales) in the prior year period. For
the first six months of fiscal 2005, EBIT was $5.4 million (9.7% of net sales)
as compared to $5.5 million (10.0% of net sales) in the prior year period. In
the second quarter of fiscal 2005, EBIT margin was higher than the prior year
period due primarily to the favorable changes in sales mix resulting from
additional sales of antennas and other components. The decrease in EBIT margin
in the first six months of fiscal 2005 as compared to the prior year period is
mainly the result of installation cost overruns incurred during the first
quarter of fiscal 2005 on certain government shielding projects being installed
in challenging areas throughout the world, as well as increased costs of steel
and copper.
- -Corporate
Corporate costs included in EBIT were $(2.9) million and $(5.1) million for the
three and six-month periods ended March 31, 2005, respectively, compared to
$(2.9) million and $(5.2) million for the respective prior year periods.
INTEREST INCOME, NET
Interest income, net, was $0.3 million and $0.8 million for the three and
six-month periods ended March 31, 2005, respectively, compared to interest
income of $0.5 million for both respective prior year periods. The decrease in
interest income in the second quarter of fiscal 2005 as compared to the prior
year quarter is due to $0.3 million of interest received on the collection of
the Riverhead note receivable in February 2004. The increase in interest income
in the first six months of fiscal 2005 as compared to the respective prior year
period is due to higher average cash balances on hand in fiscal 2005 and a tax
refund of lookback interest.
INCOME TAX EXPENSE
The second quarter fiscal 2005 effective income tax rate was 36.6% compared to
38.2% in the second quarter of fiscal 2004. The effective income tax rate in the
first six months of fiscal 2005 was 37.3% compared to 38.5% in the prior year
period. The decrease in the effective income tax rate in the first six months of
fiscal 2005 is primarily due to the timing and volume of profit contributions of
the Company's foreign operations. The Company estimates the annual effective tax
rate for fiscal 2005 to be approximately 37.5%.
CAPITAL RESOURCES AND LIQUIDITY
Working capital increased to $169.1 million at March 31, 2005 from $165.2
million at September 30, 2004. During the first six months of fiscal 2005, cash
increased $2.3 million, net of the $24.9 million share repurchase. Accounts
receivable decreased by $5.1 million in the first six months of fiscal 2005, of
which $4.0 million represented collections from two significant customers (PREPA
and Boeing). Inventories increased by $5.2 million in the first six months of
fiscal 2005, of which $3.2 million related to the Test segment due to the timing
of sales and $1.3 million was to build safety stock within the Communications
segment due to a change in suppliers. In addition, accounts payable and accrued
expenses decreased by $7.0 million in the first six months of fiscal 2005
primarily due to the timing of vendor payments.
Net cash provided by operating activities from continuing operations increased
$4.8 million to $29.1 million in the first six months of fiscal 2005, compared
to $24.3 million in the same period of fiscal 2004.
During the second quarter of fiscal 2005, Filtertek signed an agreement to
license certain of its patents related to needle-free connectors to a third
party for $1.5 million in cash and recognized $0.2 million of royalty income
related to this transaction, after deducting $0.2 million of professional fees.
The unrealized gain of $1.1 million will be recognized on a straight-line basis
over the remaining patent life, through 2011.
Capital expenditures for continuing operations were $4.6 million and $4.8
million in the first six months of fiscal 2005 and 2004, respectively. Major
expenditures in the current period included manufacturing equipment and facility
modifications used in the Filtration/Fluid Flow businesses.
At March 31, 2005, the Company has approximately $7.0 million in commitments in
the Communications segment to further differentiate its products and to further
penetrate the investor owned utility market. This amount is expected to be spent
during fiscal 2005.
The closure and relocation of the Filtertek Puerto Rico facility was completed
in March 2004. The Puerto Rico facility is included in other current assets with
a carrying value of $3.6 million at March 31, 2005. The facility continues to be
actively marketed for sale.
In October 2004, the Company entered into a new $100 million five-year revolving
bank credit facility with a $50 million increase option, which replaced its
then-existing credit facility. At March 31, 2005, the Company had approximately
$98.6 million available to borrow under the credit facility in addition to $74.6
million cash on hand. Against the $100 million available under the revolving
credit facility at March 31, 2005, the Company had outstanding letters of credit
of $1.4 million. Cash flow from operations and borrowings under the Company's
bank credit facility are expected to meet the Company's capital requirements and
operational needs for the foreseeable future.
STOCK REPURCHASE PROGRAM
In August 2004, the Company's Board of Directors approved the extension of the
previously authorized (February 2001) open market repurchase program of up to
1.1 million shares, which is subject to market conditions and other factors and
covers the period ending September 30, 2006. During the first quarter of fiscal
2005, the Company repurchased 335,036 shares under this program for a total of
$24.9 million and has approximately 575,000 shares remaining under the program
at March 31, 2005. There were no stock repurchases during the second quarter of
fiscal 2005.
CRITICAL ACCOUNTING POLICIES
Management has evaluated the accounting policies used in the preparation of the
Company's financial statements and related notes and believes those policies to
be reasonable and appropriate. Certain of these accounting policies require the
application of significant judgment by management in selecting appropriate
assumptions for calculating financial estimates. By their nature, these
judgments are subject to an inherent degree of uncertainty. These judgments are
based on historical experience, trends in the industry, information provided by
customers and information available from other outside sources, as appropriate.
The most significant areas involving management judgments and estimates may be
found in the Critical Accounting Policies Section of Management's Discussion and
Analysis and in Note 1 to the Consolidated Financial Statements contained in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2004, at Exhibit 13.
OTHER MATTERS
Contingencies
As a normal incident of the businesses in which the Company is engaged, various
claims, charges and litigation are asserted or commenced against the Company. In
the opinion of Management, final judgments, if any, which might be rendered
against the Company in current litigation are adequately reserved, covered by
insurance, or would not have a material adverse effect on its financial
statements.
FORWARD LOOKING STATEMENTS
Statements in this report that are not strictly historical are "forward looking"
statements within the meaning of the safe harbor provisions of the federal
securities laws. Forward looking statements include those relating to the
estimates or projections made in connection with the Company's accounting
policies, annual effective tax rate, timing of Communications segment
commitments and expenditures, continued growth in the AMR market, outcome of
current claims and litigation, future cash flow, and capital requirements and
operational needs for the foreseeable future and the amounts, if any, and timing
of foreign earnings repatriated into the U.S. and the additional taxes resulting
from such repatriation. Investors are cautioned that such statements are only
predictions, and speak only as of the date of this report. The Company's actual
results in the future may differ materially from those projected in the
forward-looking statements due to risks and uncertainties that exist in the
Company's operations and business environment including, but not limited to:
weakening of economic conditions in served markets; changes in customer demands
or customer insolvencies; competition; intellectual property rights; successful
execution of the planned sale of the Company's Puerto Rico facility; material
changes in the costs of certain raw materials including steel, copper and
petroleum based resins; delivery delays or defaults by customers; termination
for convenience of customer contracts; timing and magnitude of future contract
awards; performance issues with key suppliers, customers and subcontractors;
collective bargaining and labor disputes; changes in laws and regulations
including changes in accounting standards and taxation requirements; changes in
foreign or U.S. business conditions affecting the distribution of foreign
earnings; costs relating to environmental matters; litigation uncertainty; and
the Company's successful execution of internal operating plans.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In August 2004, the Company's Board of Directors approved the extension of the
previously authorized (February 2001) open market repurchase program of up to
1.1 million shares, which is subject to market conditions and other factors and
covers the period ending September 30, 2006. There were no stock repurchases
during the second quarter of fiscal 2005.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign currency exchange rates. There has been
no material change to the Company's risks since September 30, 2004. Refer to the
Company's 2004 Annual Report on Form 10-K for further discussion about market
risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of Management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective as of that date. Disclosure controls and
procedures are controls and procedures that are designed to ensure that
information required to be disclosed in Company reports filed or submitted under
the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the Company's
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Company's shareholders was held on Thursday, February
3, 2005, to vote on the election of three directors. The voting for directors
was as follows:
Broker
For Withheld Non-Votes
--- -------- ---------
W. S. Antle III 11,084,405 421,565 0
L. W. Solley 11,086,219 419,751 0
J. D. Woods 11,084,870 421,100 0
The terms of C. J. Kretschmer, J. M. McConnell, V. L. Richey, Jr., J. M. Stolze
and D. C. Trauscht continued after the meeting.
In addition, the voting to ratify the Company's selection of KPMG LLP as
independent auditors for the fiscal year ending September 30, 2005 was as
follows:
For Against Abstain
--- ------- -------
11,338,450 160,166 7,353
ITEM 6. EXHIBITS
a)Exhibits
Exhibit
Number
3.1 Restated Articles of Incorporated by reference to Form
Incorporation 10-K for the fiscal year ended
September 30, 1999, at Exhibit 3(a)
3.2 Amended Certificate of Incorporated by reference to Form
Designation Preferences and 10-Q for the fiscal quarter ended
Rights of Series A March 31, 2000, at Exhibit 4(e)
Participating Cumulative
Preferred Stock of the
Registrant
3.3 Articles of Merger effective Incorporated by reference to Form10-Q
July 10, 2000 for the fiscal quarter ended June 30,
2000, at Exhibit 3(c)
3.4 Bylaws, as amended and restated. Incorporated by reference to Form10-K
for the fiscal year ended September
30, 2003, at Exhibit 3.4
4.1 Specimen Common Stock Incorporated by reference to Form10-Q
Certificate for the fiscal quarter ended June 30,
2000, at Exhibit 4(a)
4.2 Specimen Rights Certificate Incorporated by reference to Current
Report on Form 8-K dated February 3,
2000, at Exhibit B to Exhibit 4.1
4.3 Rights Agreement dated as of Incorporated by reference to Current
September 24, 1990 (as amended Report on Form 8-K dated February 3,
and Restated as of February 3, 2000, at Exhibit 4.1
2000) between the Registrant
and Registrar and Transfer
Company, as successor Rights
Agent
4.4 Credit Agreement dated as of Incorporated by reference to Form10-K
October 6, 2004 among the for the fiscal year ended September
Registrant, Wells Fargo Bank, 30, 2004, at Exhibit 4.4
N.A., as agent, and the lenders
listed therein
31.1 Certification of Chief
Executive Officer relating to
Form 10-Q for period ended
March 31, 2005
31.2 Certification of Chief
Financial Officer relating to
Form 10-Q for period ended
March 31, 2005
32 Certification of Chief
Executive Officer and Chief
Financial Officer relating to
Form 10-Q for period ended
March 31, 2005
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESCO TECHNOLOGIES INC.
/s/ Gary E. Muenster
Gary E. Muenster
Vice President and Chief Financial Officer
(As duly authorized officer and principal accounting
officer of the registrant)
Dated: May 10, 2005
Exhibit 31.1
CERTIFICATIONS
I, V.L. Richey, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ESCO
Technologies Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registran's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit and finance
committee of the registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 10, 2005
(s) V.L. Richey, Jr.
V.L. Richey, Jr.
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, G.E. Muenster, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ESCO
Technologies Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report.
4. The registrant's other certifying officer and I are responsible
for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) for the registrant and we have:
a. Designed such disclosure controls and procedures, or caused
such disclosure controls and procedures to be designed under
our supervision, to ensure that material information
relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those
entities, particularly during the period in which this
quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter (the
registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit and finance
committee of the registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: May 10, 2005
(s) G.E. Muenster
G.E. Muenster
Chief Financial Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of ESCO Technologies Inc. (the
"Company") on Form 10-Q for the period ended March 31, 2005 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we, V. L.
Richey, Jr., Chief Executive Officer of the Company, and G. E. Muenster, Chief
Financial Officer of the Company, certify, to the best of our knowledge,
pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: May 10, 2005
/s/ V.L. Richey, Jr.
V.L. Richey, Jr.
Chief Executive Officer
ESCO Technologies Inc.
/s/ G.E. Muenster
G.E. Muenster
Chief Financial Officer
ESCO Technologies Inc.