1
EXHIBIT 13
ESCO Electronics Corporation and Subsidiaries
FIVE-YEAR FINANCIAL SUMMARY
(Dollars in millions, except per share amounts) 1997(1) 1996(2) 1995(3) 1994 1993(4)
- ----------------------------------------------------------------------------------------------
For years ended September 30:
Net sales ..................................... $378.5 438.5 441.0 473.9 459.7
Interest expense .............................. 5.2 4.8 5.5 3.6 2.5
Earnings (loss) before income taxes ........... 17.9 14.8 (29.5) 12.7 6.4
Net earnings (loss) ........................... 11.8 26.1 (30.3) 8.3 5.2
Earnings (loss) per share:
Primary .................................... .96 2.26 (2.76) .72 .47
Fully diluted .............................. .95 2.25 (2.76) .72 .46
As of September 30:
Working capital ............................... 62.3 86.2 71.4 86.6 76.8
Total assets .................................. 378.2 307.8 378.0 347.5 335.3
Long-term debt ................................ 50.0 11.4 23.5 25.1 8.1
Shareholders' equity .......................... 205.0 191.1 182.3 187.4 174.1
(1) Includes the acquisition of Filtertek in February 1997 (See Footnote 2 of
Notes to Consolidated Financial Statements).
(2) Includes the sale of Hazeltine; $25.3 million of other charges related to
cost of sales; and includes an adjustment to the income tax valuation
reserve (See Footnotes 2, 6 and 14 of Notes to Consolidated Financial
Statements).
(3) Includes $16.5 million of other charges related to cost of sales and a
change in accounting estimate (See Notes 1(e) and 14 of Notes to
Consolidated Financial Statements).
(4) Includes impact of Corporate Readjustment (See Note 1(b)).
36
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ESCO Electronics Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
BUSINESS ENVIRONMENT
ESCO Electronics Corporation (ESCO, the Company) operates within two
primary business segments: commercial (primarily filtration/fluid flow and
communications/test) and defense.
In 1997, the Company significantly strengthened its presence in the
fast-growing and profitable filtration industry through its February 1997
acquisition of Filtertek, Inc. (Filtertek). Filtertek effectively increases the
commercial content of the Company's sales to over 50% on an annualized basis.
This substantial acquisition provides further evidence of management's strategy
of deliberate diversification and its ongoing commitment to create shareholder
value.
During 1997, the overall defense industrial base continued its rapid
consolidation, and ESCO responded to this competitive challenge by continuing to
reposition itself to compete in the global marketplace and to apply defense
technologies to commercial products. Management continues to believe the
Company's strong product diversification and technology niches in its core
defense businesses will enable it to compete effectively in these shrinking
defense markets.
During 1996, management implemented a key element of its ongoing strategy
to create shareholder value -- the sale of Hazeltine Corporation (Hazeltine). In
July 1996, the Company sold its Hazeltine subsidiary to GEC-Marconi Electronic
Systems Corporation (GEC) for $110 million in cash. The sale of Hazeltine
enabled the Company to further strengthen its overall financial position and to
return a significant amount of the proceeds to shareholders.
Overall, 1997 was a successful and rewarding year for ESCO and its
shareholders. The Company's defense segment returned to profitability and the
commercial segment continued its strong growth. New program opportunities in
both the defense and commercial segments, in addition to the acquisition of
Filtertek, effectively reposition the Company's business base for the remainder
of the decade. This should allow ESCO to increase its commercial segment
contribution while continuing to reduce its overall dependence on its defense
business.
ESCO's improved financial position and strong balance sheet at September
30, 1997 should allow the Company to continue its strategy of deliberate
diversification through internal new product development and selective
acquisitions, thereby increasing shareholder value.
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996
Net sales of $378.5 million in 1997 were $60 million (13.7%) lower than net
sales of $438.5 million in 1996. The decrease was primarily the result of the
sale of Hazeltine in July 1996, partially offset by the acquisition of Filtertek
in February 1997. Hazeltine's sales for the ten-month period of 1996 prior to
its divestiture were $94 million, offset by Filtertek's eight-month sales of
$48.6 million. Net sales at the remainder of the Company's operating units
decreased $14.6 million in 1997 compared to 1996 due to lower sales volume at
Systems & Electronics Inc. (SEI), partially offset by increased sales at all
other operating units. In 1997, commercial sales were $187.5 million (49.5%) and
defense sales were $191 million (50.5%) compared with 1996 commercial and
defense sales of $137.6 million (31.4%) and $301 million (68.6%), respectively.
The increase in 1997 commercial sales is primarily attributable to the
acquisition of Filtertek and additional volume at PTI Technologies Inc. (PTI).
Hazeltine's commercial sales were not significant in 1996.
The Company is involved in the design, development and manufacture of
products for the commercial and defense markets. The Company generally
manufactures products only upon receipt of firm customer orders and delivers the
products in accordance with the customer's schedule. As a result, the Company's
beginning backlog of firm orders, the level of orders received during the year
and the mix of products to be produced all influence the Company's operating
results.
10
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ESCO Electronics Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Firm order backlog was $228.2 million at September 30, 1997, compared to
$244 million at September 30, 1996. The decrease in backlog reflects the timing
of receipt of orders and related sales throughout the various programs' life
cycles, principally at SEI. Order backlog increased $24 million in conjunction
with the February 1997 acquisition of Filtertek. As ESCO continues its
transition towards a predominantly commercial company, backlog plays a less
significant role as commercial products tend to be ordered by the customer and
shipped by the Company within the same period. Approximately 11% of the
September 30, 1997 backlog is expected to be delivered beyond one year.
Orders aggregating $338.7 million were received in 1997, compared with
$296.2 million in 1996 (excluding Hazeltine), reflecting a $42.5 million (14.3%)
increase. Orders during 1996 as reported including Hazeltine were $373.6
million. Orders received by Hazeltine in 1996 prior to its sale were $77.4
million, and orders received by Filtertek since February 1997 were $47.5
million. The largest increases in orders during 1997 were recorded at PTI,
Rantec and EMC Test Systems, L.P. (EMC Test Systems), offset by decreased orders
at SEI. The most significant orders in 1997 were for filtration/fluid flow
products; M1000 tank transporters; airborne radar systems; EMC test equipment;
integrated mail handling and sorting systems; and automatic meter reading
equipment.
The Company computes gross profit as: net sales, less cost of sales, less
other charges related to cost of sales. The gross profit margin is the gross
profit divided into net sales, expressed as a percentage.
The gross profit margin in 1997 was 24.2% compared to 10.6% in 1996. The
lower margin in 1996 was primarily attributable to two factors: a $23 million
adjustment of the estimate of the costs to complete the 60K Loader program at
SEI; and the components of other charges related to cost of sales as discussed
below. The 1996 gross profit margin, if "adjusted" to exclude the 60K Loader
adjustment and the other charges related to cost of sales would have been 21.6%.
The improvement in 1997 gross margin compared to the "adjusted" 1996 gross
margin is the result of a more favorable sales mix at all operating units. The
gross profit margin attributable to the commercial segment was consistent in
both periods presented.
During 1996, and in connection with the sale of Hazeltine and management's
decision to pursue a strategy of deliberate diversification from defense to
commercial, the Company reevaluated the carrying value of certain assets. As a
result of this reevaluation, the Company recorded $25.3 million of other charges
related to cost of sales in 1996. These strategic decisions were intended to
increase the contributions of the commercial segment and to reduce the Company's
overall dependence on the defense businesses.
The 1996 charge included $14.3 million of inventories related to defense
programs which management no longer intended to actively pursue; $6 million of
costs included in other assets incurred in anticipation of certain defense
contract awards (Precontract Costs) which the Company no longer intended to
actively pursue; and a $5 million adjustment in the Company's estimate of
recoveries in a contract dispute related to the M1000 tank transporter program.
Selling, general and administrative expenses (SG&A) for 1997 were $64.1
million, or 16.9% of net sales, compared with $70.5 million, or 16.1% of net
sales, for 1996. The 1997 SG&A expenses included $7.2 million for Filtertek and
the 1996 SG&A included $12.9 million for Hazeltine. The net decrease in 1997
SG&A spending is the result of successful cost containment programs throughout
the Company.
Interest expense increased to $5.2 million in 1997 from $4.8 million in
1996, primarily as a result of higher average outstanding borrowings throughout
1997. A significant amount of the outstanding borrowings in 1997 were incurred
with the acquisition of Filtertek.
Other costs and expenses, net, decreased in 1997 to $4.5 million from $5
million in 1996, primarily due to lower miscellaneous non-operating costs.
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ESCO Electronics Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
The 1996 gain on the sale of Hazeltine represents the net gain after
deducting selling costs and expenses and after adjusting for certain assets and
liabilities retained by ESCO.
Income tax expense of $6.1 million for 1997 reflects current Federal tax
expense of $.2 million, deferred tax expense of $4.8 million and foreign, state
and local taxes of $1 million. Income tax benefit of $11.4 million for 1996
reflects an increase in net deferred tax assets of $27.7 million, of which $15.1
million was credited to additional paid-in capital. Foreign, state and local
taxes amounted to $1.2 million in 1996.
Based on the Company's historical pretax income and losses, adjusted for
significant items such as the facilities consolidation program, the change in
accounting estimates and other costs related to cost of sales, together with
management's projection of future taxable income based upon its shift in
strategic direction, management believes it is more likely than not that the
Company will realize a majority of the benefits of the net deferred tax asset
existing at September 30, 1997. In order to realize the aforementioned net
deferred tax asset, excluding the capital loss carryforward, the Company will
need to generate future taxable income of approximately $175 million, of which
$97 million is required to be realized prior to the expiration of the net
operating loss (NOL) carryforwards, of which $23 million will expire in 2006; $6
million will expire in 2007; $23 million will expire in 2009; $38 million will
expire in 2010; and $7 million will expire in 2011. These net operating loss
carryforwards may be used to reduce future income tax cash payments.
As a result of the sale of Hazeltine, the Company has available capital
loss carryforwards for tax purposes of approximately $77 million. This capital
loss may be used as a reduction of future capital gains recognized by the
Company, at which time the Company may realize additional tax benefits. Any
unused capital loss carryforward will expire in 2001.
In 1997, the Company reduced its deferred tax valuation allowance by $3.7
million. The deferred tax valuation allowance of $39.6 million at September 30,
1997 includes approximately $12.5 million, which represents management's best
estimate of the portion of the deferred tax asset associated with temporary
differences and NOLs which may not be realized, and a full valuation reserve in
the amount of $27.1 million for the portion of the deferred tax asset
represented by the capital loss. There can be no assurance, however, that the
Company will generate sufficient taxable income or a specified level of
continuing taxable income in order to fully utilize the deferred tax assets in
the future.
The effective tax rate in 1997 was 33.9% compared with (77%) in 1996. The
tax provision for 1996 was impacted by the effect of the Hazeltine divestiture,
the Corporate Readjustment implemented in 1993 and other items. An analysis of
the effective tax rates for 1997, 1996 and 1995 is included in the notes to
consolidated financial statements.
1996 COMPARED WITH 1995
Net sales of $438.5 million in 1996 were $2.5 million (0.6%) lower than net
sales of $441 million in 1995. The decrease was primarily the result of the sale
of Hazeltine in July 1996. Hazeltine's sales for the ten-month period of 1996
prior to its divestiture were $20.4 million lower than its full year's sales in
1995. Net sales at the remainder of the Company's operating units increased
$17.9 million in 1996 compared to 1995 due to increased sales volume at SEI and
PTI. In 1996, defense sales were $301 million (68.6%) and commercial sales were
$137.5 million (31.4%) compared with 1995 defense and commercial sales of $345.1
million (78.2%) and $95.9 million (21.8%), respectively. Hazeltine's commercial
sales were not significant in either period presented. The increase in 1996
commercial sales reflects additional volume primarily at SEI, PTI and EMC Test
Systems.
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ESCO Electronics Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
The September 30, 1995 backlog of $528.2 million included $236.3 million
related to Hazeltine. Firm order backlog was $244 million at September 30, 1996,
compared to $291.9 million as adjusted to remove Hazeltine's backlog at
September 30, 1995. The decrease in backlog as adjusted reflects the timing of
receipt of orders and related sales throughout the various programs' life
cycles, principally at SEI.
Orders aggregating $373.6 million were received in 1996, compared with
$436.2 million 1995. Orders received by Hazeltine prior to its sale were $77.4
million and $160.1 million in 1996 and 1995, respectively. Adjusted to remove
Hazeltine from both periods, comparative orders for 1996 and 1995 were $296.2
million and $276.1 million, respectively, reflecting a $20.1 million (7.3%)
increase. The largest increases in orders were recorded at PTI and EMC Test
Systems. The most significant orders in 1996 were for filtration/fluid flow
products; aircraft cargo loaders; EMC test equipment; M1000 tank transporters;
integrated mail handling and sorting systems; and airborne radar systems.
The gross profit margin in 1996 was 10.6% compared to 18.1% in 1995. The
decrease in 1996 was primarily attributable to two factors: a $23 million
adjustment of the estimate of the costs to complete the 60K Loader program at
SEI; and the components of other charges related to cost of sales. The 1996
gross profit margin, excluding the 60K Loader adjustment and the other charges
related to cost of sales would have been 21.6%, compared to the 1995 gross
margin percentage of 21.8%, excluding the 1995 other charges related to cost of
sales. The gross profit percentage attributable to the commercial segment
increased slightly in 1996 compared to 1995 due to a favorable product sales
mix.
During 1996, and in connection with the sale of Hazeltine and management's
decision to pursue a strategy of deliberate diversification from defense to
commercial, the Company reevaluated the carrying value of certain assets,
resulting in the Company recording $25.3 million of other charges related to
cost of sales in 1996. These strategic decisions were intended to increase the
contributions of the commercial segment and to reduce the Company's overall
dependence on the defense businesses.
The 1996 charge includes $14.3 million of inventories related to defense
programs which management no longer intended to actively pursue; $6 million of
costs included in other assets incurred in anticipation of certain defense
contract awards (Precontract Costs) which the Company no longer intended to
actively pursue; and a $5 million adjustment in the Company's estimate of
recoveries in a contract dispute related to the M1000 tank transporter program.
The 1996 write-down of $14.3 million in inventories and $6 million of
Precontract Costs was the result of management's decision to refocus its
marketing efforts to products which could yield more immediate results. The
inventories related to mature armament products which, in earlier years, were
manufactured and sold in large quantities. Although this inventory had been in
limited production in recent years, until 1996 these items were considered to
have sufficient annual proposals outstanding to support potential future sales
activity. No significant sales revenue was recognized in the periods presented.
The 1996 write-off of $6 million of Precontract Costs related to a specific
armament contract with the U.S. Navy. The Company incurred costs to build a
prototype to satisfy the customer requirements. After repeated delays and
modifications by the customer, the Company, as part of its shift in strategic
direction, determined that further pursuit of this contract would not be cost
beneficial. The $5 million adjustment related to the M1000 contract dispute was
the result of the Company receiving information in 1996 which indicated the
carrying value of certain M1000 claim costs may not be fully recoverable.
13
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ESCO Electronics Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Other charges related to cost of sales of $16.5 million incurred during
1995 were related to the facilities consolidation program implemented in 1995.
The 1995 charges included an $8.6 million pretax charge for a non-cash write-off
related to the accounting for the lease on the 8100 West Florissant, St. Louis,
Missouri (8100 Building) facilities which were vacated, and a $7.9 million
non-cash pretax charge associated with the disposition of safety stock
inventories resulting from the facilities consolidation program and related
restructuring of the Company's West Coast operations.
Selling, general and administrative expenses for 1996 were $70.5 million,
or 16.1% of net sales, compared with $74.2 million, or 16.8% of net sales, for
1995. The decrease in 1996 is the result of successful cost containment program
throughout the Company and the sale of Hazeltine.
Interest expense decreased to $4.8 million in 1996 from $5.5 million in
1995, primarily as a result of lower average outstanding borrowings and lower
weighted average interest rates throughout 1996 compared to 1995. A significant
amount of the outstanding borrowings were repaid in July 1996 with a portion of
the proceeds from the sale of Hazeltine.
Other costs and expenses, net, decreased in 1996 to $5 million from $29.5
million in 1995. The decrease is primarily due to the absence in 1996 of
approximately $16.1 million in amortization of a contract guarantee fee
previously paid to Emerson Electric Co. (Emerson) in connection with the
spin-off of ESCO in 1990, and the absence of the $7.8 million charge for exit
and relocation charges incurred in connection with the abandonment of the 8100
Building. The 1995 guarantee fee amortization of $16.1 million includes an $11.1
million non-cash charge for the Company's 1995 change in accounting estimate
(see Note 1 (e) ) related to the Emerson guarantee fee, and approximately $5
million of normal amortization.
The gain on the sale of Hazeltine represents the net gain after deducting
selling costs and expenses and after adjusting for certain assets and
liabilities retained by ESCO.
Prior to 1996, the Company had reduced its deferred tax valuation allowance
systematically by utilizing projected taxable income over a specified future
period of time. In 1996, the Company reduced its beginning deferred tax
valuation allowance by $15.8 million. Due to the 1993 Corporate Readjustment,
$15.1 million of this reduction was credited directly to additional paid-in
capital. The remaining $.7 million was credited directly to the tax provision.
Income tax expense for 1995 reflects foreign, state and local taxes.
The effective tax rate in 1996 was (77%) compared with (2.6%) in 1995. The
tax provisions for both periods presented are impacted by the Corporate
Readjustment implemented in 1993. The income tax benefits recognized in 1996 and
1995 of $15.1 million and $25.2 million, respectively, were accounted for as
credits to additional paid-in capital.
CAPITAL RESOURCES AND LIQUIDITY
The Company has been, and will continue to be, impacted by changes in the
defense industry brought about by the changing international political
environment and the U.S. Government's deficit reduction measures, including
procurement policies and tax reform. This operating environment requires defense
contractors to make significant capital commitments to programs for extended
periods of time. The Company has been concentrating on shifting its business
from development programs to production programs and on increasing the
commercial content of its business base, resulting in lower working capital
requirements and thereby reducing the risk inherent in the defense industry.
Net cash provided by operating activities in 1997 was $25.3 million
compared to $1 million in 1996. The 1997 net cash provided by operating
activities improved compared to 1996, net of the gain on the sale of Hazeltine,
primarily due to the positive impact of 1997 operating earnings. The 1997 cash
generation from inventories was partially offset by the investment in costs and
estimated earnings on long-term contracts and the disbursement of accounts
payable and accrued expenses.
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ESCO Electronics Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
Net cash provided by operating activities was $1 million in 1996, compared
to net cash used by operating activities of $8.1 million in 1995. The 1996 net
cash provided by operating activities improved compared to 1995 primarily due to
lower investment in working capital, primarily inventories, in 1996.
In 1997, capital expenditures of $10.5 million included manufacturing
equipment at Filtertek, SEI and PTI. In 1996, capital expenditures of $8.6
million included capitalized facility costs at SEI, process equipment at PTI and
capital expenditures of $1.5 million related to Hazeltine. In 1995, capital
expenditures of $11.1 million included capitalized facility costs and production
test equipment at SEI and facility restoration costs at Rantec resulting from
the 1994 California earthquake. There were no commitments outstanding that were
considered material for capital expenditures at September 30, 1997.
At September 30, 1997, the Company had available net operating loss
carryforwards (NOLs) for tax purposes of approximately $97 million. These NOLs
will expire beginning in year 2006 and ending in year 2011. These NOLs will be
used to reduce future Federal income tax cash payments.
On February 7, 1997, the Company completed the acquisition of the
filtration and the thermoform packaging businesses (Filtertek) of Schawk, Inc.
The transaction involved the purchase of assets and stock certain of subsidiary
corporations of Schawk, Inc. for $92 million in cash plus working capital
adjustments. The purchase was financed with cash and borrowings from the
Company's bank credit facility. Filtertek is a leader in the manufacture of
plastic insert injection molded filter assemblies.
In conjunction with the purchase of Filtertek, the existing bank credit
facility was amended and restated as of February 7, 1997 to increase the
available credit facility to $140 million, consisting of a $60 million term
loan, and an $80 million revolving credit facility (subject to borrowing base
asset limitations). The $60 million term loan has scheduled amortization
payments of $1 million per quarter which commenced March 31, 1997. Beginning
March 31, 1998, the term loan amortization changes to $2 million per quarter
through maturity. The maturity of the bank credit facility is September 30,
2000. The bank credit facility allowed the Company to use a portion of the
Hazeltine sales proceeds to pay the special cash distribution to shareholders in
1996 and to repurchase outstanding ESCO common shares in the open market. The
revolving credit facility is available for direct borrowings and/or the issuance
of letters of credit. These credit facilities are provided by a group of banks,
led by Morgan Guaranty Trust Company of New York. At September 30, 1997, the
Company had $58.8 million available under this revolving credit facility. The $8
million subordinated term loan was repaid in 1996.
In 1996, the Company authorized an open market share repurchase program for
up to two million shares of common stock over a period ending September 30,
1998. During 1997, approximately 130,000 shares were repurchased.
Cash flow from operations and borrowings under the bank credit facility are
expected to provide adequate resources to meet the Company's capital
requirements and operational needs for the foreseeable future.
All of the Company's debt is priced at a percentage over LIBOR. The Company
has reduced this risk through a rate swap agreement that provides a cap on LIBOR
of 7% on $50 million of the long-term debt. The Company does not have
significant risk or exposure to fluctuations in foreign currencies.
Management believes that, for the periods presented, inflation has not had
a material effect on the Company's operations.
The Company is currently involved in various stages of investigation,
remediation and litigation 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.
15
8
ESCO Electronics Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share"
and SFAS No. 129, "Disclosure of Information about Capital Structure." The
Company will adopt the provisions of these pronouncements during the quarter
ending December 31, 1997. The effect of adopting these provisions is not
expected to be material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income must be reported in a
financial statement with the same prominence as other financial statements. SFAS
No. 130 is effective for fiscal years beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." This Statement establishes
standards for the manner in which public business enterprises report information
about operating segments in interim and annual financial statements, and the
related disclosures about products and services, geographic areas and major
customers. The effect of adopting this provision is not expected to provide
additional disclosures materially different than those previously disclosed by
the Company, on an annual basis. SFAS No. 131 is effective for interim periods
beginning after December 15, 1997.
16
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ESCO Electronics Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended September 30,
(Dollars in thousands, except per share amounts) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Net sales.........................................................$378,524 438,543 441,023
Costs and expenses:
Cost of sales................................................ 286,790 366,719 344,781
Other charges related to cost of sales....................... -- 25,300 16,522
Selling, general and administrative expenses................. 64,142 70,464 74,162
Interest expense............................................. 5,220 4,781 5,549
Other, net................................................... 4,522 5,017 29,514
Gain on sale of Hazeltine.................................... -- (48,500) --
------- ------- -------
Total costs and expenses................................ 360,674 423,781 470,528
------- ------- -------
Earnings (loss) before income tax................................. 17,850 14,762 (29,505)
Income tax expense (benefit)...................................... 6,053 (11,374) 755
------- ------- -------
Net earnings (loss).......................................... $11,797 26,136 (30,260)
------- ------- -------
Earnings (loss) per share:
Primary...................................................... $ .96 2.26 (2.76)
Fully diluted................................................ $ .95 2.25 (2.76)
See accompanying notes to consolidated financial statements.
17
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ESCO Electronics Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
Years ended September 30,
(Dollars in thousands) 1997 1996
- ------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................. $ 5,818 22,209
Accounts receivable, less allowance for doubtful accounts of $462 and $273
in 1997 and 1996, respectively....................................... 48,612 34,664
Costs and estimated earnings on long-term contracts, less progress
billings of $56,451 and $70,671 in 1997 and 1996, respectively....... 54,633 51,585
Inventories............................................................... 45,110 51,187
Other current assets...................................................... 2,794 3,005
-------- -------
Total current assets................................................. 156,967 162,650
-------- -------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements................................................ 12,449 6,586
Buildings and leasehold improvements...................................... 43,573 27,974
Machinery and equipment................................................... 74,067 40,748
Construction in progress.................................................. 4,913 5,043
-------- -------
135,002 80,351
Less accumulated depreciation and amortization............................ 38,470 26,325
-------- -------
Net property, plant and equipment.................................... 96,532 54,026
Excess of cost over net assets of purchased businesses, less accumulated
amortization of $2,735 and $1,597 in 1997 and 1996, respectively.......... 54,996 20,395
Deferred tax assets............................................................ 48,510 53,326
Other assets................................................................... 21,182 17,435
-------- -------
$378,187 307,832
============================================================================================================
See accompanying notes to consolidated financial statements.
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ESCO Electronics Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
Years ended September 30,
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-term debt ........................ $ 25,500 1,300
Accounts payable ...................................................................... 38,238 40,057
Advance payments on long-term contracts, less costs incurred
of $1,624 and $5,478 in 1997 and 1996, respectively ................................. 6,348 8,336
Accrued expenses ...................................................................... 24,590 26,771
-------- -------
Total current liabilities ........................................................... 94,676 76,464
-------- -------
Other liabilities ....................................................................... 28,548 28,860
Long-term debt .......................................................................... 50,000 11,375
-------- -------
Total liabilities ................................................................... 173,224 116,699
-------- -------
Commitments and contingencies ........................................................... -- --
SHAREHOLDERS' EQUITY:
Preferred stock, par value $.01 per share, authorized 10,000,000 shares ............... -- --
Common stock, par value $.01 per share, authorized 50,000,000 shares;
issued 12,478,328 and 12,415,346 shares in 1997 and 1996, respectively .............. 125 124
Additional paid-in capital ............................................................ 194,663 192,967
Retained earnings since elimination of deficit of $60,798 at September 30, 1993 ....... 15,981 4,184
Cumulative foreign currency translation adjustments ................................... 196 107
Minimum pension liability ............................................................. (181) (1,869)
-------- -------
210,784 195,513
Less treasury stock, at cost (689,945 and 566,622 common shares in 1997
and 1996, respectively) ............................................................. (5,821) (4,380)
-------- -------
Total shareholders' equity .......................................................... 204,963 191,133
-------- -------
$378,187 307,832
================================================================================================================
See accompanying notes to consolidated financial statements.
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12
ESCO Electronics Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Cumulative
Foreign
Common Stock Additional Retained Currency Minimum
-------------- Paid-in Earnings Translation Pension Treasury
Years ended September 30, (In thousands) Shares Amount Capital (Deficit) Adjustments Liability Stock
- ------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1994........ 11,520 $115 183,623 8,308 (195) -- (4,438)
Stock options and stock
compensation plans............. 54 1 1,343 -- -- -- 30
Net loss......................... -- -- -- (30,260) -- -- --
Effect of Corporate Readjustment
on taxes....................... -- -- 25,239 -- -- -- --
Translation adjustments.......... -- -- -- -- 487 -- --
Minimum pension liability........ -- -- -- -- -- (1,998) --
- ------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1995 11,574 116 210,205 (21,952) 292 (1,998) (4,408)
Stock options and stock
compensation plans............. 841 8 3,214 -- -- -- 28
Net earnings..................... -- -- -- 26,136 -- -- --
Effect of Corporate Readjustment
on taxes....................... -- -- 15,094 -- -- -- --
Cash distribution ($3.00
per share)..................... -- -- (35,546) -- -- -- --
Translation adjustments.......... -- -- -- -- (185) -- --
Minimum pension liability........ -- -- -- -- -- 129 --
- ------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1996........ 12,415 124 192,967 4,184 107 (1,869) (4,380)
Stock options and stock
compensation plans............. 63 1 1,696 -- -- -- 45
Net earnings..................... -- -- -- 11,797 -- -- --
Purchases into treasury.......... -- -- -- -- -- -- (1,486)
Translation adjustments.......... -- -- -- -- 89 -- --
Minimum pension liability........ -- -- -- -- -- 1,688 --
- ------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997........ 12,478 $125 194,663 15,981 196 (181) (5,821)
==============================================================================================================================
See accompanying notes to consolidated financial statements.
20
13
ESCO Electronics Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOW
Years ended September 30,
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net earnings (loss).......................................................... $ 11,797 26,136 (30,260)
Adjustments to reconcile net earnings (loss) to net cash
provided (used) by operating activities:
Depreciation and amortization........................................... 14,423 13,486 14,042
Changes in operating working capital.................................... (2,666) 5,852 (6,602)
Write-off of certain assets............................................. -- 25,300 19,744
Gain on sale of Hazeltine............................................... -- (48,500) --
Effect of deferred taxes on tax provision............................... 4,816 (12,598) (448)
Other................................................................... (3,033) (8,698) (4,595)
--------- --------- ---------
Net cash provided (used) by operating activities........................... 25,337 978 (8,119)
--------- --------- ---------
Cash flows from investing activities:
Capital expenditures......................................................... (10,526) (8,558) (11,146)
Divestiture/(acquisition) of businesses...................................... (93,200) 110,000 (1,596)
--------- --------- ---------
Net cash provided (used) by investing activities........................... (103,726) 101,442 (12,742)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt................................................. 60,000 -- 4,490
Principal payments on long-term debt......................................... (15,675) (15,386) (2,217)
Net increase (decrease) in short-term borrowings............................. 18,500 (33,000) 15,500
Special cash distribution/purchases of common stock into treasury............ (1,486) (35,546) --
Other........................................................................ 659 3,401 752
--------- --------- ---------
Net cash provided (used) by financing activities........................... 61,998 (80,531) 18,525
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents......................... (16,391) 21,889 (2,336)
Cash and cash equivalents at beginning of year.................................... 22,209 320 2,656
--------- --------- ---------
Cash and cash equivalents at end of year.......................................... $ 5,818 22,209 320
--------- --------- ---------
Changes in operating working capital:
Accounts receivable, net..................................................... $ (2,997) 5,487 1,191
Costs and estimated earnings on long-term contracts, net..................... (3,048) (14,382) (7,140)
Inventories.................................................................. 18,618 20,730 (21,820)
Other current assets......................................................... 734 (15) 2,625
Accounts payable............................................................. (8,522) 133 8,408
Advance payments on long-term contracts, net................................. (1,988) (7,183) 9,180
Accrued expenses............................................................. (5,463) 1,082 954
--------- --------- ---------
$ (2,666) 5,852 (6,602)
--------- --------- ---------
Supplemental cash flow information:
Interest paid to third parties............................................... $ 4,981 4,765 5,495
Income taxes paid............................................................ 720 673 972
-------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
21
14
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. SUMMARY
OF SIGNIFICANT
ACCOUNTING
POLICIES
(a) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ESCO
Electronics Corporation (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 1997 presentation.
(b) BASIS OF PRESENTATION
Effective September 30, 1990, Emerson Electric Co. (Emerson) transferred
the stock of certain of its subsidiaries, primarily related to its government
and defense business, to ESCO and distributed all of the issued and outstanding
ESCO common stock to Emerson shareholders (the spin-off). 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,
1997 and 1996.
(c) NATURE OF OPERATIONS
The Company is engaged in the research, development, manufacture, sale and
support of a wide variety of defense and commercial systems and products.
Defense items principally are supplied to the United States Government under
prime contracts from the Army, Navy and Air Force and under subcontracts with
their prime contractors, and are also sold to foreign customers. Commercial
items are supplied to a variety of customers worldwide, and include
filtration/fluid flow products serving the aerospace, automotive, industrial,
medical/health care and fluid flow markets.
The Company operates in two principal industry segments: commercial and
defense. The Company's main products include defense electronics, defense
systems, filtration/fluid flow, communications/test and other industrial and
government products.
(d) USE OF ESTIMATES AND BUSINESS RISKS
The preparation of financial statements in conformity with generally
accepted accounting principles 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.
Sales to the U.S. Government may be affected by changes in procurement
policies, budget considerations, changing concepts of national defense and other
factors. Fluctuations and changes in any of these areas could materially impact
the Company's financial statements in future years.
(e) ACCOUNTING CHANGES
Effective October 1995, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121
requires that certain long-lived assets to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Additionally, SFAS No. 121
requires that certain long-lived assets to be disposed of be reported at the
lower of carrying amount or fair value less costs to sell. The impact of the
adoption of this standard was not material to the Company's financial
statements.
22
15
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective September 30, 1997, the Company adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." SFAS No. 123 allows, and the Company elected, to
continue its accounting under Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company adopted the provisions
of SFAS No. 123 requiring disclosure of the pro forma effect on net earnings and
earnings per share as if compensation cost had been recognized based upon the
estimated fair value at the date of grant for options and performance shares.
During 1995, management reviewed its accounting for performance guarantees
on certain contracts and determined the period and method of amortizing the
guarantee fee should take into consideration the expected future revenue stream
from the respective guaranteed contracts. Accordingly, management changed its
method of accounting from amortizing the guarantee fee over the expected
duration of the guaranteed contracts (estimated benefit period of seven years)
on a straight-line basis to amortizing it based upon the related guaranteed
contract revenues generated to date and the expected future revenues.
This change in accounting principle, which is inseparable from a change in
accounting estimate, was retroactively implemented effective October 1, 1994,
which represents the beginning of the Company's fiscal year 1995. This change
resulted in an $11.1 million non-cash pretax charge, which is included in Other,
net in the 1995 results of operations.
(f) REVENUE RECOGNITION
Revenue on production contracts is recorded when specific contract terms
are fulfilled, usually by delivery or acceptance (the units of production or
delivery methods). The costs attributed to units delivered are based on the
estimated average costs of all units expected to be produced in a contract or
group of contracts. Revenue under long-term contracts for which units of
production or delivery are inappropriate measures of performance is recognized
on the percentage-of-completion method based upon incurred costs compared to
total estimated costs under the contract. Revenue under engineering contracts is
generally recognized as milestones are attained.
Revenues from cost reimbursement contracts are recorded as costs are
incurred, plus fees earned. Estimated amounts for contract changes and claims
are included in contract revenues only when realization is probable. Revisions
to assumptions and estimates, primarily in contract value and estimated costs
used for recording sales and earnings, are reflected in the accounting period in
which the facts become known. Losses recognized on contracts include a provision
for the future selling, general and administrative costs applicable to the
respective contracts.
Revenue is recognized on commercial sales when products are shipped or when
services are performed.
(g) CASH AND CASH EQUIVALENTS
Cash equivalents include temporary investments that are readily convertible
into cash, such as certificates of deposit, commercial paper and treasury bills
with original maturities of three months or less.
(h) COSTS AND ESTIMATED EARNINGS ON LONG-TERM CONTRACTS
Costs and estimated earnings on long-term contracts represent unbilled
revenues, including accrued profits on long-term contracts accounted for under
the percentage-of-completion method, net of progress billings.
(i) INVENTORIES
Inventories under long-term contracts reflect accumulated production costs,
factory overhead, initial tooling and other related costs less the portion of
such costs charged to cost of sales and any progress payments received. In
accordance with industry practice, costs incurred on contracts in progress
include amounts relating to programs having production cycles longer than one
year, and a portion thereof will not be realized within one year.
Other inventories are carried at the lower of cost (first-in, first-out) or
market.
23
16
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(j) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are computed on accelerated methods 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) EXCESS OF COST OVER NET ASSETS OF PURCHASED BUSINESSES
Assets and liabilities related to business combinations accounted for as
purchase transactions are recorded at their respective fair values. Excess of
cost over the fair value of net assets purchased (goodwill) is amortized on a
straight-line basis over the periods estimated to be benefited, not exceeding 40
years. The Company assesses the recoverability of this intangible asset by
determining whether the amortization of the asset balance over its remaining
life can be recovered through undiscounted future operating cash flows.
(l) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
reduced by a valuation allowance if it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in
the period that includes the enactment date.
(m) RESEARCH AND DEVELOPMENT COSTS
Company-sponsored research and development costs include research and
development and bid and proposal efforts related to U.S. Government and
commercial products and services. Company-sponsored product development costs
are charged to expense when incurred. Customer-sponsored research and
development costs incurred pursuant to contracts are accounted for similar to
other program costs.
(n) FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign operations are translated
into U.S. dollars in accordance with SFAS No. 52, "Foreign Currency
Translation." The resulting translation adjustments are recorded as a separate
component of shareholders' equity.
(o) EARNINGS (LOSS) PER SHARE
Earnings per share are based on the weighted average number of common
shares outstanding plus shares issuable upon the assumed exercise of dilutive
common share options and performance shares by using the treasury stock method.
For 1997, earnings per share is computed using 12,273,588 and 12,425,577 common
shares and common share equivalents outstanding for primary and fully diluted,
respectively. For 1996, earnings per share is computed using 11,579,840 and
11,638,408 common shares and common share equivalents outstanding for primary
and fully diluted, respectively. Loss per share is based on the weighted average
number of common shares outstanding. For 1995, loss per share is computed using
10,973,315 common shares outstanding.
24
17
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2. ACQUISITIONS/
DIVESTITURES
(UNAUDITED)
On February 7, 1997, the Company completed the acquisition of the
filtration and the thermoform packaging businesses (Filtertek) of Schawk, Inc.
The transaction involved the purchase of assets and stock of certain subsidiary
corporations of Schawk, Inc. for $92 million in cash plus working capital
adjustments. Filtertek is a leader in the manufacture of plastic insert
injection molded filter assemblies.
On July 22, 1996, the Company completed the sale of its Hazeltine
subsidiary to GEC-Marconi Electronic Systems Corporation (GEC). The Company sold
100% of the common stock of Hazeltine for $110 million in cash, resulting in a
$48.5 million gain. Certain assets and liabilities of Hazeltine were retained by
the Company.
Included in the 1996 and 1995 consolidated statements of operations are the
operating results of Hazeltine prior to its divestiture as follows:
(Dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------
Net sales ..................................... $93,987 114,196
Cost of sales ................................. 75,598 96,833
Selling, general and administrative expenses .. 12,859 14,198
Other costs and expenses, net ................. 941 1,650
------- -------
Earnings before income taxes .................. $ 4,589 1,515
======= =======
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 acquired and liabilities assumed based on estimated
fair values at the date of acquisition. The excess cost of the acquisitions over
the estimated fair value of the net assets acquired is being amortized on a
straight-line basis over periods ranging from 15-40 years, depending on
management's assessment of its useful life. The financial results from these
acquisitions have been included in the Company's financial statements from the
date of acquisition.
The following unaudited pro forma financial information assumes the
acquisition of Filtertek and the divestiture of Hazeltine had occurred on
October 1, 1995. The pro forma summary is not necessarily indicative of the
results of operations that would have occurred had the acquisition and
divestiture been completed on October 1, 1995, or of future results of
operations.
Years ended September 30, Pro forma (Unaudited)
(Dollars in thousands) 1997 1996
- -------------------------------------------------------------------
Net sales ...................... $403,229 422,710
Net earnings ................... 11,272 25,622
Earnings per share:
Primary ..................... .92 2.21
Fully diluted ............... .91 2.20
======== =======
- -------------------------------------------------------------------------------
3. ACCOUNTS
RECEIVABLE
Accounts receivable consist of the following at September 30, 1997 and 1996:
(Dollars in thousands) 1997 1996
- -----------------------------------------------------------------------
U.S. Government and prime contractors .......... $11,191 9,459
Commercial ..................................... 35,482 17,596
Other .......................................... 1,939 7,609
------- ------
Total ....................................... $48,612 34,664
======= ======
The increase in commercial accounts receivable is primarily due to the
acquisition of Filtertek.
25
18
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
4. INVENTORIES
Inventories consist of the following at September 30, 1997 and 1996:
(Dollars in thousands) 1997 1996
- ----------------------------------------------------------------------------
Finished goods ......................................... $ 8,542 5,927
Work in process -- including long-term contracts ....... 22,971 32,071
Raw materials .......................................... 13,597 13,189
-------- ------
Total ................................................ $ 45,110 51,187
======== ======
Under the contractual arrangements by which progress payments are received,
the U.S. Government has a security interest in the inventories associated with
specific contracts. Inventories are net of progress payment receipts of $3.2
million and $1.2 million at September 30, 1997 and 1996, respectively.
The $25.3 million of other charges related to cost of sales in 1996
included $14.3 million in expense related to inventories adjusted to net
realizable value in conjunction with the Company's deliberate diversification
strategy. The $16.5 million of other charges related to cost of sales in 1995
included $7.9 million in expense related to inventories adjusted to net
realizable value in conjunction with the facilities consolidation program.
- -------------------------------------------------------------------------------
5. PROPERTY, PLANT
AND EQUIPMENT
Depreciation and amortization of property, plant and equipment for the
years ended September 30, 1997, 1996 and 1995 were $12,441,000, $12,163,000 and
$12,695,000, respectively.
The Company leases certain real property, equipment and machinery under
noncancelable operating leases. Rental expense under these operating leases for
the years ended September 30, 1997, 1996 and 1995 amounted to $4,502,000,
$4,759,000 and $7,187,000, 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, 1997 are:
(Dollars in thousands) Years ending September 30:
- -------------------------------------------------------------------------------
1998 ........................ $ 3,941
1999 ........................ 2,877
2000 ........................ 2,232
2001 ........................ 1,848
2002 and thereafter ......... 2,520
-------
Total .................... $13,418
=======
- -------------------------------------------------------------------------------
6. INCOME
TAX EXPENSE
(BENEFIT)
The principal components of income tax expense (benefit) for the years ended
September 30, 1997, 1996 and 1995 consist of:
(Dollars in thousands) 1997 1996 1995
- --------------------------------------------------------------
Federal:
Current ...................... $ 223 -- 133
Deferred ..................... 4,816 (12,598) (448)
State, local and foreign ........ 1,014 1,224 1,070
------ ------ -----
Total ........................ $6,053 (11,374) 755
====== ======= =====
26
19
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The actual income tax expense for the years ended September 30, 1997, 1996
and 1995 differs from the expected tax expense for those years (computed by
applying the U.S. Federal statutory rate) as follows:
1997 1996 1995
- ---------------------------------------------------------------------------------------------
Federal corporate statutory rate ................................. 35.0% 35.0% 35.0%
Effect of Corporate Readjustment on temporary differences ........ -- 102.2 (85.5)
Net change in the balance of the tax valuation allowance ......... (6.8) 100.2 51.8
Effect of subsidiary divestiture on temporary differences ........ -- (314.0) --
Net interest income attributable to long-term contracts .......... -- -- 0.5
Income taxes, net of Federal benefits:
State and local ............................................... 2.7 4.3 1.4
Foreign ....................................................... (1.1) 1.1 1.4
Other, net ....................................................... 4.1 (5.8) (7.2)
---- ---- ----
Effective income tax rate ........................................ 33.9% (77.0)% (2.6)%
==== ===== ====
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 1997, 1996
and 1995 are presented below:
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
Deferred tax assets:
Inventories, long-term contract accounting,
contract cost reserves and others ...................... $ 7,371 14,538 601
Pension and other postretirement benefits ................. 10,272 9,402 9,538
Net operating loss carryforwards .......................... 34,036 42,188 39,366
Capital loss carryforwards ................................ 27,074 30,567 --
Other compensation-related costs and other
cost accruals .......................................... 11,960 2,948 11,278
------- ------- -------
Total deferred tax assets .............................. 90,713 99,643 60,783
Deferred tax liabilities:
Plant and equipment, depreciation methods
and acquisition asset allocations ...................... (2,640) (3,011) (6,609)
------- ------- -------
Net deferred tax asset before valuation allowance ...... 88,073 96,632 54,174
Less valuation allowance ..................................... (39,563) (43,306) (28,537)
------- ------- -------
Net deferred tax asset ................................. $ 48,510 53,326 25,637
======== ======= =======
Management believes it is more likely than not that with its projections of
future taxable income, its shift in strategic direction, and after consideration
of the valuation allowance, the Company will generate sufficient taxable income
to realize the benefits of the net deferred tax assets existing at September 30,
1997.
In order to fully realize the deferred tax assets existing at September 30,
1997, the Company will need to generate future taxable income of approximately
$175 million of which $97 million is required to be realized prior to the
expiration of the net operating loss (NOL) carryforwards, of which $23 million
will expire in 2006; $6 million will expire in 2007; $23 million will expire in
2009; $38 million will expire in 2010; and $7 million will expire in 2011. Also,
the Company will need to generate future capital gains of approximately $77
million prior to 2001, at which time the capital loss carryforward, resulting
from the 1996 divestiture of Hazeltine, will expire. There can be no assurance,
however, that the Company will generate any taxable income or any specific level
of continuing taxable income.
27
20
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended September 30, 1997, the Company reduced its net
deferred tax asset valuation allowance to $39.6 million. A full valuation
allowance of $27.1 million is being maintained against the deferred tax asset
associated with the capital loss. The remaining balance of $12.5 million
represents management's best estimate of the portion of deferred tax asset
associated with temporary differences and NOLs which may not be realized.
- -------------------------------------------------------------------------------
7. DEBT
Long-term debt consists of the following at September 30, 1997 and 1996:
(Dollars in thousands) 1997 1996
- -----------------------------------------------------------------------
Term loan ...................................... $57,000 12,675
Less current maturities ........................ 7,000 1,300
------- ------
Long-term debt ............................... $50,000 11,375
======= ======
In conjunction with the purchase of Filtertek, the existing bank credit
facility was amended and restated as of February 7, 1997 to increase the
available credit facility to $140 million, consisting of a $60 million term
loan, and an $80 million revolving credit facility (subject to borrowing base
asset limitations). The $60 million term loan has scheduled amortization
payments of $1 million per quarter which commenced March 31, 1997. Beginning
March 31, 1998, the term loan amortization changes to $2 million per quarter
through maturity. The maturity of the bank credit facility is September 30,
2000. The bank credit facility allowed the Company to use a portion of the
Hazeltine sales proceeds to pay the special cash distribution to shareholders in
1996 and to repurchase outstanding ESCO common shares in the open market. The
revolving credit facility is available for direct borrowings and/or the issuance
of letters of credit. These credit facilities are provided by a group of banks,
led by Morgan Guaranty Trust Company of New York. At September 30, 1997, the
Company had $58.8 million available under this revolving credit facility.
The amended credit facility requires, as determined by certain financial
ratios, a commitment fee ranging from 5/16% to 7/16% per annum on the unused
portion. The terms of the credit facility provide that interest on borrowings
may be calculated at a spread over the London Interbank Offered Rates (LIBOR),
or certificate of deposit rates for various maturities, 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 most restrictive financial covenants
of the credit facility include minimum interest coverage, limitations on
leverage and minimum tangible net worth. Dividends may not exceed 25% of the
Company's consolidated net earnings.
During 1997 and 1996, the maximum aggregate short-term borrowings at any
month-end were $55 million and $50 million, respectively; the average aggregate
short-term borrowings outstanding based on month-end balances were $24.7 million
and $35.1 million, respectively; and the weighted average interest rates were
6.9% in both periods. The weighted average interest rate throughout 1995 was
7.3%. The letters of credit issued and outstanding under the credit facility
totaled $2.7 million and $6.4 million at September 30, 1997 and 1996,
respectively. Borrowings under the revolving credit facility were $18.5 million
at September 30, 1997.
The $8 million subordinated term loan payable to Textron, Inc. issued in
connection with the purchase of PTI was repaid in 1996.
- -------------------------------------------------------------------------------
8. CAPITAL STOCK
The 12,478,328 and 12,415,346 common shares as presented in the
accompanying consolidated balance sheets at September 30, 1997 and 1996
represent the actual number of shares issued at the respective dates. The
Company held 689,945 and 566,622 common shares in treasury at September 30, 1997
and 1996, respectively.
Pursuant to a Deposit and Trust Agreement (the Trust Agreement), all of the
outstanding shares of the Company's common stock are held in trust by a trustee
on behalf of the persons otherwise entitled to hold the Company's common stock,
and such persons, instead, hold common stock trust receipts (Receipts)
representing the Company's common stock and associated
28
21
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
preferred stock purchase rights (the Rights). Although the trustee is the record
holder of the Company's common stock, each holder of a Receipt is generally
entitled to all of the rights of a holder of the Company's common stock
(including the right to vote and to receive dividends or other distributions),
except in certain circumstances. If the Company fails in certain circumstances
to collateralize its obligations to indemnify Emerson with respect to Emerson's
guarantees of certain of the Company's government contracts and for so long as
such failure continues, Emerson will have the right to direct the trustee how to
vote in the election of directors and certain related matters.
During 1995, the Company adopted the 1994 Stock Option Plan, and in 1991,
the Company adopted the 1990 Stock Option Plan (the Option Plans). The Option
Plans permit the Company to grant key management employees (1) options to
purchase shares of the Company's common stock (or Receipts representing such
shares) or (2) stock appreciation rights with respect to all or any part of the
number of shares covered by the options. As long as the Trust Agreement is in
effect, an optionee will receive Receipts in lieu of shares. All outstanding
options were granted at prices equal to fair market value at the date of grant.
As a result of the $3.00 per share special cash distribution paid to
shareholders in 1996 as a non-taxable return of capital, unexercised stock
options were repriced, and the number of options outstanding were adjusted,
using a method which resulted in no additional compensation expense to the
Company. Information regarding stock options awarded under the Option Plans is
as follows:
1997 1996 1995
---------------------- ----------------------- ------------------------
Estimated Estimated Estimated
Shares Avg. Price Shares Avg. Price Shares Avg. Price
- ----------------------------------------------------------------------------------------------------------------
October 1, .................. 889,930 $ 6.04 1,135,301 $ 5.77 1,135,402 $5.77
Granted .................. 227,450 $ 10.78 497,250 $ 10.38 88,000 $9.25
Exercised ................ (68,371) $ 6.87 (806,255) $ 5.77 (55,434) $5.56
Cancelled ................ (50,523) $ 9.28 (119,257) $ 10.31 (32,667) $9.31
Repricing ................ -- -- 182,891 $ 8.06 -- --
- ----------------------------------------------------------------------------------------------------------------
September 30, ............... 998,486 $ 6.18 889,930 $ 6.04 1,135,301 $5.77
At September 30,
Reserved for
future grant .......... 165,984
Exercisable .............. 404,387 $ 6.18 264,265 $ 6.04 707,617 $5.77
======= ======= ========= ====== ========= =====
During 1996, the Company announced a stock repurchase program. Under this
program, the Company is authorized to purchase up to two million shares of its
common stock in the open market through September 30, 1998.
During 1993 and 1997, the Board of Directors authorized, and the
shareholders approved, the Performance Share Plans (the Plans). The maximum
number of shares available for issue under the Plans is 875,000 shares. At
September 30, 1997, 566,303 shares have been awarded, and are outstanding under
the terms of the Plans.
The Company has a Preferred Stock Purchase Rights Plan pursuant to which a
dividend of one Right was declared for each outstanding share of the Company's
common stock. Each Right entitles the holder to purchase one one-hundredth of a
share of preferred stock at an initial purchase price of $25. Approximately
120,000 preferred shares are reserved for issuance under this plan. Under
certain conditions involving the acquisition of, or an offer for, 20% or more of
the Company's common stock, all holders of Rights, except an acquiring entity,
would be entitled (1) to purchase, at a defined price, common stock of the
Company or an acquiring entity at a value twice the defined price, or (2) at the
option of the Board, to exchange each Right for one share of common stock. The
Rights remain in existence until September 30, 2000, unless redeemed earlier (at
one cent per Right), exercised or exchanged under the terms of the plan.
29
22
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company adopted the disclosure-only provisions of SFAS No. 123. Under
APB No. 25, no compensation cost was recognized for the Company's stock option
plans. Had compensation cost for the Company's stock option plans and
performance share plans been determined based on the fair value at the grant
date for awards in 1997 and 1996 consistent with the provisions of this
statement, the Company's net earnings and net earnings per share would have been
as follows:
(Dollars in thousands, except per share amount) 1997 1996
- -------------------------------------------------------------------------------
Net earnings ..................................... $10,858 25,392
Net earnings per share:
Primary ........................................ .88 2.19
Fully diluted .................................. .87 2.18
======= ======
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 1997 and 1996: expected dividend yield 0%,
expected volatility 35.45%, risk-free interest rate 6.299% and expected life
based on historical exercise periods of 3.68 years.
To determine the fair value of grants under the 1997 Performance Share
Plan, the probability that performance milestones would be met were applied to
the ESCO stock price on the date of grant. This probability was based on an
estimated average annual growth rate of 11.9% and an annualized volatility of
35.45%.
- -------------------------------------------------------------------------------
9. RETIREMENT
AND OTHER
BENEFIT PLANS
Substantially all employees are covered by defined benefit or defined
contribution pension plans maintained by the Company for the benefit of its
employees. Benefits are provided to employees under defined benefit pay-related
and flat-dollar plans which are primarily noncontributory. Annual contributions
to retirement plans equal or exceed the minimum funding requirements of the
Employee Retirement Income Security Act or applicable local regulations. Pension
expense for the years ended September 30, 1997, 1996 and 1995 is comprised of
the following:
(Dollars in millions) 1997 1996 1995
- ------------------------------------------------------------------------------------------
Defined benefit plans:
Service cost (benefits earned during the period) .......... $ 3.3 3.2 3.1
Interest cost ............................................. 5.4 5.0 4.9
Actual return on plan assets .............................. (19.0) (5.5) (5.0)
Net amortization and deferral ............................. 13.5 .8 .7
------ --- ---
Net periodic pension expense ........................... 3.2 3.5 3.7
Other ........................................................ -- -- .1
Defined contribution plans ................................... .4 2.1 2.6
------ --- ---
Total .................................................. $ 3.6 5.6 6.4
====== === ===
The funded status of the Company's defined benefit pension plans at
September 30, 1997 and 1996 is shown below:
(Dollars in millions) 1997 1996
- ---------------------------------------------------------------------------------------------
Accumulated benefit obligation, including vested benefit obligation of
$59.4 and $53.7 at September 30, 1997 and 1996, respectively .............. $63.1 57.3
----- ----
Projected benefit obligation ................................................. 77.6 71.0
Plan assets at fair value, primarily corporate equity and
fixed income securities ................................................... 78.9 58.4
----- ----
Projected benefit obligation in excess of (less than) plan assets ............ (1.3) 12.6
Unrecognized transition amount ............................................... -- --
Unrecognized net gain (loss) ................................................. 12.2 (2.9)
Unrecognized prior service costs ............................................. (2.5) (.3)
Additional minimum liability ................................................. 2.3 1.8
----- ----
Net pension liability (included in other liabilities) ..................... $10.7 11.2
===== ====
30
23
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has overfunded and underfunded defined benefit plans at
September 30, 1997. The majority of the plans are overfunded. The projected
benefit obligation and the assets of the underfunded plans represent
approximately 3% and 2% of the total consolidated projected benefit obligation
and the plan assets, repectively.
The benefit obligations of the defined benefit plans as of September 30,
1997 and 1996 were both based on a discount rate of 7.5%, and an assumed rate of
increase in compensation levels of 4%. The 1997, 1996 and 1995 pension expense
for the defined benefit plans was based on a 7.5%, 7.5% and 8.5% discount rate,
respectively; a 4%, 4% and 4.75% increase in compensation levels, respectively;
and a 10% expected long-term rate of return on plan assets.
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) 1997 1996 1995
- -----------------------------------------------------------------------------
Service cost ...................................... $ .2 .2 .3
Interest cost ..................................... 1.2 1.3 1.4
Other ............................................. -- -- (.1)
---- --- ---
Net periodic postretirement benefit cost ....... $1.4 1.5 1.6
==== === ===
Accumulated postretirement benefit obligation for 1997 and 1996 by
component is as follows:
(Dollars in millions) 1997 1996
- ------------------------------------------------------------------------------------------------
Retirees ....................................................................... $12.1 13.2
Fully eligible active plan participants ........................................ .5 .5
Other active participants ...................................................... 3.0 3.0
----- ----
Total accumulated postretirement benefit obligation ......................... 15.6 16.7
Plan assets .................................................................... -- --
----- ----
Accumulated postretirement benefit obligation in excess of plan assets ...... 15.6 16.7
Unrecognized prior service cost ................................................ .1 .1
Unrecognized net gain .......................................................... .1 .1
----- ----
Accrued postretirement benefit obligation (included in other liabilities) ... $15.8 16.9
===== ====
The accumulated postretirement benefit obligations of the plans as of
September 30, 1997 and 1996 were both based on a discount rate of 7.5%. The
September 30, 1996 accumulated postretirement benefit obligation was based on a
health care cost trend of 8% for fiscal 1997, gradually grading down to an
ultimate rate of 5.5% by fiscal 2002. The September 30, 1997 accumulated
postretirement benefit obligation was based on a health care cost trend of 7.5%
for fiscal 1998, gradually grading down to an ultimate rate of 5.5% by fiscal
2002. A 1% increase in the health care cost trend rate for each year would
increase the September 30, 1997 accumulated postretirement benefit obligation by
approximately $375,000.
The 1997, 1996 and 1995 net periodic postretirement benefit costs were
based on a discount rate of 7.5%, 7.5% and 8.5%, respectively. The net periodic
postretirement benefit cost was based on an assumed health care cost trend of
8%, 8.5% and 9% for fiscal 1997, 1996 and 1995, respectively, gradually grading
down to 5.5% by fiscal 2002. A 1% increase in the health care cost trend rate
for each year would increase the aggregate of the service cost and interest cost
components of the 1997 net periodic postretirement benefit cost by approximately
$35,000.
31
24
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
10. OTHER
FINANCIAL DATA
Items charged to operations during the years ended September 30, 1997, 1996 and
1995 included the following:
(Dollars in thousands) 1997 1996 1995
- -----------------------------------------------------------------------
Maintenance and repairs ............. $ 5,828 5,826 5,664
Salaries and wages .................. 113,953 136,783 147,813
--------- ------- -------
Research and development costs:
Company-sponsored ................ 6,161 11,905 15,067
Customer-sponsored ............... 6,341 3,894 10,056
--------- ------- -------
Total ......................... $ 12,502 15,799 25,123
========= ======= =======
The decreases in 1997 and 1996 research and development costs is due to the
divestiture of Hazeltine in 1996.
Accrued expenses included accrued employee compensation of $9,300,000 and
$8,820,000 at September 30, 1997 and 1996, respectively.
- -------------------------------------------------------------------------------
11. BUSINESS
SEGMENT
INFORMATION
The Company's principal business segments are defense and commercial.
Summarized below is the Company's business segment information for the years
ended September 30, 1997, 1996 and 1995. Sales between segments have been
eliminated. Corporate expenses and assets have been allocated to the segment
data on a systematic basis. Hazeltine primarily operated within the defense
segment prior to its divestiture in 1996. Filtertek is included in the
commercial results for 1997. Operating profit (loss) is calculated as: net
sales, less cost of sales, less other charges related to cost of sales, less
selling, general and administrative expenses.
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------------------
Net sales:
Defense .......................... $191,039 300,970 345,076
Commercial ....................... 187,485 137,573 95,947
-------- ------- ------
$378,524 438,543 441,023
Operating profit (loss):
Defense .......................... $ 13,408 (31,842) 2,812
Commercial ....................... 14,184 7,902 2,746
-------- ------- ------
$ 27,592 (23,940) 5,558
Identifiable assets:
Defense .......................... $166,063 191,588 283,617
Commercial ....................... 212,124 116,244 94,384
-------- ------- ------
$378,187 307,832 378,001
Depreciation and amortization:
Defense .......................... $ 4,644 8,001 9,955
Commercial ....................... 9,779 5,485 4,087
-------- ------- ------
$ 14,423 13,486 14,042
Capital expenditures:
Defense .......................... $ 3,131 5,204 7,859
Commercial ....................... 7,395 3,354 3,287
-------- ------- ------
$ 10,526 8,558 11,146
======== ======= ======
Net sales derived from U.S. Government agencies, either through direct
sales or through prime contractors, totaled $164,660,000, $231,503,000 and
$307,970,000 for the years ended September 30, 1997, 1996 and 1995,
respectively.
32
25
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
International sales included in net sales for the years ended September 30,
1997, 1996 and 1995 are as follows:
(Dollars in thousands) 1997 1996 1995
- ----------------------------------------------------------
Europe ................... $31,075 53,856 44,111
Middle East .............. 6,024 19,223 27,314
Far East ................. 17,773 48,391 32,362
Other .................... 13,954 23,215 25,308
------ ------ ------
Total ................. $68,826 144,685 129,095
======= ======= =======
The decrease in 1997 international sales reflects the divestiture of
Hazeltine in July 1996 and lower Middle East sales at SEI; offset by the
addition of Filtertek ($10.3 million, primarily Europe) and higher volume at all
other operating units. Hazeltine's international sales for 1996 and 1995 were
$58.6 million and $58.4 million, respectively.
- -------------------------------------------------------------------------------
12. TRANSACTIONS
WITH EMERSON
(a) CONTRACT GUARANTEE ARRANGEMENT
Emerson has directly or indirectly guaranteed or is otherwise liable for
the performance of most of the Company's contracts with its customers which
existed at September 30, 1990 (the Guaranteed Contracts). The Guaranteed
Contracts include certain U.S. Government contracts entered into by the Company
prior to September 30, 1990. As of September 30, 1997, the aggregate backlog of
all firm orders received by the Company included Guaranteed Contracts of
$4,151,000. At September 30, 1997, there were open letters of credit with an
aggregate value of $2,443,000 related to foreign advance payments in support of
various contracts that are directly or indirectly guaranteed by Emerson.
In consideration of these guarantees, and in connection with the spin-off,
the Company paid Emerson a guarantee fee of $7,400,000 per year during the
five-year period ended September 30, 1995.
(b) LEASE AND BUILDING SERVICES
SEI, as tenant, entered into a building lease and a services agreement with
Emerson effective October 1, 1990. The building lease and services agreement was
terminated as of September 30, 1995. Rental expense under this lease and other
expenses for related building services aggregated $4,244,000 for the year ended
September 30, 1995.
- -------------------------------------------------------------------------------
13. COMMITMENTS
AND CONTINGENCIES
At September 30, 1997, the Company had $5,103,000 in letters of credit
outstanding as guarantees of contract performance.
In 1994, an action was commenced against the Company's Hazeltine subsidiary
alleging injury caused by Hazeltine's purported release of hazardous materials.
The Company believes that no one and no property has been injured by any release
of hazardous substances from Hazeltine's plant. In 1996, the plaintiffs filed a
motion to be certified as a class. This motion was denied and is currently being
appealed by the plaintiffs. Based upon the current facts, the Company is not
able to estimate the probable outcome. Therefore, no provision for this
litigation has been made in the accompanying consolidated financial statements.
Management believes the Company will be successful in defending this action and
that the outcome will not have a material adverse effect on the Company's
financial statements. This contingent liability was retained by the Company.
As a normal incidence of the businesses in which the Company is engaged,
various claims, charges and litigation are asserted or commenced against the
Company. In the opinion of management, final judgments, if any, which might be
rendered against the Company in current litigation are adequately reserved,
covered by insurance, or would not have a material adverse effect on its
financial statements.
33
26
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
14. OTHER CHARGES
RELATED TO COST
OF SALES AND
OTHER COSTS
AND EXPENSES
During 1996, and in conjunction with the sale of Hazeltine and management's
decision to pursue a strategy of deliberate diversification from defense to
commercial, the Company reevaluated the carrying value of certain assets. As a
result of this reevaluation, the Company recorded $25.3 million of other charges
related to cost of sales in 1996.
The 1996 charge includes $14.3 million of inventories related to defense
programs which the Company no longer intended to actively pursue; $6 million of
costs included in other assets incurred in anticipation of certain defense
contract awards which the Company is no longer actively pursuing; and a $5
million adjustment in the Company's estimate of recoveries in a contract dispute
related to the M1000 Trailer program.
Other charges related to cost of sales of $16.5 million incurred during
1995 were related to the facilities consolidation program implemented in 1995.
The 1995 charges include an $8.6 million pretax charge for a non-cash write-off
related to the accounting for the lease on the 8100 West Florissant, St. Louis,
Missouri facilities which were vacated and a $7.9 million non-cash pretax charge
associated with the disposition of inventories resulting from the consolidation
program and related restructuring of the Company's West Coast operations.
The 1997 and 1996 other costs and expenses, net of $4.5 million and $5
million includes miscellaneous non-operating charges. The 1995 other costs and
expenses, net of $29.5 million includes: $16.1 million in amortization of a
contract guarantee fee previously paid to Emerson ($5 million of normal
amortization and an $11.1 million adjustment related to the change in accounting
estimate, see Note 1 (e)); $7.8 million of exit and relocation costs incurred in
connection with the abandonment of the 8100 Building; and $5.6 million of
miscellaneous non-operating charges.
- -------------------------------------------------------------------------------
15. QUARTERLY
FINANCIAL
INFORMATION
(UNAUDITED)
(Dollars in thousands, First Second Third Fourth Fiscal
except per share amounts) Quarter Quarter Quarter Quarter Year
- -----------------------------------------------------------------------------------------------------------
1997
Net sales ................................. $ 68,899 88,811 109,348 111,466 378,524
Gross profit .............................. 16,960 22,427 25,513 26,834 91,734
Net earnings .............................. 2,182 2,767 3,330 3,518 11,797
Earnings per share:
Primary ................................ $ .18 .23 .27 .28 .96
Fully diluted .......................... .18 .23 .27 .28 .95
======== ======= ======= ======= =======
1996
Net sales ................................. $112,610 117,444 109,103 99,386 438,543
Gross profit (loss) ....................... 23,420 25,108 (23,794) 21,790 46,524
Gain on sale of Hazeltine ................. -- -- -- (48,500) (48,500)
Net earnings (loss) ....................... 1,922 2,414 (19,411) 41,211 26,136
Earnings (loss) per share:
Primary ................................ $ .17 .20 (1.72) 3.47 2.26
Fully diluted .......................... .17 .20 (1.72) 3.46 2.25
======== ======= ======= ======= =======
Gross profit (loss) is computed as net sales, less cost of sales, less
other charges related to cost of sales.
The 1997 quarterly financial information includes the results of Filtertek
subsequent to the February 1997 acquisition.
The 1996 quarterly financial information reflects the impact of the July
1996 sale of Hazeltine and the related gain, as well as the third quarter
write-off of certain assets.
34
27
ESCO Electronics Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's management is responsible for the preparation and integrity
of the financial information contained in this Annual Report. Management
believes that the consolidated financial statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances and that the other information in this Annual Report is consistent
with those principles. In preparing the consolidated financial statements,
management makes informed judgments and estimates where necessary to reflect the
expected effects of events and transactions that have not been completed.
In meeting its responsibility for the reliability of the consolidated
financial statements, management relies on a system of internal accounting
controls. This system is designed to provide reasonable assurance that assets
are safeguarded and transactions are executed in accordance with management's
authorization and recorded properly to permit the preparation of consolidated
financial statements in accordance with generally accepted accounting
principles. The design of this system recognizes that errors or irregularities
may occur and that estimates and judgments are required to assess the relative
cost and expected benefits of the controls. Management believes that the
Company's accounting controls provide reasonable assurance that errors or
irregularities that could be material to the consolidated financial statements
are prevented or would be detected within a timely period.
The Board of Directors monitors management's administration of the
Company's financial and accounting policies and practices, and the preparation
of these consolidated financial statements. The Audit and Finance Committee,
which is comprised solely of Directors who are not employees of the Company,
meets with management and the internal auditors periodically to review their
activities. The Audit and Finance Committee also meets periodically with
representatives of KPMG Peat Marwick LLP who have free access to the Audit and
Finance Committee and the Board of Directors to discuss internal accounting
control, auditing and financial reporting matters, as well as management
advisory services. The consolidated financial statements have been audited by
KPMG Peat Marwick LLP, whose report appears below.
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
ESCO ELECTRONICS CORPORATION:
We have audited the accompanying consolidated balance sheets of ESCO
Electronics Corporation and subsidiaries as of September 30, 1997 and 1996, 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,
1997. 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 generally accepted auditing
standards. 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
Electronics Corporation and subsidiaries as of September 30, 1997 and 1996, and
the results of their operations and their cash flows for each of the years in
the three-year period ended September 30, 1997, in conformity with generally
accepted accounting principles.
St. Louis, Missouri
November 10, 1997
35
28
ESCO Electronics Corporation and Subsidiaries
SHAREHOLDERS' SUMMARY
SHAREHOLDERS' ANNUAL MEETING
The Annual Meeting of the shareholders of ESCO Electronics Corporation will
be held at 10 a.m. Thursday, February 12, 1998, at the offices of Systems &
Electronics Inc., 201 Evans Lane, St. Louis County, Missouri 63121. 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 1997 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
Electronics Corporation, 8888 Ladue Road, Suite 200, St. Louis, Missouri 63124.
INVESTOR RELATIONS
Additional investor-related information from interested parties may be
obtained by contacting the Director of Investor Relations at (314) 213-7277.
TRANSFER AGENT AND REGISTRAR
Shareholder inquiries concerning lost certificates, transfer of shares or
address changes should be directed to:
Transfer Agent/Registrar
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Ridgefield Park, NJ 07660-2108
1 (800) 851-9677
E-mail: SHRRELATION@CHASEMELLON.COM
CAPITAL STOCK INFORMATION
ESCO Electronics Corporation common stock trust receipts (and the
underlying common stock and associated preferred stock purchase rights) (symbol
ESE) are listed on the New York Stock Exchange.
There were approximately 9,100 holders of record of trust receipts
representing shares of common stock at September 30, 1997.
FORWARD-LOOKING INFORMATION
The statements contained in the Chairman's message (pgs. 2-3), the
Commercial and Defense business summaries (pgs. 4-9), and Management's
Discussion and Analysis concerning the Company's future revenues, profitability,
financial resources, product mix, market demand and product development are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. 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: changing priorities or
reductions in the U.S. and worldwide defense budgets; termination of government
contracts due to unilateral government action or the Company's failure to
perform; delivery delays or defaults by customers; performance issues with key
suppliers and subcontractors; the Company's successful execution of internal
operating plans; and collective bargaining labor disputes.
37
29
COMMON STOCK MARKET PRICES
The Company's common stock trust receipts and the underlying 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 (excluding the impact in
1996 of the $3.00 per share cash distribution paid September 27, 1996) of the
Company's common stock for each quarter of 1997 and 1996:
1997 1996
- -----------------------------------------------------------------------
Quarter High Low High Low
- -----------------------------------------------------------------------
First......... 10 3/8 8 5/8 9 3/4 7 7/8
Second........ 13 1/4 9 7/8 14 8 7/8
Third......... 12 13/16 9 5/8 14 5/8 10 7/8
Fourth........ 18 1/4 12 3/8 13 1/4 10 1/4
=======================================================================
36