ESCO TECHNOLOGIES 2003 ANNUAL REPORT
MARKET PERFORMANCE
(ESCO vs. PEER GROUP(1) AND RUSSELL 2000 (FY 2003) GRAPH)
(ESCO vs. PEER GROUP(1) AND RUSSELL 2000 (FY 2000-2003) GRAPH)
(1) As defined in the Company's Proxy Statement
to our shareholders
Our fiscal 2003 financial results reflect both the underlying strength of our
core businesses and the impact of the decisions we made during the year which
were directed toward positioning the Company for further improvement in
shareholder value.
The most significant decisions we made during fiscal 2003 were to sell our Power
Systems and Microfiltration businesses and to close our Filtration plant in
Puerto Rico and relocate the production to existing ESCO facilities in Juarez,
Mexico and Hebron, Illinois. Although these decisions resulted in a significant
charge to our fiscal 2003 earnings, we are confident that they were
strategically sound. The divestitures will not only generate funds to support
future growth initiatives, but will also allow us to concentrate our investments
in the end markets where we have the best opportunities. The plant closure in
Puerto Rico will improve both the profitability and competitive posture of our
Filtration segment. Collectively, the actions we initiated in fiscal 2003, when
completed, will result in a more focused business and a stronger foundation for
continued profitable growth.
While our repositioning actions have been in the forefront of our public
communications, we have also been working aggressively across all of our
segments to grow the Company.
o In Filtration, we won a significant new program in the emerging market for
enhanced drug delivery devices and we made substantial progress on the design
of new standard products for the medical sector. We are also actively looking
at acquisitions that would expand our capabilities in the medical filtration
market or augment our aerospace filtration businesses.
From left:
Victor L. Richey
Charles J. Kretschmer (PHOTO)
Alyson S. Barclay
Gary E. Muenster
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 1
o In Communications, we are making significant investments to strengthen our
core offering in the electric utility market as well as adapting it for
broader global capability. At the same time, we are reviewing opportunities
to gain direct access through alternate technologies to the Automatic Meter
Reading market for gas and water utilities.
o In the Test segment during fiscal 2003, we acquired an acoustics business
which not only expanded our served market but provides us a complementary
offering for our existing customers. In addition, we are continuing to
develop the Asian operations we established in fiscal 2002. In China, we have
expanded the range of shielding products being manufactured in country, and
as a result we have improved our opportunity to take further advantage of our
leading position in this rapidly expanding market. Our product offering in
Japan has been extended to include shielding and test components. We have
also established a direct selling presence in Japan for our medical shielding
products.
While in the near term our growth will be for the most part a product of the
initiatives outlined above, the market leadership we have established in each of
our segments and the magnitude of our end market opportunities suggest we are
well positioned for sustained growth over the longer term.
Our approach to delivering enhanced shareholder value has not changed. We
continue to be focused on using our technology to deliver solutions to our
customers around the world. We also remain committed to ongoing attention to our
cost and competitive position and we are supplementing our organic growth
program with acquisitions in our core markets.
Our focus and approach are important, but in the end the integrity, talent and
extraordinary commitment of our people form the basis of our expectation for an
even brighter future.
When fiscal 2004 ends, we believe that the convergence of our initiatives and
opportunities will have formed the foundation for continued increases in
shareholder value over the long term.
/s/ VICTOR L. RICHEY
Victor L. Richey
Chairman & Chief Executive Officer
/s/ CHARLES J. KRETSCHMER
Charles J. Kretschmer
President & Chief Operating Officer
November 17, 2003
2 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
COMPANY OVERVIEW
ESCO IS COMPRISED OF THREE BUSINESS SEGMENTS, BOUND TOGETHER BY ONE COMMON SET
OF VALUES AND OBJECTIVES. THOUGH ALL OF OUR BUSINESSES ARE TECHNOLOGY ORIENTED
INDUSTRIAL MANUFACTURERS, THE DIVERSITY OF OUR PRODUCT MIX AND SERVED MARKETS
HAS BEEN A KEY STRENGTH, ALLOWING US TO BALANCE OUR INVESTMENTS AND BUILD FOR
THE FUTURE.
FILTRATION/FLUID FLOW Our Filtration/Fluid Flow Segment is comprised
of a mix of specialty manufacturers developing
products typically designed for original
equipment manufacturers. Innovative drug
(PHOTO) delivery devices, flow control mechanisms that
filter and feed liquid butane into
micropropulsion devices on satellites, and fuel
injection filters that must last the lifetime
of a vehicle are just a few examples of the
many products this segment produces. Markets
served by this segment include:
HEALTHCARE | AVIATION | SPACE |
TRANSPORTATION | CONSUMER APPLIANCE
COMMUNICATIONS Our Communications Segment provides users the
means to reliably collect and transmit data
over the existing electrical infrastructure and
video files over the standard telephonic
network. Using our patented signal processing
technology and advanced video compression
techniques, products in this segment provide
one of the fundamental keys to customer
(PHOTO) profitability - knowledge. Our TWACS(R)
two-way communication system enables utilities
to remotely read metering devices in all
terrain in both urban and rural settings, to
track energy usage by the hour and to balance
the loads on their system in order to optimize
their operations. Our security system hardware
and software, sold under the name of
Securvision(R), provide users fully
interactive surveillance capability, central
station automation and control as well as
critical video storage. Markets served by this
segment include:
ELECTRIC UTILITIES | SECURITY INDUSTRY
RF SHIELDING AND TEST In our RF Shielding and Test Segment, we
provide products and services for users needing
to measure, contain or evaluate the effect of
electromagnetic emissions. These emissions are
produced by all electronic devices and can
(PHOTO) interfere with telecommunications signals,
cause inaccuracy in medical diagnostic imaging
equipment, and interfere with the validity of
EMI test results that manufacturers obtain when
developing their new electronic products. From
sensors, probes and antennas to large RF
shielded chambers, this business segment
provides all of the products necessary to
ensure that the emissions are understood and
controlled. Markets served by this segment
include:
HEALTHCARE | ELECTRONICS | TRANSPORTATION
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 3
NEW TECHNOLOGIES
New features are continually being added to our TWACS(R) technology.
(PHOTO)
AT ESCO, WE KNOW THAT OUR FUTURE DEPENDS ON DEVELOPING NEW PRODUCTS AND
TECHNOLOGIES THAT WILL PROVIDE CLEAR, DIFFERENTIATED BENEFITS TO OUR CUSTOMERS.
Across our three technology platforms and throughout our subsidiaries,
many innovations come to life as a result of the focused engineering and
industry expertise that is dedicated to product development.
In our Communications Segment, we are constantly expanding the breadth
of our offering to utilities with new commercial and residential transponders -
the key protocol converter between solid state meters and the TWACS(R)
communications channel, and with feature adds such as the Disconnect Switch
Interbase (DSI), which allows utilities to remotely connect and disconnect
service to a home. We are also deeply invested in the future needs of our
customers, optimizing our proprietary signal-processing technology for the most
rigorous demands of large investor-owned electric utilities, working towards
universal compatibility of protocols with all solid state meters, and developing
robust radio frequency transmission mechanisms for gas and water.
In our RF Shielding and Test Segment, our recent development focus has
been directed at providing critical electromagnetic measurement tools for
manufacturers developing products that must comply with new standards for
devices operating in the increasingly utilized frequency spectrum above 1GHz. As
"Wi-Fi" connectivity moves beyond coffee shops, airports and hotels, it is more
important than ever that these devices be tested during all phases of their
development. Our new Double-Ridged Waveguide Horn antenna with its single lobe
radiation pattern, even distribution of electromagnetic energy, and uniform gain
across the entire operational frequency is just one example of a new product
offering the accuracy needed to test Wi-Fi devices at these higher frequencies.
In our Filtration Segment, new product development efforts over the
last year have focused on adding incremental value to that provided by the
filtration mechanism alone. One example is our new Intellisensor(R) technology.
Developed over three years and with several patents pending, this technology
provides aviation and industrial customers with a prognostic health monitoring
tool for their lubricants and fluids being filtered. In addition, the sensing
technology reduces the weight, footprint and cost of filter housings, a
significant benefit to customers seeking space savings and a reduction in fuel
consumption and overall operating expense.
4 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
(PHOTO)
The hourly usage data collected by the TWACS(R) system provides a utility the
insight needed to ensure reliable and cost effective service to its customer
base.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 5
INTERNATIONAL EXPANSION
(PHOTO)
New product development centers in China and Asia require test and measurement
products and chambers from ETS-Lindgren that eliminate electromagnetic
interference.
6 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
ALONG WITH CONTINUOUS INVESTMENT IN NEW PRODUCTS AND TECHNOLOGY, ESCO'S
GROWTH STRATEGY INVOLVES INTERNATIONAL EXPANSION. The Company has operated as a
global supplier for many years, with facilities in the United Kingdom, Finland,
France, Ireland and in Central and South America.
During fiscal year 2003, we made several additional moves to expand our
presence worldwide and to leverage the efficiencies that can result from
in-country localized manufacturing.
In our RF Shielding and Test Segment, we recently opened two new
facilities in Asia. Multi-national companies with new product development
centers in China and the increasing use of diagnostic imaging equipment across
medical centers in Asia have both driven demand for test products and chambers
providing an electromagnetically sanitized environment. New ESCO facilities in
Beijing and Tokyo now provide the localized manufacturing, program management
and engineering required to support those markets.
In our Filtration Segment, we recently expanded operations at our
Mexican facility to optimize production efficiencies for the products used by
our customers in the transportation and commercial sectors. The facility,
located in Juarez, is ISO and QS 9000 certified and fully automated with the
quality controls essential for these demanding industry segments. It joins the
French, Irish and Brazilian operations already in place internationally within
the Filtration Segment.
In our Communications Segment, we have recently begun expansion
internationally with the first series of trials using our new 50Hz
communications protocol designed for the lower frequencies and different voltage
levels utilized by countries outside the Americas. It is expected that the
strategic justification associated with advanced metering technology will become
more widely understood and accepted by utilities abroad as deregulation and
enhanced competition in the energy sector continue to increase. From the most
heavily populated cities of Asia to the most rural areas of New Zealand and
Australia, the TWACS(R) system can ultimately provide a robust, reliable
solution for utilities desiring to optimize their energy management.
(PHOTO)
Electronic games, cellular phones, and portable DVD players all must be tested
to ensure compliance with electromagnetic emissions standards.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 7
CUSTOMER SUCCESSES
ULTIMATELY, IT IS OUR CUSTOMERS WHO FUEL OUR SUCCESS.
We have established true partnerships with many of our long-term
customers, and have developed close working relationships with our new customers
that are critical to our future.
Recent examples of our customer successes include new drug delivery
devices, developed by Filtertek in conjunction with large pharmaceutical
partners. The companies each desired user-friendly dispensing devices that would
offer value to healthcare providers in addition to that brought by their
respective drugs. Through a collaborative effort between the engineering teams
at Filtertek and the marketing groups at the pharmaceutical companies,
prototypes were developed that met the needs of each company. The unique designs
of the delivery devices should provide the added value needed to support the
companies in their goals of maintaining and building brand loyalty around their
prescription drug products.
In our Communications Segment, our advanced metering products have the
most feature-rich set of options in the industry because of our intimate working
relationships with our customers. Functionality is added and options changed as
a direct result of the input we receive from utilities, both large and small.
For example, when a rural electric cooperative utility told us that, in addition
to selectively turning off single appliances, it would like a way to actually
turn power on and off to the entire home, we responded and developed the
Disconnect Switch Interbase (DSI). Likewise, when an investor-owned utility
asked for a way to correlate the coincident consumption data of its peak energy
use periods with that of the capacity rating of its distribution, we responded
and are now automating the process to make the data request achievable at the
touch of a computer screen.
In our RF Shielding and Test Segment, our market leadership means we
are the "go-to" company for any unique RF test and measurement challenges. When
a large cell phone manufacturer came to us with a need to determine the effect
of body position and mass on its phones' over-the-air performance, ETS-Lindgren
quickly got to work and developed a model which utilized a multi-axis
positioning device (MAPS) in conjunction with a liquid-filled phantom
representative of a human head. Specialized measurement antennas and customized
data acquisition and analysis software provided the additional tools necessary
for making certain the model gave accurate and repeatable results. The
ETS-Lindgren model is currently the only one that can be used to perform this
type of over-the-air performance testing for the Cellular Telecommunications and
Internet Association (CTIA) certification seal.
More than anything else, we understand that our customers, as partners,
are what will make ESCO successful.
(PHOTO)
Mission critical for Filtertek's in-line IV filtration is ensuring bacteria and
particulate free IV fluids.
8 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
(PHOTO)
Innovators in IV filtration and fluid flow control, Filtertek has recently
introduced the industry's first two-piece needleless access device.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 9
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto. The years 2003,
2002 and 2001 represent the fiscal years ended September 30, 2003, 2002
and 2001, respectively, and are used throughout the document.
INTRODUCTION
ESCO Technologies Inc. and its wholly owned subsidiaries (ESCO, the
Company) operate in three business segments: Filtration/Fluid Flow
(Filtration), Communications, and RF Shielding and Test (Test). ESCO
develops, manufactures and markets a broad range of filtration products
used in the 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 the removal of
contaminants in fuel, lubrication and hydraulic systems, various health
care applications, industrial processing, satellite propulsion systems,
and oil production. The Company's Communications segment provides a
well-proven power line based communications system to the electric
utility industry. The Two-Way Automatic Communications System, known as
the TWACS(R) system, is currently used for automatic meter reading
(AMR) and related advanced metering functions, as well as having load
management capabilities. ESCO is a leading supplier of radio frequency
(RF) shielding and electro-magnetic compatibility (EMC) test products.
ESCO also supplies shielding to the growing Magnetic Resonance Imaging
(MRI) market. The Company's business segments are comprised of the
following primary operating entities:
- Filtration/Fluid Flow: Filtertek Inc. (Filtertek), PTI Technologies
Inc. (PTI), and VACCO Industries (Vacco),
- Communications: Distribution Control Systems, Inc. (DCSI) and
Comtrak Technologies, L.L.C. (Comtrak),
- Test: EMC Group consisting of ETS-Lindgren L.P. (ETS) and Lindgren
RF Enclosures, Inc. (Lindgren).
Rantec Power Systems Inc. (Rantec) and the Microfiltration and
Separations businesses (MicroSep) are accounted for as "discontinued
operations." Rantec, formerly included in the "Other" segment was
divested in April 2003. The MicroSep businesses (previously included in
the Filtration segment) include PTI Advanced Filtration Inc. (PTA), PTI
Technologies Limited (PTL) and PTI S.p.A. (PTB). The MicroSep
divestiture should be completed during the quarter ending March 31,
2004.
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, ongoing
performance improvement initiatives, and selective acquisitions.
HIGHLIGHTS OF 2003 CONTINUING OPERATIONS
o Net sales increased $80.1 million, or 25.3%, to $396.7 million from
$316.6 million in 2002.
o Net sales in the Communications segment increased 50.4% to $142.3
million from $94.6 million in 2002.
o Net sales in the Test segment increased 28.1% to $90.3 million from
$70.5 million in 2002.
o Net sales in the Filtration segment increased 8.3% to $164.1 million
from $151.5 million in 2002.
o Net cash provided by operating activities was $38.0 million,
including $7.3 million from a patent litigation settlement.
o Expanded the Company's capabilities and presence in the Asian Test
markets.
o Commenced the process of divesting the MicroSep businesses, which
had been significantly dilutive to earnings. o Completed the sale
of Rantec for $6 million in cash plus future consideration.
o Announced the closure and consolidation of the Filtration operation
in Puerto Rico and the corresponding move to existing manufacturing
locations in Juarez, Mexico and Hebron, Illinois.
o Net loss was $41.1 million, or $3.13 per share. The 2003 results
were impacted by significant non-cash charges related to the
divestiture of the MicroSep businesses and other repositioning
actions (described on page 11) undertaken by Management to further
focus the core business and to provide an improved foundation for
profitable growth.
10 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
DESCRIPTION OF 2003 GAINS AND CHARGES
The Company incurred several gains and charges that impacted the
reported operating results in 2003. The amounts noted below are
included in the net earnings of the Company as defined within
accounting principles generally accepted in the United States of
America (GAAP). These gains and charges are more fully described in
Management's Discussion and Analysis and notes to consolidated
financial statements.
Management believes this information will be useful in understanding of
the operating results of the Company for the periods presented. The
following table provides a description of the gains and charges
(dollars in millions).
<Table>
<Caption>
Pretax Gains/(Charges): 2003
----------------------- ----
(1) Patent litigation settlement gain $ 2.1)
(2) Rantec divestiture gain 1.6
(3) MicroSep divestiture charge (68.9)
(4) Puerto Rico facility closure charge (4.3)
(5) Puerto Rico severance/move costs (0.9)
(6) U.K. Test move/restructure costs (0.5)
(7) Interest rate swap charge (2.6)
(8) Cumulative effect of accounting change (2.3)
(9) Management transition agreement (MTA) (1.4)
(10) Manufacturing & supply agreement (MSA) (0.2)
</Table>
(1) During the fiscal third quarter, the Company settled patent
litigation related to certain revenue generating patents in the
Company's Filtration business and received a $7.3 million cash
payment. The pretax gain is calculated as the gross proceeds
received, less deferred legal costs incurred to defend this
patent. The gain was allocated to past and future licensing
periods. The unrecognized gain of $3.7 million will be recognized
in pretax income on a straight-line basis over the remaining eight
year life of the patent.
(2) During the fiscal third quarter, the Company sold Rantec and
received $6 million in cash, and is entitled to additional
consideration based on the future operating results of Rantec,
which will be recognized when earned. This gain is included in
discontinued operations, along with the operating results of
Rantec.
(3) In July 2003, the Company announced its decision to sell the
MicroSep businesses, resulting in this pretax charge. The
after-tax charge was $60.5 million. The amount of the charge is
calculated as the difference between the MicroSep book value and
the estimated proceeds to be received upon completion of the
divestiture. The divestiture is expected to be complete by March
31, 2004.
(4) The Puerto Rico facility closure charge includes the write-down of
the building and equipment from their respective carrying values
to their estimated net realizable value. This charge is related to
Filtertek's operations and is included in the Filtration segment
results of operations.
(5) The Puerto Rico severance/move costs relate to severance
agreements with personnel at the Puerto Rico facility and the
actual costs of the physical move to Juarez, Mexico and Hebron,
Illinois. These costs are being recognized as incurred, and are
included in the Filtration segment results of operations.
(6) The U.K. Test move/restructure costs relate to severance,
write-offs of leasehold improvements and moving costs incurred as
a result of consolidating a portion of the Company's Test segment
operations in the U.K.
(7) Incident to the decision to divest the MicroSep businesses, the
Company closed out the interest rate swap related to the synthetic
lease obligations. This charge was recognized in the fourth
quarter results of operations.
(8) As a result of Interpretation No. 46 issued by the FASB relating
to the Company's synthetic lease obligations, during the fourth
quarter the Company recorded a pretax charge of $2.3 million ($1.4
million, after-tax) that is reported as a cumulative effect of a
change in accounting principle.
(9) The MTA charge relates to a formal transition agreement between
the Company and its former Chairman who retired in April 2003.
During 2002, the Company incurred $0.7 million of costs related to
the MTA.
(10) The MSA relates to the termination of a manufacturing and supply
agreement with Whatman Hemasure Inc. (Whatman). During the second
quarter, the Company recorded a pretax charge of $1.5 million
related to this termination and in the fourth quarter the Company
recorded a $1.3 million gain related to Whatman's settlement and
cash payment. This resulted in a $0.2 million charge.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The following discussion refers to the Company's results from
continuing operations, except where noted. Rantec and the MicroSep
businesses are accounted for as discontinued operations in accordance
with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." Accordingly, amounts in the financial statements
and related notes for all periods presented reflect discontinued
operations.
NET SALES
Net sales were $396.7 million, $316.6 million and $298.3 million in
2003, 2002 and 2001, respectively. Net sales in 2003 increased $80.1
million, or 25.3% from net sales of $316.6 million in 2002. Organic
sales growth accounted for $72.8 million, or 90.9%, of the increased
sales volume in 2003, with the balance coming from the acoustic
business acquisition within the Test segment. New products, defined as
those introduced during the prior three years, accounted for $41.1
million, or 10.4% of net sales in 2003. PPL Electric Utilities
Corporation (PPL) sales represented $63.9 million, or 16% of the total
net sales in 2003. No other customers exceeded 10% of the net sales in
the periods presented.
Filtration/Fluid Flow
Net sales of $164.1 million in 2003 were $12.6 million, or 8.3 % higher
than net sales of $151.5 million in 2002. Net sales in 2003 increased
primarily as a result of higher defense aerospace shipments at Vacco
and increased deliveries of Filtertek products.
Net sales of $151.5 million in 2002 were $2.2 million, or 1.4% lower
than net sales of $153.7 million in 2001 as a result of lower
commercial aerospace sales in 2002.
Communications
Net sales were $142.3 million, $94.6 million and $59.1 million in 2003,
2002 and 2001, respectively. Net sales in 2003 were $47.7 million, or
50.4% higher than the $94.6 million of net sales in 2002. The increase
in net sales each year is the result of significantly higher shipments
of AMR equipment. Net sales to PPL were $63.9 million in 2003 and $31.5
million in 2002. In addition, sales to various electric utility
cooperatives (Co-ops) in 2003 increased in both dollar amount and
number of utility customers as compared to the prior year.
The Communications segment received $93.7 million and $192.4 million of
new orders for its TWACS systems and load control transponders in 2003
and 2002, respectively. The largest order in 2002 was from PPL for $112
million. The Communications segment customer base includes significant
investor owned utilities (IOUs) and municipal utilities such as PPL,
Puerto Rico Electric Power Authority (PREPA), Wisconsin Public Service
Corporation (WPS), Florida Power & Light (FPL), as well as numerous
Co-ops throughout North America.
Sales of Comtrak's SecurVision(R) products were $8.4 million in 2003,
$2.5 million in 2002 and $4.4 million in 2001. The increase in sales in
2003 versus 2002 and 2001 is due to additional product deliveries of
digital video security products.
TEST
Net sales were $90.3 million and $70.5 million in 2003 and 2002,
respectively. The $19.8 million (28.1%) increase in 2003 net sales is
the result of additional test chamber installations, increased volume
from the Company's Asian operations, and $7.3 million in sales from the
acoustics business acquired December 31, 2002.
Net sales were $70.5 million and $85.5 million in 2002 and 2001,
respectively. The net sales decrease of $15.0 million in 2002 from 2001
is mainly due to the severe downturn in the overall electronics and
telecommunications markets and the 2001 completion of the General
Motors test chamber complex. Sales of large EMC test chamber products
were significantly impacted by the economic downturn in 2002.
ORDERS AND BACKLOG
New orders received in 2003 were $384.7 million, resulting in an order
backlog of $263.0 million at September 30, 2003 as compared to $274.9
million at September 30, 2002. The Filtration and Test businesses
recorded positive book-to-bill (orders to net sales) ratios during
2003. The Communications segment, excluding orders and sales related to
PPL, recorded
12 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
a positive book-to-bill ratio during 2003. Ending backlog decreased
during 2003 in the Communications segment as a result of $63.9 million
of shipments to PPL.
In 2003, the Company recorded $180.4 million of new orders related to
Filtration products, $102.3 million related to Test products, and
$102.1 million related to Communications products.
In February 2002, the Company was awarded a $112 million contract from
PPL for an AMR system in Pennsylvania. An additional $3.2 million was
awarded on this contract in 2003.The project is currently scheduled for
completion in mid-year 2004.
COST OF SALES
Cost of sales was $271.2 million (68.4% of net sales), $214.3 million
(67.7% of net sales) and $204.5 million (68.6% of net sales) in 2003,
2002 and 2001, respectively. Cost of sales as a percent of net sales
increased slightly in 2003 versus 2002 due to changes in sales mix
(IOUs versus Co-ops) and additional program costs within the
Communications segment. Cost of sales as a percentage of net sales
decreased slightly in 2002 versus 2001 due to operational improvements
including product pricing and successful cost containment programs.
ASSET IMPAIRMENT
The $4.5 million asset impairment charge in 2003 related to the closure
of the Filtration operation in Puerto Rico and the consolidation of the
Test business manufacturing facility in the U.K. The Puerto Rico charge
($4.3 million) resulted from the write-down of the Puerto Rico building
and equipment from their respective carrying value to their estimated
net realizable value. Management expects the building to be sold during
fiscal 2004. The U.K. Test charge ($0.2 million) resulted from the
write-off of abandoned leasehold improvements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) were $73.2 million,
or 18.5% of net sales in 2003, $65.1 million, or 20.6% of net sales in
2002, and $59.2 million, or 19.8% of net sales in 2001.
SG&A in 2003 included $1.4 million of costs related to the MTA between
the Company and its former Chairman, and $0.6 million of severance
costs related to the closure of the Puerto Rico facility and the
consolidation of the U.K. Test facility. SG&A in 2002 included $0.7
million related to the MTA.
In addition, the increase in SG&A spending in each of the years
presented is due to continued investments in engineering, sales and
marketing personnel within the Communications and Test segments related
to new product development and market expansion initiatives.
OTHER COSTS AND EXPENSES, NET
Other costs and expenses, net, were $4.7 million, $0.8 million and $7.1
million in 2003, 2002 and 2001, respectively. Other costs and expenses,
net, of $4.7 million in 2003 consisted primarily of the following items
(dollars in millions):
<Table>
<Caption>
2003
-------
o Interest rate swap charge $ 2.6
o Amortization of identifiable intangible assets 2.4
o Gain on settlement of patent litigation (2.1)
o Whatman MSA settlement, net 0.2
o Puerto Rico / U.K. consolidation costs 0.6
o Other 1.0
------
Total $ 4.7
======
</Table>
The interest rate swap charge relates to the cancellation and repayment of the
interest rate swap associated with the synthetic lease obligation that was
repaid during the fiscal 2003 fourth quarter.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
The amortization of identifiable intangibles relates primarily to
patents and technology licenses.
The gain on settlement of patent litigation relates to the defense of
certain revenue generating patents used in the Filtration business,
which resulted in a cash settlement of $7.3 million. The pretax gain is
calculated as the gross cash proceeds, less the deferred legal costs
incurred to defend this patent. The net gain is allocated to past and
future licensing periods, and the unrecognized gain of $3.7 million
will be recognized on a straight-line basis into pretax income over the
remaining eight year life of the patent.
The Whatman MSA settlement involved a dispute with a customer related
to the termination of a formal Manufacturing Supply Agreement (MSA).
The Company recorded a pretax charge of $1.5 million during the fiscal
second quarter and settled with Whatman and received cash of $1.3
million during the fourth fiscal quarter, resulting in a net $0.2
million charge.
The Puerto Rico and U.K. consolidation costs primarily relate to
physical shut down and move related costs.
Other costs and expenses, net, of $0.8 million in 2002 consisted
primarily of the following items: $1.6 million of amortization of
identifiable intangible assets, primarily patents and technology
licenses; $0.3 million of exit costs related to the Company's joint
venture in India (Filtration segment) which was terminated in the first
quarter of 2002; and $0.2 million of start-up costs for the Asian
operations (Test segment). These costs were offset by a $0.4 million
gain from insurance proceeds related to a former subsidiary and a $0.7
million gain from a customer funded refurbishment of production test
equipment within the Filtration segment.
Other costs and expenses, net, of $7.1 million in 2001 consisted
primarily of the following items: goodwill amortization of $2.7
million; patent and other intangible asset amortization of $1.3
million; and approximately $2.1 million of net costs related to the
Filtration segment described below.
(1) $1.2 million of moving costs related to the consolidation of PTI's
filtration businesses into new facilities in Oxnard, CA. The
primary expenditures consisted of moving costs to pack and ship
manufacturing equipment, inventory and supplies. This amount also
included $0.5 million of certain vacant facility costs and costs
to restore the former facilities to their original condition.
(2) $0.6 million of exit costs related to the consolidation of the
Stockton, CA manufacturing facility into the Huntley, IL facility,
which consisted primarily of lease termination payments,
write-offs of abandoned leasehold improvements.
(3) $0.3 million of termination costs related to the Brazil operation,
which were incurred as part of the management reorganization.
EARNINGS BEFORE INTEREST AND TAXES (EBIT)
The Company evaluates the performance of its operating segments based
on EBIT, which the Company defines as earnings from continuing
operations before interest and taxes. On October 1, 2001, the Company
adopted SFAS 142, which eliminated goodwill amortization beginning in
2002. See note 14 of notes to consolidated financial statements.
EBIT was $43.1 million (10.9% of net sales) in 2003, $36.4 million
(11.5% of net sales) in 2002, and $27.5 million (9.2% of net sales) in
2001.
During 2003, the following items negatively impacted EBIT by $7.8
million: $4.5 million of impairment charges related to the Puerto Rico
and U.K. consolidation activities; $2.0 million of MTA and severance
charges recognized; $2.6 million interest rate swap charge; $0.6
million of exit/move costs; $0.2 million MSA charge; partially offset
by a $2.1 million patent settlement gain. These items will be described
in their respective operating segments noted below.
During 2002, $0.7 million of MTA charges negatively impacted EBIT.
During 2001, $2.7 million of goodwill amortization charges were
recognized against EBIT.
EBIT as a financial measure is not calculated as a GAAP measure. EBIT
provides investors and Management with an alternative method for
addressing the Company's operating results. Management evaluates the
performance of its operating segments based on EBIT and believes that
EBIT is useful to investors to demonstrate the operational
profitability of the
14 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
Company's business segments by excluding interest and taxes, which are
generally accounted for across the entire company on a consolidated
basis. EBIT is also one of the measures Management uses to determine
resource allocations and incentive compensation.
The reconciliation of EBIT to a GAAP financial measure is as follows
(dollars in millions):
<Table>
<Caption>
2003 2002 2001
------ ------ ------
EBIT $ 43.1 36.4 27.5
Add back: Interest income (0.2) (0.3) (0.2)
Less: Income taxes / Add: (Benefit) 16.6 13.4 (3.4)
------ ------ ------
Net earnings from continuing operations $ 26.7 23.3 31.1)
====== ====== ======
</Table>
See Note 14 of notes to consolidated financial statements for
additional discussion.
FILTRATION/FLUID FLOW
EBIT of $14.7 million (9.0% of net sales) in 2003 decreased $1.9
million from EBIT of $16.6 million (11.0% of net sales) in 2002.
The 2003 results were negatively impacted by $3.3 million of the $7.8
million EBIT charges noted above. The $3.3 million of charges include:
$4.3 million of asset impairment charges related to the Puerto Rico
facility and equipment; $0.5 million of severance costs; $0.2 million
of Whatman MSA charges; $0.4 million of exit/move costs; partially
offset by the $2.1 million patent settlement gain.
During 2003, the Company continued to experience softness in its
commercial aerospace products. The continued strengthening of the
defense aerospace markets and European operations at Filtertek offset
this softness.
EBIT was $16.6 million (11.0% of net sales) and $14.0 million (9.1% of
net sales) in 2002 and 2001, respectively. Fiscal 2002 included a $0.7
million gain recognized from a customer funded refurbishment of certain
production test equipment.
In July 2003, the Company announced its decision to sell the MicroSep
businesses. These businesses are accounted for as discontinued
operations. See further discussion at Notes 2 and 14 in notes to
consolidated financial statements.
COMMUNICATIONS
EBIT was $30.0 million (21.1% of net sales) in 2003, $21.0 million
(22.2% of net sales) in 2002 and $11.9 million (20.1% of net sales) in
2001. The increases in EBIT dollars in the comparable periods were the
result of significantly higher shipments of AMR equipment. The slight
decrease in EBIT as a percent of net sales in 2003 is the result of the
sales mix between IOUs and Co-ops and due to additional marketing,
engineering and customer support costs. The Company continues to
increase its engineering and new product development expenditures in
the Communications segment in order to further penetrate the AMR
markets, primarily involving IOUs, and to further differentiate its
technology from the competition with additional features and
functionality.
TEST
EBIT was $5.3 million (5.9% of net sales) and $3.6 million (5.1% of net
sales) in 2003 and 2002, respectively.
The 2003 results were negatively impacted by $0.5 million of the $7.8
million EBIT charges noted above. The $0.5 million of charges include:
$0.2 million of asset impairment charges related to the U.K.
consolidation; $0.1 million of severance costs; and $0.2 million of
exit/move costs.
The increase in EBIT in 2003 as compared to 2002 is mainly due to
increased sales of large EMC test chambers and the significantly higher
sales volume in 2003 versus 2002.
EBIT was $3.6 million (5.1% of net sales) and $7.5 million (8.8% of net
sales) in 2002 and 2001, respectively. The decline in EBIT in 2002 as
compared to 2001 is mainly due to lower sales of large EMC test
chambers as a result of the
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
downturn in the electronics and telecommunications markets and the
completion of the General Motors test chamber complex in 2001.
CORPORATE
The "Reconciliation to Consolidated Totals (Corporate)" is the residual
amount of Corporate office operating charges remaining after the
Corporate overhead charges are allocated to the operating units.
Corporate charges are allocated to the segments at 2.5% of the segments
net sales. Beginning in fiscal 2004, these Corporate office operating
charges will no longer be allocated to the operating units.
The 2003 amounts include the $2.6 million interest rate swap charge and
the MTA charges of $1.4 million.
INTEREST INCOME
Interest income was $0.2 million in 2003, $0.3 million in 2002 and $0.2
million in 2001. The amounts vary based on the timing of cash flows and
respective interest rates within the given year.
INCOME TAX EXPENSE (BENEFIT)
Income tax expense from continuing operations of $16.6 million for 2003
reflects current Federal tax expense of $3.4 million, deferred Federal
tax expense of $9.9 million, current state and local tax expense of
$2.0 million, deferred state and local tax expense of $0.2 million,
current foreign tax expense of $1.1 million, and deferred foreign tax
expense of $0.1 million.
Income tax expense from continuing operations of $13.4 million for 2002
reflects current Federal tax expense of $1.4 million, deferred Federal
tax expense of $7.9 million, current state and local tax expense of
$2.4 million, deferred state and local tax benefit of $(0.2) million,
current foreign tax expense of $1.4 million, and deferred foreign tax
expense of $0.5 million.
Income tax benefit from continuing operations of $3.4 million for 2001
reflects current Federal tax expense of $0.5 million, deferred Federal
tax benefit of $5.9 million, current state and local tax expense of
$0.8 million, current foreign tax expense of $1.3 million, and deferred
foreign tax benefit of $0.1 million.
Total income tax benefit attributable to discontinued operations was
$9.6 million in 2003, and $0.6 million in 2002. Income tax expense
attributable to discontinued operations was $0.5 million in 2001. In
addition, in 2003 the Company had an income tax benefit of $0.8 million
attributable to the cumulative effect of a change in accounting method.
Management believes that, based on the Company's historical pretax
income together with the projection of future taxable income, and after
consideration of the valuation allowance, it is more likely than not
that the Company will realize the benefits of the net deferred tax
assets existing at September 30, 2003. In order to realize this net
deferred tax asset, the Company will need to generate future taxable
income of approximately $117 million, of which $84 million is required
to be realized prior to the expiration of the net operating loss (NOL)
carryforward, of which $29 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 NOL carryforward may be used to reduce future
Federal income tax cash payments.
During 2001, Management concluded that it was more likely than not that
it would realize the benefits of the deferred tax assets existing at
September 30, 2001, and therefore, eliminated the existing deferred tax
valuation allowance of $12.7 million. See full discussion at Note 9 in
notes to consolidated financial statements.
During 2003 the Company established a valuation allowance against
certain deferred tax assets associated with its discontinued
operations. A valuation allowance of $3.5 million was established
against certain deferred tax assets associated with the Company's stock
holdings in PTI Technologies Limited and PTI S.p.A., as the disposition
of such assets in 2004 is expected to generate a loss, which may not be
realized in future periods.
No deferred taxes have been provided on the accumulated unremitted
earnings of the Company's foreign subsidiaries as of September 30,
2003. The Company's intention is to reinvest these earnings
indefinitely. In the event these foreign
16 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
entities' earnings were distributed, it is estimated that U.S. taxes,
net of available foreign tax credits, of approximately $7.1 million
would be due, which would correspondingly reduce net earnings and the
Company's NOL.
The effective tax rate for continuing operations in 2003 was 38.4%
compared to 36.5% in 2002. An analysis of the effective tax rates for
2003, 2002 and 2001 is included in the notes to the consolidated
financial statements.
CAPITAL RESOURCES AND LIQUIDITY
Working capital increased to $120.5 million at September 30, 2003 from
$112.6 million at September 30, 2002. During 2003, cash and cash
equivalents increased by $6.4 million. Accounts receivable increased
$12.5 million and inventories increased $5.0 million.
The increase in accounts receivable at September 30, 2003 of $12.5
million is due to a $6.2 million increase in the Test segment mainly
due to higher sales volume and the Acoustics acquisition which added
$1.5 million; a $4.6 million increase in the Communications segment as
a result of significantly higher shipments of AMR products; and a $3.0
million increase in the Filtration segment. Approximately $0.8 million
of accounts receivable at September 30, 2003 represents amounts due
under long-term contracts related to retainage provisions, which are
due after one year.
Net cash provided by operating activities was $38.0 million, $35.0
million and $33.0 million in 2003, 2002 and 2001, respectively.
Capital expenditures for continuing operations were $10.6 million, $9.6
million and $9.5 million, in 2003, 2002 and 2001, respectively.
Included in the 2003 capital expenditures for continuing operations
were approximately $2.4 million of leasehold improvements related to
the new headquarters facility for DCSI in the Communications segment.
The balance of the expenditures primarily included manufacturing
equipment. There were no commitments outstanding that were considered
material for capital expenditures at September 30, 2003.
At September 30, 2003, the Company had an available NOL carryforward
for tax purposes of approximately $84 million. This NOL will expire
beginning in 2009 and ending in 2019, and will be available to reduce
future Federal income tax cash payments.
At September 30, 2003, other current assets include a mortgage note
receivable of $1.8 million from the prior sale of the Riverhead, NY
property, related to a former defense subsidiary. The property was sold
in December 1999 for $2.6 million, with $0.5 million received as a down
payment and the remaining $2.1 million financed under the mortgage
note. Through September 30, 2003, the buyer has paid additional
principal and interest payments totaling $1.3 million. However,
currently the buyer is in default of the provisions of the note
receivable and the Company has begun foreclosure proceedings on the
property. A recent independent appraisal indicates the value of the
property is greater than $5 million. The Company does not anticipate a
loss related to this matter.
SYNTHETIC LEASE OBLIGATION
Effective July 1, 2003 the Company adopted FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46) which required
it to consolidate its $31.5 million synthetic lease obligation,
previously accounted for as an operating lease, onto its balance sheet.
This obligation was secured by three manufacturing locations, two of
which are located in Oxnard, CA, and the other in Cedar Park, TX, as
well as a $10.6 million letter of credit issued under the Company's $65
million credit facility. Upon consolidation, the Company recorded $29.2
million of property plant and equipment, $31.5 million of long term
debt and a non-cash after tax charge-reported as a cumulative effect of
a change in accounting principle-of $1.4 million.
In September 2003, the Company repaid the $31.5 million synthetic lease
obligation and cancelled the $10.6 million letter of credit. The
synthetic lease facility was dissolved and there are no further
obligations.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
PATENT LITIGATION SETTLEMENT
During fiscal 2003, the Company reached a settlement in the defense of a certain
revenue-generating patent used in the Filtration business. Under the terms of
the agreement, the Company received $7.3 million in fiscal third quarter of
2003, and the Company recorded a gain of $2.1 million, after deducting $1.4
million of professional fees related to the settlement. The unrecognized gain of
$3.7 million ($0.5 million classified in current liabilities and $3.2 million
classified in long-term deferred income) will be recognized on a straight-line
basis in Other, net, over the remaining patent life, through 2011.
TERMINATION AND SETTLEMENT OF WHATMAN HEMASURE INC. MANUFACTURING AND SUPPLY
AGREEMENT
On January 24, 2003, the Company's Filtertek Inc. subsidiary terminated its
Manufacturing and Supply Agreement (MSA) with Whatman Hemasure Inc. (Whatman)
based on Whatman's breach of its obligations under the MSA. The MSA related to
the parties' responsibilities concerning the manufacture and supply of leukocyte
filters. Under the terms of the MSA, Filtertek's termination based on Whatman's
breach entitled Filtertek to recover its damages and certain specified costs,
which included among other costs, payment for certain equipment used in the
production of leukocyte filters. The Company recorded a $1.5 million charge in
Other, net, during the second quarter of fiscal 2003 primarily related to the
fair value of the remaining equipment lease obligations for that program. During
the fourth quarter of fiscal 2003, the Company settled its outstanding contract
dispute with Whatman for $1.3 million, which was received in September 2003.
ACQUISITIONS/DIVESTITURES
On December 31, 2002, the Company acquired the assets and certain liabilities of
Austin Acoustics Systems, Inc. (Austin Acoustics) for $4 million in cash. Austin
Acoustics is a leading supplier of noise control chambers for the test, medical
and broadcast/music industries. Austin Acoustics is headquartered in Austin, TX
and has annual sales of approximately $8 million. The assets, liabilities and
results of operations since the date of acquisition are included within the
Company's Test segment.
In March 2002, pursuant to a license agreement, the Company acquired the
exclusive rights to the patent portfolio and related intellectual property of
North Carolina Separations Research Technology Inc. and its affiliate (SRT), a
manufacturer of cross-flow filtration and separation modules and equipment. The
Company also acquired certain production assets and inventory of SRT. The
purchase price was $11.5 million of which the Company paid $9.5 million at
closing and additional consideration of $1 million was paid in March 2003 and
$0.9 million will be paid throughout fiscal year 2004. SRT is included in the
discontinued operations of the MicroSep businesses as a part of PTI Advanced
Filtration Inc.
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 is
included in the discontinued operations of the MicroSep businesses as a part of
PTB.
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.
In April 2003, the Company completed the sale of the Rantec Power Systems Inc.
(Rantec) subsidiary, to an entity owned by a group of investors primarily
comprised of the subsidiary's management. Rantec was previously reported in the
"Other" segment. Rantec, a manufacturer of power supplies for commercial and
military applications, is located in Los Osos, California. The Company received
$6 million from the buyer at closing. An additional $0.7 million will be paid by
the buyer in equal installments during the nine months following the sale. The
Company is also entitled to contingent consideration of up to $6.4 million over
the next ten years, based on the future operating results of Rantec, which will
be recognized when earned. A pretax gain of $1.6 million related to the sale is
reflected in the Company's fiscal 2003 results in discontinued operations.
Rantec is accounted for as a discontinued operation in accordance with SFAS 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144).
18 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
In July 2003, the Company announced its decision to sell the Microfiltration and
Separations (MicroSep) businesses in the Filtration segment. These businesses
consist of PTI Advanced Filtration Inc., located in Oxnard, California, PTI
Technologies Limited, located in Sheffield, England, and PTI S.p.A., located in
Milan, Italy. As part of this process, in October 2003, the Company terminated
its existing license with SRT. These businesses are accounted for as a
discontinued operation in accordance with SFAS 144, and accordingly, amounts in
the financial statements and related notes for all periods shown, reflect
discontinued operations presentation. The MicroSep businesses represent
approximately 20% of the Filtration segment net sales. These actions resulted in
a non-cash after-tax charge of approximately $60 million in the fourth quarter
of fiscal 2003, primarily related to goodwill and other intangible assets. The
Company expects the sale of the MicroSep businesses to be completed prior to
March 31, 2004.
BANK CREDIT FACILITY
Effective September 5, 2003, the Company amended its existing revolving credit
facility to allow for the announced divestiture of its MicroSep businesses as
well as the repayment of the Company's $31.5 million synthetic lease obligation.
The amended credit facility continues to have $5 million annual reductions, a
$25 million increase option through April 11, 2004 and a final maturity and
expiration of April 11, 2005. As of September 30, 2003, the Company had not
exercised the $25 million increase option and the revolving line of credit was
$65 million. The credit facility is available for direct borrowings and/or the
issuance of letters of credit, and is provided by a group of five banks, led by
Bank of America as agent.
During 2003, the Company paid off its previously outstanding $31.5 million
synthetic lease obligation.
At September 30, 2003, the Company had approximately $43.7 million available to
borrow under the credit facility in addition to its $31.3 million cash on hand.
Against the $65 million available under the revolving credit facility at
September 30, 2003, the Company had $10 million of short-term borrowings, $8
million of outstanding long-term borrowings related to the Bea acquisition
(included in "Other liabilities from discontinued operations") and outstanding
letters of credit of $3.3 million.
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, 2003, the Company was in compliance with all bank covenants.
Cash flow from operations and borrowings under the bank credit facility is
expected to provide adequate resources to meet the Company's capital
requirements and operational needs for the foreseeable future.
CONTRACTUAL OBLIGATIONS
The following table shows the Company's contractual obligations as of September
30, 2003 (dollars in millions):
<Table>
<Caption>
Payments due by period
------------------------------------------------------------
Less than More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
-------- --------- --------- --------- ---------
Long-Term Debt Obligations $ 0.6 0.1 0.3 0.2 --
Capital Lease Obligations 1.0 0.3 0.5 0.2 --
Operating Lease Obligations 17.2 4.7 6.8 5.7 --
Purchase Obligations(1) -- -- -- -- --
-------- -------- -------- -------- --------
Total $ 18.8 5.1 7.6 6.1 --
Discontinued Operations 11.5 0.8 9.4 1.3 --
-------- -------- -------- -------- --------
Total $ 30.3 5.9 17.0 7.4 --
======== ======== ======== ======== ========
</Table>
(1) A purchase obligation is defined as a legally binding and enforceable
agreement to purchase goods and services that specifies all significant
terms. Since purchase orders can be cancelled, the Company does not include
them in this calculation.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 19
MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company has no material off balance sheet arrangements outstanding at
September 30, 2003.
SHARE REPURCHASE
In August 2003, the Company extended its previously authorized (February 2001)
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 30,
2004. The Company repurchased 42,881, 127,100 and 76,700 shares in 2003, 2002
and 2001, respectively.
MANAGEMENT TRANSITION AGREEMENT
On August 5, 2002, the Company entered into a Management Transition Agreement
(MTA) with Dennis J. Moore, the Company's former Chairman, under which Mr. Moore
receives certain compensation in conjunction with his retirement in April 2003
and for his consulting services after retirement. Of the $2.5 million total cost
related to the MTA, $1.4 million was expensed in SG&A during the first nine
months of fiscal 2003, and $0.7 million was recorded in the fourth quarter of
fiscal 2002. The remaining cost of the MTA related to a $0.3 million consulting
agreement that is being expensed over the twelve-month period from April 2003
through March 2004, consistent with the period of service.
PENSION FUNDING REQUIREMENTS
The minimum cash funding requirements related to the Company's defined benefit
pension plans are zero in 2004, approximately $1 million in 2005 and
approximately $4 million in 2006.
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.
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
had interest rate exposure relating to its floating rate synthetic lease
obligations and, accordingly, the Company previously entered into interest rate
swaps of approximately $31.5 million to mitigate this exposure. In conjunction
with the repayment of the Company's synthetic lease obligation in fourth quarter
of fiscal 2003, the Company repaid and cancelled the related interest rate swap
associated with this obligation. This resulted in a pretax charge of
approximately $2.6 million recorded in the fourth quarter of fiscal 2003 as well
as an after tax reduction in accumulated other comprehensive loss of $1.8
million.
In addition, the Company has interest rate exposure of approximately $8.0
million relating to floating rate obligations denominated in Euros related to
PTB and included in other liabilities from discontinued operations. Therefore,
in September 2001, the Company entered into an interest rate swap of
approximately $5.0 million to mitigate this exposure, which effectively fixed
the interest rate on these floating rate obligations at 4.89%. These Euro
obligations consist of borrowings under the Company's $65 million credit
facility and mature on April 11, 2005 along with the related interest rate swap.
This swap is accounted for as a cash flow hedge under the provisions of SFAS
133, "Accounting for Derivative Instruments and Hedging Activities, as amended
by SFAS 138". For the year ended September 30, 2003, the Company recorded an
adjustment of $0.1 million to accumulated other comprehensive loss related to
this interest rate swap.
20 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following table provides further detail about the Company's interest rate
swaps outstanding at September 30, 2003:
<Table>
<Caption>
Amounts scheduled for maturity Estimated fair value at
as of April 11, 2005 September 30, 2003
------------------------------ -----------------------
Interest Rate Swaps (related to Euro debt)
Variable to fixed:
Notional value (in millions) $ 5.0 $ (0.1)
Average pay rate (excludes spread) 4.1%
============================== =======================
</Table>
The Company is also subject to foreign currency exchange rate risk inherent in
its sales commitments, anticipated sales, anticipated purchases and assets and
liabilities denominated in currencies other than the U.S. dollar. The currency
most significant to the Company's operations is the Euro. The Company hedges
certain foreign currency commitments by purchasing foreign currency forward
contracts. The estimated fair value of open forward contracts at September 30,
2003 is not material.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP requires
Management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying consolidated financial statements.
In preparing these financial statements, Management has made its best estimates
and judgments of certain amounts included in the financial statements, giving
due consideration to materiality. The Company does not believe there is a great
likelihood that materially different amounts would be reported under different
conditions or using different assumptions related to the accounting policies
described below. However, application of these accounting policies involves the
exercise of judgment and use of assumptions as to future uncertainties and, as a
result, actual results could differ from these estimates. The Company's senior
Management discusses the critical accounting policies described below with the
Audit Committee of the Company's Board of Directors on a periodic basis.
The following discussion of critical accounting policies is intended to bring to
the attention of readers those accounting policies, which Management believes
are critical to the Consolidated Financial Statements and other financial
disclosure. It is not intended to be a comprehensive list of all significant
accounting policies that are more fully described in Note 1 of Notes to
Consolidated Financial Statements.
REVENUE RECOGNITION
The majority of the Company's revenues are recognized when products are shipped
to or when services are performed for unaffiliated customers. Other revenue
recognition methods the Company uses include the following: revenue on
production contracts is recorded when specific contract terms are fulfilled,
usually by delivery or acceptance; revenue from cost reimbursement contracts is
recorded as costs are incurred, plus fees earned; revenue under long-term
contracts, for which delivery is an inappropriate measure of performance, is
recognized on the percentage-of-completion method based upon incurred costs
compared to total estimated costs under the contract; and revenue under
engineering contracts is generally recognized as milestones are attained. The
Company has certain revenue arrangements with multiple elements within the Test
segment. For such arrangements, the Company determines the fair value of each
element under the provisions of EITF 00-21, "Revenue Arrangements with Multiple
Deliverables." Revenue of each element is then recognized when the products
and/or services are delivered. Revenue arrangements with software components are
recognized under the provisions of SOP 97-2, "Software Revenue Recognition."
Management believes that all relevant criteria and conditions are considered
when recognizing revenue.
ACCOUNTS RECEIVABLE
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. This estimated allowance is based primarily
on Management's evaluation of the financial condition of the customer and
historical bad debt experience.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
INVENTORY
Inventories are valued at the lower of cost (first-in, first-out) or market
value and have been reduced by an allowance for excess, slow-moving and obsolete
inventories. The estimated allowance is based on Management's review of
inventories on hand compared to historical usage and estimated future usage and
sales. Inventories under long-term contracts reflect accumulated production
costs, factory overhead, initial tooling and other related costs less the
portion of such costs charged to cost of sales and any unliquidated progress
payments. In accordance with industry practice, costs incurred on contracts in
progress include amounts relating to programs having production cycles longer
than one year, and a portion thereof may not be realized within one year.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred tax assets may be reduced by a valuation
allowance if it is more likely than not that some portion of all of the deferred
tax assets will not be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance when Management
believes it is more likely than not such assets will not be recovered, taking
into consideration historical operating results, expectations of future
earnings, tax planning strategies, and the expected timing of the reversals of
existing temporary differences.
GOODWILL AND OTHER LONG-LIVED ASSETS
The Company adopted the provisions of SFAS 142 effective October 1, 2001.
Management annually reviews goodwill and other long-lived assets with indefinite
useful lives for impairment or whenever events or changes in circumstances
indicate the carrying amount may not be recoverable. If indicators of impairment
are present, the determination of the amount of impairment for long-lived assets
with definite lives is based on Management's judgment as to the future operating
cash flows to be generated from these assets throughout their estimated useful
lives. SFAS 142 also requires that intangible assets with estimable useful lives
be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS 144.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
The measurement of liabilities related to pension plans and other
post-retirement benefit plans is based on Management's assumptions related to
future events including interest rates, return on pension plan assets, rate of
compensation increases, and health care cost trend rates. Actual pension plan
asset performance will either decrease or increase unamortized pension losses
that will affect net earnings in future years. Depending upon the performance of
the equity and bond markets in 2004, the Company could be required to record a
charge to equity. In addition, if the discount rate was decreased by 25 basis
points from 6% to 5.75%, the accumulated benefit obligation for the defined
benefit plan would increase by approximately $1.4 million and result in an
additional after-tax charge to shareholder's equity of approximately $0.9
million.
OTHER MATTERS
CONTINGENCIES
As a normal incident of the businesses in which the Company is engaged, various
claims, charges and litigation are asserted or commenced against the Company. In
the opinion of Management, final judgments, if any, which might be rendered
against the Company in current litigation, are adequately reserved, covered by
insurance, or would not have a material adverse effect on its financial
statements.
22 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
MANAGEMENT'S DISCUSSION AND ANALYSIS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign currency exchange rates. In conjunction
with the repayment of the Company's synthetic lease obligation in fourth quarter
of fiscal 2003, the Company repaid and cancelled the interest rate swap
associated with this obligation. This resulted in an after tax reduction in
accumulated other comprehensive loss of $1.8 million. As of September 30, 2003,
the Company's only remaining interest rate swap is related to Euro denominated
debt and carries an estimated fair value of ($0.1) million. For the year ended
September 30, 2003 there was no change to accumulated other comprehensive loss
related to this interest rate swap. See further discussion in "Management
Discussion and Analysis-Market Risk Analysis" regarding the Company's market
risks.
CONTROLS AND PROCEDURES
The Company carried out an evaluation under the supervision and with the
participation of Management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. Disclosure controls and procedures are
controls and procedures that are designed to ensure that information required to
be disclosed in company reported filed or submitted under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within time
periods specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors during the period covered by this report that have materially
affected, or are reasonably likely to materially affect those controls and
procedures.
NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure, an Amendment of SFAS 123," which
provides alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The provisions of SFAS 148 are effective for
interim periods beginning after December 15, 2002. The Company has adopted the
provisions of SFAS 148.
In December 2002, the Emerging Issues Task Force issued EITF 00-21, "Revenue
Arrangements with Multiple Deliverables." This issue addresses certain aspects
of the accounting by a vendor for arrangements under which it will perform
multiple revenue-generating activities. In some arrangements, the different
revenue-generating activities (deliverables) are sufficiently separable, and
there exists sufficient evidence of their fair values to separately account for
some or all of the deliverables (that is, there are separate units of
accounting). This issue addresses when and, if so, how an arrangement involving
multiple deliverables should be divided into separate units of accounting. This
issue does not change otherwise applicable revenue recognition criteria. This
issue is applicable for revenue arrangements beginning in the fourth quarter of
fiscal 2003. The Company has adopted the provisions of EITF 00-21, and the
impact of this was not material to the Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of ARB No. 51, which addresses
consolidation by business enterprises of variable interest entities. This
Interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among the parties involved. This Interpretation applies to
variable interest entities created
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
after January 31, 2003. It applies in the first fiscal year or interim period
beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company consolidated the synthetic lease obligation on July 1, 2003, the
beginning of the Company's fourth fiscal quarter. See further discussion in Note
8.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Management does not believe the adoption
of this statement will have a material impact on the Company's financial
statements.
FORWARD-LOOKING INFORMATION
Statements regarding future events and the Company's future results that are
based on current expectations, estimates, forecasts and projections about the
Company's performance and the industries in which the Company operates and the
beliefs and assumptions of Management contained in the Letters to Shareholders
(pages 1-2), the business summaries (pages 3-9), and Management's Discussion and
Analysis and other statements contained herein which are not strictly historical
are considered "forward-looking statements". Words such as expects, anticipates,
targets, goals, projects, intends, plans, believes, estimates, variations of
such words, and similar expressions are intended to identify such
forward-looking statements. 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: the
timing and terms of the MicroSep divestiture; performance of discontinued
operations prior to divestiture; successful execution of planned facility
closures; the timing and execution of sales, consolidations and relocations with
regard to the Company's Puerto Rico Facility and U.K. facility; termination for
convenience of customer contracts; timing and magnitude of future contract
awards; further weakening of economic conditions in served markets; changes in
customer demands or customer insolvencies; competition; intellectual property
rights; delivery delays or defaults by customers; performance issues with key
suppliers and subcontractors; collective bargaining and labor disputes; changes
in laws and regulations including changes in accounting standards and taxation
requirements; changes in foreign or U.S. business conditions effecting the
distribution of foreign earnings; costs relating to environmental matters;
litigation uncertainty; and the Company's successful execution of internal
operating plans.
24 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
CONSOLIDATED STATEMENTS OF OPERATIONS
<Table>
<Caption>
Years ended September 30,
(Dollars in thousands, except per share amounts) 2003 2002 2001
------------ ------------ ------------
Net sales $ 396,687 316,611 298,297
Costs and expenses:
Cost of sales 271,164 214,325 204,486
Asset impairment 4,528 -- --
Selling, general and administrative expenses 73,185 65,099 59,173
Interest income, net (217) (351) (204)
Other, net 4,664 803 7,149
------------ ------------ ------------
Total costs and expenses 353,324 279,876 270,604
------------ ------------ ------------
Earnings before income tax 43,363 36,735 27,693
Income tax expense (benefit) 16,625 13,400 (3,375)
------------ ------------ ------------
Net earnings from continuing operations 26,738 23,335 31,068
Loss from discontinued operations,
net of tax: 2003, $1,821; 2002, $552; and 2001, $(541) (6,901) (1,554) (961)
Loss on sale of discontinued operations,
net of tax of $7,755 (59,556) -- --
------------ ------------ ------------
Net loss from discontinued operations (66,457) (1,554) (961)
------------ ------------ ------------
Net earnings (loss) before accounting change (39,719) 21,781 30,107
Cumulative effect of accounting change, net of tax of $842 (1,419) -- --
------------ ------------ ------------
Net earnings (loss) $ (41,138) 21,781 30,107
============ ============ ============
Earnings per share:
Basic:
Continuing operations $ 2.10 1.86 2.51
Discontinued operations (5.24) (0.12) (0.08)
Cumulative effect of accounting change (0.11) -- --
------------ ------------ ------------
Net earnings (loss) (3.25) 1.74 2.43
============ ============ ============
Diluted:
Continuing operations 2.04 1.79 2.43
Discontinued operations (5.06) (0.12) (0.08)
Cumulative effect of accounting change (0.11) -- --
------------ ------------ ------------
Net earnings (loss) (3.13) 1.67 2.35
============ ============ ============
Average common shares outstanding (in thousands):
Basic 12,675 12,511 12,382
Diluted 13,128 13,022 12,805
</Table>
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 25
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
As of September 30,
(Dollars in thousands) 2003 2002
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 31,285 24,930
Accounts receivable, less allowance for doubtful accounts of $734
and $606 in 2003 and 2002, respectively 69,379 56,884
Costs and estimated earnings on long-term contracts, less progress
billings of $5,089 and $4,541 in 2003 and 2002, respectively 4,663 2,951
Inventories 48,432 43,441
Current portion of deferred tax assets 24,187 20,601
Other current assets 6,549 7,481
Current assets from discontinued operations 21,640 25,100
------------ ------------
Total current assets 206,135 181,388
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 5,541 2,316
Buildings and leasehold improvements 41,708 27,478
Machinery and equipment 72,959 67,373
Construction in progress 2,583 927
------------ ------------
122,791 98,094
Less accumulated depreciation and amortization 51,622 44,190
------------ ------------
Net property, plant and equipment 71,169 53,904
Goodwill 68,653 66,649
Deferred tax assets 16,618 28,690
Other assets 14,081 14,243
Other assets from discontinued operations, including goodwill
of $0 and $36,634 at 2003 and 2002, respectively 16,725 62,814
------------ ------------
$ 393,381 407,688
</Table>
See accompanying notes to consolidated financial statements.
26 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
CONSOLIDATED BALANCE SHEETS
<Table>
<Caption>
As of September 30,
(Dollars in thousands) 2003 2002
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-term debt $ 10,143 121
Accounts payable 34,940 34,101
Advance payments on long-term contracts, less costs incurred
of $1,728 and $3,769 in 2003 and 2002, respectively 1,144 2,706
Accrued expenses 30,013 23,236
Current liabilities from discontinued operations 9,397 8,623
------------ ------------
Total current liabilities 85,637 68,787
------------ ------------
Deferred income 3,194 --
Other liabilities 20,556 23,571
Long-term debt 490 538
Other liabilities from discontinued operations 8,115 8,481
------------ ------------
Total liabilities 117,992 101,377
------------ ------------
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 13,933,193 and 13,601,095 shares in 2003 and 2002, respectively 139 136
Additional paid-in capital 216,506 209,402
Retained earnings since elimination of deficit at September 30, 1993 80,292 121,430
Accumulated other comprehensive loss (4,982) (9,473)
------------ ------------
291,955 321,495
Less treasury stock, at cost (1,105,052 and 1,067,046 common shares in
2003 and 2002, respectively) (16,566) (15,184)
------------ ------------
Total shareholders' equity 275,389 306,311
------------ ------------
$ 393,381 407,688
============ ============
</Table>
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 27
CONSOLIDATED STATEMENTS 0F SHAREHOLDERS' EQUITY
<Table>
<Caption>
Accumulated
Common Stock Additional Other
Years ended September 30, --------------------- Paid-In Retained Comprehensive Treasury
(In thousands) Shares Amount Capital Earnings Income (Loss) Stock Total
--------- --------- ---------- --------- ------------- --------- ---------
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 of tax of $344 -- -- -- -- (639) -- (639)
Interest rate swap adjustment,
net of tax of $487 -- -- -- -- (904) -- (904)
---------
Comprehensive income -- -- -- -- -- -- 28,355
---------
Stock options and stock compensation 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
---------
Comprehensive income:
Net earnings -- -- -- 21,781 -- -- 21,781
Translation adjustments -- -- -- -- 782 -- 782
Minimum pension liability,
net of tax of $1,478 -- -- -- -- (2,745) -- (2,745)
Interest rate swap adjustment,
net of tax of $534 -- -- -- -- (992) -- (992)
---------
Comprehensive income -- -- -- -- -- -- 18,826
---------
Stock options and stock compensation plans 191 2 3,120 -- -- 521 3,643
Purchases into treasury -- -- -- -- -- (3,438) (3,438)
--------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 2002 13,601 136 209,402 121,430 (9,473) (15,184) 306,311
---------
Comprehensive loss:
Net loss -- -- -- (41,138) -- -- (41,138)
Translation adjustments -- -- -- -- 3,880 -- 3,880
Minimum pension liability,
net of tax of $641 -- -- -- -- (1,190) -- (1,190)
Interest rate swap adjustment,
net of tax of $(970) -- -- -- -- 1,801 -- 1,801
---------
Comprehensive loss -- -- -- -- -- -- (36,647)
---------
Stock options and stock compensation plans 332 3 7,104 -- -- 56 7,163
Purchases into treasury -- -- -- -- -- (1,438) (1,438)
--------- --------- --------- --------- --------- --------- ---------
Balance, September 30, 2003 13,933 $ 139 216,506 80,292 (4,982) (16,566) 275,389
========= ========= ========= ========= ========= ========= =========
</Table>
See accompanying notes to consolidated financial statements
28 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
CONSOLIDATED STATEMENTS 0F CASH FLOW
<Table>
<Caption>
Years ended September 30,
(Dollars in thousands) 2003 2002 2001
---------- ---------- ----------
Cash flows from operating activities:
Net earnings (loss) $ (41,138) 21,781 30,107
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Loss from discontinued operations, net of tax 6,901 1,554 961
Loss on sale of discontinued operations, net of tax 59,556 -- --
Depreciation and amortization 13,451 10,398 12,952
Changes in operating working capital (15,669) (12,793) (12,283)
Effect of deferred taxes on tax provision 10,137 8,226 (5,985)
Proceeds from settlement of patent litigation 7,300 -- --
Gain from settlement of patent litigation (2,056) -- --
Other 7,441 8,172 7,828
---------- ---------- ----------
Net cash provided by operating activities-continuing operations 45,923 37,338 33,580
Net cash used by discontinued operations (7,907) (2,322) (594)
---------- ---------- ----------
Net cash provided by operating activities 38,016 35,016 32,986
---------- ---------- ----------
Cash flows from investing activities:
Acquisition of business-continuing operations (4,000) -- --
Acquisition of businesses and technology rights-discontinued operations (1,364) (9,546) (13,559)
Proceeds from divestiture of business 6,000 -- --
Capital expenditures-continuing operations (10,599) (9,591) (9,502)
Capital expenditures-discontinued operations (3,528) (3,588) (2,379)
---------- ---------- ----------
Net cash used by investing activities (13,491) (22,725) (25,440)
Cash flows from financing activities:
Proceeds from long-term debt -- 453 7,356
Principal payments on long-term debt-continuing operations (31,636) (505) (740)
Principal payments on long-term debt-discontinued operations (621) -- --
Net increase (decrease) in short-term borrowings 10,000 (12) (3,988)
Purchases of common stock into treasury (1,438) (3,438) (1,681)
Other, including exercise of stock options 5,525 1,635 393
---------- ---------- ----------
Net cash (used) provided by financing activities (18,170) (1,867) 1,340
---------- ---------- ----------
Net increase in cash and cash equivalents 6,355 10,424 8,886
Cash and cash equivalents at beginning of year 24,930 14,506 5,620
---------- ---------- ----------
Cash and cash equivalents at end of year $ 31,285 24,930 14,506
========== ========== ==========
Changes in operating working capital:
Accounts receivable, net $ (12,149) (8,173) 684
Costs and estimated earnings on long-term contracts, net (1,712) 3,686 (456)
Inventories (3,883) (5,274) (790)
Other current assets and current portion of deferred tax assets (2,692) (8,426) (13,608)
Accounts payable 839 3,739 1,510
Advance payments on long-term contracts, net (1,562) 1,324 (1,472)
Accrued expenses 5,490 331 1,849
---------- ---------- ----------
$ (15,669) (12,793) (12,283)
========== ========== ==========
Supplemental cash flow information:
Interest paid $ 805 521 425
Income taxes paid (including state, foreign & AMT) 6,208 4,076 4,106
========== ========== ==========
</Table>
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1 (Y) 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 2003
presentation.
(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, 2003 and
2002.
(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 and precision screen
filters. The balance of the Company's sales is derived primarily from special
purpose communication systems including automatic meter reading, and from radio
frequency (RF) shielding and EMC test products.
The Company operates in three industry segments: Filtration/Fluid Flow,
Communications and Test.
Effective April 11, 2003, the Company completed the sale of Rantec Power
Systems, Inc. (Rantec) to an entity owned by a group of investors primarily
comprised of the subsidiary's management. Rantec is accounted for as a
discontinued operation. See Note 2, "Discontinued Operations".
In July 2003, the Company announced its decision to sell the Microfiltration and
Separations (MicroSep) businesses in the Filtration/Fluid Flow segment. These
businesses are recorded as discontinued operations beginning in the fourth
quarter of fiscal 2003. See Note 2, "Discontinued Operations".
(D) USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America (GAAP) 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
The majority of the Company's revenues are recognized when products are shipped
to or when services are performed for unaffiliated customers. Other revenue
recognition methods the Company uses include the following: revenue on
production contracts is recorded when specific contract terms are fulfilled,
usually by delivery or acceptance; revenue from cost reimbursement contracts is
recorded as costs are incurred, plus fees earned; revenue under long-term
contracts, for which delivery is an inappropriate measure of performance, is
recognized on the percentage-of-completion method based upon incurred costs
compared to total estimated costs under the contract; and revenue under
engineering contracts is generally recognized as milestones are attained. The
Company has certain revenue arrangements with multiple elements within the Test
segment. For such arrangements, the Company determines the fair value of each
element under the provisions of EITF 00-21, "Revenue Arrangements with Multiple
Deliverables." Revenue of each element is then recognized when the products
and/or services are delivered. Revenue arrangements with software components are
recognized under the provisions of SOP 97-2, "Software Revenue Recognition."
Management believes that all relevant criteria and conditions are considered
when recognizing revenue.
30 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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) ACCOUNTS RECEIVABLE
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. This estimated allowance is based primarily
on Management's evaluation of the financial condition of the customer and
historical bad debt experience.
(H) COSTS AND ESTIMATED EARNINGS ON LONG-TERM CONTRACTS
Costs and estimated earnings on long-term contracts represent unbilled revenues,
including accrued profits, accounted for under the percentage-of-completion
method, net of progress billings.
(I) INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out) or market
value and have been reduced by an allowance for excess, slow-moving and obsolete
inventories. This estimated allowance is based on Management's review of
inventories on hand compared to historical usage and estimated future usage and
sales. Inventories under long-term contracts reflect accumulated production
costs, factory overhead, initial tooling and other related costs less the
portion of such costs charged to cost of sales and any unliquidated progress
payments. In accordance with industry practice, costs incurred on contracts in
progress include amounts relating to programs having production cycles longer
than one year, and a portion thereof will not be realized within one year.
(J) 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.
(K) GOODWILL AND OTHER LONG-LIVED ASSETS
Goodwill represents the excess of purchase costs over the fair value of net
identifiable assets acquired in business acquisitions. The Company accounts for
goodwill as required by Statement of Financial Accounting Standards (SFAS) 142,
"Goodwill and Other Intangible Assets." Management annually reviews goodwill and
other long-lived assets with indefinite useful lives for impairment annually or
whenever events or changes in circumstances indicate the carrying amount may not
be recoverable. If indicators of impairment are present, the determination of
the amount of impairment is based on Management's judgment of the discounted
future operating cash flows to be generated from these assets throughout their
estimated useful lives. Prior to fiscal 2002, goodwill was amortized over
periods ranging in periods from 20-30 years. Other intangible assets represent
costs allocated to identifiable intangible assets, principally patents and
technology rights. See Note 5 below regarding goodwill and other intangible
assets activity.
(L) 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 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.
(M) 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
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
all of the deferred tax assets will not be realized. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company regularly reviews its
deferred tax assets for recoverability and establishes a valuation allowance
when Management believes it is more likely than not such assets will not be
recovered, taking into consideration historical operating results, expectations
of future earnings, tax planning strategies, and the expected timing of the
reversals of existing temporary differences.
(N) 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.
Customer-sponsored research and development costs refer to certain situations
whereby customers provide funding to support specific contractually defined
research and development costs. As the Company incurs costs under these specific
funding contracts, the costs are "inventoried" until billed to the customer for
reimbursement, consistent with other program costs. Once billed/invoiced, these
costs are transferred to accounts receivable until the cash is received from the
customer. All research and development costs incurred in excess of the
contractual funding amount, or costs incurred outside the scope of the
contractual research and development project, are expensed as incurred.
(O) FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign operations are translated into
U.S. dollars in accordance with SFAS 52 "Foreign Currency Translation" (SFAS
52). The resulting translation adjustments are recorded as a separate component
of accumulated other comprehensive income.
(P) 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 vesting of performance shares by using the treasury stock
method.
The number of shares used in the calculation of earnings per share for each year
presented is as follows:
(In thousands) 2003 2002 2001
- -------------- ---- ---- ----
Weighted Average Shares Outstanding - Basic 12,675 12,511 12,382
Dilutive Options and Performance Shares 453 511 423
------ ------ ------
Adjusted Shares - Diluted 13,128 13,022 12,805
====== ====== ======
There were no options outstanding during the year ended September 30, 2003,
where the options' exercise price was greater than the average market price of
the common shares. Options to purchase 34,000 shares (at a per share price of
$35.93) and 12,500 shares (at per share prices of $25.18 - $27.28) were
outstanding during the years ended September 30, 2002 and 2001, 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 2013. Approximately
50,000, 91,000 and 181,000 performance shares were outstanding but unearned at
September 30, 2003, 2002 and 2001, respectively, and, therefore, were not
included in the respective years' computations of diluted EPS.
(Q) 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. In December 2002, the FASB issued SFAS 148, "Accounting for
Stock-Based Compensation Transition and Disclosure, an Amendment of SFAS 123,"
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the
32 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
method used on reported results. Under APB 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 2003, 2002 and
2001 consistent with the provisions of this Statement, the Company's net
earnings (loss) and net earnings (loss) per share would have been as shown in
the table below:
Pro forma (Unaudited)
(Dollars in thousands, except per share amounts) 2003 2002 2001
- ------------------------------------------------ ---- ---- ----
Net earnings (loss), as reported $ (41,138) 21,781 30,107
Less: total stock-based employee compensation expense
determined under fair value based methods, net of tax (1,942) (2,476) (702)
---------- --------- ---------
Pro forma net earnings (loss) (43,080) 19,305 29,405
========== ========= =========
Net earnings (loss) per share:
Basic-as reported (3.25) 1.74 2.43
Basic-pro forma (3.40) 1.54 2.37
Diluted-as reported (3.13) 1.67 2.35
Diluted-pro forma (3.28) 1.48 2.30
========== ========= =========
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 2003, 2002 and 2001, respectively: expected
dividend yield of 0% in all periods; expected volatility of 31.5%, 31.2% and
37.5%, risk-free interest rate of 3.9%, 3.6% and 4.6%, and expected life based
on historical exercise periods of 4.13 years, 4.25 years and 4.21 years.
The 2003 and 2002 performance share award grants were valued at the stock price
on the date of grant. No adjustments were made for the probability that
performance thresholds would not be met. In 2001, to determine the fair value of
performance share grants, the probability that performance thresholds 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% and an annualized
volatility of 37.9% in 2001.
(R) 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.
(S) ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS 133, "Accounting for Derivative Instruments and Hedging Activities" as
amended by SFAS 138 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. The Company has interest rate exposure
relating to floating rate obligations denominated in Euros, therefore, as of
September 30, 2003, $5.0 million of this debt is hedged by a fixed interest rate
swap entered into during fiscal 2001. The interest rate swap is accounted for as
a cash flow hedge under the provisions of SFAS 133 as of and for the year ended
September 30, 2003. A $0.1 million adjustment was recorded to other
comprehensive income during 2003 related to this swap. The Company paid off the
interest rate swaps relating to floating lease obligations and incurred a $2.6
million pretax charge during fiscal 2003 related to this extinguishment,
included in Other, net.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(T) DEFERRED INCOME
Deferred income represents the long-term portion of unearned income related to
the fiscal 2003 patent litigation settlement. The amount is being amortized into
income on a straight-line basis over the remaining patent life through 2011. The
current portion of approximately $0.5 million is classified in accrued expenses
on the Consolidated Balance Sheet.
(U) NEW ACCOUNTING STANDARDS
In December 2002, the FASB issued SFAS 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure, an Amendment of SFAS 123," which
provides alternative methods of transition for an entity that voluntarily
changes to the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The provisions of SFAS 148 are effective for
interim periods beginning after December 15, 2002. The Company has adopted the
provisions of SFAS 148.
In December 2002, the Emerging Issues Task Force issued EITF 00-21, "Revenue
Arrangements with Multiple Deliverables." This issue addresses certain aspects
of the accounting by a vendor for arrangements under which it will perform
multiple revenue-generating activities. In some arrangements, the different
revenue-generating activities (deliverables) are sufficiently separable, and
there exists sufficient evidence of their fair values to separately account for
some or all of the deliverables (that is, there are separate units of
accounting). This issue addresses when and, if so, how an arrangement involving
multiple deliverables should be divided into separate units of accounting. This
issue does not change otherwise applicable revenue recognition criteria. This
issue is applicable for revenue arrangements beginning in the fourth quarter of
fiscal 2003. The Company has adopted the provisions of EITF 00-21.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of ARB No. 51, which addresses
consolidation by business enterprises of variable interest entities. This
Interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among the parties involved. This Interpretation applies to
variable interest entities created after January 31, 2003. It applies in the
first fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. The Company consolidated the synthetic lease
obligation on July 1, 2003, the beginning of the Company's fourth fiscal
quarter. See further discussion in note 15 of notes to consolidated financial
statements.
In May 2003, the FASB issued SFAS 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity." SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Management does not believe the adoption
of this statement will have a material impact on the Company's financial
statements.
2 (Y) DISCONTINUED OPERATIONS
MICROFILTRATION AND SEPARATIONS BUSINESSES (MICROSEP)--
In July 2003, the Company announced its decision to sell the MicroSep businesses
in the Filtration/Fluid Flow segment, and therefore, these businesses are
recorded as discontinued operations beginning in the fourth quarter of fiscal
2003. Management changed its strategic direction related to its MicroSep
businesses based on an objective evaluation of the Company's market position and
competitive landscape for these businesses. Historically, the Company had
continued to make significant investments in the MicroSep businesses that were
required to improve its market position. After a
34 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
comprehensive review of the actions required to best position the Company to
meet its long-term objectives, Management decided to sell the MicroSep
businesses. These actions resulted in a pretax charge of $68.9 million,
including $48.8 million related to the write-off of goodwill and other
intangible assets. The charge was calculated based on the carrying value of the
MicroSep net assets compared to Management's estimate of the net proceeds
anticipated upon completion of the transaction. The estimate of net proceeds
anticipated was based on a review of similar transactions and discussions with
potential acquirers of these businesses. These businesses consist of PTI
Advanced Filtration Inc., located in Oxnard, California, PTI Technologies
Limited, located in Sheffield, England, and PTI S.p.A., located in Milan, Italy.
The MicroSep businesses represent approximately 20% of the Filtration/Fluid Flow
segment net sales. The MicroSep businesses are accounted for as a discontinued
operation in accordance with SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" (SFAS 144) and, accordingly, amounts in the
financial statements and related notes for all periods shown, reflect
discontinued operations presentation. The net sales from the MicroSep businesses
were $43.8 million, $41.4 million and $34.4 million for the years ended
September 30, 2003, 2002, and 2001, respectively. The major classes of
discontinued assets and liabilities related to the MicroSep businesses included
in the Consolidated Balance Sheet at September 30, 2003 and 2002 are as follows
(in thousands):
ASSETS: SEPTEMBER 30, 2003 September 30, 2002
- ------- ------------------ ------------------
Accounts receivable, net $10,728 10,463
Inventories 8,778 7,550
Current portion of deferred tax assets 1,379 710
Other current assets 755 1,019
------- -------
Current assets 21,640 19,742
------- -------
Net property, plant and equipment 9,096 12,350
Goodwill - 36,634
Deferred tax assets 7,493 (1,716)
Other assets 136 13,172
------- -------
Total assets of Discontinued Operations $38,365 80,182
======= =======
LIABILITIES:
Accounts payable $ 4,522 4,086
Accrued expenses and other current liabilities 4,875 3,036
------- -------
Current liabilities 9,397 7,122
------- -------
Other liabilities 8,115 7,834
------- -------
Total liabilities of Discontinued Operations $17,512 14,956
======= =======
RANTEC--
In February 2003, the Board of Directors approved the plan to dispose of the
Rantec Power Systems Inc. (Rantec). Rantec, a manufacturer of power supplies for
commercial and military applications, is located in Los Osos, California. Rantec
was previously reported in the "Other" segment. Effective April 11, 2003, the
Company completed the sale of Rantec to an entity owned by a group of investors
primarily comprised of the subsidiary's management. The Company received $6.0
million from the buyer at closing. A pretax gain of $1.6 million related to the
sale is reflected in the Company's fiscal 2003 results in discontinued
operations. Rantec is accounted for as a discontinued operation in accordance
with SFAS 144 and, accordingly, amounts in the financial statements and related
notes for all periods shown, reflect discontinued operations presentation. The
net sales from Rantec were $5.7 million, $11.4 million and $12.2 million for the
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
years ended September 30, 2003, 2002, and 2001, respectively. The major classes
of discontinued assets and liabilities included in the Consolidated Balance
Sheet at September 30, 2002 are as follows (in thousands):
ASSETS: September 30, 2002
- ------- ------------------
Accounts receivable, net $ 2,149
Inventories 1,588
Current portion of deferred tax assets 1,471
Other Current Assets 150
-------
Current assets 5,358
-------
Net property, plant and equipment 2,268
Deferred tax assets (24)
Other assets 130
-------
Total assets of Discontinued Operations $ 7,732
=======
LIABILITIES:
Accounts payable $ 864
Accrued expenses and other current liabilities 637
-------
Current liabilities 1,501
-------
Other liabilities 647
-------
Total liabilities of Discontinued Operations $ 2,148
=======
3 (Y) ACQUISITIONS
On December 31, 2002, the Company acquired the assets and certain liabilities of
Austin Acoustics Systems, Inc. (Austin Acoustics) for $4.0 million in cash.
Austin Acoustics is a leading supplier of noise control chambers for the test,
medical and broadcast/music industries. Austin Acoustics is headquartered in
Austin, TX and has annual sales of approximately $8.0 million. The assets,
liabilities and results of operations since the date of acquisition are included
within the Company's Test segment.
In March 2002, pursuant to a license agreement, the Company acquired the
exclusive rights to the patent portfolio and related intellectual property of
North Carolina Separations Research Technology Inc. and its affiliate (SRT), a
manufacturer of cross-flow filtration and separation modules and equipment. The
Company also acquired certain production assets and inventory of SRT. The
purchase price was $11.5 million of which the Company paid $9.5 million at
closing and additional consideration of $1.0 million was paid in March 2003 and
$0.9 million will be paid throughout fiscal year 2004. In October 2003, the
Company terminated its existing license with SRT. SRT is included in the
discontinued operations of the MicroSep businesses as a part of PTI Advanced
Filtration Inc. as discussed in note 2, above.
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 is
included in the discontinued operations of the MicroSep businesses as a part of
PTI S.p.A. as discussed in note 2, above.
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.
36 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4 (Y) ASSET IMPAIRMENTS
In May 2003, the Company committed to plans to close the Filtertek manufacturing
operation in Puerto Rico (Filtration/Fluid Flow segment). The manufacturing will
be moved to existing facilities in Hebron, Illinois and Juarez, Mexico. This
action resulted in a fiscal 2003 asset impairment charge of $4.3 million
consisting of a $3.5 million write down of the Puerto Rico facility to its
appraised value and a $0.8 million write down of machinery and equipment to
their estimated salvage value. Severance charges of $0.5 million are included
within SG&A expense and move costs of $0.4 million are included within Other,
net, in the fiscal 2003 results of operations related to the closure. The
closure of the Filtertek manufacturing operation in Puerto Rico will be
completed in fiscal 2004.
In May 2003, the Company committed to plans to restructure its Test operations
in the U.K. and centralize the management of the European Test operations. The
European consolidation resulted in a fiscal 2003 asset impairment charge of $0.2
million related to the write-off of leasehold improvements. The European
consolidation will be completed in fiscal 2004.
5 (Y) GOODWILL AND OTHER INTANGIBLE ASSETS
Management adopted the provisions of SFAS 142, "Goodwill and Other Intangible
Assets" effective October 1, 2001, the beginning of the Company's fiscal year
2002. 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 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." In addition, to the extent an
intangible asset is identified as having an indefinite useful life, the Company
is required to test the intangible asset for impairment in accordance with the
provisions of SFAS 142.
Included on the Company's Consolidated Balance Sheet at September 30, 2003 and
2002 are the following intangible assets gross carrying amounts and accumulated
amortization:
(Dollars in millions) 2003 2002
- --------------------- ---- ----
Goodwill:
Gross carrying amount $ 77.6 75.5
Less: accumulated amortization 8.9 8.9
------- ------
Net $ 68.7 66.6
======= ======
Intangible assets with determinable
lives: (included in Other
Assets)
Patents
Gross carrying amount $ 16.7 16.1
Less: accumulated amortization 11.2 10.1
------- ------
Net $ 5.5 6.0
======= ======
Other
Gross carrying amount $ 1.1 1.0
Less: accumulated amortization 0.6 0.5
------- ------
Net $ 0.5 0.5
======= ======
At September 30, 2003, the net goodwill balance of $68.7 million is comprised of
$39.6 million and $29.1 million related to the Filtration and Test segments,
respectively.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortization expense related to intangible assets with determinable lives was
$2.4 million and $1.6 million in 2003 and 2002, respectively. These assets,
primarily patents, are amortized over the life of the patents, generally 17
years. Estimated intangible assets amortization for each of the subsequent five
fiscal years is estimated at $2.4 million per year.
The following table presents a reconciliation of net earnings (loss) for the
fiscal year ended September 30, 2001, to reflect the removal of goodwill
amortization in accordance with SFAS 142, to be used for comparison purposes
with the fiscal year ended September 30, 2003:
(Dollars in thousands, except per share amounts) 2003 2002 2001
- ------------------------------------------------ ---- ---- ----
Reported net earnings $ (41,138) 21,781 30,107
Add back: Goodwill amortization, net of tax - - 1,872
---------- --------- ---------
Adjusted net earnings $ (41,138) 21,781 31,979
========== ========= =========
Earnings per share - Basic:
As Reported $ (3.25) 1.74 2.43
Goodwill amortization - - 0.15
---------- --------- ---------
Adjusted $ (3.25) 1.74 2.58
========== ========= =========
Earnings per share - Diluted:
As Reported $ (3.13) 1.67 2.35
Goodwill amortization - - 0.14
---------- --------- ---------
Adjusted $ (3.13) 1.67 2.49
========== ========= =========
Note: 2001 includes the tax gain related to the elimination of the valuation
allowance of $12.7 million, or $0.99 per share.
6 (Y) ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at September 30, 2003 and 2002:
(Dollars in thousands) 2003 2002
- ---------------------- ---- ----
Commercial $65,247 54,341
U. S. Government and prime contractors 4,132 2,543
------- -------
Total $69,379 56,884
======= =======
7 (Y) INVENTORIES
Inventories consist of the following at September 30, 2003 and 2002:
(Dollars in thousands) 2003 2002
- ---------------------- ---- ----
Finished goods $12,449 10,417
Work in process - including long-term contracts 14,611 12,393
Raw materials 21,372 20,631
------- -------
Total $48,432 43,441
======= =======
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8 (Y) PROPERTY, PLANT AND EQUIPMENT
Depreciation expense from continuing operations of property, plant and equipment
for the years ended September 30, 2003, 2002 and 2001 was $11.1 million, $9.3
million and $8.9 million, respectively.
During fiscal 2003, the Company repaid a $31.5 million obligation under a
synthetic lease facility, which had been accounted for as an operating lease for
GAAP purposes. This obligation was secured by three manufacturing locations, two
of which are located in Oxnard, CA, and the other in Cedar Park, TX, as well as
a $10.6 million letter of credit issued under the Company's $65 million credit
facility. The net book value of the property, plant and equipment consolidated
under the synthetic lease obligation was approximately $29.3 million.
Approximately $11.5 million of the $29.3 million was related to the MicroSep
businesses. As part of the divestiture described in note 2, the MicroSep assets
were written down to estimated net realizable value and are included in the
asset amounts in note 2.
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, 2003, 2002 and 2001 was $6.1 million, $5.3 million
and $5.4 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, 2003 are:
(Dollars in thousands) Years ending September 30:
---------------------- --------------------------
2004 $ 4,693
2005 3,888
2006 2,930
2007 2,376
2008 and thereafter 3,332
-------
Total $17,219
=======
9 (Y) INCOME TAX EXPENSE (BENEFIT)
Total income tax expense (benefit) for the years ended September 30, 2003, 2002
and 2001 was allocated as follows:
(Dollars in thousands) 2003 2002 2001
-------- -------- --------
Income tax expense (benefit) from continuing operations $ 16,625 13,400 (3,375)
Discontinued operations (including establishment
of valuation allowance in 2003) (9,576) (552) 541
Tax impact of cumulative effect of accounting change (842) - -
-------- -------- --------
Total income tax expense (benefit) $ 6,207 12,848 (2,834)
======== ======== ========
For the year ended September 30, 2003, pretax earnings (loss) related to United
States (U.S.) and foreign tax jurisdictions were $(22.2) million and $(12.7)
million, respectively. For the year ended September 30, 2002, pretax earnings
related to U.S. and foreign tax jurisdictions were $27.2 million and $7.4
million, respectively. For the year ended September 30, 2001, pretax earnings
related to U.S. and foreign tax jurisdictions were $21.7 million and $5.6
million, respectively.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The principal components of income tax expense (benefit) from continuing
operations for the years ended September 30, 2003, 2002 and 2001 consist of:
(Dollars in thousands) 2003 2002 2001
------- ------- -------
Federal:
Current (including Alternative Minimum Tax) $ 3,407 1,366 451
Deferred (including elimination of valuation allowance in 2001) 9,869 7,880 (5,880)
State and local:
Current 1,982 2,433 861
Deferred 162 (150) -
Foreign:
Current 1,099 1,375 1,298
Deferred 106 496 (105)
------- ------- -------
Total $16,625 13,400 (3,375)
======= ======= =======
The actual income tax expense (benefit) from continuing operations for the years
ended September 30, 2003, 2002 and 2001 differs from the expected tax expense
for those years (computed by applying the U.S. Federal corporate statutory rate)
as follows:
2003 2002 2001
---- ---- ----
Federal corporate statutory rate 35.0% 35.0% 35.0%
Change in tax valuation allowance:
Utilization of capital loss carryforward - - (2.5)
Elimination of valuation allowance - - (45.8)
State and local, net of Federal benefits 3.1 3.1 3.2
Foreign (0.8) (3.6) (3.6)
Other, net 1.1 2.0 1.6
---- ---- ----
Effective income tax rate 38.4% 36.5% (12.1)%
==== ==== ====
40 ESCO TECHNOLOGIES 2003 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, 2003 and 2002 are
presented below. Net deferred tax assets of $8.9 million and $0.4 million are
applicable to discontinued operations for September 20, 2003 and 2002,
respectively. A valuation allowance in 2003 of $3.5 million has been established
against certain deferred tax assets applicable to discontinued operations.
(Dollars in thousands) 2003 2002
-------- --------
Deferred tax assets:
Inventories, long-term contract accounting,
contract cost reserves and others $ 4,841 7,163
Pension and other postretirement benefits 5,569 5,031
Net operating loss carryforward 29,293 36,813
Other compensation-related costs and other cost accruals 15,083 7,992
-------- --------
Total deferred tax assets 54,786 56,999
Deferred tax liabilities:
Plant and equipment, depreciation methods,
acquisition asset allocations, and other (1,647) (7,267)
-------- --------
Net deferred tax asset before valuation allowance 53,139 49,732
Less valuation allowance (3,462) -
-------- --------
Net deferred tax assets 49,677 49,732
Less deferred tax asset--discontinued operations (8,872) (441)
-------- --------
Net deferred tax assets excluding discontinued operations $ 40,805 49,291
======== ========
Net deferred tax assets are classified in the Consolidated Balance Sheets as set
forth below. The current portion of the net deferred tax assets associated with
discontinued operations was $1.4 million and $2.2 million in 2003 and 2002,
respectively. The noncurrent portion of the net deferred tax assets
(liabilities) associated with discontinued operations was $7.5 million and
$(1.7) million for 2003 and 2002, respectively.
(Dollars in thousands) 2003 2002
------- -------
Current portion of deferred tax assets $25,566 22,782
Deferred tax assets (non-current) 24,111 26,950
------- -------
Net deferred tax assets 49,677 49,732
Less current deferred tax assets--discontinued operations 1,379 2,181
Less deferred tax assets (liabilities)--discontinued operations noncurrent 7,493 (1,740)
------- -------
Net deferred tax assets excluding discontinued operations $40,805 49,291
======= =======
Management believes that, based on the Company's historical pretax income
together with the projection of future taxable income, and after consideration
of the valuation allowance, it is more likely than not that the Company will
realize the benefits of the net deferred tax assets existing at September 30,
2003. In order to realize this net deferred tax asset, the Company will need to
generate future taxable income of approximately $117 million, of which $84
million is required to be realized prior to the expiration of the NOL
carryforward, of which $29 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 NOL carryforward may be used to reduce future Federal income tax cash
payments.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended September 30, 2003 the Company established a valuation
allowance against certain deferred tax assets associated with its discontinued
operations. A valuation allowance of $3.5 million was established against
certain deferred tax assets associated with the Company's stock holdings in PTL
and PTB, as the disposition of such assets in 2004 is expected to generate a
loss which may not be realized in future periods.
During 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. As a
result, the valuation reserve of $10.8 million maintained for the full value of
the deferred tax asset related to the capital loss carryforward was eliminated
in 2001. There was no impact to the Company's results of operations in 2001 as a
result of this event.
Also during 2001, the Company eliminated its remaining net deferred tax
valuation allowance of $12.7 million, which was the valuation allowance
representing the amount of the deferred tax asset associated with temporary
differences and NOLs which, prior to September 30, 2001, Management believed
would likely not be realized due to limitations on future use. Management
concluded in years prior to 2001, that the valuation allowance set forth in
prior period financial statements was appropriate based on the following
factors:
(1) The Company had a lengthy history of cumulative tax losses (NOL
carryforwards of $138 million at September 30, 2002), including the
addition of $11.6 million and $39.6 million of NOLs in the then recent
fiscal years ended September 30, 1998 and 1999, respectively;
(2) The Company's divestiture of Systems & Electronics Inc. on September 30,
1999 transformed the Company from primarily a defense-oriented business to
primarily a commercial and industrial manufacturing business, and the
Company had not yet established a record of positive tax earnings;
(3) The Company had not fully integrated the operations of its three recent
commercial acquisitions (Holaday, Lindgren, and Eaton space products) and
could not reasonably project the tax or earnings impact of these
acquisitions with respect to its newly transformed business base; and
(4) The Company was operating in commercial industries that, in 2000, were
beginning to experience economic contraction in an environment that was
beginning to show signs of a slowdown.
Based on these factors, Management concluded that the valuation allowance
recorded in the September 30, 2000 (and earlier) financial statement was
appropriate, and supported Management's belief, at the time, that it was more
likely than not that the deferred tax asset may not be realized.
At the end of 2001, Management concluded that it was more likely than not that
it would realize the benefits of the deferred tax assets existing at September
30, 2001, and therefore, eliminated the existing deferred tax valuation
allowance. Management concluded that the elimination of the valuation allowance
was appropriate based on the following factors:
(1) The Company had completed its second year of operations as a commercial and
industrial manufacturer, and had successfully integrated its prior year
acquisitions into their respective operating segments;
(2) The Company's financial projections, which incorporated the current
operating structure and acquisitions, provided Management with reasonable
assurance that taxable income in future years would be sufficient to fully
utilize the tax NOL carryforwards prior to their expiration;
(3) The Company had two consecutive years of positive, and increasing, taxable
income, which provided Management with assurance that a positive trend in
taxable earnings was being established, and that significant future tax
operating losses were unlikely; and
(4) During 2001, the Company experienced a substantial increase in the
operating contribution of its Communications segment resulting from the
rapidly expanding market for the Company's AMR equipment.
42 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Based on these factors, Management eliminated the $12.7 million deferred tax
asset valuation allowance at September 30, 2001 as a credit to its 2001 income
tax expense.
No deferred taxes have been provided on the accumulated unremitted earnings of
the Company's foreign subsidiaries as of September 30, 2003. The Company's
intention is to reinvest these earnings indefinitely. In the event these foreign
entities' earnings were distributed, it is estimated that U.S. taxes, net of
available foreign tax credits, of approximately $7.1 million would be due, which
would correspondingly reduce the Company's net earnings and net operating loss
carryforward.
10 (Y) Debt
Long-term debt consists of the following at September 30, 2003 and 2002:
(Dollars in thousands) 2003 2002
------- -------
Long-term borrowings under the revolving credit facility $ - -
Other debt 633 659
Less current maturities of long--term debt (143) (121)
------- -------
Long-term debt-continuing operations $ 490 538
------- -------
Long-term debt under the revolving credit facility-discontinued operations $ 8,018 7,739
======= =======
Effective September 5, 2003, the Company amended its existing revolving credit
facility to allow for the announced divestiture of its Microfiltration and
Separations businesses as well as the repayment of the Company's $31.5 million
synthetic lease facility. The credit facility continues to have $5 million
annual reductions, a $25 million increase option through April 11, 2004 and a
final maturity and expiration of April 11, 2005. As of September 30, 2003, the
Company had not exercised the $25 million increase option and the revolving line
of credit was $65 million. The credit facility is available for direct
borrowings and/or the issuance of letters of credit, and is provided by a group
of five banks, led by Bank of America as agent.
At September 30, 2003, the Company had approximately $43.7 million available to
borrow under the credit facility in addition to its $31.3 million cash on hand.
Against the $65 million available under the revolving credit facility at
September 30, 2003, the Company had $10 million of short-term borrowings, $8.0
million of outstanding long-term borrowings related to PTB and included in other
liabilities from discontinued operations, and outstanding letters of credit of
$3.3 million.
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, 2003, the Company was in compliance with all bank covenants.
Long-term borrowings under the revolving credit facility were $8.0 million and
$7.7 million at September 30, 2003 and 2002, respectively, and relate to
discontinued operations. The $8.0 million of long-term borrowings are due on
April 11, 2005. Short-term borrowings under the credit facility were $10.0
million and $0 as of September 30, 2003 and 2002, respectively. During 2003 and
2002, the maximum aggregate short-term borrowings at any month-end were $10.0
million and $0.6 million, respectively; the average aggregate short-term
borrowings outstanding based on month-end balances were $0.8 million and $0.1
million, respectively; and the weighted average interest rates were 1.78% in
2003, 4.8% in 2002 and 6.4% in 2001. The letters of credit issued and
outstanding under the credit facility totaled $3.3 million and $12.5 million at
September 30, 2003 and 2002, respectively.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11 (Y) CAPITAL STOCK
The 13,933,193 and 13,601,095 common shares as presented in the accompanying
Consolidated Balance Sheets at September 30, 2003 and 2002 represent the actual
number of shares issued at the respective dates. The Company held 1,105,052 and
1,067,046 common shares in treasury at September 30, 2003 and 2002,
respectively.
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.
Information regarding stock options awarded under the option plans is as
follows:
FY2003 FY2002 FY2001
------------------------- ------------------------- -------------------------
ESTIMATED Estimated Estimated
SHARES AVG. PRICE Shares Avg. Price Shares Avg. Price
---------- ----------- ---------- ----------- ---------- -----------
October 1, 1,039,538 $ 19.58 796,648 $ 12.60 792,699 $ 10.62
Granted 44,500 $ 34.76 437,500 $ 28.64 175,250 $ 18.65
Exercised (300,937) $ 15.93 (191,608) $ 11.20 (151,298) $ 9.18
Cancelled (18,505) $ 26.31 (3,002) $ 22.89 (20,003) $ 12.91
---------- ----------- ---------- ----------- ---------- -----------
September 30, 764,596 $ 21.77 1,039,538 $ 19.58 796,648 $ 12.60
At September 30,
Reserved for future grant 231,198 111,014 342,063
Exercisable 431,225 $ 17.19 366,406 $ 11.89 370,854 $ 10.72
========== =========== ========== =========== ========== ===========
The weighted-average fair value of stock options granted in 2003, 2002, and 2001
was $14.01, $14.02, and $8.37, respectively.
Summary information regarding stock options outstanding at September 30, 2003 is
presented below:
Options Outstanding
----------------------------------------------------------
Number Weighted-Average Weighted
Range of Outstanding at Remaining Average
Exercise Prices September 30, 2003 Contractual Life Exercise Price
------------------ ---------------- --------------
$6.17 - $7.37 20,640 3.0 years $ 6.33
$9.14 - $12.91 183,586 5.4 years $ 11.04
$14.19 - $19.22 132,260 6.4 years $ 17.22
$21.44 - $27.28 169,281 7.9 years $ 24.94
$29.04 - $36.33 258,829 9.0 years $ 30.87
------- --------- ---------
764,596 7.3 years $ 21.77
======= ========= =========
44 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Exercisable Options Outstanding
-----------------------------------------
Range of Number Exercisable at Weighted Average
Exercise Prices September 30, 2003 Exercise Price
--------------------- ----------------
$6.17 - $7.37 20,640 $6.33
$9.14 - $12.91 183,586 $11.04
$14.19 - $19.22 97,829 $17.22
$21.44 - $35.93 129,170 $27.64
------- -------
431,225 $17.19
======= =======
The options have a ten-year contractual life from date of issuance, expiring in
various periods through 2013.
In August 2003, the Company extended its previously authorized (February 2001)
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, 2004. The Company repurchased 42,881, 127,100 and 76,700 shares in
2003, 2002 and 2001, respectively.
During 2001, the Board of Directors authorized and the shareholders approved,
the 2001 Stock Incentive Plan, which states, in part, that on February 8, 2001
and on each October 1 thereafter, through October 1, 2004, there shall be added
to the authorized shares allocated the lesser of (i) 1% of the total outstanding
shares as of each such date, or (ii) 125,000 shares which may be used for the
grant of stock options, stock appreciation rights, performance share awards or
restricted stock. In addition, the Company may, in its discretion, use shares
held in the Treasury in lieu of authorized but unissued shares.
At September 30, 2003, the maximum number of performance shares available for
issue under the 2001 Stock Incentive Plan was 532,814 shares. As of September
30, 2003, 413,867 have been awarded and 278,733 shares have been earned.
Compensation expense related to these awards was $1.8 million and $2.4 million
in 2003 and 2002, respectively. These shares vest over five years with
accelerated vesting over three years if certain performance targets are
achieved.
See note 1(q) of notes to consolidated financial statements for a discussion of
SFAS 148 and related disclosures.
12 (Y) 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 noncontributory. The annual contributions to
retirement plans equal or exceed the minimum funding requirements of the
Employee Retirement Income Security Act or applicable local regulations.
Subsequent to September 30, 2003, the Company announced several changes to
certain of its employee benefit plans. Previously, the Company's employees were
covered by a variety of plans and the purpose of these changes is to harmonize
benefit programs throughout the Company's domestic operations. These changes are
not expected to have a material adverse effect on the results of operations in
2004 or in future periods.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic benefit cost for the years ended September 30, 2003, 2002 and 2001
is comprised of the following:
(Dollars in millions) 2003 2002 2001
---- ---- ----
Defined benefit plans:
Service cost $1.9 1.7 1.4
Interest cost 2.9 2.7 2.5
Expected return on plan assets (3.0) (3.0) (3.0)
Amortization of service costs 0.1 0.1 0.1
Net actuarial gain 0.2 (0.1) (0.5)
Curtailment charge 0.4 - -
---- ---- ----
Net periodic benefit cost 2.5 1.4 0.5
Defined contribution plans 0.4 0.6 0.7
---- ---- ----
Total $2.9 2.0 1.2
==== ==== ====
The Company recognized a curtailment charge in 2003 as a result of a change in
plan benefits and the sale of Rantec in April 2003.
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 $41.0 million, $41.0 million and $28.7
million, respectively, as of September 30, 2003. 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 $42.9 million, $35.3 million and $26.9 million, respectively,
as of September 30, 2002.
The net benefit obligation of the Company's defined benefit pension plans as of
September 30, 2003 and 2002 is shown below:
(Dollars in millions) 2003 2002
----- -----
Change in benefit obligation --
Net benefit obligation at beginning of year $42.9 36.5
Service cost 1.9 1.7
Interest cost 2.9 2.7
Plan amendments - -
Actuarial loss 3.2 3.0
Curtailment (8.6) -
Gross benefits paid (1.3) (1.0)
----- -----
Net benefit obligation at end of year $41.0 42.9
===== =====
The plan assets of the Company's defined benefit pension plans at September 30,
2003 and 2002 are shown below:
(Dollars in millions) 2003 2002
----- -----
Change in plan assets:
Fair value of plan assets at beginning of year $26.9 28.1
Actual return on plan assets 3.0 (2.6)
Employer contributions 0.1 2.4
Gross benefits paid (1.3) (1.0)
----- -----
Fair value of plan assets at end of year $28.7 26.9
===== =====
Pension plan assets consist principally of marketable securities including
common stocks, bonds, and interest-bearing deposits.
46 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's defined benefit pension plans recognized the following net amounts
at September 30, 2003 and 2002:
(Dollars in millions) 2003 2002
----- -----
Funded status at end of year $(12.3) (16.0)
Unrecognized prior service cost - 0.4
Unrecognized net actuarial loss 7.0 12.7
----- -----
Accrued benefit cost $(5.3) (2.9)
----- -----
Amounts recognized in the Balance Sheet consist of:
Prepaid benefit cost $ - 0.1
Accrued benefit cost (5.3) (3.0)
Additional minimum liability (7.0) (5.6)
Intangible asset - 0.4
Accumulated other comprehensive income (before tax effect) 7.0 5.2
----- -----
Accrued benefit liability (Included in Other liabilities) $(5.3) (2.9)
===== =====
The benefit obligations of the defined benefit plans as of September 30, 2003
and 2002 were based on discount rates of 6% and 6.75%, respectively, and an
assumed rate of increase in compensation levels of 4% and 4.5% in 2003 and 2002.
The 2003, 2002 and 2001 pension expense for the defined benefit plans was based
on a 6.75%, 7.25% and 7.75% discount rate, respectively, a 4.5% increase in
compensation levels in all three years, and a 8.5%, 9% and 9.5% 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:
(Dollars in millions) 2003 2002 2001
----- ---- ----
Service cost $ - - -
Interest cost 0.1 0.1 0.1
Net amortization and deferral (0.2) (0.2) (0.2)
Settlement charge (2.2) - -
----- ---- ----
Net periodic postretirement benefit cost $(2.3) (0.1) (0.1)
===== ==== ====
The Company recognized a settlement charge in 2003 as a result of a change in
plan benefits and the sale of Rantec in April 2003.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net benefit obligation for postretirement benefits at September 30, 2003 and
2002 is shown below:
(Dollars in millions) 2003 2002
--------- ---------
Net benefit obligation at beginning of year $ 1.3 1.7
Service cost -- --
Interest cost 0.1 0.1
Plan participant contributions 0.1 --
Actuarial (gain) loss (0.1) (0.4)
Settlements (0.7) --
Gross benefits paid (0.2) (0.1)
--------- ---------
Net benefit obligation at end of year $ 0.5 1.3
========= =========
The plan assets for postretirement benefits at September 30, 2003 and 2002 are
shown below:
(Dollars in millions) 2003 2002
--------- ---------
Fair value of plan assets at beginning of year $ -- --
Employer contributions 0.1 0.1
Plan participant contributions 0.1 --
Gross benefits paid (0.2) (0.1)
--------- ---------
Fair value of plan assets at end of year $ -- --
========= =========
The Company recognized the following accrued benefit liabilities for
postretirement benefits at September 30, 2003 and 2002:
(Dollars in millions) 2003 2002
--------- ---------
Funded status at end of year $ (0.5) (1.3)
Unrecognized prior service cost -- --
Unrecognized net actuarial (gain) loss (1.5) (3.2)
--------- ---------
Accrued benefit costs $ (2.0) (4.5)
--------- ---------
Amounts recognized in the Balance Sheet consist of --
Accrued benefit liability (Included in Other liabilities) $ (2.0) (4.5)
========= =========
The net benefit obligations of the postretirement benefit plans as of September
30, 2003 and 2002 were based on discount rates of 6% and 6.75%, respectively.
The September 30, 2003 net benefit obligation was based on a health care cost
trend of 10% for fiscal 2003, decreasing 1% per year to 5% in fiscal 2008. The
September 30, 2002 net benefit obligation was based on a health care cost trend
of 11% for fiscal 2002, decreasing 1% per year to 5% in fiscal 2008. A 1%
increase in the health care cost trend rate for each year would increase the
September 30, 2003 net benefit obligation by approximately $6,000, while a 1%
decrease in the health care cost trend rate for each year would decrease the
September 30, 2003 net benefit obligation by approximately $7,500.
The fiscal 2003, 2002 and 2001 net periodic benefit costs were based on discount
rates of 6.75%, 7.25% and 7.75%, respectively. The net periodic benefit cost was
based on an assumed health care cost trend of 10% for 2003 decreasing 1% per
year to 5% in fiscal 2008, 11% for 2002 decreasing 1% per year to 5% in fiscal
2008 and 5.5% for 2001. 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 2003 net periodic benefit cost by approximately $200,
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 2003 net periodic benefit cost by approximately $500.
48 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13 (Y) OTHER FINANCIAL DATA
Items charged to operations during the years ended September 30, 2003, 2002 and
2001 included the following:
(Dollars in thousands) 2003 2002 2001
------- ------- -------
Maintenance and repairs $ 3,895 3,703 3,988
Salaries and wages (including fringes) 88,968 79,764 77,431
======= ======= =======
Research and development (R&D) costs:
Company-sponsored $10,978 11,876 8,416
Customer-sponsored 7,067 6,017 4,774
------- ------- -------
Total R&D $18,045 17,893 13,190
Other engineering costs 6,694 5,927 8,478
------- ------- -------
Total R&D and other engineering costs $24,739 23,820 21,668
As a % of net sales 6.2% 7.5% 7.3%
======= ======= =======
The increase in salaries and wages in 2003 compared to 2002 and 2001 is mainly
due to the Company's acquisition activities and the addition of personnel within
the Communications segment.
Customer-sponsored R&D is defined in note 1(n) of notes to consolidated
financial statements.
Accrued expenses included accrued employee compensation of $9.7 million and $8.6
million at September 30, 2003 and 2002, respectively. Other liabilities include
accrued benefit liabilities related to the Company's defined benefit pension
plans, accrued benefit liabilities related to the Company's postretirement
benefits, miscellaneous tax liabilities, and liabilities related to the
Company's cash flow hedges, discussed earlier.
14 (Y) BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in three segments:
Filtration/Fluid Flow, Communications and Test. Filtration/Fluid Flow continuing
operations consist of: Filtertek Inc. (Filtertek), PTI Technologies Inc. (PTI)
and VACCO Industries. The Microfiltration and Separations businesses consisting
of PTI Advanced Filtration Inc. (PTA), PTI Technologies Limited (PTL) and PTI
S.p.A. (PTB) are accounted for as discontinued operations, therefore, the
operating results of these entities are not included in the tables below.
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. PTI and VACCO develop and manufacture a wide
range of filtration products and are leading suppliers of filters to the
commercial and defense aerospace, satellite and industrial markets.
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 Technologies, L.L.C., a provider of
digital video security systems. Test segment operations represent the EMC Group,
consisting of EMC Test Systems, L.P. (ETS) and Lindgren RF Enclosures, Inc.
(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. Accounting policies of the segments are the same as those
described in the summary of significant accounting policies in Note 1 to the
Consolidated Financial Statements.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In accordance with SFAS 131, the Company evaluates the performance of its
operating segments based on EBIT, which is defined as: Earnings Before Interest
and Taxes. 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.
NET SALES
Year ended September 30,
(Dollars in millions) 2003 2002 2001
--------- --------- ---------
Filtration/Fluid Flow $ 164.1 151.5 153.7
Communications 142.3 94.6 59.1
Test 90.3 70.5 85.5
--------- --------- ---------
Consolidated totals $ 396.7 316.6 298.3
========= ========= =========
Sales to PPL represented $63.9 million, or 16% of the total net sales in 2003.
No other customers exceeded 10% of net sales in the periods presented.
EBIT
Year ended September 30,
(Dollars in millions) 2003 2002 2001
--------- --------- ---------
Filtration/Fluid Flow $ 14.7 16.6 14.0
Communications 30.0 21.0 11.9
Test 5.3 3.6 7.5
Reconciliation to consolidated totals (Corporate) (6.9) (4.8) (5.9)
--------- --------- ---------
Consolidated EBIT 43.1 36.4 27.5
Plus: interest income 0.2 0.3 0.2
--------- --------- ---------
Earnings before income tax $ 43.4 36.7 27.7
========= ========= =========
IDENTIFIABLE ASSETS
As of September 30,
(Dollars in millions) 2003 2002 2001
--------- --------- ---------
Filtration/Fluid Flow $ 155.5 141.8 144.8
Communications 42.4 31.2 22.4
Test 76.0 59.6 62.3
Reconciliation to consolidated totals (Corporate assets) 81.1 87.2 70.3
Reconciliation to consolidated totals (Discontinued operations) 38.4 87.9 75.8
--------- --------- ---------
Consolidated totals $ 393.4 407.7 375.6
========= ========= =========
Corporate assets consist primarily of deferred taxes and cash balances.
CAPITAL EXPENDITURES
Year ended September 30,
(Dollars in millions) 2003 2002 2001
--------- --------- ---------
Filtration/Fluid Flow $ 6.8 7.9 7.5
Communications 3.0 0.8 0.8
Test 0.7 0.7 1.1
Other 0.1 0.2 0.1
--------- --------- ---------
Consolidated totals $ 10.6 9.6 9.5
========= ========= =========
50 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GEOGRAPHIC INFORMATION
Net sales to customers
(Dollars in millions) 2003 2002 2001
---------- ---------- ----------
North America $ 322.0 252.9 248.6
Europe 42.4 38.7 29.5
Far East 16.6 11.9 11.8
Other 15.7 13.1 8.4
---------- ---------- ----------
Consolidated totals $ 396.7 316.6 298.3
========== ========== ==========
Long-lived Assets
(Dollars in millions) 2003 2002 2001
---------- ---------- ----------
North America $ 60.7 44.6 45.4
Europe 10.4 9.3 7.6
Far East 0.1 -- --
---------- ---------- ----------
Consolidated totals $ 71.2 53.9 53.0
========== ========== ==========
Net sales are attributed to countries based on location of customer. Long-lived
assets are attributed to countries based on location of the asset.
15 (Y) Accounting Change
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," an interpretation of ARB No. 51, which addresses
consolidation by business enterprises of variable interest entities. The Company
adopted this Interpretation during the fiscal 2003 fourth quarter and
consolidated the synthetic lease obligation, resulting in a $1.4 million
after-tax charge recorded as a cumulative effect of accounting change. Also,
during the fiscal 2003 fourth quarter, the Company fully repaid the $31.5
million synthetic lease obligation.
16 (Y) Commitments and Contingencies
At September 30, 2003, the Company had $3.3 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.
With respect to claims and litigation asserted or commenced against the Company,
it is the opinion of Management, that 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.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17(Y)QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(Dollars in thousands, First Second Third Fourth Fiscal
except per share amounts) Quarter Quarter Quarter Quarter Year
---------- ---------- ---------- ---------- ----------
2003
Net sales $ 98,289 101,996 90,794 105,608 396,687
Net earnings from continuing operations 8,474 7,338 4,451 6,475 26,738
Net loss from discontinued operations (1,922) (1,707) (296) (62,532) (66,457)
Cumulative effect of accounting change, net of tax -- -- -- (1,419) (1,419)
---------- ---------- ---------- ---------- ----------
Net earnings (loss) 6,552 5,631 4,155 (57,476) (41,138)
Basic earnings (loss) per share:
Net earnings from continuing operations .68 .58 .35 .50 2.10
Net loss from discontinued operations (.15) (.13) (.02) (4.88) (5.24)
Cumulative effect of accounting change, net of tax -- -- -- (.11) (.11)
---------- ---------- ---------- ---------- ----------
Net earnings (loss) .53 .45 .33 (4.49) (3.25)
Diluted earnings (loss) per share:
Net earnings from continuing operations .65 .56 .34 .49 2.04
Net loss from discontinued operations (.15) (.13) (.02) (4.71) (5.06)
Cumulative effect of accounting change, net of tax -- -- -- (.11) (.11)
---------- ---------- ---------- ---------- ----------
Net earnings (loss) $ .50 .43 .32 (4.33) (3.13)
========== ========== ========== ========== ==========
2002
Net sales $ 71,586 75,194 81,622 88,209 316,611
Net earnings from continuing operations 4,905 5,274 6,066 7,092 23,335
Net loss from discontinued operations (132) (81) (329) (1,014) (1,554)
---------- ---------- ---------- ---------- ----------
Net earnings 4,773 5,193 5,737 6,078 21,781
Basic earnings per share:
Net earnings (loss) from continuing operations .40 .42 .48 .56 1.86
Net loss from discontinued operations (.01) (.01) (.03) (.08) (.12)
---------- ---------- ---------- ---------- ----------
Net earnings .39 .41 .45 .48 1.74
Diluted earnings (loss) per share:
Net earnings from continuing operations .38 .40 .46 .54 1.79
Net loss from discontinued operations (.01) (.01) (.03) (.08) (.12)
---------- ---------- ---------- ---------- ----------
Net earnings $ .37 .39 .43 .46 1.67
========== ========== ========== ========== ==========
The 2003 and 2002 financial information presented above include the results of
the MicroSep businesses and Rantec as discontinued operations. The 2003 fourth
quarter results reflect the pretax impact of the interest rate swap charge of
$2.6 million, the $1.3 million pretax gain related to the MSA settlement, and
the $1.4 million after-tax cumulative effect of the accounting change related to
the adoption of FASB Interpretation No 46.
52 ESCO TECHNOLOGIES 2003 annual report
MANAGEMENT'S STATEMENT OF FINANCIAL RESPONSIBILITY
The Company's Management is responsible for the fair presentation of ESCO's
financial statements in accordance with accounting principles generally accepted
in the United States of America, and for their integrity and accuracy.
Management is confident that its financial and business processes provide
accurate information on a timely basis.
Management, with the oversight of ESCO's Board of Directors, has established and
maintains a strong ethical climate in which the Company's affairs are conducted.
Management also has established an effective system of internal controls that
provide reasonable assurance as to the integrity and accuracy of the financial
statements, and responsibility for the Company's assets. KPMG LLP, the Company's
independent accountants, reports directly to the Audit Committee of the Board of
Directors. The Audit Committee has established policies consistent with newly
enacted corporate reform laws for auditor independence. In accordance with
corporate governance listing requirements of the New York Stock Exchange:
- - A majority of Board members are independent of the Company and its
Management
- - All members of the key Board committees-the Audit and Finance, and the
Human Resources, Ethics and Compensation Committees-are independent
- - The independent members of the Board have begun to meet regularly without
the presence of Management
- - The Company has a clear code of ethics and conflict of interest policy to
ensure that key corporate decisions are made by individuals who do not have
a financial interest in the outcome separate from their interest as company
officials
- - The charters of the Board committees clearly establish their respective
roles and responsibilities
- - The Company has an ethics officer and an ombudsman hot line available to
all domestic employees
ESCO has a strong financial team, from its executive leadership to
each of its individual contributors. Management monitors compliance with its
financial policies and practices over critical areas including internal
controls, financial accounting and reporting, accountability, and safeguarding
of its corporate assets. The internal audit control function maintains oversight
over the key areas of the business and financial processes and controls, and
reports directly to the Audit Committee. Additionally, all employees are
required to adhere to the ESCO Code of Business Conduct that is monitored by the
ethics officer.
Management is dedicated to ensuring that the standards of financial accounting
and reporting that are established are maintained. ESCO's culture demands
integrity and a commitment to strong internal practices and policies.
The consolidated financial statements have been audited by KPMG LLP, whose
report appears on the following page.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 53
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, 2003 and 2002, 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, 2003.
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, 2003 and 2002, and the results of
their operations and their cash flows for each of the years in the three-year
period ended September 30, 2003, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in note 5 of the notes to consolidated financial statements, in
fiscal year 2002, the Company adopted Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets."
As discussed in note 15 of the notes to consolidated financial statements, on
July 1, 2003, the Company adopted FASB Interpretation No. 46, "Consolidation of
Variable Interest Entities."
/s/ KMPG LLP
St. Louis, Missouri
November 17, 2003
54 ESCO TECHNOLOGIES 2003 ANNUAL REPORT
FIVE-YEAR FINANCIAL SUMMARY
(Dollars in millions, except per share amounts) 2003(1) 2002(2) 2001(3) 2000(4) 1999(5)
---------- ---------- ---------- ---------- ----------
For years ended September 30:
Net sales $ 396.7 316.6 298.3 253.9 345.8
Net earnings from continuing operations 26.7 23.3 31.1 16.6 53.8
Net earnings (loss) from discontinued operations (66.5) (1.6) (1.0) .2 (3.3)
Net earnings (loss) before accounting change (39.7) 21.8 30.1 16.8 50.5
Net earnings (loss) (41.1) 21.8 30.1 16.8 25.4
Earnings (loss) per share:
Basic:
Continuing operations 2.10 1.86 2.51 1.35 4.36
Discontinued operations (5.24) (0.12) (0.08) 0.02 (0.27)
Cumulative effect of accounting change, net of tax (0.11) -- -- -- (2.03)
---------- ---------- ---------- ---------- ----------
Net earnings (loss) (3.25) 1.74 2.43 1.37 2.06
Diluted:
Continuing operations 2.04 1.79 2.43 1.31 4.26
Discontinued operations (5.06) (0.12) (0.08) 0.02 (0.26)
Cumulative effect of accounting change, net of tax (0.11) -- -- -- (1.98)
---------- ---------- ---------- ---------- ----------
Net earnings (loss) (3.13) 1.67 2.35 1.33 2.02
As of September 30:
Working capital 120.5 112.6 87.4 62.8 95.3
Total assets 393.4 407.7 375.6 331.1 378.4
Long-term debt 0.5 0.5 0.6 0.6 41.0
Shareholders' equity 275.4 306.3 287.3 259.4 248.7
(1) Includes the acquisition of Austin Acoustics. (See note 3 of notes to
consolidated financial statements).
(2) Includes the acquisition of SRT, which is accounted for as a discontinued
operation. (See notes 2 and 3 of notes to consolidated financial
statements).
(3) Includes the acquisition of Bea, which is accounted for as a discontinued
operation. (See notes 2 and 3 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.
(4) Includes the acquisitions of Lindgren, Holaday, and Eaton Space Products
and the sale of the Rantec microwave antenna business. 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.
(5) Includes the gain on sale of Systems & Electronics Inc., the accounting
change (SOP 98-5) of $25 million, $5.1 million of restructuring charges,
and $3.9 million of other charges related to cost of sales.
COMMON STOCK MARKET PRICE
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 2003 and 2002.
2003 2002
------------------------------------------
Quarter High Low High Low
- ------- ---- --- ---- ---
First $37.20 $30.06 $34.70 $22.20
Second 37.02 30.75 40.00 31.80
Third 45.91 32.95 41.15 27.90
Fourth 49.10 41.90 36.35 25.80
The Company historically has not paid cash dividends on its common stock.
Management continues to evaluate its cash dividend policy.
ESCO TECHNOLOGIES 2003 ANNUAL REPORT 55
SHAREHOLDERS' SUMMARY
SHAREHOLDERS' ANNUAL MEETING
The Annual Meeting of the shareholders of ESCO Technologies Inc. will be held at
9:30 a.m. Thursday, February 5, 2004, 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 2003 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 e-mail 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 3,600 holders of record of shares
of common stock at September 30, 2003.
INDEPENDENT AUDITORS
KPMG LLP
10 South Broadway, Suite 900
St. Louis, Missouri 63102
56 ESCO TECHNOLOGIES 2003 ANNUAL REPORT