UNITED STATES
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, 2007
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.)
9900A CLAYTON ROAD
ST. LOUIS, MISSOURI 63124-1186
(Address of principal executive offices) (Zip Code)
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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large
accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
Indicate the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 2007
-------------------------------------- ----------------------------
[Common stock, $.01 par value per share] 25,728,995 shares
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,
--------
2007 2006
---- ----
Net sales $ 137,523 123,626
Costs and expenses:
Cost of sales 88,582 77,152
Selling, general and administrative 30,549 28,385
expenses
Amortization of intangible assets 2,853 2,554
Interest (income) expense, net (170) (195)
Other (income) and expenses, net 2,443 (513)
----- ----
Total costs and expenses 124,257 107,383
Earnings before income taxes 13,266 16,243
Income tax expense 4,412 5,080
----- -----
Net earnings $ 8,854 11,163
===== ======
Earnings per share:
Basic $ 0.34 0.43
==== ====
Diluted $ 0.33 0.42
==== ====
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,
-------
2007 2006
---- ----
Net sales $ 365,404 337,096
Costs and expenses:
Cost of sales 242,965 221,654
Selling, general and administrative
expenses
91,348 78,574
Amortization of intangible assets 7,900 4,603
Interest (income) expense, net (725) (1,012)
Other (income) and expenses, net 1,835 (2,440)
----- ------
Total costs and expenses 343,323 301,379
Earnings before income taxes 22,081 35,717
Income tax expense 4,990 15,006
----- ------
Net earnings $ 17,091 20,711
====== ======
Earnings per share:
Basic $ 0.66 0.81
==== ====
Diluted $ 0.65 0.78
==== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
June 30, September 30,
2007 2006
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 21,884 36,819
Accounts receivable, net 101,579 83,816
Costs and estimated earnings on
long-term contracts, less progress
billings of $6,295 and $4,405, 5,039 1,345
respectively
Inventories 67,994 50,984
Current portion of deferred tax assets 36,169 24,251
Other current assets 19,967 10,042
------ ------
Total current assets 252,632 207,257
Property, plant and equipment, net 74,611 68,754
Goodwill 144,435 143,450
Intangible assets, net 72,468 59,202
Other assets 9,642 10,031
----- ------
Total assets $ 553,788 488,694
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 676 -
Accounts payable 53,448 39,496
Advance payments on long-term
contracts, less costs incurred of
$15,327 and $19,532, respectively 5,623 7,367
Accrued salaries 13,381 13,932
Current portion of deferred revenue 20,999 3,569
Accrued other expenses 11,981 11,531
------ ------
Total current liabilities 106,108 75,895
Deferred revenue 3,477 7,458
Pension obligations 13,091 13,143
Deferred tax liabilities 22,626 3,750
Other liabilities 11,284 12,014
Long-term debt - -
------- -------
Total liabilities 156,586 112,260
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 29,133,959 and
29,030,995 shares, respectively 291 290
Additional paid-in capital 240,994 236,390
Retained earnings 210,137 193,046
Accumulated other comprehensive
income (loss) 475 (2,070)
------- -------
451,897 427,656
Less treasury stock, at cost:
3,255,166 and 3,166,026 common
shares, respectively (54,695) (51,222)
------- -------
Total shareholders' equity 397,202 376,434
------- -------
Total liabilities and shareholders' equity $ 553,788 488,694
======= =======
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,
--------
2007 2006
---- ----
Cash flows from operating activities:
Net earnings $ 17,091 20,711
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation and amortization 16,361 12,407
Stock compensation expense 4,113 3,660
Changes in operating working capital (28,514) 9,824
Effect of deferred taxes 6,959 2,343
Change in deferred revenue and
costs, net 6,427 1,117
Other (2,283) (1,020)
------ ------
Net cash provided by operating
activities 20,154 49,042
Cash flows from investing activities:
Acquisition of businesses, less cash
acquired (1,250) (91,468)
Capital expenditures (13,201) (6,753)
Additions to capitalized software (22,676) (24,413)
------- -------
Net cash used by investing
activities (37,127) (122,634)
Cash flows from financing activities:
Borrowings from long-term debt - 52,000
Principal payments on long-term debt - (52,000)
Net increase in short-term borrowings 676 -
Excess tax benefit from stock options
exercised 73 1,112
Proceeds from exercise of stock options 1,512 2,031
Other (223) 1,223
---- -----
Net cash provided by financing
activities 2,038 4,366
Net decrease in cash and cash equivalents (14,935) (69,226)
Cash and cash equivalents, beginning of
period 36,819 104,484
------ -------
Cash and cash equivalents, end of period $ 21,884 35,258
====== ======
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 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, 2006. Certain 2006 amounts have been reclassified to conform
with the 2007 presentation.
The Company's business is typically not impacted by seasonality, however,
the results for the three and nine-month periods ended June 30, 2007 are
not necessarily indicative of the results for the entire 2007 fiscal year.
2. 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 (restricted 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,
-------- --------
2007 2006 2007 2006
---- ---- ---- ----
Weighted Average Shares
Outstanding - Basic
25,941 25,790 25,904 25,678
Dilutive Options and
Restricted Shares 552 651 578 740
--- --- --- ---
Adjusted Shares- Diluted
26,493 26,441 26,482 26,418
====== ====== ====== ======
Options to purchase 529,879 shares of common stock at prices ranging from
$42.99 - $54.88 and options to purchase 287,486 shares of common stock at
prices ranging from $42.99 - $54.88 were outstanding during the three month
periods ended June 30, 2007 and 2006, 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 at various periods through 2013. Approximately 19,000 and 12,000
restricted shares were excluded from the computation of diluted EPS based
upon the application of the treasury stock method for the three-month
period ended June 30, 2007 and 2006, respectively.
3. SHARE-BASED COMPENSATION
The Company provides compensation benefits to certain key employees under
several share-based plans providing for employee stock options and/or
performance-accelerated restricted shares (restricted shares), and to
non-employee directors under a non-employee directors compensation plan.
Stock Option Plans
The Company's stock option awards are generally subject to graded vesting
over a three year service period. All outstanding options were granted at
prices equal to fair market value at the date of grant. The options granted
prior to September 30, 2003 have a ten-year contractual life from date of
issuance, expiring in various periods through 2013. Beginning in fiscal
2004, the options granted have a five-year contractual life from date of
issuance. Beginning with fiscal 2006 awards, the Company recognizes
compensation cost on a straight-line basis over the requisite service
period for the entire award. Prior to fiscal 2006, the Company calculated
the pro forma compensation cost using the graded vesting method.
The fair value of each option award is estimated as of the date of grant
using a Black-Scholes option pricing model. The weighted average
assumptions for the periods indicated are noted below. Expected volatility
is based on historical volatility of ESCO's stock calculated over the
expected term of the option. The expected term was calculated in accordance
with Staff Accounting Bulletin No. 107 using the simplified method for
"plain-vanilla" options. The risk-free rate for the expected term of the
option is based on the U.S. Treasury yield curve in effect at the date of
grant.
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 the three month period ended June 30, 2007
and 2006, respectively: expected dividend yield of 0% in both periods;
expected volatility of 28.5% and 28.2%; risk-free interest rate of 4.6% and
5.0%; and expected term of 3.5 years in both periods. Pre-tax compensation
expense related to the stock option awards was $0.7 million and $2.2
million for the three and nine-month periods ended June 30, 2007,
respectively, and $0.6 million and $1.7 million for the respective prior
year periods.
Information regarding stock options awarded under the option plans is as
follows:
Aggregate Weighted-Average
Weighted Intrinsic Remaining
Avg. Value Contractual
Shares Price (in millions) Life
------ ----- ------------- ----
Outstanding at
October 1, 2006 1,387,348 $26.60
Granted 295,280 $45.74
Exercised (76,013) $24.49 $ 1.8
Cancelled (20,504) $39.36
------- ------
Outstanding at
June 30, 2007 1,586,111 $30.10 $ 15.2 3.3 years
=========
Exercisable at
June 30, 2007 972,335 $21.64 $ 15.1
=======
The weighted-average grant-date fair value of options granted during the
nine-month period ended June 30, 2007 and 2006 was $12.25 and $12.11,
respectively.
Performance-accelerated Restricted Share Awards
The performance-accelerated restricted shares (restricted shares) vest over
five years with accelerated vesting if certain performance targets are
achieved. In these cases, if it is probable that the performance condition
will be met, the Company recognizes compensation cost on a straight-line
basis over the shorter performance period; otherwise, it will recognize
compensation cost over the longer service period. Compensation cost for all
outstanding restricted share awards is being recognized over the shorter
performance period as it is probable the performance condition will be met.
The restricted share award grants were valued at the stock price on the
date of grant. Pre-tax compensation expense related to the restricted share
awards was $0.2 million and $1.2 million for the three and nine-month
periods ended June 30, 2007, respectively and $0.2 million and $1.3 million
for the respective prior year periods.
The following summary presents information regarding outstanding restricted
share awards as of June 30, 2007 and changes during the nine-month period
then ended:
Weighted
Shares Avg. Price
------ ----------
Nonvested at October 1, 2006 155,730 $ 34.33
Granted 63,530 $ 45.75
Vested (51,200) $ 24.60
Cancelled (4,000) $ 34.80
------ ---------
Nonvested at June 30, 2007 164,060 $ 41.77
======= =========
Non-Employee Directors Plan
Pursuant to the non-employee directors compensation plan, each non-employee
director receives a retainer of 800 common shares per quarter. Pre-tax
compensation expense related to the non-employee director grants was $0.2
million and $0.6 million for the three and nine-month periods ended June
30, 2007, respectively and $0.2 million and $0.7 million for the respective
prior year periods.
The total share-based compensation cost that has been recognized in results
of operations and included within SG&A was $1.2 million and $4.1 million
for the three and nine-month periods ended June 30, 2007, respectively, and
$1.0 million and $3.7 million for the three and nine-months periods ended
June 30, 2006. The total income tax benefit recognized in results of
operations for share-based compensation arrangements was $0.3 million and
$1.0 million for the three and nine-month periods ended June 30, 2007
respectively, and $0.3 million and $1.0 million for the three and
nine-month periods ended June 30, 2006. As of June 30, 2007, there was
$11.0 million of total unrecognized compensation cost related to
share-based compensation arrangements. That cost is expected to be
recognized over a weighted-average period of 3.1 years.
4. INVENTORIES
Inventories consist of the following (in thousands):
June 30, September 30,
2007 2006
---- ----
Finished goods $ 21,633 12,834
Work in process, including long- term 17,045 13,211
contracts
Raw materials 29,316 24,939
------ ------
Total inventories $ 67,994 50,984
====== ======
5. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended June 30, 2007 and
2006 was $9.8 million and $12.2 million, respectively. Comprehensive income
for the nine-month periods ended June 30, 2007 and 2006 was $19.6 million
and $22.1 million, respectively. For the three and nine-month periods ended
June 30, 2007, the Company's comprehensive income was positively impacted
by foreign currency translation adjustments of $1.0 million and $2.5
million, respectively. For the three and nine-month periods ended June 30,
2006, the Company's comprehensive income was positively impacted by foreign
currency translation adjustments of $1.1 million and $1.4 million,
respectively.
6. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in three
segments: Communications, Filtration/Fluid Flow and Test. The components of
the Filtration/Fluid Flow segment are presented separately due to differing
long-term economics.
Management evaluates and measures the performance of its operating segments
based on "Net Sales" and "EBIT", which are detailed in the table below.
EBIT is defined as earnings before interest and taxes.
($ in thousands) Three Months ended Nine Months ended
June 30, June 30,
-------- --------
NET SALES 2007 2006 2007 2006
--------- ---- ---- ---- ----
Communications $ 53,943 49,251 $ 133,203 111,623
PTI 13,704 11,379 38,439 33,787
VACCO 9,366 6,551 24,507 22,930
Filtertek 25,960 24,628 72,577 72,335
------ ------ ------ ------
Filtration/Fluid Flow 49,030 42,558 135,523 129,052
Test 34,550 31,817 96,678 96,421
------ ------ ------ ------
Consolidated totals $137,523 123,626 $365,404 337,096
======== ======= ======== =======
EBIT
Communications 8,564 11,369 11,891 20,138
PTI 2,752 1,479 6,463 4,261
VACCO 2,516 1,388 5,108 4,720
Filtertek 1,652 2,330 3,520 5,026
----- ----- ----- -----
Filtration/Fluid Flow 6,920 5,197 15,091 14,007
Test 2,042 4,034 8,246 11,288
Corporate (4,430) (4,552) (13,872) (10,728)
------ ------ ------- -------
Consolidated EBIT 13,096 16,048 21,356 34,705
Add: Interest income 170 195 725 1,012
--- --- --- -----
Earnings before income
taxes $ 13,266 16,243 $ 22,081 35,717
======== ====== ========= ======
7. OTHER (INCOME) AND EXPENSES, NET
Other (income) and expenses, net, was $2.4 million for the third quarter of
2007 compared to income of $(0.5) million for the prior year third quarter.
Other (income) and expenses, net, was $1.8 million for the first nine
months of 2007 compared to income of $(2.4) million for the prior year
period. The principal component of other (income) and expenses, net, for
the third quarter of 2007 included a $2.3 million charge within the Test
segment related to the adverse arbitration award related to a delivery and
installation contract completed in 2005 for a shielded communication room
in an international location. The principal components of other (income)
and expenses, net, for the first nine months of 2007 included a $2.3
million charge related to the arbitration award mentioned above; partially
offset by $1.1 million of royalty income.
Principal components of other income, net, for the first nine months of
2006 included the following items: $1.8 million non-cash gain representing
the release of a reserve related to an indemnification obligation with
respect to a previously divested subsidiary; $1.6 million of royalty
income; partially offset by a $0.2 million write-off of assets related to a
terminated subcontract manufacturer.
8. INCOME TAX EXPENSE
The third quarter 2007 effective income tax rate was 33.3% compared to
31.3% in the third quarter of 2006. The effective income tax rate in the
first nine months of 2007 was 22.6% compared to 42.0% in the prior year
period. The third quarter 2007 income tax expense was impacted by the
resolution of certain tax exposure items of $0.7 million, reducing the 2007
third quarter effective income tax rate by 5.0%. The third quarter 2006
income tax expense was favorably impacted by a $1.0 million research tax
credit, reducing the 2006 third quarter effective income tax rate by 6.0%.
The decrease in the effective income tax rate in the first nine months of
2007 as compared to the prior year period was due to the favorable impact
of the research tax credit and the resolution of certain tax exposure items
mentioned above. The research tax credit and resolution of certain tax
exposure items favorably impacted the effective income tax rate in the
first nine months of 2007 by 14.2% and 3.0%, respectively. The effective
tax rate for the first nine months of 2006 was negatively impacted by the
repatriation of $28.7 million of cash held by foreign subsidiaries. The
effect of the repatriation increased the effective income tax rate for the
first nine months of 2006 by 4.8%. Due to the tax research credits
favorably impacting the tax rate in the first half of 2007, the Company
estimates the fiscal 2007 tax rate to be approximately 34%.
9. RETIREMENT PLANS
A summary of net periodic benefit expense for the Company's defined benefit
plans for the three and nine-month periods ended June 30, 2007 and 2006 is
shown in the following table. Net periodic benefit cost for each period
presented is comprised of the following:
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
(Dollars in thousands) 2007 2006 2007 2006
---- ---- ---- ----
Defined benefit plans
Interest cost $688 635 $2,063 1,935
Expected return on assets (700) (696) (2,100) (2,046)
Amortization of:
Prior service cost 2 6 7 6
Actuarial loss 85 55 255 305
-- -- --- ---
Net periodic benefit cost $ 75 - $ 225 200
==== == ===== ===
10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(SFAS 157). The purpose of SFAS No. 157 is to define fair value, establish
a framework for measuring fair value, and enhance disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007, and interim periods
within those fiscal years. The measurement and disclosure requirements are
effective for the Company in the first quarter of fiscal year 2009. The
adoption of SFAS 157 is not expected to have a material impact to the
Company's financial position or results of operations.
In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans" (SFAS 158), which
amends SFAS 87 and SFAS 106 to require recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the
balance sheet. Under SFAS 158, gains and losses, prior service costs and
credits, and any remaining transition amounts under SFAS 87 and SFAS 106
that have not yet been recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of tax effects.
The measurement date - the date at which the benefit obligation and plan
assets are measured - is required to be the Company's fiscal year-end,
which is the date the Company currently uses. SFAS 158 is effective for
publicly-held companies for fiscal years ending after December 15, 2006.
The adoption of SFAS 158 is not expected to have a material impact to the
Company's financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109."
This Interpretation is effective for the Company beginning October 1, 2007.
This Interpretation prescribes a recognition threshold and measurement
process for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. The Company is
currently evaluating the adoption of this Interpretation and does not
currently have an estimate of the impact on the consolidated financial
statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion refers to the Company's results from continuing
operations, except where noted. References to the third quarters of 2007 and
2006 represent the fiscal quarters ended June 30, 2007 and 2006, respectively.
NET SALES
Net sales increased $13.9 million, or 11.2%, to $137.5 million for the third
quarter of 2007 from $123.6 million for the third quarter of 2006. Net sales
increased across all segments in the third quarter of 2007 compared to the prior
year quarter. Net sales increased $28.3 million, or 8.4%, to $365.4 million for
the first nine months of fiscal 2007 from $337.1 million for the first nine
months of 2006. These increases were mainly due to the 2006 acquisitions of
Hexagram and Nexus. Favorable foreign currency values resulted in approximately
$0.5 million and $2.9 million of the sales increase in the third quarter of 2007
and in the first nine months of 2007, respectively.
- -Communications
Net sales increased $4.7 million, or 9.6%, to $53.9 million for the third
quarter of 2007 from $49.2 million for the third quarter of 2006. Net sales
increased $21.6 million, or 19.4%, to $133.2 million for the first nine months
of 2007 from $111.6 million in the prior year period. The sales increase in the
third quarter of 2007 as compared to the prior year quarter was due to: an
increase in sales of $3.7 million from Hexagram including advanced metering
projects at PG&E and Kansas City; an increase in sales of $1.1 million from
Nexus; a $0.9 million increase in sales of DCSI's AMR products; partially offset
by a $1.0 million decrease in sales from Comtrak due to the timing of product
deliveries which slipped to the fourth quarter.
The sales increase in the first nine months of 2007 as compared to the prior
year period was due to: an increase in sales of $19.5 million from Hexagram
(full nine months of sales compared to five months included in the prior year
period) in addition to the items mentioned above; an increase in sales of $4.3
million from Nexus (full nine months of sales compared to seven months included
in the prior year period); partially offset by a $1.2 million decrease in sales
of DCSI's AMR products and a $1.0 million decrease in sales from Comtrak.
The decrease in sales of DCSI's AMR products of $1.2 million in the first nine
months of 2007 as compared to the prior year period was mainly due to: a
decrease in sales to TXU of $18.3 million, partially offset by an increase in
sales to other investor-owned utilities (IOUs), such as Florida Power & Light,
Duke Energy and EDESUR of $11.6 million and an increase in sales to COOP
customers of $7.2 million. In the first nine months of 2007, DCSI's sales to
COOP and public power (Municipal) customers were $64.2 million compared to $57.0
million in the prior year period.
Sales of Comtrak's video surveillance products were $0.5 million and $1.5
million for the third quarters of 2007 and 2006, respectively, and $3.5 million
for the first nine months of 2007 as compared to $4.4 million in the prior year
nine-month period.
- -Filtration/Fluid Flow
Net sales increased $6.4 million, or 15.0%, to $49.0 million for the third
quarter of 2007 from $42.6 million for the third quarter of 2006. Net sales
increased $6.5 million to $135.5 million for the first nine months of 2007 from
$129.0 million for the first nine months of 2006. The sales increase during the
fiscal quarter ended June 30, 2007 as compared to the prior year quarter was
mainly due to: a $2.3 million increase in commercial aerospace shipments at PTI;
a sales increase of $2.7 million at VACCO driven by higher defense spares and
T-700 shipments; and a net sales increase of $1.4 million at Filtertek driven
primarily by its Brazilian operations. The sales increase in the first nine
months of 2007 as compared to the prior year period was mainly due to: a $4.6
million increase in commercial aerospace shipments at PTI; a $1.6 million
increase in defense spares and T-700 shipments at VACCO; and a $0.3 million net
sales increase at Filtertek.
- -Test
For the third quarter of 2007, net sales of $34.6 million were $2.8 million, or
8.8% higher than the $31.8 million of net sales recorded in the third quarter of
2006. Net sales increased $0.2 million to $96.7 million for the first nine
months of 2007 from $96.5 million for the first nine months of 2006. The sales
increase in the third quarter of 2007 as compared to the prior year quarter was
mainly due to: a $3.2 million increase in net sales from the Company's U.S.
operations driven by milestones on a large aircraft chamber project and
completion of other test chambers; a $0.6 million increase in net sales from the
Company's European operations; partially offset by a $1.0 million decrease in
net sales from the Company's Asian operations due to the timing of completion on
several chamber projects in Japan. The sales increase for the first nine months
of 2007 compared to the prior year period was due to: a $1.3 million increase in
net sales from the Company's Asian operations; partially offset by a $0.7
million decrease in net sales from the Company's European operations and a $0.3
million decrease in net sales from the Company's U.S. operations both driven by
the timing of sales of test chambers and components.
ORDERS AND BACKLOG
Backlog was $316.5 million at June 30, 2007 compared with $253.4 million at
September 30, 2006. The Company received new orders totaling $146.4 million in
the third quarter of 2007 compared to $109.1 million in the prior year quarter.
New orders of $61.7 million were received in the third quarter of 2007 related
to Communications products, $54.4 million related to Filtration/Fluid Flow
products, and $30.3 million related to Test products.
The Company received new orders totaling $428.5 million in the first nine months
of 2007 compared to $363.9 million in the prior year period (including $15.0
million of Hexagram and Nexus acquired backlog). New orders of $167.9 million
were received in the first nine months of 2007 related to Communications
products, $154.4 million related to Filtration/Fluid Flow products, and $106.2
million related to Test products. New orders of $144.4 million were received in
the first nine months of 2006 related to Communications products (including
$15.0 million of Hexagram and Nexus acquired backlog), $134.0 million related to
Filtration/Fluid Flow products and $85.5 million related to Test products. See
"CAPITAL RESOURCES AND LIQUIDITY - Pacific Gas & Electric" below for a
discussion of PG&E contracts. The Company received orders totaling $30.1 million
and $48.4 million from PG&E under these agreements during the third quarter and
first nine months of fiscal 2007, respectively.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $2.9 million and $7.9 million for the
three and nine-month periods ended June 30, 2007, respectively, compared to $2.6
million and $4.6 million for the respective prior year periods. Amortization of
intangible assets for the three and nine-month periods ended June 30, 2007
included $0.5 million and $1.7 million, respectively, of amortization of
acquired intangible assets related to the Nexus and Hexagram acquisitions
compared to $1.0 million and $1.9 million for the respective prior year periods.
The amortization of acquired intangible assets related to Nexus and Hexagram are
included in Corporate's operating results, see "EBIT - Corporate". The remaining
amortization expenses consist of other identifiable intangible assets (primarily
software, patents and licenses). During the three and nine-month periods ended
June 30, 2007, the Company recorded $1.8 million and $4.5 million, respectively,
of amortization related to DCSI's TNG capitalized software compared to $0.9
million and $1.2 million in the respective prior year periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the third quarter of
2007 were $30.5 million (22.2% of net sales), compared with $28.4 million (23.0%
of net sales) for the prior year quarter. For the first nine months of 2007,
SG&A expenses were $91.3 million (25.0% of net sales) compared with $78.6
million (23.3% of net sales) for the prior year period. The increase in SG&A
spending in the fiscal quarter ended June 30, 2007 as compared to the prior year
quarter was primarily due to: a $1.7 million increase in SG&A at DCSI mainly due
to an increase in headcount; and a $0.7 million increase in SG&A at Corporate.
The increase in SG&A spending in the first nine months of 2007 as compared to
the prior year period was primarily due to: a $4.4 million increase in SG&A
related to Hexagram (due to a full nine months of SG&A expenses compared to five
months included in the prior year period); a $2.7 million increase in SG&A
related to Nexus (due to a full nine months compared to seven months included in
the prior year period) and an increase in headcount; an increase of $2.6 million
in SG&A expenses at DCSI mainly due to an increase in headcount; an increase of
$1.7 million in SG&A expenses incurred in the Test segment primarily to support
growth opportunities in Asia; and a $1.3 million increase at Corporate including
an increase in professional fees incurred to support a research tax credit
project, an increase in stock option expense, and an increase in headcount.
OTHER (INCOME) AND EXPENSES, NET
Other (income) and expenses, net, was $2.4 million for the third quarter of 2007
compared to income of $(0.5) million for the prior year third quarter. Other
(income) and expenses, net, was $1.8 million for the first nine months of 2007
compared to income of $(2.4) million for the prior year period. The principal
component of other (income) and expenses, net, for the third quarter of 2007
included a $2.3 million charge within the Test segment related to the adverse
arbitration award related to a delivery and installation contract completed in
2005 for a shielded communication room in an international location. The
principal components of other (income) and expenses, net, for the first nine
months of 2007 included a $2.3 million charge related to the arbitration award
mentioned above; partially offset by $1.1 million of royalty income.
Principal components of other income, net, for the first nine months of 2006
included the following items: $1.8 million non-cash gain representing the
release of a reserve related to an indemnification obligation with respect to a
previously divested subsidiary; $1.6 million of royalty income; partially offset
by a $0.2 million write-off of assets related to a terminated subcontract
manufacturer.
EBIT
The Company evaluates the performance of its operating segments based on EBIT,
defined below. EBIT was $13.1 million (9.5 % of net sales) for the third quarter
of 2007 and $16.0 million (13.0% of net sales) for the third quarter of 2006.
For the first nine months of fiscal 2007, EBIT was $21.4 million (5.9% of net
sales) and $34.7 million (10.3% of net sales) for the first nine months of 2006.
The decrease in EBIT for the third quarter of 2007 and first nine months of 2007
as compared to the prior year periods is primarily due to the decrease in
margins in the Communications segment described below and a $2.3 million adverse
arbitration award within the Test segment.
This Form 10-Q contains the financial measure "EBIT", which is not calculated in
accordance with generally accepted accounting principles in the United States of
America (GAAP). EBIT provides investors and Management with an alternative
method for assessing the Company's operating results. The Company defines "EBIT"
as earnings from continuing operations before interest and taxes. Management
evaluates the performance of its operating segments based on EBIT and believes
that EBIT is useful to investors to demonstrate the operational profitability of
the Company's business segments by excluding interest and taxes, which are
generally accounted for across the entire Company on a consolidated basis. EBIT
is also one of the measures Management uses to determine resource allocations
within the Company and incentive compensation. The following table presents a
reconciliation of EBIT to net earnings.
Three Months ended Nine Months ended
($ in thousands) June 30, June 30,
-------- --------
2007 2006 2007 2006
---- ---- ---- ----
Consolidated EBIT $13,096 16,048 $21,356 34,705
Add: Interest income 170 195 725 1,012
Less: Income taxes 4,412 5,080 4,990 15,006
----- ----- ----- ------
Net earnings $ 8,854 11,163 $17,091 20,711
======= ====== ======= ======
- -Communications
EBIT in the third quarter of 2007 was $8.6 million (16.0% of net sales) compared
to $11.4 million (23.2% of net sales) in the prior year quarter. For the first
nine months of 2007, EBIT was $11.9 million (8.9% of net sales) compared to
$20.1 million (18.0% of net sales) in the prior year period. The decrease in
EBIT in the third quarter of 2007 was due to: a $3.9 million decrease in EBIT at
DCSI resulting from a $0.9 increase in amortization of its TNG software,
increased engineering / new product development costs, increased PG&E related
program support costs, higher freight costs and an increase in headcount; a $0.5
million decrease at Comtrak due to lower sales volumes; partially offset by a
$0.9 million increase at Hexagram and a $0.7 million increase at Nexus both
resulting from increased sales volumes. The decrease in EBIT for the first nine
months of 2007 compared to the prior year period was due to: a $10.2 million
decrease in EBIT at DCSI due to an increase of $3.3 million in amortization
expenses of its TNG software, increased PG&E related program support costs,
higher freight costs and an increase in headcount; a $0.2 million decrease in
EBIT at Comtrak; partially offset by a $1.5 million increase at Hexagram and a
$0.6 million increase at Nexus both resulting from increased sales volumes.
- -Filtration/Fluid Flow
EBIT was $6.9 million (14.1% of net sales) and $5.2 million (12.2% of net sales)
in the third quarters of 2007 and 2006, respectively, and $15.1 million (11.1%
of net sales) and $14.0 million (10.9% of net sales) in the first nine months of
2007 and 2006, respectively. For the third quarter of 2007 as compared to the
prior year quarter, EBIT increased $1.7 million due to: a $1.2 million increase
at PTI due to higher commercial aerospace shipments; a $1.1 million increase at
VACCO resulting from increased sales volumes; partially offset by a $0.6 million
decrease at Filtertek due to higher raw material and overhead costs. For the
first nine months of 2007 as compared to the prior year period, EBIT increased
$1.1 million due to: a $2.2 million increase at PTI due to higher commercial
aerospace shipments; a $0.4 million increase at VACCO due to higher sales
volumes; partially offset by a $1.5 million decrease at Filtertek due to product
mix, higher raw material costs and labor costs.
- -Test
EBIT in the third quarter of 2007 was $2.0 million (5.8% of net sales) as
compared to $4.0 million (12.6% of net sales) in the prior year quarter. For the
first nine months of 2007, EBIT was $8.2 million (8.5% of net sales) as compared
to $11.3 million (11.7% of net sales) in the prior year period. For the first
nine months of 2007, EBIT was unfavorably impacted by $2.6 million of total
costs associated with the arbitration judgment related to a 2005 U.S. Government
project. These costs included $2.3 million of damages arising out of alleged
delays in the delivery and installation of a shielded communication room in an
international location (recorded in the third quarter of 2007) and approximately
$0.3 million of legal costs associated with arbitrating this dispute. EBIT
decreased $2.0 million and $3.1 million over the prior year quarter and nine
month period, respectively, mainly due to the arbitration costs mentioned above,
the timing of sales, and additional sales and marketing costs to support
near-term sales growth opportunities, primarily in Asia.
- -Corporate
Corporate costs included in EBIT were $4.4 million and $13.8 million for the
three and nine-month periods ended June 30, 2007, respectively, compared to $4.6
million and $10.7 million for the respective prior year periods. The increase in
Corporate costs in the first nine months of 2007 as compared to the prior year
period was mainly due to: a $1.8 million non-cash gain recorded in the second
quarter of 2006 related to an indemnification obligation with respect to a
previously divested subsidiary; $0.4 million of additional professional fees
incurred to support a research tax credit project; and $0.4 million of
additional expense related to stock compensation; partially offset by a $0.2
million decrease in pre-tax amortization of acquired intangible assets related
to Nexus and Hexagram. In the first nine months of 2007, Corporate costs
included $4.1 million of pre-tax stock compensation expense and $1.7 million of
pre-tax amortization of acquired intangible assets related to Nexus and
Hexagram.
INTEREST INCOME, NE
Interest income, net, was $0.2 million and $0.7 million for the three and
nine-month periods ended June 30, 2007, respectively, compared to interest
income, net, of $0.2 million and $1.0 million for the respective prior year
periods. The decrease in interest income in the first nine months of 2007 as
compared to the prior year period was due to lower average cash balances on
hand.
INCOME TAX EXPENSE
The third quarter 2007 effective income tax rate was 33.3% compared to 31.3% in
the third quarter of 2006. The effective income tax rate in the first nine
months of 2007 was 22.6% compared to 42.0% in the prior year period. The third
quarter 2007 income tax expense was impacted by the resolution of certain tax
exposure items of $0.7 million, reducing the 2007 third quarter effective income
tax rate by 5.0%. The third quarter 2006 income tax expense was favorably
impacted by a $1.0 million research tax credit, reducing the 2006 third quarter
effective income tax rate by 6.0%.
The decrease in the effective income tax rate in the first nine months of 2007
as compared to the prior year period was due to the favorable impact of the
research tax credit and the resolution of certain tax exposure items mentioned
above. The research tax credit and resolution of certain tax exposure items
favorably impacted the effective income tax rate in the first nine months of
2007 by 14.2% and 3.0%, respectively. The effective tax rate for the first nine
months of 2006 was negatively impacted by the repatriation of $28.7 million of
cash held by foreign subsidiaries. The effect of the repatriation increased the
effective income tax rate for the first nine months of 2006 by 4.8%. Due to the
tax research credits favorably impacting the tax rate in the first half of 2007,
the Company estimates the fiscal 2007 tax rate to be approximately 34%.
CAPITAL RESOURCES AND LIQUIDITY
Working capital (current assets less current liabilities) increased to $146.5
million at June 30, 2007 from $131.4 million at September 30, 2006. Accounts
receivable increased by $17.8 million in the first nine months of 2007, of which
$12.5 million related to DCSI and $5.1 million related to the Test segment, both
due to the timing and volume of sales. The $17.0 million increase in inventories
at June 30, 2007 is mainly due to an $11.5 million increase within the
Communications segment related to the PG&E contracts and a $2.8 million increase
within the Test segment, both to support near term sales growth. Accounts
payable increased by $14.0 million in the first nine months of 2007, of which
$8.5 million related to DCSI due to timing of vendor invoicing.
Net cash provided by operating activities was $20.2 million and $49.0 million
for the nine-month periods ended June 30, 2007 and 2006, respectively. The
decrease is due to an increase in operating working capital requirements.
Capital expenditures were $13.2 million and $6.8 million in the first nine
months of fiscal 2007 and 2006, respectively. Major expenditures in the current
period included equipment used in the Filtration/Fluid Flow and Communications
businesses.
At June 30, 2007, intangible assets, net, of $72.5 million included $60.4
million of capitalized software. Approximately $53.2 million of the capitalized
software balance represents software development costs on the TNG software
within the Communications segment to further penetrate the IOU market. TNG is
being deployed to efficiently handle the additional levels of communications
dictated by the size of the utility service territories and the frequency of
meter reads that are required under time-of-use or critical peak pricing
scenarios to meet the requirements of large IOUs. At June 30, 2007, the Company
had approximately $5.5 million of commitments related to the development of TNG
versions 2.0 and 3.0 which is expected to be spent over the next three months.
Amortization of TNG expense is on a straight-line basis over seven years and
began in March 2006. The Company recorded $1.8 million and $4.5 million in
amortization expense related to TNG in the third quarter of 2007 and in the
first nine months of 2007, respectively.
The closure and relocation of the Filtertek Puerto Rico facility was completed
in March 2004. The Puerto Rico facility is included in other current assets with
a carrying value of $3.6 million at June 30, 2007. The facility is being
marketed for sale.
In October 2004, the Company entered into a $100 million five-year revolving
bank credit facility with a $50 million increase option that has a final
maturity and expiration date of October 6, 2009. At June 30, 2007, the Company
had approximately $98.5 million available to borrow under the credit facility in
addition to $21.9 million cash on hand. At June 30, 2007, the Company had $0.7
million of short-term borrowings, and outstanding letters of credit of $4.1
million ($0.8 million outstanding under the credit facility). 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.
Pacific Gas & Electric
In November 2005, DCSI entered into a contract to provide equipment, software
and services to Pacific Gas & Electric (PG&E) in support of the electric portion
of PG&E's AMI project with an initially anticipated contract value of up to
approximately $310 million covering up to five million electric endpoints over a
five year deployment period beginning in fiscal 2007. PG&E also has the right to
purchase additional equipment and services to support existing and new customers
through the twenty year term of the contract. Equipment will be purchased by
PG&E only upon issuance of purchase orders and release authorizations. PG&E will
continue to have the right to purchase products or services from other suppliers
for the electric portion of the AMI project. DCSI has agreed to deliver to PG&E
versions of its newly developed TNG software as they become available and are
tested. Delivery of the final version for which DCSI has committed is currently
anticipated in September 2007. In accordance with U.S. generally accepted
accounting standards, the Company will defer all revenue related to the DCSI
arrangement until all software is delivered and acceptance criteria have been
met. The contract provides for liquidated damages in the event that DCSI's late
delivery of hardware or software causes a delay to PG&E's AMI master project
plan or delays PG&E's realization of its business case benefits and also
includes indemnification and other customary provisions. The contract may be
terminated by PG&E for default, for its convenience and in the event of a force
majeure lasting beyond certain prescribed periods. The Company has guaranteed
the obligations of DCSI under the contract. If PG&E terminates the contract for
its convenience, DCSI will be entitled to recover certain costs.
During the third quarter of 2007, PG&E announced its plans to request
information and proposals from a small group of vendors in order to evaluate
such vendors' ability to address potential future functionality requirements for
the electric portion of its service territory currently included in DCSI's
contract. In July 2007, PG&E issued requests for proposals (RFPs) to a group of
vendors, including the Company, for PG&E's electric requirements. Prior to
PG&E's issuance of this RFP, Hexagram agreed to provide 2,000 of its RF fixed
network electric units for PG&E testing. Testing of Hexagram's electric solution
is scheduled to occur in the fourth quarter of 2007. PG&E's current activities
will impact the timing and/or receipt of future orders from PG&E for its
electric deployment and, until PG&E completes this evaluation and determines
whether it will modify its AMI project plan, the Company cannot estimate the
total value or the timing of orders that may be received under the DCSI PG&E
contract.
In November 2005, Hexagram entered into a contract to provide equipment,
software and services to PG&E in support of the gas utility portion of PG&E's
AMI project. The total anticipated contract revenue from commencement through
the five-year full deployment is expected to be up to approximately $225
million. As with DCSI's contract with PG&E, equipment will be purchased only
upon issuance of purchase orders and release authorizations, and PG&E will
continue to have the right to purchase products or services from other suppliers
for the gas utility portion of the AMI project. The contract provides for
liquidated damages in the event of late deliveries, includes indemnification and
other customary provisions, and may be terminated by PG&E for default, for its
convenience and in the event of a force majeure lasting beyond certain
prescribed periods. The Company has guaranteed the performance of the contract
by Hexagram.
CRITICAL ACCOUNTING POLICIES
Management has evaluated the accounting policies used in the preparation of the
Company's financial statements and related notes and believes those policies to
be reasonable and appropriate. Certain of these accounting policies require the
application of significant judgment by Management in selecting appropriate
assumptions for calculating financial estimates. By their nature, these
judgments are subject to an inherent degree of uncertainty. These judgments are
based on historical experience, trends in the industry, information provided by
customers and information available from other outside sources, as appropriate.
The most significant areas involving Management judgments and estimates may be
found in the Critical Accounting Policies section of Management's Discussion and
Analysis and in Note 1 to the Consolidated Financial Statements contained in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2006 at Exhibit 13.
OTHER MATTERS
Contingencies
As a normal incident of the businesses in which the Company is engaged, various
claims, charges and litigation are asserted or commenced against the Company. In
the opinion of Management, final judgments, if any, which might be rendered
against the Company in current litigation are adequately reserved, covered by
insurance, or would not have a material adverse effect on its financial
statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157). The purpose of SFAS No. 157 is to define fair value, establish a framework
for measuring fair value, and enhance disclosures about fair value measurements.
SFAS 157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007, and interim periods within those fiscal years. The
measurement and disclosure requirements are effective for the Company in the
first quarter of fiscal year 2009. The adoption of SFAS 157 is not expected to
have a material impact to the Company's financial position or results of
operations.
In September 2006, the FASB issued SFAS No. 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans" (SFAS 158), which amends
SFAS 87 and SFAS 106 to require recognition of the overfunded or underfunded
status of pension and other postretirement benefit plans on the balance sheet.
Under SFAS 158, gains and losses, prior service costs and credits, and any
remaining transition amounts under SFAS 87 and SFAS 106 that have not yet been
recognized through net periodic benefit cost will be recognized in accumulated
other comprehensive income, net of tax effects. The measurement date - the date
at which the benefit obligation and plan assets are measured - is required to be
the Company's fiscal year-end, which is the date the Company currently uses.
SFAS 158 is effective for publicly-held companies for fiscal years ending after
December 15, 2006. The adoption of SFAS 158 is not expected to have a material
impact to the Company's financial position or results of operations.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No. 109." This
Interpretation is effective for the Company beginning October 1, 2007. This
Interpretation prescribes a recognition threshold and measurement process for
the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The Company is currently evaluating the
adoption of this Interpretation and does not currently have an estimate of the
impact on the consolidated financial statements.
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, but are not limited to,
those relating to the estimates or projections made in connection with the
Company's accounting policies, SFAS 157, SFAS 158, FASB Interpretation No. 48,
annual effective tax rate, research tax credits, timing and amounts of
Communications segment commitments and expenditures, outcome of current claims
and litigation, future cash flow, capital requirements and operational needs for
the foreseeable future, the ultimate values and timing of revenues under the
DCSI / PG&E contract and the Hexagram / PG&E contract, the future delivery and
acceptance of the TNG software by PG&E, and timing of spending for TNG
commitments. 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 risk factors
described in Item 1A of the Company's Annual Report on Form 10-K for the fiscal
year ended September 30, 2006 and Item 1A of Part II of this report, actions by
PG&E's Board of Directors and PG&E's management impacting PG&E's AMI projects,
changes to PG&E's AMI project plan resulting from the evaluation of other AMI
vendor technologies or other factors; the timing and success of DCSI's software
development efforts; the timing and content of purchase order releases under
PG&E's contracts; the Company's successful performance under the PG&E contracts;
weakening of economic conditions in served markets; changes in customer demands
or customer insolvencies; competition; intellectual property rights; successful
execution of the planned sale of the Company's Puerto Rico facility; material
changes in the costs of certain raw materials including steel, copper and
petroleum based resins; delivery delays or defaults by customers; termination
for convenience of customer contracts; timing and magnitude of future contract
awards; performance issues with key suppliers, customers and subcontractors;
collective bargaining and labor disputes; changes in laws and regulations
including changes in accounting standards and taxation requirements; costs
relating to environmental matters; 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 market risks since September 30, 2006. Refer
to the Company's Annual Report on Form 10-K for the fiscal year ended September
30, 2006 for further discussion about market risk.
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 were effective as of that date. 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 (the "Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the Company's
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In May 2007, an arbitrator ruled that Lindgren R.F. Enclosures, Inc. was
responsible for construction delays incurred on a U.S. government contract
completed in June 2005, and awarded the prime contractor damages of $2.3
million. The dispute related to a delivery and installation contract signed in
2003 for a shielded communication room in an international location. The
challenging geopolitical environment of this region resulted in lengthy site
access issues, material delivery (import) delays, shortages of qualified labor,
and personnel security issues. The Company vigorously defended its position. The
arbitration award was not appealable, and the Company has paid the award.
ITEM 1A. RISK FACTORS
In Item 1A of its Annual Report on Form 10-K for the fiscal year ended September
30, 2006, the Company reported that a significant portion of the Communications
segment's business is dependent on several large contracts with customers. The
largest of these are two contracts to sell electric and gas automatic meter
reading systems to PG&E over a period of approximately five years. These
projects, which represent a potential high source of revenue, are subject to
cancellation or reduction in volume by PG&E, delays, regulatory actions and the
Company's ability to develop advanced products and successfully perform the
contracts. The loss of revenue which would result from cancellations, delays,
reductions, regulatory actions or the Company's failure to perform in connection
with these projects could have a material adverse effect on the Company's
business, results of operations, and financial condition as a whole. During the
third quarter of 2007, PG&E announced its plans to request information and
proposals from a small group of vendors in order to evaluate such vendors'
ability to address potential future functionality requirements for the electric
portion of its service territory currently included in DCSI's contract. In July
2007, PG&E issued requests for proposals (RFPs) to a group of vendors, including
the Company, for PG&E's electric requirements. PG&E's current activities will
impact the timing and/or receipt of future orders from PG&E for its electric
deployment and, until PG&E completes this evaluation and determines whether it
will modify its AMI project plan, the Company cannot estimate the total value or
the timing of orders that may be received under the DCSI PG&E contract.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In August 2006, the Company's Board of Directors authorized an open market
common stock repurchase program for up to 1.2 million shares, subject to market
conditions and other factors, which covers the period through September 30,
2008.
ISSUER PURCHASES OF EQUITY SECURITIES
Total
Number of Maximum
Shares Number of
Purchased Shares that
Total as Part of May Yet Be
Number Average Publicly Purchased
of Price Announced Under the
Shares Paid per Plans or Plans or
Period Purchased Share Programs Programs
April 1 to April 30, 2007 - -
May 1 to May 31, 2007 - -
June 1 to June 30, 2007 100,000 $36.44 * 100,000
------- ------ -------
Total 100,000 $36.44 100,000 1,100,000
* Payment made in July 2007
Subsequent to June 30, 2007, the Company repurchased an additional 165,000
shares for a total of 265,000 shares repurchased.
ITEM 6. EXHIBITS
a) Exhibits
Exhibit
Number
3.1 Restated Articles of Incorporated by reference to
Incorporation Form 10-K for the fiscal
year ended September 30,
1999, at Exhibit 3(a)
3.2 Amended Certificate of Incorporated by reference to
Designation Preferences Form 10-Q for the fiscal
and Rights of Series A quarter ended March 31,
Participating 2000, at Exhibit 4(e)
Cumulative Preferred
Stock of the Registrant
3.3 Articles of Merger Incorporated by reference to
effective July 10, 2000 Form 10-Q for the fiscal
quarter ended June 30, 2000,
at Exhibit 3(c)
3.4 Bylaws, as amended and Incorporated by reference to
restated as of July 10, Form 10-K for the fiscal
2000. year ended September 30,
2003, at Exhibit 3.4
3.5 Amendment to Bylaws Incorporated by reference to
effective as of Form 10-Q for the fiscal
February 2, 2007. quarter ended December 31,
2006, at Exhibit 3.5
4.1 Specimen Common Stock Incorporated by reference to
Certificate Form 10-Q for the fiscal
quarter ended June 30, 2000,
at Exhibit 4(a)
4.2 Specimen Rights Incorporated by reference to
Certificate Current Report on Form 8-K
dated February 3, 2000, at
Exhibit B to Exhibit 4.1
4.3 Rights Agreement dated Incorporated by reference to
as of September 24, Current Report on Form 8-K
1990 (as amended and dated February 3, 2000, at
Restated as of February Exhibit 4.1
3, 2000) between the
Registrant and
Registrar and Transfer
Company, as successor
Rights Agent
4.4 Credit Agreement dated Incorporated by reference to
as of October 6, 2004 Form10-K for the fiscal year
among the Registrant, ended September 30, 2004, at
Wells Fargo Bank, Exhibit 4.4
N.A., as agent, and
the lenders listed
therein
4.5 Consent and waiver to Incorporated by reference to
Credit Agreement Current Report on Form 8-K
(listed as 4.4, above) dated February 2, 2006 at
dated as of January Exhibit 4.1
20, 2006
31.1 Certification of Chief
Executive Officer
relating to Form 10-Q
for period ended June
30, 2007
31.2 Certification of Chief
Financial Officer
relating to Form 10-Q
for period ended June
30, 2007
32 Certification of Chief
Executive Officer and
Chief Financial
Officer relating to
Form 10-Q for period
ended June 30, 2007
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
Senior Vice President and Chief Financial Officer
(As duly authorized officer and principal accounting
officer of the registrant)
Dated: August 8, 2007
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)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) 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. Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted
accounting principles;
c. 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
d. 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.
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 8, 2007
(s) V.L. Richey, Jr.
V.L. Richey, Jr.
Chief Executive Officer
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)) and internal
control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) 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. Designed such internal control over financial reporting, or
caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles;
c. 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
d. 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.
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 8, 2007
(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, 2007 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 8, 2007
/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.