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, 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 April 30, 1997: 11,821,368
receipts.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Net sales $ 88,811 117,444
Costs and expenses:
Cost of sales 66,384 92,336
Selling, general and administrative expenses 15,740 18,577
Interest expense 1,234 1,425
Other, net 1,069 857
Total costs and expenses 84,427 113,195
Earnings before income taxes 4,384 4,249
Income tax expense 1,617 1,835
Net earnings $ 2,767 2,414
Earnings per share, primary and fully diluted $ .23 .20
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>
Six Months Ended
March 31,
1997 1996
<S> <C> <C>
Net sales $157,710 230,054
Costs and expenses:
Cost of sales 118,323 181,526
Selling, general and administrative expenses 28,691 35,468
Interest expense 1,511 2,814
Other, net 1,799 2,613
Total costs and expenses 150,324 222,421
Earnings before income taxes 7,386 7,633
Income tax expense 2,437 3,297
Net earnings $ 4,949 4,336
Earnings per share, primary and fully diluted $ .40 .37
See accompanying notes to condensed consolidated financial statements.
</TABLE>
<TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<CAPTION>
March 31, September 30,
1997 1996
<S> <C> <C>
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 4,336 22,209
Accounts receivable, less allowance for doubtful
accounts of $366 and $273, respectively 44,130 34,664
Costs and estimated earnings on long-term contracts,
less progress billings of $89,274 and $70,671,
respectively 55,562 51,585
Inventories 61,585 51,187
Other current assets 3,187 3,005
------- -------
Total current assets 168,800 162,650
------- -------
Property, plant and equipment, at cost 126,689 80,351
Less accumulated depreciation and amortization 31,647 26,325
------- -------
Net property, plant and equipment 95,042 54,026
Excess of cost over net assets of purchased
businesses, less accumulated amortization of
$2,009 and $1,597, respectively 55,199 20,395
Deferred tax asset 51,660 53,326
Other assets 17,078 17,435
------- -------
$387,779 307,832
======== =======
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 42,500 1,300
Accounts payable 32,591 40,057
Advance payments on long-term contracts,
less costs incurred of $4,849 and $5,478,
respectively 8,458 8,336
Accrued expenses and other current liabilities 24,670 26,771
------- -------
Total current liabilities 108,219 76,464
------- -------
Other liabilities 29,044 28,860
Long-term debt 54,000 11,375
------- -------
Total liabilities 191,263 116,699
------- -------
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
12,432,801 and 12,415,346 shares, respectively 124 124
Additional paid-in capital 193,445 192,967
Retained earnings since elimination of deficit of
$60,798 at September 30, 1993 9,133 4,184
Cumulative foreign currency translation adjustment 458 107
Minimum pension liability (1,770) (1,869)
-------- --------
201,390 195,513
Less treasury stock, at cost; 615,545 and 566,622
common shares, respectively (4,874) (4,380)
-------- --------
Total shareholders' equity 196,516 191,133
------- -------
$387,779 307,832
======= =======
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>
Six Months Ended
March 31,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 4,949 4,336
Adjustments to reconcile net earnings to net
cash used by operating activities:
Depreciation and amortization 6,140 7,093
Changes in operating working capital, net of
acquired business (17,941) (21,213)
Other 2,203 3,284
------- --------
Net cash used by operating activities (4,649) (6,500)
-------- --------
Cash flows from investing activities:
Capital expenditures (4,251) (4,510)
Acquisition of business, less cash acquired (92,900) _
-------- --------
Net cash used by investing activities (97,151) (4,510)
-------- --------
Cash flows from financing activities:
Net increase in short-term borrowings 37,500 14,500
Proceeds from long-term debt 60,000 _
Principal payments on long-term debt (13,675) (1,037)
Other 102 343
-------- -------
Net cash provided by financing activities 83,927 13,806
------- --------
Net increase (decrease) in cash and cash
equivalents (17,873) 2,796
Cash and cash equivalents at beginning of period 22,209 320
-------- --------
Cash and cash equivalents at end of period $ 4,336 3,116
========= ========
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 Report on
Form 10-K 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 six month periods ended March 31, 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. For the three month period ended March 31, 1997, primary and fully
diluted earnings per share are computed using 12,266,660 and 12,266,744
common shares and common share equivalents outstanding, respectively.
For the six month period ended March 31, 1997, primary and fully diluted
earnings per share are computed using 12,241,742 and 12,248,262 common
shares and common share equivalents outstanding, respectively. For the
quarter ended March 31, 1996, primary and fully diluted earnings per share
are computed using 11,810,203 and 11,950,667 common shares and common share
equivalents outstanding, respectively. For the six month period ended
March 31, 1996, primary and fully diluted earnings per share are computed
using 11,579,474 and 11,824,245 common shares and common share equivalents
outstanding, respectively.
3. Inventories
<TABLE>
Inventories consist of the following (dollars in thousands):
<CAPTION>
March 31, September 30,
1997 1996
--------- -------------
<S> <C> <C>
Finished Goods $ 5,618 5,927
Work in process, including long-term contracts 41,666 32,071
Raw materials 14,301 13,189
-------- -------
Total inventories $ 61,585 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
$.9 million and $1.2 million at March 31, 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 six months ended March 31, 1996 are the operating results of Hazeltine
prior to its divestiture as follows (dollars in thousands):
<TABLE>
<CAPTION>
Fiscal 1996
Second Quarter Six Months
<S> <C> <C>
Net sales $27,335 54,828
Cost of sales 21,533 43,486
Selling, general and administrative expenses 3,899 7,629
Other costs and expenses, net 322 525
------- ------
Earnings before income taxes $ 1,581 3,188
======= ======
</TABLE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations - Three months ended March 31, 1997 compared with
three months ended March 31, 1996.
Net sales of $88.8 million for the second quarter of fiscal 1997 decreased
$28.6 million (24.4%) from net sales of $117.4 million for the second
quarter 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 decreased approximately $1.3 million due to lower defense
sales at Systems & Electronics Inc. (SEI) in the current period, partially
offset by the additional sales ($10.7 million) resulting from the Filtertek
acquisition in February 1997. Defense sales were $49.7 million and
commercial sales were $39.1 million for the second quarter of fiscal 1997,
compared with defense and commercial sales of $84.7 million and
$32.7 million, respectively, in the second quarter of fiscal 1996. Prior to
its divestiture, Hazeltine's second quarter fiscal 1996 defense and
commercial sales were $27.2 million and $.1 million, respectively. Adjusted
for the sale of Hazeltine, prior year second quarter defense and commercial
sales were $57.5 million and $32.6 million, respectively.
The backlog of firm orders at March 31, 1997 was $265.6 million, compared
with $234.9 million at December 31, 1996. During the fiscal 1997 second
quarter, new orders aggregating $95.5 million were received, compared with
$70.6 million in the second quarter of fiscal 1996, excluding Hazeltine.
Second quarter fiscal 1996 orders, as reported including Hazeltine, were
$91.1 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 M1000 tank transporters, filtration/fluid
flow products and airborne radar systems.
The gross profit percentage was 25.3% in the second quarter of fiscal 1997
and 21.4% in the second quarter of fiscal 1996. The gross profit percentage
in the second quarter fiscal 1996 excluding Hazeltine was also 21.4%. The
fiscal 1997 second quarter gross profit percentage increased from fiscal
1996 due to an improved sales mix in both the defense and commercial segments.
Selling, general and administrative expenses for the second quarter of
fiscal 1997 were $15.7 million, or 17.7% of net sales, compared with
$18.6 million, or 15.8% of net sales, for the same period a year ago.
Excluding Hazeltine, prior year second quarter selling, general and
administrative expense was $14.7 million or 16.3% of adjusted sales. The
fiscal 1997 second quarter selling, general and administrative expenses
increased as a percentage of adjusted sales due to the reduced sales volume
in second quarter fiscal 1997.
Interest expense decreased to $1.2 million from $1.4 million as a result of
lower average borrowings in the second quarter of fiscal 1997 as compared to
the second 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 second quarter of
fiscal 1997 compared to $.9 million in the same period of fiscal 1996. The
increase in fiscal 1997 reflects the increase in amortization of goodwill
due to the purchase of Filtertek.
The effective income tax rate in the second quarter of fiscal 1997 was 36.9%
compared with 43.2% for the second quarter of fiscal 1996. The lower
effective tax rate for 1997 is attributable to the reduction in state and
foreign taxes previously paid on income from Hazeltine in fiscal 1996
coupled with the lower Federal rate recognized on the Puerto Rican
operations of Filtertek in fiscal 1997.
Results of Operations - Six months ended March 31, 1997 compared with
six months ended March 31, 1996.
Net sales of $157.7 million for the first six months of fiscal 1997 decreased
$72.3 million (31.4%) from net sales of $230.1 million for the first six
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 decreased approximately $17.5 million primarily due to lower defense
sales at SEI in the current period, partially offset by the additional sales
($10.7 million) resulting from the Filtertek acquisition. Defense sales were
$92.2 million and commercial sales were $65.5 million for the first six
months of fiscal 1997, compared with defense and
commercial sales or $167.7 million and $62.3 million, respectively, in the
first six months of fiscal 1996. Hazeltine's defense and commercial sales
were $51.5 million and $3.3 million, respectively in the first six months of
fiscal 1996. Adjusted for the sale of Hazeltine, prior year first six months
defense and commercial sales were $116.2 million and $59.0 million,
respectively.
The backlog of firm orders at March 31, 1997 was $265.6 million, compared
with $246.7 million at September 30, 1996. During the first six months of
fiscal 1997, new orders aggregating $152.6 million were received, compared
with $142.2 million in the first six months of fiscal 1996, excluding
Hazeltine. Orders during the first six months of fiscal 1996, as reported
including Hazeltine, were $199.7 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 M1000 tank
transporters, filtration/fluid flow products, airborne radar systems, and
integrated mail handling and sorting systems.
The gross profit percentage was 25.0% in the first six months of fiscal 1997
and 21.1% in the first six months of fiscal 1996. The gross profit percentage
in the first six months fiscal 1996 excluding Hazeltine was 21.2%. The fiscal
1997 first six months gross profit percentage increased from fiscal 1996 due
to an improved sales mix in both the defense and commercial segments.
Selling, general and administrative expenses for the first six months of
fiscal 1997 were $28.7 million, or 18.2% of net sales, compared with
$35.5 million, or 15.4% of net sales, for the same period a year ago.
Excluding Hazeltine, prior year first six months selling, general and
administrative expense was $27.8 million or 15.9% of adjusted sales. The
fiscal 1997 first six months selling, general and administrative expenses
increased as a percentage of adjusted sales due to the reduced sales volume
in the first six months of fiscal 1997.
Interest expense decreased to $1.5 million from $2.8 million as a result of
lower average borrowings in fiscal 1997 compared to fiscal 1996. A
significant amount of the 1997 debt was increased with the February 1997
acquisition of Filtertek.
Other costs and expenses, net, were $1.8 million in the first six months of
fiscal 1997 compared to $2.6 million in the same period of fiscal 1996. The
decrease in fiscal 1997 reflects lower miscellaneous expenditures in the
current six month period.
The effective income tax rate in the first six months of fiscal 1997 was
33.0% compared with 43.2% for the first six months of fiscal 1996. The lower
effective tax rate for the first six 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 $60.6 million at March 31, 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 six months of fiscal 1997, accounts
receivable increased by $9.5 million and inventories increased in the
aggregate by $14.4 million primarily as a result of the acquisition of
Filtertek. Accounts payable and accrued expenses decreased by $9.6 million
during the first six months of fiscal 1997 through payments necessary to
satisfy commitments outstanding at
September 30, 1996. Net cash used by operating activities was $4.6 million
in the first six months of fiscal 1997 and $6.5 million in the same period
of fiscal 1996. The decrease in the 1997 period was primarily due to the
changes in operating working capital mentioned above.
Capital expenditures were $4.3 million in the first six months of fiscal 1997
compared with $4.5 million in the first six 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 has not yet been completed.
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS 128), "Earnings Per Share"
and Statement of Financial Accounting Standards No. 129 (SFAS 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.
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Annual Meeting of the Company's shareholders was held on Tuesday
February 11, 1997. Voted on at the meeting was the election of two directors.
The voting for directors was as follows:
For Withheld
J. M. McConnell 10,425,275 74,170
D. C. Trauscht 10,447,899 51,546
The only other matter voted on at the meeting was a proposal to approve the
1997 Performance Share Plan. The voting on this proposal was as follows:
Broker
For Against Abstentions Non-Votes
---------- -------- ----------- ---------
9,805,717 631,456 62,272 0
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit
Number
2(a) Acquisition Agreement dated December 18, 1996 between the Company and
Schawk, Inc.
Certain schedules and attachments have been omitted due to
immateriality. The Company agrees to furnish supplementally a copy of
any omitted schedule or attachment to the Commission upon request.
2(b) First Amendment dated as of February 7, 1997 to Acquisition Agreement
listed as Exhibit 2(a) above.
4 Credit Agreement dated as of September 23, 1990 (as most recently
amended and restated as of February 7, 1997) among the Company,
Defense Holding Corp., the Banks listed therein and Morgan Guaranty
Trust Company of New York, as agent.
The above-listed Exhibits are incorporated by reference to Form 10-Q for
the quarterly period ended December 31, 1996, at the Exhibit Numbers listed
above, respectively.
b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated February 7, 1997,
during the quarter ended March 31, 1997 which reported "Item 2. Acquisition
or Disposition of Assets" and "Item 7. Financial Statements and Exhibits".
Financial statements filed with the report were:
(1) Audited financial statements of Filtertek at December 31, 1996 and the
consolidated results of its operations and its cash flows for the year
then ended.
(2) Introduction to Unaudited Pro Forma Consolidated Financial Statements.
(3) Unaudited Pro Forma Consolidated Statement of Operations for the fiscal
year ended September 30, 1996.
(4) Unaudited Pro Forma Consolidated Statement of Operations for the three
months ended December 31, 1996.
(5) Unaudited Pro Forma Consolidated Balance Sheet at December 31, 1996.
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
Dated: May 14,1997 officer of the registrant)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> MAR-31-1997
<CASH> 4,336
<SECURITIES> 0
<RECEIVABLES> 44,496<F1>
<ALLOWANCES> 366
<INVENTORY> 61,585
<CURRENT-ASSETS> 168,800
<PP&E> 126,689
<DEPRECIATION> 31,647
<TOTAL-ASSETS> 387,779
<CURRENT-LIABILITIES> 108,219
<BONDS> 0
0
0
<COMMON> 124
<OTHER-SE> 196,392
<TOTAL-LIABILITY-AND-EQUITY> 387,779
<SALES> 157,710
<TOTAL-REVENUES> 157,710
<CGS> 118,323
<TOTAL-COSTS> 147,014
<OTHER-EXPENSES> 1,799
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,511
<INCOME-PRETAX> 7,386
<INCOME-TAX> 2,437
<INCOME-CONTINUING> 4,949
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,949
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
<FN>
<F1>THIS NUMBER DOES NOT INCLUDE $56.0 MILLION OF COSTS AND ESTIMATED EARNINGS ON
LONG-TERM CONTRACTS.
</FN>
</TABLE>
