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, 2007
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.)
9900A CLAYTON ROAD
ST. LOUIS, MISSOURI 63124-1186
(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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer __X_ Accelerated filer ____ Non-accelerated filer ____
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding at April 30, 2007
-------------------------------------- ------------------------------
[Common stock, $.01 par value per share] 25,944,354 shares
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,
---------
2007 2006
---- ----
Net sales $ 129,068 122,884
Costs and expenses:
Cost of sales 83,021 80,514
Selling, general and administrative 31,432 26,703
expenses
Amortization of intangible assets 2,909 1,536
Interest (income) expense, net (217) (100)
Other (income) and expenses, net (93) (1,548)
--- ------
Total costs and expenses 117,052 107,105
Earnings before income taxes 12,016 15,779
Income tax expense 2,398 8,436
----- -----
Net earnings $ 9,618 7,343
========= =====
Earnings per share:
Basic $ 0.37 0.29
========= ====
Diluted $ 0.36 0.28
========= ====
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,
---------
2007 2006
---- ----
Net sales $ 227,881 213,470
Costs and expenses:
Cost of sales 154,366 144,501
Selling, general and administrative 60,816 50,189
expenses
Amortization of intangible assets 5,046 2,049
Interest (income) expense, net (555) (817)
Other (income) and expenses, net (607) (1,926)
---- ------
Total costs and expenses 219,066 193,996
Earnings before income taxes 8,815 19,474
Income tax expense 578 9,926
--- -----
Net earnings $8,237 9,548
====== =====
Earnings per share:
Basic $ 0.32 0.37
======== ====
Diluted $ 0.31 0.36
======== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, September 30,
2007 2006
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 28,045 36,819
Accounts receivable, net 91,362 83,816
Costs and estimated earnings on
long-term contracts, less progress
billings of $5,337 and $4,405,
respectively 3,046 1,345
Inventories 59,270 50,984
Current portion of deferred tax assets 39,129 24,251
Other current assets 15,863 10,042
------ ------
Total current assets 236,715 207,257
Property, plant and equipment, net 71,129 68,754
Goodwill 144,430 143,450
Intangible assets, net 67,366 59,202
Other assets 9,367 10,031
----- ------
Total assets $ 529,007 488,694
========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ - -
Accounts payable 47,421 39,496
Advance payments on long-term
contracts, less costs incurred of
$18,633 and $19,532, respectively 7,035 7,367
Accrued salaries 12,792 13,932
Current portion of deferred revenue 14,146 3,569
Accrued other expenses 11,058 11,531
------ ------
Total current liabilities 92,452 75,895
Deferred revenue 3,761 7,458
Pension obligations 13,113 13,143
Deferred tax liabilities 18,361 3,750
Other liabilities 11,953 12,014
Long-term debt - -
------- -------
Total liabilities 139,640 112,260
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 29,063,694 and 29,030,995
shares, respectively 291 290
Additional paid-in capital 239,381 236,390
Retained earnings 201,283 193,046
Accumulated other comprehensive loss (490) (2,070)
---- ------
440,465 427,656
Less treasury stock, at cost:
3,158,366 and 3,166,026 common
shares, respectively (51,098) (51,222)
------- -------
Total shareholders' equity 389,367 376,434
------- -------
Total liabilities and shareholders' equity $ 529,007 488,694
========== =======
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,
---------
2007 2006
---- ----
Cash flows from operating activities:
Net earnings $ 8,237 9,548
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 10,571 7,219
Stock compensation expense 2,932 2,643
Changes in operating working capital (10,097) 7,624
Effect of deferred taxes (267) (1,563)
Change in deferred revenue and
costs, net 2,982 915
Other (25) (197)
------ ------
Net cash provided by operating
activities 14,333 26,189
Cash flows from investing activities:
Acquisition of businesses, less cash
acquired (1,250) (90,862)
Capital expenditures (7,180) (4,296)
Additions to capitalized software (15,320) (18,095)
------- -------
Net cash used by investing
activities (23,750) (113,253)
Cash flows from financing activities:
Borrowings from long-term debt - 47,000
Principal payments on long-term debt - (47,000)
Excess tax benefit from stock options
exercised 73 880
Proceeds from exercise of stock options 706 1,526
Other (136) 1,117
---- -----
Net cash provided by financing
activities 643 3,523
--- -----
Net decrease in cash and cash equivalents (8,774) (83,541)
Cash and cash equivalents, beginning of
period 36,819 104,484
------ -------
Cash and cash equivalents, end of period $ 28,045 20,943
======== ======
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, 2006. Certain 2006 amounts have been reclassified to conform
with the 2007 presentation.
The Company's business is typically not impacted by seasonality, however,
the results for the three and six-month periods ended March 31, 2007 are
not necessarily indicative of the results for the entire 2007 fiscal year.
2. 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,
--------- ---------
2007 2006 2007 2006
---- ---- ---- ----
Weighted Average Shares
Outstanding - Basic
25,895 25,659 25,885 25,620
Dilutive Options and
Restricted Shares 596 789 592 782
--- --- --- ---
Adjusted Shares- Diluted
26,491 26,448 26,477 26,402
====== ====== ====== ======
Options to purchase 582,322 shares of common stock at prices ranging from
$42.10 - $54.88 and options to purchase 282,069 shares of common stock at
prices ranging from $42.99 - $50.26 were outstanding during the three month
periods ended March 31, 2007 and 2006, 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 26,000 and 19,000
restricted shares were excluded from the computation of diluted EPS based
upon the application of the treasury stock method for the three-month
period ended March 31, 2007 and 2006, respectively.
3. 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.
Stock Option Plans
The Company's 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. Beginning with fiscal 2006 awards, the Company recognizes
compensation cost on a straight-line basis over the requisite service
period for the entire award. Prior to fiscal 2006, the Company calculated
the pro forma compensation cost using the graded vesting method.
The fair value of each option award is estimated as of the date of grant
using a Black-Scholes option pricing model. The weighted average
assumptions for the periods indicated are noted below. Expected volatility
is based on historical volatility of ESCO's stock calculated over the
expected term of the option. The expected term was calculated in accordance
with Staff Accounting Bulletin No. 107 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 the three month period ended March 31, 2007
and 2006, respectively: expected dividend yield of 0% in both periods;
expected volatility of 28.0% in both periods; risk-free interest rate of
4.9% and 4.5%; and expected term of 3.5 years in both periods. Pre-tax
compensation expense related to the stock option awards was $0.7 million
and $1.5 million for the three and six-month periods ended March 31, 2007,
respectively, and $0.6 million and $1.1 million for the respective prior
year periods.
Information regarding stock options awarded under the option plans is as
follows:
Aggregate Weighted-
Intrinsic Average
Weighted Value Remaining
Avg. (in Contractual
Shares Price millions) Life
Outstanding at October 1,387,348
1, 2006 $26.60
Granted 289,280 $45.75
Exercised (33,790) $22.67 $ 0.8
Cancelled (10,670) $35.79
------- ------
Outstanding at March 31,
2007 1,632,168 $30.02 $ 24.9 3.5 years
--------- ------
Exercisable at March 31,
2007 978,391 $21.35 $ 23.0
======= ======
The weighted-average grant-date fair value of options granted during the
six-month period ended March 31, 2007 and 2006 was $12.25 and $11.73,
respectively.
Performance-accelerated Restricted Share Awards
The performance-accelerated restricted shares (restricted shares) vest over
five years 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 all
outstanding restricted share awards is being recognized over the shorter
performance period as it is probable the performance condition will be met.
The restricted share award grants were valued at the stock price on the
date of grant. Pre-tax compensation expense related to the restricted share
awards was $0.5 million and $1.0 million for the three and six-month
periods ended March 31, 2007, respectively and $0.6 million and $1.1
million for the respective prior year periods.
The following summary presents information regarding outstanding restricted
share awards as of March 31, 2007 and changes during the six-month period
then ended:
Weighted
Shares Avg. Price
------ ----------
Nonvested at October 1, 2006 155,730 $ 34.33
Granted 62,030 $ 45.69
Vested (51,200) $ 24.60
------- ---------
Nonvested at March 31, 2007 166,560 $ 41.55
======= =========
Non-Employee Directors Plan
Pursuant to the non-employee directors compensation plan, each non-employee
director receives a retainer of 800 common shares per quarter. Pre-tax
compensation expense related to the non-employee director grants was $0.2
million and $0.4 million for the three and six-month periods ended March
31, 2007, respectively and $0.2 million and $0.5 million for the respective
prior year periods.
The total share-based compensation cost that has been recognized in results
of operations and included within SG&A was $1.4 million and $2.9 million
for the three and six-month periods ended March 31, 2007, respectively, and
$1.4 million and $2.6 million for the three and six-months periods ended
March 31, 2006. The total income tax benefit recognized in results of
operations for share-based compensation arrangements was $0.4 million and
$0.7 million for the three and six-month periods ended March 31, 2007
respectively, and $0.3 million and $0.7 million for the three and six-month
periods ended March 31, 2006. As of March 31, 2007, there was $11.7 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 3.4 years.
4. INVENTORIES
Inventories consist of the following (in thousands):
March 31, September 30,
2007 2006
---- ----
Finished goods $ 16,395 12,834
Work in process, including long- term 15,818 13,211
contracts
Raw materials 27,057 24,939
------ ------
Total inventories $ 59,270 50,984
========= ======
5. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2007 and
2006 was $10.2 million and $8.4 million, respectively. Comprehensive income
for the six-month periods ended March 31, 2007 and 2006 was $9.8 million
and $9.9 million, respectively. For the three and six-month periods ended
March 31, 2007, the Company's comprehensive income was positively impacted
by foreign currency translation adjustments of $0.6 million and $1.6
million, respectively. For the three and six-month periods ended March 31,
2006, the Company's comprehensive income was positively impacted by foreign
currency translation adjustments of $1.1 million and $0.3 million,
respectively.
6. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in three
segments: Communications, Filtration/Fluid Flow and Test. The components of
the Filtration/Fluid Flow segment are presented separately due to differing
long-term economics.
Management evaluates and measures the performance of its operating segments
based on "Net Sales" and "EBIT", which are detailed in the table below.
EBIT is defined as earnings before interest and taxes.
($ in thousands) Three Months ended Six Months ended
March 31, March 31,
--------- ---------
NET SALES 2007 2006 2007 2006
--------- ---- ---- ---- ----
Communications $ 49,226 43,239 $ 79,260 62,372
PTI 13,116 11,711 24,735 22,408
VACCO 8,460 8,325 15,141 16,379
Filtertek 24,340 25,012 46,617 47,707
------ ------ ------ ------
Filtration/Fluid 45,916 45,048 86,493 86,494
Flow
Test 33,926 34,597 62,128 64,604
------ ------ ------ ------
Consolidated
totals $129,068 122,884 $227,881 213,470
======== ======= ======== =======
EBIT
Communications 6,109 9,728 3,327 8,844
PTI 2,608 1,583 3,711 2,782
VACCO 2,254 1,441 2,592 3,332
Filtertek 1,492 1,699 1,868 2,696
----- ----- ----- -----
Filtration/Fluid 6,354 4,723 8,171 8,810
Flow
Test 4,061 4,338 6,204 7,254
Corporate (4,725) (3,110) (9,442) (6,251)
------ ------ ------ ------
Consolidated EBIT
11,799 15,679 8,260 18,657
Add: Interest
income 217 100 555 817
--- --- --- ---
Earnings before
income taxes $ 12,016 15,779 $ 8,815 19,474
======== ====== ========= ======
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, 2007 and 2006 are shown in the following
tables. 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) 2007 2006 2007 2006
---- ---- ---- ----
Defined benefit plans
Interest cost $ 688 650 $ 1,375 1,300
Expected return on
assets (700) (675) (1,400) (1,350)
Amortization of:
Prior service cost 2 - 5 -
Actuarial loss 73 125 170 250
-- --- --- ---
Net periodic benefit cost $ 63 100 $ 150 200
======= === ===== ===
Net periodic postretirement (retiree 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) 2007 2006 2007 2006
Service cost $ 10 9 $ 20 18
Interest cost 12 10 25 20
Prior service cost (1) (2) (3) (2)
Amortization of actuarial gain (2) 2 (13) (7)
-- - --- --
Net periodic postretirement
benefit cost $ 19 19 $ 29 29
==== == ==== ==
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" (SFAS 159). SFAS No. 159
permits companies to choose to measure certain financial instruments and
certain other items at fair value. The standard requires that unrealized
gains and losses on items for which the fair value option has been elected
be reported in earnings. SFAS 159 is effective as of the beginning of an
entity's first fiscal year that begins after November 15, 2007. SFAS No.
159 is effective for the company beginning in the first quarter of fiscal
year 2009, although earlier adoption is permitted. The adoption of SFAS 159
is not expected to have a material impact to the Company's financial
position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(SFAS 157). The purpose of SFAS No. 157 is to define fair value, establish
a framework for measuring fair value, and enhance disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The measurement and disclosure requirements are
effective for the Company in the first quarter of fiscal year 2009. The
adoption of SFAS 157 is not expected to have a material impact to the
Company's financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans" (SFAS 158), which
amends SFAS 87 and SFAS 106 to require recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the
balance sheet. Under SFAS 158, gains and losses, prior service costs and
credits, and any remaining transition amounts under SFAS 87 and SFAS 106
that have not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax effects.
The measurement date - the date at which the benefit obligation and plan
assets are measured - is required to be the Company's fiscal year-end,
which is the date the Company currently uses. SFAS 158 is effective for
publicly-held companies for fiscal years ending after December 15, 2006.
The adoption of SFAS 158 is not expected to have a material impact to the
Company's financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109."
This Interpretation is effective for the Company beginning October 1, 2007.
This Interpretation prescribes a recognition threshold and measurement
process for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The Company is
currently evaluating the adoption of this Interpretation and does not
currently have an estimate of the impact on the consolidated financial
statements.
In June 2006, the FASB issued EITF Issue No. 06-3, "How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented
in the Income Statement (That Is, Gross versus Net Presentation)". This
EITF Issue is effective for periods beginning after December 15, 2006 and
requires disclosure of the accounting policy for any tax assessed by a
governmental authority that is directly imposed on a revenue-producing
transaction on a gross (include in revenues and costs) or net (excluded
from revenues) basis. The Company's accounting policy is to record taxes
assessed by a governmental authority that is directly imposed on a
revenue-producing transaction on a net basis.
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. References to the second quarters of 2007
and 2006 represent the fiscal quarters ended March 31, 2007 and 2006,
respectively.
NET SALES
Net sales increased $6.2 million, or 5.0%, to $129.1 million for the second
quarter of 2007 from $122.9 million for the second quarter of 2006 due to the
2006 acquisitions of Hexagram and Nexus. Net sales increased $14.4 million, or
6.7% to $227.9 million for the first six months of fiscal 2007 from $213.5
million for the first six months of fiscal 2006 due to the 2006 acquisitions of
Hexagram and Nexus. Favorable foreign currency values resulted in approximately
$1.3 million and $2.4 million of the sales increase in the second quarter of
2007 and in the first six months of fiscal 2007, respectively.
- -Communications
Net sales increased $6.0 million, or 13.9% to $49.2 million for the second
quarter of 2007 from $43.2 million for the second quarter of 2006. Net sales
increased $16.9 million, or 27.1% to $79.3 million for the first six months of
fiscal 2007 from $62.4 million in the prior year period. The sales increase in
the second quarter of 2007 as compared to the prior year quarter was due to: an
increase in sales of $8.1 million from Hexagram including advanced metering
projects in Kansas City, and at PG & E; an increase in sales of $0.9 million
from Nexus; and a $3.0 million decrease in sales of DCSI's automatic meter
reading (AMR) products due to lower sales to TXU Electric Delivery Company (TXU)
and Puerto Rico Power Authority (PREPA) partially offset by additional sales to
Duke Energy and Florida Power & Light (FPL).
The sales increase in the first six months of fiscal 2007 as compared to the
prior year period was due to: an increase in sales of $15.7 million from
Hexagram (full six months of sales compared to two months included in the prior
year period) in addition to the items mentioned above; an increase in sales of
$3.3 million from Nexus (full six months of sales compared to four months
included in the prior year period); partially offset by a $2.2 million decrease
in sales of DCSI's AMR products.
The decrease in sales of DCSI's AMR products of $2.2 million in the first six
months of 2007 as compared to the prior year period was mainly due to: a
decrease in sales to TXU of $9.6 million and a decrease in sales to PREPA of
$1.7 million, partially offset by an increase in sales to other investor-owned
utilities (IOUs), such as Duke Energy and FPL, of $6.2 million and an increase
in sales to COOP customers of $3.4 million. In the first six months of 2007,
DCSI's sales to COOP and public power (Municipal) customers were $35.4 million
compared to $32.0 million in the prior year period.
Sales of Comtrak's SecurVision products were $0.4 million each for the second
quarters of 2007 and 2006 and $3.0 million for the first six months of 2007 as
compared to $2.9 million in the prior year six-month period.
- -Filtration/Fluid Flow
Net sales increased $0.9 million, or 2.0%, to $45.9 million for the second
quarter of 2007 from $45.0 million for the second quarter of 2006. Net sales
decreased $0.1 million to $86.4 million for the first six months of 2007 from
$86.5 million for the first six months of 2006. The sales increase during the
fiscal quarter ended March 31, 2007 as compared to the prior year quarter was
mainly due to: a $1.4 million increase in commercial aerospace shipments at PTI
of $1.4 million and a sales increase of $0.2 million at VACCO; partially offset
by a net sales decrease at Filtertek of $0.7 million driven by lower automotive
shipments. Sales in the first six months of 2007 were consistent with the prior
year period mainly due to: a $2.3 million increase in commercial aerospace
shipments at PTI; a decrease in defense spares and T-700 shipments at VACCO of
$1.2 million; and a net sales decrease at Filtertek of $1.1 million driven by
lower automotive shipments.
- -Test
For the second quarter of 2007, net sales of $34.0 million were $0.6 million, or
1.7% lower than the $34.6 million of net sales recorded in the second quarter of
2006. Net sales decreased $2.4 million, or 3.7%, to $62.2 million for the first
six months of 2007 from $64.6 million for the first six months of 2006. The
sales decrease in the second quarter of 2007 as compared to the prior year
quarter was mainly due to: a $2.5 million decrease in net sales from the
Company's U.S. operations driven by the timing of sales of test chambers and
components; partially offset by a $1.7 million increase in net sales from the
Company's Asian operations due to several chamber projects in Japan. The sales
decrease for the first six months of 2007 compared to the prior year period was
due to: a $3.5 million decrease in net sales from the Company's U.S. operations
driven by the timing of sales of test chambers and components; a $1.3 million
decrease in net sales from the Company's European operations due to the timing
of test chamber sales; partially offset by a $2.4 million increase in net sales
from the Company's Asian operations due to several chamber projects in Japan.
ORDERS AND BACKLOG
Backlog was $307.7 million at March 31, 2007 compared with $253.4 million at
September 30, 2006. The Company received new orders totaling $135.8 million in
the second quarter of 2007 compared to $128.7 million in the prior year quarter
(including $6.0 million of Hexagram acquired backlog). New orders of $44.4
million were received in the second quarter of 2007 related to Communications
products, $54.7 million related to Filtration/Fluid Flow products, and $36.7
million related to Test products. Hexagram received a $13.5 million order for a
water AMR project in Kansas City, Missouri, during the second quarter of 2007.
The Company received new orders totaling $282.1 million in the first six months
of 2007 compared to $254.8 million in the prior year period (including $15.0
million of Hexagram and Nexus acquired backlog). New orders of $106.2 million
were received in the first six months of 2007 related to Communications
products, $100.0 million related to Filtration/Fluid Flow products, and $75.9
million related to Test products. New orders of $114.6 million were received in
the first six months of 2006 related to Communications products (including $15.0
million of Hexagram and Nexus acquired backlog), $84.4 million related to
Filtration/Fluid Flow products and $55.8 million related to Test products.
In November 2005, DCSI signed an agreement with PG&E with an anticipated
contract value of up to approximately $310 million covering up to five million
electric endpoints over a five year deployment period beginning in fiscal 2007.
Also, in November 2005, Hexagram entered into an agreement to provide equipment,
software and services to PG&E in support of the gas utility portion of PG&E's
Advanced Metering Infrastructure (AMI) project. The total anticipated contract
revenue from commencement through the five-year full deployment for this
Hexagram contract is expected to be up to approximately $225 million. The
Company received orders totaling $2.8 million and $18.3 million from PG&E under
these agreements during the second quarter and first six months of fiscal 2007,
respectively.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $2.9 million and $5.0 million for the
three and six-month periods ended March 31, 2007, respectively, compared to $1.5
million and $2.0 million for the respective prior year periods. Amortization of
intangible assets for the three and six-month periods ended March 31, 2007
included $0.6 million and $1.2 million, respectively, of amortization of
acquired intangible assets related to the Nexus and Hexagram acquisitions
compared to $0.8 million and $0.9 million for the respective prior year periods.
The amortization of acquired intangible assets related to Nexus and Hexagram are
included in Corporate's operating results, see "EBIT - Corporate". The remaining
amortization expenses consist of other identifiable intangible assets (primarily
software, patents and licenses). During the three and six-month periods ended
March 31, 2007, the Company recorded $1.8 million and $2.7 million,
respectively, of amortization related to DCSI's TNG capitalized software
compared to $0.3 million for each of the respective prior year periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the second quarter of
2007 were $31.4 million (24.3% of net sales), compared with $26.7 million (21.7%
of net sales) for the prior year quarter. For the first six months of 2007, SG&A
expenses were $60.8 million (26.7% of net sales) compared with $50.2 million
(23.5% of net sales) for the prior year period. The increase in SG&A spending in
the fiscal quarter ended March 31, 2007 as compared to the prior year quarter
was primarily due to: an increase of $1.7 million of SG&A related to Hexagram
(due to a full quarter of SG&A expenses compared to two months included in the
prior year quarter); an increase of $0.8 million in SG&A expenses at DCSI due to
an increase in headcount; an increase of $0.5 million in SG&A expenses at Nexus;
and an increase of $0.8 million of sales and marketing expenses incurred in the
Test segment to support growth opportunities, primarily in Asia.
The increase in SG&A spending in the first six months of 2007 as compared to the
prior year period was primarily due to: an increase of $4.4 million of SG&A
related to Hexagram (due to a full six months of SG&A expenses compared to two
months included in the prior year period); an increase of $2.4 million in SG&A
expenses at Nexus (due to a full six months of SG&A expenses compared to four
months included in the prior year period); an increase of $1.5 million related
to the Test segment including expenses to further expand its Asian presence; an
increase of $0.9 million in SG&A expenses at DCSI due to an increase in
headcount; and a $0.6 million increase at Corporate due to an increase in
professional fees incurred to support a research tax credit project.
OTHER (INCOME) AND EXPENSES, NET
Other income, net, was $0.1 million for the second quarter of 2007 compared to
$1.5 million for the prior year quarter. Other income, net, was $0.6 million for
the first six months of 2007 compared to $1.9 million for the prior year period.
The principal components of other income, net, for the first six months of 2007
included $1.0 million of royalty income.
Principal components of other income, net, for the first six months of 2006
included the following items: $1.8 million non-cash gain representing the
release of reserve related to an indemnification obligation with respect to a
previously divested subsidiary; $1.1 million of royalty income; partially offset
by a $0.2 million write-off of assets related to a terminated subcontract
manufacturer.
EBIT
The Company evaluates the performance of its operating segments based on EBIT,
defined below. EBIT was $11.8 million (9.1 % of net sales) for the second
quarter of 2007 and $15.7 million (12.8% of net sales) for the second quarter of
2006. For the first six months of fiscal 2007, EBIT was $8.3 million (3.6% of
net sales) and $18.7 million (8.7% of net sales) for the first six months of
2006. The decrease in EBIT for the second quarter of 2007 and first six months
of 2007 as compared to the prior year periods is primarily due to the decrease
in margins in the Communications segment described below.
This Form 10-Q contains the financial measure "EBIT", which is not calculated in
accordance with generally accepted accounting principles in the United States of
America (GAAP). EBIT provides investors and Management with an alternative
method for assessing the Company's operating results. The Company defines "EBIT"
as earnings from continuing operations before interest and taxes. Management
evaluates the performance of its operating segments based on EBIT and believes
that EBIT is useful to investors to demonstrate the operational profitability of
the Company's business segments by excluding interest and taxes, which are
generally accounted for across the entire Company on a consolidated basis. EBIT
is also one of the measures Management uses to determine resource allocations
within the Company and incentive compensation. The following table presents a
reconciliation of EBIT to net earnings.
Three Months ended Six Months ended
($ in thousands) March 31, March 31,
--------- ---------
2007 2006 2007 2006
---- ---- ---- ----
Consolidated EBIT $11,799 15,679 $ 8,260 18,657
Add: Interest income 217 100 555 817
Less: Income taxes 2,398 8,436 578 9,926
----- ----- --- -----
Net earnings $ 9,618 7,343 $ 8,237 9,548
======= ===== ======= =====
- -Communications
EBIT in the second quarter of 2007 was $6.1 million (12.4% of net sales)
compared to $9.7 million (22.5% of net sales) in the prior year quarter. For the
first six months of 2007, EBIT was $3.3 million (4.2% of net sales) compared to
$8.8 million (14.1% of net sales) in the prior year period. The decrease in EBIT
in the second quarter of 2007 was due to: a $4.6 million decrease in EBIT at
DCSI resulting from lower sales mentioned above, the amortization expenses of
its TNG software and PG&E related program support costs; partially offset by an
$0.8 million increase at Hexagram resulting from increased sales; and a $0.2
million increase at Nexus. The decrease in EBIT for the first six months of 2007
compared to the prior year period was due to: a $6.4 million decrease in EBIT at
DCSI resulting lower sales mentioned above, an increase of $2.4 million in
amortization expenses of its TNG software and PG&E related program support
costs; partially offset by a $0.6 million increase at Hexagram resulting from
increased sales; and a $0.3 million increase at Comtrak due to lower SG&A
spending.
During the second quarter of 2007, Hexagram entered into a contract with a new
supplier for its manufactured products. The new supplier offers a broader range
of capabilities as well as an opportunity for cost reductions.
- -Filtration/Fluid Flow
EBIT was $6.4 million (13.9% of net sales) and $4.7 million (10.4% of net sales)
in the second quarters of 2007 and 2006, respectively, and $8.2 million (9.4% of
net sales) and $8.8 million (10.2% of net sales) in the first six months of 2007
and 2006, respectively. For the second quarter of 2007 as compared to the prior
year quarter, EBIT increased $1.7 million due to: a $1.0 million increase at PTI
due to higher commercial aerospace shipments; an $0.8 million increase at VACCO
resulting from an improved sales mix resulting in more favorable overhead
absorption; partially offset by a $0.2 million decrease at Filtertek due to
lower automotive sales volumes. For the first six months of 2007 as compared to
the prior year period, EBIT decreased $0.6 million due to: an $0.8 million
decrease at Filtertek due to lower sales volumes and higher raw material costs;
a $0.7 million decrease at VACCO due to lower defense spares shipments and
additional engineering costs on new Space programs; partially offset by a $0.9
million increase at PTI due to higher commercial aerospace shipments.
- -Test
EBIT in the second quarter of 2007 was $4.1 million (12.1% of net sales) as
compared to $4.3 million (12.4% of net sales) in the prior year quarter. For the
first six months of 2007, EBIT was $6.2 million (10.0% of net sales) as compared
to $7.3 million (11.2% of net sales) in the prior year period. EBIT decreased
$0.2 million and $1.1 million over the prior year quarter and six month period,
respectively, due to the timing of sales, and additional sales and marketing
costs to support near-term sales growth opportunities, primarily in Asia.
- -Corporate
Corporate costs included in EBIT were $4.7 million and $9.4 million for the
three and six-month periods ended March 31, 2007, respectively, compared to $3.1
million and $6.2 million for the respective prior year periods. The increase in
Corporate costs in the second quarter of 2007 as compared to the prior year
quarter was due to a $1.8 million non-cash gain recorded in the second quarter
of 2006 related to an indemnification obligation with respect to a previously
divested subsidiary. The increase in Corporate costs in the first six months of
2007 as compared to the prior year period was due to: a $1.8 million non-cash
gain recorded in the second quarter of 2006 mentioned above; $0.4 million of
additional pre-tax amortization of acquired intangible assets related to Nexus
and Hexagram; $0.4 million of additional professional fees incurred to support a
research tax credit project; and $0.3 million of additional expense related to
stock compensation. In the first six months of 2007, Corporate costs included
$2.9 million of pre-tax stock compensation expense and $1.2 million of pre-tax
amortization of acquired intangible assets related to Nexus and Hexagram.
INTEREST INCOME, NET
Interest income, net, was $0.2 million and $0.6 million for the three and
six-month periods ended March 31, 2007, respectively, compared to interest
income, net, of $0.1 million and $0.8 million for the respective prior year
periods. The decrease in interest income in the first six months of 2007 as
compared to the prior year period was due to lower average cash balances on
hand.
INCOME TAX EXPENSE
The second quarter 2007 effective income tax rate was 20.0% compared to 53.5% in
the second quarter of 2006. The effective income tax rate in the first six
months of 2007 was 6.6% compared to 51.0% in the prior year period. The decrease
in the effective income tax rate in the second quarter and first six months of
2007 as compared to the prior year periods was due to the favorable impact of a
research tax credit in 2007. The second quarter 2007 income tax expense was
favorably impacted by a $2.2 million research tax credit, reducing the 2007
second quarter effective income tax rate by 18.7%. The income tax expense in the
first six months of 2007 was favorably impacted by a $3.1 million research tax
credit, reducing the rate for the first six months of 2007 by 35.6%. The
effective income tax rate in the second quarter and first six months of 2006 was
adversely impacted by the repatriation of $28.7 million of cash held by foreign
subsidiaries into the United States under the tax provisions of the American
Jobs Creation Act of 2004 which increased the fiscal 2006 second quarter
effective income tax rate by 10.9% and the first six months of 2006 by 8.9%. Due
to the tax research credits favorably impacting the tax rate in the first half
of 2007, the Company estimates the fiscal 2007 tax rate to be approximately 35%.
In December 2006, the President signed into law the "Tax Relief and Health Care
Act of 2006" (The Act). The Act extended the expiration date for the research
tax credit from December 31, 2005 to December 31, 2007. During the second
quarter of 2007, the Company completed its analysis of available research
credits for fiscal years 2000 through 2006 and has recorded total research
credit claims, net, of $5.6 million. The Company expects the net research
credits related to fiscal year 2007 to be approximately $1.6 million.
CAPITAL RESOURCES AND LIQUIDITY
Working capital (current assets less current liabilities) increased to $144.3
million at March 31, 2007 from $131.4 million at September 30, 2006. Accounts
receivable increased by $7.5 million in the first six months of 2007, of which
$7.0 million related to DCSI due to the timing and volume of sales. The $8.3
million increase in inventories at March 31, 2007 is mainly due to a $4.0
million increase within the Communications segment and a $2.6 million increase
within the Filtration/Fluid Flow segment to support near term sales growth.
Accounts payable increased by $7.9 million in the first six months of 2007, of
which $3.1 million related to DCSI due to timing of vendor invoicing.
Net cash provided by operating activities was $14.3 million and $26.2 million
for the six-month periods ended March 31, 2007 and 2006, respectively. The
decrease is due to an increase in operating working capital requirements.
Capital expenditures were $7.2 million and $4.3 million in the first six months
of fiscal 2007 and 2006, respectively. Major expenditures in the current period
included equipment used in the Filtration/Fluid Flow and Communications
businesses.
At March 31, 2007, intangible assets, net, of $67.4 million included $54.7
million of capitalized software. Approximately $48.1 million of the capitalized
software balance represents software development costs on the TNG software
within the Communications segment to further penetrate the IOU market. TNG is
being deployed to efficiently handle the additional levels of communications
dictated by the size of the utility service territories and the frequency of
meter reads that are required under time-of-use or critical peak pricing
scenarios to meet the requirements of large IOUs. At March 31, 2007, the Company
had approximately $9 million of commitments related to the development of TNG
versions 2.0 and 3.0 which is expected to be spent over the next six months.
Amortization of TNG expense is on a straight-line basis over seven years and
began in March 2006. The Company recorded $1.8 million and $2.7 million in
amortization expense related to TNG in the second quarter of 2007 and in the
first six months of 2007, respectively.
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, 2007. The facility is being
marketed for sale.
In October 2004, the Company entered into a $100 million five-year revolving
bank credit facility with a $50 million increase option that has a final
maturity and expiration date of October 6, 2009. At March 31, 2007, the Company
had approximately $99.2 million available to borrow under the credit facility in
addition to $28.0 million cash on hand. At March 31, 2007, the Company had no
borrowings, and outstanding letters of credit of $3.6 million ($0.8 million
outstanding under the credit facility). 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.
Pacific Gas & Electric
In November 2005, DCSI entered into a contract to provide equipment, software
and services to Pacific Gas & Electric (PG&E) in support of the electric portion
of PG&E's AMI project. PG&E's current AMI project plan calls for the purchase of
TWACS communication equipment for up to approximately five million electric
customers over a five-year period after the commencement of full deployment. The
total anticipated contract value from commencement through the five-year full
deployment period is expected to be up to approximately $310 million. PG&E also
has the right to purchase additional equipment and services to support existing
and new customers through the twenty year term of the contract. Equipment will
be purchased by PG&E only upon issuance of purchase orders and release
authorizations. PG&E will continue to have the right to purchase products or
services from other suppliers for the electric portion of the AMI project. On
July 20, 2006, the California Public Utilities Commission approved PG&E's AMI
project. DCSI has agreed to deliver to PG&E versions of its newly developed TNG
software as they become available and are tested. Delivery of the final version
for which DCSI has committed is currently anticipated in the fourth quarter of
fiscal 2007. In accordance with U.S. generally accepted accounting standards,
the Company will defer all revenue related to the DCSI arrangement until all
software is delivered and acceptance criteria have been met. The contract
provides for liquidated damages in the event that DCSI's late delivery of
hardware or software causes a delay to PG&E's AMI master project plan or delays
PG&E's realization of its business case benefits and also includes
indemnification and other customary provisions. The contract may be terminated
by PG&E for default, for its convenience and in the event of a force majeure
lasting beyond certain prescribed periods. The Company has guaranteed the
obligations of DCSI under the contract. If PG&E terminates the contract for its
convenience, DCSI will be entitled to recover certain costs.
In November 2005, Hexagram entered into a contract to provide equipment,
software and services to PG&E in support of the gas utility portion of PG&E's
AMI project. The total anticipated contract revenue from commencement through
the five-year full deployment is expected to be up to approximately $225
million. As with DCSI's contract with PG&E, equipment will be purchased only
upon issuance of purchase orders and release authorizations, and PG&E will
continue to have the right to purchase products or services from other suppliers
for the gas utility portion of the AMI project. On July 20, 2006, the California
Public Utilities Commission approved PG&E's AMI project. The contract provides
for liquidated damages in the event of late deliveries, includes indemnification
and other customary provisions, and may be terminated by PG&E for default, for
its convenience and in the event of a force majeure lasting beyond certain
prescribed periods. The Company has guaranteed the performance of the contract
by Hexagram.
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,
2006 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" (SFAS 159). SFAS No. 159 permits
companies to choose to measure certain financial instruments and certain other
items at fair value. The standard requires that unrealized gains and losses on
items for which the fair value option has been elected be reported in earnings.
SFAS 159 is effective as of the beginning of an entity's first fiscal year that
begins after November 15, 2007. SFAS No. 159 is effective for the company
beginning in the first quarter of fiscal year 2009, although earlier adoption is
permitted. The adoption of SFAS 159 is not expected to have a material impact to
the Company's financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157). The purpose of SFAS No. 157 is to define fair value, establish a framework
for measuring fair value, and enhance disclosures about fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
measurement and disclosure requirements are effective for the Company in the
first quarter of fiscal year 2009. The adoption of SFAS 157 is not expected to
have a material impact to the Company's financial position or results of
operations.
In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans" (SFAS 158), which amends
SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded
status of pension and other postretirement benefit plans on the balance sheet.
Under SFAS 158, gains and losses, prior service costs and credits, and any
remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been
recognized through net periodic benefit cost will be recognized in accumulated
other comprehensive income, net of tax effects. The measurement date - the date
at which the benefit obligation and plan assets are measured - is required to be
the Company's fiscal year-end, which is the date the Company currently uses.
SFAS 158 is effective for publicly-held companies for fiscal years ending after
December 15, 2006. The adoption of SFAS 158 is not expected to have a material
impact to the Company's financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109." This
Interpretation is effective for the Company beginning October 1, 2007. This
Interpretation prescribes a recognition threshold and measurement process for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Company is currently evaluating the
adoption of this Interpretation and does not currently have an estimate of the
impact on the consolidated financial statements.
In June 2006, the FASB issued EITF Issue No. 06-3, "How Taxes Collected from
Customers and Remitted to Governmental Authorities Should Be Presented in the
Income Statement (That Is, Gross versus Net Presentation)". This EITF Issue is
effective for periods beginning after December 15, 2006 and requires disclosure
of the accounting policy for any tax assessed by a governmental authority that
is directly imposed on a revenue-producing transaction on a gross (include in
revenues and costs) or net (excluded from revenues) basis. The Company's
accounting policy is to record taxes assessed by a governmental authority that
is directly imposed on a revenue-producing transaction on a net basis.
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, but are not limited to, the
risk factors described in Item 1A of the Company's Annual Report on Form 10-K
for the fiscal year ended September 30, 2006, those relating to the estimates or
projections made in connection with the Company's accounting policies, SFAS 158,
FASB Interpretation No. 48, annual effective tax rate, research tax credits,
timing and amounts of Communications segment commitments and expenditures,
outcome of current claims and litigation, future cash flow, capital requirements
and operational needs for the foreseeable future, the ultimate values and timing
of revenues under the DCSI / PG&E contract and the Hexagram / PG&E contract, the
future delivery and acceptance of the TNG software by PG&E, and timing of
spending for TNG commitments. 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:
actions by PG&E's Board of Directors and PG&E's management impacting PG&E's AMI
projects; the timing and success of DCSI's software development efforts; the
timing and content of purchase order releases under PG&E's contracts; the
Company's successful performance under the PG&E contracts; 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; costs relating to environmental
matters; litigation uncertainty; and the Company's successful execution of
internal operating plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign currency exchange rates. There has been
no material change to the Company's market risks since September 30, 2006. Refer
to the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 2006 for further discussion about market risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of Management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective as of that date. Disclosure controls and
procedures are controls and procedures that are designed to ensure that
information required to be disclosed in Company reports filed or submitted under
the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the Company's
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In August 2006, the Company's Board of Directors authorized an open market
common stock repurchase program for up to 1.2 million shares, subject to
marketconditions and other factors, which covers the period through September
30, 2008. There were no stock repurchases during the three month period ended
March 31, 2007.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's shareholders was held on Friday, February 2,
2007. The voting for directors was as follows:
For Withheld Broker Non-Votes
V. L. Richey, Jr. 21,912,876 932,366 0
J. M. Stolze 22,395,204 450,038 0
The terms of W.S. Antle III, J.M. McConnell, L.W. Solley, D.C. Trauscht, and
J.D. Woods as directors continued after the meeting.
The voting to ratify the Company's selection of KPMG LLP as independent auditors
for the fiscal year ending September 30, 2007 was as follows:
For Against Abstain Broker Non-Votes
22,686,596 144,768 13,878 0
ITEM 6. EXHIBITS
a) Exhibits
Exhibit
Number
3.1 Restated Articles of Incorporated by reference to
Incorporation Form 10-K for the fiscal
year ended September 30,
1999, at Exhibit 3(a)
3.2 Amended Certificate of Incorporated by reference to
Designation Preferences Form 10-Q for the fiscal
and Rights of Series A quarter ended March 31,
Participating 2000, at Exhibit 4(e)
Cumulative Preferred
Stock of the Registrant
3.3 Articles of Merger Incorporated by reference to
effective July 10, 2000 Form 10-Q for the fiscal
quarter ended June 30, 2000,
at Exhibit 3(c)
3.4 Bylaws, as amended and Incorporated by reference to
restated as of July 10, Form 10-K for the fiscal
2000. year ended September 30,
2003, at Exhibit 3.4
3.5 Amendment to Bylaws Incorporated by reference to
effective as of Form 10-Q for the fiscal
February 2, 2007. quarter ended December 31,
2006, at Exhibit 3.5
4.1 Specimen Common Stock Incorporated by reference to
Certificate Form 10-Q for the fiscal
quarter ended June 30, 2000,
at Exhibit 4(a)
4.2 Specimen Rights Incorporated by reference to
Certificate Current Report on Form 8-K
dated February 3, 2000, at
Exhibit B to Exhibit 4.1
4.3 Rights Agreement dated Incorporated by reference to
as of September 24, Current Report on Form 8-K
1990 (as amended and dated February 3, 2000, at
Restated as of February Exhibit 4.1
3, 2000) between the
Registrant and
Registrar and Transfer
Company, as successor
Rights Agent
4.4 Credit Agreement dated Incorporated by reference to
as of October 6, 2004 Form10-K for the fiscal year
among the Registrant, ended September 30, 2004, at
Wells Fargo Bank, Exhibit 4.4
N.A., as agent, and
the lenders listed
therein
4.5 Consent and waiver to Incorporated by reference to
Credit Agreement Current Report on Form 8-K
(listed as 4.4, above) dated February 2, 2006 at
dated as of January Exhibit 4.1
20, 2006
31.1 Certification of Chief
Executive Officer
relating to Form 10-Q
for period ended March
31, 2007
31.2 Certification of Chief
Financial Officer
relating to Form 10-Q
for period ended March
31, 2007
32 Certification of Chief
Executive Officer and
Chief Financial
Officer relating to
Form 10-Q for period
ended March 31, 2007
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
Senior Vice President and Chief Financial Officer
(As duly authorized officer and principal accounting
officer of the registrant)
Dated: May 9, 2007
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, 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;
c. 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
d. 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.
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 9, 2007
(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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, 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;
c. 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
d. 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.
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 9, 2007
(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, 2007 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 9, 2007
/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.