ESCO TECHNOLOGIES
Exhibit 99.2
For more information contact: For media inquiries:
Patricia K. Moore David P. Garino
Director, Investor Relations (314) 982-0551
ESCO Technologies Inc.
(314) 213-7277
ESCO ANNOUNCES FIRST QUARTER RESULTS AND
REAFFIRMS FIRST HALF AND FULL YEAR EPS GUIDANCE
St. Louis, MO, February 2, 2006 - ESCO Technologies Inc. (NYSE: ESE) today
announced its results for the fiscal 2006 first quarter ended December 31, 2005,
and reaffirmed first half earnings per share (EPS) guidance of $0.35 to $0.40
per share, and narrowed its full year EPS guidance to $1.20 to $1.30 per share
from $1.15 to $1.30 per share, excluding the impact of the Hexagram, Inc.
acquisition. The expected results of operations for Nexus Energy Software, Inc.
(Nexus) which was acquired on November 29, 2005 are included in the 2006
guidance.
Within this release, references to "quarters" relate to the fiscal quarters
ended December 31 for the respective fiscal years noted.
Net earnings for the 2006 first quarter were $2.2 million, or $0.08 per
share compared to net earnings of $10.5 million, or $0.40 per share in the first
quarter of 2005. The primary drivers of the lower earnings in the 2006 first
quarter include:
o A significant decrease in deliveries to electric utility cooperative (COOP)
customers at DCSI resulting from the low level of orders received in the
second half of fiscal 2005.
o A $3.8 million increase in consolidated SG&A expenses relating to
additional engineering, marketing, new product development, stock option
expensing ($0.5 million, or $0.02 per share), and the addition of Nexus
($0.7 million, for the one month since acquisition).
o Lower sales of Comtrak's SecurVision video security products in the
current quarter compared to the prior year.
o Lower sales of higher margin defense spares and T-700 shipments at VACCO in
the current period versus prior year.
o Additionally at DCSI, the current period operating results were negatively
impacted by pretax charges totaling $1.0 million, or $0.02 per share,
resulting from a $0.4 million write-off of assets
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related to a terminated subcontract manufacturer, and $0.6 million of
warranty costs related to a commercial transponder.
Sales
- -----
First quarter 2006 sales were $90.6 million, or 13.2 percent lower than
first quarter 2005 sales of $104.4 million. Unfavorable foreign currency values
in 2006 resulted in a $1.0 million negative sales comparison.
Communications sales of $19.1 million decreased $14.5 million, or 43
percent in the 2006 first quarter compared to the first quarter of 2005 as a
result of the following items: sales to COOP customers decreased $9.9 million in
the first quarter due to the weakness in orders entered during the latter half
of fiscal 2005; sales to legacy customers such as Wisconsin Public Service
(WPS), Bangor Hydro, Puerto Rico Electric Power Authority (PREPA), and PPL
Electric Utilities Corporation (PPL) were $2.2 million lower in the current
period compared to the prior year; and lower shipments of Comtrak's SecurVision
video security products, which generated $2.5 million in sales during the first
quarter of 2006 versus $7.1 million of sales in the 2005 first quarter. These
first quarter decreases were partially offset by $1.5 million in deliveries to
TXU Electric Delivery (TXU) and $1.2 million of sales from Nexus. During the
first quarter of 2006, DCSI's sales to COOP and public power (Municipal)
customers were $11.5 million compared to $21.4 million in the first quarter of
2005.
Filtration segment sales of $41.5 million decreased $2.5 million, or 5.8
percent during the first quarter of 2006 compared to the prior year due to the
following items: $0.5 million of additional sales at PTI due to the continued
strengthening of the commercial aerospace market; $2.5 million lower sales at
VACCO resulting from lower deliveries of defense spares; and $0.5 million lower
sales at Filtertek primarily due to lower automotive shipments and lower volumes
at its French operation.
Test segment sales of $30.0 million increased $3.2 million, or 11.9 percent
during the first quarter of 2006 due to significantly higher component sales and
additional test chamber installations. These increases were partially offset by
a $1.5 million decrease in sales in the first quarter of 2006 at the Company's
European operations resulting from the prior year completion of two large test
chamber installations.
Earnings Before Interest and Taxes (EBIT)
- -----------------------------------------
On a segment basis, items that impacted EBIT dollars and EBIT as a percent
of sales ("EBIT margin") during the first quarter of fiscal 2006 included the
following.
In the Communications segment, EBIT for the 2006 first quarter was a loss
of $1.0 million, compared to a profit of $9.6 million in the prior year first
quarter. The primary causes of this profit swing include: the significant
decrease in sales volume of AMR and SecurVision products noted above; a $1.0
million increase in SG&A expenses relating to additional engineering, marketing
and new product development; the $1.0 million in charges at DCSI related to the
subcontractor and warranty issues noted above; partially offset by the Nexus
EBIT contribution of $0.2 million for its one month of operations since the date
of acquisition.
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In the Filtration segment, the 2006 first quarter EBIT was $4.1 million, or
42.1 percent lower than prior year and was impacted by the following items: a
$1.7 million reduction in EBIT at VACCO resulting from the decreased sales of
defense spares; a $1.4 million decrease at Filtertek resulting from the slowdown
in the automotive market and a year-over-year increase in raw material costs
(ie., petroleum based resins). Additionally, the 2005 first quarter included a
$0.6 million gain realized at Filtertek related to a supply agreement with a
medical device customer which was terminated in fiscal 2005.
In the Test segment, EBIT of $2.9 million increased 40.1 percent in the
first quarter of 2006 due to additional sales volume and favorable changes in
sales mix. In addition, EBIT was negatively impacted in the first quarter of
2005 as a result of higher installation costs incurred on certain government
shielding projects in foreign locations.
The Corporate office operating expenses were $0.7 million higher in the
first quarter of 2006 and included $0.5 million of pretax expenses related to
stock options.
Effective Tax Rate
- ------------------
For the first quarter of 2006, the Company's effective tax rate was 40.4
percent versus the 2005 first quarter of rate of 38 percent. The increased rate
was primarily driven by lower than expected foreign-sourced pretax income,
primarily in Puerto Rico.
New Orders
- ----------
New orders received were $126.1 million (including $2.0 million of new
orders and $9.0 million of acquired backlog from Nexus) and $101.7 million in
the first quarters of 2006 and 2005, respectively, resulting in a backlog of
$268.7 million at December 31, 2005.
New orders received in the first quarter of 2006 compared to the first
quarter of 2005, respectively, were: in Filtration, $41.1 million and $39.2
million; in Communications, $59.2 million and $35.3 million; and in Test were
$25.8 million and $27.1 million.
New orders received by DCSI in the first quarter totaled $45.6 million and
included $33.7 million in COOP and Municipal orders, and $11.9 million in
investor-owned utility (IOU) orders including the $9.4 million from TXU for the
100,000 unit expansion as discussed in the November 15, 2005 release.
Cash
- ----
At December 31, 2005, the Company had $70.4 million in cash and no debt
outstanding. During the first quarter of 2006, the Company used $5.3 million of
cash for general operating purposes and spent $28.8 million of cash related to
the acquisition of Nexus. The 2006 first quarter cash use was the result of the
lower earnings, higher working capital requirements, and the additional
expenditures related to the TNG software project.
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Chairman's Commentary
- ---------------------
Vic Richey, Chairman and Chief Executive Officer, commented, "While I am
disappointed in our sales and earnings in the first quarter, given the strength
of our orders, we have not reduced our first half or full year guidance.
"Since our last communication we have made great progress on our highest
priority items. We reestablished our position in the COOP market and acquired
the resources and capabilities which support our commitment to becoming the
premier provider of Advanced Metering functionality at scale.
"Our confidence in the near-term financial progress we are anticipating in
Communications is well supported by the strength of our first quarter orders at
DCSI. We have also substantially enhanced our opportunity to meet our stated
long-term objectives through the acquisition of the software resources and
energy data management products we added with Nexus, and the addition of the RF
capabilities and direct access to the gas and water markets that we gained
through the acquisition of Hexagram.
"In Filtration, while our first quarter performance was in line with our
expectations, it was down from the prior year. Our commercial aerospace business
at PTI is continuing to make progress. At Filtertek, we are taking a number of
steps to improve performance, including reducing our headcount and continuing to
move work to our lower cost plants. We expect to see the benefits of these
actions in the second half of this year.
"In the Test business, we had year-over-year improvement in the first
quarter and we expect increased volumes and improved margins for the balance of
this year.
"Overall, we made great strides toward satisfying our primary strategic
objective. Our focus going forward will be to cultivate the opportunities we
have created through our recent acquisitions, complete the internal development
work at DCSI, and continue to drive for an improved contribution from our
Filtration and Test businesses.
"We remain committed to delivering significant increases in shareholder
value. The opportunities and resources we have to support that commitment have
never been better."
Business Outlook
- ----------------
Statements contained in the preceding and following paragraphs are based on
current expectations. Statements that are not strictly historical are considered
forward-looking, and actual results may differ materially.
The Business Outlook described below includes the expected results of
Nexus, but does not include the impact of the Hexagram acquisition, or any
future acquisitions or divestitures. In addition, refer to the Business Outlook
section of the November 15, 2005 release for a detailed discussion of the PG&E
contract and the related accounting.
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Earnings Per Share - 2006
- -------------------------
Management has narrowed the range of EPS guidance for the full year and now
estimates 2006 EPS to be in the range of $1.20 to $1.30 per share, with the
first half of the fiscal year EPS remaining between $0.35 and $0.40 per share on
sales now estimated to be between $200 and $205 million. The second half of the
fiscal year EPS is now expected to be between $0.85 and $0.90 per share, on
sales now estimated to be between $230 and $235 million. As noted above, in
fiscal 2006 the Company began expensing stock options. This expense, included in
the EPS numbers above, is expected to be in the range of $0.08 to $0.11 per
share annually, or $0.02 to $0.03 per quarter.
The effective tax rate for the second quarter of fiscal 2006 is expected to
be approximately 38 percent, and for the full year, the annual rate is expected
to be approximately 39 percent.
Revenues and EBIT Margins
- -------------------------
Management expects 2006 consolidated revenues to be in the range of $430 to
$440 million and consolidated EBIT margins should be in the range of 12 to 13
percent.
On a segment and operating unit basis for 2006, Management now expects the
following:
o PTI sales are expected to be between $43 and $45 million and EBIT margins
should be in the range of 12 to 13 percent (up from 9.2 percent in 2005).
o VACCO sales are expected to be between $31 and $32 million and EBIT margins
should be in the range of 20 to 22 percent (down from 26.9 percent in 2005)
as a result of the significantly lower deliveries of defense spares and a
production break in T-700 shipments.
o Filtertek sales are expected to be in the range of $93 to $95 million and
EBIT margins should be in the range of 7 to 8 percent (down from 8.9
percent in 2005). The 2005 results included approximately $2 million in
sales and EBIT realized from the settlement of a contract termination with
a medical device customer.
o Test segment sales are expected to be in the range of $125 and $127 million
and EBIT margins should be in the range of 10.5 to 11.5 percent (up from
10.2 percent in 2005) as a result of the continued strength of the wireless
and electronics markets, and solid growth in Asia.
o Communications segment sales, including Nexus, are expected to be between
$138 and $141 million and EBIT margins should be in the range of 21 to 23
percent (down from 28.1 percent in 2005) with the margin decrease driven
primarily by an expected $8 million decrease in sales of SecurVision
products at Comtrak. The 2005 sales of SecurVision products included a
catch up in deliveries previously delayed by the customer from the prior
year. Nexus sales are expected to be in the range of $10 to $12 million and
EBIT margins should be in the range of 4 to 5 percent after
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deducting the $0.9 million of non-cash amortization expenses related to
identifiable intangible assets allocated as part of the purchase accounting
valuation. Sales of AMR products at DCSI are expected to be relatively flat
and do not include any revenues associated with the PG&E contract as
software acceptance is not expected until the latter part of fiscal 2007.
DCSI's EBIT margin is expected to be 25 to 27 percent. Cost of sales will
also include approximately $2.2 million of additional costs as a result of
DCSI beginning to amortize the capitalized software development costs
related to the TNG software. TNG has been in development with a third party
software contractor for the past two years. TNG is being designed and
deployed to efficiently handle the additional levels of communications
dictated by the size of the service territories and the frequency of reads
that are required under time-of-use or critical peak pricing scenarios
needed to meet the requirements of large IOUs. The Company has incurred
approximately $23 million in external TNG development costs through
December 31, 2005, which are included on the balance sheet in other assets,
and is expected to incur another $10 to $15 million in costs over the next
two years. Additional non-TNG related engineering and development costs are
being incurred to ramp up the PG&E contract as well as support other IOU
pilots which are in process.
o Corporate operating costs are expected to increase slightly in 2006,
excluding the costs related to the initiation of stock option expensing
which began in the first quarter of 2006. Management expects quarterly
stock option pretax expenses to be approximately $0.5 to $0.6 million.
Conference Call
- ---------------
The Company will host a conference call today, February 2, at 5:00 p.m.,
Central Time, to discuss the Company's first quarter operating results. A live
audio webcast will be available on the Company's Web site at
www.escotechnologies.com. Please access the Web site at least 15 minutes prior
to the call to register, download and install any necessary audio software.
A replay of the conference call will be available for seven days on the
Company's website noted above or by phone (dial 1-888-203-1112 and enter the
pass code 8437777).
Forward-Looking Statements
- --------------------------
Statements in this press release regarding fiscal 2006 revenues, results,
earnings, sales, EBIT, EBIT margins, EPS, sales and EBIT margins from each
segment and operating unit and the timing of these contributions, expected
results from the Hexagram and Nexus acquisitions, achievement of strategic
objectives, the success of product development efforts, fiscal 2006 corporate
operating expenses, fiscal 2006 effective tax rate, long term success of the
Company, stock option expensing, amortization of capitalized software
development costs in fiscal 2006, successful development of the TNG software,
and costs to be incurred over the next two years, the timing of software
acceptance by PG&E, the Company's ability to capture future AM opportunities,
the Company's ability
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to increase shareholder value and any other written or oral statements which are
not strictly historical are "forward-looking" statements within the meaning of
the safe harbor provisions of the federal securities laws. Investors are
cautioned that such statements are only predictions and speak only as of the
date of this release, and the Company undertakes no duty to update. 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 the California Public Utility Commission, PG&E's Board of
Directors or PG&E's Management impacting PG&E's AMI projects; the success of the
Company's competitors; changes in or the effect of the Federal Energy Bill; the
timing and success of DCSI's software development efforts; the timing and
content of purchase order releases under the PG&E contracts; DCSI's and
Hexagram's successful performance of the PG&E contracts; weakening of economic
conditions in served markets; changes in customer demands or customer
insolvencies; competition; intellectual property rights; technical difficulties;
unforeseen charges impacting corporate operating expenses; the performance of
the Company's international operations; 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; containment of
engineering and development costs; performance issues with key customers,
suppliers and subcontractors; labor disputes; changes in laws and regulations
including but not limited to changes in accounting standards and taxation
requirements; changes in foreign or U.S. business conditions affecting the
distribution of foreign earnings; costs relating to environmental matters;
litigation uncertainty; successful integration of newly acquired businesses; and
the Company's successful execution of internal operating plans.
ESCO, headquartered in St. Louis, is a leading supplier of engineered
filtration products to the process, health care and transportation markets
worldwide. In addition, the Company markets proprietary, special purpose
communications systems and is the industry leader in RF shielding and EMC test
products. Further information regarding ESCO and its subsidiaries is available
on the Company's website at www.escotechnologies.com
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
December 31, 2005
-----------------
Net Sales $ 90,586
Cost and Expenses:
Cost of sales 64,027
SG&A 23,619
Interest (income) expense (717)
Other (income) expenses, net (38)
---
Total costs and expenses 86,891
------
Earnings before income taxes 3,695
Income taxes 1,491
-----
Net earnings $ 2,204
=========
Earnings per share:
Basic
Net earnings $ 0.09
=========
Diluted
Net earnings $ 0.08
=========
Average common shares O/S:
Basic 25,575
======
Diluted 26,334
======
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
December 31, 2004
-----------------
Net Sales $ 104,375
Cost and Expenses:
Cost of sales 68,509
SG&A 19,813
Interest (income) expense (481)
Other (income) expenses, net (453)
----
Total costs and expenses 87,388
------
Earnings before income taxes 16,987
Income taxes 6,464
-----
Net earnings $ 10,523
=========
Earnings per share:
Basic
Net earnings $ 0.41
=========
Diluted
Net earnings $ 0.40
=========
Average common shares O/S:
Basic 25,586
======
Diluted 26,408
======
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
Condensed Business Segment Information
(Unaudited)
(Dollars in millions)
Three Months Ended
December 31,
2005 2004
---- ----
Net Sales - GAAP
----------------
PTI $ 10.7 10.2
VACCO 8.1 10.6
Filtertek 22.7 23.2
---- ----
Filtration subtotal 41.5 44.0
Communications 19.1 33.6
Test 30.0 26.8
---- ----
Totals $ 90.6 104.4
====== =====
EBIT - GAAP basis
PTI $ 1.2 1.1
VACCO 1.9 3.6
Filtertek 1.0 2.4
--- ---
Filtration subtotal 4.1 7.1
Communications (1.0) 9.6
Test 2.9 2.1
Corporate (3.0) (2.3)
---- ----
Totals $ 3.0 16.5
====== ====
Note: Depreciation and amortization expense was $3.1 million for the
quarters ended December 31, 2005 and 2004, respectively.
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
Reconciliation of Non-GAAP Financial Measures
(Unaudited)
(Dollars in millions)
EBIT (1) - As Reported
Three Months Ended
December 31,
2005 2004
---- ----
EBIT $ 3.0 16.5
Interest income 0.7 0.5
Less: Income taxes 1.5 6.5
--- ---
Net earnings from
continuing operations $ 2.2 10.5
===== ====
(1) EBIT is defined as earnings from continuing operations before
interest and taxes.
EBIT Margin Outlook - FY 2006
- -----------------------------
Consolidated EBIT margin in the range of 12 percent to 13 percent,
PTI EBIT margin in the range of 12 percent to 13 percent, VACCO EBIT
margin in the range of 20 percent to 22 percent, Filtertek EBIT
margin in the range of 7 percent to 8 percent, Test segment EBIT
margin in the range of 10.5 percent to 11.5 percent, Communications
segment EBIT margin in the range of 21 percent to 23 percent, Nexus
EBIT margin in the range of 4 percent to 5 percent, and DCSI's EBIT
margin in the range of 25 percent to 27 percent under "Business
Outlook" cannot be reconciled with a GAAP measure as this represents
a forward-looking measure with no comparable GAAP measurement
quantifiable at this time.
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
December 31, September 30,
2005 2005
---- ----
Assets
Cash and cash equivalents $ 70,359 $104,484
Accounts receivable, net 68,928 68,819
Costs and estimated earnings
on long-term contracts 3,679 4,392
Inventories 52,774 48,645
Current portion of deferred
tax assets 29,965 30,219
Other current assets 8,369 8,394
----- -----
Total current assets 234,074 264,953
Property, plant and equipment, net 66,962 67,190
Goodwill 92,606 68,880
Deferred tax assets -- --
Other assets 40,084 27,697
------ ------
$433,726 $428,720
======== ========
Liabilities and Shareholders' Equity
Accounts payable $ 31,858 29,299
Other current liabilities 36,088 33,458
------ ------
Total current liabilities 67,946 62,757
Deferred income 2,979 3,134
Other liabilities 28,905 31,805
Long-term debt -- --
Shareholders' equity 333,896 331,024
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$433,726 $428,720
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
December 31, 2005
-----------------
Cash flows from operating activities:
Net earnings $ 2,204
Adjustments to reconcile net earnings to net
cash used by operating activities:
Depreciation and amortization 3,078
Stock compensation expense 1,273
Changes in operating working capital (532)
Effect of deferred taxes (3,090)
Other (1,001)
------
Net cash provided by operating activities 1,932
Cash flows from investing activities:
Acquisition of business (28,833)
Capital expenditures (2,320)
Additions to capitalized software (5,724)
------
Net cash used by investing activities (36,877)
-------
Cash flows from financing activities:
Proceeds from/payments of long-term debt --
Purchases of common stock into treasury --
Other, including exercise of stock options 820
---
Net cash provided by financing activities 820
---
Net decrease in cash and cash equivalents (34,125)
Cash and cash equivalents, beginning of period 104,484
-------
Cash and cash equivalents, end of period $ 70,359
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
Other Selected Financial Data
(Unaudited)
(Dollars in thousands)
Backlog And Entered
- -------------------
Orders-Q1 FY 2006 Filtration Comm. Test Total
- ----------------- ---------- ----- ---- -----
Beginning Backlog
9/30/05 $ 80,497 87,781 64,836 233,114
Entered Orders 41,145 59,166 * 25,834 126,145
Sales (41,446) (19,133)* (30,007) (90,586)
------- ------- ------- -------
Ending Backlog-
12/31/05 $ 80,196 127,814 60,663 268,673
== == == ========= ======= ====== =======
*Communications Recap Q1 FY 2006 Q1 FY 2006
Entered Orders Sales
-------------- -----
AMR Products (DCSI) $ 45,640 15,418
SecurVision Video Security
(Comtrak) 2,510 2,510
Nexus Energy 11,016 (1) 1,205 (2)
------ -----
Total 59,166 19,133
====== ======
(1) Includes $2.0 million of new orders and $9.0 million of acquired
backlog
(2) Represents one month of sales.
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