EXHIBIT NO. 13
2001 ESCO TECHNOLOGIES ANNUAL REPORT
FIVE-YEAR FINANCIAL SUMMARY
<Table>
<Caption>
(Dollars in millions, except per share amounts) 2001(1) 2000(2) 1999(3) 1998(4) 1997(5)
------- ------- ------- ------- -------
For years ended September 30:
Net sales $ 344.9 300.2 416.1 365.1 378.5
Interest expense .1 .4 6.5 7.7 5.2
Earnings before income taxes 27.3 24.7 63.5 16.3 17.9
Net earnings before accounting change 30.1 16.8 50.5 11.3 11.8
Net earnings 30.1 16.8 25.5 11.3 11.8
Earnings per share:
Earnings before accounting change
Basic 2.43 1.37 4.09 .94 1.00
Diluted 2.35 1.33 4.00 .90 .96
Net earnings
Basic 2.43 1.37 2.06 .94 1.00
Diluted 2.35 1.33 2.02 .90 .96
As of September 30:
Working capital 87.4 62.8 95.3 60.3 62.3
Total assets 375.6 331.1 378.4 409.3 378.2
Long-term debt 8.3 .6 41.9 50.1 50.0
Shareholders' equity 287.3 259.4 248.7 224.1 205.0
======= ======= ======= ======= =======
</Table>
(1) Includes the acquisition of Bea. (see Footnote 2 of Notes to Consolidated
Financial Statements). Also, includes the elimination of the net deferred
tax valuation allowance of approximately $12.7 million or $0.99 per share.
(2) Includes the acquisitions of Lindgren, Holaday, and Eaton Space Products
and the sale of the Rantec microwave antenna business (see Footnote 2 of
Notes to Consolidated Financial Statements). Also, includes the after-tax
gain on the sale of the Riverhead, NY property of approximately $2.2
million or $0.18 per share and the after-tax gain on the sale of the
Calabasas, CA property of approximately $0.5 million or $0.04 per share.
(3) Includes the gain on sale of SEI, accounting change, $5.1 million of
restructuring charges, and $3.9 million of other charges related to cost of
sales. (see Footnotes 1 and 2 of Notes to Consolidated Financial
Statements)
(4) Includes the acquisitions of Euroshield and AMT.
(5) Includes the acquisition of Filtertek in February 1997.
47
2001 ESCO TECHNOLOGIES ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto. The years 2001,
2000 and 1999 represent the fiscal years ended September 30, 2001,
2000 and 1999, respectively, and are used throughout the document.
Introduction
ESCO Technologies Inc. (ESCO, the Company) operates principally
in four business segments: Filtration/Fluid Flow, Test,
Communications and Other. ESCO develops, manufactures and markets a
broad range of filtration products used in the separation,
purification and processing of liquids and gases. The Company's
engineered filtration products utilize membrane, precision screen
and other technologies to protect critical processes and equipment
from contaminants. Major applications include oil production and
removal of contaminants in fuel, lube and hydraulic systems, various
health care applications, including blood collection, food and
beverage processing, potable water, and semiconductor production
processes. ESCO is a leading supplier of radio frequency (RF)
shielding and EMC test products. ESCO also supplies shielding to the
growing Magnetic Resonance Imaging (MRI) market. The Company's
Communications segment provides a well-proven communications system
called TWACS(R) to the electric utility industry. The TWACS(R)
system is currently used primarily for automatic meter reading (AMR)
and its load management capabilities, and also provides a ready
conduit into the home for future applications.
The Company's business segments are comprised of the following
primary operating entities:
--Filtration/Fluid Flow: PTI Technologies Inc. (PTI) and
Filtertek Inc. (Filtertek),
--Test: EMC Group consisting of EMC Test Systems, L.P. (ETS) and
Lindgren RF Enclosures, Inc. (Lindgren),
--Communications: Distribution Control Systems, Inc. (DCSI) and
Comtrak Technologies, L.L.C. (Comtrak),
--Other: Rantec Power Systems Inc. (Rantec),
--Systems & Electronics Inc. (SEI) is included as a divested
business in 1999.
ESCO continues to operate with meaningful growth prospects in
its primary served markets, and with considerable financial
flexibility. The Company continues to focus on new products that
incorporate proprietary design and process technologies. Management
is committed to delivering shareholder value through internal
growth, selective acquisitions and share repurchase when warranted.
Highlights of 2001 Operations
Sales for the year ended September 30, 2001 increased $44.7
million, or 15% to $344.9 million compared to sales of $300.2 million
in 2000. Sales growth from acquisitions accounted for approximately
$28.6 million of the sales increase in 2001. New products introduced
within the last three years accounted for $70.1 million of 2001
sales. The Company's Communications segment continued to show strong
year over year growth as sales increased 38% and approximately $104
million of new orders were received in 2001.
Gross profit margin increased to 31.4% in 2001 compared to 30.6%
in the prior year, reflecting positive results from the Company's
ongoing cost reduction programs and product mix changes. Operating
profit margin (defined as net sales, less cost of sales, less SG&A
expenses) increased to 10.7% of net sales in 2001, compared to 10.0%
of net sales in 2000. The Company's EBIT margin from operations
improved by 0.5% in 2001 compared to 2000. EBIT is defined as
earnings before interest and taxes.
In June 2001, the Company acquired Bea Filitri S.p.A. (Bea),
headquartered in Milan, Italy. Bea is a supplier of filtration
products to the pharmaceutical, food and beverage, health care, and
petrochemical markets. Bea's operating results are included within
the Filtration/Fluid Flow segment, since the date of acquisition.
13
2001 ESCO TECHNOLOGIES ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
Fiscal 2001 net earnings as reported, were $30.1 million, or
$2.35 per share, compared to $16.8 million, or $1.33 per share, in
2000. During 2001, the Company's results were favorably impacted by
an income tax adjustment of $12.7 million, or $0.99 per share,
related primarily to the elimination of the Company's net deferred
tax valuation allowance. Excluding this favorable income tax
adjustment, 2001 net earnings from operations were $17.4 million, or
$1.36 per share, compared to 2000 net earnings from operations of
$14.1 million, or $1.11 per share. 2000 net earnings from operations
exclude the after-tax gains from the sale of the Riverhead, NY and
Calabasas, CA properties in 2000, which were approximately $2.7
million, or $0.22 per share.
Recap of 2000 Performance
The Company successfully completed three acquisitions during
2000: Lindgren, Holaday Industries, Inc. (Holaday), and the Eaton
space products business (Eaton), formerly located in El Segundo, CA.
The Lindgren and Holaday operating results are included within the
Test segment and the Eaton results are included within the
Filtration/Fluid Flow segment since the date of the respective
acquisitions.
Fiscal 2000 sales increased $56.9 million, or 23% to $300.2
million over 1999 "adjusted" sales of $243.3 million, mainly due to
new product introductions and contributions from the 2000
acquisitions. Fiscal 2000 acquisitions contributed $25.7 million to
sales in 2000. Operating profit, as defined above, increased $16.5
million to $30.1 million in 2000 over 1999 "adjusted" operating
profit of $13.6 million.
Fiscal 2000's net earnings, as reported, were $1.33 per share.
In 2000, the Company sold properties in Riverhead, NY and Calabasas,
CA, thereby, converting into cash properties retained after
divestitures. Excluding the gains on the sale of these properties,
2000 net earnings from operations were $1.11 per share compared to
1999 "adjusted" net earnings of $0.61 per share. Refer to the table
on page 21 of Management's Discussion and Analysis for the
definition and reconciliation of "adjusted" net income in 1999.
1999 Strategic Actions
In conjunction with the divestiture of SEI, the Company took a
number of actions at September 30, 1999 to further sharpen its focus
on its primary served markets. Other actions included abandoning the
active pursuit of certain business areas, exiting non-core,
underperforming businesses, and restructuring the corporate overhead
of the Company.
Results of Operations
NET SALES
Net sales of $344.9 million in 2001 increased $44.7 million
(14.9%) from net sales of $300.2 million in 2000. Filtration/Fluid
Flow, Test and Communications segments all had increased sales in
2001. Sales growth from acquisitions accounted for approximately
$28.6 million of the sales increase, with the balance coming from
organic growth. New products introduced within the last three years
accounted for $70.1 million of 2001 sales.
Net sales of $300.2 million in 2000 decreased $115.9 million
(27.9%) from reported net sales of $416.1 million in 1999 due to the
divestiture of SEI. The 1999 amount included SEI sales of $172.8
million. Excluding SEI sales from the 1999 results, 2000 net sales
increased $56.9 million (23.4%) over 1999 "adjusted" net sales of
$243.3 million. Acquisitions contributed $25.7 million to sales in
2000.
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2001 ESCO TECHNOLOGIES ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
Filtration/Fluid Flow
Net sales of $188.2 million in 2001 were $6.5 million (3.6%)
higher than net sales of $181.7 million in 2000. Net sales increased
in the health care and aerospace markets, offset by declines in the
automotive and semiconductor markets. The current year acquisition
of Bea contributed approximately $2.0 million to the increase in
sales. The incremental sales contribution from the fiscal 2000
acquisition of the Eaton space products business was approximately
$3.3 million in 2001.
Net sales of $181.7 million in 2000 increased $12.8 million
(7.6%) from net sales of $168.9 million in 1999, primarily due to
new product introductions and increases in microfiltration sales.
The acquisition of the Eaton space products business in fiscal 2000
contributed approximately $3.4 million of the increase in sales.
Test
Net sales increased $22.5 million (35.6%) to $85.5 million in
2001 compared to net sales of $63.0 million in 2000. Fiscal 2001
reflected the full year contributions from Lindgren and Holaday.
Sales of the Company's Magnetic Resonance Imaging (MRI) products
increased in 2001 by more than 15%, attributable to the growing
health care market. This was partially offset by a decrease in the
sale of large EMC test chambers to electronics and
telecommunications customers as a result of the softening of these
markets. The General Motors contract contributed approximately $4.6
million, $13.2 million and $3.1 million to sales in 2001, 2000 and
1999, respectively.
Net sales of $63.0 million in 2000 increased $28.1 million
(80.5%) over the $34.9 million in net sales recorded in 1999. The
increase in 2000 over 1999 is primarily due to acquisitions, which
contributed $22.1 million. The remaining increase in 2000 over 1999
is primarily the result of additional EMC test chamber sales.
Communications
Net sales of $59.1 million in 2001 were $16.4 million (38.3%)
higher than net sales of $42.7 million in 2000. The increase in 2001
over 2000 is primarily the result of increased shipments to electric
utility Cooperatives (Co-ops), together with continued shipments to
other existing customers, such as Puerto Rico Electric Power
Authority (PREPA), Wisconsin Public Service Corporation (WPS), and
Florida Power & Light (FPL). The Company recorded approximately $104
million in new orders for its two-way automatic communications
systems and load control transponders during 2001.
The 2000 net sales increased $16.9 million over the $25.8
million in net sales recorded in 1999. The increase in 2000 over
1999, primarily is the result of increased shipments to PREPA, WPS
and the Co-ops.
Other
Net sales were $12.2 million in 2001, $12.8 million in 2000 and
$13.7 million in 1999. The decrease in net sales is due to the sale
of the Rantec microwave antenna business in February 2000, which
contributed approximately $2.1 million to sales in fiscal 2000 prior
to its divestiture and contributed $3.5 million to sales in 1999.
Excluding the microwave antenna business from the 2000 results, net
sales increased $1.5 million or 14% in 2001.
ORDERS AND BACKLOG
Firm order backlog was $180.1 million at September 30, 2001,
compared to $145.4 million at September 30, 2000. New orders
totaling $379.6 million were received in 2001, compared with $288.7
million in 2000, reflecting a 31.5% increase. Approximately $186
million of new orders in 2001 related to Filtration/Fluid Flow
products, approximately $79 million related to Test products, and
approximately $104 million related to Communications products
(automatic meter reading and load control products).
GROSS PROFIT
The Company computes gross profit as: net sales less cost of
sales. The gross profit margin is the gross profit divided by net
sales, expressed as a percentage.
The gross profit margin was 31.4%, 30.6% and 22.7% in 2001,
2000 and 1999, respectively. The "adjusted" gross profit margin for
1999 was 27.6%. The increase in 2001 compared to 2000 is due
primarily to a favorable sales mix and the results of the Company's
ongoing cost improvement initiatives. The increase in 2000 compared
to the reported 1999 results is due primarily to the lower margins
in 1999 related to the defense businesses. Gross profit margin
increased in 2000 compared to "adjusted" 1999 results due to
operational improvements in all four operating segments, including
favorable changes in sales mix and product pricing as well as
successful cost containment programs.
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2001 ESCO TECHNOLOGIES ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) for 2001
were $71.5 million, or 20.7% of net sales, compared with $61.8
million, or 20.6% of net sales for 2000. The increase in SG&A
spending in 2001 is mainly due to the 2000 acquisitions being
included for the entire fiscal year 2001, as well as additional
investments in research and development, engineering, and marketing
within the Filtration/Fluid Flow and Communications segments.
SG&A expenses in 2000 were $61.8 million, or 20.6% of net sales,
compared with $74.4 million, or 17.9% of net sales for 1999.
"Adjusted" SG&A expenses were $53.6 million, or 22.0% of net sales
in 1999. The 2000 SG&A expenses included $4.9 million of additional
expenses related to the 2000 acquisitions. The percentage decrease
from "adjusted" 1999 SG&A expenses is the result of favorable
leverage achieved on the higher sales volume.
OPERATING PROFIT
The Company evaluates the performance of its operating segments
based on operating profit, which the Company defines as net sales,
less cost of sales, and less SG&A expenses. Operating profit, as
defined by the Company, excludes certain costs which are included in
Other costs and expenses, net, in the Consolidated Statements of
Operations, and which would be included in the determination of
operating income as defined within generally accepted accounting
principles. These items are discussed in the respective segment
information below.
Operating profit of $36.8 million (10.7% of net sales) in 2001
increased $6.7 million (22.5%) from $30.1 million (10% of net sales)
in 2000. In 2001, operating profit dollars increased in all
segments.
Operating profit of $30.1 million (10% of net sales) in 2000
increased $15.2 million (102%) from $14.9 million in 1999. The 1999
operating profit amount included $10.4 million related to SEI.
Fiscal 2000 operating profit increased $16.5 million over prior year
"adjusted" operating profit of $13.6 million.
Filtration/Fluid Flow
Operating profit of $16.8 million (8.9% of net sales) in 2001
increased slightly over operating profit of $16.6 million (9.1% of
net sales) in 2000. The current year was impacted by non-recurring
costs related to the consolidation of the Eaton space products
business into existing Company owned facilities and increases in
other facility operating costs. In addition, during 2001, the
Company made significant investments in new product development and
market expansion opportunities, primarily in microfiltration.
Operating profit of $16.6 million (9.1% of net sales) in 2000
was $4.7 million (39.5%) higher than operating profit of $11.9
million (7.0% of net sales) in 1999. The increase was primarily the
result of new product introductions and increases in microfiltration
profitability. Increased shipments of disposable water filter
cartridges also contributed to the growth in profitability in 2000.
Test
Operating profit increased approximately $2.4 million to $9.3
million (10.9% of net sales) in 2001 compared to $6.9 million (11.0%
of net sales) in 2000. The increase in 2001 is mainly due to the
full year contributions from the Lindgren and Holaday acquisitions,
which occurred in the second half of fiscal 2000, offset by a
smaller revenue contribution from the General Motors contract which
is nearing completion. Operating profit of $6.9 million (11.0% of
net sales) in 2000 was $2.9 million (72.5%) higher than operating
profit of $4.0 million (11.5% of net sales) in 1999. The increase in
2000 over 1999, was primarily the result of contributions from the
General Motors contract. Fiscal 2000 was also favorably impacted by
the mid-year acquisitions mentioned above.
Communications
Operating profit of $12.6 million (21.4% of net sales) in 2001
was $3.7 million, or 41.6% higher than operating profit of $8.9
million (20.8% of net sales) in 2000. Operating profit of $8.9
million (20.8% of net sales) in 2000 was $9.3 million higher than
operating profit of ($0.4) million in 1999. The increase in
operating profit in 2001 versus 2000, as well as 2000 versus 1999,
in both dollars and as a percentage of net sales is due to increased
shipments of automatic meter reading (AMR) equipment at DCSI. The
Company is increasing its engineering and new product development
expenditures in the Communications segment in order to continue its
growth in the
16
2001 ESCO TECHNOLOGIES ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
AMR markets. The 1999 operating profit was impacted by certain
nonrecurring charges at Comtrak, discussed on page 22 of
Management's Discussion and Analysis. Other
Operating profit was $1.4 million, ($0.3) million and ($8.8)
million in 2001, 2000 and 1999, respectively. The increase in
operating profit in 2001 over 2000, and in 2000 over 1999, is mainly
related to the improved operations of Rantec's Power Systems
business and the February 2000 sale of the microwave antenna
business. The 1999 results were impacted by the nonrecurring charges
related to the microwave antenna business, discussed on page 22.
INTEREST EXPENSE
Interest expense decreased to $0.1 million in 2001 from $0.4
million in 2000, primarily as a result of lower outstanding average
borrowings throughout 2001. The timing of operating cash flows
throughout 2001 also decreased the average outstanding borrowings.
Interest expense decreased to $0.4 million in 2000 from $6.5
million in 1999, primarily as a result of lower outstanding average
borrowings throughout 2000. With the exception of $1 million of
foreign debt, all outstanding debt from fiscal 1999 was repaid in
October 1999 from the proceeds of the sale of SEI.
OTHER COSTS AND EXPENSES, NET
Other costs and expenses, net, were $9.4 million, $8.0 million
and $4.9 million in 2001, 2000 and 1999, respectively. The 2001 net
amount includes: Goodwill amortization of $3.4 million; patent and
other intangible amortization of $1.4 million; approximately $2.1
million of net costs related to the consolidation of PTI's
filtration businesses into new facilities in Oxnard, CA and the
consolidation of the Stockton, CA manufacturing facility into the
Huntley, IL facility; and other miscellaneous costs.
Other costs and expenses, net, in 2000, of $8.0 million
consisted of the following items: Goodwill amortization of $2.6
million; patent and other intangible amortization of $1.3 million;
approximately $2.0 million of net costs related to the
Filtration/Fluid Flow segment, including the consolidation of PTI's
filtration businesses into new facilities in Oxnard, CA, expenses
related to the planned upgrade of production equipment to improve
manufacturing efficiency at Filtertek, and costs related to the
microfiltration business; approximately $1.0 million of net costs
related to the Test segment primarily related to the write-off of an
investment in a third party EMC related start-up company which filed
bankruptcy in 2000; and other miscellaneous costs.
GAIN ON SALE OF PROPERTIES
The gain on the sale of properties in fiscal 2000 represents
$2.2 million from the sale of the Riverhead, NY property and $0.8
million from the sale of the Calabasas, CA property. These
properties were related to previously divested companies.
INCOME TAX (BENEFIT) EXPENSE
Income tax benefit of ($2.8) million for 2001 reflects current
tax expense of $0.4 million, deferred tax benefit of ($5.7) million,
and foreign, state and local tax expense of $2.4 million. Income tax
expense of $7.9 million for 2000 reflects current tax expense of
$0.3 million, deferred tax expense of $6.3 million, and foreign,
state and local tax expense of $1.4 million.
Based on the Company's historical pretax income, together with
the projection of future taxable income, Management believes it is
more likely than not that the Company will realize the benefits of
the net deferred tax asset existing at September 30, 2001. In order
to realize the aforementioned net deferred tax asset, the Company
will need to generate future taxable income of approximately $154
million, of which $130 million is required to be realized prior to
the expiration of the net operating loss (NOL) carryforward, of
which $8 million will expire in 2006; $6 million will expire in
2007; $23 million will expire in 2009; $38 million will expire in
2010; $4 million will expire in 2011; $11 million will expire in
2018; and $40 million will expire in 2019. The net operating loss
carryforward will be available to reduce future Federal income tax
cash payments.
In 2001, as the result of certain residual tax effects related
to the 2000 sale of the property in Calabasas, CA, the Company
utilized approximately $2 million of the remaining $33 million
capital loss carryforward available from the sale of its Hazeltine
subsidiary in 1996. The remaining capital loss carryforward of
approximately $31 million expired on September 30, 2001.
17
2001 ESCO TECHNOLOGIES ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
The valuation reserve in the amount of $10.8 million maintained
for the deferred tax asset related to the capital loss carryforward
was eliminated due to the expiration of the capital loss
carryforward. Additionally, in 2001 the Company eliminated its
remaining net deferred tax valuation allowance of $12.7 million,
which was the allowance representing the amount of the deferred tax
asset associated with temporary differences and NOLs which Management
believed would likely not be realized due to limitations on future
use.
The effective tax rate in 2001 was (10.4%), compared with 32.0%
in 2000 primarily due to the favorable impact of the elimination of
the net deferred tax valuation allowance. On an operational basis,
Management estimates the 2001 effective tax rate would have been
36.1%, excluding the net favorable income tax adjustment of $12.7
million, previously described. An analysis of the effective tax
rates for 2001, 2000 and 1999 is included in the notes to the
consolidated financial statements.
CHANGE IN ACCOUNTING PRINCIPLE - 1999
The Company adopted the provisions of Statement of Position
(SOP) 98-5, "Reporting on the Costs of Start-up Activities" in the
first quarter of 1999 which resulted in a non-cash, after-tax charge
of approximately $25 million, which was recognized as a cumulative
effect of an accounting change. The charge related to precontract,
start-up and organization costs incurred in anticipation of specific
future contract awards which were based on specific customer
identified requirements.
Capital Resources & Liquidity
Working capital increased to $87.4 million at September 30, 2001
from $62.8 million at September 30, 2000. During 2001, cash and cash
equivalents increased by $8.9 million. Inventories increased $3.7
million primarily due to the 2001 acquisition of Bea. Other current
assets increased by $10.7 million primarily due to an increase in
the current portion of deferred tax assets.
Net cash provided by operating activities was $33.0 million in
2001 compared to $20.0 million in 2000. The increase in 2001 is
primarily due to the Company's additional earnings and improved
working capital resulting from ongoing asset management initiatives.
Net cash provided by operating activities was $20.0 million in
2000 compared to $25.9 million in 1999. Net cash provided by
operating activities in 2000 increased $5.4 million from the 1999
adjusted amount of $14.6 million, which excludes $11.3 million
related to SEI.
Capital expenditures of $11.9 million, $10.4 million and $8.3
million, in 2001, 2000 and 1999, respectively, primarily included
manufacturing equipment. Capital expenditures related to SEI were
$1.1 million in 1999. There were no commitments outstanding that
were considered material for capital expenditures at September 30,
2001.
At September 30, 2001, the Company had available a net operating
loss (NOL) carryforward for tax purposes of approximately $130
million. This NOL will expire beginning in year 2006 and ending in
year 2019, and will be available to reduce future Federal income tax
cash payments.
ACQUISITIONS/DIVESTITURES
On June 8, 2001, the Company acquired all of the outstanding
common stock of Bea Filtri S.p.A. (Bea) for approximately $13.5
million in cash and debt. Bea, headquartered in Milan, Italy, is a
supplier of filtration products to the pharmaceutical, food and
beverage, healthcare, and petrochemical markets. Bea's assets and
liabilities, and related operating results, since the date of
acquisition, are included within the Company's Filtration/Fluid Flow
segment.
On June 2, 2000, the Company purchased Holaday Industries, Inc.
(Holaday) for approximately $4 million in cash. Holaday,
headquartered in Eden Prairie, MN, is a leading supplier of
specialty measurement probes to the EMC test, health and safety, and
microwave markets. The operating results for Holaday, since the date
of acquisition, are included within the Company's Test segment.
On April 9, 2000, the Company acquired all of the outstanding
common stock of Lindgren RF Enclosures, Inc. (formerly known as The
Curran Company) and Lindgren, Inc. (doing business through its
subsidiary, Rayproof Ltd.) (collectively Lindgren) for approximately
$22 million in cash plus additional consideration based upon the
future operating performance of Lindgren. Lindgren is a leading
supplier of radio frequency (RF) shielding products and
18
2001 ESCO TECHNOLOGIES ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
components used by manufacturers of medical equipment,
communications systems and electronic products. The operating
results for Lindgren, since the date of acquisition, are included
within the Company's Test segment.
On March 31, 2000, the Company acquired the Eaton space products
business (Eaton), formerly located in El Segundo, CA, for
approximately $6 million in cash. Eaton manufactures specialty
valves and other fluid flow components for satellite launch vehicles
and aircraft applications and has been integrated into the Company's
Filtration/Fluid Flow segment, since the date of acquisition.
All of the Company's acquisitions have been accounted for using
the purchase method of accounting. The goodwill recorded as a result
of the above transactions is being amortized over 20 years, until
the adoption of SFAS 142.
In February 2000, the Company completed the sale of its
microwave antenna product line, which had historically operated as
part of Rantec Microwave & Electronics, Inc. The Company transferred
the contract order backlog and operating assets of the microwave
antenna business for $2.1 million in cash, and in September 2000,
sold the related land and buildings in Calabasas, CA for
approximately $6 million.
In December 1999, the Company sold the Riverhead, NY property,
used by the Company's former Hazeltine subsidiary for approximately
$2.6 million.
On September 30, 1999, the Company sold SEI to Engineered
Support Systems, Inc. for $85 million in cash, less working capital
adjustments.
BANK CREDIT FACILITY
On April 11, 2000, the Company entered into a $75 million
revolving credit facility, with the option to increase it to $100
million through April 11, 2002. The credit facility was amended on
February 28, 2001 to allow for borrowings in foreign currencies. The
credit facility is available for direct borrowings and/or the
issuance of letters of credit. The maturity of the credit facility
is April 11, 2005, and is provided by a group of five banks, led by
Bank of America. At September 30, 2001, the Company had
approximately $61.7 million available to borrow under the credit
facility as well as $14.5 million of cash on hand.
The credit facility requires, as determined by certain financial
ratios, a commitment fee ranging from 20-30 basis points per annum
on the unused portion. The terms of the facility provide that
interest on borrowings may be calculated at a spread over the London
Interbank Offered Rate (LIBOR) or based on the prime rate, at the
Company's election. Substantially all of the assets of the Company
are pledged under the credit facility. The financial covenants of
the credit facility include limitations on leverage and minimum
consolidated EBITDA. As of September 30, 2001, the Company is in
compliance with all bank covenants.
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.
SHARE REPURCHASE
In February 2001, the Company authorized an open market
repurchase program of up to 1.3 million shares, which is subject to
market conditions and other factors and covers the period ending
September 29, 2003. Approximately 77,000, 516,000 and 177,000 shares
were repurchased in 2001, 2000 and 1999, respectively. In June 2000,
the Company initiated an odd lot share repurchase program which
extended through September 2000 whereby the Company repurchased
approximately 25,000 shares, which are included in the 516,000 of
shares repurchased in 2000, above.
OTHER
Management believes that, for the periods presented, inflation
has not had a material effect on the Company's results of
operations.
The Company is currently involved in various stages of
investigation and remediation relating to environmental matters.
Based on current information available, Management does not believe
the aggregate costs involved in the resolution of these matters will
have a material adverse effect on the Company's operating results,
capital expenditures or competitive position.
19
2001 ESCO TECHNOLOGIES ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
Market Risk Analysis
MARKET RISK EXPOSURE
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, during
2001, entered into interest rate swaps totaling approximately $23
million to mitigate this exposure. In addition, the Company has
interest rate exposure relating to floating rate obligations
denominated in EURO dollars, therefore, in September 2001, the
Company entered into an interest rate swap of approximately $4
million to mitigate this exposure. These swaps are accounted for as
cash flow hedges under the provisions of SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities" as of and for the
year ended September 30, 2001.
The Company is subject to foreign currency exchange rate risk
relating to receipts from customers and payments to suppliers in
foreign currencies. The Company hedges certain foreign currency
commitments by purchasing foreign currency forward contracts.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued
SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other
Intangible Assets". SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated or
completed after June 30, 2001. SFAS 141 also specifies criteria
intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill. SFAS
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 142. SFAS 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 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of".
The Company is required to adopt the provisions of SFAS 141
immediately. Management expects to adopt the provisions of SFAS 142
effective October 1, 2001, the beginning of the Company's fiscal
year 2002.
SFAS 141 will require that upon adoption of SFAS 142, the
Company evaluate its existing intangible assets and goodwill, and
make any necessary reclassifications in order to conform with the
new criteria in SFAS 141. Upon adoption of SFAS 142, the Company
plans to reassess the useful lives and residual values of all
recorded intangible assets, other than goodwill, and make any
necessary amortization period adjustments by December 31, 2001. In
addition, to the extent an intangible asset is identified as having
an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of
SFAS 142 by December 31, 2001. Any impairment loss will be measured
as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle. Upon adoption of SFAS 141 and
SFAS 142, the Company does not anticipate a significant impact to
the carrying value of the Company's goodwill.
20
2001 ESCO TECHNOLOGIES ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
1999 Strategic Actions
RECONCILIATION OF ADJUSTED NET INCOME - 1999
In conjunction with the divestiture of SEI, the Company took a
number of actions at September 30, 1999 to further sharpen its focus
on its primary served markets. Other actions included abandoning the
active pursuit of certain business areas, exiting non-core,
underperforming businesses, and restructuring the corporate overhead
of the Company.
The following table is not intended to present 1999 net
earnings as defined within generally accepted accounting principles
(GAAP), and is presented for informational purposes only.
The table provides a reconciliation between the 1999 reported
results of operations and what Management believes the 1999
operating results may have been after removing certain nonrecurring
items and assuming that all of the actions taken during 1999 to
reorient the business were complete at the beginning of the period.
Management believes the estimated 1999 adjusted operating results
provide a meaningful presentation for purposes of comparing ESCO's
subsequent financial performance.
<Table>
<Caption>
1999 Elimination Adjusting 1999
(Dollars in millions, rounded) As Reported of SEI(a) Items As Adjusted
----------- ----------- --------- -----------
Net sales $ 416.1 172.8 -- $ 243.3
----------- ----------- --------- -----------
Cost of sales 317.7 139.6 (2.0)(b) 176.1
Other charges related to cost of sales 3.9 -- (3.9)(c) --
SG&A expenses 74.4 21.6 .8 (d) 53.6
Interest expense (income) 6.5 .6 (8.2)(e) (2.3)
Other, net 4.9 .3 (.3)(c) 4.3
Restructuring charges 5.1 -- (5.1)(c) --
Gain on sale of SEI (59.9) -- 59.9 (c) --
----------- ----------- --------- -----------
Total costs and expenses 352.6 162.1 41.2 231.7
----------- ----------- --------- -----------
Earnings before tax 63.5 10.7 (41.2) 11.6
Income tax expense 13.0 3.7 (5.4)(f) 3.9
----------- ----------- --------- -----------
Net earnings before accounting change 50.5 7.0 (35.8) 7.7
----------- ----------- --------- -----------
Cumulative effect of accounting change,
net of tax (25.0) -- 25.0 (c) --
----------- ----------- --------- -----------
Net earnings $ 25.5 7.0 (10.8) $ 7.7
=========== =========== ========= ===========
Diluted EPS $ 2.02 $ .61
</Table>
- --------------------------------------------------------------------------------
(a) Represents the operations of SEI which were included in the 1999 GAAP
reported results of operations.
(b) Represents the 1999 operating results of Rantec's microwave antenna business
which was being offered for sale in 1999 and was sold in February 2000. Fiscal
1999 net sales included $4.9 million related to Rantec's microwave antenna
business.
(c) Represents the elimination of the nonrecurring items: includes the gain
related to the divestiture of SEI, other charges related to the strategic
initiatives described on the following page, and the accounting change (SOP
98-5) adopted in the 1999 first quarter.
(d) Represents the net amount of the remaining corporate office operating
expenses after the divestiture of SEI. This amount reflects a $4.2 million cost
reduction from the $5 million amount recorded in 1999 and previously absorbed by
the operations of SEI.
(e) Represents the estimated net interest impact of the SEI transaction proceeds
and the cash impact of the other cost saving actions noted above, assuming that
they occurred at the beginning of the period. The amount noted assumes all
outstanding debt was repaid and the excess cash proceeds were invested with a 6%
yield, representing the yields in effect in 1999.
(f) Represents the amount necessary to reflect the adjusted effective tax rate
at 33%, which represents the Company's estimated 1999 effective tax rate
excluding the nonrecurring items.
21
2001 ESCO TECHNOLOGIES ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
OTHER CHARGES RELATED TO COST OF SALES, RESTRUCTURING CHARGES AND
GAIN ON SALE OF SEI - 1999
The Company recognized certain nonrecurring items in the 1999
fourth quarter results of operations which resulted in $3.9 million
of other charges related to cost of sales and $5.1 million of
restructuring charges. In addition, in 1999, the Company recorded a
gain on the sale of SEI of $59.9 million.
The 1999 other charges related to cost of sales represent the
write-off of inventory related to the abandonment of High Pressure
Air Reducing Quiet Manifolds for surface ships ($2.2 million) and
the Vehicle Location Systems ($.6 million) business. Additionally,
the Company wrote down the Rantec microwave antenna product line
inventory ($1.1 million) to net realizable value. The Rantec
microwave business was sold in February 2000.
The 1999 restructuring charges were comprised of the following:
costs related to exiting the microwave antenna business area ($1.1
million); a write-off of the license agreement ($1.8 million)
related to the abandonment of the Vehicle Location System business;
and certain personnel separation costs ($2.2 million).
The gain on the sale of SEI of $59.9 million is calculated as:
the gross proceeds of $85 million; less SEI's net book value of
$30.6 million; less working capital adjustments of $4.0 million;
less transaction related expenses of $4.9 million; plus the $14.4
million curtailment gain related to pension and retiree medical
liabilities transferred to the buyer.
The other charges related to cost of sales noted above are
included in the calculation of 1999 gross profit discussed above.
Forward-Looking Information
The statements contained in the Chairman's Letter to
Shareholders (pgs. 2-5), the business summaries (pgs. 6-11), and
Management's Discussion and Analysis that 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 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 matters;
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.
22
2001 ESCO TECHNOLOGIES ANNUAL REPORT
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
Years ended September 30,
(Dollars in thousands, except per share amounts) 2001 2000 1999
---------- ---------- ----------
Net sales $ 344,904 300,157 416,102
Costs and expenses:
Cost of sales 236,526 208,263 317,681
Other charges related to cost of sales -- -- 3,927
Selling, general and administrative expenses 71,537 61,819 74,429
Interest expense, net 130 359 6,460
Other, net 9,438 7,969 4,871
Gain on sale of properties -- (2,989) --
Restructuring charges -- -- 5,145
Gain on sale of SEI -- -- (59,867)
---------- ---------- ----------
Total costs and expenses 317,631 275,421 352,646
---------- ---------- ----------
Earnings before income tax 27,273 24,736 63,456
Income tax (benefit) expense (2,834) 7,917 13,001
---------- ---------- ----------
Net earnings before accounting change 30,107 16,819 50,455
Cumulative effect of accounting change, net of tax -- -- (25,009)
---------- ---------- ----------
Net earnings $ 30,107 16,819 25,446
========== ========== ==========
Earnings per share:
Net earnings before accounting change:
Basic $ 2.43 1.37 4.09
Diluted 2.35 1.33 4.00
---------- ---------- ----------
Net earnings:
Basic $ 2.43 1.37 2.06
Diluted 2.35 1.33 2.02
---------- ---------- ----------
Average common shares outstanding (in thousands):
Basic 12,382 12,307 12,332
Diluted 12,805 12,668 12,614
========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
23
2001 ESCO TECHNOLOGIES ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
As of September 30,
(Dollars in thousands) 2001 2000
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 14,506 5,620
Accounts receivable, less allowance for doubtful accounts of $1,122
and $1,309 in 2001 and 2000, respectively 61,351 58,982
Costs and estimated earnings on long-term contracts, less progress
billings of $21,913 and $15,139 in 2001 and 2000, respectively 6,637 6,141
Inventories 48,167 44,457
Other current assets 20,769 10,104
---------- ----------
Total current assets 151,430 125,304
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 2,561 2,545
Buildings and leasehold improvements 29,470 27,477
Machinery and equipment 71,289 65,564
Construction in progress 4,620 3,821
---------- ----------
107,940 99,407
Less accumulated depreciation and amortization 42,902 36,844
---------- ----------
Net property, plant and equipment 65,038 62,563
Excess of cost over net assets of purchased businesses, less accumulated
amortization of $12,674 and $9,245 in 2001 and 2000, respectively 102,163 90,997
Deferred tax assets 38,573 30,808
Other assets 18,373 21,461
---------- ----------
$ 375,577 331,133
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
24
2001 ESCO TECHNOLOGIES ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
As of September 30,
(Dollars in thousands) 2001 2000
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-term debt $ 122 4,136
Accounts payable 35,180 31,206
Advance payments on long-term contracts, less costs incurred
of $809 and $3,364 in 2001 and 2000, respectively 1,534 2,903
Accrued expenses 27,233 24,246
---------- ----------
Total current liabilities 64,069 62,491
---------- ----------
Other liabilities 15,890 8,610
Long-term debt 8,338 610
---------- ----------
Total liabilities 88,297 71,711
---------- ----------
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 13,409,934 and 13,224,834 shares in 2001 and 2000, respectively 134 132
Additional paid-in capital 206,282 205,514
Retained earnings since elimination of deficit at September 30, 1993 99,649 69,542
Accumulated other comprehensive loss (6,518) (4,766)
---------- ----------
299,547 270,422
Less treasury stock, at cost (985,469 and 956,527 common shares in 2001
and 2000, respectively) (12,267) (11,000)
---------- ----------
Total shareholders' equity 287,280 259,422
---------- ----------
$ 375,577 331,133
========== ==========
</Table>
See accompanying notes to consolidated financial statements.
25
2001 ESCO TECHNOLOGIES ANNUAL REPORT
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<Table>
<Caption>
Accumulated
Years ended September 30, Common Stock Additional Other
------------------ Paid-in Retained Comprehensive Treasury
(in thousands) Shares Amount Capital Earnings Income (Loss) Stock Total
-------- -------- ---------- -------- ------------- -------- ----------
Balance, September 30, 1998 12,642 $ 126 200,913 27,277 (1,740) (2,497) 224,079
----------
Comprehensive income:
Net earnings -- -- -- 25,446 -- -- 25,446
Translation adjustments -- -- -- -- (2,390) -- (2,390)
Minimum pension liability, net -- -- -- -- 2,260 -- 2,260
----------
Comprehensive income -- -- -- -- -- -- 25,316
----------
Stock options and stock compen-
sation plans 141 2 806 -- -- 48 856
Purchases into treasury -- -- -- -- -- (1,562) (1,562)
-------- -------- ---------- -------- ------------- -------- ----------
Balance, September 30, 1999 12,783 128 201,719 52,723 (1,870) (4,011) 248,689
---------
Comprehensive income:
Net earnings -- -- -- 16,819 -- -- 16,819
Translation adjustments -- -- -- -- (2,896) -- (2,896)
----------
Comprehensive income -- -- -- -- -- -- 13,923
----------
Stock options and stock compen-
sation plans 442 4 3,795 -- -- 59 3,858
Purchases into treasury -- -- -- -- -- (7,048) (7,048)
-------- -------- ---------- -------- ------------- -------- ----------
Balance, September 30, 2000 13,225 132 205,514 69,542 (4,766) (11,000) 259,422
----------
Comprehensive income:
Net earnings -- -- -- 30,107 -- -- 30,107
Translation adjustments -- -- -- -- (209) -- (209)
Minimum pension liability, net -- -- -- -- (639) -- (639)
Interest rate swap adjustment, net -- -- -- -- (904) -- (904)
----------
Comprehensive income -- -- -- -- -- -- 28,355
----------
Stock options and stock compen-
sation plans 185 2 768 -- -- 414 1,184
Purchases into treasury -- -- -- -- -- (1,681) (1,681)
-------- -------- ---------- -------- ------------- -------- ----------
Balance, September 30, 2001 13,410 $ 134 206,282 99,649 (6,518) (12,267) 287,280
======== ======== ========== ======== ============= ======== ==========
</Table>
See accompanying notes to consolidated financial statements.
26
2001 ESCO TECHNOLOGIES ANNUAL REPORT
CONSOLIDATED STATEMENTS OF CASH FLOW
<Table>
<Caption>
Years ended September 30,
(Dollars in thousands) 2001 2000 1999
---------- ---------- ----------
Cash flows from operating activities:
Net earnings $ 30,107 16,819 25,446
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 15,100 14,185 17,021
Changes in operating working capital (9,441) (20,532) 11,271
Write-off of assets related to accounting change,
net of tax -- -- 25,009
Gain on sale of SEI -- -- (59,867)
Effect of deferred taxes on tax provision (5,669) 6,270 11,560
Other 2,889 3,259 (4,550)
---------- ---------- ----------
Net cash provided by operating activities 32,986 20,001 25,890
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (11,881) (10,363) (8,291)
(Acquisition) divestiture of businesses (13,559) (29,996) 85,000
---------- ---------- ----------
Net cash (used) provided by investing activities (25,440) (40,359) 76,709
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt 7,356 80 96
Principal payments on long-term debt (740) (49,322) (8,297)
Net decrease in short-term borrowings (3,988) (8,506) (9,494)
Purchases of common stock into treasury (1,681) (6,215) (1,562)
Other, including exercise of stock options 393 2,232 126
---------- ---------- ----------
Net cash provided (used by) financing activities 1,340 (61,731) (19,131)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 8,886 (82,089) 83,468
Cash and cash equivalents at beginning of year 5,620 87,709 4,241
---------- ---------- ----------
Cash and cash equivalents at end of year $ 14,506 5,620 87,709
========== =========== ==========
Changes in operating working capital:
Accounts receivable, net $ 1,632 (10,907) 5,150
Costs and estimated earnings on long-term contracts, net (497) (2,122) 12,891
Inventories (1,650) 1,553 (9,230)
Other current assets (10,665) 859 (1,402)
Accounts payable 1,174 (704) 734
Advance payments on long-term contracts, net (1,369) 2,221 (6,821)
Accrued expenses 1,934 (11,432) 9,949
---------- ---------- ----------
$ (9,441) (20,532) 11,271
========== =========== ==========
Supplemental cash flow information:
Interest paid $ 425 867 6,579
Income taxes paid 4,106 1,132 254
========== =========== ==========
</Table>
See accompanying notes to consolidated financial statements.
27
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of
ESCO Technologies Inc. (ESCO) and its wholly owned subsidiaries (the
Company). All significant intercompany transactions and accounts
have been eliminated in consolidation. Certain prior year amounts
have been reclassified to conform with the 2001 presentation.
Effective July 10, 2000, the Company changed its name from ESCO
Electronics Corporation to ESCO Technologies Inc.
(b) BASIS OF PRESENTATION
Effective September 30, 1993, the Company implemented an
accounting readjustment in accordance with the accounting provisions
applicable to a "quasi-reorganization" which restated assets and
liabilities to fair values and eliminated the deficit in retained
earnings.
Fair values of the Company's financial instruments are estimated
by reference to quoted prices from market sources and financial
institutions, as well as other valuation techniques. The estimated
fair value of each class of financial instruments approximated the
related carrying value at September 30, 2001 and 2000.
(c) NATURE OF OPERATIONS
The Company is a leading supplier of engineered filtration
products to the process, health care and transportation markets
worldwide. The Company's filtration products include depth filters,
membrane based microfiltration products and precision screen
filters. The balance of the Company's sales is derived primarily
from radio frequency (RF) shielding and EMC test products and
special purpose communication systems, where the Company is well
positioned in niche markets based on proprietary products.
The Company operates in four principal industry segments:
Filtration/Fluid Flow, Test, Communications and Other.
(d) USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions,
including estimates of anticipated contract costs and revenues
utilized in the earnings process, that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
(e) REVENUE RECOGNITION
Revenue is recognized on commercial sales when products are
shipped or when services are performed. 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, or are based upon
equivalent units produced. Revenue under engineering contracts is
generally recognized as milestones are attained.
(f) CASH AND CASH EQUIVALENTS
Cash equivalents include temporary investments that are readily
convertible into cash, such as EURO dollars, commercial paper and
treasury bills with original maturities of three months or less.
(g) COSTS AND ESTIMATED EARNINGS ON LONG-TERM CONTRACTS
Costs and estimated earnings on long-term contracts represent
unbilled revenues, including accrued profits and retention on
long-term contracts accounted for under the percentage-of-completion
method, net of progress billings.
(h) INVENTORIES
Inventories are carried at the lower of cost (first-in,
first-out) or market. 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 progress payments received. 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 will not be realized within one
year.
28
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(i) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation
and amortization are computed primarily on a straight-line basis
over the estimated useful lives of the assets: buildings, 10-40
years; machinery and equipment, 5-10 years; and office furniture and
equipment, 5-10 years. Leasehold improvements are amortized over the
remaining term of the applicable lease or their estimated useful
lives, whichever is shorter.
(j) EXCESS OF COST OVER NET ASSETS OF PURCHASED BUSINESSES
Assets and liabilities related to business combinations
accounted for as purchase transactions are recorded at their
respective fair values. Excess of cost over the fair value of net
assets purchased (goodwill) is amortized on a straight-line basis
over the periods estimated to be benefited. The excess of cost over
the fair value of net assets is primarily being amortized over a
period not exceeding 30 years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the asset balance over its remaining life can be
recovered through undiscounted future operating cash flows. See
further discussion below in "New Accounting Standards."
(k) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE
DISPOSED OF
Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash
flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value less
costs to dispose.
(l) 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.
(m) RESEARCH AND DEVELOPMENT COSTS
Company-sponsored research and development costs include
research and development and bid and proposal efforts related to the
Company's products and services. Company-sponsored product
development costs are charged to expense when incurred.
Customer-sponsored research and development costs incurred pursuant
to contracts are accounted for similar to other program costs.
(n) FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign operations are
translated into U.S. dollars in accordance with Statement of
Financial Accounting Standards (SFAS) No. 52 "Foreign Currency
Translation" (SFAS 52). The resulting translation adjustments are
recorded as a separate component of accumulated other comprehensive
income.
(o) EARNINGS PER SHARE
Basic earnings per share is calculated using the weighted
average number of common shares outstanding during the period.
Diluted earnings per share 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.
29
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The number of shares used in the calculation of earnings per
share for each year presented is as follows:
<Table>
<Caption>
(In thousands) 2001 2000 1999
-------- -------- --------
Weighted Average Shares Outstanding -- Basic 12,382 12,307 12,332
Dilutive Options and Performance Shares 423 361 282
-------- -------- --------
Adjusted Shares -- Diluted 12,805 12,668 12,614
======== ======== ========
</Table>
Options to purchase 12,500 shares (at per share prices of $25.18
- $27.28), 95,500 shares (at per share prices of $15.72 - $19.22)
and 176,000 shares (at per share prices of $11.44 - $19.22) were
outstanding during the years ended September 30, 2001, 2000 and
1999, respectively, but were not included in the respective
computations of diluted EPS because the options' exercise price was
greater than the average market price of the common shares. These
options expire in various periods through 2011. Approximately
181,000, zero and 190,000 performance shares were outstanding but
unearned at September 30, 2001, 2000 and 1999, respectively, and
therefore, were not included in the respective years' computations
of diluted EPS.
(p) STOCK-BASED COMPENSATION
The Company measures its compensation cost of equity instruments
issued under employee compensation plans under the provisions of
Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for
Stock Issued to Employees," and related Interpretations.
(q) COMPREHENSIVE INCOME (LOSS)
SFAS 130, "Reporting Comprehensive Income" requires the Company
to report separately the translation adjustments of SFAS 52 defined
above, changes to the minimum pension liability, and changes in fair
value of the Company's interest rate swaps designated as a cash flow
hedge, as components of comprehensive income or loss. Management has
chosen to disclose the requirements of this Statement within the
Consolidated Statements of Shareholders' Equity.
(r) ACCOUNTING CHANGE - 1999
During the first quarter of 1999, the Company adopted Statement
of Position (SOP) 98-5, "Reporting on the Costs of Start-up
Activities." Precontract costs were incurred by the Company and
capitalized under the previous guidance provided by SOP 81-1,
"Accounting for Performance of Construction-type Contracts." As a
result of adopting SOP 98-5 in 1999, the Company expensed these
costs which were recognized as a cumulative effect of an accounting
change. The effect of this accounting change was recognized in the
1999 Consolidated Statement of Operations.
(s) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended by SFAS 137 and 138 (SFAS 133) requires that
all derivative instruments be recorded on the balance sheet at their
fair value. The accounting treatment of changes in fair value is
dependent upon whether or not a derivative instrument is designated
as a hedge and if so, the type of hedge. For derivatives designated
as a fair value hedge, the changes in fair value are recognized in
other comprehensive income until the hedged item is settled and
recognized in earnings. The Company has interest rate exposure
relating to floating rate lease obligations and, accordingly, during
2001, entered into interest rate swaps totaling approximately $23
million to mitigate this exposure. In addition, the Company has
interest rate exposure relating to floating rate obligations
denominated in EURO dollars, therefore, in September 2001, the
Company entered into an interest rate swap of approximately $4
million to mitigate this exposure. These interest rate swaps are
accounted for as cash flow hedges under the provisions of SFAS 133
as of and for the year ended September 30, 2001. At September 30,
2001, other comprehensive income included an after-tax decline in
fair value of approximately $0.9 million.
30
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(t) NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued
SFAS 141, "Business Combinations", and SFAS 142, "Goodwill and Other
Intangible Assets". SFAS 141 requires that the purchase method of
accounting be used for all business combinations initiated or
completed after June 30, 2001. SFAS 141 also specifies criteria
intangible assets acquired in a purchase method business combination
must meet to be recognized and reported apart from goodwill. SFAS
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 142. SFAS 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 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of".
The Company is required to adopt the provisions of SFAS 141
immediately, and Management expects to adopt the provisions of SFAS
142 effective October 1, 2001, the beginning of the Company's fiscal
year 2002.
SFAS 141 will require that upon adoption of SFAS 142, the
Company evaluate its existing intangible assets and goodwill, and
make any necessary reclassifications in order to conform with the
new criteria in SFAS 141. Upon adoption of SFAS 142, the Company
plans to reassess the useful lives and residual values of all
recorded intangible assets, other than goodwill, and make any
necessary amortization period adjustments by December 31, 2001. In
addition, to the extent an intangible asset is identified as having
an indefinite useful life, the Company will be required to test the
intangible asset for impairment in accordance with the provisions of
SFAS 142 by December 31, 2001. Any impairment loss will be measured
as of the date of adoption and recognized as the cumulative effect
of a change in accounting principle. Upon adoption of SFAS 141 and
SFAS 142, the Company does not anticipate a material impact to the
carrying value of the Company's goodwill.
2. Acquisitions/Divestitures
On June 8, 2001, the Company acquired all of the outstanding
common stock of Bea Filtri S.p.A. (Bea) for approximately $13.5
million in cash and debt. Bea, headquartered in Milan, Italy, is a
supplier of filtration products to the pharmaceutical, food and
beverage, healthcare, and petrochemical markets. Bea broadens the
Company's microfiltration product offering and increases the
Company's penetration in European markets. Bea's assets and
liabilities, and related operating results, since the date of
acquisition, are included within the Company's Filtration/Fluid Flow
segment.
On June 2, 2000, the Company purchased Holaday Industries, Inc.
(Holaday) for approximately $4 million in cash. Holaday,
headquartered in Eden Prairie, MN, is a leading supplier of
specialty measurement probes to the EMC test, health and safety, and
microwave markets. The operating results for Holaday, since the date
of acquisition, are included within the Company's Test segment
On April 9, 2000, the Company acquired all of the outstanding
common stock of Lindgren RF Enclosures, Inc. (formerly known as The
Curran Company) and Lindgren, Inc. (doing business through its
subsidiary, Rayproof Ltd.) (collectively Lindgren) for approximately
$22 million in cash plus additional consideration based upon the
future operating performance of Lindgren. Lindgren is a leading
supplier of radio frequency (RF) shielding products and components
used by manufacturers of medical equipment, communications systems
and electronic products. The operating results for Lindgren, since
the date of acquisition, are included within the Company's Test
segment.
On March 31, 2000, the Company acquired the Eaton space products
business (Eaton), formerly located in El Segundo, CA, for
approximately $6 million in cash. Eaton manufactures specialty
valves and other fluid flow components for satellite launch vehicles
and aircraft applications and has been integrated into the Company's
Filtration/Fluid Flow segment, since the date of acquisition.
In February 2000, the Company completed the sale of its
microwave antenna business, which had historically operated as part
of Rantec Microwave & Electronics, Inc. The Company transferred the
contract order backlog and operating assets of the microwave antenna
business for $2.1 million in cash, and in September 2000, sold the
related land and buildings in Calabasas, CA for approximately $6
million.
31
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Assuming the acquisitions of Holaday, Lindgren and Eaton as well
as the divestiture of the Rantec microwave antenna business had
occurred on October 1, 1999, (the beginning of fiscal 2000), pro
forma unaudited net sales, net earnings and diluted EPS for the year
ended September 30, 2000 would have been approximately $325 million,
$17.3 million and $1.36 per share, respectively. These unaudited pro
forma amounts are not necessarily indicative of the results of
operations that would have occurred had these actions been completed
on October 1, 1999, or of future results of operations.
On September 30, 1999, the Company completed the sale of its
Systems & Electronics Inc. (SEI) subsidiary to Engineered Support
Systems, Inc. The Company sold 100% of the common stock of SEI for
$85 million in cash, less working capital adjustments, resulting in a
$59.9 million gain recorded in the 1999 results of operations.
Certain assets and liabilities of SEI were retained by the Company,
including the net operating loss carryforward.
Included in the 1999 consolidated statements of operations are
the operating results of SEI prior to its divestiture as follows: net
sales of $172.8 million; cost of sales of $139.6 million, SG&A
expenses of $21.6 million; other costs and expenses, net, of $0.9
million; and earnings before income taxes of $10.7 million.
All of the Company's acquisitions have been accounted for using
the purchase method of accounting and accordingly, the respective
purchase prices were allocated to the assets (including intangible
assets) acquired and liabilities assumed based on estimated fair
values at the date of acquisition. The financial results from these
acquisitions have been included in the Company's financial statements
from the date of acquisition. The goodwill recorded as a result of
the transactions is being amortized over 20 years, until the adoption
of SFAS 142.
3. Accounts receivable
Accounts receivable consist of the following at September 30,
2001 and 2000:
<Table>
<Caption>
(Dollars in thousands) 2001 2000
---------- ----------
Commercial $ 57,513 55,619
U. S. Government and prime contractors 3,838 3,363
---------- ----------
Total $ 61,351 58,982
========== ==========
</Table>
Commercial accounts receivable increased primarily due to the
acquisition of Bea in 2001.
4. Inventories
Inventories consist of the following at September 30, 2001 and
2000:
<Table>
<Caption>
(Dollars in thousands) 2001 2000
---------- ----------
Finished goods $ 12,065 8,709
Work in process-- including long-term contracts 17,089 17,258
Raw materials 19,013 18,490
---------- ----------
Total $ 48,167 44,457
========== ==========
</Table>
Inventories increased approximately $3.7 million mainly to
support the near term sales demand and due to the acquisition of Bea
in 2001.
32
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Property, plant and equipment
Depreciation expense of property, plant and equipment for the
years ended September 30, 2001, 2000 and 1999 was $10.3 million,
$10.3 million and $13.6 million (including SEI), respectively.
The Company leases certain real property, equipment and
machinery under noncancelable operating leases. Rental expense under
these operating leases for the years ended September 30, 2001, 2000
and 1999 amounted to $6.8 million, $5.0 million and $6.3 million,
respectively. Future aggregate minimum lease payments under
operating leases that have initial or remaining noncancelable lease
terms in excess of one year as of September 30, 2001 are:
<Table>
<Caption>
(Dollars in thousands) Years ending September 30:
--------------------------
2002 $ 5,628
2003 5,188
2004 4,676
2005 4,171
2006 and thereafter 5,748
--------
Total $ 25,411
========
</Table>
6. Income tax expense
For the year ended September 30, 2001, pre-tax earnings related
to U.S. and non-U.S. tax jurisdictions are $21.7 million and $5.6
million, respectively. Fiscal 2000 and 1999 pre-tax earnings related
to non-U.S. tax jurisdictions were insignificant. The principal
components of income tax expense for the years ended September 30,
2001, 2000 and 1999 consist of:
<Table>
<Caption>
(Dollars in thousands) 2001 2000 1999
---------- ---------- ----------
Federal:
Current (including Alternative Minimum Tax) $ 413 275 --
Deferred (including elimination of valuation allowance) (5,669) 6,270 11,560
State, local and non-U.S 2,422 1,372 1,441
---------- ---------- ----------
Total $ (2,834) 7,917 13,001
========== ========== ==========
</Table>
The actual income tax expense for the years ended September 30,
2001, 2000 and 1999 differs from the expected tax expense for those
years (computed by applying the U.S. Federal corporate statutory
rate) as follows:
<Table>
<Caption>
(Dollars in thousands) 2001 2000 1999
---------- ---------- ----------
Federal corporate statutory rate 35.0% 35.0% 35.0%
Change in tax valuation allowance:
Utilization of capital loss carryforward (2.5) (4.3) (19.3)
Elimination of valuation allowance (46.5) -- --
Other -- (3.2) 5.9
State and local, net of Federal benefits 4.2 2.0 1.1
Non-U.S. (2.8) .5 1.2
Other, net 2.2 2.0 (3.4)
---------- ---------- ----------
Effective income tax rate (10.4)% 32.0% 20.5%
========== ========== ==========
</Table>
33
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at
September 30, 2001 and 2000 are presented below:
<Table>
<Caption>
(Dollars in thousands) 2001 2000
---------- ----------
Deferred tax assets:
Inventories, long-term contract accounting,
contract cost reserves and others $ 4,243 2,644
Pension and other postretirement benefits 3,535 3,846
Net operating loss carryforward 45,361 48,345
Capital loss carryforward -- 11,537
Other compensation-related costs and other cost accruals 5,801 875
---------- ----------
Total deferred tax assets 58,940 67,247
Deferred tax liabilities:
Plant and equipment, depreciation methods,
acquisition asset allocations, and other (5,089) (5,107)
---------- ----------
Net deferred tax asset before valuation allowance 53,851 62,140
Less valuation allowance -- (24,237)
---------- ----------
Net deferred tax assets $ 53,851 37,903
========== ==========
</Table>
Net deferred tax assets are classified in the Consolidated
Balance Sheets as follows:
<Table>
<Caption>
(Dollars in thousands) 2001 2000
---------- ----------
Current deferred tax assets (included in Other current assets) $ 15,278 7,095
Noncurrent deferred tax assets 38,573 30,808
---------- ----------
$ 53,851 37,903
========== ==========
</Table>
Based on the Company's historical pretax income, together with
the projection of future taxable income, Management believes it is
more likely than not that the Company will realize the benefits of
the net deferred tax asset existing at September 30, 2001. In order
to realize the aforementioned net deferred tax asset, the Company
will need to generate future taxable income of approximately $154
million, of which $130 million is required to be realized prior to
the expiration of the net operating loss (NOL) carryforward, of
which $8 million will expire in 2006; $6 million will expire in
2007; $23 million will expire in 2009; $38 million will expire in
2010; $4 million will expire in 2011; $11 million will expire in
2018; and $40 million will expire in 2019. The net operating loss
carryforward may be used to reduce future income tax cash payments.
In 2001, as the result of certain residual tax effects related
to the fiscal 2000 sale of the property in Calabasas, CA, the
Company utilized approximately $2 million of the remaining $33
million capital loss carryforward available from the sale of its
Hazeltine subsidiary in 1996. The remaining capital loss
carryforward of approximately $31 million expired on September 30,
2001.
The valuation reserve in the amount of $10.8 million maintained
for the deferred tax asset represented by the capital loss
carryforward was eliminated by the expiration of the capital loss
carryforward. In addition, in 2001, the Company eliminated its
remaining net deferred tax valuation allowance of $12.7 million,
which was the allowance representing the amount of the deferred tax
asset associated with temporary differences and NOLs which
Management believed would likely not be realized due to limitations
on future use.
34
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Debt
Long-term debt consists of the following at September 30, 2001
and 2000:
<Table>
<Caption>
(Dollars in thousands) 2001 2000
---------- ----------
Long-term borrowings under the revolving credit facility $ 7,249 --
Other debt 1,200 746
Less current maturities of long-term debt (111) (136)
---------- ----------
Long-term debt $ 8,338 610
========== ==========
</Table>
On April 11, 2000, the Company entered into a $75 million
revolving credit facility, with the option to increase it to $100
million through April 11, 2002. The credit facility was amended on
February 28, 2001 to allow for borrowings in foreign currencies. The
credit facility is available for direct borrowings and/or the
issuance of letters of credit. The maturity of the bank credit
facility is April 11, 2005, and is provided by a group of five
banks, led by Bank of America. At September 30, 2001, the Company
had approximately $61.7 million available to borrow under the credit
facility as well as $14.5 million of cash on hand.
The credit facility requires, as determined by certain financial
ratios, a commitment fee ranging from 20-30 basis points per annum
on the unused portion. The terms of the facility provide that
interest on borrowings may be calculated at a spread over the London
Interbank Offered Rate (LIBOR) or based on the prime rate, at the
Company's election. Substantially all of the assets of the Company
are pledged under the credit facility. The financial covenants of
the credit facility include limitations on leverage and minimum
consolidated EBITDA. As of September 30, 2001, the Company is in
compliance with all bank covenants.
During 2001 and 2000, the maximum aggregate short-term
borrowings at any month-end were $5.5 million and $21 million,
respectively; the average aggregate short-term borrowings
outstanding based on month-end balances were $1.7 million and $8.1
million, respectively; and the weighted average interest rates were
6.4% in 2001, 7.5% in 2000 and 6.3% in 1999. The letters of credit
issued and outstanding under the credit facility totaled $6.1
million and $7.9 million at September 30, 2001 and 2000,
respectively. Short-term borrowings under the credit facility
totaled zero and $4.0 million as of September 30, 2001 and 2000,
respectively. Long-term borrowings under the revolving credit
facility were $7.2 million (related to the Bea acquisition and based
in the local currency) and zero at September 30, 2001 and 2000,
respectively. In addition, the Company has other borrowings in
foreign countries of approximately $1.2 million, of which $0.1
million is due within one year.
8. Capital stock
The 13,409,934 and 13,224,834 common shares as presented in the
accompanying Consolidated Balance Sheets at September 30, 2001 and
2000 represent the actual number of shares issued at the respective
dates. The Company held 985,469 and 956,527 common shares in
treasury at September 30, 2001 and 2000, respectively.
In conjunction with the sale of SEI on September 30, 1999, the
previously outstanding Deposit and Trust Agreement was terminated.
The Company has various Stock Option Plans which permit the Company
to grant key management employees (1) options to purchase shares of
the Company's common stock or (2) stock appreciation rights with
respect to all or any part of the number of shares covered by the
options. All outstanding options were granted at prices equal to
fair market value at the date of grant.
35
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding stock options awarded under the Option
Plans is as follows:
<Table>
<Caption>
FY 2001 FY 2000 FY 1999
---------------------- ---------------------- -----------------------
Estimated Estimated Estimated
Shares Avg. Price Shares Avg. Price Shares Avg. Price
--------- ---------- --------- ---------- ---------- ----------
October 1, 792,699 $ 10.62 1,437,442 $ 9.35 953,716 $ 8.61
Granted 175,250 $ 18.65 99,250 $ 12.90 522,600 $ 10.76
Exercised (151,298) $ 9.18 (558,738) $ 7.37 (17,270) $ 7.72
Cancelled (20,003) $ 12.91 (185,255) $ 12.16 (21,604) $ 12.00
-------- ---------- ---------- ---------- ---------- ----------
September 30, 796,648 $ 12.60 792,699 $ 10.62 1,437,442 $ 9.35
At September 30,
Reserved for future grant 342,063 405,566 242,725
Exercisable 370,854 $ 10.72 363,647 $ 10.65 698,464 $ 9.36
========= ========== ========== ========= ========== ==========
</Table>
Summary information regarding stock options outstanding at
September 30, 2001 is presented below:
<Table>
<Caption>
OPTIONS OUTSTANDING
-------------------------------------------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED
Range of OUTSTANDING AT REMAINING AVERAGE
Exercise Prices SEPTEMBER 30, 2001 CONTRACTUAL LIFE EXERCISE PRICE
--------------- ------------------ ---------------- --------------
$5.93 - $7.37 100,797 5.0 YEARS $ 6.56
$9.14 - $12.91 446,198 7.1 YEARS $10.93
$14.19 - $19.22 206,153 8.4 YEARS $17.01
$21.44 - $27.28 43,500 9.6 YEARS $22.90
------------------ ---------------- --------------
796,648 7.3 YEARS $12.60
================== ================ ==============
</Table>
<Table>
<Caption>
EXERCISABLE OPTIONS OUTSTANDING
---------------------------------------
NUMBER WEIGHTED
Range of EXERCISABLE AT AVERAGE
Exercise Prices SEPTEMBER 30, 2001 EXERCISE PRICE
--------------- ------------------ --------------
$5.93 - $7.37 100,797 $ 6.56
$9.14 - $12.91 216,348 $10.93
$14.19 - $19.22 53,709 $17.64
$21.44 - $27.28 -- --
------------------ --------------
370,854 $10.72
================== ==============
</Table>
The options have a ten year contractual life from date of
issuance, expiring in various periods through 2011. The increase in
exercised shares and cancelled shares in 2000 is mainly due to the
sale of SEI. Employees of SEI had 90 days, subsequent to the
divestiture, to exercise their exercisable stock options prior to
their cancellation.
In February 2001, the Company authorized a stock repurchase
program 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. Approximately 77,000, 516,000 and
177,000 shares were repurchased during fiscal years 2001, 2000 and
1999, respectively.
36
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 2001, the Board of Directors authorized, and the
shareholders approved, the Performance Share Plan (the Plan). The
maximum number of shares available for issue under the Plan was
532,814 shares. As of September 30, 2001, 331,831 shares have been
awarded and 80,000 shares have been earned. At September 30, 2001,
there were 40,000 shares of restricted stock outstanding.
In February 2000, the Company amended and restated the Preferred
Stock Purchase Rights Plan such that each Right entitles the holder
to purchase one one-hundredth of a share of preferred stock at an
initial purchase price of $60. The Rights remain in existence until
February 3, 2010, unless renewed, redeemed earlier (at one cent per
Right), exercised or exchanged under the terms of the plan. Under
certain conditions involving the acquisition of, or an offer for,
20% or more of the Company's common stock, all holders of Rights,
except an acquiring entity, would be entitled (1) to purchase, at a
defined price, common stock of the Company or an acquiring entity at
a value twice the defined price, or (2) at the option of the Board,
to exchange each Right for one share of common stock.
The Company adopted the disclosure-only provisions of SFAS No.
123. Under APB No. 25, no compensation cost was recognized for the
Company's stock option plans. Had compensation cost for the
Company's stock option plans and performance share plans been
determined based on the fair value at the grant date for awards
outstanding during 2001 and 2000 consistent with the provisions of
this Statement, the Company's net earnings and net earnings per
share would have been as shown in the table below:
<Table>
<Caption>
Pro forma (Unaudited)
(Dollars in thousands, except per share amounts) 2001 2000
---------- ----------
Net earnings $ 29,405 16,214
Net earnings per share:
Basic 2.37 1.32
Diluted 2.30 1.28
========== ==========
</Table>
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 2001 and
2000, respectively: expected dividend yield of 0% in both periods;
expected volatility of 37.5% and 29.2%, risk-free interest rate of
4.6% and 5.8%, and expected life based on historical exercise
periods of 4.21 years and 4.06 years.
To determine the fair value of grants under the Performance
Share Plans, the probability that performance milestones would be
met was applied to the ESCO stock price on the date of grant. This
probability was based on an estimated average annual growth rate of
10.0% and an annualized volatility of 37.9% and 38.3% in 2001 and
2000, respectively.
9. Retirement and other benefit plans
Substantially all employees are covered by defined benefit or
defined contribution pension plans maintained by the Company for the
benefit of its employees. Benefits are provided to employees under
defined benefit pay-related and flat-dollar plans, which are
primarily noncontributory. Annual contributions to retirement plans
equal or exceed the minimum funding requirements of the Employee
Retirement Income Security Act or applicable local regulations. On
September 30, 1999, the Company completed the sale of SEI to
Engineered Support Systems, Inc. which accounts for significant
fluctuations in amounts in 2000 as compared to 1999.
37
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic benefit cost for the years ended September 30,
2001, 2000 and 1999 is comprised of the following:
<Table>
<Caption>
(Dollars in millions) 2001 2000 1999
-------- -------- --------
Defined benefit plans:
Service cost $ 1.4 1.4 4.1
Interest cost 2.5 2.1 6.7
Expected return on plan assets (3.0) (2.8) (7.5)
Amortization of service costs .1 .1 .3
Net actuarial (gain) loss (.5) (.5) .8
Curtailment gain -- (.7) (8.5)
Settlement loss -- -- 2.9
-------- -------- --------
Net periodic benefit cost .5 (.4) (1.2)
Defined contribution plans .7 .6 .7
-------- -------- --------
Total $ 1.2 .2 (.5)
======== ======== ========
</Table>
The Company recognized a curtailment gain in 2000 as a result of
the sale of the Rantec microwave business in February 2000 and also
recognized a curtailment gain and a settlement loss in 1999 as a
result of the sale of SEI.
The projected benefit obligation, accumulated benefit
obligation, and fair value of plan assets for defined benefit
pension plans with accumulated benefit obligations in excess of plan
assets were $5.1 million, $4.7 million and $2.6 million,
respectively, as of September 30, 2001, and $2.1 million, $1.3
million and zero, respectively, as of September 30, 2000.
The net benefit obligation of the Company's defined benefit
pension plans as of September 30, 2001 and 2000 is shown below:
<Table>
<Caption>
(Dollars in millions) 2001 2000
-------- --------
Change in benefit obligation--
Net benefit obligation at beginning of year $ 29.6 27.1
Service cost 1.4 1.4
Interest cost 2.5 2.1
Plan amendments .1 .2
Actuarial (gain) loss 3.9 .3
Gross benefits paid (1.0) (.8)
Curtailments -- (.7)
-------- --------
Net benefit obligation at end of year $ 36.5 29.6
======== ========
</Table>
The plan assets of the Company's defined benefit pension plans
at September 30, 2001 and 2000 are shown below:
<Table>
<Caption>
(Dollars in millions) 2001 2000
-------- --------
Change in plan assets:
Fair value of plan assets at beginning of year $ 35.9 28.5
Actual return on plan assets (6.8) 8.0
Employer contributions -- .2
Gross benefits paid (1.0) (.8)
-------- --------
Fair value of plan assets at end of year $ 28.1 35.9
======== ========
</Table>
Pension plan assets consist principally of marketable securities
including common stocks, bonds, and interest-bearing deposits.
38
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's defined benefit pension plans recognized the
following net amounts at September 30, 2001 and 2000:
<Table>
<Caption>
(Dollars in millions) 2001 2000
-------- --------
Funded status at end of year $ (8.4) 6.3
Unrecognized prior service cost .5 .5
Unrecognized net actuarial (gain) loss 4.1 (10.2)
-------- --------
Accrued benefit cost $ (3.8) (3.4)
======== ========
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost $ .2 .1
Accrued benefit cost (4.0) (3.5)
Additional minimum liability (.8) (.1)
Intangible asset .2 .1
Accumulated other comprehensive income .6 --
-------- --------
Accrued benefit liability (Included in Other liabilities) $ (3.8) (3.4)
======== ========
</Table>
The benefit obligations of the defined benefit plans as of
September 30, 2001 and 2000 were based on discount rates of 7.25%
and 7.75%, respectively, and an assumed rate of increase in
compensation levels of 4.5% in 2001 and 2000.
The 2001, 2000 and 1999 pension expense for the defined benefit
plans was based on a 7.25%, 7.75% and 7.75% discount rate,
respectively, a 4.5%, 4.5% and 4% increase in compensation levels,
respectively, and a 9.5%, 9.5% and 10% expected long-term rate of
return on plan assets, respectively.
In addition to providing retirement income benefits, the Company
provides unfunded postretirement health and life insurance benefits
to certain retirees. To qualify, an employee must retire at age 55
or later and the employee's age plus service must equal or exceed
75. Retiree contributions are defined as a percentage of medical
premiums. Consequently, retiree contributions increase with
increases in the medical premiums. The life insurance plans are
noncontributory and provide coverage of a flat dollar amount for
qualifying retired employees.
Net periodic postretirement benefit cost is comprised of the
following:
<Table>
<Caption>
(Dollars in millions) 2001 2000 1999
-------- -------- --------
Service cost $ -- .1 .2
Interest cost .1 .1 .7
Net amortization and deferral (.2) (.3) (.3)
Curtailment gain recognized -- (.3) (8.7)
-------- -------- --------
Net periodic postretirement benefit cost $ (.1) (.4) $ (8.1)
======== ======== ========
</Table>
The net benefit obligation for postretirement benefits at
September 30, 2001 and 2000 is shown below:
<Table>
<Caption>
(Dollars in millions) 2001 2000
---- ----
Net benefit obligation at beginning of year $1.2 1.0
Service cost -- .1
Interest cost .1 .1
Actuarial (gain) loss .5 .4
Curtailments -- (.3)
Gross benefits paid (.1) (.1)
---- ----
Net benefit obligation at end of year $1.7 1.2
==== ====
</Table>
39
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The plan assets for postretirement benefits at September 30,
2001 and 2000 are shown below:
<Table>
<Caption>
(Dollars in millions) 2001 2000
---- ----
Fair value of plan assets at beginning of year $ -- --
Employer contributions .1 .1
Gross benefits paid (.1) (.1)
---- ----
Fair value of plan assets at end of year $ -- --
==== ====
</Table>
The Company recognized the following net amounts for
postretirement benefits at September 30, 2001 and 2000:
<Table>
<Caption>
(Dollars in millions) 2001 2000
----- ----
Funded status at end of year $(1.7) (1.2)
Unrecognized prior service cost -- --
Unrecognized net actuarial (gain) loss (3.1) (3.8)
----- ----
Accrued benefit costs $(4.8) (5.0)
----- ----
Amounts recognized in the balance sheet consist of--
Accrued benefit liability (Included in Other liabilities) $(4.8) (5.0)
===== ====
</Table>
The net benefit obligations of the plans as of September 30,
2001 and 2000 were based on discount rates of 7.25% and 7.75%,
respectively. The September 30, 2001 net benefit obligation was
based on a health care cost trend of 5.5% for fiscal 2001. The
September 30, 2000 net benefit obligation was based on a health care
cost trend of 6.5% for fiscal 2000, gradually grading down to an
ultimate rate of 5.5% by 2002. A 1% increase in the health care cost
trend rate for each year would increase the September 30, 2001 net
benefit obligation by approximately $45,000, while a 1% decrease in
the health care cost trend rate for each year would decrease the
September 30, 2001 net benefit obligation by approximately $50,000.
The fiscal 2001 and 2000 net periodic benefit costs were based
on discount rates of 7.25% and 7.75%, respectively. The net periodic
benefit cost was based on an assumed health care cost trend of 5.5%
for 2001 and 6.5% for 2000 gradually grading down to 5.5% by fiscal
year 2002. A 1% increase in the health care cost trend rate for each
year would increase the aggregate of the service cost and interest
cost components of the fiscal 2001 net periodic benefit cost by
approximately $3,900, while a 1% decrease in the health care cost
trend rate for each year would decrease the aggregate of the service
cost and interest cost components of the fiscal 2001 net periodic
benefit cost by approximately $4,600.
10. Other financial data
Items charged to operations during the years ended September 30,
2001, 2000 and 1999 included the following:
<Table>
<Caption>
(Dollars in thousands) 2001 2000 1999
------- ------- -------
Maintenance and repairs $ 4,952 4,870 7,078
Salaries and wages 91,649 78,206 132,671
------- ------- -------
Research and development costs:
Company-sponsored $ 9,396 6,177 7,716
Customer-sponsored 5,231 3,961 8,332
------- ------- -------
Total $14,627 10,138 16,048
======= ======= =======
</Table>
40
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The increase in salaries and wages in 2001 compared to 2000 is
due to the Company's acquisition activities. The decreases in
salaries and wages and in research and development costs in 2000
compared to 1999 are due to the sale of SEI in 1999. The increase in
research and development costs in 2001 compared to 2000 is mainly
due to the Company's acquisition activities and increased spending
in the Company's Communications segment related to product
enhancements and additional product offerings. Accrued expenses
included accrued employee compensation of $9.1 million and $7.5
million at September 30, 2001 and 2000, respectively. Other
liabilities include the accrued benefit liabilities related to the
Company's defined benefit pension plans, the accrued benefit
liabilities related to the Company's postretirement benefits,
miscellaneous tax liabilities, and liabilities related to the
Company's cash flow hedges.
11. 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 principal segments: Filtration/Fluid Flow, Test,
Communications and Other. Filtration/Fluid Flow operations consist
of PTI Technologies Inc. (PTI) and Filtertek Inc. (Filtertek). PTI
develops and manufactures a wide range of filtration products and is
a leading supplier of filters to the commercial aerospace market and
microfiltration market. Filtertek develops and manufactures a broad
range of high-volume, original equipment manufacturer (OEM)
filtration products at its facilities in North America, South
America and Europe. Test segment operations represent the EMC Group,
consisting of EMC Test Systems, L.P. (ETS) and Lindgren. The EMC
Group is principally involved in the design and manufacture of EMC
test equipment, test chambers, and electromagnetic absorption
materials. The EMC Group also manufactures radio frequency (RF)
shielding products and components used by manufacturers of medical
equipment, communications systems, electronic products, and shielded
rooms for high security data processing and secure communication.
Communications operations consist of Distribution Control Systems,
Inc. (DCSI) which is principally involved in providing two-way power
line communication systems for the utility industry. These systems
provide the electric utilities with a patented communication
technology for demand-side management, distribution automation and
automatic meter reading capabilities. Communications also includes
the operations of Comtrak, L.L.C.
The Divested Business segment consists of Systems & Electronics
Inc. (SEI). As of September 30, 1999, ESCO sold SEI to Engineered
Support Systems, Inc. The Other segment is principally comprised of
Rantec Power Systems Inc., formerly a part of Rantec Microwave &
Electronics, Inc. (Rantec) which produces power supplies widely used
in high performance displays, such as cockpit instrumentation,
engineering workstations and medical imaging. Rantec's microwave
antenna business was sold in February 2000. Accounting policies of
the segments are the same as those described in the summary of
significant accounting policies in Note 1.
In accordance with SFAS 131, the Company evaluates the
performance of its operating segments based on operating profit,
which is defined as: net sales, less cost of sales, and less SG&A
expenses. Intersegment sales and transfers are not significant.
Segment assets consist primarily of customer receivables,
inventories and fixed assets directly associated with the production
processes of the segment. Segment assets also include goodwill.
Segment depreciation and amortization is based upon the direct
assets listed above.
<Table>
<Caption>
NET SALES
Year ended September 30,
(Dollars in millions) 2001 2000 1999
------ ------ ------
Filtration/Fluid Flow $188.2 181.7 168.9
Test 85.5 63.0 34.9
Communications 59.1 42.7 25.8
Other 12.1 12.8 13.7
Divested Business -- -- 172.8
------ ------ ------
Consolidated totals $344.9 300.2 416.1
====== ====== ======
</Table>
41
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
OPERATING PROFIT
Year ended September 30,
(Dollars in millions) 2001 2000 1999
----- ----- -----
Filtration/Fluid Flow $16.8 16.6 11.9
Test 9.3 6.9 4.0
Communications 12.6 8.9
(.4)
Other 1.4 (.3) (8.8)
Divested Business -- -- 10.4
Reconciliation to consolidated totals (Corporate) (3.3) (2.0) (2.2)
----- ----- -----
Consolidated totals $36.8 30.1 14.9
===== ===== =====
</Table>
Operating profit, as defined by the Company, excludes certain
costs which are included in Other costs and expenses, net, in the
Consolidated Statements of Operations, and which would be included
in the determination of operating income as defined within generally
accepted accounting principles. In fiscal 2001, these items consist
of approximately $2.1 million of costs related to the
Filtration/Fluid Flow segment as a result of the consolidation of
PTI's filtration business into new facilities in Oxnard, CA;
consolidation costs of the Stockton, CA manufacturing facility into
the Huntley, IL facility; and other miscellaneous costs.
In 2000, these items consist of approximately $2.0 million of
net costs related to the Filtration/Fluid Flow segment as a result
of the consolidation of PTI's filtration businesses into new
facilities in Oxnard, CA; expenses related to the planned upgrade of
production equipment to improve manufacturing efficiency at
Filtertek; and costs related to the microfiltration business. In
addition, related to the Test segment in 2000, are approximately
$1.0 million of Other costs and expenses, net, primarily related to
the write-off of an investment in a third party EMC related start-up
company which filed bankruptcy in 2000.
The 1999 operating profit includes $3.9 million of other charges
related to cost of sales and $5.1 million of restructuring charges
related to the strategic actions undertaken in 1999. The total
nonrecurring charges included in 1999 operating profit amounted to
$9.1 million. The Other segment in 1999 also includes $3.8 million
of charges related to cost growth on certain development programs at
Rantec Power Systems.
The Company is also presenting EBITDA by segment for
informational purposes only. EBITDA is defined as earnings before
interest, taxes, depreciation and amortization.
<Table>
<Caption>
EBITDA 2001 2000
------------------------------- -------------------------------
Year ended September 30, EBIT DEPRECIATION/ EBITDA EBIT Depreciation/ EBITDA
(Dollars in millions) AMORTIZATION Amortization
----- ------------ ------ ----- ------------ ------
Filtration/Fluid Flow $11.5 10.8 22.3 12.4 10.7 23.1
Test 7.5 2.5 10.0 4.7 1.6 6.3
Communications 11.9 1.2 13.1 8.2 1.2 9.4
Other (Rantec & Corporate) (3.5) .6 (2.9) (.2) .7 .5
----- ----- ----- ----- ----- -----
Consolidated totals $27.4 15.1 42.5 25.1 14.2 39.3
===== ===== ===== ===== ===== =====
</Table>
42
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<Table>
<Caption>
IDENTIFIABLE ASSETS
As of September 30,
(Dollars in millions) 2001 2000 1999
------ ------ ------
Filtration/Fluid Flow $213.4 198.2 195.0
Test 62.3 61.2 22.2
Communications 22.4 21.6 14.2
Other 7.5 7.4 18.9
Reconciliation to consolidated totals (Corporate assets) 70.0 42.7 128.0
------ ------ ------
Consolidated totals $375.6 331.1 378.3
====== ====== ======
</Table>
Corporate assets consist primarily of deferred taxes and cash
balances.
<Table>
<Caption>
CAPITAL EXPENDITURES, NET
Year ended September 30,
(Dollars in millions) 2001 2000 1999
----- ----- -----
Filtration/Fluid Flow $ 9.4 9.0 6.3
Test 1.1 .3 .2
Communications .9 .5 .4
Other .5 .6 .3
Divested Business -- -- 1.1
----- ----- -----
Consolidated totals $11.9 10.4 8.3
===== ===== =====
</Table>
Depreciation and amortization is included in the EBITDA table,
noted above.
<Table>
<Caption>
GEOGRAPHIC INFORMATION
Net sales to customers
(Dollars in millions) 2001 2000 1999
------ ------ ------
North America $276.3 234.6 346.9
Europe 43.4 46.1 37.0
Far East 15.0 9.5 23.5
Other 10.2 10.0 8.7
------ ------ ------
Consolidated totals $344.9 300.2 416.1
====== ====== ======
</Table>
<Table>
<Caption>
LONG-LIVED ASSETS
(Dollars in millions) 2001 2000 1999
----- ----- -----
North America $53.8 55.9 63.8
Europe 11.2 6.7 7.5
----- ----- -----
Consolidated totals $65.0 62.6 71.3
===== ===== =====
</Table>
Net sales are attributed to countries based on location of
customer. Long-lived assets are attributed to countries based on
location of the asset.
43
2001 ESCO TECHNOLOGIES ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Commitments and Contingencies
At September 30, 2001, the Company had $6.1 million in letters
of credit outstanding as guarantees of contract performance.
As a normal incidence 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.
13. Quarterly financial information (Unaudited)
<Table>
<Caption>
Dollars in thousands, FIRST SECOND THIRD FOURTH FISCAL
except per share amounts) QUARTER QUARTER QUARTER QUARTER YEAR
---------- ---------- ---------- ---------- ----------
2001
Net sales $ 82,871 86,905 87,862 87,266 344,904
Gross profit 25,245 27,230 28,015 27,888 108,378
Net earnings 3,978 4,287 4,557 17,285 30,107
Earnings per share (GAAP Reported):
Basic .32 .35 .37 1.39 2.43
Diluted .31 .34 .35 1.33 2.35
---------- ---------- ---------- ---------- ----------
Earnings per share (From Operations - pro forma)
Basic .32 .35 .37 .37 1.41
Diluted .31 .34 .35 .36 1.36
========== ========== ========== ========== ==========
2000
Net sales $ 65,865 70,062 79,235 84,995 300,157
Gross profit 19,628 21,576 24,699 25,991 91,894
Net earnings 5,056 3,517 3,708 4,538 16,819
Earnings per share (GAAP Reported):
Basic .41 .29 .30 .37 1.37
Diluted .40 .28 .29 .36 1.33
---------- ---------- ---------- ---------- ----------
Earnings per share (From Operations - pro forma)
Basic .22 .29 .30 .33 1.14
Diluted .22 .28 .29 .32 1.11
========== ========== ========== ========== ==========
</Table>
The 2001 fourth quarter GAAP Reported reflects the elimination
of the net deferred tax valuation allowance of approximately $12.7
million or $0.97 per share.
The 2001 earnings per share From Operations - pro forma excludes
the elimination of the net deferred tax valuation allowance of
approximately $12.7 million or $0.99 per share.
The 2000 first quarter GAAP Reported net earnings reflects the
impact of the after-tax gain on the sale of the Riverhead, NY
property of approximately $2.2 million or $0.18 per share. The 2000
fourth quarter GAAP Reported net earnings reflects the after-tax
gain on the sale of the Calabasas, CA property of approximately $0.5
million or $0.04 per share.
The 2000 earnings per share From Operations pro - forma excludes
the gains on the sale of the Riverhead, NY and the Calabasas, CA
properties as described above.
44
2001 ESCO TECHNOLOGIES ANNUAL REPORT
Independent Auditors' Report
THE BOARD OF DIRECTORS AND SHAREHOLDERS
ESCO TECHNOLOGIES INC.:
We have audited the accompanying consolidated balance sheets of
ESCO Technologies Inc. and subsidiaries as of September 30, 2001 and
2000, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the years in the
three-year period ended September 30, 2001. These consolidated
financial statements are the responsibility of the Company's
Management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of ESCO Technologies Inc. and subsidiaries as of September
30, 2001 and 2000, and the results of their operations and their
cash flows for each of the years in the three-year period ended
September 30, 2001, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements,
in 1999, the Company adopted Statement of Position 98-5, "Reporting
on the Costs of Start-Up Activities".
/s/ KPMG LLP
St. Louis, Missouri
November 13, 2001
46
2001 ESCO TECHNOLOGIES ANNUAL REPORT
Shareholders' Summary
Shareholders' Annual Meeting
The Annual Meeting of the shareholders of ESCO Technologies Inc.
will be held at 10 a.m. Tuesday, February 5, 2002, at the Hilton St.
Louis Frontenac Hotel, 1335 South Lindbergh Boulevard, St. Louis
County, Missouri 63131. Notice of the meeting and a proxy statement
were sent to shareholders with this Annual Report.
10-K Report
A copy of the Company's 2001 Annual Report on Form 10-K filed
with the Securities and Exchange Commission is available to
shareholders without charge. Direct your written request to the
Investor Relations Department, ESCO Technologies Inc., 8888 Ladue
Road, Suite 200, St. Louis, Missouri 63124.
Investor Relations
Additional investor-related information may be obtained by
contacting the Director of Investor Relations at (314) 213-7277 or
toll free at (888) 622-3726. Information is also available through
the Company's website at www.escotechnologies.com or by email at
pmoore@escotechnologies.com.
Transfer Agent and Registrar
Shareholder inquiries concerning lost certificates, transfer of
shares or address changes should be directed to:
Transfer Agent/Registrar
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
1 (800) 368-5948
E-mail: info@rtco.com
Capital Stock Information
ESCO Technologies Inc. common stock shares (symbol ESE) are
listed on the New York Stock Exchange.
There were approximately 4,300 holders of record of shares of
common stock at September 30, 2001.
48
Common Stock Market Prices
The Company's common stock and associated preferred stock
purchase rights (subsequently referred to as common stock) are
listed on the New York Stock Exchange under the symbol "ESE." The
following table summarizes the high and low prices of the Company's
common stock for each quarter of fiscal 2001 and 2000.
<Table>
<Caption>
2001 2000
------------------- -------------------
Quarter HIGH LOW High Low
------- ------ ------ ------ ------
First $21.50 $16.38 $12.63 $ 9.50
Second 26.25 19.75 17.13 11.50
Third 32.67 23.67 20.13 15.50
Fourth 30.45 21.90 20.00 17.06
====== ====== ====== ======
</Table>
47