View:
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 MARCH 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
COMMISSION FILE NUMBER 1-10596
ESCO TECHNOLOGIES INC.
(Exact name of registrant as specified in its charter)
MISSOURI 43-1554045
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8888 LADUE ROAD, SUITE 200 63124-2090
ST. LOUIS, MISSOURI (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:(314) 213-7200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares of the registrant's stock outstanding at April 30,
2002 was 12,582,597.
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
March 31,
------------------
2002 2001
---- ----
Net sales $ 88,224 86,905
-------- ------
Costs and expenses:
Cost of sales 59,099 59,675
Selling, general and administrative
expenses 20,152 17,594
Interest expense 59 5
Other, net 613 2,643
------ ------
Total costs and expenses 79,923 79,917
------ ------
Earnings before income taxes 8,301 6,988
Income tax expense 3,108 2,701
----- -----
Net earnings $ 5,193 4,287
======== ======
Earnings per share:
Net earnings - Basic $ .42 .35
-Diluted .40 .34
======== ======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Six Months Ended
March 31,
----------------
2002 2001
---- ----
Net sales $ 172,560 169,777
-------- -------
Costs and expenses:
Cost of sales 116,556 117,302
Selling, general and administrative
expenses 38,905 34,359
Interest expense 110 85
Other, net 928 4,555
------- -------
Total costs and expenses 156,499 156,301
------- -------
Earnings before income taxes 16,061 13,476
Income tax expense 6,096 5,211
------- -------
Net earnings $ 9,965 8,265
======= =======
Earnings per share:
Net earnings - Basic $ .80 .67
-Diluted .77 .65
=== ===
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, September 30,
2002 2001
--------- -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 12,591 14,506
Accounts receivable, less allowance for doubtful
accounts of $881 and $1,122, respectively 63,898 61,351
Costs and estimated earnings on long-term
contracts, less progress billings of
$3,718 and $21,913, respectively 4,082 6,637
Inventories 50,032 48,167
Current portion of deferred tax assets 14,590 15,278
Other current assets 6,828 5,491
------- -------
Total current assets 152,021 151,430
======= =======
Property, plant and equipment, at cost 113,351 107,940
Less accumulated depreciation and amortization 47,336 42,902
------- -------
Net property, plant and equipment 66,015 65,038
Goodwill, less accumulated amortization
of $12,674 101,612 102,163
Deferred tax assets 36,029 38,573
Other assets 27,772 18,373
------- -------
$383,449 375,577
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ 50 122
Accounts payable 34,157 35,180
Advance payments on long-term contracts, less
costs incurred of $2,290 and $809, respectively 1,967 1,534
Accrued expenses and other current liabilities 25,342 27,233
------- -------
Total current liabilities 61,516 64,069
------- -------
Other liabilities 16,185 15,890
Long-term debt 8,145 8,338
------- ------
Total liabilities 85,846 88,297
------- -------
Commitments and contingencies -- --
Shareholders' equity:
Preferred stock, par value $.01 per share,
authorized 10,000,000 shares -- --
Common stock, par value $.01 per share,
authorized 50,000,000 shares; issued 12,529,681
and 13,409,934 shares, respectively 135 134
Additional paid-in capital 208,090 206,282
Retained earnings since elimination of
deficit at September 30, 1993 109,614 99,649
Accumulated other comprehensive loss (7,546) (6,518)
------- --------
310,293 299,547
Less treasury stock, at cost: 1,002,546
and 985,469 common shares, respectively (12,690) (12,267)
------- -------
Total shareholders' equity 297,603 287,280
------- -------
$383,449 375,577
======= =======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
March 31,
-----------------
2002 2001
---- ----
Cash flows from operating activities:
Net earnings $ 9,965 8,265
Adjustments to reconcile net earnings
to net cash provided by operating activities:
Depreciation and amortization 6,089 7,756
Changes in operating working capital (4,987) (4,276)
Change in long-term portion of deferred tax
assets 2,544 2,881
Other 772 (918)
------- -------
Net cash provided by operating activities 14,383 13,708
------- -------
Cash flows from investing activities:
Capital expenditures (6,140) (4,492)
Acquisition of technology rights (9,546) -
------- -------
Net cash used by investing activities (15,686) (4,492)
------- -------
Cash flows from financing activities:
Net decrease in short-term borrowings (12) (4,000)
Proceeds from long-term debt 45 108
Principal payments on long-term debt (299) (100)
Purchases of common stock into treasury (456) (266)
Other 110 37
------ -------
Net cash used by financing activities (612) (4,221)
------- -------
Net (decrease) increase in cash and cash equivalents (1,915) 4,995
Cash and cash equivalents, beginning of period 14,506 5,620
------- -------
Cash and cash equivalents, end of period $ 12,591 10,615
======= =======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements, in the opinion of
management, include all adjustments, consisting only of normal recurring
accruals, necessary for a fair presentation of the results for the interim
periods presented. The consolidated financial statements are presented in
accordance with the requirements of Form 10-Q and consequently do not
include all the disclosures required by accounting principles generally
accepted in the United States of America (GAAP). For further information
refer to the consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K for the year ended September
30, 2001. Certain prior year amounts have been reclassified to conform to
the fiscal 2002 presentation.
The results for the three and six month periods ended March 31, 2002 are
not necessarily indicative of the results for the entire 2002 fiscal year.
2. GOODWILL AND OTHER INTANGIBLE ASSETS - ADOPTION OF SFAS NO. 142
Management adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 142 Goodwill and Other Intangible Assets effective
October 1, 2001, the beginning of the Company's fiscal year. SFAS No. 142
requires that goodwill and intangible assets with indefinite useful lives
no longer be amortized, but instead tested for impairment at least annually
in accordance with the provisions of SFAS No. 142. SFAS No. 142 also
requires that intangible assets with definite useful lives be amortized
over their respective estimated useful lives to their estimated residual
values, and reviewed for impairment in accordance with SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of. In addition, to the extent an intangible asset is
identified as having an indefinite useful life, the Company is required to
test the intangible asset for impairment in accordance with the provisions
of SFAS No. 142. Any impairment loss will be measured as of the date of
adoption and recognized as the cumulative effect of a change in accounting
principle. No impairment loss was recorded upon the adoption of SFAS No.
142.
The following table presents a reconciliation of net earnings for the three
and six month periods ended March 31, 2001, as restated, to reflect the
removal of goodwill amortization in accordance with SFAS No. 142, to be
used for comparison purposes with the three and six month periods ended
March 31, 2002. (Dollars in thousands, except per share amounts)
Three Months Six Months
Ended March 31, Ended March 31,
2001 2001
--------------- ---------------
Reported net earnings $4,287 $8,265
Add back: Goodwill amortization,
net of tax 523 1,056
------ ------
Adjusted net earnings $4,810 $9,321
====== ======
Earnings per share - Basic:
As Reported $ .35 $ .67
Goodwill amortization .04 .09
------ ------
Adjusted $ .39 $ .76
====== ======
Earnings per share - Diluted:
As Reported $ .34 $ .65
Goodwill amortization .04 .08
------ ------
Adjusted $ .38 $ .73
====== ======
3. EARNINGS PER SHARE (EPS)
Basic EPS is calculated using the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the weighted
average number of common shares outstanding during the period plus shares
issuable upon the assumed exercise of dilutive common share options and
performance shares by using the treasury stock method. The number of shares
used in the calculation of earnings per share for each period presented is
as follows (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
------------------ ----------------
2002 2001 2002 2001
---- ---- ---- ----
Weighted Average Shares
Outstanding - Basic 12,477 12,327 12,448 12,309
Dilutive Options and
Performance Shares 586 444 545 407
------ ------ ------ ------
Adjusted Shares- Diluted 13,063 12,771 12,993 12,716
====== ====== ====== ======
Options to purchase approximately 40,500 shares of common stock at prices
ranging between $32.54 - $35.93 and options to purchase 32,000 shares of
common stock at a price of $21.44 per share were outstanding during the six
month periods ended March 31, 2002 and 2001, 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.
These options expire in various periods through 2012. Approximately 118,000
and 202,000 Performance Shares were outstanding but unvested at March 31,
2002 and 2001, respectively, and therefore, were not included in the
respective computation of diluted EPS.
4. INVENTORIES
Inventories consist of the following (in thousands):
March 31, September 30,
2002 2001
--------- -------------
Finished goods $ 11,788 12,065
Work in process, including long-term
contracts 15,853 17,089
Raw materials 22,391 19,013
------ ------
Total inventories $ 50,032 48,167
======= ======
5. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2002 and
2001 was $5.1 million and $3.3 million, respectively. Comprehensive income
for the six-month periods ended March 31, 2002 and 2001 was $8.9 million
and $7.5 million, respectively. For the six months ended March 31, 2002,
the Company's comprehensive income was negatively impacted by foreign
currency translation adjustments of $1.6 million, which was partially
offset by an increase in fair value of the Company's interest rate swaps
designated as a cash flow hedge of $0.5 million, discussed below in Item 3.
6. ACQUISITIONS
In March 2002, the Company acquired the exclusive rights to the patent
portfolio and related intellectual property of North Carolina SRT Inc. and
its affiliate (NC SRT), a manufacturer of cross-flow filtration and
separation modules and equipment. The Company paid approximately $9.5
million for these filtration technology rights, including certain
production assets and inventory of NC SRT. In addition, the Company will
pay future consideration of $1 million in March 2003 and $1 million in
March 2004. NC SRT sales of products utilizing the technologies acquired
were approximately $3 million in calendar 2001. NC SRT is included within
the Company's Filtration/Fluid Flow segment.
7. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in four segments:
Filtration/Fluid Flow, Test, Communications and Other.
Management evaluates and measures the performance of its operating segments
based on "Net Sales and EBIT", which are detailed in the table below. EBIT
is defined as Earnings Before Interest and Taxes.
($ in millions) Three Months ended Six Months ended
March 31, March 31,
------------------ ----------------
NET SALES 2002 2001 2002 2001
--------- ---- ---- ---- ----
Filtration/Fluid Flow $ 48.0 $ 46.9 92.4 91.1
Test 16.7 22.4 34.5 44.0
Communications 20.4 14.6 39.8 29.0
Other 3.1 3.0 5.9 5.7
------ ------ ----- -----
Consolidated totals $ 88.2 $ 86.9 172.6 169.8
====== ====== ===== =====
EBIT
----
Filtration/Fluid Flow $ 3.1 $ 2.3 5.4 4.4
Test 0.9 1.6 2.3 3.7
Communications 4.9 3.4 9.2 6.9
Other (0.5) (0.3) (0.7)(4) (1.4)(5)
----- ----- ----- -----
Consolidated totals $ 8.4(1) $ 7.0(2) 16.2(1) 13.6(3)
---- ---- ---- ----
(1) The three and six-month periods ended March 31, 2002 excludes
goodwill amortization in accordance with the adoption of SFAS
No. 142.
(2) The three month period ended March 31, 2001 included $0.9 million
of goodwill amortization.
(3) The six month period ended March 31, 2001 included $1.7 million of
goodwill amortization.
(4) The amount for the six month period ended March 31, 2002 consisted
of $0.6 million related to Rantec and ($1.3) million related to
unallocated corporate operating charges, which includes
$0.3 million of exit costs related to the Sanmar joint venture
recorded in the first quarter of fiscal 2002, related to the
Filtration/Fluid Flow segment.
(5) The amount for the six month period ended March 31, 2001 consisted
of $0.7 million related to Rantec and ($2.1) million related to
unallocated corporate operating charges, which includes
$0.3 million of charges related to personnel termination costs
in Brazil (Filtration/Fluid Flow segment); $0.4 million of
corporate litigation costs related to the Filtration/Fluid
Flow segment; $0.6 million of costs related to the consolidation
of the Stockton, CA facility into the Huntley, IL facility
(Filtration/Fluid Flow segment) and $0.3 million of residual
costs to consolidate PTI's filtration business into new facilities
in Oxnard, CA.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
NET SALES
Net sales were $88.2 million and $86.9 million for the second quarter
of fiscal 2002 and 2001, respectively. Net sales were $172.6 million and $169.8
million for the first six months of fiscal 2002 and 2001, respectively. The
largest increase was in the Company's Communications segment, resulting from
significantly higher shipments of Automatic Meter Reading (AMR) equipment to
electric utility cooperatives (Co-ops) and PPL Electric Utilities Corporation
(PPL).
FILTRATION/FLUID FLOW
Net sales were $48.0 million and $46.9 million for the second quarter of fiscal
2002 and 2001, respectively. Net sales were $92.4 million and $91.1 million for
the first six months of fiscal 2002 and 2001, respectively. Sales increased
slightly during the first six months of fiscal 2002 as a result of the
contribution from Bea Filtri S.p.A. (Bea), acquired in June 2001, which
contributed approximately $5.4 million of net sales in the first six months of
fiscal 2002. This increase was partially offset by lower sales in the commercial
aerospace and semiconductor markets, which continue to experience economic
softness.
TEST
Net sales were $16.7 million and $22.4 million for the second quarter of fiscal
2002 and 2001, respectively. For the first six months of fiscal 2002, net sales
were $34.5 million compared to $44.0 million in the prior year period. The sales
decrease in the first six months of fiscal 2002 as compared to the prior year
period is primarily due to the prior year completion of the General Motors test
chamber complex, which contributed $3.3 million of the decrease to net sales,
and continued softness in the overall electronics and telecommunications
markets.
COMMUNICATIONS
For the second quarter of fiscal 2002, net sales of $20.4 million were $5.8
million, or 39.7%, higher than the $14.6 million of net sales recorded in the
second quarter of fiscal 2001. Net sales of $39.8 million in the first six
months of fiscal 2002 were $10.8 million, or 37.3%, higher than the $29.0
million recorded in the first six months of fiscal 2001. The increases are the
result of significantly higher shipments of AMR equipment to Co-ops and PPL.
OTHER
Net sales were $3.1 million in the second quarter of fiscal 2002 and $3.0
million in the second quarter of fiscal 2001. In the first six months of fiscal
2002, net sales were $5.9 million compared to $5.7 million in the prior year
period. The Other segment represents the net sales of Rantec Power Systems
(Rantec).
ORDERS AND BACKLOG
Firm order backlog was $315.6 million at March 31, 2002, compared with $180.1
million at September 30, 2001. Orders totaling $308.1 million were received in
the first six months of fiscal 2002. Approximately $102.1 million of new orders
in the first six months of fiscal 2002 related to Filtration/Fluid Flow
products, $35.5 million related to Test products, and $165.2 million related to
Communications products. In February 2002, the Company received a $112 million
contract from PPL Electric Utilities Corporation, a subsidiary of PPL
Corporation, for an AMR system in Pennsylvania. The project is currently
scheduled for completion in November 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the second quarter of
fiscal 2002 were $20.2 million, or 22.8% of net sales, compared with $17.6
million, or 20.2% of net sales for the prior year period. For the first six
months of fiscal 2002, SG&A expenses were $38.9 million, or 22.5% of net sales,
compared with $34.4 million, or 20.2% of net sales for the prior year period.
The increase in SG&A spending in the first six months of fiscal 2002 is mainly
due to the Bea acquisition, which added approximately $1.8 million of SG&A
expenses in the first six months of fiscal 2002, and additional investments in
research and development, engineering, and marketing within the Communications
and Filtration/Fluid Flow segments.
OTHER COSTS AND EXPENSES, NET
Other costs and expenses, net, were $0.6 million for the quarter ended March 31,
2002 compared to $2.6 million for the prior year quarter. The second quarter of
fiscal 2002 excludes goodwill amortization in accordance with the adoption of
SFAS No. 142, while the second quarter of fiscal 2001 included goodwill
amortization of $0.9 million. Other costs and expenses, net, were $0.9 million
for the first six months of fiscal 2002 compared to $4.6 million for the prior
year period. The first six months of fiscal 2002 excludes goodwill amortization,
and the first six months of fiscal 2001 included goodwill amortization of $1.7
million.
Principal components of other costs and expenses, net for the first six months
of fiscal 2002 include $0.6 million of amortization of identifiable intangible
assets, primarily patents, and $0.3 million of exit costs related to the Sanmar
joint venture (Filtration/Fluid Flow segment) which was terminated in the first
quarter of fiscal 2002, offset by a $0.4 million gain from insurance proceeds
related to a former subsidiary. Principal components of the amount for the first
six months of fiscal 2001 include $1.7 million of goodwill amortization, $0.7
million of amortization of identifiable intangible assets, $0.3 million of
charges related to personnel termination costs in Brazil (Filtration/Fluid Flow
segment), $0.4 million of corporate litigation costs related to the
Filtration/Fluid Flow segment, $0.6 million of costs related to the
consolidation of the Stockton, CA facility into the Huntley, IL facility
(Filtration/Fluid Flow segment) and $0.3 million of residual costs to
consolidate PTI's filtration business into new facilities in Oxnard, CA.
EBIT
Management evaluates the performance of its operating segments based on EBIT,
which the Company defines as Earnings Before Interest and Taxes. EBIT increased
$1.4 million to $8.4 million (9.5% of net sales) for the second quarter of
fiscal 2002 from $7.0 million (8.0% of net sales) for the second quarter of
fiscal 2001. The prior year quarter included goodwill amortization of
approximately $0.9 million. Excluding the amortization of goodwill from the
second quarter of fiscal 2001's results, EBIT would have been $7.9 million (9.0%
of net sales).
For the first six months of fiscal 2002, EBIT increased $2.6 million to $16.2
million (9.4% of net sales) from $13.6 million (8.0% of net sales) for the first
six months of fiscal 2001. The prior year period included goodwill amortization
of approximately $1.7 million. Excluding the amortization of goodwill from the
first six months of fiscal 2001's results, EBIT would have been $15.3 million
(9.0% of net sales).
FILTRATION/FLUID FLOW
EBIT was $3.1 million and $2.3 million in the second quarter of fiscal 2002 and
2001, respectively, and $5.4 million and $4.4 million in the first six months of
fiscal 2002 and 2001, respectively. The prior year second quarter and six months
ended March 31, 2001 included goodwill amortization of $0.5 million and $1.0
million, respectively. Excluding the goodwill amortization, EBIT for the second
quarter and six months of fiscal 2001 would have been $2.8 million and $5.4
million, respectively. The current year continues to be impacted by the
softening of the commercial aerospace and semiconductor markets and investments
in new product development and market expansion initiatives, primarily in
microfiltration.
TEST
EBIT was $0.9 million and $1.6 million in the second quarter of fiscal 2002 and
2001, respectively, and $2.3 million and $3.7 million in the first six months of
fiscal 2002 and 2001, respectively. The prior year second quarter and six months
ended March 31, 2001 included goodwill amortization of $0.4 million and $0.7
million, respectively. Excluding the goodwill amortization, EBIT for the second
quarter and six months of fiscal 2001 would have been $2.0 million and $4.4
million, respectively. The decline in EBIT in the first six months of fiscal
2002 as compared to the prior year period is mainly due to the completion of the
General Motors test chamber complex in fiscal 2001 and the continued softness in
the electronics and telecommunications markets.
COMMUNICATIONS
Second quarter EBIT of $4.9 million in fiscal 2002 was $1.5 million, or 44.1%,
higher than the $3.4 million of EBIT in the second quarter of fiscal 2001. For
the first six months of fiscal 2002, EBIT increased $2.3 million, or 33.3%, to
$9.2 million from $6.9 million in fiscal 2001. The increase in EBIT is the
result of significantly higher shipments of AMR equipment.
OTHER
EBIT was ($0.5) million and ($0.7) million for the three and six-month periods
ended March 31, 2002, respectively, compared to ($0.3) million and ($1.4)
million for the respective prior year periods. The amount for the second quarter
ended March 31, 2002 consisted of $0.3 million related to Rantec and ($0.8)
million related to unallocated corporate operating charges. EBIT for the first
six months of fiscal 2002 consisted of $0.6 million related to Rantec and ($1.3)
million related to unallocated corporate operating charges, which includes $0.3
million of exit costs related to the Sanmar joint venture (Filtration/Fluid Flow
segment) which was terminated in the first quarter of fiscal 2002. The amount
for the first six months of fiscal 2001 consisted of $0.7 million related to
Rantec and ($2.1) million related to unallocated corporate operating charges,
which includes $0.3 million of charges related to personnel termination costs in
Brazil (Filtration/Fluid Flow segment), $0.4 million of corporate litigation
costs related to the Filtration/Fluid Flow segment, $0.6 million of costs
related to the consolidation of the Stockton, CA facility into the Huntley, IL
facility (Filtration/Fluid Flow segment) and $0.3 million of residual costs to
consolidate PTI's filtration business into new facilities in Oxnard, CA.
INTEREST EXPENSE (INCOME)
Interest expense, net, was approximately $0.1 million for both the three and
six-month periods ended March 31, 2002, consistent with the
prior year three and six-months periods ended March 31, 2001, respectively.
INCOME TAX EXPENSE
The second quarter fiscal 2002 effective income tax rate was 37.4% compared to
38.7% in the second quarter of fiscal 2001. The decrease in the effective income
tax rate in the second quarter of fiscal 2002 compared to the prior year period
is primarily due to the favorable earnings impact of the foreign operations. The
effective income tax rate in the first six months of fiscal 2002 was 38.0%
compared to 38.7% in the prior year period. Management estimates the annual
effective tax rate for fiscal 2002 to be approximately 38.5%.
FINANCIAL CONDITION
Working capital increased to $90.5 million at March 31, 2002 from $87.4 million
at September 30, 2001. During the first six months of fiscal 2002, accounts
receivable increased by $2.5 million due to the increase in sales; inventories
increased by $1.9 million to support near term demand; offset by a decrease in
costs and estimated earnings on long-term contracts of $2.6 million due to the
completion of the General Motors test chamber complex. In addition, accounts
payable and accrued expenses decreased by $2.9 million primarily due to the
timing of payments.
Net cash provided by operating activities was $14.4 million in the first six
months of fiscal 2002 compared to net cash provided by operating activities of
$13.7 million in the same period of fiscal 2001.
Cash flow from operations and borrowings under the bank credit facility are
expected to provide adequate resources to meet the Company's capital
requirements and operational needs for the foreseeable future.
Effective April 5, 2002, the Company amended its existing $75 million revolving
credit facility changing the scheduled reductions and extending the $25 million
increase option through April 11, 2004. The amendment calls for $5 million
reductions to the credit facility on each April 11th beginning in 2002 through
2004 with the balance due upon maturity and expiration, April 11, 2005.
Capital expenditures were $6.1 million in the first six months of fiscal 2002
compared with $4.5 million in the comparable period of fiscal 2001. Major
expenditures in the current period included manufacturing automation equipment
used in the Filtration / Fluid Flow businesses.
In March 2002, the Company paid cash of approximately $9.5 million to acquire
the exclusive rights to the patent portfolio and related intellectual property
of North Carolina SRT Inc. and its affiliate (NC SRT).
Other current assets include approximately $0.6 million of capitalized legal
costs at March 31, 2002. These costs have been incurred in the defense of
certain patents used in the Company's Filtration/Fluid Flow business and their
recovery while probable, is subject to litigation or further negotiations.
The Company has a $31.5 million obligation under a synthetic lease facility
arranged by Bank of America. For GAAP purposes, this is accounted for as an
operating lease. This obligation is secured by leases of three manufacturing
locations, two of which are located in Oxnard, CA and the other in Cedar Park,
TX, as well as a $10.6 million letter of credit issued under the Company's $75
million credit facility. The leases expire on December 29, 2005 at which time
the Company will be required to extend the leases on terms to be negotiated,
purchase the properties for $31.5 million, or refinance the obligation. The
Financial Accounting Standards Board (FASB) has issued an exposure draft on the
accounting treatment related to synthetic lease arrangements. If this exposure
draft is adopted as written, the Company would record the net assets and
obligations under the synthetic lease facility as property, plant and equipment
and long-term obligations.
On February 8, 2001, the Company approved a stock repurchase program. Under this
program, the Company is authorized to purchase up to 1.3 million shares of its
common stock in the open market, subject to market conditions and other factors,
through September 30, 2003. The Company repurchased 20,000 shares during the
first six months of fiscal 2002.
The Company continues to explore consolidation opportunities within its existing
businesses which could improve future operating earnings and enhance the
Company's competitive position. The Company will also continue to look for
acquisitions that offer complementary products and/or new technologies.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires Company management to make
estimates and assumptions in certain circumstances that affect amounts reported
in the accompanying consolidated financial statements. In preparing these
financial statements, management has made their best estimates and judgments of
certain amounts included in the financial statements, giving due consideration
to materiality. The Company does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or
using different assumptions related to the accounting policies described below.
However, application of these accounting policies involves the exercise of
judgment and use of assumptions as to future uncertainties and, as a result,
actual results could differ from these estimates. The Company's senior
management discusses the accounting policies described below with the audit
committee of the Company's board of directors on an annual basis.
The following discussion of critical accounting policies is intended to bring to
the attention of readers those accounting policies which management believes are
critical to the Consolidated Financial Statements and other financial
disclosure. It is not intended to be a comprehensive list of all significant
accounting policies that are more fully described in Note 1 of the Notes to the
Consolidated Financial Statements included in our 2001 Annual Report on Form
10-K.
The Company has identified the following areas as critical accounting policies.
Revenue Recognition
The majority of the Company's revenues are recognized when products are shipped
to or when services are performed for unaffiliated customers. Other revenue
recognition methods the Company uses include the following: Revenue on
production contracts is recorded when specific contract terms are fulfilled,
usually by delivery or acceptance (the units of production or delivery methods).
Revenues from cost reimbursement contracts are recorded as costs are incurred,
plus fees earned. Revenue under long-term contracts for which units of
production or delivery are inappropriate measures of performance is recognized
on the percentage-of-completion method based upon incurred costs compared to
total estimated costs under the contract. Revenue under engineering contracts is
generally recognized as milestones are attained. The SEC's Staff Accounting
Bulletin (SAB) No. 101, "Revenue Recognition" provides guidance on the
application of generally accepted accounting principles to selected revenue
recognition issues. Management believes the Company's revenue recognition policy
is in accordance with generally accepted accounting principles and SAB No. 101.
Accounts Receivable
Accounts receivable have been reduced by an allowance for amounts that may
become uncollectible in the future. This estimated allowance is based primarily
on management's evaluation of the financial condition of the customer and
historical bad debt experience.
Inventory
Inventories are valued at the lower of cost or market value and have been
reduced by an allowance for excess and obsolete inventories. The estimated
allowance is based on management's review of inventories on hand compared to
estimated future usage and sales. Inventories under long-term contracts reflect
accumulated production costs, factory overhead, initial tooling and other
related costs less the portion of such costs charged to cost of sales and any
unliquidated progress payments. In accordance with industry practice, costs
incurred on contracts in progress include amounts relating to programs having
production cycles longer than one year, and a portion thereof may not be
realized within one year.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. Deferred tax assets may be reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax assets will not be realized. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The Company regularly reviews its deferred tax
assets for recoverability and establishes a valuation allowance when management
believes it is more likely than not such assets will not be recovered, taking
into consideration historical operating results, expectations of future
earnings, and the expected timing of the reversals of existing temporary
differences.
Goodwill and Other Long-Lived Assets
The Company adopted the provisions of SFAS No. 142 effective October 1, 2001.
Goodwill and other long-lived assets with indefinite useful lives are reviewed
by management for impairment annually or whenever events or changes in
circumstances indicate the carrying amount may not be recoverable. If indicators
of impairment are present, the determination of the amount of impairment is
based on management's judgment as to the future operating cash flows to be
generated from these assets throughout their estimated useful lives. SFAS No.
142 also requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS No. 121 and
subsequently, SFAS No. 144 after its adoption.
Pension Plans and Other Postretirement Benefit Plans
The measurement of liabilities related to pension plans and other
post-retirement benefit plans is based on management's assumptions related to
future events including interest rates, return on pension plan assets, rate of
compensation increases, and health care cost trend rates. Actual pension plan
asset performance will either decrease or increase unamortized pension losses
which will affect net earnings in future years.
Contingencies
As a normal incident of the businesses in which the Company is engaged, various
claims, charges and litigation are asserted or commenced against the Company. In
the opinion of management, final judgments, if any, which might be rendered
against the Company in current litigation are adequately reserved, covered by
insurance, or would not have a material adverse effect on its financial
statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", effective for fiscal years beginning after June 15, 2002. SFAS No.
143 addresses financial accounting requirements for retirement obligations
associated with tangible long-lived assets.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", that replaces SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of"
The provisions of SFAS No. 144 are effective for fiscal years beginning after
December 15, 2001 and, generally, are to be applied prospectively. SFAS No. 144
requires that long-lived assets to be disposed of by sale, including those of
discontinued operations, be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or in
discontinued operations. Discontinued operations will no longer be measured at
net realizable value or include amounts for operating losses that have not yet
been incurred. SFAS No. 144 also broadens the reporting of discontinued
operations to include all components of an entity with operations that can be
distinguished from the rest of the entity and that will be eliminated from the
ongoing operations of the entity in a disposal transaction.
Management does not believe the implementation of Statements No. 143 and 144
will have a material adverse effect on the Company's 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 those relating to the
estimates made in connection with the Company's accounting policies and the
Company's capital requirements and operational needs for the foreseeable future.
Investors are cautioned that such statements are only predictions, and speak
only as of the date of this report. The Company's actual results in the future
may differ materially from those projected in the forward-looking statements due
to risks and uncertainties that exist in the Company's operations and business
environment including, but not limited to: further weakening of economic
conditions in served markets; changes in customer demands or customer
insolvencies; electricity shortages; competition; intellectual property rights;
consolidation of internal operations; integration of recently acquired
businesses; delivery delays or defaults by customers; performance issues with
key suppliers and subcontractors; collective bargaining labor disputes; 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. The Company
has interest rate exposure relating to floating rate lease obligations and,
accordingly, the Company has entered into interest rate swaps covering
approximately $32 million to mitigate this exposure. These interest rate swaps
relate to operating lease obligations under its synthetic lease facility, and
have been arranged by Bank of America. The interest rate swaps effectively fix
the interest rates on the underlying lease obligations at a weighted average
rate of 6.47%. These lease obligations and their related interest rate swaps
expire on December 29, 2005. In addition, the Company has interest rate exposure
of approximately $4 million relating to floating rate obligations denominated in
EURO dollars. Therefore, the Company has entered into an interest rate swap of
approximately $4 million to mitigate this exposure which effectively fixed the
interest rate on these floating rate obligations at 4.89%. These EURO dollar
obligations consist of borrowings under the Company's $75 million credit
facility and mature on April 11, 2005 along with the related interest rate swap.
These swaps are accounted for as cash flow hedges under the provisions of SFAS
133, "Accounting for Derivative Instruments and Hedging Activities, as amended
by SFAS 138". For the six months ended March 31, 2002, accumulated other
comprehensive loss included an after tax increase in fair value of approximately
$0.5 million related to the interest rate swaps. The Company is subject to
foreign currency exchange rate risk inherent in its sales commitments,
anticipated sales, anticipated purchases and assets and liabilities denominated
in currencies other than the U.S. dollar. The currency most significant to the
Company's operations is the Euro. The Company hedges certain foreign currency
commitments by purchasing foreign currency forward contracts.
PART II OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of the Company's shareholders was held on Tuesday, February
5, 2002, to vote on the election of three directors. The voting for directors
was as follows:
Broker
For Withheld Non-Votes
W. S. Antle III 10,459,481 108,397 0
L. W. Solley 10,457,504 110,374 0
J. D. Woods 10,088,386 479,492 0
The terms of J. M. McConnell, D. C. Trauscht, J. M. Stolze, and D. J. Moore
continued after the meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
a) Exhibits
Exhibit
Number
3(a) Restated Articles of Incorporation Incorporated by reference to
Form 10-K for the fiscal year
ended September 30, 1999 at
Exhibit 3(a)
3(b) Amended Certificate of Incorporated by reference to
Designation Preferences and Form 10-Q for the fiscal
Rights of Series quarter ended March 31, 2000
A Participating Cumulative at Exhibit 4(e)
Preferred Stock of the
Registrant
3(c) Articles of Merger effective Incorporated by reference to
July 10, 2000 Form 10-Q for the fiscal quarter
ended June 30, 2000 at
Exhibit 3(c)
3(d) Bylaws, as amended Incorporated by reference to
Form 10-Q for the fiscal quarter
ended June 30, 2000 at
Exhibit 3(d)
4(a) Specimen Common Stock Incorporated by reference to
Certificate Form 10-Q for the fiscal
quarter ended June 30, 2000 at
Exhibit 4(a)
4(b) Specimen Rights Certificate Incorporated by reference to
Exhibit B to Exhibit 4.1 to
the Registrant's Current
Report on Form 8-K dated
February 3, 2000
4(c) Rights Agreement dated as of Incorporated by reference to
September 24, 1990 (as Current Report on Form 8-K
amended and Restated as of dated February 3, 2000, at
February 3, 2000) between the Exhibit 4.1
Registrant and Registrar and
Transfer Company, as successor
Rights Agent
4(d) Amended and Restated Credit Incorporated by reference to
Agreement dated as of February Form 10-Q for the fiscal
28, 2001 among the quarter ended March 31, 2001
Registrant, Bank of America, at Exhibit 4(d)
N.A., as agent, and the
lenders listed therein
10 Severance Plan adopted as of
August 10, 1995 (as restated
February 5, 2002)
b) Reports on Form 8-K.
During the quarter ended March 31, 2002, the Company filed the following
Current Reports on Form 8-K:
The Company filed a Current Report on Form 8-K, dated February 5, 2002,
which reported in "Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits" and "Item 9. Regulation FD Disclosure" that the
Company would issue a press release announcing its first quarter fiscal
2002 results, present certain related financial information at the
Company's Annual Meeting of Stockholders and include such information on
the Company's website.
The Company filed a Current Report on Form 8-K, dated February 6, 2002,
which reported in "Item 7. Financial Statements, Pro Forma Financial
Information and Exhibits" and "Item 9. Regulation FD Disclosure" additional
information to supplement the information reported in the Company's Current
Report on Form 8-K, dated February 5, 2002.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ESCO TECHNOLOGIES INC.
/s/ Gary E. Muenster
--------------------
Gary E. Muenster
Vice President and
Corporate Controller
(As duly authorized officer
and principal accounting
officer of the registrant)
Dated: May 14, 2002
EXHIBIT 10
SEVERANCE PLAN
Initially adopted as of August 10, 1995
Restated February, 2002
This Executive Severance Plan ("Plan") was originally adopted as of the
10th day of August, 1995 by ESCO ELECTRONICS CORPORATION, a Missouri
Corporation, now ESCO TECHNOLOGIES INC. (the "Company"). The Plan is hereby
restated on February 5, 2002. The participants designated to be subject to this
Plan (each an "Executive" and collectively the "Executives") shall be determined
by the Chief Executive Officer of the Company ("CEO"), except that the Human
Resources and Ethics Committee ("HREC") of the Board of Directors of the Company
("Board") shall make any decision concerning the CEO. The Executives designated
and the Applicable Multipliers determined with respect to such Executives
pursuant to Section 4(a)(i)(D), are set forth in Appendix A. Appendix A may be
changed from time to time as determined by the CEO or HREC.
1. Certain Definitions. For purposes of this Plan the following words
shall have the following meanings:
(a) "Change of Control" shall mean:
(i) The purchase or other acquisition by any person, entity or
group of persons, within the meaning of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act")
(excluding, for this purpose, the Company or its subsidiaries or any
employee benefit plan of the Company or its subsidiaries), of
beneficial ownership (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of 20% or more of either the then-outstanding
shares of common stock of the Company or the combined voting power of
the Company's then-outstanding voting securities entitled to vote
generally in the election of directors; or
(ii) When individuals who, as of the date hereof, constitute the
Board of Directors of the Company (the "Board" and, as of the date
hereof, the "Incumbent Board") cease for any reason to constitute at
least a majority of the Board, provided that any person who becomes a
director subsequent to the date hereof whose election or nomination
for election by the Company's shareholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent
Board (other than an individual whose initial assumption of office is
in connection with an actual or threatened election contest relating
to the election of the directors of the Company, as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act) shall be, for purposes of this section, considered as though such
person were a member of the Incumbent Board; or
(iii) Approval by the stockholders of the Company of (a) a
reorganization, merger or consolidation, in each case with respect to
which persons who were the stockholders of the Company immediately
prior to such reorganization, merger or consolidation do not,
immediately thereafter, own more than 50% of, respectively, the common
stock and the combined voting power entitled to vote generally in the
election of directors of the reorganized, merged or consolidated
corporation's then-outstanding voting securities, or (b) a liquidation
or dissolution of the Company or of the sale of all or substantially
all of the assets of the Company.
Notwithstanding the foregoing, an isolated sale, spin-off, joint venture or
other business combination by the Company, which involves one or more divisions
or subsidiaries of the Company and is approved by a majority vote of the
Incumbent Board, shall not be deemed to be a Change of Control.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Effective Date" shall mean the first date on which a Change of Control
occurs. Anything in this Plan to the contrary notwithstanding, if an Officer's
employment with the Company is terminated or if the Plan is amended, changed or
modified and if such termination of employment or amendment, change or
modification to the Plan (i) was at the request of a third party who has taken
steps reasonably calculated to effect a Change of Control, or (ii) otherwise
arose in connection with, or in anticipation of, a Change of Control, then for
all purposes of this Plan the "Effective Date" shall mean the date immediately
prior to the date of such termination of employment, or amendment, change or
modification to the Plan as the case may be.
(d) "Employment Period" shall mean the period commencing on the Effective
Date and ending on the third anniversary of such date.
(e) "Fiscal Year" shall mean the fiscal year of the Company which, as of
the date hereof, is the twelve month period commencing October 1 and ending
September 30.
2. Terms of Employment.
(a) Location and Duties.
(i) The Company shall keep each Officer in its employ for the
Employment Period. During the Employment Period, each Officer's services
shall be required to be performed at the location where the Officer was
employed immediately preceding the Effective Date, or at any office or
location less than 50 miles from such location.
(ii) During the Employment Period, and excluding any periods of
vacation and sick leave to which an Officer is entitled, each Officer will
be expected to devote reasonable attention and time during normal business
hours to the business and affairs of the Company and, to the extent
necessary to discharge the responsibilities assigned to the Officer, to use
the Officer's reasonable best efforts to perform faithfully and efficiently
such responsibilities. During the Employment Period it shall not be a
violation of this Plan for an Officer to (A) serve on corporate, civic or
charitable boards or committees, (B) deliver lectures, fulfill speaking
engagements or teach at educational institutions and (C) manage personal
investments, so long as such activities do not significantly interfere with
the performance of the Officer's assigned responsibilities. To the extent
that any such activities have been conducted by an Officer prior the
Effective Date, the continued conduct of such activities (or the conduct of
activities similar in nature and scope thereto) subsequent to the Effective
Date shall not hereafter be deemed to interfere with the performance of the
Officer's responsibilities to the Company.
(b) Compensation.
During the Employment Period, unless his employment is
earlier terminated pursuant to Section 3, each Officer shall receive:
(i) Base Salary. A minimum base salary ("Base Salary"),
which shall be paid at a monthly rate, in an amount not less than the
annualized monthly base salary rate paid or payable to the Officer during
the month immediately preceding the month in which the Effective Date
occurs, including any base salary which was earned but payment of which was
deferred and any base salary which was paid or payable to the Officer by
the Company and its affiliated companies. As used in this Plan, the term
"affiliated companies" shall include any company directly or indirectly
controlled by, controlling or under common control with the Company.
(ii) Annual Bonus. A minimum annual bonus ("Annual Bonus")
in cash, payable in accordance with past practices of the Company,
calculated by multiplying the Base Salary defined in Section 2(b)(i) times
the Average Annual Bonus Percentage. The "Average Annual Bonus Percentage"
is the average of the percentages of the Officer's base salary earned in a
Fiscal Year represented by his annual bonus earned in respect of that
Fiscal Year from the Company or its affiliated companies for each of the
five Fiscal Years most recently ended, after disregarding the highest and
lowest of such percentages.
(iii) Benefits. All pension, welfare and other employee
benefits, fringe benefits and perquisites in amounts and on terms not less
favorable than those to which the Officer was entitled on the Effective
Date, subject only to benefits reductions within the scope of
Section 3(c)(i).
3. Termination of Employment.
(a) Death or Disability. An Officer's employment shall terminate
automatically upon the Officer's death during the Employment Period.
If the Company determines in good faith and as set forth below that
the Disability of the Officer has occurred or is continuing during the
Employment Period, it may give to the Officer written notice of its
intention to terminate the Officer's employment. In such event, the
Officer's employment with the Company shall terminate effective on the
30th day after receipt of such notice by the Officer (the "Disability
Effective Date"), provided that, within the 30 days after such
receipt, the Officer shall not have returned to full-time performance
of the Officer's duties. For purposes of this Plan, "Disability" shall
mean the absence of the Officer from the Officer's duties with the
Company on a full-time basis for 180 consecutive business days as a
result of incapacity due to mental or physical illness which is
determined to be total and permanent by a physician selected by the
Company or its insurers and acceptable to the Officer or the Officer's
legal representative (such agreement as to acceptability not to be
withheld unreasonably).
(b) Cause. The Company may terminate an Officer's employment
during the Employment Period for Cause. For the sole and
exclusive purposes of this Plan, "Cause" shall mean:
(i) The willful and continued failure of the Officer to perform
substantially the Officer's duties with the Company or one of its
affiliates (other than any such failure resulting from incapacity due
to physical or mental illness), after a written demand for such
performance is delivered to the Officer by the Board (or the CEO of
the Company in the case of another Officer) which specifically
identifies the manner in which the Board (or CEO) believes that the
Officer has not substantially performed the Officer's duties, or
(ii) The willful engaging by the Officer in (A) illegal conduct
(other than minor traffic offenses), or (B) conduct which is in breach
of the Officer's fiduciary duty to the Company and which is
demonstrably injurious to the Company, its reputation or its business
prospects. For purposes of this provision, no act or failure to act,
on the part of the Officer, shall be considered "willful" unless it is
done, or omitted to be done, by the Officer in bad faith or without
reasonable belief that the Officer's action or omission was in the
best interests of the Company. Any act, or failure to act, based upon
authority given pursuant to a resolution duly adopted by the Board (or
upon the instructions of the CEO in the case of another Officer) or
based upon the advice of counsel for the Company shall be conclusively
presumed to be done, or omitted to be done, by the Officer in good
faith and in the best interests of the Company. The cessation of
employment of the Officer shall not be deemed to be for Cause unless
and until there shall have been delivered to the Officer a copy of a
resolution duly adopted by the affirmative vote of not less than
three-quarters of the entire membership of the Board at a meeting of
the Board called and held for such purpose (after reasonable notice is
provided to the Officer and the Officer is given an opportunity,
together with counsel, to be heard before the Board), finding that, in
the good-faith opinion of the Board, the Officer is guilty of the
conduct described in subparagraph (i) or (ii) above, and specifying
the particulars thereof in detail.
(c) Good Reason. An Officer may voluntarily terminate his
employment for Good Reason. For the sole and exclusive purposes of
this Plan, "Good Reason" shall mean:
(i) any failure by the Company to comply with any of the
provisions of this Plan, other than an isolated failure not
occurring in bad faith and which is remedied by the Company
promptly after receipt of notice thereof given by the Officer and
other than a failure to comply with Section 2(b)(iii) solely by
reason of a reduction in benefits that applies to all salaried
employees who are exempt from the wage and hour provisions of the
Fair Labor Standards Act;
(ii) the Company's requiring the Officer to be based at any
office or location other than as provided in Section 2(a)(i);
(iii) the occurrence on or after the Effective Date of (A)
any change in the Officer's status, title, position or
responsibilities (including reporting responsibilities) which, in
the Officer's reasonable judgement, represents a reduction in his
status, title, position or responsibilities as in effect
immediately prior thereto, (B) the assignment to the Officer of
any duties or responsibilities which, in the Officer's reasonable
judgement, are inconsistent with such status, title, position or
responsibilities, or (C) any removal of the Officer from or
failure to reappoint or re-elect the Officer to any of such
positions, except in connection with the termination of his
employment by reason of the Officer's death or Disability, for
Cause, or by the Officer without Good Reason;
(iv) any purported termination by the Company of the
Officer's employment otherwise than as expressly permitted by
this Plan; or
(v) any failure by the Company to comply with and satisfy
Section 9(c).
(d) Notice of Termination. Any termination of employment hereunder
shall be communicated by Notice of Termination to the other party hereto
given in accordance with Section 10(c). For purposes of this Plan, a
"Notice of Termination" means a written notice which (i) indicates the
specific termination provision in this Plan relied upon, (ii) to the extent
applicable, sets forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Officer's employment
under the provision so indicated and (iii) if the Date of Termination (as
defined below) is other than the date of receipt of such notice, specifies
the termination date (which date shall be not more than 90 days after the
giving of such notice). Any failure by an Officer or the Company to set
forth in the Notice of Termination any fact or circumstance which
contributes to a showing of Good Reason or Cause shall not waive any right
to the Officer or the Company, respectively, hereunder or preclude the
Officer or the Company, respectively, from asserting such fact or
circumstance in enforcing the Officer's or the Company's rights hereunder.
(e) Date of Termination. "Date of Termination" means (i) if the
Officer's employment is terminated by the Company for Cause, or by the
Officer for Good Reason, the date of receipt of the Notice of Termination
or any later date specified therein, as the case may be, (ii) if the
Officer's employment is terminated by the Company other than for Cause or
Disability, the Date of Termination shall be the date 90 days after the
date on which the Company notifies the Officer of such termination and
(iii) if the Officer's employment is terminated by reason of death or
Disability, the Date of Termination shall be the date of death of the
Officer or the Disability Effective Date, as the case may be.
4. Obligations of the Company upon Termination.
(a) Good Reason; Other Than for Cause, Death or Disability.
If, during the Employment Period, the Company shall terminate the
Officer's employment other than for Cause or Disability or the
Officer shall terminate employment for Good Reason:
(i) The Company shall pay to the Officer in a lump sum
in cash within 30 days after the Date of Termination the
aggregate of the following amounts:
(A) To the extent not theretofore paid, the
Officer's current base salary; plus
(B) All previously deferred base salary, bonuses
and other compensation (together with any accrued interest thereon)not yet
paid by the Company; plus
(C) A bonus equal to the base salary earned from
the beginning of the Fiscal Year in which the termination occurred to the Date
of Termination multiplied by the Average Annual Bonus Percentage defined in
Section 2(b)(ii); plus
(D) The product of (1)a multiplier which
shall be equal to "Three" (the "Applicable Multiplier"), and (2)Final
Compensation. "Final Compensation" is the sum of (x)the Base Salary defined
in Section 2(b)(i), plus (y) the Average Annual Bonus Percentage defined in
Section 2(b)(ii) multiplied by such base salary; plus
(E) Vacation pay equal to Final Compensation
per day multiplied by the number of days of earned vacation not taken as of
the Date of Termination; plus
(F) The lump sum actuarial equivalent of a
supplemental retirement benefit equal to the difference between
a) the amounts which would have been payable under any tax-qualified defined
benefit retirementplan (and any non-qualified supplement to such plan) of the
Company or a subsidiary applicable to the Officer (collectively, the "Retirement
Plan") if the Officer had remained employed by the Company at the
Final Compensation level for a number of years after the Date of
Termination equal to the Applicable Multiplier (or until reaching 67
years of age, if earlier) and (b) the amounts actually payable under
the Retirement Plan.
(ii) The Company shall continue to provide to the Officer, or
reimburse the Officer for the cost of, all medical, hospitalization,
disability, dental, life insurance, club membership and automobile benefits
in amounts and on terms not less favorable than those to which the Officer
was entitled on the Date of Termination, for a number of years after the
Date of Termination equal to the Applicable Multiplier, and shall pay or
provide any other amounts or benefits required by law to be paid or
provided to the Officer or which the Officer is entitled to receive under
any plan, program, policy, practice, contract or agreement of the Company
or any of its affiliated companies. (iii) If the aggregate amounts under
(i) above are not paid to the Officer when due, interest thereon shall
accrue and be paid to the Officer at the rate of the lesser of (A) 15% per
annum, compounded monthly or (B) the maximum rate allowed by law.
(iv) As a condition of receiving payments and benefits under this
Section 4(a), the Officer must provide the Company with a release,
satisfactory to the Company in its sole discretion, of all claims, charges
and causes of action the Officer may have arising out of or relating in any
way to the Officer's employment by the Company and its affiliated companies
and the termination of such employment, including, but not limited to, ADEA
waivers.
(b) Termination in Other Cases. If an Officer's employment
is terminated during the Employment Period by reason of the Officer's
death or Disability, for Cause, or as a result of the
Officer's termination thereof without Good Reason, this Plan shall
terminate with respect to the Officer without further obligations to the
Officer or the Officer's legal representative under this Plan.
5. Non-exclusivity of Rights. Nothing shall herein limit or otherwise
affect such rights as an Officer may have under any other contract or agreement
with the Company or any of its affiliated companies or by law. Amounts which are
vested benefits or which any Officer is otherwise entitled to receive under any
other plan, policy, practice or program of or any contract or agreement with the
Company or any of its affiliated companies at or subsequent to the Date of
Termination shall be payable in accordance with its terms, unless explicitly
modified by this Plan.
6. No Obligation to Mitigate. The Company's obligation to make the payments
provided for in this Plan and otherwise to perform its obligations hereunder
shall not be affected by any set-off, counterclaim, recoupment, defense or other
claim, right or action which the Company may have against any Officer. Except as
otherwise provided in this Section 6, in no event shall any Officer be obligated
to seek other employment or take any other action by way of mitigation of the
amounts payable to the Officer under any of the provisions of this Plan and such
amounts shall not be reduced whether or not the Officer obtains other
employment. Notwithstanding the foregoing, if the Officer obtains other
employment, the Company's obligation to provide medical, hospitalization,
disability, dental or life insurance benefits under Section 4(a)(ii) shall be
reduced to the extent such benefits are provided to the Officer as a result of
such other employment.
7. Legal Expenses. The Company and its affiliated companies shall pay
promptly upon submission of appropriate invoices, to the full extent permitted
by law, all reasonable attorneys' fees and related expenses which any Officer
reasonably deems necessary to incur in connection with any dispute with respect
to the validity or enforceability of, or liability under, any provision of this
Plan (including without limitation any dispute as to the amount of any payment
pursuant to this Plan); provided, however, that if the Company is advised by
independent counsel that it will probably prevail if the dispute is litigated on
a motion for summary judgment, the Company may refrain from such payments so
long as the Company actively pursues a decision on such motion,
and if such motion is granted and becomes a final, non-appealable order, the
Company shall have no obligation under this Section 7 with respect to the
Officer's attorneys' fees and related expenses in connection with such dispute.
However, if such motion for summary judgment is denied and if such denial
becomes a final, non-appealable order, the Company shall pay such attorneys'
fees and related expenses, or, if the Officer had already paid such attorneys'
fees and related expenses, the Company shall reimburse the Officer for such
payment, together with interest, from the date of such payment to the date of
reimbursement, at the rate of the lesser of (A) 15% per annum, compounded
monthly or (B) the maximum rate allowed by law.
8. Provisions Relating to Taxation of Payments.
(a) Anything in this Plan to the contrary notwithstanding, in the
event it shall be determined that any payment or distribution by the
Company to or for the benefit of any Officer (whether paid or
payable or distributed or distributable pursuant to the terms of this
Plan or otherwise) would be subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1988 (the "Code") (or any
other provision of the Code relating to excise taxes or "excess parachute
payments") or any interest or penalty is imposed on an Officer with
respect to such excise tax, the Officer shall
not be entitled to receive any additional payment in any amount to
compensate for such tax, interest or penalty.
(b) For purposes of this section, (i) "Payment" shall mean any payment
or distribution in the nature of compensation to or for the benefit of an
Officer, whether paid or payable pursuant to this Plan or otherwise; (ii)
"Net After Tax Receipt" shall mean the Present Value of a Payment net of
all taxes imposed on the Officer with respect thereto under Section 1 and
4999 of the Code, determined by applying the highest marginal rate under
Section 1 of the Code which applied to the Officer's taxable income for the
immediately preceding taxable year; (iii) "Present Value" shall mean such
value determined in accordance with Section 280G(d)(4) of the Code; and
(iv) "Reduced Amount" shall mean the largest aggregate amount of Payments
which (a) is less than the sum of all Payments and (b) results in aggregate
Net After Tax Receipts which are equal to or greater than the Net After Tax
Receipts which relate to or would result if Payments were made without
regard to this Section 8.
(c) Anything in this Plan to the contrary notwithstanding,
in the event a certified public accounting firm designated by the
Company (the "Accounting Firm") shall determine that receipt of
all Payments would subject the Officer to tax under Section 4999
of the Code, it shall determine whether some amount of Payments
would meet the definition of a "Reduced Amount." If the
Accounting Firm determines that there is a Reduced Amount, the
Payments under this Plan shall be reduced so that the aggregate
Payments shall equal such Reduced Amount.
(d) While it is the intention of the Company that the amount
of Payments to the Officer shall result in the maximum aggregate
Net After Tax Receipts to each Officer, as a result of the
uncertainty in the application of Section 4999 of the Code at the
time of the initial determination by the Accounting Firm
hereunder, it is possible that amounts will have been paid or
distributed by the Company to or for the benefit of the Officer
pursuant to this Plan which should not have been so paid or
distributed ("Overpayment") or that additional amounts which will
have not been paid or distributed by the Company to or for the
benefit of the Officer pursuant to this Plan could have been so
paid or distributed ("Underpayment"), in each case, consistent
with the calculation of the Reduced Amount hereunder. In the
event that the Accounting Firm, based either upon the assertion
of a deficiency by the Internal Revenue Service against the
Company or the Officer which the Accounting Firm believes has
high probability of success or controlling precedent or other
substantial authority, determines that an Overpayment has been
made, any such Overpayment paid or distributed by the Company to
or for the benefit of the Officer shall be treated for all
purposes as a loan ab initio to the Officer which the Officer
shall repay to the Company together with interest at the
applicable federal rate provided for in Section 7872(f)(2) of the
Code; provided, however, that no such loan shall be deemed to
have been made and no amount shall be payable by the Officer to
the Company if and to the extent such deemed loan and payment
would not either reduce the amount on which the Officer is
subject to tax under Section 1 and Section 4999 of the Code or
generate a refund of such taxes. In the event that the Accounting
Firm, based upon controlling precedent or other substantial
authority, determines that an Underpayment has occurred, any such
Underpayment shall be promptly paid by the Company to or for the
benefit of the Officer together with interest at the applicable
federal rate provided for in Section 7872(f)(2) of the Code.
9. Successors.
(a) This Plan shall inure to the benefit of and be
enforceable by the Officer and the Officer's legal
representative.
(b) This Plan shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
(c) The Company shall require any successor (whether direct
or indirect, by purchase, merger, consolidation, sale of assets
or otherwise) to all or substantially all of the business and/or
assets of the Company to assume expressly and agree to perform
this Plan in the same manner and to the same extent that the
Company would be required to perform it if no such succession had
taken place. As used in this Plan, "Company" shall mean the
Company as hereinbefore defined and any successor to its business
and/or assets as aforesaid which assumes and agrees to perform
this Plan by operation of law, or otherwise.
10. Miscellaneous.
(a) This Plan shall be governed by and construed in
accordance with the laws of the State of Missouri, without
reference to principles of conflict of laws. The captions of this
Plan are not part of the provisions hereof and shall have no
force or effect.
(b) This Plan may be amended, changed or modified by the
Company prior to the Effective Date in any manner (including
adding or deleting Officers or changing Applicable Multipliers)
by written notice to all affected Officers given in accordance
with subparagraph (c) below; provided, however, that unless the
first anniversary of the giving of such notice occurs prior to
the Effective Date, no such amendment, change or modification
adverse to the rights of any Officer hereunder shall become
effective. This Plan is intended to benefit and create a binding
contractual relationship between each Officer and the Company,
and to be enforceable by any Officer, with respect to such
Officer, according to its terms.
(c) All notices and other communications hereunder shall be
in writing and shall be given by hand delivery to the other party
or by registered or certified mail, return receipt requested,
postage prepaid, addressed as follows:
If to the Officer:
At the current home address of the Officer identified in the
personnel records of the Company.
If to the Company: General
Counsel (Chief Executive Officer, if from the General Counsel)
ESCO Technologies Inc.
8888 Ladue Road - Suite 200
St. Louis, MO 63124
Notices and communications shall be effective at the time they are given in the
foregoing manner.
(d) The Company shall withhold from any amounts payable
under this Plan such Federal, state, local or foreign taxes as
may be required to be withheld pursuant to any applicable law or
regulation.
(e) An Officer's or the Company's failure to insist upon
strict compliance with any provision hereof or any other
provision of this Plan or the failure to assert any right the
Officer or the Company may have hereunder, including, without
limitation, the right of an Officer to terminate employment for
Good Reason of this Plan, shall not be deemed to be a waiver of
such provision or right or any other provision or right of this
Plan.
(f) Except as may otherwise be provided under any other
written agreement between an Officer and the Company, the
employment of the Officers by the Company is "at will" and, prior
to the Effective Date, any Officer's employment may be terminated
by either the Officer or the Company, in which case such Officer
shall have no further rights under this Plan.
IN WITNESS WHEREOF, the foregoing Plan was adopted as of the
10th day of August, 1995, and restated on February 5, 2002. ESCO
TECHNOLOGIES INC.
By: ______________________
[SEAL]
ATTEST: _____________________
APPENDIX A
Name Multiplier
D. J. Moore 3x
V. Richey 2x
C. Kretschmer 2x
A. Barclay 2x