SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the quarterly period
ended December 31, 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) 213-7
200
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 January
31, 1998: 11,844,478 receipts.
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)
<TABLE>
Three Months Ended
December 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Net sales $ 78,077 68,899
------- ------
Costs and expenses:
Cost of sales 56,048 51,939
Selling, general and administrative expenses15,532 12,951
Interest expense 1,691 277
Other, net 1,071 730
------ ------
Total costs and expenses 74,342 65,897
------ ------
Earnings before income taxes 3,735 3,002
Income tax expense 1,125 820
------ ------
Net earnings $ 2,610 2,182
======= ======
Earnings per share: - Basic $ .22 .18
======= ======
- Diluted .21 .18
======= ======
See accompanying notes to condensed consolidated financial
statements.
</TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
December 31, September 30,
1997 1997
<S> <C> <C>
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 1,735 5,818
Accounts receivable, less allowance for
doubtful accounts of $415 and $462,
respectively 44,107 48,612
Costs and estimated earnings on long-term
contracts, less progress billings of
$60,774 and $56,451, respectively 52,373 54,633
Inventories 66,098 45,110
Other current assets 3,933 2,794
------- -------
Total current assets 168,246 156,967
------- -------
Property, plant and equipment, at cost 138,765 135,002
Less accumulated depreciation and
amortization 42,557 38,470
------- -------
Net property, plant and equipment 96,208 96,532
Excess of cost over net assets of purchased
businesses, less accumulated amortization
of $3,152 and $2,735, respectively 57,647 54,996
Deferred tax assets 47,451 48,510
Other assets 21,043 21,182
------- -------
$390,595 378,187
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 44,000 25,500
Accounts payable 33,061 38,238
Advance payments on long-term contracts,
less costs incurred of $1,422 and
$1,624, respectively 5,548 6,348
Accrued expenses and other current
liabilities 24,481 24,590
------- -------
Total current liabilities 107,090 94,676
------- -------
Other liabilities 26,535 28,548
Long-term debt 49,000 50,000
------- -------
Total liabilities 182,625 173,224
------- -------
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
12,490,674 and 12,478,328 shares,
respectively 125 125
Additional paid-in capital 195,115 194,663
Retained earnings since elimination of
deficit of $60,798 at September 30, 1993 18,591 15,981
Cumulative foreign currency translation
adjustment (101) 196
Minimum pension liability (181) (181)
------- -------
213,549 210,784
Less treasury stock, at cost; 656,445
and 689,945 common shares, respectively (5,579) (5,821)
------- -------
Total shareholders' equity 207,970 204,963
------- -------
$390,595 378,187
======= =======
See accompanying notes to condensed consolidated financial
statements.
</TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
<TABLE>
Three Months Ended
December 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,610 2,182
Adjustments to reconcile net earnings to net
cash used by operating activities:
Depreciation and amortization 4,773 2,558
Changes in operating working capital (21,448) (6,374)
Other 219 365
------- -------
Net cash used by operating activities(13,846) (1,269)
------- -------
Cash flows from investing activities:
Capital expenditures (3,747) (1,753)
Acquisition of business, less cash
acquired (3,460) -
------- -------
Net cash used by investing
activities (7,207) (1,753)
------- -------
Cash flows from financing activities:
Net increase in short-term borrowings 18,500 -
Principal payments on long-term debt (1,000) (325)
Other (530) 15
------- -------
Net cash provided (used) by financing
activities 16,970 (310)
------- -------
Net decrease in cash and cash equivalents (4,083) (3,332)
Cash and cash equivalents, beginning of
period 5,818 22,209
------- -------
Cash and cash equivalents, end of period $ 1,735 18,877
====== ======
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, 1997. Certain prior year
amounts have been reclassified to conform with the fiscal
1998 presentation.
The results for the three month period ended December 31,
1997 are not necessarily indicative of the results for the
entire 1998 fiscal year.
2. Earnings Per Share
During the three months ended December 31, 1997, the
Company adopted the provisions of Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share."
Basic earnings per share is calculated using the weighted
average number of common shares outstanding during the
period. Diluted earnings per share is calculated using the
weighted average number of common shares outstanding during
the period plus shares issuable upon the assumed exercise
of dilutive common share options and performance shares by
using the treasury stock method. The number of shares used
in the calculation of earnings per share for each period
presented is as follows (in thousands):
<TABLE>
Three Months Ended
December 31,
------------------
1997 1996
---- ----
<S> <C> <C>
Weighted Average Shares Outstanding
- Basic 11,818 11,818
Dilutive Options and Performance Shares 764 227
------ ------
Adjusted Shares - Diluted 12,582 12,045
====== ======
</TABLE>
Options to purchase 22,750 shares of common stock at $18.00
per share were outstanding during the quarter ended
December 31, 1997, but were not included in the computation
of diluted EPS because the options' exercise price was
greater than the average market price of the common shares.
These options expire in 2007. At December 31, 1996 all
outstanding options were included in the computation of
dilutive EPS. Approximately 167,000 and 498,000 performance
shares were outstanding but unearned at December 31, 1997,
and 1996, respectively, and therefore, were not included in
the respective computations of diluted EPS. The unearned
performance shares expire in 2001.
3. Inventories
Inventories consist of the following (dollars in
thousands):
<TABLE>
December 31, September 30,
1997 1997
------------ -------------
<S> <C> <C>
Finished Goods $ 8,923 8,542
Work in process, including long-term
contracts 42,146 22,971
Raw materials 15,029 13,597
------ ------
Total inventories $ 66,098 45,110
======== ======
</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 $2.7 million and $3.2 million at December 31, 1997 and
September 30, 1997, respectively.
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition
Results of Operations - Three months ended December 31, 1997
compared with three months ended
December 31, 1996.
Net sales of $78.1 million for the first quarter of fiscal
1998 increased $9.2 million (13.3%) from net sales of $68.9
million for the first quarter of fiscal 1997. The sales
increase in the current quarter reflects additional
commercial sales resulting from the Filtertek acquisition
($18.0 million) and higher volume at PTI and Rantec, offset
by lower defense sales at Systems & Electronics Inc. (SEI).
Commercial sales were $46.7 million (59.8%) and defense
sales were $31.4 million (40.2%) for the first quarter of
fiscal 1998, compared with commercial and defense sales of
$26.5 million (38.5%) and $42.4 million (61.5%),
respectively, in the first quarter of fiscal 1997. The
Filtertek acquisition effectively increases the commercial
content of the Company's annualized sales in fiscal 1998 to
over 50%.
Order backlog at December 31, 1997 was $238.9 million,
compared with $228.2 million at September 30, 1997. During
the fiscal 1998 first quarter, new orders aggregating $88.8
million were received, compared with $57.1 million in the
first quarter of fiscal 1997. The increase in fiscal 1998
orders includes $18.9 million related to Filtertek. The most
significant orders in the current period were for
filtration/fluid flow products, airborne radar systems and
fire support mission equipment.
The gross profit percentage was 28.2% in the first quarter
of fiscal 1998 and 24.6% in the first quarter of fiscal
1997. The margin improvement in the first quarter of fiscal
1998 is due to an improved sales mix throughout the Company.
Selling, general and administrative (SG&A) expenses for the
first quarter of fiscal 1998 were $15.5 million, or 19.9% of
net sales, compared with $13 million, or 18.8% of net sales,
for the same period a year ago. The increase in fiscal 1998
SG&A expenses is primarily due to the addition of Filtertek.
Interest expense increased to $1.7 million in fiscal 1998
from $.3 million in fiscal 1997 as a result of higher
average outstanding borrowings. A significant amount of the
outstanding borrowings in 1998 were incurred in February
1997 with the acquisition of Filtertek.
Other costs and expenses, net, were $1.1 million in the
first quarter of fiscal 1998 compared to $.7 million in the
same period of fiscal 1997. The increase in fiscal 1998
primarily reflects additional goodwill amortization expense
associated with the acquisition of Filtertek in February
1997.
The effective income tax rate in the first quarter of fiscal
1998 was 30.1% compared to 27.3% in the first quarter of
fiscal 1997. The fiscal 1998 effective tax rate was
favorably impacted by the earnings contributed from the
Company's Puerto Rican operations, and refunds received
relating to state and local taxes. The effective tax rate
during the first quarter of fiscal 1997 was favorably
impacted by the settlement of a state tax liability.
Management estimates the annual effective tax rate for
fiscal year 1998 to be approximately 34%.
Financial Condition
Working capital decreased to $61.2 million at December 31,
1997 from $62.3 million at September 30, 1997. During the
first three months of fiscal 1998: accounts receivable
decreased by $4.5 million as a result of cash collections;
costs and estimated earnings on long-term contracts and
inventories increased in the aggregate by $18.7 million as a
result of near-term production requirements (primarily
TUNNER 60K Loader); and accounts payable and accrued
expenses decreased by $5.3 million through payments
necessary to satisfy commitments outstanding at September
30, 1997.
Net cash used by operating activities was $13.8 million in
the first three months of fiscal 1998 and $1.3 million in
the same period of fiscal 1997. The 1998 cash usage was
primarily due to the TUNNER 60K Loader inventory
requirements at SEI.
Capital expenditures were $3.7 million in the first three
months of fiscal 1998 compared with $1.8 million in the
comparable period of fiscal 1997. Major expenditures in the
current period include manufacturing equipment at Filtertek
and PTI.
On December 31, 1997, the Company completed the purchase of
Euroshield OY for approximately $3.5 million. Euroshield,
based in Eura, Finland, designs and manufactures high
quality shielding products used in the electromagnetic
compatibility (EMC) industry.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits
Exhibit
Number
4 Credit Agreement dated as of September
23, 1990 (as most recently amended and
restated as of February 7, 1997 and
amended as of November 21, 1997) among
the Company, Defense Holding Corp.,
the Banks listed therein and Morgan
Guaranty Trust Company of New York, as
agent.
b) Reports on Form 8-K - There were no reports on Form 8-K
filed during the quarter ended December 31,
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
Dated: February 12, 1998 officer of the registrant)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> DEC-31-1997
<CASH> 1,735
<SECURITIES> 0
<RECEIVABLES> 44,522<F1>
<ALLOWANCES> 415
<INVENTORY> 66,098
<CURRENT-ASSETS> 168,246
<PP&E> 138,765
<DEPRECIATION> 42,557
<TOTAL-ASSETS> 390,595
<CURRENT-LIABILITIES> 107,090
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 207,845
<TOTAL-LIABILITY-AND-EQUITY> 390,595
<SALES> 78,077
<TOTAL-REVENUES> 78,077
<CGS> 56,048
<TOTAL-COSTS> 71,580
<OTHER-EXPENSES> 1,071
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,691
<INCOME-PRETAX> 3,735
<INCOME-TAX> 1,125
<INCOME-CONTINUING> 2,610
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,610
<EPS-PRIMARY> .22
<EPS-DILUTED> .21
<FN>
<F1>THIS NUMBER DOES NOT INCLUDE $61 MILLION OF COSTS AND ESTIMATED EARNINGS ON
LONG-TERM CONTRACTS.
</FN>
</TABLE>
Amendment dated as of November 21, 1997, to the
Credit Agreement dated as of September 23, 1990 (as
amended and restated as of February 7, 1997) (the
"Credit Agreement"), among ESCO Electronics
Corporation, a Missouri corporation ("ESCO"),
Defense Holding Corp., a Delaware corporation (the
"Borrower"), the Banks party thereto (the "Banks")
and Morgan Guaranty Trust Company of New York, as
agent (the "Agent").
A. Capitalized terms used and not otherwise defined herein
shall have the meanings assigned to them in the Credit
Agreement, as amended hereby.
B. ESCO and the Borrower have requested that certain
provisions of the Credit Agreement be amended as set forth
herein. The Banks are willing to so amend the Credit
Agreement subject to the terms and conditions set forth
herein.
Accordingly, in consideration of the mutual agreements
herein contained and other good and valuable consideration,
the sufficiency and receipt of which are hereby acknowledged,
the parties hereto hereby agree as follows:
Section 1. Amendments. (a) Section 1.01 of the Credit
Agreement is amended to add the following definitions in
alphabetical order:
"Euroshield" means Euroshield OY.
"Euroshield Acquisition Corporation" means EMC Test
Systems or any other Wholly-Owned Consolidated Subsidiary.
"PTI Filters" means Sanmar - PTI Filters Limited.
(b) The second proviso in the second sentence of Section
5.08 of the Credit Agreement is hereby amended and restated
as follows:
provided further, that the Borrower shall not be
required to pledge or create a security interest in any
of the assets of SFL, FBV FGMBH, FSA, Filtrotec, PPD
(including the capital stock of PPD) or Euroshield, nor
shall SFL, FBV, FGMBH, FSA, Filtrotec, PPD or
Euroshield be required to become a party to the
Guarantee Agreement or the Security Agreement, and the
pledge by the Borrower of the capital stock of SFL, the
pledge by Filtertek of the capital stock of FBV, FGMBH,
FSA and Filtrotec, and the pledge by Euroshield
Acquisition Corporation of the capital stock of
Euroshield shall be limited to 65% of each class of
such capital stock.
(c) Section 5.09 of the Credit Agreement is hereby amended
and restated as follows:
Section 5.09. Subsidiaries; Partnerships. ESCO will
not have any direct Subsidiaries other than the
Borrower and any Restricted Subsidiaries. The Borrower
will not have any direct or indirect Subsidiaries,
other than the Specified Subsidiaries and any
Subsidiaries resulting from any Investments made in
accordance with clause (f), (l), or (n) of Section 5.16
and any restricted Subsidiaries, all of which shall be
direct Subsidiaries (except that (i) PPD shall be a
direct Subsidiary of SFL, (ii) Comtrak shall be a
direct Subsidiary of SEI, (iii) EMC Test Systems shall
be a limited partnership as described in the definition
of "EMC Test Systems Reorganization", (iv) Rantec shall
be a direct Subsidiary of Rantec Holding as described
in the definition of "EMC Test Systems Reorganization",
(v) Rantec Commercial shall be a direct Subsidiary of
Rantec as described in the definition of "EMC Test
Systems Reorganization", (vi) FBV, FGMBH, Filtrotec,
FDPR and FDB shall be direct subsidiaries of Filtertek,
(vii) FSA shall be a subsidiary of Filtertek and FBV,
and (vii) Euroshield shall be a subsidiary of
Euroshield Acquisition Corporation). Neither ESCO nor
the Borrower will, and they will not permit any of
their Subsidiaries to, enter into any partnership or
joint venture other than EMC Test Systems, PTI Filters
and a Permitted Joint Venture. Notwithstanding anything
to the Contrary contained in this Section (i) Uniexcel
shall be a partially-owned Subsidiary of SFL, (ii)
Filtertek de Puerto Rico S.A. may issue Class B Common
Stock to certain of its senior executives, (iii)
Filtertek may own less than all of, but not less than
85% of, the outstanding common stock of FDB and (iv)
PTI may own not less than 40% and not more than 49% of
the outstanding common stock of PTI Filters.
(d) Section 5.11 (a) of the Credit Agreement is hereby
amended to add the following clauses (xiii) and (xiv) at the
end of such Section:
(xiii) Debt consisting of unsecured guarantees by ESCO,
the Borrower or PTI of 49% of the outstanding amount of loans
to PTI Filters made by local banks in India; provided that
the aggregate principal amount of such unsecured guarantees
at any time outstanding under this clause (xiii) shall not
exceed $800,000; and
(xiv) following the completion of the acquisition of
Euroshield by Euroshield Acquisition Corporation, unsecured
and secured debt of Euroshield and unsecured guarantees by
ESCO, the Borrower or Euroshield Acquisition Corporation of
Debt of Euroshield, in each case, in an amount not to exceed
$2,500,000.
(d) Section 5.16 of the Credit Agreement is hereby amended
to add the following clauses (m) and (n) at the end of such
Section:
(m) if at the time thereof and after giving effect thereto
no Default shall have occurred and be continuing, Investments
by PTI in PTI Filters consisting of (i) contributions of cash
and equipment with a book value not exceeding $255,000, which
shall be treated as an equity contribution, and (ii) loans
made to, or guarantees of loans made to, PTI Filters, to the
extent permitted by clause (xiii) of Section 5.11 (a);
provided that all Investments in PTI Filters, made pursuant
to this clause (m), including any guarantees of Debt of PTI
Filters, shall be treated as an Investment made pursuant to
clause (f) of this Section for purposes of determining
compliance with the limitations of such clause (f).
(n) if at the time thereof and after giving effect thereto
no Default shall have occurred and be continuing, Investments
by Euroshield Acquisition Corporation to effect the
acquisition of Euroshield consisting of (i) $3,500,000 of
cash, (ii) $750,000 of deferred purchase price payable over
three years following such acquisition, and (iii) $750,000
payable in the third year if certain performance targets are
met; provided that all Investments in Euroshield, made
pursuant to this caluse (n) shall be treated as an Investment
made pursuant to clause (f) of this Section for purposes of
determining compliance with the limitations of such clause
(f).
(e) Section 5.17 of the Credit Agreement is hereby amended
to add the following clause (n) at the end of such Section:
(n) Liens of Euroshield to secure Debt of Euroshield
permitted by Section 5.11(a) (xiv).
Section 2. Representations and Warranties. Each of ESCO
and the Borrower hereby represents and warrants to each
Bank, on and as of the date hereof, that:
(a) This Amendment has been duly authorized, executed and
delivered by each of ESCO and the Borrower, and each of this
Amendment and the Credit Agreement as amended by this
Amendment constitutes a legal, valid and binding obligation
of each of ESCO and the Borrower, enforceable in accordance
with its terms.
(b) The representations and warranties of each of ESCO and
Borrower contained in the Credit Agreement and in each other
Loan Document are true and correct in all respects with the
same effect as if made on and as of the date hereof, except
to the extent that such representations and warranties
expressly relate to an earlier date.
(c) After giving effect to this Amendment, no Default has
occurred and is continuing.
Section 3. Effectiveness. This Amendment shall become
effective upon receipt by the Agent of counterparts hereof
signed by each of ESCO, the Borrower and the Required Banks.
Section 4 Miscellaneous (a) This Amendment constitutes
the entire agreement and understanding of the parties with
respect to the subject matter hereof and supersedes any and
all prior agreements and understandings, oral or written,
relating to the subject matter hereof.
(b) Section headings used herein are for convenience of
reference only and are not to affect the construction of, or
to be taken into consideration in interpreting, this
Amendment.
(c) This Amendment shall be construed in accordance with and
governed by the law of the State of New York.
(d) Each reference to a party hereto shall be deemed to
include its successors and assigns, all of whom shall be
bound by this Amendment and to whose benefit the provisions
of this Amendment shall inure.
(e) This Amendment may be executed in any number of
counterparts, each of which shall be an original but all of
which, when taken together, shall constitute but one
instrument.
(f) Except as specifically amended or modified hereby, the
Credit Agreement shall continue in full force and effect in
accordance with the provisions thereof.
In witness whereof, the parties hereto have caused this
Amendment to be duly executed by their respective authorized
officers as of the date first above written:
ESCO ELECTRONICS CORPORATION
by
/S/ Donald H. Nonnenkamp
---------------------------
Name: Donald H. Nonnenkamp
Title: Vice President & Treasurer
DEFENSE HOLDINGS CORP.
by
/S/ Philip M. Ford
---------------------
Name: Philip M. Ford
Title: Sr. Vice President & CFO
MORGAN GUARANTY TRUST COMPANY OF
NEW YORK, individually and as Agent
by
/s/ Kevin J. O'Brien
-----------------------
Name: Kevin J. O'Brien
Title: Vice President
NATIONSBANK, N.A.
by
/s/ Kenneth J. Schult
------------------------
Name: Kenneth J. Schult
Title: Vice President
THE BANK OF NEW YORK
by
/s/ Christopher C. Jacobs
----------------------------
Name: Christopher C. Jacobs
Title: Assistant Treasurer
THE BANK OF NOVA SCOTIA
by
/s/ F.C.H. Ashby
-------------------
Name: F.C.H. Ashby
Title: Senior Manager Loan
Operations
THE SUMITOMO BANK, LIMITED
by
/s/ Teresa A. Lekich
-----------------------
Name: Teresa A. Lekich
Title: Vice President
by
/s/ Michael F. Murphy
------------------------
Name: Michael F. Murphy
Title: Vice President & Manager
FIRST UNION NATIONAL BANK OF
NORTH CAROLINA
by
/s/ Glenn Edwards
--------------------
Name: Glenn Edwards
Title: Vice President
SANWA BUSINESS CREDIT CORPORATION
by
/s/ Lawrence J. Placek
-------------------------
Name: Lawrence J. Placek
Title: Vice President
