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, 2002
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 63124-2090
ST. LOUIS, MISSOURI (Zip Code)
(Address of principal executive offices)
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
The number of shares of the registrant's stock outstanding at April 30,
2002 was 12,582,597.
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,
------------------
2002 2001
---- ----
Net sales $ 88,224 86,905
-------- ------
Costs and expenses:
Cost of sales 59,099 59,675
Selling, general and administrative
expenses 20,152 17,594
Interest expense 59 5
Other, net 613 2,643
------ ------
Total costs and expenses 79,923 79,917
------ ------
Earnings before income taxes 8,301 6,988
Income tax expense 3,108 2,701
----- -----
Net earnings $ 5,193 4,287
======== ======
Earnings per share:
Net earnings - Basic $ .42 .35
-Diluted .40 .34
======== ======
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,
----------------
2002 2001
---- ----
Net sales $ 172,560 169,777
-------- -------
Costs and expenses:
Cost of sales 116,556 117,302
Selling, general and administrative
expenses 38,905 34,359
Interest expense 110 85
Other, net 928 4,555
------- -------
Total costs and expenses 156,499 156,301
------- -------
Earnings before income taxes 16,061 13,476
Income tax expense 6,096 5,211
------- -------
Net earnings $ 9,965 8,265
======= =======
Earnings per share:
Net earnings - Basic $ .80 .67
-Diluted .77 .65
=== ===
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, September 30,
2002 2001
--------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 12,591 14,506
Accounts receivable, less allowance for doubtful
accounts of $881 and $1,122, respectively 63,898 61,351
Costs and estimated earnings on long-term
contracts, less progress billings of
$3,718 and $21,913, respectively 4,082 6,637
Inventories 50,032 48,167
Current portion of deferred tax assets 14,590 15,278
Other current assets 6,828 5,491
------- -------
Total current assets 152,021 151,430
======= =======
Property, plant and equipment, at cost 113,351 107,940
Less accumulated depreciation and amortization 47,336 42,902
------- -------
Net property, plant and equipment 66,015 65,038
Goodwill, less accumulated amortization
of $12,674 101,612 102,163
Deferred tax assets 36,029 38,573
Other assets 27,772 18,373
------- -------
$383,449 375,577
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 50 122
Accounts payable 34,157 35,180
Advance payments on long-term contracts, less
costs incurred of $2,290 and $809, respectively 1,967 1,534
Accrued expenses and other current liabilities 25,342 27,233
------- -------
Total current liabilities 61,516 64,069
------- -------
Other liabilities 16,185 15,890
Long-term debt 8,145 8,338
------- ------
Total liabilities 85,846 88,297
------- -------
Commitments and contingencies -- --
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 12,529,681
and 13,409,934 shares, respectively 135 134
Additional paid-in capital 208,090 206,282
Retained earnings since elimination of
deficit at September 30, 1993 109,614 99,649
Accumulated other comprehensive loss (7,546) (6,518)
------- --------
310,293 299,547
Less treasury stock, at cost: 1,002,546
and 985,469 common shares, respectively (12,690) (12,267)
------- -------
Total shareholders' equity 297,603 287,280
------- -------
$383,449 375,577
======= =======
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,
-----------------
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $ 9,965 8,265
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 6,089 7,756
Changes in operating working capital (4,987) (4,276)
Change in long-term portion of deferred tax
assets 2,544 2,881
Other 772 (918)
------- -------
Net cash provided by operating activities 14,383 13,708
------- -------
Cash flows from investing activities:
Capital expenditures (6,140) (4,492)
Acquisition of technology rights (9,546) -
------- -------
Net cash used by investing activities (15,686) (4,492)
------- -------
Cash flows from financing activities:
Net decrease in short-term borrowings (12) (4,000)
Proceeds from long-term debt 45 108
Principal payments on long-term debt (299) (100)
Purchases of common stock into treasury (456) (266)
Other 110 37
------ -------
Net cash used by financing activities (612) (4,221)
------- -------
Net (decrease) increase in cash and cash equivalents (1,915) 4,995
Cash and cash equivalents, beginning of period 14,506 5,620
------- -------
Cash and cash equivalents, end of period $ 12,591 10,615
======= =======
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 notes thereto included
in the Company's Annual Report on Form 10-K for the year ended September
30, 2001. Certain prior year amounts have been reclassified to conform to
the fiscal 2002 presentation.
The results for the three and six month periods ended March 31, 2002 are
not necessarily indicative of the results for the entire 2002 fiscal year.
2. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142
Management adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 142 Goodwill and Other Intangible Assets effective
October 1, 2001, the beginning of the Company's fiscal year. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead tested for impairment at least annually
in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company is required to
test the intangible asset for impairment in accordance with the provisions
of SFAS No. 142. Any impairment loss will be measured as of the date of
adoption and recognized as the cumulative effect of a change in accounting
principle. No impairment loss was recorded upon the adoption of SFAS No.
142.
The following table presents a reconciliation of net earnings for the three
and six month periods ended March 31, 2001, as restated, to reflect the
removal of goodwill amortization in accordance with SFAS No. 142, to be
used for comparison purposes with the three and six month periods ended
March 31, 2002. (Dollars in thousands, except per share amounts)
Three Months Six Months
Ended March 31, Ended March 31,
2001 2001
--------------- ---------------
Reported net earnings $4,287 $8,265
Add back: Goodwill amortization,
net of tax 523 1,056
------ ------
Adjusted net earnings $4,810 $9,321
====== ======
Earnings per share - Basic:
As Reported $ .35 $ .67
Goodwill amortization .04 .09
------ ------
Adjusted $ .39 $ .76
====== ======
Earnings per share - Diluted:
As Reported $ .34 $ .65
Goodwill amortization .04 .08
------ ------
Adjusted $ .38 $ .73
====== ======
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
performance 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,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted Average Shares
Outstanding - Basic 12,477 12,327 12,448 12,309
Dilutive Options and
Performance Shares 586 444 545 407
------ ------ ------ ------
Adjusted Shares- Diluted 13,063 12,771 12,993 12,716
====== ====== ====== ======
Options to purchase approximately 40,500 shares of common stock at prices
ranging between $32.54 - $35.93 and options to purchase 32,000 shares of
common stock at a price of $21.44 per share were outstanding during the six
month periods ended March 31, 2002 and 2001, 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.
These options expire in various periods through 2012. Approximately 118,000
and 202,000 Performance Shares were outstanding but unvested at March 31,
2002 and 2001, respectively, and therefore, were not included in the
respective computation of diluted EPS.
4. INVENTORIES
Inventories consist of the following (in thousands):
March 31, September 30,
2002 2001
--------- -------------
Finished goods $ 11,788 12,065
Work in process, including long-term
contracts 15,853 17,089
Raw materials 22,391 19,013
------ ------
Total inventories $ 50,032 48,167
======= ======
5. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2002 and
2001 was $5.1 million and $3.3 million, respectively. Comprehensive income
for the six-month periods ended March 31, 2002 and 2001 was $8.9 million
and $7.5 million, respectively. For the six months ended March 31, 2002,
the Company's comprehensive income was negatively impacted by foreign
currency translation adjustments of $1.6 million, which was partially
offset by an increase in fair value of the Company's interest rate swaps
designated as a cash flow hedge of $0.5 million, discussed below in Item 3.
6. ACQUISITIONS
In March 2002, the Company acquired the exclusive rights to the patent
portfolio and related intellectual property of North Carolina SRT Inc. and
its affiliate (NC SRT), a manufacturer of cross-flow filtration and
separation modules and equipment. The Company paid approximately $9.5
million for these filtration technology rights, including certain
production assets and inventory of NC SRT. In addition, the Company will
pay future consideration of $1 million in March 2003 and $1 million in
March 2004. NC SRT sales of products utilizing the technologies acquired
were approximately $3 million in calendar 2001. NC SRT is included within
the Company's Filtration/Fluid Flow segment.
7. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in four segments:
Filtration/Fluid Flow, Test, Communications and Other.
Management evaluates and measures the performance of its operating segments
based on "Net Sales and EBIT", which are detailed in the table below. EBIT
is defined as Earnings Before Interest and Taxes.
($ in millions) Three Months ended Six Months ended
March 31, March 31,
------------------ ----------------
NET SALES 2002 2001 2002 2001
--------- ---- ---- ---- ----
Filtration/Fluid Flow $ 48.0 $ 46.9 92.4 91.1
Test 16.7 22.4 34.5 44.0
Communications 20.4 14.6 39.8 29.0
Other 3.1 3.0 5.9 5.7
------ ------ ----- -----
Consolidated totals $ 88.2 $ 86.9 172.6 169.8
====== ====== ===== =====
EBIT
----
Filtration/Fluid Flow $ 3.1 $ 2.3 5.4 4.4
Test 0.9 1.6 2.3 3.7
Communications 4.9 3.4 9.2 6.9
Other (0.5) (0.3) (0.7)(4) (1.4)(5)
----- ----- ----- -----
Consolidated totals $ 8.4(1) $ 7.0(2) 16.2(1) 13.6(3)
---- ---- ---- ----
(1) The three and six-month periods ended March 31, 2002 excludes
goodwill amortization in accordance with the adoption of SFAS
No. 142.
(2) The three month period ended March 31, 2001 included $0.9 million
of goodwill amortization.
(3) The six month period ended March 31, 2001 included $1.7 million of
goodwill amortization.
(4) The amount for the six month period ended March 31, 2002 consisted
of $0.6 million related to Rantec and ($1.3) million related to
unallocated corporate operating charges, which includes
$0.3 million of exit costs related to the Sanmar joint venture
recorded in the first quarter of fiscal 2002, related to the
Filtration/Fluid Flow segment.
(5) The amount for the six month period ended March 31, 2001 consisted
of $0.7 million related to Rantec and ($2.1) million related to
unallocated corporate operating charges, which includes
$0.3 million of charges related to personnel termination costs
in Brazil (Filtration/Fluid Flow segment); $0.4 million of
corporate litigation costs related to the Filtration/Fluid
Flow segment; $0.6 million of costs related to the consolidation
of the Stockton, CA facility into the Huntley, IL facility
(Filtration/Fluid Flow segment) and $0.3 million of residual
costs to consolidate PTI's filtration business into new facilities
in Oxnard, CA.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES
Net sales were $88.2 million and $86.9 million for the second quarter
of fiscal 2002 and 2001, respectively. Net sales were $172.6 million and $169.8
million for the first six months of fiscal 2002 and 2001, respectively. The
largest increase was in the Company's Communications segment, resulting from
significantly higher shipments of Automatic Meter Reading (AMR) equipment to
electric utility cooperatives (Co-ops) and PPL Electric Utilities Corporation
(PPL).
FILTRATION/FLUID FLOW
Net sales were $48.0 million and $46.9 million for the second quarter of fiscal
2002 and 2001, respectively. Net sales were $92.4 million and $91.1 million for
the first six months of fiscal 2002 and 2001, respectively. Sales increased
slightly during the first six months of fiscal 2002 as a result of the
contribution from Bea Filtri S.p.A. (Bea), acquired in June 2001, which
contributed approximately $5.4 million of net sales in the first six months of
fiscal 2002. This increase was partially offset by lower sales in the commercial
aerospace and semiconductor markets, which continue to experience economic
softness.
TEST
Net sales were $16.7 million and $22.4 million for the second quarter of fiscal
2002 and 2001, respectively. For the first six months of fiscal 2002, net sales
were $34.5 million compared to $44.0 million in the prior year period. The sales
decrease in the first six months of fiscal 2002 as compared to the prior year
period is primarily due to the prior year completion of the General Motors test
chamber complex, which contributed $3.3 million of the decrease to net sales,
and continued softness in the overall electronics and telecommunications
markets.
COMMUNICATIONS
For the second quarter of fiscal 2002, net sales of $20.4 million were $5.8
million, or 39.7%, higher than the $14.6 million of net sales recorded in the
second quarter of fiscal 2001. Net sales of $39.8 million in the first six
months of fiscal 2002 were $10.8 million, or 37.3%, higher than the $29.0
million recorded in the first six months of fiscal 2001. The increases are the
result of significantly higher shipments of AMR equipment to Co-ops and PPL.
OTHER
Net sales were $3.1 million in the second quarter of fiscal 2002 and $3.0
million in the second quarter of fiscal 2001. In the first six months of fiscal
2002, net sales were $5.9 million compared to $5.7 million in the prior year
period. The Other segment represents the net sales of Rantec Power Systems
(Rantec).
ORDERS AND BACKLOG
Firm order backlog was $315.6 million at March 31, 2002, compared with $180.1
million at September 30, 2001. Orders totaling $308.1 million were received in
the first six months of fiscal 2002. Approximately $102.1 million of new orders
in the first six months of fiscal 2002 related to Filtration/Fluid Flow
products, $35.5 million related to Test products, and $165.2 million related to
Communications products. In February 2002, the Company received a $112 million
contract from PPL Electric Utilities Corporation, a subsidiary of PPL
Corporation, for an AMR system in Pennsylvania. The project is currently
scheduled for completion in November 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the second quarter of
fiscal 2002 were $20.2 million, or 22.8% of net sales, compared with $17.6
million, or 20.2% of net sales for the prior year period. For the first six
months of fiscal 2002, SG&A expenses were $38.9 million, or 22.5% of net sales,
compared with $34.4 million, or 20.2% of net sales for the prior year period.
The increase in SG&A spending in the first six months of fiscal 2002 is mainly
due to the Bea acquisition, which added approximately $1.8 million of SG&A
expenses in the first six months of fiscal 2002, and additional investments in
research and development, engineering, and marketing within the Communications
and Filtration/Fluid Flow segments.
OTHER COSTS AND EXPENSES, NET
Other costs and expenses, net, were $0.6 million for the quarter ended March 31,
2002 compared to $2.6 million for the prior year quarter. The second quarter of
fiscal 2002 excludes goodwill amortization in accordance with the adoption of
SFAS No. 142, while the second quarter of fiscal 2001 included goodwill
amortization of $0.9 million. Other costs and expenses, net, were $0.9 million
for the first six months of fiscal 2002 compared to $4.6 million for the prior
year period. The first six months of fiscal 2002 excludes goodwill amortization,
and the first six months of fiscal 2001 included goodwill amortization of $1.7
million.
Principal components of other costs and expenses, net for the first six months
of fiscal 2002 include $0.6 million of amortization of identifiable intangible
assets, primarily patents, and $0.3 million of exit costs related to the Sanmar
joint venture (Filtration/Fluid Flow segment) which was terminated in the first
quarter of fiscal 2002, offset by a $0.4 million gain from insurance proceeds
related to a former subsidiary. Principal components of the amount for the first
six months of fiscal 2001 include $1.7 million of goodwill amortization, $0.7
million of amortization of identifiable intangible assets, $0.3 million of
charges related to personnel termination costs in Brazil (Filtration/Fluid Flow
segment), $0.4 million of corporate litigation costs related to the
Filtration/Fluid Flow segment, $0.6 million of costs related to the
consolidation of the Stockton, CA facility into the Huntley, IL facility
(Filtration/Fluid Flow segment) and $0.3 million of residual costs to
consolidate PTI's filtration business into new facilities in Oxnard, CA.
EBIT
Management evaluates the performance of its operating segments based on EBIT,
which the Company defines as Earnings Before Interest and Taxes. EBIT increased
$1.4 million to $8.4 million (9.5% of net sales) for the second quarter of
fiscal 2002 from $7.0 million (8.0% of net sales) for the second quarter of
fiscal 2001. The prior year quarter included goodwill amortization of
approximately $0.9 million. Excluding the amortization of goodwill from the
second quarter of fiscal 2001's results, EBIT would have been $7.9 million (9.0%
of net sales).
For the first six months of fiscal 2002, EBIT increased $2.6 million to $16.2
million (9.4% of net sales) from $13.6 million (8.0% of net sales) for the first
six months of fiscal 2001. The prior year period included goodwill amortization
of approximately $1.7 million. Excluding the amortization of goodwill from the
first six months of fiscal 2001's results, EBIT would have been $15.3 million
(9.0% of net sales).
FILTRATION/FLUID FLOW
EBIT was $3.1 million and $2.3 million in the second quarter of fiscal 2002 and
2001, respectively, and $5.4 million and $4.4 million in the first six months of
fiscal 2002 and 2001, respectively. The prior year second quarter and six months
ended March 31, 2001 included goodwill amortization of $0.5 million and $1.0
million, respectively. Excluding the goodwill amortization, EBIT for the second
quarter and six months of fiscal 2001 would have been $2.8 million and $5.4
million, respectively. The current year continues to be impacted by the
softening of the commercial aerospace and semiconductor markets and investments
in new product development and market expansion initiatives, primarily in
microfiltration.
TEST
EBIT was $0.9 million and $1.6 million in the second quarter of fiscal 2002 and
2001, respectively, and $2.3 million and $3.7 million in the first six months of
fiscal 2002 and 2001, respectively. The prior year second quarter and six months
ended March 31, 2001 included goodwill amortization of $0.4 million and $0.7
million, respectively. Excluding the goodwill amortization, EBIT for the second
quarter and six months of fiscal 2001 would have been $2.0 million and $4.4
million, respectively. The decline in EBIT in the first six months of fiscal
2002 as compared to the prior year period is mainly due to the completion of the
General Motors test chamber complex in fiscal 2001 and the continued softness in
the electronics and telecommunications markets.
COMMUNICATIONS
Second quarter EBIT of $4.9 million in fiscal 2002 was $1.5 million, or 44.1%,
higher than the $3.4 million of EBIT in the second quarter of fiscal 2001. For
the first six months of fiscal 2002, EBIT increased $2.3 million, or 33.3%, to
$9.2 million from $6.9 million in fiscal 2001. The increase in EBIT is the
result of significantly higher shipments of AMR equipment.
OTHER
EBIT was ($0.5) million and ($0.7) million for the three and six-month periods
ended March 31, 2002, respectively, compared to ($0.3) million and ($1.4)
million for the respective prior year periods. The amount for the second quarter
ended March 31, 2002 consisted of $0.3 million related to Rantec and ($0.8)
million related to unallocated corporate operating charges. EBIT for the first
six months of fiscal 2002 consisted of $0.6 million related to Rantec and ($1.3)
million related to unallocated corporate operating charges, which includes $0.3
million of exit costs related to the Sanmar joint venture (Filtration/Fluid Flow
segment) which was terminated in the first quarter of fiscal 2002. The amount
for the first six months of fiscal 2001 consisted of $0.7 million related to
Rantec and ($2.1) million related to unallocated corporate operating charges,
which includes $0.3 million of charges related to personnel termination costs in
Brazil (Filtration/Fluid Flow segment), $0.4 million of corporate litigation
costs related to the Filtration/Fluid Flow segment, $0.6 million of costs
related to the consolidation of the Stockton, CA facility into the Huntley, IL
facility (Filtration/Fluid Flow segment) and $0.3 million of residual costs to
consolidate PTI's filtration business into new facilities in Oxnard, CA.
INTEREST EXPENSE (INCOME)
Interest expense, net, was approximately $0.1 million for both the three and
six-month periods ended March 31, 2002, consistent with the
prior year three and six-months periods ended March 31, 2001, respectively.
INCOME TAX EXPENSE
The second quarter fiscal 2002 effective income tax rate was 37.4% compared to
38.7% in the second quarter of fiscal 2001. The decrease in the effective income
tax rate in the second quarter of fiscal 2002 compared to the prior year period
is primarily due to the favorable earnings impact of the foreign operations. The
effective income tax rate in the first six months of fiscal 2002 was 38.0%
compared to 38.7% in the prior year period. Management estimates the annual
effective tax rate for fiscal 2002 to be approximately 38.5%.
FINANCIAL CONDITION
Working capital increased to $90.5 million at March 31, 2002 from $87.4 million
at September 30, 2001. During the first six months of fiscal 2002, accounts
receivable increased by $2.5 million due to the increase in sales; inventories
increased by $1.9 million to support near term demand; offset by a decrease in
costs and estimated earnings on long-term contracts of $2.6 million due to the
completion of the General Motors test chamber complex. In addition, accounts
payable and accrued expenses decreased by $2.9 million primarily due to the
timing of payments.
Net cash provided by operating activities was $14.4 million in the first six
months of fiscal 2002 compared to net cash provided by operating activities of
$13.7 million in the same period of fiscal 2001.
Cash flow from operations and borrowings under the bank credit facility are
expected to provide adequate resources to meet the Company's capital
requirements and operational needs for the foreseeable future.
Effective April 5, 2002, the Company amended its existing $75 million revolving
credit facility changing the scheduled reductions and extending the $25 million
increase option through April 11, 2004. The amendment calls for $5 million
reductions to the credit facility on each April 11th beginning in 2002 through
2004 with the balance due upon maturity and expiration, April 11, 2005.
Capital expenditures were $6.1 million in the first six months of fiscal 2002
compared with $4.5 million in the comparable period of fiscal 2001. Major
expenditures in the current period included manufacturing automation equipment
used in the Filtration / Fluid Flow businesses.
In March 2002, the Company paid cash of approximately $9.5 million to acquire
the exclusive rights to the patent portfolio and related intellectual property
of North Carolina SRT Inc. and its affiliate (NC SRT).
Other current assets include approximately $0.6 million of capitalized legal
costs at March 31, 2002. These costs have been incurred in the defense of
certain patents used in the Company's Filtration/Fluid Flow business and their
recovery while probable, is subject to litigation or further negotiations.
The Company has a $31.5 million obligation under a synthetic lease facility
arranged by Bank of America. For GAAP purposes, this is accounted for as an
operating lease. This obligation is secured by leases of three manufacturing
locations, two of which are located in Oxnard, CA and the other in Cedar Park,
TX, as well as a $10.6 million letter of credit issued under the Company's $75
million credit facility. The leases expire on December 29, 2005 at which time
the Company will be required to extend the leases on terms to be negotiated,
purchase the properties for $31.5 million, or refinance the obligation. The
Financial Accounting Standards Board (FASB) has issued an exposure draft on the
accounting treatment related to synthetic lease arrangements. If this exposure
draft is adopted as written, the Company would record the net assets and
obligations under the synthetic lease facility as property, plant and equipment
and long-term obligations.
On February 8, 2001, the Company approved a stock repurchase program. Under this
program, the Company is authorized to purchase up to 1.3 million shares of its
common stock in the open market, subject to market conditions and other factors,
through September 30, 2003. The Company repurchased 20,000 shares during the
first six months of fiscal 2002.
The Company continues to explore consolidation opportunities within its existing
businesses which could improve future operating earnings and enhance the
Company's competitive position. The Company will also continue to look for
acquisitions that offer complementary products and/or new technologies.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires Company management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements. In preparing these
financial statements, management has made their best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. The Company does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or
using different assumptions related to the accounting policies described below.
However, application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from these estimates. The Company's senior
management discusses the accounting policies described below with the audit
committee of the Company's board of directors on an annual basis.
The following discussion of critical accounting policies is intended to bring to
the attention of readers those accounting policies which management believes are
critical to the Consolidated Financial Statements and other financial
disclosure. It is not intended to be a comprehensive list of all significant
accounting policies that are more fully described in Note 1 of the Notes to the
Consolidated Financial Statements included in our 2001 Annual Report on Form
10-K.
The Company has identified the following areas as critical accounting policies.
Revenue Recognition
The majority of the Company's revenues are recognized when products are shipped
to or when services are performed for unaffiliated customers. Other revenue
recognition methods the Company uses include the following: Revenue on
production contracts is recorded when specific contract terms are fulfilled,
usually by delivery or acceptance (the units of production or delivery methods).
Revenues from cost reimbursement contracts are recorded as costs are incurred,
plus fees earned. Revenue under long-term contracts for which units of
production or delivery are inappropriate measures of performance is recognized
on the percentage-of-completion method based upon incurred costs compared to
total estimated costs under the contract. Revenue under engineering contracts is
generally recognized as milestones are attained. The SEC's Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition" provides guidance on the
application of generally accepted accounting principles to selected revenue
recognition issues. Management believes the Company's revenue recognition policy
is in accordance with generally accepted accounting principles and SAB No. 101.
Accounts Receivable
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. This estimated allowance is based primarily
on management's evaluation of the financial condition of the customer and
historical bad debt experience.
Inventory
Inventories are valued at the lower of cost or market value and have been
reduced by an allowance for excess and obsolete inventories. The estimated
allowance is based on management's review of inventories on hand compared to
estimated future usage and sales. Inventories under long-term contracts reflect
accumulated production costs, factory overhead, initial tooling and other
related costs less the portion of such costs charged to cost of sales and any
unliquidated progress payments. In accordance with industry practice, costs
incurred on contracts in progress include amounts relating to programs having
production cycles longer than one year, and a portion thereof may not be
realized within one year.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred tax assets may be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance when management
believes it is more likely than not such assets will not be recovered, taking
into consideration historical operating results, expectations of future
earnings, and the expected timing of the reversals of existing temporary
differences.
Goodwill and Other Long-Lived Assets
The Company adopted the provisions of SFAS No. 142 effective October 1, 2001.
Goodwill and other long-lived assets with indefinite useful lives are reviewed
by management for impairment annually or whenever events or changes in
circumstances indicate the carrying amount may not be recoverable. If indicators
of impairment are present, the determination of the amount of impairment is
based on management's judgment as to the future operating cash flows to be
generated from these assets throughout their estimated useful lives. SFAS No.
142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121 and
subsequently, SFAS No. 144 after its adoption.
Pension Plans and Other Postretirement Benefit Plans
The measurement of liabilities related to pension plans and other
post-retirement benefit plans is based on management's assumptions related to
future events including interest rates, return on pension plan assets, rate of
compensation increases, and health care cost trend rates. Actual pension plan
asset performance will either decrease or increase unamortized pension losses
which will affect net earnings in future years.
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 June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", effective for fiscal years beginning after June 15, 2002. SFAS No.
143 addresses financial accounting requirements for retirement obligations
associated with tangible long-lived assets.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", that replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
The provisions of SFAS No. 144 are effective for fiscal years beginning after
December 15, 2001 and, generally, are to be applied prospectively. SFAS No. 144
requires that long-lived assets to be disposed of by sale, including those of
discontinued operations, be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
been incurred. SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction.
Management does not believe the implementation of Statements No. 143 and 144
will have a material adverse effect on the Company's 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 made in connection with the Company's accounting policies and the
Company's capital requirements and operational needs for the foreseeable future.
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: further weakening of economic
conditions in served markets; changes in customer demands or customer
insolvencies; electricity shortages; competition; intellectual property rights;
consolidation of internal operations; integration of recently acquired
businesses; delivery delays or defaults by customers; performance issues with
key suppliers and subcontractors; collective bargaining labor disputes; 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. The Company
has interest rate exposure relating to floating rate lease obligations and,
accordingly, the Company has entered into interest rate swaps covering
approximately $32 million to mitigate this exposure. These interest rate swaps
relate to operating lease obligations under its synthetic lease facility, and
have been arranged by Bank of America. The interest rate swaps effectively fix
the interest rates on the underlying lease obligations at a weighted average
rate of 6.47%. These lease obligations and their related interest rate swaps
expire on December 29, 2005. In addition, the Company has interest rate exposure
of approximately $4 million relating to floating rate obligations denominated in
EURO dollars. Therefore, the Company has entered into an interest rate swap of
approximately $4 million to mitigate this exposure which effectively fixed the
interest rate on these floating rate obligations at 4.89%. These EURO dollar
obligations consist of borrowings under the Company's $75 million credit
facility and mature on April 11, 2005 along with the related interest rate swap.
These swaps are accounted for as cash flow hedges under the provisions of SFAS
133, "Accounting for Derivative Instruments and Hedging Activities, as amended
by SFAS 138". For the six months ended March 31, 2002, accumulated other
comprehensive loss included an after tax increase in fair value of approximately
$0.5 million related to the interest rate swaps. The Company is subject to
foreign currency exchange rate risk inherent in its sales commitments,
anticipated sales, anticipated purchases and assets and liabilities denominated
in currencies other than the U.S. dollar. The currency most significant to the
Company's operations is the Euro. The Company hedges certain foreign currency
commitments by purchasing foreign currency forward contracts.
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 Tuesday, February
5, 2002, to vote on the election of three directors. The voting for directors
was as follows:
Broker
For Withheld Non-Votes
W. S. Antle III 10,459,481 108,397 0
L. W. Solley 10,457,504 110,374 0
J. D. Woods 10,088,386 479,492 0
The terms of J. M. McConnell, D. C. Trauscht, J. M. Stolze, and D. J. Moore
continued after the meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit
Number
3(a) Restated Articles of Incorporation Incorporated by reference to
Form 10-K for the fiscal year
ended September 30, 1999 at
Exhibit 3(a)
3(b) Amended Certificate of Incorporated by reference to
Designation Preferences and Form 10-Q for the fiscal
Rights of Series quarter ended March 31, 2000
A Participating Cumulative at Exhibit 4(e)
Preferred Stock of the
Registrant
3(c) Articles of Merger effective Incorporated by reference to
July 10, 2000 Form 10-Q for the fiscal quarter
ended June 30, 2000 at
Exhibit 3(c)
3(d) Bylaws, as amended Incorporated by reference to
Form 10-Q for the fiscal quarter
ended June 30, 2000 at
Exhibit 3(d)
4(a) Specimen Common Stock Incorporated by reference to
Certificate Form 10-Q for the fiscal
quarter ended June 30, 2000 at
Exhibit 4(a)
4(b) Specimen Rights Certificate Incorporated by reference to
Exhibit B to Exhibit 4.1 to
the Registrant's Current
Report on Form 8-K dated
February 3, 2000
4(c) Rights Agreement dated as of Incorporated by reference to
September 24, 1990 (as Current Report on Form 8-K
amended and Restated as of dated February 3, 2000, at
February 3, 2000) between the Exhibit 4.1
Registrant and Registrar and
Transfer Company, as successor
Rights Agent
4(d) Amended and Restated Credit Incorporated by reference to
Agreement dated as of February Form 10-Q for the fiscal
28, 2001 among the quarter ended March 31, 2001
Registrant, Bank of America, at Exhibit 4(d)
N.A., as agent, and the
lenders listed therein
10 Severance Plan adopted as of
August 10, 1995 (as restated
February 5, 2002)
b) Reports on Form 8-K.
During the quarter ended March 31, 2002, the Company filed the following
Current Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated February 5, 2002,
which reported in "Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits" and "Item 9. Regulation FD Disclosure" that the
Company would issue a press release announcing its first quarter fiscal
2002 results, present certain related financial information at the
Company's Annual Meeting of Stockholders and include such information on
the Company's website.
The Company filed a Current Report on Form 8-K, dated February 6, 2002,
which reported in "Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits" and "Item 9. Regulation FD Disclosure" additional
information to supplement the information reported in the Company's Current
Report on Form 8-K, dated February 5, 2002.
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
Corporate Controller
(As duly authorized officer
and principal accounting
officer of the registrant)
Dated: May 14, 2002