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, 1999
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 January 31,
2000: 12,267,062 receipts.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended
December 31,
------------------
1999 1998
---- ----
Net sales $ 65,865 88,193
-------- ------
Costs and expenses:
Cost of sales 46,237 65,299
Selling, general and administrative expenses13,752 17,221
Interest (income) expense (151) 1,732
Other, net 1,591 1,610
Gain on sale of property (2,239) -
------- ------
Total costs and expenses 59,190 85,862
------ ------
Earnings before income taxes 6,675 2,331
Income tax expense 1,619 816
------ ------
Net earnings before accounting change 5,056 1,515
------ ------
Cumulative effect of accounting change,
net of tax - (25,009)
------ --------
Net earnings (loss) $ 5,056 (23,494)
====== ========
Earnings (loss) per share:
Earnings before accounting change
- Basic $ .41 .12
- Diluted .40 .12
====== ======
Net earnings (loss) - Basic $ .41 (1.91)
- Diluted .40 (1.91)
====== ======
See accompanying notes to consolidated financial statements.
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands)
December 31,September 30,
1999 1999
---- ----
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 11,732 87,709
Accounts receivable, less allowance for
doubtful accounts of $629 and $574,
respectively 42,025 38,669
Costs and estimated earnings on long-term
contracts, less progress billings of
$10,614 and $11,778, respectively 5,712 4,019
Inventories 42,748 39,590
Other current assets 3,874 3,559
------- -------
Total current assets 106,091 173,546
------- -------
Property, plant and equipment, at cost 111,084 109,763
Less accumulated depreciation and
amortization 40,776 38,445
------- -------
Net property, plant and equipment 70,308 71,318
Excess of cost over net assets of purchased
businesses, less accumulated amortization
of $7,162 and $6,631, respectively 67,912 68,950
Deferred tax assets 43,161 44,783
Other assets 21,501 19,788
------- -------
$308,973 378,385
======= =======
Liabilities and Shareholders' Equity
Current liabilities:
Short-term borrowings and current
maturities of long-term debt $ - 20,598
Accounts payable 23,709 26,339
Advance payments on long-term contracts,
less costs incurred of $616 and $479,
respectively 1,405 682
Accrued expenses and other current
liabilities 22,306 30,598
------- -------
Total current liabilities 47,420 78,217
------- -------
Other liabilities 9,984 9,583
Long-term debt 920 41,896
------- -------
Total liabilities 58,324 129,696
------- -------
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
13,076,139 and 12,782,663 shares,
respectively 131 128
Additional paid-in capital 203,831 201,719
Retained earnings since elimination of
deficit at September 30, 1993 57,779 52,723
Accumulated other comprehensive loss (2,482) (1,870)
------- -------
259,259 252,700
Less treasury stock, at cost; 807,125
and 404,625 common shares, respectively (8,610) (4,011)
------- -------
Total shareholders' equity 250,649 248,689
------- -------
$308,973 378,385
======= =======
See accompanying notes to consolidated financial statements.
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
Three Months Ended
December 31,
------------------
1999 1998
---- ----
Cash flows from operating activities:
Net earnings (loss) $ 5,056 (23,494)
Adjustments to reconcile net earnings (loss)
to net cash used by operating activities:
Depreciation and amortization 3,626 4,501
Changes in operating working capital,
net of accounting change (18,721) (19,019)
Effect of accounting change, net of tax - 25,009
Other (81) 2,751
------- ------
Net cash used by operating activities (10,120) (10,252)
-------- --------
Cash flows from investing activities:
Capital expenditures (1,852) (1,681)
Acquisition of businesses, less cash acquired - -
------ ------
Net cash used by investing activities (1,852) (1,681)
------ ------
Cash flows from financing activities:
Net increase (decrease) in short-term
borrowings (12,506) 16,500
Proceeds from long-term debt 80 96
Principal payments on long-term debt (49,148) (2,108)
Purchases of common stock into treasury (4,613) (1,562)
Other 2,182 (52)
------ ------
Net cash provided (used) by financing
activities (64,005) 12,978
------ ------
Net increase (decrease) in cash and cash
equivalents (75,977) 1,045
Cash and cash equivalents, beginning of period 87,709 4,241
------ ------
Cash and cash equivalents, end of period $ 11,732 5,286
====== ======
See accompanying notes to consolidated financial statements.
ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying consolidated financial statements, in the
opinion of management, include all adjustments, consisting
only of normal recurring accruals, necessary for a fair
presentation of the results for the interim periods
presented. The consolidated financial statements are
presented in accordance with the requirements of Form 10-Q
and consequently do not include all the disclosures required
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, 1999. Certain
prior year amounts have been reclassified to conform to the
fiscal 2000 presentation.
The results for the three month period ended December 31,1999
are not necessarily indicative of the results for the entire
2000 fiscal year.
On September 30, 1999, the Company sold its last major
defense business, Systems & Electronics Inc. (SEI) for $85
million in cash, less working capital adjustments. The prior
year amounts include the operating results of SEI for the
entire year. The Company has provided a reconciliation of
reported earnings to "adjusted" earnings within "Item 2.
Management's Discussion and Analysis (MD&A)" noted below.
2. Earnings (Loss) 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 net loss per share for the
first three months of fiscal 1999, for both basic and diluted
loss per share, is calculated using the weighted average
number of common shares outstanding during the period. The
number of shares used in the calculation of earnings (loss)
per share for each period presented is as follows (in
thousands):
Three Months Ended
December 31,
------------
1999 1998
---- ----
Weighted Average Shares
Outstanding - Basic 12,343 12,310
Dilutive Options and
Performance Shares 246 312
------ ------
Adjusted Shares- Diluted 12,589 12,622
====== ======
Options to purchase approximately 395,000 shares of common
stock at prices ranging from $11.44-$19.22 per share and
options to purchase 298,000 shares of common stock at
approximately $10.00 - $19.22 were outstanding during the
three month periods ended December 31, 1999 and
1998,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 various periods through 2009.
Approximately 136,000 and 166,000 performance shares were
outstanding but unearned at December 31, 1999, and 1998,
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):
December 31, September 30,
1999 1999
---- ----
Finished goods $ 11,109 11,387
Work in process, including
long-term contracts 16,934 14,517
Raw materials 14,705 13,686
------ ------
Total inventories $ 42,748 39,590
====== ======
4. Change in Accounting Principle
During the first quarter of fiscal 1999, the Company adopted
the provisions of Statement of Position (SOP) 98-5,"Reporting
on the Costs of Start-up Activities". This SOP provides
guidance on accounting for start-up activities, including
precontract costs and organization costs. The adoption of SOP
98-5 resulted in a non-cash, after-tax charge of
approximately $25 million, which was recognized as a
cumulative effect of an accounting change in the prior year
first quarter ended December 31, 1998.
5. Comprehensive Income (Loss)
Effective October 1, 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income". SFAS No. 130 requires the Company to
disclose all non-owner changes included in equity but not
included in net earnings (loss) in a financial statement that
is displayed with the same prominence as other financial
statements.
Comprehensive income (loss) for the three-month periods ended
December 31, 1999 and 1998 was $4.4 million and ($23.5)
million, respectively. The Company's comprehensive income and
loss is impacted only by foreign currency translation
adjustments.
6. Business Segment information
The Company is organized based on the products and services
that it offers. Beginning with the first quarter of fiscal
2000, the operating results of Comtrak Technologies, L.L.C
(Comtrak) are included within the Company's Communications
segment. This change from September 30, 1999 is the result of
the consolidation of Distribution Control Systems, Inc. (DCSI)
and Comtrak under common management, and the move of Comtrak
operations into the DCSI operating facility. This
consolidation occurred in the quarter ended December 31, 1999.
($ in millions) Three Months ended
December 31,
------------
Net Sales 1999 1998
--------- ---- ----
Filtration/Fluid Flow $43.2 40.0
Test 8.7 7.1
Communications 10.5 4.8
Other 3.5 3.8
Divested Business - 32.5
---- ----
Consolidated totals $65.9 88.2
==== ====
Operating Profit (Loss)
----------------------
Filtration/Fluid Flow $ 3.4 3.4
Test .7 .5
Communications 2.3 .3
Other (.5) (.2)
Divested Business - 1.7
----- ----
Consolidated totals $ 5.9 5.7
===== ====
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Reconciliation of Adjusted Net Earnings - 1999
The following table is not intended to present prior year net
earnings as defined within generally accepted accounting
principles (GAAP), and is presented for informational purposes
only. The table is comparable to the full year table presented in
the 1999 Annual Report to Shareholders (page 11).
The table provides a reconciliation between the 1999 reported
financials and what Management believes the 1999 operating
results may have been after removing certain nonrecurring items
and assuming that all of the actions taken during 1999 to
reorient the business were complete at the beginning of the
period. Management believes the estimated 1999 adjusted operating
results provide a meaningful presentation for purposes of
analyzing ESCO's ongoing financial performance.
Three Months Ended December 31, 1998
------------------------------------
(a) (b)
Elimination Adjusting
($ in millions, rounded) Reported of SEI Items Adjusted
- ------------------------ -------- ------ ----- --------
Net sales $88.2 32.5 - $55.7
---- ---- ----- ----
Cost of sales 65.3 25.7 (.2) 39.4
SG&A expenses 17.2 5.2 .2 12.2
Interest expense (income) 1.8 .2 (1.8) (.2)
Other, net 1.6 .1 - 1.5
---- ---- ---- ----
Total costs and expenses 85.9 31.2 (1.8) 52.9
---- ---- ---- ----
Earnings before tax 2.3 1.3 1.8 2.8
Income tax expense .8 - .2 1.0
---- ---- ---- ----
Net earnings before
accounting change 1.5 1.3 1.6 1.8
Cumulative effect of
accounting change,
net of tax (25.0) - 25.0 -
---- ---- ---- ----
Net earnings (loss) $(23.5) 1.3 26.6 $1.8
==== ==== ==== ====
(a) Represents the operations of SEI, which were included in the
ESCO consolidated first quarter 1999 GAAP reported results of
operations.
(b) Represents the adjusting items as explained in detail in the
1999 Annual Report to Shareholders (page 11), including: the
operating results of Rantec's microwave business which is being
offered for sale; the adjustment to the corporate office
operating expenses resulting from the 1999 actions; the estimated
net interest impact of the SEI transaction proceeds; and any
related tax adjustment.
Results of Operations- Three months ended December 31, 1999
- --------------------- compared with three months ended
December 31, 1998.
NET SALES
Net sales of $65.9 million for the first quarter of fiscal 2000
decreased $22.3 million from reported net sales of $88.2 million
for the first quarter of fiscal 1999 due to the divestiture of
SEI. The prior year amount included SEI sales of $32.5 million.
Excluding SEI from the prior year amounts, first quarter sales
increased $10.2 million (18.3%) over 1999 "adjusted" sales of
$55.7 million.
Filtration/Fluid Flow
- ---------------------
Net sales of $43.2 million in the first quarter of fiscal 2000 were
8.0% higher than prior year sales of $40.0 million. The increase
was primarily the result of new product introductions and increases
in microfiltration sales. Increased shipments of disposable water
filter cartridges and automotive transmission sump filters and fuel
filters also contributed to the sales growth.
Test
- ----
Net sales of $8.7 million increased 22.5% in fiscal 2000 over the
$7.1 million of net sales in fiscal 1999. The increase is primarily
due to additional revenue related to the General Motors contract to
design and build an electromagnetic compatibility (EMC) test
complex.
Communications
- --------------
Net sales of $10.5 million in fiscal 2000 were 118.8% higher than
the $4.8 million of sales recorded in fiscal 1999. The large
increase is the result of significantly higher shipments to
Wisconsin Public Service Corporation (WPS) and the Puerto Rico
Electric Power Authority (PREPA) to provide Automatic Meter Reading
(AMR) systems.
Other
- -----
Sales were $3.5 million in fiscal 2000 and $3.8 million in fiscal
1999. The sale of the Rantec microwave antenna business is still
being actively pursued.
ORDERS AND BACKLOG
Firm order backlog was $147.9 million at December 31, 1999,
compared with $142.9 million at September 30, 1999. Orders totaling
$70.9 million were received in the first quarter of fiscal 2000,
with the majority of the orders relating to Filtration / Fluid Flow
products.
GROSS PROFIT
The gross profit margin was 29.8% in the first quarter of fiscal
2000 and 26.0% in the first quarter of fiscal 1999 as reported.
The fiscal 1999 "adjusted" gross margin was 29.2%. The gross
margin increased compared to the reported 1999 results primarily
due to the lower margins related to the former defense
subsidiary, SEI. Gross profit margin increased compared to
"adjusted" 1999 due to changes in sales mix.
SELLING, GENERAL AND ADMINISTRTIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the first
quarter of fiscal 2000 were $13.7 million, or 20.9% of net sales,
compared with $17.2 million, or 19.5% of net sales. "Adjusted"
SG&A expense was $12.2 million, or 21.9% of net sales for the
same period a year ago. The percentage decrease from "adjusted"
1999 is the result of favorable sales leverage achieved on the
higher sales volume.
OPERATING PROFIT
Operating profit of $5.9 million for the first quarter of fiscal
2000 increased 3.5% from reported operating profit of $5.7
million for the first quarter of fiscal 1999. The prior year
operating profit amount included $1.7 million related to SEI.
Current year operating profit increased $1.9 million (47.5%) over
prior year "adjusted" operating profit of $4.1 million.
Filtration/Fluid Flow
- ---------------------
Operating profit was $3.4 million in both periods presented. The
current year was impacted by costs related to the consolidation of
the microfiltration business. In addition, the prior year period
was favorably impacted by the close out of several high profit
margin programs.
Test
- ----
Operating profit of $.7 million increased 40.0% in fiscal 2000 over
the $.5 million of operating profit in fiscal 1999. The increase is
primarily due to additional revenue related to the General Motors
contract.
Communications
- --------------
Operating profit of $2.3 million in fiscal 2000 was $2.0 million
(666%) higher than the $.3 million of operating profit in fiscal
1999. The large increase is the result of significantly higher
shipments to WPS and PREPA as described above.
Other
- -----
Operating loss was ($.5) million in fiscal 2000 and ($.2) million
in fiscal 1999, and primarily relates to the operations of the
Rantec microwave antenna business, which is being offered for sale.
INTEREST (INCOME) EXPENSE
Interest income was $.2 million versus interest expense of $1.7
million in the first quarter of fiscal 1999. The positive change
is due to the absence of debt in the current period. All
outstanding debt, excluding approximately $1 million of foreign
debt, was repaid in October 1999 with the proceeds from the sale
of SEI.
OTHER COSTS AND EXPENSES, NET
Other costs and expenses, net, were $1.6 million in both periods
presented. The current year amounts are comprised of amortization
expense of $.5 million and $.3 million related to goodwill and
patents, respectively. The balance relates to miscellaneous
costs.
GAIN ON THE SALE OF PROPERTY
The gain relates to the sale of the Riverhead, New York property,
used by the Company's former Hazeltine subsidiary. The property
was sold for $2.6 million, consisting of $.5 million in cash and
a $2.1 million interest-bearing, 18-month note receivable.
INCOME TAX EXPENSE
The effective income tax rate in the first quarter of fiscal
2000 was 24.3% compared to 35.0% in the first quarter of fiscal
1999. The current period effective tax rate was favorably
impacted by the $2.2 million gain on the sale of property, in
which the Company recognized zero tax expense. The deferred tax
asset related to the book versus tax basis in the property was
fully reserved in the deferred tax asset valuation allowance
existing at September 30, 1999.
Excluding the gain on the sale of property, the effective income
tax rate was 36.5%, and included a settlement related to certain
state tax liabilities. Management estimates the annual effective
tax rate, excluding the gain on the sale of property, for fiscal
2000 to be approximately 35%.
Financial Condition
- -------------------
Working capital decreased to $58.7 million at December 31, 1999
from $95.3 million at September 30, 1999. The decrease is
primarily due to the use of cash to repay all debt
outstanding at September 30, 1999, except for the $0.9 million
of foreign debt outstanding at December 31, 1999. During the
first three months of fiscal 2000, accounts receivable increased
by $3.4 million as a result of the timing of sales and
collections throughout the period. Costs and estimated earnings
on long-term contracts and inventories increased in the
aggregate by $4.9 million primarily due to increased production
requirements to satisfy additional sales expectations. Accounts
payable and accrued expenses decreased by $10.9 million due to
the timing of payments related to the September 30, 1999
divestiture of SEI.
Net cash used by operating activities was $10.1 million in the
first three months of fiscal 2000 compared to net cash used by
operating activities of $10.3 million in the same period of
fiscal 1999. The cash used by operating activities in fiscal
2000 was primarily impacted by divestiture related (SEI)
payments and the above mentioned inventory requirements.
Cash flow from operations and borrowings under the bank credit
facility are expected to provide adequate resources to meet the
Company's capital requirements and operational needs for the
foreseeable future.
During the quarter ended December 31, 1999, the Company
repurchased approximately 400,000 shares of ESCO common stock as
part of its ongoing open market repurchase program. Since
announcing the program in fiscal 1999, the Company has
repurchased approximately 600,000 shares of the 1.3 million
shares authorized under the current program.
Capital expenditures were $1.9 million in the first three months
of fiscal 2000 compared with $1.7 million in the comparable
period of fiscal 1999. Major expenditures in the current period
included manufacturing equipment used in the filtration / fluid
flow business.
The Year 2000 Issue
- -------------------
The Company did not experience any significant problems, nor any
operating inefficiencies, related to the Year 2000 issue.
Forward Looking Statements
- --------------------------
Statements in this report that are not strictly historical are
"forward looking" statements within the meaning of the safe
harbor provisions of the federal securities laws. Investors are
cautioned that such statements are only predictions, and speak
only as of the date of this report. Actual results may differ
materially due to risks and uncertainties which are described
in the Company's Form 10-K for fiscal year 1999 and on page 41 of
the 1999 Annual Report to Shareholders.
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.
Market risks relating to the Company's operations result
primarily from changes in interest rates and changes in foreign
currency exchange rates. Based on the current debt structure,
the exposure to interest rate risk is not material. The Company
is subject to foreign currency exchange rate risk relating to
receipts from customers and payments to suppliers in foreign
currencies. The Company hedges foreign currency commitments by
purchasing foreign currency forward contracts. The company does
not consider the market risk exposure relating to currency
exchange to be material.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In August 1994, a class action lawsuit was filed by Ronald and Angela
Aprea and other persons against Hazeltine Corporation ("Hazeltine") in
the Supreme Court of the State of New York, Suffolk County, alleging
personal injury and property damage caused by Hazeltine's purported
releases of hazardous materials at Hazeltine's facility at Greenlawn,
New York. In connection with the Company's sale of Hazeltine in 1996,
the Company indemnified Hazeltine against expenses and potential
liability related to this suit. The suit sought compensatory and punitive
damages, and an order enjoining Hazeltine from discharging further
hazardous materials and for Hazeltine to remediate all damage to the
property of the plaintiffs. It was the Company's position that no one
and no property was injured by any release of hazardous materials from
Hazeltine's facility. As of December 20, 1999, this suit was settled
and discontinued with prejudice. The settlement cost to the Company
was $45,000.
Item 4. Submission of Matters to a vote of Security Holders.
The Annual Meeting of the Company's shareholders was held on
Thursday, February 3, 2000. Voted on at the meeting was the
election of two directors. The voting for directors was as follows:
For Withheld
J. M. McConnell 11,057,229 136,120
D. C. Trauscht 11,057,825 135,524
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits. NONE
b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated October 13, 1999,
during the quarter ended December 31, 1999 which reported "Item 2.
Acquisition or Disposition of Assets" and "Item 7. Financial Statements
and Exhibits". Financial statements filed with the report were:
(1) Unaudited Pro Forma Consolidated Statements of Operations for the
fiscal year ended September 30, 1998.
(2) Unaudited Pro Forma Consolidated Statement of Operations for the
nine months ended June 30, 1999.
(3) Unaudited Pro Forma Consolidated Balance Sheet at June 30, 1999.
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/Gary E. Muenster
Gary E. Muenster
Vice President and
Corporate Controller
(As duly authorized officer
and principal accounting
officer of the registrant)
Dated: February 14, 2000
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<PERIOD-END> DEC-31-1999
<CASH> 11,732
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<PP&E> 111,084
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0
0
<COMMON> 131
<OTHER-SE> 250,518
<TOTAL-LIABILITY-AND-EQUITY> 308,973
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<INTEREST-EXPENSE> (151)
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<FN>
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LONG-TERM CONTRACTS.
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