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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-10596
ESCO TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1554045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8888 LADUE ROAD, SUITE 200 63124-2090
ST. LOUIS, MISSOURI (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:(314) 213-7200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No___
The number of shares of the registrant's stock outstanding at July 31, 2003 was
12,793,817.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
------------------
June 30,
--------
2003 2002
---- ----
Net sales $ 102,343 92,154
Costs and expenses:
Cost of sales 70,970 61,968
Asset impairment 4,528 -
Selling, general and 22,406 20,414
administrative expenses
Interest expense 377 113
Other, net (1,264) 571
------ ---
Total costs and expenses 97,017 83,066
------ ------
Earnings before income taxes 5,326 9,088
Income tax expense 2,056 3,404
----- -----
Net earnings from continuing
operations 3,270 5,684
Earnings (loss) from discontinued
operations, net of tax of ($10)
and $44, respectively (10) 54
Gain on sale of discontinued
operations, net of tax of $733 894 -
--- ---
Net earnings from discontinued
operations 884 54
Net earnings $ 4,154 5,738
===== =====
Earnings per share:
Basic - Continuing operations $0.26 $0.45
- Discontinued operations 0.07 0.01
---- ----
- Net earnings $0.33 $0.46
===== =====
Diluted - Continuing operations $0.25 $0.43
- Discontinued operations 0.07 0.01
---- ----
- Net earnings $0.32 $0.44
==== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine Months Ended
June 30,
--------
2003 2002
---- ----
Net sales $323,828 258,829
Costs and expenses:
Cost of sales 223,433 174,721
Asset impairment 4,528 -
Selling, general and administrative 67,757 57,826
expenses
Interest expense 299 220
Other, net 2,463 1,445
----- -----
Total costs and expenses 298,480 234,212
------- -------
Earnings before income taxes 25,348 24,617
Income tax expense 9,979 9,260
----- -----
Net earnings from continuing
operations 15,369 15,357
Earnings from discontinued
operations, net of tax of $62
and $284, respectively 74 346
Gain on sale of discontinued
operations, net of tax of $733 894 -
---- ---
Net earnings from discontinued
operations 968 346
Net earnings $ 16,337 15,703
======== ======
Earnings per share:
Basic - Continuing operations $1.22 $1.23
- Discontinued operations 0.07 0.03
---- ----
- Net earnings $1.29 $1.26
===== =====
Diluted - Continuing operations $1.17 $1.18
- Discontinued operations 0.08 0.03
---- ----
- Net earnings $1.25 $1.21
===== =====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, September 30,
2003 2002
---- ----
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 45,392 25,160
Accounts receivable, less allowance for doubtful
accounts of $1,395 and $1,018, respectively 71,966 67,347
Costs and estimated earnings on long-term
contracts, less progress billings of
$5,533 and $4,541, respectively 5,382 2,951
Inventories 63,010 50,991
Current portion of deferred tax assets 18,527 22,796
Other current assets 7,766 8,500
Current assets from discontinued operations - 3,643
----- -----
Total current assets 212,043 181,388
------- -------
Property, plant and equipment, at cost 124,643 117,031
Less accumulated depreciation and amortization 58,028 50,777
------ ------
Net property, plant and equipment 66,615 66,254
Goodwill 105,213 103,283
Deferred tax assets 22,467 26,950
Other assets 26,936 26,219
Other assets from discontinued operations - 3,858
------ -----
$433,274 407,952
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 35 121
Accounts payable 38,120 38,364
Advance payments on long-term contracts, less costs
incurred of $7,171 and $3,770, respectively 1,161 2,706
Accrued expenses and other current liabilities 29,421 26,287
Current liabilities from discontinued operations - 1,309
------ -----
Total current liabilities 68,737 68,787
------ ------
Deferred income 3,308 -
Other liabilities 22,748 24,313
Long-term debt 9,319 8,277
Other liabilities from discontinued operations - 647
----- ---
Total liabilities 104,112 102,024
------- -------
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, par value $.01 per share,
authorized 10,000,000 shares -- --
Common stock, par value $.01 per share,
authorized 50,000,000 shares, issued
13,888,420 and 13,601,095 shares, respectively 139 136
Additional paid-in capital 213,602 209,019
Retained earnings since elimination of deficit
at September 30, 1993 137,767 121,430
Accumulated other comprehensive loss (5,769) (9,473)
------ ------
345,739 321,112
Less treasury stock, at cost: 1,106,027 and
1,067,046 common shares, respectively (16,577) (15,184)
Total shareholders' equity 329,162 305,928
------- -------
$433,274 407,952
======== =======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
June 30,
--------
2003 2002
---- ----
Cash flows from operating activities:
Net earnings $16,337 15,703
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net earnings from discontinued operations (74) (346)
Gain on disposal of discontinued operations (894) -
Depreciation and amortization 10,211 9,213
Changes in operating working capital (10,133) (11,631)
Effect of deferred taxes 4,483 2,578
Proceeds from settlement of patent litigation 7,300 -
Gain from settlement of patent litigation (2,056) -
Other 3,013 1,870
----- -----
Net cash provided by operating activities -
continuing operations 28,187 17,387
Net cash provided by discontinued operations 485 374
--- ---
Net cash provided by operating activities 28,672 17,761
Cash flows from investing activities:
Capital expenditures (9,568) (8,863)
Acquisition of businesses (5,364) (9,546)
Proceeds from divestiture of business 6,000 -
Capital expenditures of discontinued operations (147) (354)
---- ----
Net cash used by investing activities (9,079) (18,763)
------ -------
Cash flows from financing activities:
Net decrease in short-term borrowings (86) (12)
Proceeds from long-term debt - 144
Principal payments on long-term debt (626) (483)
Purchases of common stock into treasury (1,438) (456)
Other (including exercise of stock options) 2,789 478
----- ---
Net cash provided (used) by financing activities 639 (329)
--- ----
Net increase (decrease) in cash and cash equivalents 20,232 (1,331)
Cash and cash equivalents, beginning of period 25,160 15,125
------ ------
Cash and cash equivalents, end of period $45,392 13,794
------- ------
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements, in the opinion of
management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results for the interim
periods presented. The consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not
include all the disclosures required by accounting principles generally
accepted in the United States of America (GAAP). For further information
refer to the consolidated financial statements and related notes included
in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2002. Certain prior year amounts have been reclassified to
conform to the fiscal 2003 presentation.
The results for the three and nine month periods ended June 30, 2003 are
not necessarily indicative of the results for the entire 2003 fiscal year.
2. DISCONTINUED OPERATIONS - RANTEC
In February 2003, the Board of Directors approved the plan to dispose of
the Rantec Power Systems Inc. (Rantec) subsidiary under the terms outlined
by Management. Rantec, a manufacturer of power supplies for commercial and
military applications, is located in Los Osos, California. Rantec was
previously reported in the "Other" segment. Effective April 11, 2003, the
Company completed the sale of Rantec to an entity owned by a group of
investors primarily comprised of the subsidiary's management. The Company
received $6 million from the buyer at closing. An additional $0.7 million
will be paid by the buyer in equal installments during the nine months
following the sale. The Company is also entitled to contingent
consideration of up to $6.4 million over the next ten years, based on the
future operating results of Rantec, which will be recognized when earned. A
pretax gain of $1.6 million related to the sale is reflected in the
Company's fiscal 2003 third quarter results in discontinued operations.
Rantec is accounted for as a discontinued operation in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
and, accordingly, amounts in the financial statements and related notes for
all periods shown, reflect discontinued operations presentation. The net
sales from the discontinued operation were $0.3 million and $2.5 million
for the third quarters ended June 30, 2003 and 2002, respectively, and $5.7
million and $8.4 million for the nine-month periods ended June 30, 2003 and
2002, respectively. The net sales of $0.3 million for the third quarter of
fiscal 2003 represent the period April 1, 2003 - April 11, 2003, the date
of sale. The major classes of discontinued assets and liabilities included
in the Consolidated Balance Sheet at September 30, 2002 are as follows (in
thousands):
September 30, 2002
Assets:
Cash and cash equivalents (float) $ (230)
Accounts receivable, less allowance
for doubtful accounts 2,149
Inventories 1,724
-----
Current assets 3,643
-----
Net property, plant & equipment 2,268
Other assets 1,590
Total Assets of Discontinued Operations 7,501
=====
Liabilities:
Accounts payable 687
Accrued expenses and other current liabilities 622
---
Current liabilities 1,309
-----
Other liabilities 647
Total Liabilities of Discontinued Operations $ 1,956
=======
3. EARNINGS PER SHARE (EPS)
Basic EPS is calculated using the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the weighted
average number of common shares outstanding during the period plus shares
issuable upon the assumed exercise of dilutive common share options and
vesting of performance-accelerated restricted shares (performance shares)
by using the treasury stock method. The number of shares used in the
calculation of earnings per share for each period presented is as follows
(in thousands):
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
2003 2002 2003 2002
Weighted Average Shares
Outstanding - Basic 12,717 12,581 12,634 12,492
Dilutive Options and
Performance Shares 436 513 451 537
--- --- --- ---
Adjusted Shares- Diluted 13,153 13,094 13,085 13,029
====== ====== ====== ======
Options to purchase 2,000 shares of common stock at a price of $36.33 and
options to purchase approximately 34,500 shares of common stock at a price
of $35.93 were outstanding during the nine month periods ended June 30,
2003 and 2002, respectively, but were not included in the computation of
diluted EPS because the options' exercise prices were greater than the
average market price of the common shares. The options expire in various
periods through 2013. Approximately 51,000 and 93,000 performance shares
were excluded from the respective computation of diluted EPS based upon
the application of the treasury stock method.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement
No. 123," (SFAS 148) that provides alternative methods of transition for an
entity that voluntarily changes to the fair value based method of
accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS 123, "Accounting for Stock-Based
Compensation" (SFAS 123) to require prominent disclosures in both annual
and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The Company previously adopted the disclosure-only
provisions of SFAS 123. Under APB 25, no compensation cost was recognized
for the Company's stock option plans. The following table illustrates the
effect on net earnings and net earnings per share if the company had
applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation.
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Nine Months
Ended Ended
June 30, June 30,
2003 2003
---- ----
Net earnings, as reported $4,154 $16,337
====== =======
Pro forma net earnings $3,771 $14,719
====== =======
Net earnings per share:
Basic - as reported $0.33 $1.29
Basic - pro forma $0.30 $1.17
Diluted - as reported $0.32 $1.25
Diluted - pro forma $0.29 $1.12
===== =====
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2003: expected dividend yield of 0%;
expected volatility of 33.8%; risk-free interest rate of 3.5%; and expected
life based on historical exercise periods of 4.04 years. The Company did
not include the comparable disclosures for the prior year periods as the
Company was not able to generate the quarterly data for the prior years
from its database because this information was kept previously only for the
entire fiscal year and not by quarter. The Company estimates that for the
three and nine-month periods ended June 30, 2002, the pro forma diluted net
earnings per share impact would have been approximately $0.04 per quarter.
4. INVENTORIES
Inventories consist of the following (in thousands):
June 30, September 30,
2003 2002
---- ----
Finished goods $ 17,644 12,164
Work in process, including long- term
contracts 14,952 12,505
Raw materials 30,414 26,322
------ ------
Total inventories $ 63,010 50,991
========= ======
5. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended June 30, 2003 and
2002 was $6.4 million and $7.4 million, respectively. Comprehensive income
for the nine-month periods ended June 30, 2003 and 2002 was $20.0 million
and $16.4 million, respectively. For the nine months ended June 30, 2003,
the Company's comprehensive income was positively impacted by foreign
currency translation adjustments of approximately $3.8 million. This
positive effect was partially offset by a decrease in fair value of the
Company's interest rate swaps designated as a cash flow hedge of $0.1
million, discussed below in Item 3, Quantitative and Qualitative
Disclosures About Market Risk.
6. ACQUISITIONS
On December 31, 2002, the Company acquired the assets and certain
liabilities of Austin Acoustics Systems, Inc. for $4 million in cash.
Austin Acoustics is a leading supplier of noise control chambers for the
test, medical and broadcast/music industries. Austin Acoustics is
headquartered in Austin, TX and has annual sales of approximately $8
million. The assets, liabilities and results of operations since the date
of acquisition are included within the Company's Test segment.
7. ASSET IMPAIRMENTS
In May 2003, the Company committed to plans to proceed with the closure of
the Filtertek manufacturing operation in Puerto Rico (Filtration/Fluid Flow
segment). The manufacturing will be moved to existing facilities in Hebron,
IL and Juarez, Mexico. The closure resulted in a fiscal 2003 third quarter
asset impairment charge of $4.3 million consisting of a $3.5 million write
down of the Puerto Rico facility to its appraised value and a $0.8 million
write down of machinery and equipment to their estimated salvage value.
Severance charges of $0.2 million are included within SG&A and move costs
of $0.2 million are included within Other, net, in the fiscal 2003 third
quarter related to the closure.
In May 2003, the Company committed to plans to restructure its Test
operations in the U.K. and centralize the management of the European Test
operations. The European consolidation resulted in a fiscal 2003 third
quarter asset impairment charge of $0.2 million related to write-offs of
leasehold improvements. Severance charges of $0.1 million are included
within SG&A in the fiscal 2003 third quarter related to the U.K.
restructuring. The consolidation will be complete in fiscal 2004.
8. PATENT LITIGATION SETTLEMENT
During the third quarter of fiscal 2003, the Company reached a settlement
in the defense of a certain revenue generating patent used in the Company's
Filtration/Fluid Flow business, which had been previously disclosed in the
fiscal 2003 second quarter Form 10-Q. Under the terms of the agreement, the
Company received $7.3 million in May 2003. The Company recorded a gain of
$2.1 million during the third quarter of fiscal 2003, after deducting $1.4
million of professional fees related to the settlement. The unrealized gain
of $3.8 million ($0.5 million classified in accrued expenses and other
current liabilities and $3.3 million classified in long-term deferred
income) will be recognized on a straight-line basis in Other, net, over the
remaining patent life, through 2011.
9. TERMINATION OF WHATMAN HEMASURE INC. MANUFACTURING AND SUPPLY AGREEMENT
On January 24, 2003, the Company's Filtertek Inc. subsidiary (Filtertek)
terminated its Manufacturing and Supply Agreement (MSA) with Whatman
Hemasure Inc. (Whatman) based on Whatman's breach of its obligations under
the MSA. The MSA related to the parties' responsibilities concerning the
manufacture and supply of leukocyte filters. Under the terms of the MSA,
Filtertek's termination based on Whatman's breach entitles Filtertek to
recover its damages and certain specified costs, which include among other
costs, payment for certain equipment used in the production of leukocyte
filters. Whatman has disputed Filtertek's allegations of breach. However,
Whatman has entered into settlement discussions with Filtertek. If the
settlement discussions do not result in an acceptable resolution, Filtertek
believes it will be successful in enforcing its contractual rights.
Filtertek recorded a $1.5 million charge in Other, net, during the second
quarter of fiscal 2003 primarily related to the fair value of the remaining
equipment lease obligations for that program. Any recovery will be recorded
as a gain in the period a settlement is reached or a final judgment under
litigation is rendered and all contingencies are resolved.
10. SYNTHETIC LEASE OBLIGATION
The Company has a $31.5 million obligation under a synthetic lease
facility. For GAAP purposes, prior to the adoption of FASB Interpretation
No. 46, "Consolidation of Variable Interest Entities" (FIN 46), this
obligation is accounted for as an operating lease. This obligation is
secured by leases of three manufacturing locations, two of which are in
Oxnard, CA (Filtration/Fluid Flow segment) and the other in Cedar Park, TX,
(Test segment) as well as a $10.6 million letter of credit issued under the
Company's $65 million credit facility. The Company plans to repay this
obligation prior to September 30, 2003. See further discussion in Note 12
to the consolidated financial statements "Subsequent Events".
FIN 46 provides guidance for identifying variable interest entities and
determining whether such entities should be consolidated. The Company will
be consolidating the synthetic lease obligation and recording additional
assets and liabilities on its consolidated balance sheet beginning on July
1, 2003, the beginning of the Company's fourth fiscal quarter. Upon
consolidation, the Company will record property, plant & equipment of $29.2
million, long-term debt of $31.5 million and a non-cash after-tax charge --
reported as a cumulative effect of a change in accounting principle -- of
approximately $1.4 million during the fourth quarter of fiscal 2003.
11. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in three
segments: Filtration/Fluid Flow, Communications and Test.
Management evaluates and measures the performance of its operating segments
based on "Net Sales" and "EBIT", which are detailed in the table below.
EBIT is defined as earnings from continuing operations before interest and
taxes. Corporate costs are allocated to the operating segments based on
2.5% of net sales. "Other" consists of a residual amount after corporate
operating charges are allocated to the operating units. The table below is
presented for continuing operations and excludes discontinued operations
(Rantec).
($ in millions) Three Months ended Nine Months ended
June 30, June 30,
-------- --------
NET SALES 2003 2002 2003 2002
--------- ---- ---- ---- ----
Filtration/Fluid Flow $ 53.1 $ 50.4 $153.3 $142.8
Communications 28.5 25.0 105.9 64.7
Test 20.7 16.8 64.6 51.3
---- ---- ---- ----
Consolidated totals $102.3 $ 92.2 $323.8 $258.8
====== ====== ====== ======
EBIT
----
Filtration/Fluid Flow $(0.5)(1) $4.3 $1.2(2) $9.7
Communications 4.8 5.1 23.0 14.3
Test 0.7(3) 0.9 3.2(3) 3.2
Other 0.7 (1.1) (1.8)(4) (2.4)
--- ---- ---- ----
Consolidated EBIT 5.7 9.2 25.6 24.8
=== === ==== ====
Interest expense 0.4 0.1 0.3 0.2
Earnings before income
taxes $5.3 $9.1 $25.3 $24.6
==== ==== ===== =====
(1) Includes $4.7 million of impairment charges and exit costs related to the
Filtertek Puerto Rico facility, and a $2.1 million gain related to the
settlement of patent litigation which is discussed in Notes 7 and 8 to the
consolidated financial statements. See further discussion in Item 2 below,
under "Results of Operations - EBIT - Filtration/Fluid Flow".
(2) Includes $4.7 million of impairment charges and exit costs related to the
Filtertek Puerto Rico facility, and a $2.1 million gain related to the
settlement of patent litigation which is discussed in Notes 7 and 8 to the
consolidated financial statements. Also, includes a $1.5 million charge
resulting from an equipment lease termination related to the Whatman MSA
dispute which was recorded in the second fiscal quarter of 2003, which is
discussed in Note 9 to the consolidated financial statements. See further
discussion in Item 2 below, under "Results of Operations - EBIT-
Filtration/Fluid Flow".
(3) Includes $0.3 million of charges related to the U.K. Test
move/restructuring. See further discussion in Item 2 below, under "Results
of Operations - EBIT - Test".
(4) Includes $1.4 million of costs related to the MTA, which were incurred in
the first six months of fiscal 2003.
12. SUBSEQUENT EVENTS
In July 2003, the Company announced its decision to sell the Microfiltration and
Separations businesses in the Filtration/Fluid Flow segment, and therefore,
these businesses will be recorded as discontinued operations beginning in the
fourth quarter of fiscal 2003. The Microfiltration and Separations businesses
represent approximately 20% of the Filtration/Fluid Flow segment net sales.
These businesses consist of PTI Advanced Filtration Inc., located in Oxnard, CA,
PTI Technologies Limited, located in Sheffield, England, and PTI S.p.A., located
in Milan, Italy. These actions will result in an estimated non-cash pretax
charge of $65 million to $75 million in the fourth quarter of fiscal 2003,
primarily related to goodwill and other intangible assets.
In addition, the Company announced its plans to close out the synthetic lease
obligation by purchasing the three properties at their original cost of $31.5
million, and repay and cancel the related interest rate swap associated with
this obligation, which would result in a pretax charge of approximately $3.0
million in the fourth quarter of fiscal 2003.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
The following discussion refers to the Company's results from continuing
operations, except where noted. At June 30, 2003, Rantec Power Systems Inc.
(Rantec) is accounted for as a discontinued operation in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Accordingly, amounts in the financial statements and related notes for all
periods shown reflect this discontinued operation.
NET SALES
Net sales increased $10.2 million (11.1%) to $102.3 million for the third
quarter of fiscal 2003 from $92.2 million for the third quarter of fiscal 2002.
Net sales increased $65.0 million (25.1%) to $323.8 million for the first nine
months of fiscal 2003 from $258.8 million for the prior year period.
Filtration/Fluid Flow, Communications and Test segments each had increased sales
in the third quarter of 2003 and the first nine months of fiscal 2003 as
compared to the prior year periods. During the nine month period ended June 30,
2003, the largest increase in net sales was in the Communications segment,
resulting from significantly higher shipments of Automatic Meter Reading (AMR)
equipment, primarily to PPL Electric Utilities Corporation (PPL).
- -Filtration/Fluid
Flow Net sales increased $2.8 million (5.5%) to $53.1 million for the third
quarter of fiscal 2003 from $50.4 million for the third quarter of fiscal 2002.
Net sales increased $10.5 million (7.4%) to $153.3 million for the first nine
months of fiscal 2003 from $142.8 million for the first nine months of fiscal
2002. Sales increases during the three and nine month period ended June 30, 2003
as compared to the prior year periods are mainly due to higher product shipments
from the VACCO and Filtertek subsidiaries.
- -Communications
For the third quarter of fiscal 2003, net sales of $28.5 million were $3.5
million (14.1%) higher than the $25.0 million of net sales recorded in the third
quarter of fiscal 2002. Net sales of $105.9 million in the first nine months of
fiscal 2003 were $41.2 million (63.7%) higher than the $64.7 million recorded in
the first nine months of fiscal 2002. Sales increases are the result of
significantly higher shipments of AMR products, primarily to PPL. Sales to PPL
were $12.5 million and $10.9 million in the third quarter of fiscal 2003 and
2002, respectively, and $50.3 million and $15.4 million during the first nine
months of fiscal 2003 and 2002, respectively. In addition, sales to electric
utility cooperatives (Co-ops) remain strong in fiscal 2003. During the third
quarter of fiscal 2003, the Company experienced a delay in completing a
modification of the automatic meter reading module to interface with a new
electronic meter. The modification was completed early in the fourth quarter of
fiscal 2003 and is now being delivered to several customers. This issue impacted
the timing of sales and earnings between the third and fourth quarters of fiscal
2003.
Sales of Comtrak's SecurVision products were $1.4 million for the third quarter
of fiscal 2003 as compared to $0.4 million for the prior year third quarter and
$7.2 million for the first nine months of fiscal 2003 as compared to $2.1
million for the prior year nine month period.
- -Test
Net sales increased $3.9 million (23.2%) to $20.7 million for the third quarter
of fiscal 2003 from $16.8 million for the third quarter of fiscal 2002. Net
sales increased $13.3 million (26.0%) to $64.6 million for the first nine months
of fiscal 2003 from $51.3 million for the first nine months of fiscal 2002. The
net sales increases are the result of higher sales of large EMC test chambers,
an increase in sales from the Company's Asian operations, and the addition of
the acoustics business at the end of the first quarter of fiscal 2003, which
contributed $4.1 million to sales for the first nine months of fiscal 2003.
During the third quarter of fiscal 2003, the Company experienced some customer
driven delays primarily as a result of the late completion of the parent
buildings which house the test chambers. The deliveries and installations that
were anticipated in the third quarter of fiscal 2003 are now expected to occur
over the next two fiscal quarters.
ORDERS AND BACKLOG
Backlog was $269.7 million at June 30, 2003 compared with $293.2 million at
September 30, 2002. The Company received orders from continuing operations
totaling $308.2 million in the first nine months of fiscal 2003. New orders of
$166.3 million were received in the first nine months of fiscal 2003 related to
Filtration/Fluid Flow products, $71.6 million related to Communications
products, and $70.4 million related to Test products.
GROSS PROFIT
The Company computes gross profit as net sales less cost of sales less asset
impairment charges. The gross profit margin is the gross profit divided by net
sales, expressed as a percentage. The gross profit margin was 26.2% and 32.8% in
the third quarter of fiscal 2003 and 2002, respectively. The gross profit margin
was 29.6% and 32.5% for the nine months of fiscal 2003 and 2002, respectively.
The gross profit margin was negatively impacted by $4.5 million of asset
impairment charges, which represented 4.4% and 1.4% of gross profit margin for
the three and nine month periods ended June 30, 2003, respectively. In addition,
the gross profit margin was negatively impacted by overall changes in sales mix.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the third quarter of
fiscal 2003 were $22.4 million (21.9% of net sales), compared with $20.4 million
(22.2% of net sales) for the prior year period. For the first nine months of
fiscal 2003, SG&A expenses were $67.8 million (20.9% of net sales), compared
with $57.8 million (22.3% of net sales) for the prior year period. The increase
in SG&A spending in the first nine months of fiscal 2003 is mainly due to the
costs associated with research and development, engineering, and marketing
within the Communications and Filtration/Fluid Flow segments. The Company's
Microfiltration and Separations businesses currently are significantly dilutive
to earnings. The MTA added $1.4 million of SG&A expenses in the first nine
months of fiscal 2003. In addition, the fiscal 2003 acquisition of the acoustics
business and the fiscal 2002 acquisition of technology from North Carolina
Separations Research Technology (NC SRT), added $2.0 million of SG&A expenses in
the first nine months of fiscal 2003. SG&A also includes $0.3 million of
severance charges related to the closure of the Filtertek Puerto Rico facility
($0.2 million) and the U.K. Test restructuring ($0.1 million). See further
discussion in Note 7 to the consolidated financial statements.
OTHER COSTS AND EXPENSES (INCOME), NET
Other costs and expenses (income), net, were ($1.3) million for the quarter
ended June 30, 2003 compared to $0.6 million for the prior year quarter. Other
costs and expenses (income), net, were $2.5 million for the first nine months of
fiscal 2003 compared to $1.4 million for the prior year period. The principal
component of other costs and expenses (income), net, for the three months ended
June 30, 2003 was a $2.1 million gain resulting from the settlement of patent
litigation (Filtration/Fluid Flow segment). Principal components of other costs
and expenses (income), net, for the first nine months of fiscal 2003 included
the following: a $2.1 million gain resulting from the settlement of patent
litigation (Filtration/Fluid Flow segment); a $1.5 million charge resulting from
an equipment lease termination related to the previously disclosed Whatman MSA
dispute (Filtration/Fluid Flow segment); and $1.4 million of amortization of
identifiable intangible assets, primarily patents and licenses.
Principal components of Other costs and expenses (income), net, for the first
nine months of fiscal 2002 include $1.1 million of amortization of identifiable
intangible assets, primarily patents and licenses, and a $0.4 million gain from
insurance proceeds related to a former subsidiary.
EBIT
The Company evaluates the performance of its operating segments based on EBIT,
which the Company defines as Earnings Before Interest and Taxes. EBIT was $5.7
million (5.6% of net sales) for the third quarter of fiscal 2003 and $9.2
million (10.0% of net sales) for the third quarter of fiscal 2002. For the first
nine months of fiscal 2003, EBIT was $25.6 million (7.9% of net sales) and $24.8
million (9.6% of net sales) for the first nine months of fiscal 2002. EBIT for
the first nine months of fiscal 2003 was negatively impacted by the following:
the investments made in Microfiltration and Separations, $4.7 million of
impairment charges and exit costs related to the Filtertek Puerto Rico facility
(Filtration/Fluid Flow segment); a $1.5 million charge resulting from an
equipment lease termination related to the Whatman MSA dispute (Filtration/Fluid
Flow segment); $1.4 million in MTA costs; $0.4 million of exit costs related to
the Brooklyn Park, MN facility (Filtration/Fluid Flow segment); and $0.3 million
of restructuring costs related to the U.K. Test facility (Test segment).
This Form 10-Q contains the financial measure "EBIT", which is not calculated in
accordance with generally accepted accounting principles in the United States of
America (GAAP). EBIT provides investors and Management with an alternative
method for assessing the Company's operating results. The Company defines "EBIT"
as earnings from continuing operations before interest and taxes. Management
evaluates the performance of its operating segments based on EBIT and believes
that EBIT is useful to investors to demonstrate the operational profitability of
the Company's business segments by excluding interest and taxes, which are
generally accounted for across the entire Company on a consolidated basis. EBIT
is also one of the measures Management uses to determine resource allocations
within the Company and incentive compensation.
EBIT
----
Three Months ended Nine Months ended
($ in thousands) June 30, June 30,
-------- --------
2003 2002 2003 2002
EBIT $5,703 $9,201 $25,647 $24,837
Interest expense (income) 377 113 299 220
Less: Income taxes 2,056 3,404 9,979 9,260
===== ===== ===== =====
Net earnings from continuing
operations $3,270 $5,684 $15,369 $15,357
====== ====== ======= =======
- -Filtration/Fluid Flow
EBIT was ($0.5) million and $4.3 million in the third quarter of fiscal 2003 and
2002, respectively, and $1.2 million and $9.7 million in the first nine months
of fiscal 2003 and 2002, respectively. During the third quarter of fiscal 2003,
the Company recorded $4.7 million of impairment charges and exit costs related
to the Filtertek Puerto Rico facility and a $2.1 million gain related to the
settlement of patent litigation, see further discussion in the paragraphs below.
In addition, in the third quarter and the first nine months of fiscal 2003, EBIT
declined as compared to the prior year periods due to costs related to the
Microfiltration and Separations businesses and costs related to establishing a
new German sales and support operation. During the second quarter of fiscal
2003, the Company incurred a $1.5 million charge resulting from an equipment
lease termination related to the Whatman MSA dispute. During the first quarter
of fiscal 2003, the Company incurred approximately $0.4 million of costs to exit
the Brooklyn Park, MN facility in conjunction with its plan to consolidate the
operations into its Oxnard, CA facility.
In July 2003, the Company announced its decision to sell the Microfiltration and
Separations businesses which will result in an estimated non-cash pretax charge
of $65 million to $75 million in the fourth quarter of fiscal 2003, primarily
related to goodwill and other intangible assets. The Microfiltration and
Separations businesses contributed EBIT losses of ($1.6) million and ($6.5)
million for the three and nine-month periods ended June 30, 2003, respectively.
In May 2003, the Company committed to plans to proceed with the closure of the
Filtertek manufacturing operation in Puerto Rico. The manufacturing will be
moved to existing facilities in Hebron, IL and Juarez, Mexico. The closure
resulted in a fiscal 2003 third quarter asset impairment charge of $4.3 million
consisting of a $3.5 million write down of the Puerto Rico facility to its
appraised value and a $0.8 million write down of machinery and equipment to
their estimated salvage value. The Company also recorded severance and move
costs totaling $0.4 million in the fiscal 2003 third quarter. Total severance
and move costs are expected to be between $1.5 million and $2.0 million and will
be incurred over the next six months. When the closure and relocation are
completed in fiscal 2004, Management expects this action to result in at least
$2.0 million of annual cost savings.
During the third quarter of fiscal 2003, the Company reached a settlement in the
defense of a certain revenue generating patent used in the Filtration/Fluid Flow
business, which had been previously disclosed in the fiscal 2003 second quarter
Form 10-Q. Under the terms of the agreement, the Company received $7.3 million
in May 2003. The Company recorded a gain of $2.1 million during the third
quarter of fiscal 2003, after deducting $1.4 million of professional fees
related to the settlement. The unrealized gain of $3.8 million will be
recognized on a straight line basis in Other, net over the remaining patent
life, through 2011.
- -Communications
Third quarter EBIT of $4.8 million in fiscal 2003 was $0.3 million lower than
the $5.1 million of EBIT in the third quarter of fiscal 2002. The decrease in
EBIT in the third quarter of fiscal 2003 as compared to the prior year period is
due to higher volumes of lower margin commercial and industrial (C&I) meter
modules. For the first nine months of fiscal 2003, EBIT increased by $8.7
million to $23.0 million from $14.3 million in fiscal 2002. The increase in EBIT
for the first nine months of fiscal 2003 is the result of significantly higher
shipments of AMR equipment, primarily to PPL. The Company continues to increase
its engineering and new product development expenditures in the Communications
segment in order to continue its growth in the AMR markets, and to further
differentiate its technology from the competition.
- -Test
EBIT in the third quarter of fiscal 2003 was $0.7 million as compared to $0.9
million in the prior year period. EBIT was $3.2 million in both the first nine
months of fiscal 2003 and fiscal 2002, respectively. Current year EBIT was
negatively impacted by the U.K. Test restructuring, as discussed more fully in
the paragraph below, and investments to expand the Company's presence in China
and Japan.
In May 2003, the Company committed to plans to restructure its Test operations
in the U.K. and centralize the management of the European Test operations. The
European consolidation resulted in a fiscal 2003 third quarter pretax charge of
$0.3 million. The costs primarily relate to severance, write-offs of leasehold
improvements, and moving costs. The Company expects to incur an additional $0.3
million of costs prior to the completion of the consolidation. The consolidation
will be complete in fiscal 2004.
- -Other
"Other" consists of a residual amount after corporate operating charges are
allocated to the operating units. EBIT was $0.7 million and ($1.8) million for
the three and nine-month periods ended June 30, 2003, respectively, compared to
($1.1) million and ($2.4) million for the respective prior year periods. EBIT
for the first nine months of fiscal 2003 included $1.4 million of MTA costs.
INTEREST EXPENSE (INCOME), NET
Interest expense, net, was $0.4 million and $0.1 million for the quarter ended
June 30, 2003 and 2002, respectively. Interest expense, net, was $0.3 million
and $0.2 million for the first nine months of fiscal 2003 and 2002,
respectively.
INCOME TAX EXPENSE
The third quarter fiscal 2003 effective income tax rate was 38.6% compared to
37.5% in the third quarter of fiscal 2002. The effective income tax rate in the
first nine months of fiscal 2003 was 39.4% compared to 37.6% in the prior year
period. The increase in the effective income tax rate in fiscal 2003 is
primarily due to an increase in certain tax accruals related to the tax sharing
agreement resulting from the spin-off of the Company in 1990. The Company
estimates the annual effective tax rate for fiscal 2003 to be approximately
39.7%, excluding the effect of discontinued operations and the Company's other
initiatives as discussed in Note 12 to the consolidated financial statements
"Subsequent Events".
FINANCIAL CONDITION
Working capital increased to $143.3 million at June 30, 2003 from $112.6 million
at September 30, 2002. During the first nine months of fiscal 2003, accounts
receivable increased by $4.6 million due to the increase in sales, mainly within
the Company's Communications segment. Inventories increased by $12.0 million in
the first nine months of fiscal 2003 to support near term demand, mainly within
the Communications segment and facility relocations related to the Filtertek
Puerto Rico move (Filtration/Fluid Flow segment). The acoustics business
contributed $1.3 million and $1.2 million to the increase in accounts receivable
and inventories, respectively, at June 30, 2003. In addition, accounts payable
and accrued expenses increased by $2.9 million in the first nine months of
fiscal 2003 primarily due to the purchases of inventories and the timing of
payments.
Net cash provided by operating activities from continuing operations was $28.2
million in the first nine months of fiscal 2003, which includes $7.3 million
received from the patent litigation settlement, compared to $17.4 million in the
same period of fiscal 2002.
Capital expenditures from continuing operations were $9.6 million and $8.9
million in the nine-month period ended June 30, 2003 and 2002, respectively.
Major expenditures in the current period included manufacturing equipment used
in the Filtration / Fluid Flow businesses. The Company has capital commitments
of approximately $1.6 million in the fourth quarter of fiscal 2003 related to a
new headquarters facility in the Communications segment.
At March 31, 2003, accounts receivable included $1.3 million of reimbursable
costs incurred to replace certain filtration elements resulting from a
supplier's nonconforming material. A formal settlement was reached in March
2003. The Company received $1.0 million in May 2003 and a note receivable for
$0.3 million.
At June 30, 2003, other current assets include a mortgage note receivable of
$1.8 million from the prior sale of the Riverhead, NY property, related to a
former defense subsidiary. The property was sold in December 1999 for $2.6
million, with $0.5 million received as a down payment and the remaining $2.1
million financed under the mortgage note. Through June 30, 2003, the buyer has
paid additional principal and interest payments totaling $0.8 million. However,
currently, the buyer is in default of the provisions of the note receivable and
the Company has begun foreclosure proceedings on the property. A recent
independent appraisal indicates the value of the property is greater than $5
million. The Company does not anticipate a loss related to this matter.
Effective April 5, 2002, the Company amended its existing $75 million revolving
credit facility, changing the previously scheduled reductions and extending the
$25 million increase option through April 11, 2004. The amendment calls for $5
million reductions to the credit facility annually beginning in April 2002 with
the balance due upon maturity and expiration on April 11, 2005. As of June 30,
2003, the Company had not exercised the $25 million increase option and the
revolving line of credit was $65 million. At June 30, 2003, the Company had
approximately $42.3 million available to borrow under the credit facility in
addition to $45.4 million cash on hand. Against the $65 million available under
the revolving credit facility at June 30, 2003, the Company had $8.7 million of
outstanding long-term foreign borrowings and $14.0 million of outstanding
letters of credit. Cash flow from operations and borrowings under the Company's
bank credit facility are expected to meet the Company's capital requirements and
operational needs for the foreseeable future. The Company plans to negotiate
amendments to the credit facility in the fourth quarter of fiscal 2003 to
reflect the recently announced divestiture, charges and synthetic lease
repayment.
In December 2002, the Company paid $4 million to acquire the assets and certain
liabilities of Austin Acoustics Systems, Inc. In March 2003, the Company paid $1
million related to the technology acquired from NC SRT under the terms of the
acquisition agreement.
SYNTHETIC LEASE OBLIGATION
The Company has a $31.5 million obligation under a synthetic lease facility. For
GAAP purposes, prior to the adoption of FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46), this obligation is
accounted for as an operating lease. This obligation is secured by leases of
three manufacturing locations, two of which are in Oxnard, CA (Filtration/Fluid
Flow segment) and the other in Cedar Park, TX, (Test segment) as well as a $10.6
million letter of credit issued under the Company's $65 million credit facility.
The Company plans to repay this obligation prior to September 30, 2003. See
further discussion in Note 12 to the consolidated financial statements
"Subsequent Events".
FIN 46 provides guidance for identifying variable interest entities and
determining whether such entities should be consolidated. The Company will be
consolidating the synthetic lease obligation and recording additional assets and
liabilities on its consolidated balance sheet beginning on July 1, 2003, the
beginning of the Company's fourth fiscal quarter. Upon consolidation of the
synthetic lease obligation, the Company will record property, plant & equipment
of $29.2 million, long-term debt of $31.5 million and a non-cash after-tax
charge -- reported as a cumulative effect of a change in accounting principle --
of approximately $1.4 million during the fiscal 2003 fourth quarter.
MANAGEMENT TRANSITION AGREEMENT
On August 5, 2002, the Company entered into the MTA with Dennis J. Moore, the
Company's former Chairman, under which Mr. Moore receives certain compensation
in conjunction with his retirement in April 2003 and for his consulting services
after retirement. Of the $2.5 million total cost related to the MTA, $1.4
million was expensed in SG&A during the first nine months of fiscal 2003, and
$0.7 million was recorded in the fourth quarter of fiscal 2002, for a total of
$2.1 million expensed to date. The remaining cost of the MTA is the $0.3 million
consulting agreement that is being expensed over the twelve-month period from
April 2003 through March 2004, consistent with the period of service.
SUBSEQUENT EVENTS
In July 2003, the Company announced its decision to sell the Microfiltration and
Separations businesses in the Filtration/Fluid Flow segment, and therefore,
these businesses will be recorded as discontinued operations beginning in the
fourth quarter of fiscal 2003. The Microfiltration and Separations businesses
represent approximately 20% of the Filtration/Fluid Flow segment net sales.
These businesses consist of PTI Advanced Filtration Inc., located in Oxnard, CA,
PTI Technologies Limited, located in Sheffield, England, and PTI S.p.A., located
in Milan, Italy. These actions will result in an estimated non-cash pretax
charge of $65 million to $75 million in the fourth quarter of fiscal 2003,
primarily related to goodwill and other intangible assets.
In addition, the Company announced its plans to close out the synthetic lease
obligation by purchasing the three properties at their original cost of $31.5
million and repay and cancel the related interest rate swap associated with this
obligation, which would result in a pretax charge of approximately $3.0 million
in the fourth quarter of fiscal 2003.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires Management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements. In preparing these
financial statements, Management has made its best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. The Company does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or
using different assumptions related to the accounting policies described below.
However, application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from these estimates. The Company's senior
Management discusses the accounting policies described below with the Audit and
Finance Committee of the Company's Board of Directors on a periodic basis.
The following discussion of critical accounting policies is intended to bring to
the attention of readers those accounting policies which Management believes are
critical to the Consolidated Financial Statements and other financial
disclosure. It is not intended to be a comprehensive list of all significant
accounting policies that are more fully described in Note 1 of the Notes to the
Consolidated Financial Statements included in the 2002 Annual Report on Form
10-K.
The Company has identified the following areas as critical accounting policies.
Revenue Recognition
The majority of the Company's revenues are recognized when products are shipped
to or when services are performed for unaffiliated customers. Other revenue
recognition methods the Company uses include the following: Revenue on
production contracts is recorded when specific contract terms are fulfilled,
usually by delivery or acceptance. Revenues from cost reimbursement contracts
are recorded as costs are incurred, plus fees earned. Revenue under long-term
contracts, for which delivery is an inappropriate measure of performance, is
recognized on the percentage-of-completion method based upon incurred costs
compared to total estimated costs under the contract. Revenue under engineering
contracts is generally recognized as milestones are attained. The SEC's Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition" provides guidance on
the application of generally accepted accounting principles to selected revenue
recognition issues. Management believes the Company's revenue recognition policy
is in accordance with generally accepted accounting principles and SAB No. 101.
Accounts Receivable
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. This estimated allowance is based primarily
on Management's evaluation of the financial condition of the customer and
historical bad debt experience.
Inventory
Inventories are valued at the lower of cost (first-in, first-out) or market
value and have been reduced by an allowance for excess, slow-moving and obsolete
inventories. The estimated allowance is based on Management's review of
inventories on hand compared to historical usage and estimated future usage and
sales. Inventories under long-term contracts reflect accumulated production
costs, factory overhead, initial tooling and other related costs less the
portion of such costs charged to cost of sales and any unliquidated progress
payments. In accordance with industry practice, costs incurred on contracts in
progress include amounts relating to programs having production cycles longer
than one year, and a portion thereof may not be realized within one year.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred tax assets may be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance when Management
believes it is more likely than not such assets will not be recovered, taking
into consideration historical operating results, expectations of future
earnings, and the expected timing of the reversals of existing temporary
differences.
Goodwill and Other Long-Lived Assets
The Company adopted the provisions of SFAS No. 142 effective October 1, 2001.
Management annually reviews goodwill and other long-lived assets with indefinite
useful lives for impairment or whenever events or changes in circumstances
indicate the carrying amount may not be recoverable. If indicators of impairment
are present, the determination of the amount of impairment for long-lived assets
with definite lives is based on Management's judgment as to the future operating
cash flows to be generated from these assets throughout their estimated useful
lives. SFAS No. 142 also requires that intangible assets with estimable useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
No. 121.
Pension Plans and Other Postretirement Benefit Plans
The measurement of liabilities related to pension plans and other
post-retirement benefit plans is based on Management's assumptions related to
future events including interest rates, return on pension plan assets, rate of
compensation increases, and health care cost trend rates. Actual pension plan
asset performance will either decrease or increase unamortized pension losses
that will affect net earnings in future years.
Contingencies
As a normal incident of the businesses in which the Company is engaged, various
claims, charges and litigation are asserted or commenced against the Company. In
the opinion of Management, final judgments, if any, which might be rendered
against the Company in current litigation are adequately reserved, covered by
insurance, or would not have a material adverse effect on its financial
statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In July 2002, the FASB issued SFAS No. 146 "Accounting for Costs Associated with
Exit or Disposal Activities," which supersedes Emerging Issues Task Force (EITF)
Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and other Costs to Exit An Activity (including Certain Costs Incurred in a
Restructuring)." The provisions of SFAS No. 146 are effective for exit or
disposal activities that are initiated after December 31, 2002. The Company has
adopted the provisions of SFAS No. 146.
In December 2002, the FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No.
123," which provides alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for stock-based
employee compensation. It also amends the disclosure provisions of SFAS No. 123
to require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results. The provisions of SFAS No. 148
are effective for interim periods beginning after December 15, 2002. The Company
has adopted the provisions of SFAS No. 148. See Note 3 "Earnings Per Share" for
the disclosure related to the three and nine-month periods ended June 30, 2003.
In December 2002, the Emerging Issues Task Force issued EITF 00-21, "Revenue
Arrangements with Multiple Deliverables." This issue addresses certain aspects
of the accounting by a vendor for arrangements under which it will perform
multiple revenue-generating activities. In some arrangements, the different
revenue-generating activities (deliverables) are sufficiently separable, and
there exists sufficient evidence of their fair values to separately account for
some or all of the deliverables (that is, there are separate units of
accounting). This issue addresses when and, if so, how an arrangement involving
multiple deliverables should be divided into separate units of accounting. This
issue does not change otherwise applicable revenue recognition criteria. This
issue is applicable for revenue arrangements beginning in the fourth quarter of
fiscal 2003. The Company does not expect the adoption of EITF 00-21 to have a
material impact on the Company's results of operations.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities," an interpretation of ARB No. 51, which addresses
consolidation by business enterprises of variable interest entities. This
Interpretation requires existing unconsolidated variable interest entities to be
consolidated by their primary beneficiaries if the entities do not effectively
disperse risks among the parties involved. This Interpretation applies
immediately to variable interest entities created after January 31, 2003. It
applies in the first fiscal year or interim period beginning after June 15,
2003, to variable interest entities in which an enterprise holds a variable
interest that it acquired before February 1, 2003. Upon consolidation of the
synthetic lease obligation, the Company will record property, plant and
equipment of $29.2 million, long-term debt of $31.5 million, and an after-tax
charge reported as a cumulative effect of a change in accounting principle of
approximately $1.4 million during the fourth quarter of fiscal 2003.
FORWARD LOOKING STATEMENTS
Statements in this report that are not strictly historical are "forward looking"
statements within the meaning of the safe harbor provisions of the federal
securities laws. Forward looking statements include those relating to the
estimates made in connection with the Company's accounting policies, annual
effective tax rate, continued strength of Co-op sales, recovery in connection
with foreclosure proceedings, success in ongoing litigation, the Company's
ability to negotiate a successful settlement and/or enforce the terms of the
MSA, results of future closures, consolidations, relocations, divestitures and
real estate sales, the associated costs and resulting savings to be achieved,
results to be achieved from future Filtration initiatives, future fiscal 2003
gains/charges, and capital requirements and operational needs for the
foreseeable future. Investors are cautioned that such statements are only
predictions, and speak only as of the date of this report. The Company's actual
results in the future may differ materially from those projected in the
forward-looking statements due to risks and uncertainties that exist in the
Company's operations and business environment including, but not limited to: the
timing and terms of the divestiture; further weakening of economic conditions in
served markets; changes in customer demands or customer insolvencies;
competition; intellectual property rights; the Company's successful exploitation
of acquired intellectual property rights; the success of future Filtration
initiatives adopted by Management; the performance of discontinued operations
prior to completing the divestiture; successful execution of planned facility
closures, sales consolidations and relocations with regard to the Company's
Puerto Rico facility and U.K. facility; the impact of FASB Interpretation No.
46; consolidation of internal operations; integration of recently acquired
businesses; delivery delays or defaults by customers; termination for
convenience of customer contracts; the Company's enforcement of its contractual
rights under MSA; timing and magnitude of future contract awards; performance
issues with key suppliers and subcontractors; collective bargaining and labor
disputes; changes in laws and regulations including changes in accounting
standards and taxation requirements; litigation uncertainty; and the Company's
successful execution of internal operating plans.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company's operations result primarily from changes
in interest rates and changes in foreign currency exchange rates. There has been
no material change to the Company's risks since September 30, 2002. For the nine
months ended June 30, 2003, accumulated other comprehensive loss included an
after tax decrease in fair value of approximately $0.1 million related to the
Company's interest rate swaps. See further discussion in Item 2 above, under
"Results of Operations - Subsequent Events" regarding the Company's plans to
repay and cancel the interest rate swaps related to the synthetic lease
obligation.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision and with the
participation of Management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures as of the end of the period covered
by this report. Based upon that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures are effective. Disclosure controls and procedures are
controls and procedures that are designed to ensure that information required to
be disclosed in Company reports filed or submitted under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Company's internal controls or in
other factors during the period covered by this report that have materially
affected, or are reasonably likely to materially affect those controls and
procedures.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit
Number
3(a) Restated Articles of Incorporated by reference to
Incorporation Form 10-K for the fiscal
year ended September 30,
1999 at Exhibit 3(a)
3(b) Amended Certificate of Incorporated by reference to
Designation Preferences and Form 10-Q for the fiscal
Rights of Series A quarter ended March 31, 2000
Participating Cumulative at Exhibit 4(e)
Preferred Stock of the
Registrant
3(c) Articles of Merger effective Incorporated by reference to
July 10, 2000 Form10-Q for the fiscal
quarter ended June 30, 2000
at Exhibit 3(c)
3(d) Bylaws, as amended Incorporated by reference to
Form 10-Q for the fiscal
quarter ended June 30, 2000
at Exhibit 3(d)
4(a) Specimen Common Stock Incorporated by reference to
Certificate Form 10-Q for the fiscal
quarter ended June 30, 2000
at Exhibit 4(a)
4(b) Specimen Rights Certificate Incorporated by reference to
Exhibit B to Exhibit 4.1 to
the Registrant's Current
Report on Form 8-K dated
February 3, 2000
4(c) Rights Agreement dated as of Incorporated by reference to
September 24, 1990 (as Current Report on Form 8-K
amended and Restated as of dated February 3, 2000, at
February 3, 2000) between the Exhibit 4.1
Registrant and Registrar and
Transfer Company, as successor
Rights Agent
4(d) Amended and Restated Credit Incorporated by reference to
Agreement dated as of Form10-Q for the fiscal
February 28, 2001 among the quarter ended March 31, 2001
Registrant, Bank of America, at Exhibit 4(d)
N.A., as agent, and the
lenders listed therein
4(e) Amendment No. 1 dated as of Incorporated by reference to
April 5, 2002 to Credit Form 10-Q for the fiscal
Agreement listed as Exhibit quarter ended June 30, 2002,
4(d) above. at Exhibit 4(e)
31.1 Section 302 Certification of
Chief Executive Officer
relating to Form 10-Q for
period ended June 30, 2003
31.2 Section 302 Certification of
Chief Financial Officer
relating to Form 10-Q for
period ended June 30, 2003
32 Section 906 Certification of
Chief Executive Officer and
Chief Financial Officer
relating to Form 10-Q for
period ended June 30, 2003
b) Reports on Form 8-K.
During the quarter ended June 30, 2003, the Company filed the following
Current Report on Form 8-K:
The Company filed a Current Report on Form 8-K, dated May 13, 2003, which
reported in "Item 7. Financial Statements, Pro Forma Financial Information
and Exhibits" and "Item 9. Regulation FD Disclosure (Information Provided
Under Item 12. Results of Operations and Financial Condition)" that the
Company had issued a press release announcing its fiscal second quarter
2003 financial and operating results, which would be included on its
website, and that a related conference call would be held.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESCO TECHNOLOGIES INC.
/s/ Gary E. Muenster
Gary E. Muenster
Vice President and
Chief Financial Officer
(As duly authorized officer
and principal accounting
officer of the registrant)
Dated: August 13, 2003
Exhibit 31.1
CERTIFICATIONS
I, V.L. Richey, Jr., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ESCO Technologies
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e) for the registrant and we
have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit and finance committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a. All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: August 13, 2003
(s) V.L. Richey, Jr.
V.L. Richey, Jr.
Chief Executive Officer
Exhibit 31.2
CERTIFICATIONS
I, G.E. Muenster, certify that:
1. I have reviewed this quarterly report on Form 10-Q of ESCO
Technologies Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e) for the
registrant and we have:
a. Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to us by others within those entities, particularly during
the period in which this quarterly report is being prepared;
b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls
and procedures, as of the end of the period covered by this
report based on such evaluation; and
c. Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth
fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial
reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit and finance
committee of the registrant's board of directors (or persons
performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the
design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's
ability to record, process, summarize and report financial
information; and
b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: August 13, 2003
(s) G.E. Muenster
G.E. Muenster
Chief Financial Officer
EXHIBIT 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the quarterly report of ESCO Technologies Inc. (the
"Company") on Form 10-Q for the period ended June 30, 2003 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), we, V. L.
Richey, Jr., Chief Executive Officer of the Company, and G. E. Muenster, Chief
Financial Officer of the Company, certify, to the best of our knowledge,
pursuant to 18 U.S.C. 1350, as adopted pursuant to 906 of the Sarbanes-Oxley
Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
Dated: August 13, 2003 /s/ V.L. Richey, Jr.
V.L. Richey, Jr.
Chief Executive Officer
ESCO Technologies Inc.
/s/ G.E. Muenster
G.E. Muenster
Chief Financial Officer
ESCO Technologies Inc.