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, 1998
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, 1998:
11,965,082 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>
<CAPTION>
Three Months Ended
March 31,
------------------
1998 1997
---- ----
<S> <C> <C>
Net sales $ 86,030 88,811
-------- ------
Costs and expenses:
Cost of sales 61,434 66,384
Selling, general and administrative expenses 17,285 15,740
Interest expense 1,952 1,234
Other, net 647 1,069
------- ------
Total costs and expenses 81,318 84,427
------- ------
Earnings before income taxes 4,712 4,384
Income tax expense 1,472 1,617
------- ------
Net earnings $ 3,240 2,767
======== ======
Earnings per share: - Basic $ .27 .23
======== ======
- Diluted .26 .23
======== ======
See accompanying notes to condensed consolidated financial statements.
</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)
<TABLE>
<CAPTION>
Six Months Ended
March 31,
----------------
1998 1997
---- ----
<S> <C> <C>
Net sales $164,107 157,710
-------- -------
Costs and expenses:
Cost of sales 117,482 118,323
Selling, general and administrative expenses 32,817 28,691
Interest expense 3,643 1,511
Other, net 1,718 1,799
-------- -------
Total costs and expenses 155,660 150,324
-------- -------
Earnings before income taxes 8,447 7,386
Income tax expense 2,597 2,437
-------- -------
Net earnings $ 5,850 4,949
======== =======
Earnings per share: - Basic $ .49 .42
======== =======
- Diluted .47 .40
======== =======
See accompanying notes to condensed consolidated financial statements.
</TABLE>
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, September 30,
1998 1997
---- ----
<S> <C> <C>
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 6,589 5,818
Accounts receivable, less allowance for doubtful
accounts of $534 and $462, respectively 44,508 48,612
Costs and estimated earnings on long-term
contracts, less progress billings of
$53,782 and $56,451, respectively 42,092 54,633
Inventories 82,089 45,110
Other current assets 3,477 2,794
------- -------
Total current assets 178,755 156,967
------- -------
Property, plant and equipment, at cost 142,180 135,002
Less accumulated depreciation and amortization 46,212 38,470
------- -------
Net property, plant and equipment 95,968 96,532
Excess of cost over net assets of purchased
businesses, less accumulated amortization
of $3,583 and $2,735, respectively 59,078 54,996
Deferred tax assets 45,834 48,510
Other assets 21,028 21,182
------- -------
$400,663 378,187
======== =======
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings and current maturities
of long-term debt $ 47,500 25,500
Accounts payable 36,574 38,238
Advance payments on long-term contracts, less costs
incurred of $1,201 and $1,624, respectively 5,974 6,348
Accrued expenses and other current liabilities 24,922 24,590
------- -------
Total current liabilities 114,970 94,676
------- -------
Other liabilities 27,110 28,548
Long-term debt 47,208 50,000
------- -------
Total liabilities 189,288 173,224
------- -------
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 12,519,924 and
12,478,328 shares, respectively 125 125
Additional paid-in capital 195,696 194,663
Retained earnings since elimination of
deficit of $60,798 at September 30, 1993 21,831 15,981
Cumulative foreign currency translation adjustment (528) 196
Minimum pension liability (181) (181)
-------- --------
216,943 210,784
Less treasury stock, at cost; 654,945
and 689,945 common shares, respectively (5,568) (5,821)
-------- --------
Total shareholders' equity 211,375 204,963
-------- --------
$400,663 378,187
======== =======
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>
<CAPTION>
Six Months Ended
March 31,
-----------------
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,850 4,949
Adjustments to reconcile net earnings to net
cash used by operating activities:
Depreciation and amortization 9,168 6,140
Changes in operating working capital,
net of acquired business (23,233) (17,941)
Other 3,313 2,203
------- -------
Net cash used by operating activities ( 4,902) (4,649)
------- -------
Cash flows from investing activities:
Capital expenditures ( 6,539) (4,251)
Acquisition of businesses, less cash acquired( 4,722) (92,900)
------- -------
Net cash used by investing activities (11,261) (97,151)
------- -------
Cash flows from financing activities:
Net increase in short-term borrowings 20,976 37,500
Proceeds from Long-term debt - 60,000
Principal payments on long-term debt (3,052) (13,675)
Other (990) 102
------- -------
Net cash provided by financing activities 16,934 83,927
------- -------
Net increase (decrease) in cash and cash
equivalents 771 (17,873)
Cash and cash equivalents, beginning of period 5,818 22,209
------- -------
Cash and cash equivalents, end of period $ 6,589 4,336
======= =======
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 and six month periods ended March 31, 1998 are not
necessarily indicative of the results for the entire 1998 fiscal year.
2. 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>
<CAPTION>
Three Months Ended Six Months ended
March 31, March 31,
--------- ---------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted Average Shares
Outstanding - Basic 11,848 11,808 11,833 11,814
Dilutive Options and
Performance Shares 731 459 741 428
------ ------ ------ ------
Adjusted Shares - Diluted 12,579 12,267 12,574 12,242
====== ====== ====== ======
</TABLE>
Options to purchase 62,000 shares of common stock at approximately $18.00
per share and options to purchase 100,750 shares of common stock at $12.38
were outstanding during the six month periods ended March 31, 1998 and
March 31, 1997, respectively, but were not included in the respective
computations of diluted EPS because the options' exercise price was greater
than the average market price of the common shares. These options expire in
2007 and 2008. Approximately 157,000 and 334,000 performance shares were
outstanding but earned at March 31, 1998, and 1997, 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>
<CAPTION>
March 31, September 30,
1998 1997
---- ----
<S> <C> <C>
Finished Goods $ 9,315 8,542
Work in process, including long-term
contracts 56,361 22,971
Raw materials 16,413 13,597
------ ------
Total inventories $ 82,089 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
$2.1 million and $3.2 million at March 31, 1998 and September 30, 1997,
respectively. The increase in inventories (work-in-process) is primarily
related to the TUNNER program at SEI, as well as a normal inventory build-up
at the other operating units necessary to satisfy the increased sales
requirements for the remaining six months of fiscal 1998.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations - Three months ended March 31, 1998 compared with
- --------------------- three months ended March 31, 1997.
Net sales of $86.0 million for the second quarter of fiscal 1998 decreased
$2.8 million (3.1%) from net sales of $88.8 million for the second quarter
of fiscal 1997. The sales decrease in the current quarter reflects lower
defense sales at Systems & Electronics Inc. (SEI) resulting from the timing
of the receipt of orders. This decrease was partially offset by additional
commercial sales resulting from the Filtertek acquisition ($7.3 million net
increase) and higher volume at EMC Test Systems. Commercial sales were $44.2
million (51.4%)
and defense sales were $41.8 million (48.6%) for the second quarter of fiscal
1998, compared with commercial and defense sales of $39.1 million (44.0%) and
$49.7 million (56.0%), respectively, in the second quarter of fiscal 1997.
Order backlog at March 31, 1998 was $253.4 million, compared with
$238.9 million at December 31, 1997. During the fiscal 1998 second quarter,
new orders aggregating $100.5 million were received, compared with
$95.5 million in the second quarter of fiscal 1997. The most significant
orders in the current period were for filtration/fluid flow products,
M1000 tank transporters and long-lead funding for the 60K/TUNNER aircraft
cargo loader program.
The gross profit percentage was 28.6% in the second quarter of fiscal 1998
and 25.3% in the second quarter of fiscal 1997. The gross margin increased
in the second quarter of fiscal 1998 due to an improved sales mix primarily
related to the filtration/fluid flow businesses. Filtertek and PTI reported
higher gross margins in the current quarter as compared to the prior year
second quarter. The defense gross margin also increased in the current period
due to changes in sales mix.
Selling, general and administrative (SG&A) expenses for the second quarter of
fiscal 1998 were $17.3 million, or 20.1% of net sales, compared with
$15.7 million, or 17.7% of net sales, for the same period a year ago. The
increase in fiscal 1998 SG&A expenses is primarily due to the inclusion of
Filtertek for the entire period of fiscal 1998 as compared to a partial
period of fiscal 1997 as the acquisition was completed February 7, 1997.
Interest expense increased to $2.0 million in fiscal 1998 from $1.2 million
in fiscal 1997 as a result of higher average outstanding borrowings in the
current period. A significant amount of the outstanding borrowings in 1998
were incurred in conjunction with the 1997 acquisition of Filtertek.
Other costs and expenses, net, were $.6 million in the second quarter of
fiscal 1998 compared to $1.1 million in the same period of fiscal 1997.
The decrease in fiscal 1998 primarily reflects the impact of a favorable
modification of a royalty agreement.
The effective income tax rate in the second quarter of fiscal 1998 was
31.2% compared to 36.9% in the second quarter of fiscal 1997. The lower
effective tax rate is primarily attributable to the earnings contributed
from the Company's Puerto Rican operations.
Results of Operations - Six months ended March 31, 1998 compared with
- --------------------- six months ended March 31, 1997
Net sales of $164.1 million for the first six months of fiscal 1998
increased $6.4 million (4.1%) from net sales of $157.7 million for the
first six months of fiscal 1997. The increase was primarily due to the
Filtertek results of operations being included for the entire period in
fiscal 1998, versus approximately seven weeks of operations during
fiscal 1997. This increase was partially offset by a decrease in defense
sales at SEI. PTI and EMC Test Systems also reported increases in year-
to-year sales. Commercial sales were $90.8 million (55.3%) and Defense
sales were $73.3 million (44.7%) for the first six months of fiscal
1998, compared with commercial and defense sales or $65.5 million
(41.5%) and $92.2 million, (58.5%) respectively, in the first six months
of fiscal 1997.
The order backlog at March 31, 1998 was $253.4 million, compared with
$228.2 million at September 30, 1997. During the first six months of
fiscal 1998, new orders aggregating $189.3 million were received,
compared with $152.6 million (24% increase) in the first six months of
fiscal 1997. The most significant orders in the current period were for
filtration/fluid flow products, M1000 tank transporters, long-lead
funding for the 60K/TUNNER aircraft cargo loader program, airborne radar
systems, automatic meter reading equipment and fire support mission
equipment.
The gross profit percentage was 28.4% in the first six months of fiscal
1998 and 25.0% in the first six months of fiscal 1997. The fiscal 1998
gross profit percentage increased from fiscal 1997 due to an improved
sales mix primarily related to the filtration/fluid flow businesses.
Filtertek and PTI reported higher gross margins in the current year period
as compared to the prior year period. The defense gross margin
also increased in the current year due to an improved sales mix.
Selling, general and administrative expenses for the first six months of
fiscal 1998 were $32.8 million, or 20.0% of net sales, compared with
$28.7 million or 18.2% of net sales, for the same period a year ago. The
increase in fiscal 1998 SG&A expenses is primarily due to the inclusion
of Filtertek for the entire period of fiscal 1998 as compared to a
partial period of fiscal 1997 as the acquisition was completed February
7, 1997.
Interest expense increased to $3.6 million from $1.5 million as a result
of higher average outstanding borrowings in fiscal 1998 compared to
fiscal 1997. A significant amount of the outstanding borrowings in 1998
were incurred in conjunction with the 1997 acquisition of Filtertek.
Other costs and expenses, net, were $1.7 million in the first six months
of fiscal 1998 compared to $1.8 million in the same period of fiscal
1997. The net decrease in fiscal 1998 reflects additional goodwill
amortization expense associated with the acquisition of Filtertek,
offset by the favorable modification of a royalty agreement as reported
in the second quarter of fiscal 1998.
The effective income tax rate in the first six months of fiscal 1998 was
30.7% compared with 33.0% for the first six months of fiscal 1997. The
lower effective tax rate for the first six months of fiscal 1998 is
attributable to the earnings contributed from the Company's Puerto Rican
operations, and refunds received relating to the resolutions of state
and local tax matters. Management estimates the annual effective tax
rate for fiscal 1998 to be approximately 32%.
Financial Condition
- -------------------
Working capital increased to $63.8 million at March 31, 1998 from $62.3
million at September 30, 1997. During the first six months of fiscal
1998: accounts receivable decreased by $4.1 million as a result of cash
collections; costs and estimated earnings on long-term contracts and
inventories increased in the aggregate by $24.4 million in support of
near-term production requirements (primarily 60K/TUNNER); and accounts
payable and accrued expenses decreased by $1.3 million through payments
necessary to satisfy commitments outstanding at September 30, 1997.
Net cash used by operating activities was $4.9 million in the first six
months of fiscal 1998 and $4.6 million in the same period of fiscal
1997. The 1998 cash usage was primarily due to the inventory requirements
discussed in the previous paragraph.
Capital expenditures were $6.5 million in the first six months of fiscal
1998 compared with $4.3 million in the comparable period of fiscal 1997.
Major expenditures in the current period included manufacturing
equipment at Filtertek and PTI.
On December 31, 1997, the Company completed the purchase of Euroshield
OY for consideration which included $3.5 million in cash. Euroshield,
based in Eura, Finland, designs and manufactures high quality shielding
products used in the electromagnetic compatibility (EMC) industry.
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 Thursday,
February 12, 1998. Voted on at the meeting was the election of two
directors. The voting for directors was as follows:
For Withheld
--- --------
J. J. Carey 10,716,079 30,248
D. J. Moore 10,716,647 29,680
Item 5. Other Information.
The Year 2000 ("Y2K") issue refers to the inability of a date-sensitive
computer program to recognize a two-digit date field designated as "00" as
the year 2000. Mistaking "00" for 1900 could result in a system failure or
miscalculations causing disruptions to operations, including manufacturing,
a temporary inability to process transactions, send invoices, or engage in
other normal business activities. This is a significant issue for most, if
not all, companies with far reaching implications, some of which cannot be
anticipated or predicted with any degree of certainty.
The Company is currently assessing the magnitude of its Y2K issue and has
already determined that it may be required to modify or replace certain
portions of its software so that its computer systems will be able to
function properly beyond December 31, 1999. This may require software
replacement, reprogramming or other remedial action. The Company is also
communicating with its suppliers and customers to determine the extent of
the Company's vulnerability to the failure of third parties to remediate
their own Y2K issue.
In conjunction with this assessment, the Company is finalizing its action
plans to address the Y2K issue, including contingencies to address
unforeseen problems. The Company plans to use both internal and external
resources to complete Y2K reprogramming, software replacement and testing.
Preliminary plans anticipate completion of the Y2K remedial work by mid-
1999. To date, the company has incurred approximately $1 million related to
the Y2K remedial work. The total cost of the Y2K remedial work is estimated
to be less than $5 million and will be expensed as incurred over the next
18 months.
The expected costs of the project and the date on which the Company plans
to complete the Y2K remediation work are based on management's best
estimates, which were derived from numerous assumptions about future
events, including the availability of certain resources, third-party
modification plans, and other factors. However, there can be no guarantee
that these estimates will be achieved and actual results could differ
materially from those plans. Specific factors that might cause material
differences include, but are not limited to the availability and cost of
personnel trained in this area and the ability to identify and correct all
relevant computer codes.
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 March 31, 1998.
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, 1998 officer of the registrant)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-END> MAR-31-1998
<CASH> 6,589
<SECURITIES> 0
<RECEIVABLES> 45,042<F1>
<ALLOWANCES> 534
<INVENTORY> 82,089
<CURRENT-ASSETS> 178,755
<PP&E> 142,180
<DEPRECIATION> 46,212
<TOTAL-ASSETS> 400,663
<CURRENT-LIABILITIES> 114,970
<BONDS> 0
0
0
<COMMON> 125
<OTHER-SE> 211,250
<TOTAL-LIABILITY-AND-EQUITY> 400,663
<SALES> 164,107
<TOTAL-REVENUES> 164,107
<CGS> 117,482
<TOTAL-COSTS> 150,299
<OTHER-EXPENSES> 1,718
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,643
<INCOME-PRETAX> 8,447
<INCOME-TAX> 2,597
<INCOME-CONTINUING> 5,850
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,850
<EPS-PRIMARY> .49
<EPS-DILUTED> .47
<FN>
<F1>THIS NUMBER DOES NOT INCLUDE $42 MILLION OF COSTS AND ESTIMATED EARNINGS ON
LONG-TERM CONTRACTS.
</FN>
</TABLE>
