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 DECEMBER 31, 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 issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at January 31, 2008
- --------------------------------------- --------------------------------
[Common stock, $.01 par value per share] 25,823,039 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
December 31,
------------
2007 2006
---- ----
Net sales $ 134,957 80,587
Costs and expenses:
Cost of sales 84,012 56,014
Selling, general and administrative 33,510 26,623
expenses
Amortization of intangible assets 3,597 2,026
Interest expense (income), net 1,359 (321)
Other (income) and expenses, net (214) (554)
---- ----
Total costs and expenses 122,264 83,788
Earnings (loss) before income taxes 12,693 (3,201)
Income tax expense (benefit) 4,788 (1,850)
----- ------
Net earnings (loss) from continuing
operations 7,905 (1,351)
Loss from discontinued operations, net of
tax of $325 and $30, respectively (115) (30)
Loss on sale of discontinued operations,
net of tax of $4,809 (4,974) -
------ ------
Net loss from discontinued operations (5,089) (30)
------ ---
Net earnings (loss) $ 2,816 (1,381)
========== ======
Earnings (loss) per share:
Basic - Continuing operations $ 0.31 (0.05)
- Discontinued operations (0.20) -
----- ------
- Net earnings (loss) $ 0.11 (0.05)
========= =====
Diluted - Continuing operations $ 0.30 (0.05)
- Discontinued operations (0.19) -
----- ------
- Net earnings (loss) $ 0.11 (0.05)
========= =====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
December 31, September 30,
2007 2007
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 23,694 18,638
Accounts receivable, net 96,322 85,319
Costs and estimated earnings on
long-term contracts, less progress
billings of $26,091 and $21,292,
respectively 10,885 11,520
Inventories 73,150 55,885
Current portion of deferred tax assets 18,982 25,264
Other current assets 14,122 28,054
Current assets of discontinued
operations 1,100 35,670
----- ------
Total current assets 238,255 260,350
Property, plant and equipment, net 71,499 50,193
Goodwill 339,737 124,757
Intangible assets, net 207,928 74,624
Other assets 14,965 10,338
Other assets of discontinued operations - 55,845
------- -------
Total assets $ 872,384 576,107
========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt $ 30,000 -
Accounts payable 33,375 45,726
Advance payments on long-term
contracts, less costs incurred of
$4,285 and $2,902, respectively 6,945 3,408
Accrued salaries 14,160 12,348
Current portion of deferred revenue 15,201 24,621
Accrued other expenses 20,168 16,103
Current liabilities of discontinued
operations - 16,994
------- -------
Total current liabilities 119,849 119,200
Long-term portion of deferred revenue 5,389 4,514
Pension obligations 9,206 8,029
Deferred tax liabilities 72,365 18,522
Other liabilities 8,971 7,825
Long-term debt, less current portion 235,000 -
Other liabilities of discontinued operations - 2,534
------- -------
Total liabilities 450,780 160,624
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
29,181,663 and 29,159,629 shares,
respectively 292 292
Additional paid-in capital 245,013 243,131
Retained earnings 229,575 226,759
Accumulated other comprehensive income,
net of tax 7,275 6,303
----- -----
482,155 476,485
Less treasury stock, at cost: 3,389,166
and 3,416,966 common shares,
respectively (60,551) (61,002)
------- -------
Total shareholders' equity 421,604 415,483
------- -------
Total liabilities and shareholders' equity $ 872,384 576,107
========== =======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Three Months Ended
December 31
-----------
2007 2006
---- ----
Cash flows from operating activities:
Net earnings (loss) $ 2,816 (1,381)
Adjustments to reconcile net earnings
(loss) to net cash provided by operating
activities:
Net loss from discontinued operations,
net of tax 5,089 30
Depreciation and amortization 5,702 3,490
Stock compensation expense 1,207 1,334
Changes in operating working capital (5,006) 1,955
Effect of deferred taxes 7,223 (1,259)
Change in deferred revenue and costs, net (7,593) (2,278)
Other 171 (670)
--- ----
Net cash provided by operating
activities - continuing operations 9,609 1,221
Net loss from discontinued operations,
net of tax (5,089) (30)
Net cash provided by discontinued opertaions 125 855
--- ---
Net cash (used) provided by operating
activities - discontinued operations (4,964) 825
------ ---
Net cash provided by operating activities 4,645 2,046
----- -----
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (328,829) -
Proceeds from sale of marketable securities 4,966 -
Additions to capitalized software (5,574) (8,344)
Capital expenditures - continuing operations (4,503) (1,975)
------ ------
Net cash used by investing activities
- continuing operations (333,940) (10,319)
Capital expenditures - discontinued operations (1,126) (812)
Proceeds from divestiture of business, net
- discontinued operations 74,370 -
------ -----
Net cash provided (used) by investing
activities - discontinued operations 73,244 (812)
------ ----
Net cash used by investing activities (260,696) (11,131)
-------- -------
Cash flows from financing activities:
Proceeds from long-term debt 274,723 -
Principal payments on long-term debt (9,723) -
Debt issuance costs (2,965) -
Net decrease in short-term borrowings
- discontinued operations (2,844) -
Excess tax benefit from stock options exercised 737 20
Other 1,179 (244)
------- ---
Net cash provided by financing activities 261,107 264
======= ===
Net increase (decrease) in cash and cash equivalents 5,056 (8,821)
Cash and cash equivalents, beginning of period 18,638 36,819
------ ------
Cash and cash equivalents, end of period $ 23,694 27,998
======== ======
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, 2007. Certain 2007 amounts have been reclassified to conform
with the 2008 presentation.
The Company's business is typically not impacted by seasonality, however,
the results for the three-month period ended December 31, 2007 are not
necessarily indicative of the results for the entire 2008 fiscal year.
As a result of the acquisition of Doble Engineering Company (Doble) in
November 2007, the Company changed the name of the Communications segment
to the Utility Solutions Group segment. The renaming of this segment more
accurately describes the segment's operating activities and strategically
aligns the respective operating entities to focus on a single goal of
satisfying the expanding AMI, Smart Grid, and other operational
requirements of electric, gas and water utilities worldwide. The name
change was done in conjunction with the Company's strategic integration and
rebranding of its AMI related technologies under the brand name Aclara,
and renaming the businesses as follows: Distribution Control Systems, Inc.
renamed Aclara Power-Line Systems Inc.; Hexagram, Inc. renamed Aclara RF
Systems Inc.; and Nexus Energy Software, Inc. renamed Aclara Software Inc.
2. DIVESTITURE
On November 25, 2007, the Company completed the sale of the filtration
portion of Filtertek Inc. (Filtertek) to Illinois Tool Works Inc. for $77.5
million in cash, subject to closing working capital adjustments. The Tek
Packaging division of Filtertek was not included in the transaction. The
Filtertek businesses are accounted for as discontinued operations in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." Accordingly, the Filtertek businesses are reflected as
discontinued operations in the financial statements and related notes for
all periods presented. A pre-tax loss of $0.2 million related to the sale
of Filtertek is reflected in the Company's fiscal 2008 first quarter
results in discontinued operations. Filtertek's net sales were $13.7
million for the two-month period ended November 25, 2007 and $18.2 million
for the three-month period ended December 31, 2006, respectively.
Filtertek's operations were included within the Company's Filtration
segment prior to divestiture. The operations of the Tek Packaging division
are reflected in continuing operations and continue to be included in the
Filtration segment.
The major classes of discontinued assets and liabilities included in the
Consolidated Balance Sheet at September 30, 2007 are shown below (in
thousands).
September 30, 2007
Assets:
Accounts receivable, net $17,675
Inventories 11,986
Other current assets 6,009
-----
Current assets 35,670
Net property, plant & equipment 28,084
Goodwill 24,709
Other assets 3,052
-----
Total assets of Discontinued Operations $91,515
=======
Liabilities:
Accounts payable $ 8,908
Accrued expenses and other current liabilities 8,086
-----
Current liabilities 16,994
Other liabilities 2,534
-----
Total liabilities of Discontinued Operations $19,528
=======
3. ACQUISITIONS
Doble
-----
On November 30, 2007, the Company acquired the capital stock of Doble for a
purchase price of $319 million, net of cash acquired and subject to a
working capital adjustment. Doble, headquartered in Watertown,
Massachusetts, is a worldwide leader in providing high-end diagnostic test
solutions for the electric utility industry. The acquisition aligns with
the Company's long-term growth strategy of expanding its products and
services in the utility industry. The acquisition was funded by a
combination of the Company's existing cash, including the proceeds from the
divestiture of Filtertek, and borrowings under a new $330 million credit
facility led by National City Bank. The operating results for Doble, since
the date of acquisition, are included within the Utility Solutions Group
segment.
The acquisition was recorded by allocating the cost of completing the
acquisition to the assets acquired, including identifiable intangible
assets and liabilities assumed, based on their estimated fair values at the
acquisition date pursuant to SFAS No. 141, "Business Combinations". The
excess of the cost of the acquisition over the net amounts assigned to the
fair value of the assets acquired and the liabilities assumed was recorded
as goodwill. The allocation below is preliminary, as the final valuation of
certain tangible and intangible assets and tax contingencies has not been
completed.
The preliminary purchase price allocation is as follows:
(In thousands)
Net tangible assets $ 42,854
Identifiable intangible assets:
Trade Names $ 75,720
Customer relationships 54,210
Software and databases 3,740
-----
Total identifiable intangible
assets 133,670
Goodwill 214,341
Long-term deferred tax liabilities (53,404)
-------
Total cash consideration $337,461
========
Reconciliation of purchase price:
Purchase price per agreement $319,000
Add: cash acquired 9,639
Add: short-term marketable securities acquired 4,966
Add: transaction costs 2,574
Add: working capital adjustment, net 1,282
-----
Total cash consideration $337,461
========
The identifiable intangible assets consisting of customer relationships
will be amortized on a straight-line basis over 20 years and the software
and databases will be amortized on a straight-line basis over 5 years. The
identifiable intangible asset consisting of trade names has an indefinite
life and is not subject to amortization. The purchase price allocation is
preliminary and is subject to finalization of purchase accounting which is
expected to be completed prior to September 30, 2008.
Pro Forma Results
-----------------
The following pro forma financial information for the three months ended
December 31, 2007 and 2006 presents the combined results of operations of
ESCO and Doble as if the acquisition had occurred on October 1, 2006,
respectively. The pro forma financial information for the periods presented
excludes the Filtertek Inc. business which was sold on November 25, 2007.
The combined results of operations have been adjusted for the impact of
certain acquisition-related items, including additional amortization of
identifiable intangible assets, additional financing expenses and other
direct costs. The impact of pro forma adjustments are tax-effected at the
expected future consolidated corporate tax rate.
The unaudited pro forma financial information is not intended to represent,
or be indicative of, the Company's consolidated results of operations or
financial condition that would have been reported had the acquisition been
completed as of the beginning of each of the periods presented. This
information is provided for illustrative purposes only and is not
necessarily indicative of the Company's future consolidated results of
operations or financial condition.
(In millions, except per Three Months ended
share data) December 31,
------------
2007 2006
---- ----
Net sales $ 151.2 101.5
EBIT 16.2 1.5
Net earnings from
continuing operations $ 7.4 0.1
======= ===
Net earnings per share
Basic $ 0.29 0.00
======= ====
Diluted $ 0.28 0.00
======= ====
Other Acquisitions
------------------
In addition, during the first quarter of 2008, the Company acquired certain
assets and liabilities related to two minor acquisitions for a total
purchase price of $1 million.
All acquisitions have been accounted for by the purchase method and,
accordingly, their results are included in the Company's consolidated
financial statements from the respective dates of acquisition. Under the
purchase price method, the purchase price is allocated based on the fair
value of assets received and liabilities assumed as of the acquisition
date.
4. 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
December 31,
------------
2007 2006
---- ----
Weighted Average Shares
Outstanding - Basic 25,759 25,874
Dilutive Options and
Restricted Shares 443 -
----- ------
Adjusted Shares- Diluted 26,202 25,874
====== ======
Options to purchase 592,046 shares of common stock at prices ranging from
$35.69 - $54.88 and options to purchase 574,255 shares of common stock at
prices ranging from $42.10 - $54.88 were outstanding during the three month
periods ended December 31, 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 55,000
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 December 31, 2007.
5. 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 Company utilized historical, company data
to develop its expected term assumption. For fiscal years 2006 and 2007,
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 December 31,
2007 and 2006, respectively: expected dividend yield of 0% in both periods;
expected volatility of 34.8% and 27.2%; risk-free interest rate of 2.9% and
4.6%; and expected term of 3.8 and 3.5 years. Pre-tax compensation expense
related to the stock option awards was $0.6 million and $0.6 million for
the three-month periods ended December 31, 2007 and 2006, respectively.
Information regarding stock options awarded under the option plans is as
follows:
Aggregate Weighted-
Intrinsic Average
Weighted Value Remaining
Avg. (in Contractual
Shares Price millions) Life
------ ----- --------- ----
Outstanding at
October 1, 2007 1,558,941 $30.35
Granted 16,000 $35.82
Exercised (22,034) $17.72 $ 0.5
Cancelled (49,742) $44.84
------- ------
Outstanding at
December 31, 2007 1,503,165 $30.12 $ 17.7 2.8 years
========= ======
Exercisable at
December 31, 2007 1,210,780 $26.46 $ 17.6
========= ====== ======
The weighted-average grant-date fair value of options granted during the
three-month periods ended December 31, 2007 and 2006 was $10.98 and $12.25,
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 the
majority of the outstanding restricted share awards is being recognized
over the longer performance period as it is not 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 $0.4 million and $0.5 million for the
three-month periods ended December 31, 2007 and 2006, respectively.
The following summary presents information regarding outstanding restricted
share awards as of December 31, 2007 and changes during the three-month
period then ended:
Weighted
Shares Avg. Price
------ ----------
Nonvested at October 1, 2007 164,060 $41.77
Granted 87,985 $36.94
Cancelled (8,000) $41.74
------ ------
Nonvested at December 31, 2007 244,045 $40.03
======= ======
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 $0.2 million for the three-month periods ended December 31,
2007 and 2006, respectively.
The total share-based compensation cost that has been recognized in results
of operations and included within SG&A was $1.2 million and $1.3 million
for the three-month periods ended December 31, 2007 and 2006, respectively.
The total income tax benefit recognized in results of operations for
share-based compensation arrangements was $0.3 million and $0.4 million for
the three-month periods ended December 31, 2007 and 2006, respectively. As
of December 31, 2007, there was $12.7 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 2.9
years.
6. INVENTORIES
Inventories from continuing operations consist of the following (in
thousands):
December 31, September 30,
2007 2007
---- ----
Finished goods $ 23,748 17,652
Work in process, including long- term 15,861 13,532
contracts
Raw materials 33,541 24,701
------ ------
Total inventories $ 73,150 55,885
========= ======
7. COMPREHENSIVE INCOME
Comprehensive income (loss) for the three-month periods ended December 31,
2007 and 2006 was $3.8 million and $(0.4) million, respectively. For the
three-month periods ended December 31, 2007 and 2006, the Company's
comprehensive income was positively impacted by foreign currency
translation adjustments of $1.2 million and $1.0 million, respectively and
negatively impacted by interest rate swaps of $0.2 million and zero,
respectively.
8. 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: Utility Solutions Group (formerly the Communications segment),
Test and Filtration/Fluid Flow (Filtration). As a result of the acquisition
of Doble in November 2007, the Company changed the name of the
Communications segment to the Utility Solutions Group segment. The renaming
of this segment more accurately describes the segment's operating
activities and strategically aligns the respective operating entities to
focus on a single goal of satisfying the expanding AMI, Smart Grid, and
other operational requirements of electric, gas and water utilities
worldwide. The change in segment name was made in conjunction with the
Company's strategic integration and rebranding of its AMI related
technologies under the brand name Aclara, and renaming the businesses as
follows: Distribution Control Systems, Inc. renamed Aclara Power-Line
Systems Inc.; Hexagram, Inc. renamed Aclara RF Systems Inc.; and Nexus
Energy Software, Inc. renamed Aclara Software Inc. In addition to the AMI
busineses known as Aclara, the Utility Solutions Group also includes
Comtrak and Doble Engineering Company (Doble). Doble provides high-end,
diagnostic test solutions for the electric power delivery industry.
As a result of the divestiture of Filtertek in November 2007, the Company
re-evaluated the aggregation criteria of its remaining operating units
within the Filtration segment. The Tek Packaging business (formerly a
division of Filtertek) was not included in the divestiture transaction.
Prior to the divestiture of Filtertek, each of the components of the
Filtration segment were presented separately due to differing long-term
economics. However, as a result of the divestiture of Filtertek, management
believes the remaining companies within the Filtration segment now have
similar long-term economics and, therefore, will not be presented
separately beginning with the first quarter of 2008. The Filtration
segment's operations consist of: PTI Technologies Inc., VACCO Industries
and Tek Packaging.
Test segment operations represent the EMC Group, consisting primarily of
ETS-Lindgren L.P. (ETS) and Lindgren R.F. Enclosures, Inc. (Lindgren). The
EMC Group is principally involved in the design and manufacture of EMC test
equipment, test chambers, and electromagnetic absorption materials.
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. The table below is presented on the basis of continuing operations
and excludes discontinued operations.
(In thousands) Three Months ended
December 31,
------------
NET SALES 2007 2006
--------- ---- ----
Utility Solutions Group $ 79,309 30,034
Test 32,065 28,202
Filtration 23,583 22,351
------ ------
Consolidated totals $134,957 80,587
======== ======
EBIT
----
Utility Solutions Group $ 13,408 (2,782)
Test 1,990 2,143
Filtration 3,649 1,682
Corporate (4,995) (4,565)
------ ------
Consolidated EBIT 14,052 (3,522)
Add: Interest
(expense)/income (1,359) 321
------ ---
Earnings (loss) before
income taxes $ 12,693 (3,201)
======== ======
IDENTIFIABLE ASSETS
-------------------
Utility Solutions Group $188,677 99,921
Test 76,313 52,407
Filtration 55,723 55,966
Reconciliation to
consolidated totals
(Corporate assets) 551,671 271,218
------- -------
Consolidated totals $872,384 479,512
======== =======
9. DEBT
The Company's debt is summarized as follows:
(In thousands) December 31, September 30,
2007 2007
---- ----
Revolving credit facility, including current
portion $265,000 -
Current portion of long-term debt 30,000 -
------ -------
Total long-term debt, less current portion $235,000 -
======== ========
On November 30, 2007, in conjunction with the acquisition of Doble, the
Company entered into a new $330 million five-year revolving credit facility
with a $50 million increase option. This facility replaces the Company's
$100 million credit facility that would have otherwise matured in October
2009. The facility is available for direct borrowings and/or the issuance
of letters of credit. It is provided by a group of sixteen banks, led by
National City Bank as agent, with a maturity of November 30, 2012.
At December 31, 2007, the Company had approximately $65 million available
to borrow under the credit facility in addition to $23.7 million cash on
hand. At December 31, 2007, the Company had $265 million of outstanding
borrowings under the credit facility and outstanding letters of credit of
$3.6 million ($2.7 million outstanding under the credit facility). The
Company classified $30 million as current portion on long-term debt as of
December 31, 2007, as the Company intends to repay this amount within the
next twelve months.
The new credit facility requires, as determined by certain financial
ratios, a facility fee ranging from 15-25 basis points per annum on the
revolving line of credit. The terms of the facility provide that interest
on borrowings may be calculated at a spread over the London Interbank
Offered Rate (LIBOR) or based on the prime rate, at the Company's election.
The facility is secured by the unlimited guaranty of the Company's material
domestic subsidiaries and a 65% pledge of the material foreign
subsidiaries' share equity. The financial covenants of the credit facility
include a leverage ratio and an interest coverage ratio.
10. INCOME TAX EXPENSE
The first quarter of 2008 effective income tax rate for continuing
operations was 37.7% compared to a benefit of 57.8% in the first quarter of
2007. The first quarter 2007 income tax benefit was favorably impacted by a
$0.9 million, net, research tax credit, reducing the 2007 first quarter
effective income tax rate by 27.9%. The first quarter 2007 rate was
unfavorably impacted by 8.5% due to additional state and foreign tax
liabilities and by 1.9% due to non-deductible stock option expense related
to foreign optionees. The Company estimates the fiscal 2008 tax rate to be
approximately 38%, excluding the effect of discontinued operations.
Effective October 1, 2007, the Company adopted FASB Interpretation No. 48
(FIN 48), "Accounting for Uncertainty in Income Taxes." FIN 48 provides a
financial statement recognition threshold and measurement attribute for a
tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The adoption of
FIN 48 had the following impact on the Company's financial statements:
decreased current assets by $1.5 million, decreased current liabilities by
$0.3 million, and decreased long-term liabilities by $1.2 million. As of
October 1, 2007, the Company had $6.7 million of unrecognized tax benefits
of which $5.9 million, if recognized, would affect the Company's effective
tax rate. The Company made no adjustments to retained earnings related to
the adoption.
In addition to the adjustments recorded as of October 1, 2007 with respect
to the adoption of FIN 48, the Company recorded an increase of $5.8 million
in its unrecognized tax benefits in the current period. The Company
anticipates a $0.3 million reduction in the amount of unrecognized tax
benefits in the next twelve months as a result of a lapse of the applicable
statute of limitations. The Company's policy is to include interest related
to unrecognized tax benefits in income tax expense and penalties in
operating expense. As of October 1, 2007, the Company had accrued interest
related to uncertain tax positions of $0.1 million, net of federal income
tax benefit, on its consolidated balance sheet. No penalties have been
accrued due to the Company's net operating loss position.
The principal jurisdictions for which the Company files income tax returns
are U.S. federal and the various city, state, and international locations
where the Company has operations. Due to the Company's available net
operating loss, the 1995 through 2006 U.S. federal tax years remain subject
to income tax examinations. Various state years from 2003 through 2006
remain subject to income tax examinations. The Company is subject to income
tax in many jurisdictions outside the United States, none of which are
individually material to the Company's financial position, statement of
cash flows, or results of operations.
11. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill attributable to each
business segment from continuing operations for the three-month period
ended December 31, 2007 are presented in the table below.
Utility
(In millions) Solutions
Group Filtration Test Total
----- ---------- ---- -----
Balance as of September 30, 2007 $ 75.4 20.3 29.1 124.8
Acquisitions 214.5 - 0.4 214.9
----- ---- --- -----
Balance as of December 31, 2007 $289.9 20.3 29.5 339.7
====== ==== ==== =====
The following table presents the gross carrying amount and accumulated
amortization of identifiable intangible assets, other than goodwill, at the
dates presented:
December 31, 2007 September 30, 2007
--------------------- ----------------------
Gross Gross
Carrying Accum Carrying Accum
Amt Amort Net Amt Amort Net
--- ----- --- --- ----- ---
Amortized intangible
assets:
Customer relationships $54.2 $0.2 $54.0 $0.0 $0.0 $0.0
Capitalized software $89.4 $16.3 $73.1 $79.0 $13.6 $65.4
Patents & other $19.9 $18.3 $1.6 $23.3 $17.6 $5.7
Unamortized intangible
assets:
Trade Names $79.2 $0.0 $79.2 $3.5 $0.0 $3.5
----- ---- ----- ---- ---- ----
Total other intangible
assets $242.7 $34.8 $207.9 $105.8 $31.2 $74.6
====== ===== ====== ====== ===== =====
Amortization of intangible assets for the three-month periods ended
December 31, 2007 and 2006, was $3.6 million and $2.0 million,
respectively. Amortization of intangible assets for fiscal years 2008
through 2012 is estimated at approximately $17 million to $22 million per
year. The increase in intangible asset amortization is related to the TWACS
NG software.
12. RETIREMENT PLANS
A summary of net periodic benefit expense for the Company's defined benefit
plans for the three-month periods ended December 31, 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
December 31,
------------
(In thousands) 2007 2006
-------------- ---- ----
Defined benefit plans
Interest cost $713 688
Expected return on assets (738) (700)
Amortization of:
Prior service cost 4 2
Actuarial loss 86 98
-- --
Net periodic benefit cost $ 65 88
==== ==
13. DERIVATIVE FINANCIAL INSTRUMENTS
Market risks relating to the Company's operations result primarily from
changes in interest rates and changes in foreign currency exchange rates.
The Company is exposed to market risk related to changes in interest rates
and selectively uses derivative financial instruments, including forward
contracts and swaps, to manage these risks. During the first quarter of
2008, the Company entered into a two-year amortizing interest rate swap to
hedge some of its exposure to variability in future LIBOR-based interest
payments on variable rate debt. The swap notional amount for the first year
is $175 million amortizing to $100 million in the second year. All
derivative instruments are reported on the balance sheet at fair value. The
derivative instrument is designated as a cash flow hedge and the gain or
loss on the derivative is deferred in accumulated other comprehensive
income until recognized in earnings with the underlying hedged item.
Including the impact of interest rate swaps outstanding, the interest rates
on approximately 66% of the Company's total borrowings were effectively
fixed as of December 31, 2007.
The following is a summary of the notional transaction amounts and fair
values for the Company's outstanding derivative financial instruments by
risk category and instrument type, as of December 31, 2007.
Average
Notional Receive Average
(In thousands) Amount Rate Pay Rate Fair Value
------ ---- -------- ----------
Interest rate swaps $175,000 5.25% 3.99% ($183)
14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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 adopted
the provisions of this Interpretation during the first quarter of 2008 and
recorded no adjustments to retained earnings related to the adoption.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
(SFAS 157), which defines fair value in generally accepted accounting
principles and expands disclosures about fair value measurements. This
Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The adoption of SFAS 157 is not expected
to have a material impact to the Company's financial position or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
As a result of the acquisition of Doble Engineering Company (Doble) in November
2007, the Company changed the name of the Communications segment to the Utility
Solutions Group segment. The name change was done in conjunction with the
Company's strategic integration and rebranding of its AMI related technologies
under the brand name Aclara, and renaming the businesses as follows:
Distribution Control Systems, Inc. renamed Aclara Power-Line Systems Inc.;
Hexagram, Inc. renamed Aclara RF Systems Inc.; and Nexus Energy Software, Inc.
renamed Aclara Software Inc.
The following discussion refers to the Company's results from continuing
operations, except where noted. The Filtertek businesses (excluding Tek
Packaging) are accounted for as discontinued operations in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Accordingly, the Filtertek businesses are reflected as discontinued operations
in the financial statements and related notes for all periods shown. References
to the first quarters of 2008 and 2007 represent the fiscal quarters ended
December 31, 2007 and 2006, respectively.
NET SALES
Net sales increased $54.4 million, or 67.5%, to $135.0 million for the first
quarter of 2008 from $80.6 million for the first quarter of 2007. Net sales
increased across all segments in the first quarter of 2008 compared to the prior
year quarter, with the most significant increase in the Utility Solutions Group
segment of $49.3 million.
- -Utility Solutions Group
Net sales increased $49.3 million, or 164.3%, to $79.3 million for the first
quarter of 2008 from $30.0 million for the first quarter of 2007. The sales
increase in the first quarter of 2008 as compared to the prior year quarter was
primarily due to: an increase in sales of $42.8 million from the Aclara Group
(consisting of Aclara Power-Line Systems Inc., Aclara RF Systems Inc. and Aclara
Software; an increase of $9.4 million of sales relating to the Doble acquisition
(representing sales for the month of December); partially offset by a $2.9
million decrease in sales from Comtrak due to the timing of product deliveries.
The increase in sales of $42.8 million from the Aclara Group in the first
quarter of 2008 as compared to the prior year quarter was mainly due to: a $31.6
million increase in sales from Aclara Power-Line Systems Inc. (of which $20.5
million represented the cumulative effect of the hardware shipments to date as
TWACS NG(trademark) 3.0 software was delivered to PG&E in December 2007) and a
$10.1 million increase in sales to electric utility cooperative (COOP) and
public power (Municipal) customers; an $11.0 million increase in sales from
Aclara RF Systems Inc. mainly due to an $8.9 million increase in shipments to
PG&E for the gas deployment and a $1.2 million increase related to the Kansas
City water project.
- -Test
For the first quarter of 2008, net sales of $32.1 million were $3.9 million, or
13.7% higher than the $28.2 million of net sales recorded in the first quarter
of 2007. The sales increase in the first quarter of 2008 as compared to the
prior year quarter was mainly due to: a $2.1 million increase in net sales from
the Company's U.S. operations driven by project milestones on a large aircraft
chamber and completion of other test chambers; a $0.9 million and $0.7 million
increase in net sales volume from the Company's European and Asian operations,
respectively.
- -Filtration
Net sales increased $1.2 million, or 5.4%, to $23.6 million for the first
quarter of 2008 from $22.4 million for the first quarter of 2007. The sales
increase during the fiscal quarter ended December 31, 2007 as compared to the
prior year quarter was mainly due to: a $1.3 million increase in commercial
aerospace shipments at PTI; a sales increase of $0.3 million at VACCO driven by
higher defense spares and the acquisition of Wintec; partially offset by a $0.4
million decrease in sales at Tek Packaging.
ORDERS AND BACKLOG
Backlog from continuing operations was $253.0 million at December 31, 2007
compared with $257.6 million at September 30, 2007. The Company received new
orders totaling $130.4 million in the first quarter of 2008 compared to $126.6
million in the prior year quarter. New orders of $67.3 million were received in
the first quarter of 2008 related to Utility Solutions Group products (including
$7.0 million of Doble acquired backlog), $33.3 million related to Test products,
and $29.8 million related to Filtration products. In December 2007, the Company
signed a contract with the Puerto Rico Electric Power Authority (PREPA) for a
total value expected to be $27 million for the purchase of Aclara Power-Line
Systems meter modules and associated substation equipment to be released through
the placement of purchase orders over the next two-and-a-half years. During the
first quarter of 2008, the Company recorded approximately $2 million in entered
orders related to this contract.
See "CAPITAL RESOURCES AND LIQUIDITY - Pacific Gas & Electric" below for a
discussion of PG&E contracts. The Company received orders totaling $14.2 million
from PG&E under these agreements during the first quarter of fiscal 2008.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $3.6 million and $2.0 million for the
three-month periods ended December 31, 2007 and 2006, respectively. Amortization
of intangible assets for the three-month periods ended December 31, 2007 and
2006, included $0.7 million and $0.7 million, respectively, of amortization of
acquired intangible assets related to recent acquisitions. The amortization of
these acquired intangible assets 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-month periods ended December 31, 2007 and 2006, the Company
recorded $2.3 million and $0.9 million, respectively, of amortization related to
Aclara Power-Line Systems TWACS NG software.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the first quarter of
2008 were $33.5 million (24.8% of net sales), compared with $26.6 million (33.0%
of net sales) for the prior year quarter. The increase in SG&A spending in the
fiscal quarter ended December 31, 2007 as compared to the prior year quarter was
primarily due to: a $2.5 million increase in SG&A at Aclara Power-Line Systems
mainly due to an increase in sales, marketing, and engineering headcount; $2.4
million of SG&A expenses related to Doble; a $0.6 million increase in SG&A at
Aclara Software; and a $0.5 million increase in SG&A at Aclara RF Systems.
OTHER (INCOME) AND EXPENSES, NET
Other (income) and expenses, net, was $(0.2) million and $(0.6) million for the
three-month periods ended December 31, 2007 and 2006, respectively. The
principal components of other (income) and expenses, net, for the first quarter
of 2008 included $0.3 million of life insurance proceeds related to a former
defense subsidiary. The principal components of other (income) and expenses,
net, for the first quarter of 2007 included $0.6 million of royalty income.
EBIT
The Company evaluates the performance of its operating segments based on EBIT,
defined below. EBIT was $13.9 million (10.3% of net sales) for the first quarter
of 2008 and a loss of $(3.5) million (4.4% of net sales) for the first quarter
of 2007. The increase in EBIT for the first quarter of 2008 as compared to the
prior year quarter is primarily due to the increase in margins in the Utility
Solutions Group segment including the acquisition of Doble.
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 from continuing operations.
Three Months ended
(In thousands) December 31,
------------
2007 2006
---- ----
Consolidated EBIT $14,052 (3,522)
Less: Interest (expense) (1,359) -
Add: interest income - 321
Less: Income tax expense (4,788) -
Add: Income tax benefit - 1,850
------ -----
Net earnings (loss) from
continuing operations $7,905 (1,351)
====== ======
- -Utility Solutions Group
EBIT in the first quarter of 2008 was $13.4 million (16.9% of net sales)
compared to $(2.8) million (9.3% of net sales) in the prior year quarter. The
increase in EBIT in the first quarter of 2008 was due to: an $18.0 million
increase in EBIT from the Aclara Group related to the increased sales volumes
(of which approximately $9 million related to the cumulative revenue catch-up
for PG&E from Aclara Power-Line Systems) and the EBIT contribution from Doble;
partially offset by a $1.7 million decrease in EBIT at Comtrak due to lower
sales volumes.
- -Test
EBIT in the first quarter of 2008 was $2.0 million (6.2% of net sales) as
compared to $2.1 million (7.4% of net sales) in the prior year quarter. EBIT
decreased $0.1 million over the prior year quarter due to the timing of sales
and product mix.
- -Filtration
EBIT was $3.6 million (15.3% of net sales) and $1.7 million (7.6% of net sales)
in the first quarters of 2008 and 2007, respectively. For the first quarter of
2008 as compared to the prior year quarter, EBIT increased $1.9 million due to:
a $1.6 million increase at PTI due to higher commercial aerospace shipments; a
$0.5 million increase at VACCO resulting from increased sales volumes; partially
offset by a $0.2 million decrease at Tek Packaging.
- -Corporate
Corporate costs included in EBIT were $5.0 million and $4.6 million for the
three-month periods ended December 31, 2007 and 2006, respectively. The increase
in Corporate costs in the first quarter of 2008 as compared to the prior year
quarter was mainly due to: a $0.4 million decrease in royalty income. In the
first quarter of 2008, Corporate costs included $1.2 million of pre-tax stock
compensation expense and $0.7 million of pre-tax amortization of acquired
intangible assets.
INTEREST EXPENSE (INCOME), NET
Interest expense was $1.4 million for the first quarter of 2008 compared to
interest income of $0.3 million in the prior year quarter. The increase in
interest expense in the first quarter of 2008 as compared to the prior year
quarter is due to the outstanding borrowings under the revolving credit facility
related to the Doble acquisition.
INCOME TAX EXPENSE
The first quarter of 2008 effective income tax rate for continuing operations
was 37.7% compared to a benefit of 57.8% in the first quarter of 2007. The first
quarter 2007 income tax benefit was favorably impacted by a $0.9 million, net,
research tax credit, reducing the 2007 first quarter effective income tax rate
by 27.9%. The first quarter 2007 rate was unfavorably impacted by 8.5% due to
additional state and foreign tax liabilities and by 1.9% due to non-deductible
stock option expense related to foreign optionees. The Company estimates the
fiscal 2008 tax rate to be approximately 38%, excluding the effect of
discontinued operations.
Effective October 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN
48), "Accounting for Uncertainty in Income Taxes." FIN 48 provides a financial
statement recognition threshold and measurement attribute for a tax position
taken or expected to be taken in a tax return. The Company recorded a $5.8
million increase in its unrecognized tax benefits in the current period.
CAPITAL RESOURCES AND LIQUIDITY
Working capital (current assets less current liabilities) decreased to $118.4
million at December 31, 2007 from $141.2 million at September 30, 2007. Accounts
receivable increased by $11.0 million and inventories increased by $17.3 million
in the first quarter of 2008 primarily related to acquisition of Doble. Accounts
payable decreased by $12.4 million in the first quarter of 2008, of which
approximately $6.0 million related to the Utility Solutions Group segment and
$3.3 million related to the Test segment, both due to timing of vendor
invoicing.
Net cash provided by operating activities from continuing operations was $9.6
million and $1.2 million for the three-month periods ended December 31, 2007 and
2006, respectively.
Capital expenditures from continuing operations were $4.5 million and $2.0
million in the first quarter of fiscal 2008 and 2007, respectively. The increase
in the first quarter of 2008 as compared to the prior year quarter included
approximately $2 million for the ETS Cedar Park facility expansion.
At December 31, 2007, intangible assets, net, of $207.9 million included $69.4
million of capitalized software. Approximately $58.8 million of the capitalized
software balance represents software development costs on the TWACS NG software
within the Utility Solutions Group segment to further penetrate the IOU market.
This software 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. Amortization expense
of TWACS NG software is on a straight-line basis over seven years and began in
March 2006. The Company recorded $2.3 million and $0.9 million in amortization
expense related to TWACS NG in the first quarter of 2008 and 2007, respectively.
Divestiture
On November 25, 2007, the Company completed the sale of the filtration portion
of Filtertek Inc. (Filtertek) to Illinois Tool Works Inc. for $77.5 million in
cash, subject to closing working capital adjustments. The Tek Packaging division
of Filtertek was not included in the transaction. The Filtertek businesses are
accounted for as discontinued operations in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Accordingly,
the Filtertek businesses are reflected as discontinued operations in the
financial statements and related notes for all periods presented. A pre-tax loss
of $0.2 million related to the sale of Filtertek is reflected in the Company's
fiscal 2008 first quarter results in discontinued operations. Filtertek's net
sales were $13.7 million for the two-month period ended November 25, 2007 and
$18.2 million for the three-month period ended December 31, 2006, respectively.
The operations of the Tek Packaging division are reflected in continuing
operations. The closure and relocation of the Filtertek Puerto Rico facility was
completed in March 2004. The Puerto Rico facility is included in current assets
from discontinued operations with a carrying value of $1.1 million at December
31, 2007. During the first quarter of 2008, the Company recorded a $2.5 million
write-down to reduce the carrying value to its expected net realizable value.
The charge is included in the loss on sale of discontinued operations for the
quarter ended December 31, 2007.
Acquisitions
On November 30, 2007, the Company acquired the capital stock of Doble for a
purchase price of approximately $319 million, net of cash acquired and subject
to a working capital adjustment. Doble, headquartered in Watertown,
Massachusetts, is a worldwide leader in providing high-end diagnostic test
solutions for the electric utility industry. The acquisition aligns with the
Company's long-term growth strategy of expanding its products and services in
the utility industry. The acquisition was funded by a combination of the
Company's existing cash, including the proceeds from the partial divestiture of
Filtertek, and borrowings under a new $330 million credit facility led by
National City Bank. Doble's annual revenue for the trailing twelve months ended
September 30, 2007 was approximately $80 million. The operating results for
Doble, since the date of acquisition, are included within the Utility Solutions
Group segment. The Company recorded approximately $214 million of goodwill and
$76 million of trade names as a result of transaction, subject to post-closing
adjustments including finalization of purchase accounting. The Company also
recorded $58 million of identifiable intangible assets consisting primarily of
customer relationships and software/databases which will be amortized on a
straight-line basis over periods ranging from five years to twenty years. The
post-closing purchase accounting items are expected to be completed prior to
September 30, 2008.
Other Acquisitions
In addition, during the first quarter of 2008, the Company acquired certain
assets and liabilities related to two minor acquisitions for a total purchase
price of $1 million.
Credit facility
On November 30, 2007, in conjunction with the acquisition of Doble, the Company
entered into a new $330 million five-year revolving credit facility with a $50
million increase option. This facility replaces the Company's $100 million
credit facility that would have otherwise matured in October 2009. The facility
is available for direct borrowings and/or the issuance of letters of credit. It
is provided by a group of sixteen banks, led by National City Bank as agent,
with a maturity of November 30, 2012.
At December 31, 2007, the Company had approximately $65 million available to
borrow under the credit facility in addition to $23.7 million cash on hand. At
December 31, 2007, the Company had $265 million of outstanding borrowings under
the credit facility and outstanding letters of credit of $3.6 million ($2.7
million outstanding under the credit facility). The Company classified $30
million as current portion on long-term debt as of December 31, 2007, as the
Company intends to repay this amount within the next twelve months. 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
Aclara Power-Line Systems Inc. (formerly known as Distribution Control Systems
Inc.) delivered the final software version (TWACS NG 3.0) to PG&E in December
2007 and, as a result, recognized deferred revenue of $20.5 million during the
first quarter of 2008. The parties continue to negotiate an amendment to the
current contract to conform to the parties' performance. Testing of Aclara RF
Systems Inc.'s (formerly known as Hexagram Inc.) RF electric solution by PG&E
began in the fiscal fourth quarter of 2007 and continues. PG&E has not yet
announced what changes, if any, will be made to its AMI project plan, and
therefore, the Company continues to be unable to estimate the timing or value of
orders that may be received under the Company's PG&E contracts. Refer to
"Pacific Gas & Electric" in "Management's Discussion and Analysis" appearing in
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2007 for further discussion about the Company's contracts with PG&E.
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,
2007 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 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 adopted the provisions of this
Interpretation during the first quarter of 2008 and recorded no adjustments to
retained earnings related to the adoption.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
157), which defines fair value in generally accepted accounting principles and
expands disclosures about fair value measurements. This Statement is effective
for financial statements issued for fiscal years beginning after November 15,
2007. The adoption of SFAS 157 is not expected to have a material impact to the
Company's financial position or results of operations.
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, completion of Doble purchase price allocation,
timing and amount of repayment of debt, annual effective tax rate, the reduction
in the amount of unrecognized tax benefits over the next twelve months, outcome
of current claims and litigation, future cash flow, capital requirements and
operational needs for the foreseeable future, and the ultimate values and timing
of revenues under the Aclara Power-Line Systems / PREPA contract. 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, 2007, 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 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 and copper; 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 and
integration of newly acquired businesses.
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. The Company is
exposed to market risk related to changes in interest rates and selectively uses
derivative financial instruments, including forward contracts and swaps, to
manage these risks. During the first quarter of 2008, the Company entered into a
two-year amortizing interest rate swap to hedge some of its exposure to
variability in future LIBOR-based interest payments on variable rate debt. The
swap notional amount for the first year is $175 million amortizing to $100
million in the second year. All derivative instruments are reported on the
balance sheet at fair value. The derivative instrument is designated as a cash
flow hedge and the gain or loss on the derivative is deferred in accumulated
other comprehensive income until recognized in earnings with the underlying
hedged item. Including the impact of interest rate swaps outstanding, the
interest rates on approximately 66% of the Company's total borrowings were
effectively fixed as of December 31, 2007.
The following is a summary of the notional transaction amounts and fair values
for the Company's outstanding derivative financial instruments by risk category
and instrument type, as of December 31, 2007.
Average
Notional Receive Average
(In thousands) Amount Rate Pay Rate Fair Value
------ ---- -------- ----------
Interest rate swaps $175,000 5.25% 3.99% ($183)
In addition, the Company pays 100bps spread on its outstanding debt. Refer to
the Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2007 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 1A. RISK FACTORS
The discussion of risk factors in Item 1A of the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2007 refers to the Company's
Communications segment and to its subsidiaries DCSI (Distribution Controls
Systems, Inc.) and Hexagram (Hexagram, Inc.). As a result of the acquisition of
Doble in November 2007, the Company changed the name of the Communications
segment to the Utility Solutions Group segment. The name change was done in
conjunction with the Company's strategic integration and rebranding of its AMI
related technologies under the brand name Aclara, and renaming the businesses
as follows: Distribution Control Systems, Inc. renamed Aclara Power-Line Systems
Inc.; Hexagram, Inc. renamed Aclara RF Systems Inc.; and Nexus Energy Software,
Inc. renamed Aclara Software Inc.
ITEM 6. EXHIBITS
a) Exhibits
Exhibit
Number
2.1 Stock Purchase and Sale Incorporated by reference to
Agreement dated as of Current Report on Form 8-K
November 6, 2007 by and dated November 6, 2007 at
among ESCO Technologies Exhibit 2.1
Holding Inc. and ESCO
Technologies Inc.,
Doble Engineering
Company and the
Stockholders of Doble
Engineering Company
2.2 Stock Purchase Incorporated by reference to
Agreement dated as of Current Report on Form 8-K
November 25, 2007 by dated November 25, 2007 at
and among ESCO Exhibit 2.1
Technologies Holding
Inc. and ESCO
Technologies Inc. and
Illinois Tool Works Inc.
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
3.6 Amendment to Bylaws Incorporate by reference to
effective as of Current Report on Form 8-K
November 9, 2007. dated November 12, 2007 at
Exhibit 3.1
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 November 30, Current Report on Form 8-K
2007 among the dated November 30, 2007, at
Registrant, National Exhibit 4.1
City Bank and the
lenders from time to
time parties thereto
10.1 Third Amendment to Incorporated by reference to
Directors' Extended Form 10-K for the fiscal
Compensation Plan year ended September 30,
effective October 3, 2007, at Exhibit 10.43
2007
10.2 Second Amendment to Incorporated by reference to
2004 Incentive Form 10-K for the fiscal
Compensation Plan year ended September 30,
effective October 3, 2007, at Exhibit 10.44
2007
10.3 Third Amendment to Incorporated by reference to
2001 Stock Incentive Form 10-K for the fiscal
Plan effective October year ended September 30,
3, 2007 2007, at Exhibit 10.45
10.4 First Amendment to Incorporated by reference to
Incentive Compensation Form 10-K for the fiscal
Plan for Executive year ended September 30,
Officers effective 2007, at Exhibit 10.46
October 3, 2007
10.5 Amendment to 1999 Incorporated by reference to
Stock Option Plan Form 10-K for the fiscal
effective October 3, year ended September 30,
2007 2007, at Exhibit 10.47
10.6 Amendment to Severance Incorporated by reference to
Plan effective October Form 10-K for the fiscal
3, 2007 year ended September 30,
2007, at Exhibit 10.48
10.7 Amendment to Incorporated by reference to
Performance Form 10-K for the fiscal
Compensation Plan year ended September 30,
effective October 3, 2007, at Exhibit 10.49
2007
10.8 Amendment to Incorporated by reference to
Compensation Plan for Form 10-K for the fiscal
Non-Employee Directors year ended September 30,
effective October 3, 2007, at Exhibit 10.50
2007
10.9 Third Amendment to Incorporated by reference to
Employment Agreement Current Report on Form 8-K
dated as of December dated December 31, 2007 at
31, 2007 between the Exhibit 10.1
Registrant and Victor
L. Richey, Jr.*
31.1 Certification of Chief
Executive Officer
relating to Form 10-Q
for period ended
December 31, 2007
31.2 Certification of Chief
Financial Officer
relating to Form 10-Q
for period ended
December 31, 2007
32 Certification of Chief
Executive Officer and
Chief Financial
Officer relating to
Form 10-Q for period
ended December 31, 2007
* Identical Amendments to Employment Agreements between the Registrant and
executive officers A.S. Barclay and G.E. Muenster, except that (i) the
termination amounts payable under Paragraph 9.a(1) are equal to base salary for
12 months, and (ii) under Paragraph 9.a(1)(B), such termination amounts may be
paid in biweekly installments equal to 1/26th of such amounts
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: February 11, 2008
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: February 8, 2008
(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: February 8, 2008
(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 December 31, 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: February 8, 2008
/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.