<PAGE> 1
EXHIBIT 13
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
The following discussion should be read in conjunction with the
consolidated financial statements and notes thereto.
INTRODUCTION
ESCO Technologies Inc. (ESCO, the Company) operates principally in four
business segments: Filtration/Fluid Flow, Test, Communications and Other.
ESCO develops, manufactures and markets a broad range of filtration products
used in the separation, purification and processing of liquids and gases. The
Company's engineered filtration products utilize membrane, precision screen
and other technologies to protect critical processes and equipment from
contaminants. Major applications include semiconductor production processes,
blood collection, water purification, food and beverage processing, oil
production and removal of contaminants in fuel, lube and hydraulic systems.
ESCO is a leading supplier of radio frequency (RF) shielding and test
products. The rapid proliferation of electronics equipment, particularly
wireless communication products, has increased the need to shield critical
equipment from increasing levels of RF energy present in the atmosphere, and
to perform more stringent electromagnetic compatibility (EMC) testing of all
new electronic products. The Company's Communications segment provides a
well-proven communications system called TWACS(R) to the electric utility
industry. The TWACS(R) system is currently used primarily for automatic meter
reading (AMR), but also provides a ready conduit into the home for future
applications.
As part of Management's strategy to narrow the Company's product/market
focus, ESCO's last major defense business, Systems & Electronics Inc. was
sold on September 30, 1999 to Engineered Support Systems, Inc. (ESSI) for $85
million in cash, less working capital adjustments. In addition, the Company
sold the Rantec microwave antenna business in February 2000 for $2.1 million
in cash, plus contingent consideration based on its future operating results
over the next two years.
The ongoing business segments are comprised of the following operating
entities:
- Filtration/Fluid Flow: PTI Technologies Inc. (PTI) and Filtertek Inc.
(Filtertek),
- Test: EMC Test Systems, L.P. (ETS) and Lindgren RF Enclosures, Inc.
(Lindgren),
- Communications: Distribution Control Systems, Inc. (DCSI) and Comtrak
Technologies, L.L.C. (Comtrak),
- Other: Rantec Power Systems Inc. (Rantec),
- Systems & Electronics Inc. (SEI) is included as a divested business in
1999.
ESCO enters the new millennium with meaningful growth prospects in its
primary served markets, and a substantially lower risk profile with the
divestitures of the defense businesses. It is a more focused Company with
considerable financial flexibility.
Management is committed to delivering shareholder value through internal
growth, selective acquisitions and share repurchase when warranted.
HIGHLIGHTS OF 2000
Fiscal 2000 marked the beginning of "the new ESCO". Sales for the year
ended September 30, 2000 increased $56.9 million, or 23% to $300.2 million
over 1999 "adjusted" sales of $243.3 million mainly due to new product
introductions and contributions from the fiscal 2000 acquisitions. Fiscal
2000 acquisitions contributed $25.7 million to the sales growth in 2000,
while organic growth accounted for $31.2 million or 12.8%. Operating profit
increased to $30.1 million, or 10% of net sales in fiscal 2000.
Fiscal 2000's net earnings, as reported, were $1.33 per share. In 2000,
the Company sold properties in Riverhead, NY and Calabasas, CA, thereby,
converting into cash properties retained after divestitures. Excluding the
gains on the sales of these properties, fiscal 2000 net earnings from
operations were $1.11 per share compared to 1999 "adjusted" net earnings of
$0.61 per share.
The Company successfully completed three acquisitions during 2000 which
were accretive to current year earnings, including Lindgren, Holaday
Industries, Inc. (Holaday), and the Eaton Space Products business located in
El Segundo, CA (Eaton). The Lindgren and Holaday operating results are
included within the Test segment and the Eaton results are included within
the Filtration/Fluid Flow segment.
12
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS
RECAP OF 1999 STRATEGIC ACTIONS
RECONCILIATION OF ADJUSTED NET INCOME - 1999
In conjunction with the divestiture of SEI, the Company took a number
of actions at September 30, 1999 to further sharpen its focus on its
primary served markets, including actively pursuing the sale of its Rantec
microwave antenna business, which was sold in February 2000. Other actions
included abandoning the active pursuit of certain business areas, exiting
non-core, underperforming businesses, and restructuring the corporate
overhead of the Company. Specifically, the Company planned to discontinue
its investment in High Pressure Air Reducing Quiet Manifolds for surface
ships (Filtration/Fluid Flow segment) as well as its Vehicle Location
Systems (Communications segment), and reduce ongoing operating costs.
The following table is not intended to present 1999 net earnings as
defined within generally accepted accounting principles (GAAP), and is
presented for informational purposes only.
The table provides a reconciliation between the 1999 reported results
of operations 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. The estimated adjusted
net earnings may not be indicative of future performance.
<TABLE>
<CAPTION>
1999 Elimination Adjusting 1999
(Dollars in millions, rounded) As Reported of SEI(a) Items As Adjusted
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 416.1 172.8 -- $ 243.3
------- ------- ------- -------
Cost of sales 317.7 139.6 (2.0)(b) 176.1
Other charges related to cost of sales 3.9 -- (3.9)(c) --
SG&A expenses 74.4 21.6 .8(d) 53.6
Interest expense (income) 6.5 .6 (8.2)(e) (2.3)
Other, net 4.9 .3 (.3)(c) 4.3
Restructuring charges 5.1 -- (5.1)(c) --
Gain on sale of SEI (59.9) -- 59.9(c) --
------- ------- ------- -------
Total costs and expenses 352.6 162.1 41.2 231.7
------- ------- ------- -------
Earnings before tax 63.5 10.7 (41.2) 11.6
Income tax expense 13.0 3.7 (5.4)(f) 3.9
------- ------- ------- -------
Net earnings before accounting change 50.5 7.0 (35.8) 7.7
------- ------- ------- -------
Cumulative effect of accounting change,
net of tax (25.0) -- 25.0(c) --
------- ------- ------- -------
Net earnings $ 25.5 7.0 (10.8) $ 7.7
======= ======= ======= =======
Diluted EPS $ 2.02 $ .61
==============================================================================================================
</TABLE>
(a) Represents the operations of SEI which were included in the 1999 GAAP
reported results of operations.
(b) Represents the 1999 operating results of Rantec's microwave antenna
business which was being offered for sale and was sold in February 2000.
Fiscal 1999 net sales included $4.9 million related to Rantec's microwave
antenna business.
(c) Represents the elimination of the nonrecurring items: includes the gain
related to the divestiture of SEI, other charges related to the strategic
initiatives described on the following page, and the accounting change
(SOP 98-5) adopted in the 1999 first quarter.
(d) Represents the net amount of the remaining corporate office operating
expenses after the divestiture of SEI. This amount reflects a $4.2 million
cost reduction from the $5 million amount recorded in 1999 and previously
absorbed by the operations of SEI.
(e) Represents the estimated net interest impact of the SEI transaction
proceeds and the cash impact of the other cost saving actions noted above,
assuming that they occurred at the beginning of the period. The amount
noted assumes all outstanding debt was repaid and the excess cash proceeds
were invested with a 6% yield.
(f) Represents the amount necessary to reflect the adjusted effective tax rate
at 33%, which represents the Company's estimated 1999 effective tax rate
excluding the nonrecurring items.
13
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OTHER CHARGES RELATED TO COST OF SALES, RESTRUCTURING CHARGES AND GAIN ON
SALE OF SEI - 1999
During the fourth quarter of fiscal 1999, the Company implemented a
major portion of its strategic operating plan. Its previously communicated
strategy was to transform the Company from a primarily defense-oriented
business to a supplier of engineered products used in industrial and
commercial applications. As a result of implementing Management's
strategic actions, the Company recognized certain nonrecurring items in
the 1999 fourth quarter results of operations.
These defined actions in 1999 resulted in $3.9 million of other charges
related to cost of sales and $5.1 million of restructuring charges. In
addition, the Company recorded a gain on the sale of SEI of $59.9 million.
The 1999 other charges related to cost of sales represent the write-off
of inventory related to the abandonment of High Pressure Air Reducing
Quiet Manifolds for surface ships ($2.2 million) and the Vehicle Location
Systems ($.6 million) business. Additionally, the Company wrote down the
Rantec microwave antenna product line inventory ($1.1 million) to net
realizable value as a result of that business area being offered for sale.
This business was sold in February 2000.
The 1999 restructuring charges are comprised of the following: costs
related to exiting the microwave antenna business area ($1.1 million); a
write-off of the license agreement ($1.8 million) related to the
abandonment of the Vehicle Location System business; and certain personnel
separation costs ($2.2 million).
The gain on the sale of SEI of $59.9 million is calculated as: the
gross proceeds of $85 million; less SEI's net book value of $30.6 million;
less working capital adjustments of $4.0 million; less transaction related
expenses of $4.9 million; plus the $14.4 million curtailment gain related
to pension and retiree medical liabilities transferred to the buyer.
The other charges related to cost of sales noted above are included in
the calculation of 1999 gross profit discussed below.
RESULTS OF OPERATIONS
NET SALES
Net sales of $300.2 million in 2000 decreased $115.9 million (28%) from
reported net sales of $416.1 million in 1999 due to the divestiture of
SEI. The prior year amount included SEI sales of $172.8 million. Excluding
SEI from the prior year amounts, 2000 net sales increased $56.9 million
(23%) over 1999 "adjusted" net sales of $243.3 million. Filtration/Fluid
Flow, Test and Communications all had increased sales volume in 2000.
Current year acquisitions contributed $25.7 million (10.6%) to the sales
growth in 2000, while organic growth accounted for $31.2 million (12.8%).
Net sales of $416.1 million in 1999 increased $51 million (14%) from
net sales of $365.1 million in 1998, primarily due to an increase in sales
at SEI, which was divested on September 30, 1999.
FILTRATION/FLUID FLOW
Net sales of $181.7 million in 2000 were $12.8 million (7.6%) higher
than net sales of $168.9 million in 1999. The increase was primarily the
result of new product introductions and increases in microfiltration
sales. Increased shipments of disposable water filter cartridges also
contributed to the sales growth. The Company's microfiltration businesses
contributed approximately $4.7 million of additional sales in 2000,
primarily due to increased shipments to the semiconductor market. The
current year acquisition of Eaton contributed approximately $3.4 million
to the increase in sales.
Net sales of $168.9 million in 1999 increased $10.6 million (6.7%) from
net sales of $158.3 million in 1998, primarily due to new product
introductions and increases in microfiltration sales.
TEST
Net sales of $63.0 million in 2000 were $28.1 million (80.5%) higher
than net sales of $34.9 million in 1999. The 1999 sales increased $4.3
million over the $30.6 million in sales recorded in 1998. The increase in
2000 over 1999 is primarily due to the current year acquisitions, which
contributed $22.1 million. The remaining increase in 2000 over 1999, as
well as the 1999 increase over 1998 primarily is the result of additional
EMC test chamber business at ETS. Sales were significantly impacted by
additional revenue relating to the $21 million contract
14
<PAGE> 4
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
awarded in 1999 by General Motors to design and build an EMC test complex
in Milford, Michigan. The General Motors contract contributed
approximately $13.2 million and $3.1 million to sales in 2000 and 1999,
respectively. This contract is expected to be completed in 2001.
COMMUNICATIONS
Net sales of $42.7 million in 2000 were $16.9 million (65.5%) higher
than net sales of $25.8 million in 1999. The 1999 sales increased $6.7
million over the $19.1 million in sales recorded in 1998. The increase in
2000 over 1999, as well as the 1999 increase over 1998, primarily is the
result of increased shipments to the Puerto Rico Electric Power Authority
(PREPA), Wisconsin Public Service Corporation (WPS) and various electric
utility Cooperatives (Coops). The current contract with PREPA to provide
Automatic Meter Reading (AMR) systems using proprietary power line
communications technology is valued at more than $50 million over a
three-year period ending in 2001. The Company is anticipating a
significant follow-on order to this contract.
OTHER
Sales were $12.8 million, $13.7 million and $22.1 million in 2000, 1999
and 1998, respectively. The decrease in sales in 2000 versus 1999, as well
as 1999 versus 1998, is due to the decrease in sales of the Rantec
microwave antenna business, which was sold in February 2000. Sales for
Rantec Power Systems represented approximately $10.7 million in 2000 and
$10.2 million in 1999.
ORDERS AND BACKLOG
Firm order backlog was $145.4 million at September 30, 2000, compared
to $142.9 million at September 30, 1999. Orders totaling $288.7 million
were received in 2000, compared with $247.5 million in 1999. The majority
of the orders in 2000 related to Filtration/Fluid Flow products. In
addition, fiscal 2000 acquisitions contributed approximately $21.0 million
in backlog. The February 2000 sale of the Rantec microwave business
resulted in a decrease in backlog of $6.3 million.
GROSS PROFIT
The Company computes gross profit as: net sales, less cost of sales,
less other charges related to cost of sales. The gross profit margin is
the gross profit divided into net sales, expressed as a percentage.
The gross profit margin was 30.6%, 22.7% and 26.1% in 2000, 1999 and
1998, respectively. The "adjusted" gross profit margin for fiscal 1999 was
27.6%. The increase in 2000 compared to the reported 1999 results is due
primarily to the lower margins in 1999 related to the defense businesses.
Gross profit margin increased in 2000 compared to "adjusted" 1999 results
due to operational improvements in all four operating segments, including
favorable changes in sales mix and product pricing as well as successful
cost containment programs.
The decrease in reported 1999 gross profit margin versus 1998 is
primarily the result of operating inefficiencies experienced at Rantec.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) for 2000 were $61.8
million, or 20.6% of net sales, compared with $74.4 million, or 17.9% of
net sales, for 1999. "Adjusted" SG&A expenses were $53.6 million, or 22.0%
of net sales in 1999. The 2000 SG&A expenses included $ 4.9 million of
additional expenses related to the current year acquisitions. The
percentage decrease from "adjusted" 1999 SG&A expenses is the result of
favorable leverage achieved on the higher sales volume.
SG&A expenses in 1999 were $74.4 million, or 17.9% of net sales,
compared with $68.3 million, or 18.7% of net sales, for 1998. The 1999
SG&A expenses included $3.2 million of additional expenses related to
acquisitions in 1998 and are included in 1999 for the entire year versus a
partial year in 1998. The percentage decrease in 1999 is the result of
higher sales throughout the Company available to cover certain fixed
costs.
OPERATING PROFIT
In accordance with Statement of Financial Accounting Standards (SFAS)
No. 131 "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131), the Company defines operating profit as net
sales, less cost of sales, less other charges related to cost of sales,
less SG&A expenses and less restructuring charges. Operating profit, as
defined by the Company, excludes certain costs which are included in Other
costs and expenses, net, in the consolidated statements of operations, and
which would be included in the determination
15
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
of operating income as defined within generally accepted accounting
principles. These items are discussed in the respective segment
information below.
Operating profit of $30.1 million (10% of net sales) in 2000 increased
$15.2 million (102%) from $14.9 million in 1999. The prior year operating
profit amount included $10.4 million related to SEI. Current year
operating profit increased $16.5 million over prior year "adjusted"
operating profit of $13.6 million. In 2000, all operating segments
experienced improvements in operating profit, in both dollar amount and as
a percentage of net sales.
Operating profit of $14.9 million in 1999 decreased $12.0 million from
operating profit of $26.9 million in 1998 primarily due to the 1999
special charges, including $3.9 million of other charges related to cost
of sales, and the $5.1 million of restructuring charges.
FILTRATION/FLUID FLOW
Operating profit of $16.6 million (9.1% of net sales) in 2000 was $4.7
million (39.5%) higher than operating profit of $11.9 million (7.0% of net
sales) in 1999. The increase was primarily the result of new product
introductions and increases in microfiltration profitability. Increased
shipments of disposable water filter cartridges also contributed to the
growth in profitability.
Operating profit of $11.9 million in 1999 was $1.4 million (13.3%)
higher than operating profit of $10.5 million in 1998. The 1999
Filtration/Fluid Flow amounts include the $2.2 million of nonrecurring
charges related to the abandonment of the surface ship manifolds. The
recurring increase in profitability was primarily the result of new
product introductions and increases in microfiltration profitability.
Aerospace and industrial products experienced a slight decline during 1999
due to weaker demand in these markets.
Included in Other costs and expenses, net, in 2000 are approximately
$2.0 million of net costs related to the Filtration/Fluid Flow segment as
a result of the following: the consolidation of PTI's filtration
businesses into new facilities in Oxnard, California; expenses related to
the planned upgrade of production equipment to improve manufacturing
efficiency at Filtertek; and costs related to the 1998 acquisition of AMT.
TEST
Operating profit of $6.9 million (11.0% of net sales) in 2000 was $2.9
million (72.5%) higher than operating profit of $4.0 million (11.5% of net
sales) in 1999. The 1999 operating profit increased $1.1 million (37.9%)
over the $2.9 million of operating profit recorded in 1998. The increase
in 2000 over 1999, as well as the 1999 increase over 1998, primarily was
the result of contributions from the General Motors contract. Fiscal 2000
was also favorably impacted by the current year acquisitions of Lindgren
and Holaday.
Included in Other costs and expenses, net, in 2000, is approximately $1
million of costs primarily related to the write-off of an investment in a
third party EMC related start-up company which filed bankruptcy in 2000.
COMMUNICATIONS
Operating profit of $8.9 million (20.8% of net sales) in 2000 was $9.3
million higher than operating profit of $(0.4) million in 1999. The
significant increase in operating profit in 2000 is the result of
significantly higher shipments of AMR equipment at DCSI. The 1999
operating profit decreased $0.8 million from the $0.4 million in operating
profit recorded in 1998, primarily due to certain nonrecurring charges at
Comtrak recorded in 1999 as mentioned earlier.
OTHER
Operating profit was ($0.3) million, ($8.8) million and $1.9 million in
2000, 1999 and 1998, respectively. The change in operating profit in 2000
as compared to 1999 is mainly related to the improved operations of
Rantec. The decrease in 1999 is the result of the nonrecurring charges
related to Rantec's microwave antenna business prior to its sale, and
significant cost growth on certain development programs at Rantec Power
Systems.
INTEREST EXPENSE
Interest expense decreased to $0.4 million in 2000 from $6.5 million in
1999, primarily as a result of lower outstanding average borrowings
throughout 2000. All outstanding debt from fiscal 1999 was repaid in
October 1999 from the proceeds of the sale of SEI, except for the $1
million of foreign debt.
16
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
Interest expense decreased to $6.5 million in 1999 from $7.7 million in
1998, primarily as a result of lower outstanding average borrowings
throughout 1999. The timing of operating cash flows throughout 1999 also
decreased the average outstanding borrowings.
OTHER COSTS AND EXPENSES, NET
Other costs and expenses, net, were $5.0 million compared to $4.9
million in 1999. The 2000 net amount consists of the following items (in
millions):
<TABLE>
<S> <C>
Filtration/Fluid Flow segment costs, described above $ 2.0
Test segment costs, described above 1.0
Amortization of intangible assets, including goodwill 3.9
Other miscellaneous costs 1.1
------
Total other expenses 8.0
------
Less: Gain on sale of Riverhead, NY property (2.2)
Less: Gain on sale of Calabasas, CA property (0.8)
------
Total other income (3.0)
----
Other costs and expenses, net, as reported $ 5.0
------
</TABLE>
Other costs and expenses, net, increased in 1999 to $4.9 million from
$2.9 million in 1998, primarily due to the $1.6 million PTI lease
surrender payment recorded as income in 1998. The remainder of other costs
and expenses, net, increased in 1999 due to additional goodwill
amortization related to the 1998 acquisitions.
INCOME TAX EXPENSE
Income tax expense of $7.9 million for 2000 reflects current tax
expense of $0.3 million, deferred tax expense of $6.3 million, and
foreign, state and local tax expense of $1.4 million. Income tax expense
of $13.0 million for 1999 reflects deferred tax expense of $11.6 million
and foreign, state and local tax expense of $1.4 million. Income tax
expense of $5.1 million for 1998 reflects deferred tax expense of $6.1
million and foreign, state and local tax benefits of ($1.0) million.
Based on the Company's historical pretax income, together with the
projection of future taxable income, Management believes it is more likely
than not that the Company will realize the benefits of the net deferred
tax asset existing at September 30, 2000. In order to realize the
aforementioned net deferred tax asset before valuation allowance, the
Company will need to generate future taxable income of approximately $189
million, of which $138 million is required to be realized prior to the
expiration of the net operating loss (NOL) carryforward, of which $20
million will expire in 2006; $6 million will expire in 2007; $23 million
will expire in 2009; $38 million will expire in 2010; $4 million will
expire in 2011; $7 million will expire in 2018; and $40 million will
expire in 2019. The net operating loss carryforward may be used to reduce
future income tax cash payments.
In 2000, as a result of the sale of the Rantec property in Calabasas,
California, as well as a result of certain residual tax effects related to
the sale of SEI in 1999, the Company utilized approximately $9 million of
the remaining $42 million capital loss carryforward available from the
sale of its Hazeltine subsidiary in 1996. At September 30, 2000, the
Company had a capital loss carryforward for tax purposes of approximately
$33 million. This capital loss carryforward may be used as a reduction of
future capital gains recognized by the Company, at which time the Company
may realize additional tax benefits. Any unused capital loss carryforward
will expire in 2001.
The Company's deferred tax valuation allowance of $28.4 million at
September 30, 2000, was comprised of $16.9 million, which represents
Management's best estimate of the portion of the deferred tax asset
associated with temporary differences and NOLs which may not be realized
due to limitations on future use, and a full valuation reserve in the
amount of $11.5 million for the portion of the deferred tax asset
represented by the capital loss carryforward.
The effective tax rate in 2000 was 32.0% compared with 20.5% in 1999.
The 2000 effective tax rate was favorably impacted by the decrease in the
deferred tax valuation allowance resulting from the 1999 sale of SEI, as
well as the 2000 sales of the Riverhead, New York and Calabasas,
California properties. An analysis of the effective tax rates for 2000,
1999 and 1998 is included in the notes to consolidated financial
statements.
17
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
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MANAGEMENT'S DISCUSSION AND ANALYSIS
CHANGE IN ACCOUNTING PRINCIPLE - 1999
The Company adopted the provisions of Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities" in the first quarter of
fiscal 1999 which resulted in a non-cash, after-tax charge of
approximately $25 million, which was recognized as a cumulative effect of
an accounting change.
The after-tax charge related to precontract, start-up and organization
costs incurred in anticipation of specific future contract awards which
were based on specific customer identified requirements. The after-tax
charge is comprised of the following programs: the Tunner 60K aircraft
cargo loader at SEI ($17.2 million), the Automatic Vehicle Location System
at Comtrak ($2 million), the advanced video surveillance system
(Securvision(R)) at Comtrak ($2 million), the Seawolf (U.S. Navy attack
submarine) valve and manifold ship set program at VACCO Industries ($1.9
million), and other minor programs which aggregated to $1.9 million.
CAPITAL RESOURCES & LIQUIDITY
Working capital decreased to $55.7 million at September 30, 2000 from
$95.3 million at September 30, 1999. The decrease is primarily due to the
use of cash to repay all of the debt outstanding at September 30, 1999,
except for the foreign debt of approximately $1 million. Accounts
receivable increased $20.3 million mainly due to the recent acquisitions
which contributed approximately $9.4 million. Additionally, accounts
receivable increased $7.0 million in the Company's Communications segment
resulting from the increase and timing of sales to PREPA. Inventory
increased approximately $4.9 million, net, mainly due to recent
acquisitions which contributed approximately $6.4 million.
Net cash provided by operating activities was $20.0 million in 2000
compared to $25.9 million in 1999. Net cash provided by operating
activities in fiscal 2000 increased $5.4 million from the 1999 adjusted
amount of $14.6 million, which excludes $11.3 million related to SEI. The
increase in 2000 is primarily due to the Company's ongoing asset
management initiatives.
Net cash provided by operating activities increased in 1999 to $25.9
million from $20.3 million in 1998. The increase in 1999 was driven by the
improvement in cash flow from working capital, primarily the lower
investment in inventory.
Capital expenditures of $10.4 million, $8.3 million and $12.9 million,
in 2000, 1999 and 1998, respectively, primarily included manufacturing
equipment. Capital expenditures related to SEI were $1.1 million and $1.5
million in 1999 and 1998, respectively. There were no commitments
outstanding that were considered material for capital expenditures at
September 30, 2000.
At September 30, 2000, the Company had available a net operating loss
(NOL) carryforward for tax purposes of approximately $138 million. This
NOL will expire beginning in year 2006 and ending in year 2019, and will
be used to reduce future Federal income tax cash payments.
ACQUISITIONS/DIVESTITURES
On June 2, 2000, the Company purchased Holaday Industries, Inc.
("Holaday") for approximately $4 million in cash. Holaday is a leading
supplier of specialty measurement probes to the EMC test, health and
safety, and microwave markets. The business, headquartered in Eden
Prairie, Minnesota, has annual sales of approximately $5.5 million. The
operating results for Holaday, since the date of acquisition, are included
within the Company's Test segment. The goodwill recorded as a result of
the transaction is being amortized over 20 years.
On April 9, 2000, the Company acquired all of the outstanding common
stock of The Curran Company (doing business as Lindgren RF Enclosures,
Inc.) and Lindgren, Inc. (doing business through its subsidiary, Rayproof
Ltd.) (collectively "Lindgren") for approximately $22 million in cash plus
additional consideration based upon the future performance of Lindgren.
Lindgren has annual sales in excess of $40 million and is a leading
supplier of radio frequency (RF) shielding products and components used by
manufacturers of medical equipment, communications systems and electronic
products. Lindgren is headquartered near Chicago, Illinois and operates
facilities in Wisconsin, Florida, and the United Kingdom. The operating
results for Lindgren, since the date of acquisition, are included within
the Company's Test segment. The goodwill recorded as a result of the
transaction is being amortized over 20 years.
18
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ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
On March 31, 2000, the Company acquired the Eaton Space Products
business located in El Segundo, CA (Eaton), for approximately $6 million
in cash. Eaton manufactures specialty valves and other fluid flow
components for satellite launch vehicles and aircraft applications. With
annual sales of approximately $7 million, this business has been
integrated into the Company's Filtration/Fluid Flow segment. The goodwill
recorded as a result of the transaction is being amortized over 20 years.
In February 2000, the Company completed the sale of its microwave
antenna product line, which had historically operated as part of Rantec
Microwave & Electronics, Inc. The operating results for this business,
prior to the divestiture, have been included within the Company's Other
segment. The Company transferred the contract order backlog and operating
assets of the microwave antenna business for $2.1 million in cash, plus
contingent consideration based on their future operating results over the
next two years. In addition, in September 2000, the Company sold the land
and buildings in Calabasas, CA related to this business for approximately
$6 million.
In December 1999, the Company sold the Riverhead, NY property, used by
the Company's former Hazeltine subsidiary. The property was sold for $2.6
million, consisting of $0.5 million in cash and a $2.1 million
interest-bearing, note receivable due in June 2001.
On September 30, 1999, the Company sold SEI to Engineered Support
Systems, Inc. (ESSI) for $85 million in cash, less working capital
adjustments.
On July 1, 1998, the Company completed the acquisition of Advanced
Membrane Technology, Inc. (AMT) headquartered in San Diego, California.
The transaction involved the purchase of AMT common stock for
approximately $7 million in cash plus approximately 450,000 shares of ESCO
common stock valued at $8.6 million. The goodwill recorded as a result of
the transaction is being amortized over 20 years.
BANK CREDIT FACILITY
On April 11, 2000, the Company entered into a new $75 million revolving
credit facility replacing its previous $40 million credit facility. The
Company has the option to increase the credit facility to $100 million
through April 11, 2002. The revolving credit facility is available for
direct borrowings and/or the issuance of letters of credit. The maturity
of the new bank credit facility is April 11, 2005. The new credit facility
is provided by a group of five banks, led by Bank of America. At September
30, 2000, the Company had approximately $63 million available to borrow
under the credit facility as well as $5.6 million of cash on hand.
The new credit facility requires, as determined by certain financial
ratios, a commitment fee ranging from 20-30 basis points per annum on the
unused portion. The terms of the facility provide that interest on
borrowings may be calculated at a spread over the London Interbank Offered
Rate (LIBOR) or based on the prime rate, at the Company's election.
Substantially all of the assets of the Company are pledged under the
credit facility. The financial covenants of the credit facility include
limitations on leverage and minimum consolidated EBITDA.
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.
SHARE REPURCHASE
In 1996, the Company authorized an open market share repurchase program
for up to two million shares of common stock over a period ended September
30, 1998. Approximately 180,000 shares were repurchased throughout that
two-year period. During 1999, the Company authorized an additional open
market repurchase program of up to 1.3 million shares, which was subject
to market conditions and other factors and covered the period ended
September 29, 2000. Approximately 516,000 and 177,000 shares were
repurchased in 2000 and 1999, respectively. In June 2000, the Company
initiated an odd lot share repurchase program which extended through
September 2000 whereby the Company repurchased approximately 25,000
shares.
19
<PAGE> 9
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OTHER
Management believes that, for the periods presented, inflation has not
had a material effect on the Company's results of operations.
The Company is currently involved in various stages of investigation,
remediation and litigation relating to environmental matters. Based on
current information available, Management does not believe the aggregate
costs involved in the resolution of these matters will have a material
adverse effect on the Company's operating results, capital expenditures or
competitive position.
MARKET RISK ANALYSIS
MARKET RISK EXPOSURE
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 holdings of fixed-rate notes, 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 some foreign currency commitments by
purchasing foreign currency forward contracts.
20
<PAGE> 10
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands, except per share amounts) 2000 1999 1998
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $300,157 416,102 365,083
Costs and expenses:
Cost of sales 208,263 317,681 267,332
Other charges related to cost of sales -- 3,927 2,500
Selling, general and administrative expenses 61,819 74,429 68,326
Interest expense 359 6,460 7,703
Other, net 4,980 4,871 2,875
Restructuring charges -- 5,145 --
Gain on sale of SEI -- (59,867) --
-------- ------- -------
Total costs and expenses 275,421 352,646 348,736
-------- ------- -------
Earnings before income tax 24,736 63,456 16,347
Income tax expense 7,917 13,001 5,051
-------- ------- -------
Net earnings before accounting change 16,819 50,455 11,296
Cumulative effect of accounting change, net of tax -- (25,009) --
-------- ------- -------
Net earnings $ 16,819 25,446 11,296
================================================================================================================
Earnings per share:
Net earnings before accounting change:
Basic $ 1.37 4.09 .94
Diluted 1.33 4.00 .90
======== ======= =======
Net earnings:
Basic $ 1.37 2.06 .94
Diluted 1.33 2.02 .90
======== ======= =======
Average common shares outstanding (in thousands):
Basic 12,307 12,332 12,015
Diluted 12,668 12,614 12,550
================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 11
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of September 30,
(Dollars in thousands) 2000 1999
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,620 87,709
Accounts receivable, less allowance for doubtful accounts of $1,309
and $574 in 2000 and 1999, respectively 58,982 38,669
Costs and estimated earnings on long-term contracts, less progress
billings of $15,139 and $11,778 in 2000 and 1999, respectively 6,141 4,019
Inventories 44,457 39,590
Other current assets 3,009 3,559
-------- -------
Total current assets 118,209 173,546
-------- -------
PROPERTY, PLANT AND EQUIPMENT:
Land and land improvements 2,545 10,582
Buildings and leasehold improvements 27,477 29,007
Machinery and equipment 65,564 65,988
Construction in progress 3,821 4,186
-------- -------
99,407 109,763
Less accumulated depreciation and amortization 36,844 38,445
-------- -------
Net property, plant and equipment 62,563 71,318
Excess of cost over net assets of purchased businesses, less accumulated
amortization of $9,245 and $6,631 in 2000 and 1999, respectively 90,997 68,950
Deferred tax assets 37,903 44,783
Other assets 21,461 19,788
-------- -------
$331,133 378,385
==================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 12
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of September 30,
(Dollars in thousands) 2000 1999
------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings and current maturities of long-term debt $ 4,136 20,598
Accounts payable 31,206 26,339
Advance payments on long-term contracts, less costs incurred
of $3,364 and $479 in 2000 and 1999, respectively 2,903 682
Accrued expenses 24,246 30,598
--------- --------
Total current liabilities 62,491 78,217
--------- --------
Other liabilities 8,610 9,583
Long-term debt 610 41,896
--------- --------
Total liabilities 71,711 129,696
--------- --------
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
13,224,834 and 12,782,663 shares in 2000 and 1999, respectively 132 128
Additional paid-in capital 205,514 201,719
Retained earnings since elimination of deficit at September 30, 1993 69,542 52,723
Accumulated other comprehensive loss (4,766) (1,870)
--------- --------
270,422 252,700
Less treasury stock, at cost (956,527 and 404,625 common shares in 2000
and 1999, respectively) (11,000) (4,011)
--------- --------
Total shareholders' equity 259,422 248,689
--------- --------
$ 331,133 378,385
==============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 13
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other
Years ended September 30, ------------------ Paid-in Retained Comprehensive Treasury
(in thousands) Shares Amount Capital Earnings Income (Loss) Stock Total
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1997 12,478 $125 194,663 15,981 15 (5,821) 204,963
-------
Comprehensive income:
Net earnings -- -- -- 11,296 -- -- 11,296
Translation adjustments -- -- -- -- 324 -- 324
Minimum pension liability, net -- -- -- -- (2,079) -- (2,079)
-------
Comprehensive income -- -- -- -- -- -- 9,541
-------
Stock options and stock compen-
sation plans 164 1 1,137 -- -- 405 1,543
Acquisitions of business -- -- 5,113 -- -- 3,496 8,609
Purchases into treasury -- -- -- -- -- (577) (577)
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1998 12,642 126 200,913 27,277 (1,740) (2,497) 224,079
-------
Comprehensive income:
Net earnings -- -- -- 25,446 -- -- 25,446
Translation adjustments -- -- -- -- (2,390) -- (2,390)
Minimum pension liability, net -- -- -- -- 2,260 -- 2,260
-------
Comprehensive income -- -- -- -- -- -- 25,316
-------
Stock options and stock compen-
sation plans 141 2 806 -- -- 48 856
Purchases into treasury -- -- -- -- -- (1,562) (1,562)
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1999 12,783 128 201,719 52,723 (1,870) (4,011) 248,689
-------
Comprehensive income:
Net earnings -- -- -- 16,819 -- -- 16,819
Translation adjustments -- -- -- -- (2,896) -- (2,896)
-------
Comprehensive income -- -- -- -- -- -- 13,923
-------
Stock options and stock compen-
sation plans 442 4 3,795 -- -- 59 3,858
Purchases into treasury -- -- -- -- -- (7,048) (7,048)
------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 20003 13,225 $132 205,514 69,542 (4,766) (11,000) 259,422
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
24
<PAGE> 14
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Years ended September 30,
(Dollars in thousands) 2000 1999 1998
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 16,819 25,446 11,296
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 14,185 17,021 17,460
Changes in operating working capital (20,532) 11,271 (8,594)
Write-off of assets related to accounting change, net of tax -- 25,009 --
Gain on sale of SEI -- (59,867) --
Effect of deferred taxes on tax provision 6,270 11,560 6,121
Other 3,259 (4,550) (5,971)
-------- ------- -------
Net cash provided by operating activities 20,001 25,890 20,312
-------- ------- -------
Cash flows from investing activities:
Capital expenditures (10,363) (8,291) (12,896)
(Acquisition) divestiture of businesses (29,996) 85,000 (11,323)
-------- ------- -------
Net cash (used) provided by investing activities (40,359) 76,709 (24,219)
-------- ------- -------
Cash flows from financing activities:
Proceeds from long-term debt 80 96 7,000
Principal payments on long-term debt (49,322) (8,297) (7,504)
Net (decrease) increase in short-term borrowings (8,506) (9,494) 3,476
Purchases of common stock into treasury (6,215) (1,562) (695)
Other, including exercise of stock options 2,232 126 53
-------- ------- -------
Net cash (used) provided by financing activities (61,731) (19,131) 2,330
-------- ------- -------
Net (decrease) increase in cash and cash equivalents (82,089) 83,468 (1,577)
Cash and cash equivalents at beginning of year 87,709 4,241 5,818
-------- ------- -------
Cash and cash equivalents at end of year $ 5,620 87,709 4,241
=======================================================================================================================
Changes in operating working capital:
Accounts receivable, net $(10,907) 5,150 (1,745)
Costs and estimated earnings on long-term contracts, net (2,122) 12,891 7,358
Inventories 1,553 (9,230) (17,737)
Other current assets 859 (1,402) 143
Accounts payable (704) 734 245
Advance payments on long-term contracts, net 2,221 (6,821) 5,094
Accrued expenses (11,432) 9,949 (1,952)
-------- ------- -------
$(20,532) 11,271 (8,594)
=======================================================================================================================
Supplemental cash flow information:
Interest paid $ 867 6,579 7,521
Income taxes paid 1,132 254 353
=======================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
25
<PAGE> 15
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) PRINCIPLES OF CONSOLIDATION
Effective July 10, 2000, the Company changed its name from ESCO
Electronics Corporation to ESCO Technologies Inc.
The consolidated financial statements include the accounts of ESCO
Technologies Inc. (ESCO) and its wholly owned subsidiaries (the Company). All
significant intercompany transactions and accounts have been eliminated in
consolidation. Certain prior year amounts have been reclassified to conform
with the 2000 presentation.
(b) BASIS OF PRESENTATION
Effective September 30, 1990, Emerson Electric Co. (Emerson) transferred
the stock of certain of its subsidiaries, primarily related to its government
and defense business, to ESCO and distributed all of the issued and
outstanding ESCO common stock to Emerson shareholders (the spin-off).
Effective September 30, 1993, the Company implemented an accounting
readjustment in accordance with the accounting provisions applicable to a
"quasi-reorganization" which restated assets and liabilities to fair values
and eliminated the deficit in retained earnings.
Fair values of the Company's financial instruments are estimated by
reference to quoted prices from market sources and financial institutions, as
well as other valuation techniques. The estimated fair value of each class of
financial instruments approximated the related carrying value at September
30, 2000 and 1999.
(c) NATURE OF OPERATIONS
The Company is a leading supplier of engineered filtration products to the
process, health care and transportation markets worldwide. The Company's
filtration products include depth filters, membrane based microfiltration
products and precision screen filters. A steady stream of new products and
selective acquisitions are the key growth drivers in ESCO's filtration
business, which contributes approximately 60% of the Company's total sales.
The balance of the Company's sales is derived primarily from radio
frequency (RF) shielding and EMC test products and special purpose
communication systems, where the Company is well-positioned in niche markets
based on proprietary products.
The Company operates in four principal industry segments: Filtration/Fluid
Flow, Test, Communications and Other.
(d) USE OF ESTIMATES AND BUSINESS RISKS
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions, including estimates of
anticipated contract costs and revenues utilized in the earnings process,
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(e) REVENUE RECOGNITION
Revenue is recognized on commercial sales when products are shipped or
when services are performed. Revenue on production contracts is recorded when
specific contract terms are fulfilled, usually by delivery or acceptance (the
units of production or delivery methods). Revenues from cost reimbursement
contracts are recorded as costs are incurred, plus fees earned. Revenue under
long-term contracts for which units of production or delivery are
inappropriate measures of performance is recognized on the
percentage-of-completion method based upon incurred costs compared to total
estimated costs under the contract, or are based upon equivalent units
produced. Revenue under engineering contracts is generally recognized as
milestones are attained.
(f) CASH AND CASH EQUIVALENTS
Cash equivalents include temporary investments that are readily
convertible into cash, such as certificates of deposit, commercial paper and
treasury bills with original maturities of three months or less.
(g) COSTS AND ESTIMATED EARNINGS ON LONG-TERM CONTRACTS
Costs and estimated earnings on long-term contracts represent unbilled
revenues, including accrued profits on long-term contracts accounted for
under the percentage-of-completion method, net of progress billings.
26
<PAGE> 16
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(h) INVENTORIES
Inventories are carried at the lower of cost (first-in, first-out) or
market.
Inventories under long-term contracts reflect accumulated production
costs, factory overhead, initial tooling and other related costs less the
portion of such costs charged to cost of sales and any progress payments
received. In accordance with industry practice, costs incurred on contracts
in progress include amounts relating to programs having production cycles
longer than one year, and a portion thereof will not be realized within one
year.
(i) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are recorded at cost. Depreciation and
amortization are computed primarily on a straight-line basis over the
estimated useful lives of the assets: buildings, 10-40 years; machinery and
equipment, 5-10 years; and office furniture and equipment, 5-10 years.
Leasehold improvements are amortized over the remaining term of the
applicable lease or their estimated useful lives, whichever is shorter.
(j) EXCESS OF COST OVER NET ASSETS OF PURCHASED BUSINESSES
Assets and liabilities related to business combinations accounted for as
purchase transactions are recorded at their respective fair values. Excess of
cost over the fair value of net assets purchased (goodwill) is amortized on a
straight-line basis over the periods estimated to be benefited. The excess of
cost over the fair value of net assets is primarily being amortized over a
period not exceeding 20 years. The Company assesses the recoverability of
this intangible asset by determining whether the amortization of the asset
balance over its remaining life can be recovered through undiscounted future
operating cash flows.
(k) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value
less costs to dispose.
(l) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Deferred tax
assets are reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(m) RESEARCH AND DEVELOPMENT COSTS
Company-sponsored research and development costs include research and
development and bid and proposal efforts related to the Company's products
and services. Company-sponsored product development costs are charged to
expense when incurred. Customer-sponsored research and development costs
incurred pursuant to contracts are accounted for similar to other program
costs.
(n) FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign operations are
translated into U.S. dollars in accordance with SFAS No. 52, (SFAS 52)
"Foreign Currency Translation." The resulting translation adjustments are
recorded as a separate component of accumulated other comprehensive income.
(o) 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.
27
<PAGE> 17
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The number of shares used in the calculation of earnings per share for
each year presented is as follows:
<TABLE>
<CAPTION>
(In thousands) 2000 1999 1998
--------------------------------------------------------------------------------------
<S> <C> <C> <C>
Weighted Average Shares Outstanding-- Basic 12,307 12,332 12,015
Dilutive Options and Performance Shares 361 282 535
------ ------ ------
Adjusted Shares-- Diluted 12,668 12,614 12,550
======================================================================================
</TABLE>
Options to purchase 95,500, 176,000 and 84,000 shares of common stock at
per share prices of $15.72 -$19.22 in 2000, $11.44 - $19.22 in 1999 and
$18.00 - $19.22 in 1998 were outstanding during the years ended September 30,
2000, 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 2010. Approximately 190,000 and 166,000 performance
shares were outstanding but unearned at September 30, 1999 and 1998,
respectively, and therefore, were not included in the respective years'
computations of diluted EPS. All performance shares were earned in 2000 and
are included in the 2000 computation of diluted EPS.
(p) STOCK-BASED COMPENSATION
The Company measures its compensation cost of equity instruments issued
under employee compensation plans under the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to
Employees," and related Interpretations.
(q) COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, "Reporting Comprehensive Income" (SFAS 130) requires the
Company to report separately the translation adjustments of SFAS 52 defined
above, and changes to the minimum pension liability as components of
comprehensive income or loss. Management has chosen to disclose the
requirements of this Statement within the consolidated statements of
shareholders' equity.
(r) ACCOUNTING CHANGE - 1999
During the first quarter of 1999, the Company adopted Statement of
Position (SOP) 98-5, "Reporting on the Costs of Start-up Activities."
Precontract costs were incurred by the Company and capitalized under the
previous guidance provided by SOP 81-1, "Accounting for Performance of
Construction-type Contracts." As a result of adopting SOP 98-5 in 1999, the
Company expensed these costs which were recognized as a cumulative effect of
an accounting change. The effect of this accounting change was recognized in
the 1999 Consolidated Statement of Operations.
2. ACQUISITIONS/DIVESTITURES (UNAUDITED)
On June 2, 2000, the Company purchased Holaday Industries, Inc.
("Holaday") for approximately $4 million in cash. Holaday is a leading
supplier of specialty measurement probes to the EMC test, health and safety,
and microwave markets. The business, headquartered in Eden Prairie,
Minnesota, has annual sales of approximately $5.5 million. The operating
results for Holaday, since the date of acquisition, are included within the
Company's Test segment. The goodwill recorded as a result of the transaction
is being amortized over 20 years.
On April 9, 2000, the Company acquired all of the outstanding common stock
of The Curran Company (doing business as Lindgren RF Enclosures, Inc.) and
Lindgren, Inc. (doing business through its subsidiary, Rayproof Ltd.)
(collectively "Lindgren") for approximately $22 million in cash plus
additional consideration based upon the future performance of Lindgren.
Lindgren has annual sales in excess of $40 million and is a leading supplier
of radio frequency (RF) shielding products and components used by
manufacturers of medical equipment, communications systems and electronic
products. Lindgren is headquartered near Chicago, Illinois and operates
facilities in Wisconsin, Florida, and the United Kingdom. The operating
results for Lindgren, since the date of acquisition, are included within the
Company's Test segment. The goodwill recorded as a result of the transaction
is being amortized over 20 years.
28
<PAGE> 18
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On March 31, 2000, the Company acquired the Eaton Space Products business
located in El Segundo, CA (Eaton), for approximately $6 million in cash.
Eaton manufactures specialty valves and other fluid flow components for
satellite launch vehicles and aircraft applications. With annual sales of
approximately $7 million, this business has been integrated into the
Company's Filtration/Fluid Flow segment. The goodwill recorded as a result of
the transaction is being amortized over 20 years.
In February 2000, the Company completed the sale of its microwave antenna
business, which had historically operated as part of Rantec Microwave &
Electronics, Inc. The operating results for this business, prior to the
divestiture, have been included within the Company's Other segment. The
Company transferred the contract order backlog and operating assets of the
microwave antenna business for $2.1 million in cash, plus contingent
consideration based on their future operating results over the next two
years. In addition, in September 2000, the Company sold the land and
buildings in Calabasas, CA related to this business for approximately $6
million.
Assuming the acquisitions of Holaday, Lindgren and Eaton as well as the
divestiture of the Rantec microwave antenna business had occurred on October
1, 1999, pro forma unaudited net sales, net earnings and diluted EPS for the
year ended September 30, 2000 would have been approximately $325 million,
$17.3 million and $1.36 per share, respectively. These pro forma amounts are
not necessarily indicative of the results of operations that would have
occurred had these actions been completed on October 1, 1999, or of future
results of operations.
On September 30, 1999, the Company completed the sale of its Systems &
Electronics Inc. (SEI) subsidiary to Engineered Support Systems, Inc. (ESSI).
The Company sold 100% of the common stock of SEI for $85 million in cash,
less working capital adjustments, resulting in a $59.9 million gain recorded
in the 1999 results of operations. Certain assets and liabilities of SEI were
retained by the Company, including the net operating loss carryforward.
Included in the consolidated statements of operations are the operating
results of SEI prior to its divestiture as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1999 1998
--------------------------------------------------------------------------------
<S> <C> <C>
Net sales $ 172.8 135.0
Cost of sales 139.6 98.7
Selling, general and administrative expenses 21.6 22.6
Other costs and expenses, net .9 1.1
------- -----
Earnings before income taxes $ 10.7 12.6
================================================================================
</TABLE>
On July 1, 1998, the Company completed the acquisition of Advanced
Membrane Technology, Inc. (AMT) and consolidated AMT within PTI. The
transaction involved the purchase of AMT common stock for approximately $7
million in cash plus approximately 450,000 shares of ESCO common stock valued
at $8.6 million. The goodwill recorded as a result of the transaction is
being amortized over 20 years.
All of the Company's acquisitions have been accounted for using the
purchase method of accounting and accordingly, the respective purchase prices
were allocated to the assets (including intangible assets) acquired and
liabilities assumed based on estimated fair values at the date of
acquisition. The financial results from these acquisitions have been included
in the Company's financial statements from the date of acquisition.
3. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at September 30, 2000 and
1999:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Commercial $55,619 35,287
U. S. Government and prime contractors 3,363 3,382
------- ------
Total $58,982 38,669
================================================================================
</TABLE>
29
<PAGE> 19
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The increase in Commercial accounts receivable and the increase in the
allowance for doubtful accounts in 2000 is primarily due to the current
year acquisitions which contributed approximately $9.4 million to accounts
receivable and approximately $0.4 million to the allowance for doubtful
accounts. Accounts receivable in the Company's Communications segment
increased approximately $7 million due to the sales increase within that
segment.
4. INVENTORIES
Inventories consist of the following at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Finished goods $ 8,709 11,387
Work in process-- including long-term contracts 17,258 14,517
Raw materials 18,490 13,686
--------- ------
Total $ 44,457 39,590
=============================================================================
</TABLE>
Inventories increased approximately $6.4 million due to the current
year acquisitions.
5. PROPERTY, PLANT AND EQUIPMENT
Depreciation and amortization of property, plant and equipment for the
years ended September 30, 2000, 1999 and 1998 were $10,259,000,
$13,598,000 and $14,589,000, respectively.
The Company leases certain real property, equipment and machinery under
noncancelable operating leases. Rental expense under these operating
leases for the years ended September 30, 2000, 1999 and 1998 amounted to
$4,968,000, $6,324,000 and $5,675,000, respectively. Future aggregate
minimum lease payments under operating leases that have initial or
remaining noncancelable lease terms in excess of one year as of September
30, 2000 are:
<TABLE>
<CAPTION>
(Dollars in thousands) Years ending September 30:
--------------------------------------------------------------------------------
<S> <C> <C>
2001 $ 6,454
2002 5,210
2003 4,626
2004 4,157
2005 and thereafter 9,339
-------
Total $29,786
================================================================================
</TABLE>
6. INCOME TAX EXPENSE
The principal components of income tax expense for the years ended
September 30, 2000, 1999 and 1998 consist of:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999 1998
----------------------------------------------------------------------------
<S> <C> <C> <C>
Federal:
Current (including Alternative Minimum Tax) $ 275 -- --
Deferred 6,270 11,560 6,121
State, local and foreign 1,372 1,441 (1,070)
------ ------ ------
Total $7,917 13,001 5,051
============================================================================
</TABLE>
30
<PAGE> 20
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The actual income tax expense for the years ended September 30, 2000,
1999 and 1998 differs from the expected tax expense for those years
(computed by applying the U.S. Federal statutory rate) as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal corporate statutory rate 35.0% 35.0% 35.0%
Change in tax valuation allowance:
Utilization of capital loss carryforward (4.3) (19.3) --
Other (3.2) 5.9 3.0
Income taxes, net of Federal benefits:
State and local 2.0 1.1 (2.8)
Foreign .5 1.2 .4
Other, net 2.0 (3.4) (4.7)
------ ------ ------
Effective income tax rate 32.0% 20.5% 30.9%
==========================================================================================================
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at September 30, 2000,
1999 and 1998 are presented below:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax assets:
Inventories, long-term contract accounting,
contract cost reserves and others $ 2,644 4,169 4,283
Pension and other postretirement benefits 3,846 3,576 10,177
Net operating loss carryforward 48,345 51,097 38,989
Capital loss carryforward 11,537 14,824 27,074
Other compensation-related costs and other cost accruals 875 5,262 6,703
-------- -------- --------
Total deferred tax assets 67,247 78,928 87,226
Deferred tax liabilities:
Plant and equipment, depreciation methods
and acquisition asset allocations (941) (1,671) (1,516)
-------- -------- --------
Net deferred tax asset before valuation allowance 66,306 77,257 85,710
Less valuation allowance (28,403) (32,474) (40,970)
-------- -------- --------
Net deferred tax assets $ 37,903 44,783 44,740
==========================================================================================================
</TABLE>
Management believes it is more likely than not that with its
projections of future taxable income, and after consideration of the
valuation allowance, the Company will generate sufficient taxable income
to realize the benefits of the net deferred tax assets existing at
September 30, 2000.
In order to fully realize the net deferred tax assets before valuation
allowance existing at September 30, 2000, the Company will need to
generate future taxable income of approximately $189 million of which $138
million is required to be realized prior to the expiration of the net
operating loss (NOL) carryforward, of which $20 million will expire in
2006; $6 million will expire in 2007; $23 million will expire in 2009; $38
million will expire in 2010; $4 million will expire in 2011; $7 million
will expire in 2018; and $40 million will expire in 2019. Also, the
Company will need to generate future capital gains of approximately $33
million prior to 2001, at which time the capital loss carryforward will
expire.
During the year ended September 30, 2000, and as a result of the
Company utilizing approximately $9 million of the capital loss
carryforward relating to residual SEI tax matters and the sale of the
Riverhead and Calabasas properties in 2000, the Company decreased its
deferred tax valuation allowance to $28.4 million. A full valuation
allowance of $11.5 million is being maintained against the deferred tax
asset associated with the capital loss.
31
<PAGE> 21
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The remaining valuation allowance balance of $16.9 million represents
Management's best estimate of the portion of deferred tax assets
associated with temporary differences and NOLs which may not be realized
due to limitations on future use.
7. DEBT
Long-term debt consists of the following at September 30, 2000 and
1999:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Term loan -- 49,000
Other debt $ 746 988
Less current maturities (136) (8,092)
------- -------
Long-term debt $ 610 41,896
=============================================================================
</TABLE>
On April 11, 2000, the Company entered into a new $75 million revolving
credit facility replacing its previous $40 million credit facility. The
Company has the option to increase the credit facility to $100 million
through April 11, 2002. The revolving credit facility is available for
direct borrowings and/or the issuance of letters of credit. The maturity
of the new bank credit facility is April 11, 2005. The new credit facility
is provided by a group of five banks, led by Bank of America. At September
30, 2000, the Company had approximately $63 million available to borrow
under the credit facility as well as $5.6 million of cash on hand.
The new credit facility requires, as determined by certain financial
ratios, a commitment fee ranging from 20-30 basis points per annum on the
unused portion. The terms of the facility provide that interest on
borrowings may be calculated at a spread over the London Interbank Offered
Rate (LIBOR) or based on the prime rate, at the Company's election.
Substantially all of the assets of the Company are pledged under the
credit facility. The financial covenants of the credit facility include
limitations on leverage and minimum consolidated EBITDA.
During 2000 and 1999, the maximum aggregate short-term borrowings at
any month-end were $21 million and $42 million, respectively; the average
aggregate short-term borrowings outstanding based on month-end balances
were $8.1 million and $32.5 million, respectively; and the weighted
average interest rates were 7.5% in 2000, 6.3% in 1999 and 6.9% in 1998.
The letters of credit issued and outstanding under the credit facility
totaled $7.9 million and $4.8 million at September 30, 2000 and 1999,
respectively. Borrowings under the revolving credit facility were $4
million and $12.5 million at September 30, 2000 and 1999, respectively.
8. CAPITAL STOCK
The 13,224,834 and 12,782,663 common shares as presented in the
accompanying consolidated balance sheets at September 30, 2000 and 1999
represent the actual number of shares issued at the respective dates. The
Company held 956,527 and 404,625 common shares in treasury at September
30, 2000 and 1999, respectively.
In conjunction with the sale of SEI on September 30, 1999, the
previously outstanding Deposit and Trust Agreement was terminated. The
Company has various Stock Option Plans which permit the Company to grant
key management employees (1) options to purchase shares of the Company's
common stock or (2) stock appreciation rights with respect to all or any
part of the number of shares covered by the options. All outstanding
options were granted at prices equal to fair market value at the date of
grant.
32
<PAGE> 22
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information regarding stock options awarded under the Option Plans is
as follows:
<TABLE>
<CAPTION>
2000 1999 1998
--------------------------- --------------------------- --------------------------
ESTIMATED Estimated Estimated
SHARES AVG. PRICE Shares Avg. Price Shares Avg. Price
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
October 1, 1,437,442 $ 9.35 953,716 $ 8.61 998,486 $ 6.18
Granted 99,250 $ 12.90 522,600 $ 10.76 89,500 $ 18.14
Exercised (558,738) $ 7.37 (17,270) $ 7.72 (107,964) $ 7.58
Cancelled (185,255) $ 12.16 (21,604) $ 12.00 (26,306) $ 7.20
----------------------------------------------------------------------------------------------------------------------------
September 30, 792,699 $ 10.62 1,437,442 $ 9.35 953,716 $ 8.61
At September 30,
Reserved for future grant 405,566
Exercisable 363,647 $ 10.65 698,464 $ 9.36 509,559 $ 7.46
============================================================================================================================
</TABLE>
At September 30, 2000, the 792,699 options outstanding and the 363,647
options exercisable ranged in price from $5.65 - $19.22 per share. The
options have a ten year contractual life from date of issuance, expiring
in various periods through 2010. The increase in exercised shares and
cancelled shares in 2000 is mainly due to the sale of SEI. Employees of
SEI had 90 days, subsequent to the divestiture, to exercise their
exercisable stock options prior to their cancellation.
During 1996, the Company announced a stock repurchase program. Under
this program, the Company was authorized to purchase up to two million
shares of its common stock in the open market through September 30, 1998.
Approximately 180,000 shares were repurchased throughout that two-year
period. In October 1998, the Company authorized an additional open market
repurchase program of up to 1.3 million shares, which was subject to
market conditions and other factors and covered the period ended September
29, 2000. Approximately 516,000 shares and 177,000 shares were repurchased
during fiscal years 2000 and 1999, respectively.
During 1993 and 1997, the Board of Directors authorized, and the
shareholders approved, the Performance Share Plans (the Plans). The
maximum number of shares available for issue under the Plans was 875,000
shares. As of September 30, 2000, 866,000 shares have been awarded and
earned. At September 30, 2000, there were 32,000 shares of restricted
stock outstanding and earned.
In February 2000, the Company amended and restated the Preferred Stock
Purchase Rights Plan such that each Right entitles the holder to purchase
one one-hundredth of a share of preferred stock at an initial purchase
price of $60. The Rights remain in existence until February 3, 2010,
unless renewed, redeemed earlier (at one cent per Right), exercised or
exchanged under the terms of the plan. Under certain conditions involving
the acquisition of, or an offer for, 20% or more of the Company's common
stock, all holders of Rights, except an acquiring entity, would be
entitled (1) to purchase, at a defined price, common stock of the Company
or an acquiring entity at a value twice the defined price, or (2) at the
option of the Board, to exchange each Right for one share of common stock.
The Company adopted the disclosure-only provisions of SFAS No. 123.
Under APB No. 25, no compensation cost was recognized for the Company's
stock option plans. Had compensation cost for the Company's stock option
plans and performance share plans been determined based on the fair value
at the grant date for awards outstanding during 2000 and 1999 consistent
with the provisions of this Statement, the Company's net earnings and net
earnings per share would have been as shown in the table on the following
page:
33
<PAGE> 23
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pro forma (Unaudited)
(Dollars in thousands, except per share amounts) 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Net earnings $ 16,214 $ 24,779
Net earnings per share:
Basic $ 1.32 2.01
Diluted $ 1.28 1.96
==================================================================================
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions used for grants in 2000 and 1999,
respectively: expected dividend yield of 0% in both periods; expected
volatility of 29.2% and 35.3%, risk-free interest rate of 5.79% and 5.89%,
and expected life based on historical exercise periods of 4.06 years and
4.05 years.
To determine the fair value of grants under the Performance Share
Plans, the probability that performance milestones would be met was
applied to the ESCO stock price on the date of grant. This probability was
based on an estimated average annual growth rate of 10.0% and an
annualized volatility of 38.3% and 38.4% in 2000 and 1999, respectively.
9. RETIREMENT AND OTHER BENEFIT PLANS
Substantially all employees are covered by defined benefit or defined
contribution pension plans maintained by the Company for the benefit of
its employees. Benefits are provided to employees under defined benefit
pay-related and flat-dollar plans, which are primarily noncontributory.
Annual contributions to retirement plans equal or exceed the minimum
funding requirements of the Employee Retirement Income Security Act or
applicable local regulations. On September 30, 1999, the Company completed
the sale of SEI to Engineered Support Systems, Inc. which accounts for
significant fluctuations in 2000 as compared to prior years.
Net periodic benefit cost for the years ended September 30, 2000, 1999
and 1998 is comprised of the following:
<TABLE>
<CAPTION>
(Dollars in millions) 2000 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Defined benefit plans:
Service cost $ 1.4 4.1 3.5
Interest cost 2.1 6.7 6.1
Expected return on plan assets (2.8) (7.5) (6.7)
Amortization of service costs .1 .3 .2
Net actuarial (gain) loss (.5) .8 .1
Curtailment gain (.7) (8.5) --
Settlement loss -- 2.9 --
------- ------- -------
Net periodic benefit cost (.4) (1.2) 3.2
Defined contribution plans .6 .7 .4
------- ------- -------
Total $ .2 (.5) 3.6
=============================================================================
</TABLE>
The Company recognized a curtailment gain in 2000 as a result of the
sale of the Rantec microwave business in February 2000 and also recognized
a curtailment gain and a settlement loss in 1999 as a result of the sale
of SEI on September 30, 1999.
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for defined benefit pension plans with
accumulated benefit obligations in excess of plan assets were $2.1
million, $1.3 million and zero, respectively, as of September 30, 2000,
and $1.5 million, $1.1 million and zero, respectively, as of September 30,
1999.
34
<PAGE> 24
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net benefit obligation of the Company's defined benefit pension
plans as of September 30, 2000 and 1999 is shown below:
<TABLE>
<CAPTION>
(Dollars in millions) 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Change in benefit obligation--
Net benefit obligation at beginning of year $ 27.1 96.0
Service cost 1.4 4.1
Interest cost 2.1 6.7
Plan amendments .2 .8
Actuarial (gain) loss .3 (5.5)
Gross benefits paid (.8) (3.2)
Divestitures -- (27.9)
Curtailments (.7) (10.6)
Settlements -- (33.3)
--------- ---------
Net benefit obligation at end of year $ 29.6 27.1
=============================================================================
</TABLE>
The plan assets of the Company's defined benefit pension plans at
September 30, 2000 and 1999 are shown below:
<TABLE>
<CAPTION>
(Dollars in millions) 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Change in plan assets:
Fair value of plan assets at beginning of year $ 28.5 77.9
Actual return on plan assets 8.1 16.9
Employer contributions .2 3.7
Divestitures -- (66.8)
Gross benefits paid (.8) (3.2)
------- -------
Fair value of plan assets at end of year $ 36.0 28.5
=============================================================================
</TABLE>
The Company's defined benefit pension plans recognized the following
net amounts at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(Dollars in millions) 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Funded status at end of year $ 6.3 1.3
Unrecognized prior service cost .5 .4
Unrecognized net actuarial (gain) loss (10.2) (5.6)
------- ------
Accrued benefit cost $ (3.4) (3.9)
======= ======
Amounts recognized in the balance sheet consist of:
Prepaid benefit cost $ .1 --
Accrued benefit cost (3.5) (3.9)
Additional minimum liability (.1) (.1)
Intangible asset .1 .1
Accumulated other comprehensive income -- --
------- ------
Accrued benefit liability $ (3.4) (3.9)
=============================================================================
</TABLE>
Pension plan assets consist principally of marketable securities
including common stocks, bonds, and interest-bearing deposits.
The benefit obligations of the defined benefit plans as of September
30, 2000 and 1999 were based on discount rates of 7.75%, and an assumed
rate of increase in compensation levels of 4.5% in 2000 and 4% in 1999.
35
<PAGE> 25
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 2000, 1999 and 1998 pension expense for the defined benefit plans
was based on a 7.75%, 7.75% and 6.75% discount rate, respectively, a 4.5%,
4% and 4% increase in compensation levels, respectively, and a 9.5%, 10%
and 10% expected long-term rate of return on plan assets, respectively.
In addition to providing retirement income benefits, the Company
provides unfunded postretirement health and life insurance benefits to
certain retirees. To qualify, an employee must retire at age 55 or later
and the employee's age plus service must equal or exceed 75. Retiree
contributions are defined as a percentage of medical premiums.
Consequently, retiree contributions increase with increases in the medical
premiums. The life insurance plans are noncontributory and provide
coverage of a flat dollar amount for qualifying retired employees.
Net periodic postretirement benefit cost is comprised of the following:
<TABLE>
<CAPTION>
(Dollars in millions) 2000 1999 1998
----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost $ .1 .2 .2
Interest cost .1 .7 1.1
Net amortization and deferral (.3) (.3) --
Curtailment gain recognized (.3) (8.7) --
------- ------- -------
Net periodic postretirement benefit cost $ (.4) $ (8.1) 1.3
========================================================================================
</TABLE>
The net benefit obligation for postretirement benefits at September 30,
2000 and 1999 is shown below:
<TABLE>
<CAPTION>
(Dollars in millions) 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Net benefit obligation at beginning of year $ 1.0 16.0
Service cost .1 .2
Interest cost .1 .7
Actuarial (gain) loss .4 (5.8)
Curtailments (.3) (8.7)
Gross benefits paid (.1) (1.4)
------- -------
Net benefit obligation at end of year $ 1.2 1.0
=============================================================================
</TABLE>
The plan assets for postretirement benefits at September 30, 2000 and
1999 are shown below:
<TABLE>
<CAPTION>
(Dollars in millions) 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Fair value of plan assets at beginning of year $ -- --
Employer contributions .1 1.4
Gross benefits paid (.1) (1.4)
------- -------
Fair value of plan assets at end of year $ -- --
=============================================================================
</TABLE>
The Company recognized the following net amounts for postretirement
benefits at September 30, 2000 and 1999:
<TABLE>
<CAPTION>
(Dollars in millions) 2000 1999
-----------------------------------------------------------------------------
<S> <C> <C>
Funded status at end of year $ (1.2) (1.0)
Unrecognized prior service cost -- --
Unrecognized net actuarial (gain) loss (3.8) (4.6)
------- ------
Accrued benefit costs $ (5.0) (5.6)
------- ------
Amounts recognized in the balance sheet consist of--
Accrued benefit liability $ (5.0) (5.6)
=============================================================================
</TABLE>
36
<PAGE> 26
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net benefit obligations of the plans as of September 30, 2000 and
1999 were based on discount rates of 7.75%. The September 30, 2000 net
benefit obligation was based on a health care cost trend of 6.5% for
fiscal 2000, gradually grading down to an ultimate rate of 5.5% by 2002.
The September 30, 1999 net benefit obligation was based on a health care
cost trend of 6.5% for fiscal 1999, gradually grading down to an ultimate
rate of 5.5% by 2002. A 1% increase in the health care cost trend rate for
each year would increase the September 30, 2000 net benefit obligation by
approximately $30,000, while a 1% decrease in the health care cost trend
rate for each year would decrease the September 30, 2000 net benefit
obligation by approximately $35,000.
The fiscal 2000 and 1999 net periodic benefit costs were based on
discount rates of 7.75%. The net periodic benefit cost was based on an
assumed health care cost trend of 6.5% for 2000 and 1999, gradually
grading down to 5.5% by fiscal year 2002. A 1% increase in the health care
cost trend rate for each year would increase the aggregate of the service
cost and interest cost components of the fiscal 2000 net periodic benefit
cost by approximately $3,100, while a 1% decrease in the health care cost
trend rate for each year would decrease the aggregate of the service cost
and interest cost components of the fiscal 2000 net periodic benefit cost
by approximately $3,700.
10. OTHER FINANCIAL DATA
Items charged to operations during the years ended September 30, 2000,
1999 and 1998 included the following:
<TABLE>
<CAPTION>
(Dollars in thousands) 2000 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C>
Maintenance and repairs $ 4,870 7,078 6,751
Salaries and wages 78,206 132,671 133,507
------- ------- -------
Research and development costs:
Company-sponsored $ 6,177 7,716 5,866
Customer-sponsored 3,961 8,332 10,201
------- ------- -------
Total $10,138 16,048 16,067
=============================================================================
</TABLE>
The decreases in salaries and wages and in research and development
costs in 2000 compared to 1999 are due to the sale of SEI in 1999.
Accrued expenses included accrued employee compensation of $7.5 million
and $6.0 million at September 30, 2000 and 1999, respectively.
11. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it
offers. Under this organizational structure, the Company operates in four
principal segments: Filtration/Fluid Flow, Test, Communications and
Other. Filtration/Fluid Flow operations consist of PTI Technologies Inc.
(PTI) and Filtertek Inc. (Filtertek). PTI develops and manufactures a wide
range of filtration products and is a leading supplier of filters to the
commercial aerospace market and microfiltration market. Filtertek develops
and manufactures a broad range of high-volume, original equipment
manufacturer (OEM) filtration products at its facilities in North America,
South America and Europe. Test segment operations consist of EMC Test
Systems, L.P. (ETS) and Lindgren. ETS is principally involved in the
design and manufacture of EMC test equipment, test chambers, shielded
rooms for high security data processing and secure communication, and
electromagnetic absorption materials. Lindgren manufactures radio
frequency (RF) shielding products and components used by manufacturers of
medical equipment, communications systems and electronic products.
Communications operations consist of Distribution Control Systems, Inc.
(DCSI) which is principally involved in providing two-way power line
communication systems for the utility industry.
37
<PAGE> 27
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
These systems provide the electric utilities with a patented
communication technology for demand-side management, distribution
automation and automatic meter reading capabilities. Communications also
includes the operations of Comtrak, L.L.C.
The Divested Business segment consists of Systems & Electronics Inc.
(SEI). As of September 30, 1999, ESCO sold SEI to Engineered Support
Systems, Inc. The Other segment is principally comprised of Rantec Power
Systems Inc., formerly a part of Rantec Microwave & Electronics, Inc.
(Rantec) which produces power supplies widely used in high performance
displays, such as cockpit instrumentation, engineering workstations and
medical imaging. Rantec's microwave antenna business was sold in February
2000. Accounting policies of the segments are the same as those described
in the summary of significant accounting policies in Note 1.
In accordance with SFAS 131, the Company evaluates the performance of
its operating segments based on operating profit, which is defined as: net
sales, less cost of sales, less other charges related to cost of sales,
less SG&A expenses and less restructuring charges. Intersegment sales and
transfers are not significant. Segment assets consist primarily of
customer receivables, inventories and fixed assets directly associated
with the production processes of the segment. Segment assets also include
goodwill. Segment depreciation and amortization is based upon the direct
assets listed above.
<TABLE>
<CAPTION>
NET SALES
Year ended September 30,
(Dollars in millions) 2000 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Filtration/Fluid Flow $ 181.7 168.9 158.3
Test 63.0 34.9 30.6
Communications 42.7 25.8 19.1
Other 12.8 13.7 22.1
Divested Business -- 172.8 135.0
------- ------- -------
Consolidated totals $ 300.2 416.1 365.1
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
OPERATING PROFIT
Year ended September 30,
(Dollars in millions) 2000 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Filtration/Fluid Flow $ 16.6 11.9 10.5
Test 6.9 4.0 2.9
Communications 8.9 (.4) .4
Other (.3) (8.8) 1.9
Divested Business -- 10.4 11.2
Reconciliation to consolidated totals (Corporate) (2.0) (2.2) --
------- ------- -------
Consolidated totals $ 30.1 14.9 26.9
============================================================================================
</TABLE>
Operating profit, as defined by the Company, excludes certain costs
which are included in Other costs and expenses, net, in the consolidated
statements of operations, and which would be included in the determination
of operating income as defined within generally accepted accounting
principles. These items consist of approximately $2.0 million of net costs
related to the Filtration/Fluid Flow segment as a result of the
consolidation of PTI's filtration businesses into new facilities in
Oxnard, California; expenses related to the planned upgrade of production
equipment to improve manufacturing efficiency at Filtertek; and costs
related to the 1998 acquisition of AMT. In addition, related to the Test
segment in 2000, are approximately $1 million of Other costs and expenses,
net, primarily related to the write-off of an investment in a third party
start-up EMC related company which filed bankruptcy in 2000.
The 1999 operating profit includes $3.9 million of other charges
related to cost of sales and $5.1 million of restructuring charges related
to the strategic actions undertaken in 1999.
38
<PAGE> 28
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Filtration/Fluid Flow segment in 1999 includes $2.2 million of
other charges related to cost of sales attributable to the write-off of
inventory resulting from the abandonment of the High Pressure Air Reducing
Quiet Manifold for surface ships. $1.1 million relates to Rantec which is
included in the Other segment and the remaining balance of $0.6 million
relates to Comtrak which is included in the Communications segment.
The 1999 restructuring charges of $5.1 million are included in the
following segments: the $1.1 million of costs related to exiting the
Rantec microwave antenna business area, and the $1.8 million write-off of
the license agreement related to the abandonment of the Vehicle Location
System at Comtrak are included in the Communications segment. The $2.2
million of personnel separation costs are included as a Corporate expense.
The total nonrecurring charges included in 1999 operating profit
amounted to $9.1 million.
The Other segment in 1999 also includes $3.8 million of charges related
to cost growth on certain development programs at Rantec Power Systems.
The $2.5 million of other charges related to cost of sales in 1998
related to SEI and is included in Divested Business.
<TABLE>
<CAPTION>
IDENTIFIABLE ASSETS
As of September 30,
(Dollars in millions) 2000 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Filtration/Fluid Flow $ 198.2 195.0 203.0
Test 61.2 22.2 21.5
Communications 21.6 14.2 23.0
Other 7.4 18.9 27.7
Divested Business -- -- 80.3
Reconciliation to consolidated totals (Corporate assets) 42.7 128.0 53.8
------- ------- -------
Consolidated totals $ 331.1 378.3 409.3
=================================================================================================
</TABLE>
Corporate assets consist primarily of deferred taxes and cash balances.
<TABLE>
<CAPTION>
DEPRECIATION AND AMORTIZATION
Year ended September 30,
(Dollars in millions) 2000 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Filtration/Fluid Flow $ 10.7 10.7 10.5
Test 1.6 .9 .9
Communications 1.2 1.2 1.3
Other .7 1.2 1.1
Divested Business -- 3.0 3.6
------- ------- -------
Consolidated totals $ 14.2 17.0 17.4
=================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES, NET
Year ended September 30,
(Dollars in millions) 2000 1999 1998
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Filtration/Fluid Flow $ 9.0 6.3 7.3
Test .3 .2 .3
Communications .5 .4 2.6
Other .6 .3 1.2
Divested Business -- 1.1 1.5
------- ------- -------
Consolidated totals $ 10.4 8.3 12.9
=================================================================================================
</TABLE>
39
<PAGE> 29
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
GEOGRAPHIC INFORMATION
Net sales to customers
(Dollars in millions) 2000 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C>
North America $ 234.6 346.9 313.0
Europe 46.1 37.0 37.6
Middle East .6 3.1 3.9
Far East 9.5 23.5 8.6
Other 9.4 5.6 2.0
------- ------- -------
Consolidated totals $ 300.2 416.1 365.1
=============================================================================
</TABLE>
<TABLE>
<CAPTION>
LONG-LIVED ASSETS
(Dollars in millions) 2000 1999 1998
-----------------------------------------------------------------------------
<S> <C> <C> <C>
North America $ 55.9 63.8 89.2
Europe 6.7 7.5 8.8
------- ------- -------
Consolidated totals $ 62.6 71.3 98.0
=============================================================================
</TABLE>
Net sales are attributed to countries based on location of customer.
Long-lived assets are attributed to countries based on location of the
asset.
12. COMMITMENTS AND CONTINGENCIES
At September 30, 2000, the Company had $7.9 million in letters of
credit outstanding as guarantees of contract performance.
As a normal incidence of the businesses in which the Company is
engaged, various claims, charges and litigation are asserted or commenced
against the Company. In the opinion of management, final judgments, if
any, which might be rendered against the Company in current litigation are
adequately reserved, covered by insurance, or would not have a material
adverse effect on its financial statements.
13. OTHER CHARGES RELATED TO COST OF SALES - 1999
Other charges related to cost of sales of $3.9 million in 1999
represent the write-off of inventory related to the strategic abandonment
of the High Pressure Air Reducing Quiet Manifolds for surface ships ($2.2
million) and the Vehicle Location Systems ($.6 million) business areas.
Additionally, the Company wrote down the Rantec microwave antenna product
line inventory ($1.1 million) to net realizable value as a result of the
anticipated sale of that business area.
Other charges related to cost of sales of $2.5 million in 1998 resulted
from the Company's settlement of a long-standing contract dispute on the
original M1000 tank transporter program at SEI.
40
<PAGE> 30
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
-------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(Dollars in thousands, FIRST SECOND THIRD FOURTH FISCAL
except per share amounts) QUARTER QUARTER QUARTER QUARTER YEAR
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2000
Net sales $ 65,865 70,062 79,235 84,995 300,157
Gross profit 19,628 21,576 24,699 25,991 91,894
Net earnings 5,056 3,517 3,708 4,538 16,819
Earnings per share:
Basic .41 .29 .30 .37 1.37
Diluted .40 .28 .29 .36 1.33
=========================================================================================================================
1999 - Reported
Net sales $ 88,193 96,214 113,978 117,717 416,102
Gross profit 22,894 25,036 27,951 18,613 94,494
Net earnings before accounting change 1,515 2,047 4,072 42,821 50,455
Net earnings (23,494) 2,047 4,072 42,821 25,446
Earnings per share before accounting change:
Basic .12 .17 .33 3.46 4.09
Diluted .12 .16 .32 3.36 4.00
=========================================================================================================================
1999 - Adjusted
Net sales $ 55,654 60,021 63,155 64,510 243,340
Net earnings 1,797 2,149 2,658 1,116 7,720
=========================================================================================================================
</TABLE>
Gross profit is computed as net sales, less cost of sales, less other
charges related to cost of sales.
The 2000 first quarter net earnings reflects the impact of the after-tax
gain on the sale of the Riverhead, NY property of approximately $2.2 million or
$0.18 per share. The 2000 fourth quarter net earnings reflects the after-tax
gain on the sale of the Calabasas, CA property of approximately $0.5 million or
$0.04 per share.
The 1999 Reported first quarter reflects the impact of adopting SOP 98-5.
The 1999 Reported fourth quarter reflects the impact of the SEI divestiture and
the nonrecurring costs incurred.
1999 Adjusted is defined within the MD&A section and is intended to
represent what Management believes 1999 operating results may have been after
removing the results of SEI and 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.
41
<PAGE> 31
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
---------------------------------------
INDEPENDENT AUDITORS' REPORT
THE BOARD OF DIRECTORS AND SHAREHOLDERS
ESCO TECHNOLOGIES INC.:
We have audited the accompanying consolidated balance sheets of ESCO
Technologies Inc. and subsidiaries as of September 30, 2000 and 1999, and
the related consolidated statements of operations, shareholders' equity,
and cash flows for each of the years in the three-year period ended
September 30, 2000. These consolidated financial statements are the
responsibility of the Company's Management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of ESCO
Technologies Inc. and subsidiaries as of September 30, 2000 and 1999, and
the results of their operations and their cash flows for each of the years
in the three-year period ended September 30, 2000, in conformity with
accounting principles generally accepted in the United States of America.
As discussed in note 1 to the consolidated financial statements, in
1999, the Company adopted Statement of Position 98-5, "Reporting on the
Costs of Start-Up Activities".
KPMG LLP
St. Louis, Missouri
November 8, 2000
43
<PAGE> 32
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
---------------------------------------
FIVE-YEAR FINANCIAL SUMMARY
<TABLE>
<CAPTION>
(Dollars in millions, except per share amounts) 2000(1) 1999(2) 1998(3) 1997(4) 1996(5)
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
For years ended September 30:
Net sales $ 300.2 416.1 365.1 378.5 438.5
Interest expense .4 6.5 7.7 5.2 4.8
Earnings before income taxes 24.7 63.5 16.3 17.9 14.8
Net earnings before accounting change 16.8 50.5 11.3 11.8 26.1
Net earnings 16.8 25.5 11.3 11.8 26.1
Earnings per share:
Earnings before accounting change
Basic 1.37 4.09 .94 1.00 2.32
Diluted 1.33 4.00 .90 .96 2.26
Net earnings
Basic 1.37 2.06 .94 1.00 2.32
Diluted 1.33 2.02 .90 .96 2.26
As of September 30:
Working capital 55.7 95.3 60.3 62.3 86.2
Total assets 331.1 378.4 409.3 378.2 307.8
Long-term debt .6 41.9 50.1 50.0 11.4
Shareholders' equity 259.4 248.7 224.1 205.0 191.1
=================================================================================================================================
</TABLE>
(1) Includes the acquisitions of Lindgren, Holaday, and Eaton Space Products
and the sale of the Rantec microwave antenna business (see Footnote 2 of
Notes to Consolidated Financial Statements). Also, includes the after-tax
gain on the sale of the Riverhead, NY property of approximately $2.2
million or $0.18 per share and the after-tax gain on the sale of the
Calabasas, CA property of approximately $0.5 million or $0.04 per share.
(2) Includes the gain on sale of SEI, accounting change, $5.1 million of
restructuring charges, and $3.9 million of other charges related to cost
of sales.
(3) Includes the acquisitions of Euroshield (December 31,1997) and AMT (July
1, 1998) (see Footnote 2 of Notes to Financial Statements). Consolidated
(4) Includes the acquisition of Filtertek in February 1997.
(5) Includes the sale of Hazeltine; $25.3 million of other charges related to
cost of sales; and includes an adjustment to the income tax valuation
reserve.
COMMON STOCK MARKET PRICES
The Company's common stock and associated preferred stock purchase
rights (subsequently referred to as common stock) are listed on the New
York Stock Exchange under the symbol "ESE." The following table summarizes
the high and low prices of the Company's common stock for each quarter of
fiscal 2000 and 1999.
<TABLE>
<CAPTION>
2000 1999
------------------------------------------------------------------
Quarter HIGH LOW High Low
------------------------------------------------------------------
<S> <C> <C> <C> <C>
First 12 5/8 9 1/2 11 3/4 8 3/4
Second 17 1/8 11 1/2 11 1/4 9 3/16
Third 20 1/8 15 1/2 11 7/8 10 1/8
Fourth 20 17 1/16 13 3/8 11 3/4
==================================================================
</TABLE>
44
<PAGE> 33
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
---------------------------------------
SHAREHOLDERS' SUMMARY
SHAREHOLDERS' ANNUAL MEETING
The Annual Meeting of the shareholders of ESCO Technologies Inc. will
be held at 10 a.m. Thursday, February 8, 2001, at the Hilton St. Louis
Frontenac Hotel, 1335 South Lindbergh Boulevard, St. Louis County,
Missouri 63131. Notice of the meeting and a proxy statement were sent to
shareholders with this Annual Report.
10-K REPORT
A copy of the Company's 2000 Annual Report on Form 10-K filed with the
Securities and Exchange Commission is available to shareholders without
charge. Direct your written request to the Investor Relations Department,
ESCO Technologies Inc., 8888 Ladue Road, Suite 200, St. Louis, Missouri
63124.
INVESTOR RELATIONS
Additional investor-related information may be obtained by contacting
the Director of Investor Relations at (314) 213-7277 or toll free at (888)
622-3726. Information is also available through the Company's website at
www.escotechnologies.com or by email at [email protected].
TRANSFER AGENT AND REGISTRAR
Shareholder inquiries concerning lost certificates, transfer of shares
or address changes should be directed to:
Transfer Agent/Registrar
ChaseMellon Shareholder Services, L.L.C.
85 Challenger Road
Ridgefield Park, NJ 07660-2108
1 (800) 851-9677
E-mail: [email protected]
CAPITAL STOCK INFORMATION
ESCO Technologies Inc. common stock shares (symbol ESE) are listed on
the New York Stock Exchange. There were approximately 4,600 holders of
record of shares of common stock at September 30, 2000.
FORWARD-LOOKING INFORMATION
The statements contained in the Chairman's Letter to Shareholders (pgs.
2 and 3), the business summaries (pgs. 4-9), and Management's Discussion
and Analysis 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. The Company's
actual results in the future may differ materially from those projected in
the forward-looking statements due to risks and uncertainties that exist
in the Company's operations and business environment including, but not
limited to: changing economic conditions in served markets; changes in
customer demands; competition; intellectual property matters; integration
of recently acquired businesses; delivery delays or defaults by customers;
performance issues with key suppliers and subcontractors; and the
Company's successful execution of internal operating plans.
45
