SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended June 30, 1997
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 ELECTRONICS CORPORATION
(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
Number of common stock trust receipts outstanding at July 31, 1997: 11,788,066
receipts.
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
Three Months Ended
June 30,
1997 1996
<S> <C> <C>
Net sales $109,348 109,103
Costs and expenses:
Cost of sales 83,835 107,597
Other charges related to cost of sales - 25,300
Selling, general and administrative expenses 17,063 17,443
Interest expense 1,935 1,455
Other, net 1,096 2,115
Total costs and expenses 103,929 153,910
Earnings (loss) before income taxes 5,419 (44,807)
Income tax expense (benefit) 2,089 (25,396)
Net earnings (loss) $ 3,330 (19,411)
Earnings (loss) per share, primary and
fully diluted $ .27 (1.72)
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
Nine Months Ended
June 30,
1997 1996
<S> <C> <C>
Net sales $267,058 339,157
Costs and expenses:
Cost of sales 202,158 289,123
Other charges related to cost of sales - 25,300
Selling, general and administrative expenses 45,754 52,911
Interest expense 3,446 4,269
Other, net 2,895 4,728
Total costs and expenses 254,253 376,331
Earnings (loss) before income taxes 12,805 (37,174)
Income tax expense (benefit) 4,526 (22,099)
Net earnings (loss) $ 8,279 (15,075)
Earnings (loss) per share:
Primary $ .68 (1.35)
Fully diluted .67 (1.35)
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<CAPTION>
June 30, September 30,
1997 1996
<S> <C> <C>
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 6,001 22,209
Accounts receivable, less allowance for
doubtful accounts of $589 and $273,
respectively 50,202 34,664
Costs and estimated earnings on long-term
contracts, less progress billings of $79,413
and $70,671, respectively 58,708 51,585
Inventories 57,166 51,187
Other current assets 3,824 3,005
Total current assets 175,901 162,650
Property, plant and equipment, at cost 129,483 80,351
Less accumulated depreciation and amortization 35,379 26,325
Net property, plant and equipment 94,104 54,026
Excess of cost over net assets of purchased
businesses, less accumulated amortization of
$2,369 and $1,597, respectively 54,859 20,395
Deferred tax asset 49,735 53,326
Other assets 16,489 17,435
$391,088 307,832
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 39,000 1,300
Accounts payable 35,523 40,057
Advance payments on long-term contracts,
less costs incurred of $1,459 and $5,478,
respectively 11,521 8,336
Accrued expenses and other current liabilities 24,443 26,771
Total current liabilities 110,487 76,464
Other liabilities 29,080 28,860
Long-term debt 52,000 11,375
Total liabilities 191,567 116,699
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
12,439,730 and 12,415,346 shares, respectively 124 124
Additional paid-in capital 193,958 192,967
Retained earnings since elimination of deficit
of $60,798 at September 30, 1993 12,463 4,184
Cumulative foreign currency translation adjustment 132 107
Minimum pension liability (1,770) (1,869)
204,907 195,513
Less treasury stock, at cost; 663,745 and
566,622 common shares, respectively (5,386) (4,380)
Total shareholders' equity 199,521 191,133
$391,088 307,832
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<CAPTION>
Nine Months Ended
June 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ 8,279 (15,075)
Adjustments to reconcile net earnings
(loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 10,513 10,809
Changes in operating working capital,
net of acquired business (17,609) (7,907)
Other 5,333 3,434
Net cash provided (used) by operating
activities 6,516 (8,739)
Cash flows from investing activities:
Capital expenditures (7,518) (6,468)
Acquisition of business, less cash acquired (92,900) _
Net cash used by investing activities (100,418) (6,468)
Cash flows from financing activities:
Net increase in short-term borrowings 33,000 17,000
Proceeds from long-term debt 60,000 _
Principal payments on long-term debt (14,675) (1,555)
Other (631) 968
Net cash provided by financing activities 77,694 16,413
Net increase (decrease) in cash and cash
equivalents (16,208) 1,206
Cash and cash equivalents at beginning
of period 22,209 320
Cash and cash equivalents at end of period $ 6,001 1,526
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying condensed 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 condensed consolidated financial statements are
presented in accordance with the requirements of Form 10-Q and consequently
do not include all the disclosures required by generally accepted accounting
principles. For further information refer to the consolidated financial
statements and notes thereto included in the Company's Annual Reports on
form 10-K and Form 10-k/A for the year ended September 30, 1996. Certain
prior year amounts have been reclassified to conform with the fiscal 1997
presentation.
The results for the three and nine month periods ended June 30, 1997 are not
necessarily indicative of the results for the entire 1997 fiscal year.
2. Earnings Per Share
Earnings per share are based on the weighted average number of common shares
outstanding plus shares issuable upon the assumed exercise of dilutive
common share options and performance shares by using the treasury stock
method. Loss per share is based on the weighted average number of common
shares outstanding. For the three month period ended June 30, 1997, primary
and fully diluted earnings per share are computed using 12,219,233 and
12,296,008 common shares and common share equivalents outstanding,
respectively. For the nine month period ended June 30, 1997, primary and
fully diluted earnings per share are computed using 12,234,416 and
12,310,085 common shares and common share equivalents outstanding,
respectively. For the quarter and nine month periods ended June 30,1996
loss per share is computed using 11,281,395 and 11,170,129 common shares
outstanding, respectively.
<TABLE>
3. Inventories
Inventories consist of the following (dollars in thousands):
<CAPTION>
June 30 , September 30,
1997 1996
<S> <C> <C>
Finished Goods $ 9,769 5,927
Work in process, including long-term contracts 33,255 32,071
Raw materials 14,142 13,189
Total inventories $ 57,166 51,187
</TABLE>
Under the contractual arrangements by which progress payments are received,
the U.S. Government has a security interest in the inventories associated
with specific contracts. Inventories are net of progress payment receipts of
$2.1 million and $1.2 million at June 30, 1997 and September 30, 1996,
respectively.
4. Hazeltine Divestiture - 1996
On July 22, 1996, the Company completed the sale of its Hazeltine subsidiary
to GEC-Marconi Electronic Systems Corporation (GEC). The Company sold 100%
of the common stock of Hazeltine for $110 million in cash. Certain assets
and liabilities of Hazeltine were retained by the Company.
Included in the condensed consolidated statement of operations for the three
and nine months ended June 30, 1996 are the operating results of Hazeltine
prior to its divestiture as follows (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal 1996
Third Quarter Nine Months
<S> <C> <C>
Net sales $31,474 86,302
Cost of sales 25,562 69,048
Selling, general and administrative expenses 3,856 11,485
Other costs and expenses, net 392 917
Earnings before income taxes $ 1,664 4,852
</TABLE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations - Three months ended June 30, 1997 compared with three
months ended June 30, 1996.
Net sales of $109.3 million for the third quarter of fiscal 1997 increased
$.2 million (.2%) from net sales of $109.1 million for the third quarter of
fiscal 1996. The sales increase in the current quarter reflects higher
volume at Systems & Electronics Inc. (SEI) and PTI, additional sales
resulting from the Filtertek acquisition ($19.1 million), offset by the sale
of Hazeltine in 1996. Commercial sales were $56.5 million (51.7%) and
defense sales were $52.8 million for the third quarter of fiscal 1997,
compared with commercial and defense sales of $38.9 million (35.7%) and
$70.2 million, respectively, in the third quarter of fiscal 1996. Prior to
its divestiture, Hazeltine's third quarter fiscal 1996 commercial and
defense sales were $.4 million and $31.1 million, respectively. Adjusted for
the sale of Hazeltine, prior year third quarter commercial and defense sales
were $38.5 million and $39.1 million, respectively.
The backlog of firm orders at June 30, 1997 was $244.3 million, compared
with $265.6 million at March 31, 1997. During the fiscal 1997 third quarter,
new orders aggregating $88.0 million were received, compared with
$65.5 million in the third quarter of fiscal 1996, excluding Hazeltine.
Third quarter fiscal 1996 orders, as reported including Hazeltine, were
$82 million. The most significant orders in the current period were for
filtration/fluid flow products, airborne radar systems and electronic
test equipment.
The Company computes gross profit as: net sales, less cost of sales, less
other charges related to cost of sales. The gross profit margin is the gross
profit divided into net sales expressed as a percentage. The gross profit
percentage was 23.3% in the third quarter of fiscal 1997 and (21.8%) in the
third quarter of fiscal 1996. The loss in 1996 was primarily attributable to
two factors: a $23 million adjustment of the estimate of the costs to
complete the 60K Loader program at SEI, and the components of other charges
related to cost of sales as discussed below. The 1996 gross profit margin,
excluding the 60K Loader adjustment and the other charges related to cost of
sales would have been 21.6%. The margin improvement in the third quarter of
fiscal 1997 compared to the "pro forma" third quarter of 1996 is primarily
the result of the increase in commercial sales.
During 1996, and in connection with the sale of Hazeltine and management's
decision to pursue a strategy of deliberate diversification from defense to
commercial, the Company reevaluated the carrying value of certain assets. As
a result of this reevaluation, the Company recorded $25.3 million of other
charges related to cost of sales in 1996. These strategic decisions were
intended to increase the contributions of the commercial segment and to
reduce the Company's overall dependence on the defense businesses.
The 1996 charge of $25.3 million includes: $14.3 million of inventories
related to defense programs which management no longer intends to actively
pursue; $6 million of costs included in other assets incurred in
anticipation of certain defense contract awards (Precontract Costs) which
the Company no longer intends to actively pursue; and a $5 million
adjustment in the Company's estimate of recoveries in a contract dispute
related to the M1000 tank transporter program.
Selling, general and administrative expenses for the third quarter of fiscal
1997 were $17.1 million, or 15.6% of net sales, compared with $17.4 million,
or 16% of net sales, for the same period a year ago. Excluding Hazeltine, prior
year third quarter selling, general and administrative expenses were
$13.6 million or 17.5% of adjusted sales. The fiscal 1997 third quarter
selling, general and administrative expenses decreased as a percentage of
adjusted sales due to the favorable contribution of Filtertek.
or 16% of net sales, for the same period a year ago. Excluding Hazeltine,
prior year third quarter selling, general and administrative expenses were
$13.6 million or 17.5% of adjusted sales. The fiscal 1997 third quarter
selling, general and administrative expenses decreased as a percentage of
adjusted sales due to the favorable contribution of Filtertek.
Interest expense increased to $1.9 million from $1.5 million as a result of
higher average borrowings in the third quarter of fiscal 1997 as compared to
the third quarter of fiscal 1996. A significant amount of the fiscal 1997 debt
was incurred with the February 1997 acquisition of Filtertek.
Other costs and expenses, net, were $1.1 million in the third quarter of fiscal
1997 compared to $2.1 million in the same period of fiscal 1996. The decrease
in fiscal 1997 reflects lower miscellaneous non-operating costs in the current
period.
The effective income tax rate in the third quarter of fiscal 1997 was 38.5%.
During the third quarter of 1996, the Company reduced its deferred tax
valuation allowance by $21.6 million. Due to the 1993 Corporate Readjustment,
$11.6 million of this 1996 reduction was credited directly to additional
paid-in capital. The remaining $10 million was credited to the third quarter
1996 tax provision.
Results of Operations - Nine months ended June 30, 1997 compared with nine
months ended June 30, 1996.
Net sales of $267.1 million for the first nine months of fiscal 1997 decreased
$72.1 million (21.3%) from net sales of $339.2 million for the first nine
months of fiscal 1996. The decrease was primarily due to the sale of
Hazeltine in July 1996. Net sales at the remainder of the Company's
operating units increased approximately $14.2 million primarily due to
additional sales resulting from the Filtertek acquisition ($29.8 million),
partially offset by lower sales at SEI. Commercial sales were $122.1 million
defense sales were $145 million for the first nine months of fiscal 1997,
compared with commercial and defense sales of $101.2 million and
$238 million, respectively, in the first nine months of fiscal 1996.
Hazeltine's commercial and defense sales were $3.7 million and $82.6 million,
respectively in the first nine months of fiscal 1996. Adjusted for the sale
of Hazeltine, prior year first nine months commercial and defense sales were
$97.5 million and $155.4 million, respectively, representing a 25.2% increase
in commercial sales in 1997 compared to 1996.
The backlog of firm orders at June 30, 1997 was $244.3 million, compared with
$246.7 million at September 30, 1996. During the first nine months of fiscal
1997, new orders aggregating $240.6 million were received, compared with
$207.6 million in the first nine months of fiscal 1996, excluding Hazeltine.
Orders during the first nine months of fiscal 1996, as reported including
Hazeltine, were $281.8 million. Order backlog increased $24 million in
conjunction with the acquisition of Filtertek in February 1997.The most
significant orders in the current period were for filtration/fluid flow
products, M1000 tank transporters, airborne radar systems and integrated
mail handling and sorting systems.
The gross profit percentage was 24.3% in the first nine months of fiscal 1997
and 7.3% in the first nine months of fiscal 1996. The gross profit
percentage in the first nine months of fiscal 1996 excluding Hazeltine was
3.0%. The fiscal 1996 nine month gross profit percentage reflects the
adjustments noted in the third quarter related to 60K Loader and the other
charges related to cost of sales.
Selling, general and administrative expenses for the first nine months of
fiscal 1997 were $45.8 million, or 17.1% of net sales, compared with
$52.9 million, or 15.6% of net sales, for the same period a year ago.
Excluding Hazeltine, prior year first nine months selling, general and
administrative expenses were $41.4 million or 16.4% of adjusted sales.
The fiscal 1997 first nine months selling, general and administrative
expenses decreased as a percentage of adjusted sales due to the favorable
contribution Filtertek.
Interest expense decreased to $3.4 million from $4.3 million as a result of
lower average borrowings in fiscal 1997 compared to fiscal 1996. A significant
amount of the 1997 debt was incurred with the February 1997 acquisition of
Filtertek.
Other costs and expenses, net, were $2.9 million in the first nine months of
fiscal 1997 compared to $4.7 million in the same period of fiscal 1996. The
decrease in fiscal 1997 reflects lower miscellaneous non-operating costs in
the current period.
The effective income tax rate in the first nine months of fiscal 1997 was
35.3% compared with (59.4%) for the first nine months of fiscal 1996. The
effective tax rate in 1996 was impacted by the adjustments noted in the third
quarter of 1996. The lower effective tax rate for the first nine months of
fiscal 1997 is attributable to the reduction in state and foreign taxes
previously paid on income from Hazeltine in fiscal 1996 coupled with the
favorable resolution of a Hazeltine state tax audit, and the lower Federal
rate recognized on the Puerto Rican operations of Filtertek in fiscal 1997.
Management estimates the annual effective tax rate for fiscal year 1997
to be approximately 37%.
Financial Condition
Working capital decreased to $65.4 million at June 30, 1997 from $86.2
million at September 30, 1996, primarily due to the additional borrowings
related to the Filtertek acquisition, offset by the purchased working capital
of Filtertek. During the first nine months of fiscal 1997: costs and
estimated earnings on long-term contracts increased $7.1 million due to
the timing and volume of progress billings throughout the period; accounts
receivable increased by $15.5 million and inventories increased in the
aggregate by $6 million primarily as a result of the acquisition of
Filtertek; and accounts payable and accrued expenses decreased by
$6.9 million through payments necessary to satisfy commitments outstanding
at September 30, 1996. Net cash generated by operating activities was
$6.5 million in the first nine months of fiscal 1997 and net cash used
by operating activities was $8.7 million in the same period of fiscal
1996. The increase in 1997 was primarily due to the improved operating
results in fiscal 1997.
Capital expenditures were $7.5 million in the first nine months of fiscal
1997 compared with $6.5 million in the first nine months of fiscal 1996.
Major expenditures in the current period include routine capitalized facility
costs at SEI and manufacturing equipment at Filtertek and PTI.
On February 7, 1997, the Company completed the purchase of Filtertek.
The purchase was financed with cash and borrowings from the Company's
bank credit facility. The existing bank credit facility was amended and
restated as of February 7, 1997 to increase the available credit facility
to $140 million. The maturity of the amended bank credit facility was
extended to September 30, 2000. This acquisition will be accounted for
under the purchase method of accounting, and accordingly, the acquisition
cost will be allocated among the net assets of Filtertek based upon their
estimated fair market values. However, this allocation process will be
completed in the quarter ending September 30, 1997.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share" and SFAS No. 129, "Disclosure of Information about Capital Structure".
The Company will adopt the provisions of these pronouncements during the
quarter ending December 31, 1997. The effect of adopting these provisions
is not expected to be material.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income".
This Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. All items that are required to be recognized under
accounting standards as components of comprehensive income must be
reported in a financial statement with the same prominence as other
financial statements. SFAS NO. 130 is effective for fiscal years
beginning after December 15, 1997.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This Statement
establishes standards for the manner in which public business enterprises
report information about operating segments in interim and annual financial
statements, and the related disclosures about products and services,
geographic areas and major customers. Management has not determined
whether this Statement will require additional disclosures or any
additional report of business segments. SFAS No. 131 is effective for
periods beginning after December 15, 1997.
PART II. OTHER INFORMATION
Item 6 . Exhibits and Reports on Form 8-K.
a) Exhibits - None
b) Reports on Form 8-K. - There were no reports on Form 8-K filed
during the quarter ended June 30, 1997.
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 ELECTRONICS CORPORATION
/s/ Philip M. Ford
------------------
Philip M. Ford
Senior Vice President
and Chief Financial Officer
(as duly authorized officer
and principal financial
officer of the registrant)
Dated: August 14, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 6,001
<SECURITIES> 0
<RECEIVABLES> 50,791<F1>
<ALLOWANCES> 589
<INVENTORY> 57,166
<CURRENT-ASSETS> 175,901
<PP&E> 129,483
<DEPRECIATION> 35,379
<TOTAL-ASSETS> 391,088
<CURRENT-LIABILITIES> 110,487
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 199,397
<TOTAL-LIABILITY-AND-EQUITY> 391,088
<SALES> 267,058
<TOTAL-REVENUES> 267,058
<CGS> 202,158
<TOTAL-COSTS> 247,912
<OTHER-EXPENSES> 2,895
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,446
<INCOME-PRETAX> 12,805
<INCOME-TAX> 4,526
<INCOME-CONTINUING> 8,279
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,279
<EPS-PRIMARY> .68
<EPS-DILUTED> .67
<FN>
<F1>THIS NUMBER DOES NOT INCLUDE $59 MILLION OF COSTS AND ESTIMATED EARNINGS ON
LONG-TERM CONTRACTS
</FN>
</TABLE>
