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 MARCH 31, 2009
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)
(314) 213-7200
(Registrant's telephone number, including area code)
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 has submitted electronically
and posted on its corporate web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(232.405 of this Chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes No
------ ------
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer
----- -----
Non-accelerated filer Smaller reporting company
----- -----
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 April 30, 2009
- -------------------------------------- -----------------------------
Common stock, $.01 par value per share 26,208,772 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
March 31,
---------
2009 2008
---- ----
Net sales $ 154,156 134,400
Costs and expenses:
Cost of sales 92,226 77,889
Selling, general and administrative 38,237 38,535
expenses
Amortization of intangible assets 4,985 4,467
Interest expense, net 1,756 3,172
Other expenses (income), net 357 (136)
------- -------
Total costs and expenses 137,561 123,927
Earnings before income taxes 16,595 10,473
Income tax expense 5,990 3,912
----- -----
Net earnings from continuing operations 10,605 6,561
Loss from discontinued operations, net of
tax benefit of $101 and $292, respectively (177) (479)
Loss on sale from discontinued operations,
net of tax benefit of $905 (32) -
------ ------
Net loss from discontinued operations (209) (479)
------ ------
Net earnings $ 10,396 6,082
========= =====
Earnings per share:
Basic - Continuing operations $ 0.41 0.25
- Discontinued operations (0.01) (0.01)
----- -----
- Net earnings $ 0.40 0.24
==== ====
Diluted - Continuing operations $ 0.40 0.25
- Discontinued operations (0.01) (0.02)
----- -----
- Net earnings $ 0.39 0.23
========= ====
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,
---------
2009 2008
---- ----
Net sales $ 301,513 269,672
Costs and expenses:
Cost of sales 184,842 162,071
Selling, general and administrative 77,519 70,986
expenses
Amortization of intangible assets 9,587 7,933
Interest expense, net 4,374 4,529
Other expenses (income), net 244 (350)
------- -------
Total costs and expenses 276,566 245,169
Earnings before income taxes 24,947 24,503
Income tax expense 8,502 9,208
----- -----
Net earnings from continuing operations 16,445 15,295
Loss from discontinued operations, net of
tax benefit of $112 and $1,125, respectively (197) (1,423)
Loss on sale from discontinued operations,
net of tax benefit of $905 and expense of
$4,809, respectively (32) (4,974)
--- ------
Net loss from discontinued operations (229) (6,397)
---- ------
Net earnings $ 16,216 8,898
Earnings per share:
Basic - Continuing operations $ 0.63 0.59
- Discontinued operations (0.01) (0.25)
----- -----
- Net earnings $ 0.62 0.34
==== ====
Diluted - Continuing operations $ 0.62 0.58
- Discontinued operations (0.01) (0.24)
----- -----
- Net earnings $ 0.61 0.34
==== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, September 30,
2009 2008
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 26,600 28,667
Accounts receivable, net 121,156 134,710
Costs and estimated earnings on long-term
contracts, less progress billings of
$34,568 and $34,978, respectively 4,239 9,095
Inventories 81,868 65,019
Current portion of deferred tax assets 14,540 15,368
Other current assets 17,215 14,888
Current assets from discontinued
operations - 2,889
------- -------
Total current assets 265,618 270,636
Property, plant and equipment, net 69,774 72,353
Goodwill 329,659 328,878
Intangible assets, net 227,690 236,192
Other assets 17,565 17,665
Other assets from discontinued operations - 2,349
------- -------
Total assets $910,306 928,073
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion
of long-term debt $ 50,000 50,000
Accounts payable 43,768 48,982
Advance payments on long-term contracts,
less costs incurred of $21,704 and
$7,880, respectively 6,122 7,467
Accrued salaries 17,039 20,409
Current portion of deferred revenue 18,386 18,226
Accrued other expenses 21,370 22,058
Current liabilities from discontinued
operations - 1,541
------- -------
Total current liabilities 156,685 168,683
Long-term portion of deferred revenue 2,087 2,228
Pension obligations 10,547 12,172
Deferred tax liabilities 83,167 83,515
Other liabilities 9,695 9,588
Long-term debt, less current portion 165,504 183,650
------- -------
Total liabilities 427,685 459,836
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
29,567,818 and 29,465,154 shares,
respectively 296 295
Additional paid-in capital 257,366 254,240
Retained earnings 289,686 273,470
Accumulated other comprehensive (loss)
income, net of tax (4,566) 556
------ -------
542,782 528,561
Less treasury stock, at cost: 3,365,046 and
3,375,106 common shares, respectively (60,161) (60,324)
------- -------
Total shareholders' equity 482,621 468,237
------- -------
Total liabilities and shareholders' equity $910,306 928,073
======== =======
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,
---------
2009 2008
---- ----
Cash flows from operating activities:
Net earnings $ 16,216 8,898
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net loss from discontinued operations 229 6,397
Depreciation and amortization 15,108 12,462
Stock compensation expense 2,097 2,326
Changes in current assets and liabilities (11,413) 2,615
Effect of deferred taxes (1,074) 6,201
Other (1,242) (777)
------ ----
Net cash provided by operating activities-
continuing operations 19,921 38,122
------ ------
Net loss from discontinued operations,
net of tax (229) (6,397)
Net cash provided by discontinued operations 39 (416)
------ ------
Net cash used by operating activities-
discontinued operations (190) (6,813)
---- ------
Net cash provided by operating activities 19,731 31,309
------ ------
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 (2,487) (8,004)
Capital expenditures - continuing operations (3,116) (8,673)
------ ------
Net cash used by investing activities-
continuing operations (5,603) (340,540)
Capital expenditures - discontinued operations - (1,140)
Proceeds from divestiture of business, net-
discontinued operations 3,100 74,370
----- ------
Net cash provided by investing activities-
discontinued operations 3,100 73,230
----- ------
Net cash used by investing activities (2,503) (267,310)
------ --------
Cash flows from financing activities:
Proceeds from long-term debt 27,000 275,197
Principal payments on long-term debt (45,146) (24,723)
Debt issuance costs - (2,965)
Proceeds from exercise of stock options 1,164 2,209
Other 592 (112)
Net decrease in short-term borrowings - discontinued
operations - (2,844)
----- ------
Net cash (used) provided by financing activities (16,390) 246,762
Effect of exchange rate changes on cash and cash
equivalents (2,905) 1,574
------ ------
Net(decrease) increase in cash and cash equivalents (2,067) 12,335
Cash and cash equivalents, beginning of period 28,667 18,638
------ ------
Cash and cash equivalents, end of period $ 26,600 30,973
====== ======
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 for annual financial statements 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, 2008.
The Company's business is typically not impacted by seasonality: however, the
results for the three-month period ended March 31, 2009 are not necessarily
indicative of the results for the entire 2009 fiscal year. References to the
second quarters of 2009 and 2008 represent the fiscal quarters ended March 31,
2009 and 2008, respectively.
Certain assets of Comtrak Technologies, LLC (Comtrak) were sold during the
second quarter of fiscal 2009. Comtrak is accounted for as a discontinued
operation in accordance with Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144)." In addition, the Filtertek businesses (excluding TekPackaging LLC) were
sold during fiscal 2008 and are accounted for as discontinued operations in
accordance with SFAS 144.
2. DIVESTITURE
On March 13, 2009, the Company completed the sale of certain assets of Comtrak
for $3.1 million, net, of cash (referred to as the "Comtrak sale"). The Comtrak
business is reflected as a discontinued operation in the financial statements
and related notes for all periods presented. Comtrak's operations were
previously included within the Company's Utility Solutions Group segment. A
pretax loss of $0.9 million related to the Comtrak sale is reflected in the
Company's fiscal 2009 second quarter results in discontinued operations.
Comtrak's net sales were $1.6 million and $3.4 million for the three and
six-month periods ended March 31, 2009, respectively. Comtrak's net sales were
$0.5 million for the six-month period ended March 31, 2008. The major classes of
discontinued assets and liabilities included in the Consolidated Balance Sheet
at September 30, 2008 are not significant and, therefore, will not be disclosed
separately.
3. EARNINGS PER SHARE (EPS)
Basic EPS is calculated using the weighted average number of common shares
outstanding during the period. Diluted EPS is calculated using the weighted
average number of common shares outstanding during the period plus shares
issuable upon the assumed exercise of dilutive common share options and vesting
of performance-accelerated restricted shares (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 Six Months Ended
March 31, March 31,
--------- ---------
2009 2008 2009 2008
---- ---- ---- ----
Weighted Average Shares
Outstanding - Basic 26,177 25,847 26,143 25,803
Dilutive Options and
Restricted Shares 293 403 301 424
--- --- --- ---
Adjusted Shares- Diluted 26,470 26,250 26,444 26,227
====== ====== ====== ======
Options to purchase 609,091 shares of common stock at prices ranging from $35.69
- - $54.88 and options to purchase 554,842 shares of common stock at prices
ranging from $35.69 - $54.88 were outstanding during the three month periods
ended March 31, 2009 and 2008, 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 2014. Approximately 218,000 and 168,000 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 March
31, 2009 and 2008, respectively.
4. 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.
The fair value of each option award is estimated as of the date of grant
using the 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 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 six-month period ended
March 31, 2009: expected dividend yield of 0%; expected volatility of
39.2%; risk-free interest rate of 1.9%; and expected term of 3.8 years.
Pretax compensation expense related to the stock option awards was $0.3
million and $0.8 million for the three and six-month periods ended March
31, 2009, respectively, and $0.5 million and $1.2 million for the
respective prior year periods.
Information regarding stock options awarded under the option plans is as
follows:
Aggregate Weighted
Intrinsic Avg.
Weighted Value Remaining
Avg. (in Contractual
Shares Price millions) Life
Outstanding at
October 1, 2008 1,139,201 $30.40
Granted 128,300 $37.42
Exercised (116,537) $13.08 $ 2.5
Cancelled (31,883) $45.23
------- ------
Outstanding at
March 31, 2009 1,119,081 $32.60 $ 9.8 2.2 years
========= ====== =======
Exercisable at
March 31, 2009 896,543 $30.51 $ 9.6
======= ====== =======
The weighted-average grant-date fair value of options granted during the
six-month periods ended March 31, 2009 and 2008 was $12.09 and $10.98,
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. Pretax compensation expense related to
the restricted share awards was $0.6 million and $1.1 million for the three
and six-month periods ended March 31, 2009, respectively, and $0.4 million
and $0.9 million for the respective prior year periods.
The following summary presents information regarding outstanding restricted
share awards as of March 31, 2009 and changes during the six-month period
then ended:
Weighted
Shares Avg. Price
------ ----------
Nonvested at October 1, 2008 202,895 $41.15
Granted 98,459 $37.35
------ ------
Nonvested at March 31, 2009 301,354 $39.91
======= ======
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. Pretax
compensation expense related to the non-employee director grants was $0.2
million and $0.4 million for the three and six-month periods ended March
31, 2009, respectively, and $0.2 million and $0.3 million for the
respective prior year periods.
The total share-based compensation cost that has been recognized in results
of operations and included within SG&A was $1.1 million and $2.1 million
for the three and six-month periods ended March 31, 2009, respectively, and
$1.1 million and $2.4 million for the three and six-month periods ended
March 31, 2008, respectively. The total income tax benefit recognized in
results of operations for share-based compensation arrangements was $0.3
million and $0.7 million for the three and six-month periods ended March
31, 2009, respectively, and $0.3 million and $0.6 million for the three and
six-month periods ended March 31, 2008, respectively. As of March 31, 2009,
there was $9.8 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 2.6 years.
5. INVENTORIES
Inventories from continuing operations consist of the following (in
thousands):
March 31, September 30,
2009 2008
---- ----
Finished goods $ 31,631 19,866
Work in process, including long-term contracts 20,318 15,736
Raw materials 29,919 29,417
------ ------
Total inventories $ 81,868 65,019
========= ======
6. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2009 and
2008 was $8.3 million and $4.4 million, respectively. Comprehensive income
for the six-month periods ended March 31, 2009 and 2008 was $11.1 million
and $8.2 million, respectively. For the six-month period ended March 31,
2009, the Company's comprehensive income was negatively impacted by foreign
currency translation adjustments and interest rate swaps totaling $5.1
million. For the six-month period ended March 31, 2008, the Company's
comprehensive income was positively impacted by foreign currency
translation adjustments of $1.6 million and negatively impacted by interest
rate swaps of $2.3 million.
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 three
segments: Utility Solutions Group (USG), RF Shielding and Test (Test) and
Filtration/Fluid Flow (Filtration). The USG segment's operations consist
primarily of: Aclara Power-Line Systems Inc. (Aclara PLS), Aclara RF
Systems Inc. (Aclara RF), Aclara Software, and Doble Engineering Company
(Doble). The Aclara companies are suppliers of special purpose fixed
network communications systems for electric, gas and water utilities,
including hardware and software to support advanced metering applications.
Doble provides high-end, diagnostic test solutions for the electrical power
delivery industry and is a leading supplier of partial discharge testing
instruments used to assess the integrity of high voltage power delivery
equipment. Test segment operations consist of ETS-Lindgren L.P. (ETS) and
Lindgren R.F. Enclosures, Inc. (Lindgren). The Test segment is principally
involved in the design and manufacture of electromagnetic compatability
test equipment, test chambers, and electromagnetic absorption materials.
The Filtration segment's operations consist of: PTI Technologies Inc.
(PTI), VACCO Industries (VACCO) and TekPackaging LLC. PTI and VACCO develop
and manufacture a wide range of filtration products and are leading
suppliers of filters to the commercial and defense aerospace, satellite and
industrial markets.
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 Six Months ended
March 31, March 31,
--------- ---------
NET SALES 2009 2008 2009 2008
--------- ---- ---- ---- ----
USG $ 94,065 73,812 182,266 153,436
Test 33,713 33,496 69,202 65,561
Filtration 26,378 27,092 50,045 50,675
------ ------ ------ ------
Consolidated totals $154,156 134,400 301,513 269,672
======== ======= ======= =======
EBIT
----
USG $ 16,138 11,222 26,693 25,965
Test 3,748 2,742 6,982 4,732
Filtration 4,227 4,913 7,090 8,562
Corporate (loss) (5,762) (5,232) (11,444) (10,227)
------ ------ ------- -------
Consolidated EBIT 18,351 13,645 29,321 29,032
Less: Interest expense (1,756) (3,172) (4,374) (4,529)
------ ------ ------ ------
Earnings before income
taxes $ 16,595 10,473 24,947 24,503
====== ====== ====== ======
8. DEBT
The Company's debt is summarized as follows:
(In thousands) March 31, September 30,
2009 2008
---- ----
Revolving credit facility, including current
portion $215,504 233,650
Current portion of long-term debt (50,000) (50,000)
------- -------
Total long-term debt, less current portion $165,504 183,650
======== =======
At March 31, 2009, the Company had $184.6 million available to borrow
comprised of: approximately $108.0 million available under the credit
facility, plus a $50.0 million increase option, in addition to $26.6
million cash on hand. At March 31, 2009, the Company had $215.5 million of
outstanding borrowings under the credit facility and outstanding letters of
credit of $7.0 million. The Company classified $50 million as the current
portion on long-term debt as of March 31, 2009, as the Company intends to
repay this amount within the next twelve months; however, the Company has
no contractual obligation to repay such amount during the next twelve
months.
The credit facility requires, as determined by certain financial ratios, a
facility fee ranging from 15 to 25 basis points per annum on the unused
portion. 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 also include a leverage ratio
and an interest coverage ratio.
9. INCOME TAX EXPENSE
The second quarter 2009 effective income tax rate for continuing operations
was 36.1% compared to 37.4% in the second quarter of 2008. The effective
income tax rate from continuing operations in the first six months of 2009
was 34.1% compared to 37.6% in the prior year period. The decrease in the
effective income tax rate in the first six months of 2009 as compared to
the prior year period was due to the favorable impact of research tax
credits as a result of the Tax Extenders and Alternative Minimum Tax Relief
Act of 2008. The income tax expense in the first six months of 2009 was
favorably impacted by $0.7 million, net, research credit for fiscal 2008,
reducing the rate for the first six months of 2009 by 2.8%. The Company
estimates the annual effective tax rate for fiscal 2009 to be approximately
35%, excluding the effect of discontinued operations.
During the fourth quarter of 2008, the Internal Revenue Service commenced
examination of the Company's U.S. Federal income tax return for the periods
ended September 30, 2003 through September 30, 2006 (fiscal 2003-2006). It
is reasonably possible that the fiscal 2003-2006 U.S. audit cycle will be
completed within the next twelve months, which could result in a decrease
in the Company's balance of unrecognized tax benefits. However, an estimate
of a range cannot be determined at this time. Various state tax years from
2003 through 2007 remain subject to income tax examinations.
10. RETIREMENT PLANS
A summary of net periodic benefit expense for the Company's defined benefit
plans for the three and six-month periods ended March 31, 2009 and 2008 is
shown in the following table. Net periodic benefit cost for each period
presented is comprised of the following:
Three Months Ended Six Months Ended
March 31, March 31,
(In thousands) 2009 2008 2009 2008
---- ---- ---- ----
Defined benefit plans
Interest cost $ 724 713 1,437 1,425
Expected return on assets (776) (738) (1,514) (1,475)
Amortization of:
Prior service cost 4 4 8 8
Actuarial loss 79 86 131 172
-- -- --- ---
Net periodic benefit cost $ 31 65 62 130
== == == ===
11. 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
was $175 million amortizing to $100 million in the second year. In
addition, during the second quarter of 2009, the Company entered into two
$40 million one-year forward interest rate swaps effective October 5, 2009
to hedge some of its exposure to variability in future LIBOR-based interest
payments on variable rate debt. 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. Based on the interest rate swaps outstanding,
the interest rates on approximately 50% of the Company's total borrowings
were effectively fixed as of March 31, 2009.
The following is a summary of the notional transaction amounts and fair
values for the Company's outstanding derivative financial instruments as of
March 31, 2009.
Average
Notional Receive Average
(In thousands) Amount Rate Pay Rate Fair Value
------ ---- -------- ----------
Interest rate swap $100,000 1.28% 3.99% ($1,966)
Interest rate swaps * $ 80,000 N/A N/A ($369)
* These swaps represent forward contracts and will be effective in
October 2009.
12. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2007, the Financial Accounting Standards Board (FASB) issued
SFAS No. 141R, "Business Combinations" (SFAS 141R), which establishes
principles and requirements for how an acquirer recognizes and measures in
its financial statements the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in an acquiree, including the
recognition and measurement of goodwill acquired in a business combination.
The requirements of SFAS 141R are effective for business combinations for
which the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Earlier adoption
is not permitted.
In February 2008, the FASB released FASB Staff Position No. FAS 157-2,
"Effective Date of FASB Statement No. 157," which delayed for one year the
effective date of SFAS 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Items in this classification
include goodwill, asset retirement obligations, rationalization accruals,
intangible assets with indefinite lives and certain other items. The
adoption of SFAS 157 with respect to the Company's non-financial assets and
liabilities will be effective October 1, 2009, and is not expected to have
a significant effect on the Company's financial position or results of
operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161). This statement is intended to improve transparency in financial
reporting by requiring enhanced disclosures of an entity's derivative
instruments and hedging activities and their effects on the entity's
financial position, financial performance, and cash flows. SFAS 161 is
effective prospectively for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008, with early
application permitted. The adoption of SFAS 161 is not expected to have a
material impact on 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
The following discussion refers to the Company's results from continuing
operations, except where noted. Certain assets of Comtrak were sold during the
second quarter of fiscal 2009. Comtrak is accounted for as a discontinued
operation in accordance with SFAS 144. Accordingly, the Comtrak business is
reflected as discontinued operations in the financial statements and related
notes for all periods shown. References to the second quarters of 2009 and 2008
represent the fiscal quarters ended March 31, 2009 and 2008, respectively.
NET SALES
Net sales increased $19.8 million, or 14.7%, to $154.2 million for the second
quarter of 2009 from $134.4 million for the second quarter of 2008 mainly due to
a significant increase in net sales from Aclara RF. Net sales increased $31.8
million, or 11.8%, to $301.5 million for the first six months of 2009 from
$269.7 million for the prior year period mainly due to a significant increase in
net sales from Aclara RF and the impact of a full six months of Doble's
operations versus four months in the prior year period. The Company acquired
Doble on November 30, 2007.
- -Utility Solutions Group
Net sales increased $20.3 million, or 27.5%, to $94.1 million for the second
quarter of 2009 from $73.8 million for the second quarter of 2008. Net sales
increased $28.9 million, or 18.8%, to $182.3 million for the first six months of
2009 from $153.4 million in the prior year period. The sales increase in the
second quarter of 2009 as compared to the prior year quarter was mainly due to a
$21.8 million increase in net sales from Aclara RF primarily due to higher gas
product Advanced Metering Infrastructure (AMI) deliveries at Pacific Gas &
Electric (PG&E) and the shipment of additional water AMI products. The sales
increase for the first six months of 2009 as compared to the prior year period
was due to: a $42.7 million increase in net sales from Aclara RF; a $13.0
million increase from Doble reflecting the impact of a full six months of
operations versus four months in the prior year period; a $2.0 million increase
in net sales at Aclara Software; and partially offset by a $28.8 million
decrease in sales at Aclara PLS driven mainly by a decrease in power-line AMI
sales to PG&E. In the first quarter of 2008, the Company recorded revenue of
$20.5 million representing the cumulative effect of the recognition of deferred
revenue related to the hardware shipments to PG&E to date, as TWACS NG 3.0
software was delivered to PG&E in December 2007.
- -Test
For the second quarter of 2009, net sales of $33.7 million were $0.2 million, or
1%, higher than the $33.5 million of net sales recorded in the second quarter of
2008. Net sales increased $3.6 million, or 5.5%, to $69.2 million for the first
six months of 2009 from $65.6 million for the first six months of 2008. The
sales increase for the first six months of 2009 compared to the prior year
period was due to: a $3.3 million increase in net sales from the segment's U.S.
operations driven by the timing of domestic chamber deliveries; a $2.2 million
increase in net sales from the segment's Asian operations due to an increase in
large chamber deliveries to the international wireless and electronics
end-markets; and partially offset by a $1.9 million decrease in net sales from
the segment's European operations due to unfavorable foreign currency values and
a decrease in component shipments.
- -Filtration
For the second quarter of 2009, net sales of $26.4 million were $0.7 million, or
2.6% lower than the $27.1 million of net sales recorded in the second quarter of
2008. Net sales decreased $0.7 million, or 1.4%, to $50.0 million for the first
six months of 2009 from $50.7 million for the first six months of 2008. The
sales decrease during the fiscal quarter ended March 31, 2009 as compared to the
prior year quarter was mainly due to: a $2.8 million decrease in net sales at
PTI due to lower commercial aerospace shipments; and partially offset by a $2.1
million increase in net sales at VACCO driven by higher military / defense
aircraft product shipments. The sales decrease in the first six months of 2009
as compared to the prior year period was mainly due to: a $5.0 million decrease
in net sales at PTI; partially offset by a $4.3 million increase in net sales at
VACCO due to the reasons mentioned above.
ORDERS AND BACKLOG
Backlog from continuing operations was $260.8 million at March 31, 2009 compared
with $266.1 million at September 30, 2008. The Company received new orders
totaling $156.7 million in the second quarter of 2009 compared to $162.5 million
in the prior year quarter. New orders of $97.3 million were received in the
second quarter of 2009 related to USG products, $26.0 million related to Test
products, and $33.4 million related to Filtration products. New orders of $98.1
million were received in the second quarter of 2008 related to USG products,
$32.5 million related to Test products, and $31.9 million related to Filtration
products. The Company received orders totaling $24.3 million and $53.1 million
from PG&E during the three and six-month periods ended March 31, 2009,
respectively, compared to $32.3 million and $46.5 million for the three and
six-month periods ended March 31, 2008.
The Company received new orders totaling $296.2 million in the first six months
of 2009 compared to $293.2 million in the prior year period. New orders of
$182.2 million were received in the first six months of 2009 related to USG
products, $55.9 million related to Test products, and $58.1 million related to
Filtration products. New orders of $165.7 million were received in the first six
months of 2008 related to USG products, $65.8 million related to Test products,
and $61.7 million related to Filtration products.
Orders from PG&E for AMI gas products in the second quarter of 2009 were $24.3
million bringing the total gas project-to-date to over 3 million units, or $175
million. The entire PG&E project-to-date (gas and electric) represents 3.7
million units, worth approximately $225 million.
In March 2009, Aclara Software received an order for approximately $5 million
from the City of Tallahassee, Florida for a system-wide implementation of Aclara
Software Inc.'s Meter Data Management System (MDMS) and ENERGYprism (EP) AMI
software applications with deployment beginning in the third quarter of fiscal
2009.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $5.0 million and $9.6 million for the
three and six-month periods ended March 31, 2009, respectively, compared to $4.5
million and $7.9 million for the respective prior year periods. Amortization of
intangible assets for the three and six-month periods ended March 31, 2009
included $1.2 million and $2.4 million, respectively, of amortization of
acquired intangible assets related to recent acquisitions compared to $1.1
million and $1.9 million for the respective prior year periods. 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 and six-month periods ended March 31, 2009, the Company
recorded $3.1 million and $6.0 million, respectively, of amortization related to
Aclara PLS TWACS NG software compared to $2.9 million and $5.2 million for the
respective prior year periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the second quarter of
2009 were $38.2 million (24.8% of net sales), compared with $38.5 million (28.7%
of net sales) for the prior year quarter. For the first six months of 2009, SG&A
expenses were $77.5 million (25.7% of net sales) compared with $71.0 million
(26.3% of net sales) for the prior year period. The $6.5 million increase in
SG&A spending in the first six months of 2009 as compared to the prior year
period was primarily due to a $5.8 million increase in SG&A expenses related to
the acquisition of Doble, reflecting a full six months of SG&A expenses versus
four months in the prior year period.
EBIT
The Company evaluates the performance of its operating segments based on EBIT,
defined below. EBIT was $18.4 million (11.9% of net sales) for the second
quarter of 2009 and $13.6 million (10.2% of net sales) for the second quarter of
2008. For the first six months of 2009, EBIT was $29.3 million (9.7% of net
sales) compared with $29.0 million (10.8% of net sales) for the prior year
period. The increase in EBIT for the second quarter of 2009 and first six months
of 2009 as compared to the prior year periods is primarily due to the increase
in shipments from Aclara RF within the USG segment.
This Form 10-Q contains the financial measure "EBIT", which is not calculated in
accordance with generally accepted accounting principles in the United States of
America (GAAP). EBIT provides investors and Management with an alternative
method for assessing the Company's operating results. The Company defines "EBIT"
as earnings from continuing operations before interest and taxes. Management
evaluates the performance of its operating segments based on EBIT and believes
that EBIT is useful to investors to demonstrate the operational profitability of
the Company's business segments by excluding interest and taxes, which are
generally accounted for across the entire Company on a consolidated basis. EBIT
is also one of the measures Management uses to determine resource allocations
within the Company and incentive compensation. The following table presents a
reconciliation of EBIT to net earnings from continuing operations.
Three Months ended Six Months ended
(In thousands) March 31, March 31,
--------- ---------
2009 2008 2009 2008
---- ---- ---- ----
Consolidated EBIT $18,351 13,645 29,321 29,032
Less: Interest expense, net (1,756) (3,172) (4,374) (4,529)
Less: Income tax expense (5,990) (3,912) (8,502) (9,208)
------ ------ ------ ------
Net earnings from
continuing operations $10,605 6,561 16,445 15,295
======= ===== ====== ======
- -Utility Solutions Group (USG)
EBIT in the second quarter of 2009 was $16.1 million (17.2% of net sales)
compared to $11.2 million (15.2% of net sales) in the prior year quarter. For
the first six months of 2009, EBIT was $26.7 million (14.6% of net sales)
compared to $26.0 million (16.9% of net sales) in the prior year period. The
$4.9 million increase in EBIT in the second quarter of 2009 as compared to the
prior year quarter was driven by an increase in EBIT at Aclara RF related to the
increased sales volumes noted above. The $0.7 million increase in EBIT in the
first six months of 2009 compared to the prior year period was due to: an
increase in EBIT at Aclara RF due to the sales increases mentioned above; an
increase in EBIT from Doble due to a full six months included in the current
year versus four months in the prior year period; partially offset by a decrease
in EBIT at Aclara PLS resulting from lower sales to PG&E ; additional TWACS NG
software amortization; and additional costs to support business development
efforts related to the pursuit of international AMI market opportunities. The
remaining operating units within the USG segment had increases in EBIT dollars
for the first six months of 2009 compared to the prior year period as a result
of the sales increases noted above.
- -Test
EBIT in the second quarter of 2009 was $3.7 million (11.1% of net sales) as
compared to $2.7 million (8.2% of net sales) in the prior year quarter. For the
first six months of 2009, EBIT was $7.0 million (10.1% of net sales) as compared
to $4.7 million (7.2% of net sales) in the prior year period. EBIT increased
$1.0 million and $2.3 million over the prior year quarter and six-month period,
respectively, mainly due to favorable changes in sales mix; sales increases as
compared to the prior year period; and rigorous cost controls which resulted in
a reduction of the segment's SG&A expenses.
- -Filtration
EBIT was $4.2 million (16.0% of net sales) and $4.9 million (18.1% of net sales)
in the second quarters of 2009 and 2008, respectively, and $7.1 million (14.2%
of net sales) and $8.6 million (16.9% of net sales) in the first six months of
2009 and 2008, respectively. For the second quarter of 2009 as compared to the
prior year quarter, EBIT decreased $0.7 million mainly due to a decrease at PTI
due to lower sales volumes. For the first six months of 2009 as compared to the
prior year period, EBIT decreased $1.5 million due to lower sales at PTI;
additional research and development costs; and bid and proposal costs related to
the pursuit of a significant number of space related projects at VACCO.
- -Corporate
Corporate costs included in EBIT were $5.8 million and $11.4 million for the
three and six-month periods ended March 31, 2009, respectively, compared to $5.2
million and $10.2 million for the respective prior year periods. The increase in
Corporate costs for the first six months of 2009 as compared to the prior year
period was due to a $0.5 million increase in amortization expense related to
acquired intangible assets recorded at Corporate. In the first six months of
2009, Corporate costs included $2.1 million of pretax stock compensation expense
and $2.4 million of pretax amortization of acquired intangible assets. In the
first six months of 2008, Corporate costs included $2.3 million of pretax stock
compensation expense and $1.9 million of pretax amortization of acquired
intangible assets.
INTEREST EXPENSE, NET
Interest expense was $1.8 million and $4.4 million for the three and six-month
periods ended March 31, 2009, respectively, and $3.2 million and $4.5 million
for the three and six-month periods ended March 31, 2008. The decrease in
interest expense in the second quarter of 2009 and the first six months of 2009
as compared to the prior year periods is due to lower interest rates and lower
average outstanding borrowings under the revolving credit facility.
INCOME TAX EXPENSE
The second quarter 2009 effective income tax rate for continuing operations was
36.1% compared to 37.4% in the second quarter of 2008. The effective income tax
rate from continuing operations in the first six months of 2009 was 34.1%
compared to 37.6% in the prior year period. The decrease in the effective income
tax rate in the first six months of 2009 as compared to the prior year period
was due to the favorable impact of research tax credits as a result of the Tax
Extenders and Alternative Minimum Tax Relief Act of 2008. The income tax expense
in the first six months of 2009 was favorably impacted by $0.7 million, net,
research credit for fiscal 2008, reducing the rate for the first six months of
2009 by 2.8%. The Company estimates the annual effective tax rate for fiscal
2009 to be approximately 35%, excluding the effect of discontinued operations.
There was no material change in the unrecognized tax benefits of the Company
during the three months ended March 31, 2009. During the fourth quarter of 2008,
the Internal Revenue Service commenced examination of the Company's U.S. Federal
income tax return for the periods ended September 30, 2003 through September 30,
2006 (fiscal 2003-2006). It is reasonably possible that the fiscal 2003-2006
U.S. audit cycle will be completed within the next twelve months, which could
result in a decrease in the Company's balance of unrecognized tax benefits.
However, an estimate of a range cannot be determined at this time. Various state
tax years from 2003 through 2007 remain subject to income tax examinations.
CAPITAL RESOURCES AND LIQUIDITY
Working capital from continuing operations (current assets less current
liabilities) increased to $108.9 million at March 31, 2009 from $100.6 million
at September 30, 2008. Accounts receivable decreased by $13.6 million in the
first six months of 2009, of which $7.0 million related to the Test segment and
approximately $6.0 million related to the Filtration segment, both driven by
timing of sales and increased collections. Inventories increased by $16.8
million in the first six months of 2009 primarily related to an increase of
approximately $13.0 million in the USG segment to meet forecasted sales for the
remainder of 2009.
Capital expenditures from continuing operations were $3.1 million and $8.7
million in the first six months of fiscal 2009 and 2008, respectively. The
decrease in the first six months of 2009 as compared to the prior year period is
mainly due to expenditures of approximately $3.0 million for the ETS Austin
facility expansion which occurred in 2008.
Credit facility
At March 31, 2009, the Company had $184.6 million available to borrow comprised
of: approximately $108.0 million available under the credit facility, plus a
$50.0 million increase option, in addition to $26.6 million cash on hand. At
March 31, 2009, the Company had $215.5 million of outstanding borrowings under
the credit facility and outstanding letters of credit of $7.0 million. The
Company classified $50.0 million as the current portion on long-term debt as of
March 31, 2009, as the Company intends to repay this amount within the next
twelve months; however, the Company has no contractual obligation to repay such
amount during 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.
Divestiture
On March 13, 2009, the Company completed the sale of certain assets of Comtrak
for $3.1 million, net, of cash. The Comtrak business is reflected as
discontinued operations in the financial statements and related notes for all
periods presented. A pretax loss of $0.9 million related to the Comtrak sale is
reflected in the Company's fiscal 2009 second quarter results in discontinued
operations. Comtrak's net sales were $1.6 million and $3.4 million for the three
and six-month periods ended March 31, 2009, respectively.
Pacific Gas & Electric
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, 2008 for 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,
2008 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 December 2007, the FASB issued SFAS No. 141R, "Business Combinations" (SFAS
141R), which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. The requirements of SFAS 141R are effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Earlier
adoption is not permitted.
In February 2008, the FASB released FASB Staff Position No. FAS 157-2,
"Effective Date of FASB Statement No. 157," which delayed for one year the
effective date of SFAS 157 for all non-financial assets and non-financial
liabilities, except those that are recognized or disclosed in the financial
statements at fair value at least annually. Items in this classification include
goodwill, asset retirement obligations, rationalization accruals, intangible
assets with indefinite lives and certain other items. The adoption of SFAS 157
with respect to the Company's non-financial assets and liabilities will be
effective October 1, 2009, and is not expected to have a significant effect on
the Company's financial position or results of operations.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161). This statement is intended to improve transparency in financial
reporting by requiring enhanced disclosures of an entity's derivative
instruments and hedging activities and their effects on the entity's financial
position, financial performance, and cash flows. SFAS 161 is effective
prospectively for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application permitted. The
adoption of SFAS 161 is not expected to have a material impact on 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, 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, the impact of SFAS 157 and SFAS 161, outcome of
current claims and litigation, future cash flow, capital requirements and
operational needs for the foreseeable future, and the results of tax audits.
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, 2008, the effect of the American Recovery and Reinvestment Act of 2009,
actions by PG&E impacting PG&E's AMI projects, the Company's successful
performance of large AMI contracts; weakening of economic conditions in served
markets; changes in customer demands or customer insolvencies; competition;
intellectual property rights; 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 was $175 million amortizing to $100
million in the second year. In addition, during the second quarter of 2009, the
Company entered into two $40 million one-year forward interest rate swaps
effective October 5, 2009 to hedge some of its exposure to variability in future
LIBOR-based interest payments on variable rate debt. 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. Based on the interest rate swaps outstanding,
the interest rates on approximately 50% of the Company's total borrowings were
effectively fixed as of March 31, 2009.
The following is a summary of the notional transaction amounts and fair values
for the Company's outstanding derivative financial instruments as of March 31,
2009.
Average
Notional Receive Average
(In thousands) Amount Rate Pay Rate Fair Value
------ ---- -------- ----------
Interest rate swap $100,000 1.28% 3.99% ($1,966)
Interest rate swaps * $ 80,000 N/A N/A ($369)
* These swaps represent forward contracts and will be effective in October 2009.
In addition, as of March 31, 2009, the Company paid 67.5bps spread on its
outstanding debt. Refer to the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 2008 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 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In August 2008, the Company's Board of Directors authorized an open market
common stock repurchase program of the Company's shares in a value not to exceed
$30 million, subject to market conditions and other factors, which covers the
period through September 30, 2009. There were no stock repurchases during the
three and six-month periods ended March 31, 2009.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's shareholders was held on Thursday, February
5, 2009. The voting for directors was as follows:
For Withheld Broker Non-Votes
--- -------- ----------------
J.M. McConnell 23,117,158 1,332,969 0
D.C. Trauscht 23,111,050 1,339,077 0
The terms of V.L. Richey, Jr., L.W. Solley, J.M. Stolze and J.D. Woods as
directors continued after the meeting.
The voting to ratify the Company's selection of KPMG LLP as independent public
accountants for the fiscal year ending September 30, 2009 was as follows:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
23,244,761 1,197,746 7,620 0
ITEM 6. EXHIBITS
a) Exhibits
Exhibit
Number
3.1 Restated Articles of Incorporated by reference to
Incorporation Form 10-K for the fiscal
year ended September 30,
1999, at Exhibit 3(a)
3.2 Amended Certificate of Incorporated by reference to
Designation Preferences Form 10-Q for the fiscal
and Rights of Series A quarter ended March 31,
Participating 2000, at Exhibit 4(e)
Cumulative Preferred
Stock of the Registrant
3.3 Articles of Merger Incorporated by reference to
effective July 10, 2000 Form 10-Q for the fiscal
quarter ended June 30, 2000,
at Exhibit 3(c)
3.4 Bylaws, as amended and Incorporated by reference to
restated as of July 10, Form 10-K for the fiscal
2000 year ended September 30,
2003, at Exhibit 3.4
3.5 Amendment to Bylaws Incorporated by reference to
effective as of Form 10-Q for the fiscal
February 2, 2007 quarter ended December 31,
2006, at Exhibit 3.5
3.6 Amendment to Bylaws Incorporated 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
*31.1 Certification of Chief
Executive Officer
relating to Form 10-Q
for period ended March
31, 2009
*31.2 Certification of Chief
Financial Officer
relating to Form 10-Q
for period ended March
31, 2009
*32 Certification of Chief
Executive Officer and
Chief Financial
Officer relating to
Form 10-Q for period
ended March 31, 2009
* Denotes filed or furnished herewith.
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
Executive Vice President and Chief Financial Officer
(As duly authorized officer and principal accounting
officer of the registrant)
Dated: May 8, 2009
Exhibit 31.1
CERTIFICATION
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 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
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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 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 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 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; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit 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: May 8, 2009
/s/ V.L. Richey, Jr.
V.L. Richey, Jr.
Chief Executive Officer
Exhibit 31.2
CERTIFICATION
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 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 report;
3. Based on my knowledge, the financial statements, and other financial
information included in this 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
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 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 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; and
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit 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: May 8, 2009
/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 March 31, 2009 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: May 8, 2009
/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.