UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
|
|
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
|
For the fiscal year ended September 30, 2007
OR
|
|
|
|
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the transition period from
to
Commission file number: 1-10596
ESCO Technologies Inc.
(Exact name of registrant as specified in its charter)
|
|
|
|
Missouri
(State or other jurisdiction
of incorporation or organization)
|
|
43-1554045
(I.R.S. Employer
Identification No.)
|
|
|
|
|
9900A Clayton Road
St. Louis, Missouri
(Address of principal executive offices)
|
|
63124-1186
(Zip Code)
|
Registrant’s telephone number, including area code:
(314) 213-7200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
|
|
|
|
|
Title of Each Class
|
|
Name of Each Exchange on Which Registered
|
|
|
|
|
|
Common Stock, par value $0.01 per share
|
|
New York Stock Exchange, Inc.
|
|
Preferred Stock Purchase Rights
|
|
New York Stock Exchange, Inc.
|
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes
þ
No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
o
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form l0-K
or any amendment to this Form l0-K.
þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in
Rule 12b-2 of the Exchange Act.
Large accelerated filer
þ
Accelerated filer
o
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Act).
Yes
o
No
þ
Aggregate market value of the Common Stock held by non-affiliates of the registrant as of the close
of business on March 31, 2007: $1,144,087,825*.
|
|
|
|
|
*
|
|
For purpose of this calculation only, without determining whether the
following are affiliates of the registrant, the registrant has assumed that (i)
its directors and executive officers are affiliates, and (ii) no party who has
filed a Schedule 13D or 13G is an affiliate.
|
Number of shares of Common Stock outstanding at November 26, 2007: 25,747,897.
DOCUMENTS INCORPORATED BY REFERENCE:
|
1.
|
|
Portions of the registrant’s Annual Report to Stockholders for fiscal year ended September
30, 2007 (the “2007 Annual Report”) (Parts I and II).
|
|
|
|
2.
|
|
Portions of the registrant’s Proxy Statement dated December 19, 2007 (the “2008 Proxy
Statement”) (Part III).
|
ESCO TECHNOLOGIES INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
i
PART I
Item 1. Business
THE COMPANY
ESCO Technologies Inc. (“ESCO”) is a producer of engineered products and systems sold to
customers worldwide, primarily for industrial and commercial applications. ESCO operates in three
operating segments which, together with the operating subsidiaries within each segment, are as
follows:
Communications:
Distribution Control Systems, Inc. (“DCSI”)
Distribution Control Systems Caribe, Inc.
Hexagram, Inc. (“Hexagram”)
Nexus Energy Software, Inc. (“Nexus”)
Comtrak Technologies, L.L.C. (“Comtrak”)
Filtration/Fluid Flow (“Filtration”):
Filtertek Inc.
Filtertek BV
Filtertek do Brasil Industria E Commercio Ltda.
Filtertek SA
Filtertek De Mexico, S.A. de C.V.
PTI Technologies Inc. (“PTI”)
VACCO Industries (“VACCO”)
TekPackaging LLC
RF Shielding and Test (“Test”):
ETS-Lindgren L.P.
Lindgren RF Enclosures, Inc.
ETS-Lindgren OY
ETS-Lindgren Limited
Beijing Lindgren ElectronMagnetic Technology Co., Ltd.
ETS-Lindgren Japan, Inc.
All of the Filtertek entities listed above are hereinafter collectively referred to as
“Filtertek”. All of the Test segment entities listed above are hereinafter collectively referred
to as “ETS-Lindgren”.
On November 25, 2007, the Company completed the sale of the Filtertek businesses to Illinois
Tool Works Inc. for approximately $77.5 million in cash, subject to closing working capital
adjustments. The net cash proceeds from the sale, estimated at $70 million after taxes and
expenses, will be used to pay down a portion of the debt associated with the Doble Engineering
Company acquisition, mentioned below.
The above operating subsidiaries are engaged primarily in the research, development,
manufacture, sale and support of the products and systems described below, and are subsidiaries of
ESCO Technologies Holding Inc., a wholly-owned direct subsidiary of ESCO. ESCO and its direct and
indirect subsidiaries are hereinafter referred to collectively as the “Company”. The Company’s
businesses are subject to a number of risks and uncertainties, including without limitation those
discussed in Item 1A below. See also “Management’s Discussion and Analysis” appearing in the 2007
Annual Report, which is herein incorporated by reference, and “Forward-Looking Information” below.
On August 10, 2007 ESCO acquired the assets and certain liabilities of Wintec, LLC (Wintec)
for a purchase price of $6 million. Wintec produces metallic filtration products and its business
has been incorporated into VACCO’s operations.
On November 7, 2007, ESCO announced an agreement to acquire the stock of Doble Engineering
Company, headquartered in Watertown, Massachusetts, for $319 million in cash, subject
1
to adjustment
for differences in working capital and cash on hand at closing. The Company intends to
fund the acquisition by a combination of existing cash and borrowings under a new credit
facility to be entered into with a group led by National City Bank. The acquisition is expected to
close in the quarter ending December 31, 2007.
PRODUCTS
The Company’s products are described below. See Note 14 of the Notes to Consolidated Financial
Statements in the 2007 Annual Report for financial information regarding segments, which Note is
herein incorporated by reference.
COMMUNICATIONS
The Communications segment accounted for approximately 37%, 34% and 32% of the Company’s total
revenue in fiscal years 2007, 2006 and 2005, respectively.
DCSI is a leading manufacturer of two-way power line communication systems for the electric
utility industry (the “TWACS
®
systems”), which are composed of equipment (primarily
meter modules and equipment for central stations and substations), software and support services.
The TWACS Network Gateway (“TWACS NG”) software is being developed with technical assistance from a
third-party contractor. This development continued in fiscal 2007, leading to the commercial
release of its third version, which was delivered to the customer, and has been undergoing
operational testing. Additional versions of this software are currently under development and are
scheduled for commercial release in fiscal 2008. The TWACS systems provide electric utilities with
a proprietary communication technology for automatic meter reading, load control, interval data,
outage assessment/restoration monitoring, remote service disconnect/connect, time-of-use data for
critical peak pricing, tamper/theft detection and pre-paid metering. Revenue from the TWACS
systems, which may be considered a class of similar products, accounted for approximately 24%, 26%
and 28% of the Company’s total revenue in fiscal years 2007, 2006 and 2005, respectively. In
November 2005, DCSI entered into a contract to provide equipment, software and services to Pacific
Gas & Electric (PG&E) in support of the electric portion of PG&E’s Advanced Metering Infrastructure
(AMI) project. The contract value was initially expected to total approximately $310 million over a
five-year period; however, during the third quarter of fiscal 2007, PG&E announced its plans to
request proposals from a small group of vendors in order to evaluate such vendors’ ability to
address potential future functionality requirements for the electric portion of its service
territory currently included in DCSI’s contract. For further discussion of this contract and
certain related contingencies and uncertainties, see Item 1.A Risk Factors and “Management’s
Discussion and Analysis — Pacific Gas & Electric” appearing in the 2007 Annual Report.
Hexagram provides, through its STAR
®
network, wireless RF data communications
systems, primarily to gas and water utilities for automatic meter reading applications. In
November 2005, Hexagram entered into a contract with PG&E to provide its communications system for
the gas meter portion of PG&E’s AMI Project. The total anticipated contract revenue through the
full five-year deployment is approximately $225 million. This contract is subject to contingencies
and uncertainties similar to those associated with the DCSI — PG&E contract described above,
except that the TWACS NG software is not applicable to this contract. PG&E is currently evaluating
Hexagram’s technology for possible use in the electric portion of its AMI project.
Nexus provides energy companies with software solutions that add value to their existing
billing and metering infrastructure to allow both the energy company and its customers to better
manage energy-driven transactions and decision-making. Nexus’ analytics-based software applications
are used by over 100 major energy organizations worldwide.
Comtrak manufactures advanced video security monitoring systems for commercial and industrial
applications. Comtrak is continuing to work jointly with ADT Security Services, Inc., who is
selling this system under its SecurVision
®
trademark to a variety of markets.
2
FILTRATION
The Filtration segment accounted for approximately 36%, 38% and 40% of the Company’s total
revenue in fiscal years 2007, 2006 and 2005, respectively.
PTI is a leading supplier of filtration products serving the commercial aerospace, military
aerospace and various industrial markets. The industrial markets include chemical processing,
automotive and mobile equipment. Products include filter elements, assemblies, modules, indicators
and other related components. All products must meet stringent quality requirements and withstand
severe operating conditions. Product applications include aircraft and mobile equipment hydraulic
systems, aircraft engines, plant equipment and automotive transmissions. PTI supplies products
worldwide to original equipment manufacturers and the U.S. government under long term contracts,
and to the commercial aftermarkets through distribution channels.
VACCO supplies flow control products, valves and filters to the space, defense and commercial
industries for use in aircraft, satellite propulsion systems, satellite launch vehicles, the space
shuttle and its successor, Project Constellation. VACCO also uses its etched disc technology to
produce quiet valves and manifolds for U.S. Navy applications.
TekPackaging LLC produces highly engineered thermal-formed and security packaging products for
medical, food and electronics products.
As previously noted in this report, the Filtertek businesses were sold as of November 25,
2007. Filtertek develops and manufactures a broad range of specialized filtration and fluid/flow
products at its facilities in North America, South America and Europe. Filtertek’s products, which
are centered around its insert injection-molding technology wherein a filter medium is inserted
into the tooling prior to injection-molding of the filter housing, have widespread applications in
the medical and healthcare, automotive fluid system, consumer appliance and other commercial and
industrial markets. Typical Filtertek customers may require daily production of thousands of units,
at very high levels of quality, that are generally produced in highly-automated manufacturing
cells. Many of Filtertek’s products are produced utilizing patented designs or proprietary product
or process design, or both. Filtertek’s products are typically supplied to original equipment
manufacturers under long-term contracts.
TEST
The Test segment accounted for approximately 27%, 28% and 28% of the Company’s total revenue
in fiscal years 2007, 2006 and 2005, respectively.
ETS-Lindgren designs and manufactures products to measure and contain magnetic,
electromagnetic and acoustic energy. It supplies customers with a broad range of isolated
environments including RF test enclosures, acoustic test enclosures, RF and magnetically shielded
rooms, secure communication facilities and broadcast and recording studios. Many of these
facilities include proprietary features such as shielded doors and windows. ETS-Lindgren also
provides the design, program management, installation and integration services required to
successfully complete these types of facilities.
ETS-Lindgren also supplies customers with a broad range of components including RF absorptive
materials, RF filters, active compensation systems, antennas, antenna masts, turntables and
electric and magnetic probes, RF test cells, proprietary measurement software and other test
accessories required to perform a variety of tests. ETS-Lindgren also offers a variety of services
including calibration for antennas and field probes, chamber certification, field surveys, customer
training and a variety of product tests. ETS-Lindgren operates the following accredited test labs:
American Association for Laboratory Accreditation (“A2LA”), National Voluntary Laboratory
Accreditation Program (“NAVLAP”) and CATL (CTIA-The Wireless Association (“CTIA”) Accredited Test
Lab). In addition, ETS-Lindgren serves the acoustics, medical, health and safety, electronics,
wireless communications, automotive and defense markets.
3
MARKETING AND SALES
The Filtration and Test segments’ products generally are distributed to customers through a
domestic and foreign network of distributors, sales representatives and in-house salespersons. DCSI’s
sales to investor-owned utilities are made directly to the utilities through its sales team. DCSI
utilizes distributors and direct sales representatives to sell its systems to the electric utility
cooperative and municipal markets. Hexagram utilizes distributors and direct sales representatives
to sell its systems to electric, gas, water and combination utilities. Nexus markets its products
utilizing its in-house sales force.
The Company’s international sales accounted for approximately 23%, 22% and 24% of the
Company’s total sales in the fiscal years ended September 30, 2007, 2006 and 2005, respectively.
See Note 14 of the Notes to Consolidated Financial Statements in the 2007 Annual Report for
financial information regarding geographic areas, which Note is herein incorporated by reference.
See also Item 1.A Risk Factors for a discussion of risks of the Company’s international operations.
Some of the Company’s products are sold directly or indirectly to the U.S. Government under
contracts with the Army, Navy and Air Force and subcontracts with prime contractors of such
entities. Direct and indirect sales to the U.S. Government accounted for approximately 6%, 6% and
8% of the Company’s total sales in the fiscal years ended September 30, 2007, 2006 and 2005,
respectively.
INTELLECTUAL PROPERTY
The Company owns or has other rights in various forms of intellectual property (i.e., patents,
trademarks, service marks, copyrights, mask works, trade secrets and other items). As a major
supplier of engineered products to growing industrial and commercial markets, the Company
emphasizes developing intellectual property and protecting its rights therein. However, the scope
of protection afforded by intellectual property rights, including those of the Company, is often
uncertain and involves complex legal and factual issues. Some intellectual property rights, such
as patents, have only a limited term. Also, there can be no assurance that third parties will not
infringe or design around the Company’s intellectual property. Policing unauthorized use of
intellectual property is difficult, and copyright infringement is a persistent problem for many
companies, particularly in some international markets. In addition, the Company may not elect to
pursue an unauthorized user due to the high costs and uncertainties associated with litigation.
Further, there can be no assurance that courts will ultimately hold issued patents valid and
enforceable. See Item 1.A Risk Factors.
In the Communications segment, many of the products are based on patented or otherwise
proprietary technology, including the Company’s TWACS technology. The TWACS systems are protected
primarily by a number of patents expiring on various dates ending in 2017. Patents covering
significant aspects of the TWACS technology will expire in 2010 for outbound signal reception and
in 2017 for inbound signal generation. Other patents covering inbound and outbound signal
detection have expired in 2007. The Communications segment policy is to seek patent and/or other
forms of intellectual property protection on new and improved products, components of products and
methods of operation for its businesses, as such developments are made. The Company plans to
protect the TWACS NG software code as a trade secret, although certain discrete features and
functionality may be patented. Hexagram holds two significant patents which cover the operation of
its STAR
®
network communications systems. These will expire in 2015 and 2016.
With respect to the Filtration segment, an increasing number of products are based on patented
or otherwise proprietary technology that sets them apart from the competition. VACCO’s proprietary
quieting technology, which it protects as trade secrets, is a significant differentiator for
products supplied to the U.S. Navy submarine fleet.
In the Test segment, patent protection has been sought for significant inventions. Examples
of such inventions include novel designs for window and door assemblies used in shielded enclosures
and anechoic chambers, improved acoustic techniques for sound isolation and a variety of unique
antennas.
The Company considers its patent and other intellectual property to be of significant value in
each of
4
its segments. The Communications segment owns intellectual property, including its TWACS
technology, which it deems necessary or desirable for the manufacture, use or sale of its products.
See the references to the TWACS NG software above in this section and in “Communications” on page
2 of this report. No other segment is materially dependent on any single patent, group of patents
or other intellectual property.
BACKLOG
Total Company backlog, including Filtertek, at September 30, 2007 was $288.1 million,
representing an increase of $34.7 million (13.7%) from the beginning of the fiscal year backlog of
$253.4 million. The backlog of firm orders at September 30, 2007 and September 30, 2006,
respectively, was: $104.9 million and $78.6 million for Filtration (of which, $30.5 million and
$21.3 million, respectively, was for Filtertek); $123.2 million and $119.0 million for
Communications; and $60.0 million and $55.8 million for Test. As of September 30, 2007, it is
estimated that, excluding Filtertek, domestic customers accounted for approximately 83% of the
Company’s total firm orders, and international customers accounted for approximately 17%. Of the
Company’s total backlog of orders at September 30, 2007, excluding Filtertek, approximately 85% is
expected to be completed in the fiscal year ending September 30, 2008.
PURCHASED COMPONENTS AND RAW MATERIALS
The Company’s products require a wide variety of components and materials. Although the
Company has multiple sources of supply for most of its materials requirements, certain components
and raw materials are supplied by sole-source vendors, and the Company’s ability to perform certain
contracts depends on their performance. In the past, these required raw materials and various
purchased components generally have been available in sufficient quantities. However, in each of
the Company’s segments, there are instances of some risk of shortages of materials or components
due to reliance on sole or limited source of supply. See Item 1.A Risk Factors.
In the Communications segment, DCSI has arrangements with three independent manufacturers
which produce and supply substantially all of DCSI’s end-products. Two of these manufacturers are
industry leaders with worldwide operations. Each of these manufacturers is directed by DCSI to
purchase certain unique raw material components from suppliers designated by DCSI. DCSI also has
contracts with certain of the raw material suppliers, directing them to supply such raw materials
to DCSI’s manufacturers. Hexagram has contracts with two independent manufacturers which produce
and supply substantially all of Hexagram’s end-products, as well as contracts with several of the
suppliers of the raw materials that are incorporated into such end-products. Hexagram also utilizes
one of the primary suppliers used by DCSI, which is another source for the production of Hexagram’s
end-products. The Company believes that the above-described manufacturers and suppliers will be
reliable sources for DCSI’s and Hexagram’s end-products for the foreseeable future.
The Filtration segment purchases supplies from a wide array of vendors. In most instances,
multiple vendors of raw materials are screened during a qualification process to ensure that there
will not be an interruption of supply should one of them discontinue operations. Nonetheless, in
some situations, there is a risk of shortages due to reliance on a limited number of suppliers or
because of price fluctuations due to the nature of the raw materials.
The Test segment is a vertically integrated supplier of EM shielding products, producing most
of its critical RF components. However, this segment purchases significant quantities of raw
materials such as steel, copper, nickel and wood. Accordingly, the segment is subject to price
fluctuations in the worldwide raw materials markets. In fiscal 2007, this segment experienced
significant price increases in the metal markets as compared to the prior year.
COMPETITION
Competition in the Company’s major markets is broadly based and global in scope. The Company
faces intense competition from a large number of companies for nearly all of its products.
Competition can be
5
particularly intense during periods of economic slowdown, and this has been
experienced in the past in some of the Filtration markets. Although the Company is a leading
supplier in several of the markets it serves, it maintains a relatively small share of the business
in many of the other markets it serves. Individual competitors range in size from annual revenues
of less than $1 million to billion dollar enterprises. Because of the specialized nature of the
Company’s products, its competitive position with respect to its products cannot be precisely
stated. However, DCSI and Hexagram are believed to be leading suppliers in the fixed network
segment of the automatic meter reading (“AMR”) market. This fixed network segment comprises a
substantial part of the total AMR market for utilities. Substantial efforts are required in order
to maintain existing business levels. In the Company’s major served markets, competition is driven
primarily by quality, technology, price and delivery performance. See Item 1.A Risk Factors.
Primary competitors of the Communications segment in the utility communications market include
Itron, Inc., Cellnet+Hunt, Cannon Technologies Inc., Sensus Metering Systems Inc., Elster
Electricity, L.L.C, Comverge, Inc. e-Meter Corporation and Oracle Corporation.
Pall Corporation and SoFrance are the primary competitors in the Filtration markets. Other
significant competitors in these markets include Clarcor Inc. and Moog Inc.
The Test segment is the global leader in the EM shielding market. Significant competitors in
this served market include TDK RF Solutions Inc., Albatross GmbH, IMEDCO AG and Cuming Corporation.
RESEARCH AND DEVELOPMENT
Research and development and the Company’s technological expertise are important factors in
the Company’s business. Research and development programs are designed to develop technology for
new products or to extend or upgrade the capability of existing products, and to enhance their
commercial potential.
The Company performs research and development at its own expense, and also engages in research
and development funded by customers. For the fiscal years ended September 30, 2007, 2006 and 2005,
total Company-sponsored research and development expenses were approximately $25.4 million, $20.0
million and $16.8 million, respectively. Total customer-sponsored research and development expenses
were approximately $7.6 million, $6.3 million and $5.7 million for the fiscal years ended September
30, 2007, 2006 and 2005, respectively. All of the foregoing expense amounts exclude certain
engineering costs primarily associated with product line extensions, modifications and maintenance,
which amounted to approximately $9.1 million, $9.1 million and $7.8 million for the fiscal years
ended September 30, 2007, 2006 and 2005, respectively.
ENVIRONMENTAL MATTERS
The Company is involved in various stages of investigation and cleanup relating to
environmental matters. It is very difficult to estimate the potential costs of such matters and
the possible impact of these costs on the Company at this time due in part to: the uncertainty
regarding the extent of pollution; the complexity of Government laws and regulations and their
interpretations; the varying costs and effectiveness of alternative cleanup technologies and
methods; the uncertain level of insurance or other types of cost recovery; and in the case of
off-site waste disposal facilities, the uncertain level of the Company’s relative involvement and
the possibility of joint and several liability with other contributors under applicable law. Based
on information currently available, the Company does not believe that the aggregate costs involved
in the resolution of any of its environmental matters will have a material adverse effect on the
Company’s financial statements.
GOVERNMENT CONTRACTS
The Company’s contracts with the U.S. Government and subcontracts with prime contractors of
the U.S. Government are primarily firm fixed-price contracts under which work is performed and paid
for at a fixed amount without adjustment for the actual costs experienced in connection with the
contracts. Therefore,
6
unless the customer actually or constructively alters or impedes the work
performed, all risk of loss due to cost overruns is borne by the Company. However, VACCO has had
an increasing number of “cost plus fixed fee” contracts awarded. All Government prime contracts
and virtually all of the Company’s subcontracts provide that they may be terminated at the
convenience of the Government. Upon such termination, the Company is normally entitled to receive
equitable compensation. See “Marketing And Sales” in this Item 1 and Item 1.A Risk Factors for
additional information regarding Government contracts.
EMPLOYEES
As of October 31, 2007, the Company employed approximately 2,700 persons.
FINANCING
On October 6, 2004, the Company entered into a $100 million five-year revolving credit
facility with a $50 million increase option. This facility is available for direct borrowings
and/or the issuance of letters of credit, and is provided by a group of six banks, led by Wells
Fargo Bank as agent, with a maturity of October 6, 2009. The facility is secured by the unlimited
guaranty of the Company’s material domestic subsidiaries and a 65% pledge of the material foreign
subsidiaries’ share equity. See “Management’s Discussion and Analysis — Capital Resources and
Liquidity” in the 2007 Annual Report, and Note 9 of the Notes to Consolidated Financial Statements
in the 2007 Annual Report, which information is herein incorporated by reference.
Subsequent to September 30, 2007, the Company announced its intention to enter into a new
credit facility led by National City Bank in connection with the Company’s anticipated acquisition
of Doble Engineering Company.
HISTORY OF THE BUSINESS
ESCO was incorporated in Missouri in August 1990 as a wholly-owned subsidiary of Emerson
Electric Co. (“Emerson”) to be the indirect holding company for several Emerson subsidiaries, which
were primarily in the defense business. Ownership of ESCO and its subsidiaries was distributed on
October 19, 1990 by Emerson to its shareholders through a special distribution. Since that time,
through a series of acquisitions and divestitures, the Company has shifted its primary focus from
defense contracting to the supply of engineered products marketed to industrial and commercial
users. Effective July 10, 2000, ESCO changed its name from ESCO Electronics Corporation to ESCO
Technologies Inc.
AVAILABLE INFORMATION
The Company makes available free of charge through its Internet website,
www.escotechnologies.com
, its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after
such material is electronically filed with or furnished to the Securities and Exchange Commission.
Item 1A. Risk Factors
This Form 10-K, including Item 1 “Business,” Item 2 “Properties”, Item 3 “Legal Proceedings” and
Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
(incorporated by reference to “Management’s Discussion and Analysis” appearing in the 2007 Annual
Report), contains “forward-looking statements” within the meaning of the safe harbor provisions of
the federal securities laws. In addition to the risks and uncertainties discussed elsewhere in
this Form 10-K, the following are important risk factors which could cause actual results and
events to differ materially from those contained in any forward-looking statements.
7
A SIGNIFICANT PORTION OF COMMUNICATIONS SEGMENT REVENUES IS GENERATED BY A LIMITED NUMBER OF LARGE
CONTRACTS.
A significant portion of the Communications segment’s business is dependent on several large
contracts with customers. The largest of these are two contracts to separately sell electric and
gas automatic meter reading systems to PG&E for its AMI project over a period of approximately five
years. These contracts, which represent a potential high source of revenue, are subject to
cancellation or reduction in volume by PG&E, delays, regulatory actions and the Company’s ability to develop advanced products and
successfully perform the contracts. In the third quarter of fiscal 2007, PG&E announced that it
was going to evaluate other suppliers’ technologies for use in the electric portion of its AMI
project. Currently, PG&E has not completed its evaluation. There is no assurance that PG&E will
purchase DCSI’s systems for all of its electric meters. The loss of revenue which would result
from PG&E’s selection of other suppliers, cancellations, delays, reductions, regulatory actions or
the Company’s failure to perform in connection with these contracts could have a material adverse
effect on the Company’s business, results of operations and financial condition as a whole.
FAILURE OR DELAY IN NEW PRODUCT DEVELOPMENT COULD REDUCE THE COMPANY’S FUTURE SALES.
Much of the Company’s business is dependent on the continuous development of new products and
technologies to meet the changing needs of the Company’s markets on a cost-effective basis. Many of
these markets are highly technical from an engineering standpoint, and the relevant technologies
are subject to rapid change. For example, the continued development of the TWACS NG software is
critical to the continued sales growth of DCSI. Failure to deliver the final version of the TWACS
NG software, to which DCSI has committed under the PG&E contract, could constitute an event of
default and adversely impact expected revenues.
If the Company fails to timely enhance existing products or develop new products, sales
opportunities could be lost, which would adversely affect business. In addition, in some existing
contracts with customers, the Company has made commitments to develop and deliver new products. If
the Company fails to meet these commitments, the default could result in the imposition of
contractual penalties including termination. The inability to enhance existing products in a
timely manner could make the products less competitive, while the inability to successfully develop
new products may limit growth opportunities. Delays in product development may also require greater
investment in research and development. Increased costs associated with new product development
and product enhancements could adversely affect operating results. The costs of new product
development may not be recoverable if demand for the products is not as anticipated.
A SIGNIFICANT PORTION OF THE COMPANY’S CAPITALIZED SOFTWARE IS SUBJECT TO IMPAIRMENT RISK BASED ON
THE ABILITY TO MARKET THE SOFTWARE
A significant portion of the Company’s capitalized software value is contingent on the future
sales of TWACS NG software. Failure to generate sufficient sales to recoup costs could result in
the impairment of the capitalized software costs.
CERTAIN MANUFACTURING OPERATIONS ARE DEPENDENT ON A SMALL NUMBER OF THIRD-PARTY SUPPLIERS
A significant part of the Communications segment’s manufacturing operations relies on a small
number of third-party manufacturers to supply the segment’s products. For example, DCSI has
arrangements with three manufacturers which produce and supply substantially all of DCSI’s
end-products. Two of these suppliers produce these end-products in Mexico. A significant
disruption (for example, a strike) in the supply of those products could negatively affect the
timely delivery of DCSI’s products to customers and future sales. Comtrak currently relies on a
single source for a major portion of its products.
Certain of the Company’s other businesses are dependent upon sole source or a limited number
of third-party manufacturers of parts and components. Many of these suppliers are small
businesses. Since alternative supply sources are limited, this increases the risk of adverse
impacts on the Company’s production schedules and profits if the Company’s suppliers default in
fulfilling their price, quality or delivery obligations.
8
MOST COMMUNICATIONS SEGMENT SALES ARE TO OR FOR THE UTILITY INDUSTRY, KNOWN FOR LONG SALES CYCLES
AND UNCERTAINTY, WHICH COULD AFFECT THE TIMING OF REVENUE
Most of the Communications segment’s sales are to or for the utility industry, where sales
cycles are long and unpredictable. Most sales involve large dollar amounts, and are marked by
extended and complex competitive procurements. These factors often cause delays in the timing of
sales, and such delays could result in order postponement, reduction in size or cancellation,
thereby reducing the Company’s future revenue.
PRODUCT DEFECTS COULD RESULT IN COSTLY FIXES, LITIGATION AND DAMAGES
If there are claims related to defective products (under warranty or otherwise), particularly
in a product recall situation, the Company could be faced with significant expenses in replacing or
repairing the product. For example, the DCSI and Hexagram meter modules are installed in thousands
of residences and other buildings. The replacement/repair costs for such problems could have a
material adverse effect on the Company’s financial condition. In addition, if a dispute over
product claims cannot be settled, arbitration or litigation may result, involving attorneys’ fees
and the potential of damage awards.
INCREASES IN RAW MATERIAL PRICES AND AVAILABILITY OF RAW MATERIALS COULD ADVERSELY AFFECT THE
COMPANY’S BUSINESS.
The cost of raw materials is a major element of the total cost of many of the Company’s
products. For example, the Test segment’s critical components rely on purchases of raw materials
from third parties. Increases in the prices of raw materials (such as steel, copper, nickel, zinc,
wood and petrochemical products) could have an adverse impact on business by, among other things,
increasing costs and reducing margins.
In addition, the Company’s reliance on sole or limited sources of supply of raw materials in
each of its segments could adversely affect the business. Weather-created disruptions in supply,
in addition to affecting costs, could impact the Company’s ability to procure an adequate supply of
these raw materials and delay or prevent deliveries of products to customers.
CHANGES IN TEST STANDARDS COULD ADVERSELY IMPACT TEST SEGMENT SALES
A significant portion of the Test segment’s business involves sales to technology customers,
which results from these customers needing to meet specific international and domestic test
standards. If demand for product testing from these customers decreases, the Company’s business
could be adversely affected. Likewise, if regulatory agencies eliminate or reduce certain domestic
or international test standards, the Company’s sales could be adversely affected. For example, if
it were determined that there is no need to include Wi-Fi technology in mobile phones, there may be
no need for certain testing on mobile phones. Also, if a regulatory authority relaxes the test
standards for certain electronic devices because they do not interfere with the broadcast spectrum,
sales of certain Test products could be reduced.
ECONOMIC, POLITICAL AND OTHER RISKS OF THE COMPANY’S INTERNATIONAL OPERATIONS COULD ADVERSELY
AFFECT BUSINESS
In fiscal 2007, approximately 23% of the Company’s sales were made to international customers.
An economic downturn or an adverse change in the political situation in certain foreign countries
in which the Company does business could cause a decline in revenues and adversely affect the
Company’s financial condition. For example, the Test segment does significant business in Asia.
Changes in the Asian political climate or political changes in specific Asian countries could
negatively affect the Company’s business. Softness in the European economy could have a significant
adverse effect on the Company’s European revenues.
The Company’s international sales are also subject to other risks inherent in foreign
commerce, including currency fluctuations and devaluations, the risk of war and terrorism,
differences in foreign laws, uncertainties as to enforcement of contract rights, and difficulties
in negotiating and resolving disputes with
9
foreign customers.
SALES OF GOVERNMENT PRODUCTS DEPEND UPON CONTINUED GOVERNMENT FUNDING.
During the past three years, from 6% to 8% of the Company’s revenues has been generated from
sales to the U.S. Government or its contractors. These sales are dependent on continuous
government funding of its programs. There could be reductions or terminations of the government
funding on programs which are applicable to the Company or its customers. These funding effects
could severely affect the Company’s sales and profit, and could bring about a major restructuring
of Company operations, which could result in an adverse effect on its financial results.
For example, a significant part of VACCO’s sales involve major government defense and space
programs. Government reduction in spending on these programs could have a significant adverse
impact on Company financial results.
THE END OF CUSTOMER PRODUCT LIFE CYCLES COULD NEGATIVELY AFFECT FILTRATION SEGMENT RESULTS.
Many of the Company’s filtration products are sold to be components in the customers’
end-products. If a customer discontinues a certain end-product line, the ability of the Company to
continue to sell those components will be reduced or eliminated. The result could be a significant
decrease in Company sales and revenue.
For example, a substantial portion of PTI’s revenue is generated from commercial aviation
aftermarket sales. As certain aircraft are retired and replaced by newer aircraft, there could be
a corresponding decrease in sales and revenue associated with the Company’s current products. Such
a decrease could adversely affect the Company’s operating results. In addition, if the Government
cuts back the space program, VACCO’s sales of space products would be reduced, and its revenues
could be adversely affected.
ACQUISITIONS OF OTHER COMPANIES CARRY RISK.
Acquisitions of other companies involve numerous risks, including difficulties in the
integration of the operations, technologies and products of the acquired companies, the potential
exposure to unanticipated and undisclosed liabilities, the potential that expected benefits or
synergies are not realized and that operating costs increase, the potential loss of key personnel,
suppliers or customers of acquired businesses and the diversion of management’s time and attention
from other business concerns. Although management will attempt to evaluate the risks inherent in
any particular transaction, no assurances can be made that the Company will properly ascertain all
such risks.
DESPITE ITS EFFORTS, THE COMPANY MAY BE UNABLE TO ADEQUATELY PROTECT ITS INTELLECTUAL PROPERTY.
Despite the Company’s efforts to protect its intellectual property, unauthorized parties or
competitors may copy or otherwise obtain and use the Company’s products and technology,
particularly in foreign countries where the laws may not protect the Company’s proprietary rights
as fully as in the United States. Current and future actions to enforce the Company’s proprietary
rights may result in substantial costs and diversion of resources. No assurances can be made that
any such actions will be successful. In addition, the Company may not elect to pursue an
unauthorized user due to the high costs and uncertainties associated with litigation. The Company
may also face exposure to claims by others challenging its intellectual property rights.
DISPUTES WITH CONTRACTORS COULD ADVERSELY AFFECT THE TEST SEGMENT’S COSTS.
A major portion of the Test segment’s business involves working in conjunction with
contractors to produce the end-product, such as an electronic test chamber. If there are
performance problems caused by either the Company or a contractor, these often result in cost
overruns and may lead to a dispute as to which party is responsible. The resolution of such
disputes can result in arbitration or litigation, and could involve significant expense including
attorneys’ fees. In addition, these disputes may result in reduction in revenue or
10
even a loss to the Company on a particular project.
CHANGES IN ENVIRONMENTAL OR REGULATORY REQUIREMENTS COULD INCREASE EXPENSES AND ADVERSELY AFFECT
PROFITABILITY.
The Company’s operations and properties are subject to U.S. and foreign environmental laws and
regulations governing, among other things, the generation, storage, emission, discharge,
transportation, treatment and disposal of hazardous materials and the clean up of contaminated
properties. Changes in such requirements could increase the cost of compliance. Failure to comply
could result in the imposition of significant fines, suspension of production, alteration of
product processes, cessation of operations or other actions, which could materially and adversely
affect the Company’s business, financial condition and results of operations.
COMPETITION IS BROADLY BASED AND GLOBAL IN SCOPE.
The Company faces competition from a large number of manufacturers and distributors for nearly
all of its products. Some of the Company’s competitors are larger, more diversified corporations
with greater financial, marketing, production and research and development resources. If the
Company cannot compete successfully against current or future competitors, it could have a material
adverse effect on the Company’s business, financial condition and results of operations.
FORWARD-LOOKING INFORMATION
Statements contained in this Form 10-K regarding future events and the Company’s future
results that are based on current expectations, estimates, forecasts and projections about the
Company’s performance and the industries in which the Company operates, the Company’s ability to
utilize NOLs, adequacy of the Company’s credit facilities and future cash flows, estimates of
anticipated contract costs and revenues, the timing, amount and success of claims for research
credits, the timing and success of software development efforts and resulting costs, acceptance by
PG&E of the final version of DCSI’s TWACS NG software, the anticipated value of the PG&E contract,
timing of closing the Doble acquisition, the outcome of current litigation, claims and charges,
recoverability of deferred tax assets, continued reinvestment of foreign earnings, the impact of
FIN 48 and SFAS 157, future costs relating to environmental matters, share repurchases,
investments, sustained performance improvement, performance improvement initiatives, growth
opportunities, new product development, the Company’s ability to increase shareholder value,
acquisitions, and other statements contained herein which are not strictly historical are
considered “forward-looking statements” within the meaning of the safe harbor provisions of the
federal securities laws. Words such as expects, anticipates, targets, goals, projects, intends,
plans, believes, estimates, variations of such words, and similar expressions are intended to
identify such forward-looking statements. Investors are cautioned that such statements are only
predictions, speak only as of the date of this report, and the Company undertakes no duty to
update. 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: those described in this “Item
1A. Risk Factors;” actions by the California Public Utility Commission, PG&E’s Board of Directors
or PG&E’s management impacting PG&E’s AMI projects; the timing and success of DCSI’s software
development efforts; the timing and content of purchase order releases under the PG&E contracts;
DCSI’s and Hexagram’s successful performance of the PG&E contracts; satisfaction of closing
conditions to the Doble acquisition; the timing and execution of real estate sales; termination for
convenience of customer contracts; timing and magnitude of future contract awards; weakening of
economic conditions in served markets; the success of the Company’s
competitors; changes in customer demands or customer insolvencies; competition; intellectual
property rights; technical difficulties; the availability of selected acquisitions; the timing,
pricing and availability of shares offered for sale; delivery delays or defaults by customers;
performance issues with key customers, suppliers and subcontractors; material changes in the costs
of certain raw materials; the successful sale of the Company’s Puerto Rico facility; collective
bargaining and labor disputes; changes in laws and regulations including but not limited to changes
in accounting standards and taxation requirements; costs relating to environmental matters; litigation
11
uncertainty; and the Company’s successful execution of internal operating plans.
Item 1B. Unresolved Staff Comments
None
Item 2. Properties
The Company’s principal buildings contain approximately 913,700 square feet of floor space.
Approximately 357,300 square feet are owned by the Company and approximately 556,400 square feet
are leased. See Note 7 of the Notes to Consolidated Financial Statements in the 2007 Annual
Report, which information is herein incorporated by reference. The principal plants and offices
are as follows*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sq. Ft.
|
|
Lease Expiration
|
|
Principal Use
|
|
Location
|
|
Size (Sq. Ft.)
|
|
Owned/Leased
|
|
Date
|
|
(Operating Segment)
|
|
|
|
|
|
|
|
|
|
|
|
South El Monte, CA
|
|
132,100
|
|
Owned-100,100
|
|
1-2-2008
|
|
Management,
|
|
|
|
|
|
Leased — 32,000
|
|
|
|
Engineering and
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
|
|
|
|
|
|
|
(Filtration)
|
|
|
|
|
|
|
|
|
|
|
|
Oxnard, CA
|
|
127,400
|
|
Owned
|
|
|
|
Management,
|
|
|
|
|
|
|
|
|
|
Engineering and
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
|
|
|
|
|
|
|
(Filtration)
|
|
|
|
|
|
|
|
|
|
|
|
Durant, OK
|
|
100,000
|
|
Owned
|
|
|
|
Manufacturing (Test)
|
|
|
|
|
|
|
|
|
|
|
|
St. Louis, MO
|
|
86,800
|
|
Leased
|
|
3-31-2013
|
|
Management and
|
|
|
|
|
|
|
|
(one 5-year renewal
|
|
Engineering
|
|
|
|
|
|
|
|
option)
|
|
(Communications)
|
|
|
|
|
|
|
|
|
|
|
|
Huntley, IL
|
|
85,000
|
|
Owned
|
|
|
|
Management and
|
|
|
|
|
|
|
|
|
|
Manufacturing
|
|
|
|
|
|
|
|
|
|
(Filtration)
|
|
|
|
|
|
|
|
|
|
|
|
Cedar Park, TX
|
|
70,000
|
|
Owned
|
|
|
|
Management,
|
|
|
|
|
|
|
|
|
|
Engineering and
|
|
|
|
|
|
|
|
|
|
Manufacturing (Test)
|
|
|
|
|
|
|
|
|
|
|
|
Cleveland, OH
|
|
59,600
|
|
Leased
|
|
1-31-2011
|
|
Management,
|
|
|
|
|
|
|
|
(four 3-year renewal
|
|
Engineering and
|
|
|
|
|
|
|
|
options)
|
|
Manufacturing
|
|
|
|
|
|
|
|
|
|
(Communications)
|
|
|
|
|
|
|
|
|
|
|
|
Glendale Heights, IL
|
|
59,400
|
|
Leased
|
|
3-31-2010
|
|
Management,
|
|
|
|
|
|
|
|
(three 3-year
|
|
Engineering and
|
|
|
|
|
|
|
|
renewal options)
|
|
Manufacturing (Test)
|
|
|
|
|
|
|
|
|
|
|
|
Eura, Finland
|
|
40,900
|
|
Owned
|
|
|
|
Management,
|
|
|
|
|
|
|
|
|
|
Engineering and
|
|
|
|
|
|
|
|
|
|
Manufacturing (Test)
|
|
|
|
|
|
|
|
|
|
|
|
Beijing, China
|
|
39,600
|
|
Leased
|
|
4,600 sq. ft. Office
|
|
Manufacturing (Test)
|
|
|
|
|
|
|
|
8-30-2010
|
|
|
|
|
|
|
|
|
|
35,000 sq. ft. Plant
|
|
|
|
|
|
|
|
|
|
12-31-2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
St. Louis, MO
|
|
33,000
|
|
Owned
|
|
|
|
Management and
|
|
|
|
|
|
|
|
|
|
Engineering
|
|
|
|
|
|
|
|
|
|
(Communications)
|
|
|
|
|
|
|
|
|
|
|
|
Minocqua, WI
|
|
30,200
|
|
Leased
|
|
3-31-2010
|
|
Engineering and
|
|
|
|
|
|
|
|
(three 3-year
|
|
Manufacturing (Test)
|
|
|
|
|
|
|
|
renewal options)
|
|
|
|
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sq. Ft.
|
|
Lease Expiration
|
|
Principal Use
|
|
Location
|
|
Size (Sq. Ft.)
|
|
Owned/Leased
|
|
Date
|
|
(Operating Segment)
|
|
|
|
|
|
|
|
|
|
|
|
St. Louis, MO
|
|
19,000
|
|
Leased
|
|
8-31-2015
|
|
ESCO Headquarters
|
|
|
|
|
|
|
|
(one 5-year renewal
|
|
|
|
|
|
|
|
|
|
option)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wellesley, MA
|
|
18,500
|
|
Leased
|
|
9-30-2012
|
|
Management and
|
|
|
|
|
|
|
|
|
|
Engineering
|
|
|
|
|
|
|
|
|
|
(Communications)
|
|
|
|
|
|
|
|
|
|
|
|
Stevenage, England
|
|
12,200
|
|
Leased
|
|
8-11-2017
|
|
Management,
|
|
|
|
|
|
|
|
(Option to terminate
|
|
Engineering and
|
|
|
|
|
|
|
|
in 2012)
|
|
Manufacturing (Test)
|
|
|
|
|
|
*
|
|
The table does not include an owned vacant facility in Patillas, Puerto Rico, consisting of a
building of approximately 77,300 square feet, that was formerly used as a Filtration manufacturing
facility. The Company ceased operations in this facility in March 2004, and is currently marketing
it for sale.
|
The Company believes its buildings, machinery and equipment have been generally well
maintained, are in good operating condition and are adequate for the Company’s current production
requirements.
Item 3. Legal Proceedings
As a normal incident of the businesses in which the Company is engaged, various claims,
charges and litigation are asserted or commenced from time to time against the Company. With
respect to claims and litigation asserted or commenced against the Company, it is the opinion of
management that final judgments, if any, which might be rendered against the Company are adequately
reserved or covered by insurance, and are not likely to have a material adverse effect on its
financial condition or results of operation.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The following sets forth certain information as of November 26, 2007 with respect to ESCO’s
executive officers. These officers have been elected to terms which expire at the first meeting of
the Board of Directors after the next annual meeting of Stockholders.
|
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position(s)
|
|
|
|
Victor L. Richey, Jr.*
|
|
|
50
|
|
|
Chairman, President, Chief Executive Officer and Director
|
|
Gary E. Muenster
|
|
|
47
|
|
|
Senior Vice President and Chief Financial Officer
|
|
Alyson S. Barclay
|
|
|
48
|
|
|
Vice President, Secretary and General Counsel
|
|
|
|
|
|
*
|
|
Also Chairman of the Executive Committee of the Board of Directors.
|
There are no family relationships among any of the executive officers and directors.
Since October 2002, Mr. Richey has been Chief Executive Officer of ESCO, and since April 2003
he has also been Chairman. Since October 2006, he has also been President.
13
Mr. Muenster was Vice President and Chief Financial Officer of ESCO from October 2002 until
November 2005. Since the latter date, he has been Senior Vice President and Chief Financial
Officer.
Ms. Barclay has been Vice President, Secretary and General Counsel of ESCO since October 1999.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
The information required by this item is incorporated herein by reference to Notes 10 and 11
of the Notes to Consolidated Financial Statements, “Common Stock Market Price” and “Shareholders’
Summary—Capital Stock Information” appearing in the 2007 Annual Report. As of November 15, 2007,
there were approximately 2,700 record holders of Common Stock (including Company employees holding
shares under the Employee Stock Purchase Plan). ESCO does not anticipate, currently or in the
foreseeable future, paying cash dividends on the Common Stock, although it reserves the right to do
so to the extent permitted by applicable law and agreements. ESCO’s dividend policy will be
reviewed by the Board of Directors at such future time as may be appropriate in light of relevant
factors at that time, based on ESCO’s earnings and financial position and such other business
considerations as the Board deems relevant. See Item 12 for equity compensation plan information.
ISSUER PURCHASES OF EQUITY SECURITIES*:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased
|
|
Shares that May Yet
|
|
|
|
|
|
|
|
|
|
|
|
as Part of Publicly
|
|
Be Purchased Under
|
|
|
|
Total Number of
|
|
Average Price Paid
|
|
Announced Plans or
|
|
the Plans or
|
|
Period
|
|
Shares Purchased
|
|
per Share
|
|
Programs
|
|
Programs
|
|
July 1-31, 2007
|
|
|
165,000
|
|
|
$
|
38.54
|
|
|
|
165,000
|
|
|
|
0
|
|
|
August 1-31, 2007
|
|
|
0
|
|
|
|
N.A.
|
|
|
|
0
|
|
|
|
0
|
|
|
Sep. 1-30, 2007
|
|
|
0
|
|
|
|
N.A.
|
|
|
|
0
|
|
|
|
0
|
|
|
Total
|
|
|
165,000
|
|
|
$
|
38.54
|
|
|
|
165,000
|
|
|
|
935,000
|
|
|
|
|
|
|
*
|
|
On August 8, 2006, the Board of Directors announced a new common stock repurchase program (the
“2006 Program”) for a maximum of 1,200,000 shares. The 2006 Program will expire September 30,
2008. There currently is no repurchase program which the Company has determined to terminate
prior to the program’s expiration, or under which the Company does not intend to make further
purchases.
|
Item 6. Selected Financial Data
The information required by this item is incorporated herein by reference to “Five-Year
Financial Summary” and Note 2 of the Notes to Consolidated Financial Statements appearing in the
2007 Annual Report.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of
Operations
The information required by this item is incorporated herein by reference to “Management’s
Discussion and Analysis” appearing in the 2007 Annual Report.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated herein by reference to “Market Risk
Analysis” and
14
“Quantitative And Qualitative Disclosures About Market Risk” in “Management’s Discussion and
Analysis” appearing in the 2007 Annual Report.
Item 8. Financial Statements and Supplementary Data
The information required by this item is incorporated herein by reference to the Consolidated
Financial Statements of the Company on pages 23 through 42 and the report thereon of KPMG LLP, an
independent registered public accounting firm, appearing on page 44 of the 2007 Annual Report.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the
Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company’s disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d—15(e) under the Securities Exchange Act of 1934,
as amended (the “Exchange Act”). Based upon that evaluation, the Company’s Chief Executive Officer
and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were
effective as of September 30, 2007. Disclosure controls and procedures are controls and procedures
that are designed to ensure that information required to be disclosed in Company reports filed or
submitted under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commission’s rules and forms. Management’s Report
on Internal Control Over Financial Reporting and the attestation report thereon of KPMG LLP are
incorporated herein by reference to pages 43 and 45, respectively, in the 2007 Annual Report.
There were no changes in the Company’s internal control over financial reporting (as defined
in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter ended September 30, 2007 that
have materially affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information regarding nominees and directors appearing under “Nominees and Continuing
Directors” in the 2008 Proxy Statement is hereby incorporated by reference. Information regarding
executive officers is set forth in Part I of this Form 10-K. Information regarding the Audit and
Finance Committee and its members appearing under “Board of Directors and Committees” in the 2008
Proxy Statement is hereby incorporated by reference.
Information appearing under “Section 16(a) Beneficial Ownership Reporting Compliance” in the
2008 Proxy Statement is hereby incorporated by reference.
The Company has adopted codes of ethics which apply to its chief executive officer, its chief
financial officer and all other senior executives, as well as all Company employees. The following
documents are available free of charge through the Company’s internet website at
www.escotechnologies.com and in print to any person who requests them: Corporate Governance
Guidelines; Charters of the Audit and Finance Committee, Human Resources and Compensation
Committee, and Nominating and Corporate Governance Committee; Code of Business Conduct and Ethics;
and Code of Ethics for Senior Financial Officers.
15
Item 11. Executive Compensation
Information appearing under “Board of Directors and Committees,” “Executive Compensation,”
“Compensation Committee Interlocks and Insider Participation” and “Compensation Committee Report”
in the 2008 Proxy Statement is hereby incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
The information regarding beneficial ownership of shares of common stock by nominees and
directors, by executive officers, by directors and executive officers as a group and by any known
five percent stockholders appearing under “Security Ownership of Directors and Executive Officers”
and “Security Ownership of Certain Beneficial Owners” in the 2008 Proxy Statement is hereby
incorporated by reference.
Equity Compensation Plan Information:
The following table summarizes certain information regarding Common Shares that may be issued
by the Company pursuant to its equity compensation plans existing as of September 30, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities
|
|
|
|
|
|
|
|
|
|
|
|
remaining available for
|
|
|
|
|
|
|
|
|
|
|
|
future issuance under
|
|
|
|
Number of securities to
|
|
Weighted-average
|
|
equity compensation
|
|
|
|
be issued upon exercise
|
|
exercise price of
|
|
plans (excluding
|
|
|
|
of outstanding options,
|
|
outstanding options,
|
|
securities reflected in
|
|
Plan Category
|
|
warrants and rights(1)
|
|
warrants and rights
|
|
column (a))(1)
|
|
|
|
(a)
|
|
(b)
|
|
(c)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans approved by
security holders
(2)
|
|
|
1,723,001
|
(3)
|
|
$
|
30.35
|
(4)
|
|
|
1,749,874
|
(5)(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity compensation
plans not approved
by security holders
|
|
|
0
|
|
|
|
N/A
|
|
|
|
257,498
|
(7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,723,001
|
|
|
$
|
30.35
|
|
|
|
2,007,372
|
|
|
|
|
|
|
(1)
|
|
Number of Common Shares is subject to adjustment for any future changes in capitalization for
stock splits, stock dividends and similar events.
|
|
|
|
(2)
|
|
Consists of the Company’s 1990, 1994 and 1999 Stock Option Plans, the 2001 Stock Incentive
Plan and the 2004 Incentive Compensation Plan. Each of the above-cited Plans has been amended
without Stockholder approval in accordance with its terms, as follows: the Company’s 1990,
1994 and 1999 Stock Option Plans have been amended to provide for tax withholding, to provide
for adjustment upon a special distribution and in certain other respects; the 1994 and 1999
Stock Option Plans have been amended to reflect the change of the Company’s name and the
elimination of the Company’s common stock trust receipts; the 1994 Stock Option Plan was
amended to authorize the Human Resources and Compensation Committee (the “Committee”), in its
discretion, to: (i) permit an optionee who terminates employment with the approval of the
Company to exercise his stock option at any time within three months after termination, but
before ten years from the date of grant, and (ii) direct that an option award agreement may
permit an optionee who terminates employment on account of retirement on or after age 60 to
exercise his stock option up to five years after retirement, but before ten years from the
date of grant; the 1990, 1994 and 1999 Stock Option Plans and the 2001 Stock Incentive Plan
were amended to authorize the Committee to delegate to any employee the power to extend a
stock option beyond termination of employment for persons who are not “officers” as defined
in Rule 16a-1 under the Exchange Act; the 1994 and 1999 Stock Option Plans and the 2001 Stock
Incentive Plan have been amended to authorize the Committee to delegate to the Chief Executive
|
16
|
|
|
|
|
|
|
Officer the power to grant stock options to persons who are not such “officers”, with the
limitation of 10,000 shares per award and 100,000 shares awarded in the aggregate in any
fiscal year; the 2001 Stock Incentive Plan and the 2004 Incentive Compensation Plan were
amended with respect to Performance Share distributions to: (i) eliminate the participant’s
option to pay cash for tax withholding and receive all shares due, and (ii) eliminate the
participant’s option to defer the distribution; the 2004 Incentive Compensation Plan was
amended with respect to Performance Share distributions to eliminate the Committee’s
discretion to determine the percentage of the distribution to be made in shares or to be
withheld for tax payments; and, subsequent to September 30, 2007, the 1999 Stock Option
Plan, the 2001 Stock Incentive Plan and the 2004 Incentive Compensation Plan were amended
in accordance with Section 409A of the Internal Revenue Code of 1986, as amended, to
eliminate the
Committee’s discretion to grant to stock option holders additional alternative stock
appreciation rights covering additional shares, under certain circumstances; and in the case of
the 2004 Plan, to restrict the payment of dividend equivalents to participants in restricted
stock awards to the time when the shares to which the dividend equivalents apply are delivered
to the participant.
|
|
|
|
(3)
|
|
Includes 164,060 Common Shares issuable in connection with the vesting and distribution of
outstanding performance-accelerated restricted share awards under the Company’s 2001 Stock
Incentive Plan.
|
|
|
|
(4)
|
|
Does not include 164,060 Common Shares issuable in connection with the vesting and
distribution of outstanding performance-accelerated restricted share awards under the 2001
Stock Incentive Plan, for which there are no exercise prices.
|
|
|
|
(5)
|
|
Comprises 4,144 Common Shares under the 1999 Stock Option Plan, 278,987 Common Shares under
the 2001 Stock Incentive Plan and 1,466,743 Common Shares under the 2004 Incentive
Compensation Plan.
|
|
|
|
(6)
|
|
Does not include shares that may be purchased on the open market pursuant to the Company’s
Employee Stock Purchase Plan (the “ESPP”). Under the ESPP, participants may elect to have up
to 10% of their current salary or wages withheld and contributed to one or more independent
trustees for the purchase of Common Shares. At the discretion of an officer of the Company,
the Company or a domestic subsidiary or division may contribute cash in an amount not to
exceed 20% of the amounts contributed by participants. The total number of Common Shares
purchased with the Company’s matching contributions, however, may not exceed 183,446. As of
September 30, 2007, 36,307 shares had been purchased with the Company’s matching funds.
|
|
|
|
(7)
|
|
Represents Common Shares issuable pursuant to the Compensation Plan for Non-Employee
Directors (the “Compensation Plan”), which provides for each director to be paid (in
addition to other fees) an annual retainer fee payable partially in cash and partially in
Common Shares. Periodically, the Human Resources and Compensation Committee of the Board
of Directors determines the amount of the retainer fee and the allocation of the fee
between cash and Common Shares. The maximum number of Common Shares available for
distribution under the Compensation Plan is 400,000 shares. The stock portion of the
retainer fee is distributable in quarterly installments. Directors may elect to defer
receipt of all of their cash compensation and/or all of the stock portion of the retainer
fee. The deferred amounts are credited to the director’s deferred compensation account in
stock equivalents. Deferred amounts are distributed in Common Shares or cash at such
future dates as specified by the director unless distribution is accelerated in certain
circumstances, including a change in control of the Company. The stock portion which has
been deferred may only be distributed in Common Shares.
|
Item 13. Certain Relationships and Related Transactions and Director Independence
Information regarding the Company’s directors, nominees for directors and members of the
committees of the board of directors, and their status of independence appearing under “Board of
Directors and Committees” in the 2008 Proxy Statement is hereby incorporated by reference.
There was no transaction since the beginning of the Company’s last fiscal year, or any
currently proposed transaction, in which the Company was or is to be a participant and the amount
involved exceeds $120,000, and in which any related person had or will have a direct or indirect
material interest.
17
The Company has implemented a written policy to ensure that all “Interested Transactions” with
“Related Parties” will be at arm’s length and on terms generally available to an unaffiliated
third-party under the same or similar circumstances. Interested Transactions are any Company
transactions in which any Related Party has or will have a direct or indirect interest. Related
Parties are executive officers, directors, director nominees and persons owning more than 5% of
Company common stock, or any immediate
family member of such parties. The policy contains procedures requiring Related Parties to
notify the Company of potential Interested Transactions and for the Nominating and Corporate
Governance Committee (Committee) to review and approve or disapprove of such transaction. The
Committee will consider whether the Interested Transaction with a Related Party is on terms no less
favorable than terms generally available to an unaffiliated third-party under the same or similar
circumstances. If advance Committee approval is not feasible or is not obtained, the policy
requires submission to the Committee after the fact, and the Committee is empowered to approve,
ratify, amend, rescind or terminate the transaction. In such event, the Committee may also request
the General Counsel to evaluate the Company’s controls and procedures to ascertain whether any
changes to the policy are recommended.
Item 14. Principal Accounting Fees and Services
Information regarding the Company’s independent auditors, their fees and services, and the
Company’s Audit and Finance Committee’s pre-approval policies and procedures regarding such fees
and services appearing under “Independent Public Accountants” in the 2008 Proxy Statement is
hereby incorporated by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as a part of this report:
|
|
1.
|
|
The Consolidated Financial Statements of the Company
on pages 23 through 42 and the Reports of Independent Registered
Public Accounting Firm thereon of KPMG LLP appearing on pages 44
and 45 of the 2007 Annual Report.
|
|
|
|
|
2.
|
|
Financial statement schedules have been omitted
because the subject matter is disclosed elsewhere in the financial
statements and notes thereto, not required or not applicable, or
the amounts are not sufficient to require submission.
|
|
|
|
|
3.
|
|
Exhibits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Filed Herewith or Incorporated by
|
|
|
Exhibit
|
|
|
|
|
|
Reference to Document Indicated By
|
|
|
Number
|
|
Description
|
|
|
Footnote
|
|
|
|
|
|
|
|
|
|
|
|
18
3. Exhibits:
|
|
|
|
|
|
|
|
|
|
|
Filed Herewith or Incorporated by
|
|
Exhibit
|
|
|
|
Reference to Document Indicated By
|
|
Number
|
|
Description
|
|
Footnote
|
|
|
|
|
|
|
|
3.1
|
|
Restated Articles of Incorporation
|
|
Incorporated by Reference,
Exhibit 3(a)[1]
|
|
|
|
|
|
|
|
3.2
|
|
Amended Certificate of Designation,
Preferences and Rights of Series A
Participating Cumulative Preferred Stock
of the Registrant
|
|
Incorporated by Reference,
Exhibit 4(e)[2]
|
|
|
|
|
|
|
|
3.3
|
|
Articles of Merger effective July 10, 2000
|
|
Incorporated by Reference, Exhibit 3(c)[3]
|
|
|
|
|
|
|
|
3.4
|
|
Bylaws, as amended and restated
|
|
Incorporated by Reference,
Exhibit 3.4[4]
|
|
|
|
|
|
|
|
3.5
|
|
Amendment to Bylaws effective November 9,
2007
|
|
Incorporated by Reference,
Exhibit 3.1[23]
|
|
|
|
|
|
|
|
4.1
|
|
Specimen Common Stock Certificate
|
|
Incorporated by Reference,
Exhibit 4(a)[3]
|
|
|
|
|
|
|
|
4.2
|
|
Specimen Rights Certificate
|
|
Incorporated by Reference, Exhibit
B to Exhibit 4.1[5]
|
|
|
|
|
|
|
|
4.3
|
|
Rights Agreement dated as of September 24,
1990 (as amended and restated as of
February 3, 2000) between the Registrant
and Registrar and Transfer Company, as
successor Rights Agent
|
|
Incorporated by Reference,
Exhibit 4.1[5]
|
|
|
|
|
|
|
|
4.4
|
|
Credit Agreement dated as of October 6,
2004, among the Registrant, Wells Fargo
Bank, N.A., as agent, and the lenders
listed therein
|
|
Incorporated by Reference,
Exhibit 4.4[6]
|
|
|
|
|
|
|
|
4.5
|
|
Consent and waiver to Credit Agreement
(listed as 4.4, above) dated as of January
20, 2006
|
|
Incorporated by Reference,
Exhibit 4.1[21]
|
|
|
|
|
|
|
|
10.1
|
|
Form of Indemnification Agreement with
each of ESCO’s directors
|
|
Incorporated by Reference,
Exhibit 10(k)[7]
|
|
|
|
|
|
|
|
10.2
|
|
Supplemental Executive Retirement Plan as
amended and restated as of August 2, 1993*
|
|
Incorporated by Reference,
Exhibit 10(n)[8]
|
|
|
|
|
|
|
|
10.3
|
|
Second Amendment to Supplemental Executive
Retirement Plan effective May 1, 2001*
|
|
Incorporated by Reference,
Exhibit 10.4[9]
|
19
|
|
|
|
|
|
|
|
|
|
|
Filed Herewith or Incorporated by
|
|
Exhibit
|
|
|
|
Reference to Document Indicated By
|
|
Number
|
|
Description
|
|
Footnote
|
|
|
|
|
|
|
|
10.4
|
|
Directors’ Extended Compensation Plan*
|
|
Incorporated by Reference,
Exhibit 10(o)[8]
|
|
|
|
|
|
|
|
10.5
|
|
First Amendment to Directors’ Extended
Compensation Plan effective January 1,
2000*
|
|
Incorporated by Reference,
Exhibit 10.11[10]
|
|
|
|
|
|
|
|
10.6
|
|
Second Amendment to Directors’ Extended
Compensation Plan effective April 1, 2001*
|
|
Incorporated by Reference,
Exhibit 10.7[9]
|
|
|
|
|
|
|
|
10.7
|
|
1994 Stock Option Plan (as amended and
restated effective October 16, 2000)*
|
|
Incorporated by Reference,
Exhibit 10.1[11]
|
|
|
|
|
|
|
|
10.8
|
|
Amendment to 1994 Stock Option Plan
effective July 18, 2002*
|
|
Incorporated by Reference,
Exhibit 10(b)[12]
|
|
|
|
|
|
|
|
10.9
|
|
Form of Incentive Stock Option Agreement*
|
|
Incorporated by Reference,
Exhibit 10.15[10]
|
|
|
|
|
|
|
|
10.10
|
|
Severance Plan adopted as of August 10,
1995 (as restated February 5, 2002)*
|
|
Incorporated by Reference,
Exhibit 10[13]
|
|
|
|
|
|
|
|
10.11
|
|
Amendment to 1994 Stock Option Plan
effective August 7, 2003*
|
|
Incorporated by Reference,
Exhibit 10.12[4]
|
|
|
|
|
|
|
|
10.12
|
|
1999 Stock Option Plan (as amended and
restated effective October 16, 2000)*
|
|
Incorporated by Reference,
Exhibit 10.2[11]
|
|
|
|
|
|
|
|
10.13
|
|
Form of Incentive Stock Option Agreement*
|
|
Incorporated by Reference,
Exhibit 10.3[11]
|
|
|
|
|
|
|
|
10.14
|
|
Amendment to 1999 Stock Option Plan
effective August 7, 2003*
|
|
Incorporated by Reference,
Exhibit 10.15[4]
|
|
|
|
|
|
|
|
10.15
|
|
Employment Agreement with Executive
Officer*[14]
|
|
Incorporated by Reference,
Exhibit 10(bb)[1]
|
|
|
|
|
|
|
|
10.16
|
|
Amendment to Employment Agreement with
Executive Officer*[15]
|
|
Incorporated by Reference,
Exhibit 10.18[9]
|
|
|
|
|
|
|
|
10.17
|
|
Executive Stock Purchase Plan*
|
|
Incorporated by Reference,
Exhibit 10.24[10]
|
|
|
|
|
|
|
|
10.18
|
|
Compensation Plan For Non-Employee
Directors*
|
|
Incorporated by Reference,
Exhibit 10.22[9]
|
|
|
|
|
|
|
|
10.19
|
|
2001 Stock Incentive Plan*
|
|
Incorporated by Reference,
Exhibit B[16]
|
|
|
|
|
|
|
|
10.20
|
|
Form of Incentive Stock Option Agreement*
|
|
Incorporated by Reference,
Exhibit 10.24[17]
|
|
|
|
|
|
|
|
10.21
|
|
Form of Non-qualified Stock Option
Agreement*
|
|
Incorporated by Reference,
Exhibit 10.25[17]
|
|
|
|
|
|
|
|
10.22
|
|
Form of Notice of Award—Performance—
Accelerated Restricted Stock *
|
|
Incorporated by Reference,
Exhibit 10.26[17]
|
20
|
|
|
|
|
|
|
|
|
|
|
Filed Herewith or Incorporated by
|
|
Exhibit
|
|
|
|
Reference to Document Indicated By
|
|
Number
|
|
Description
|
|
Footnote
|
|
|
|
|
|
|
|
10.23
|
|
Form of Supplemental Executive Retirement
Plan Agreement *
|
|
Incorporated by Reference,
Exhibit 10.28[17]
|
|
|
|
|
|
|
|
10.24
|
|
Amendment to 2001 Stock Incentive Plan
effective August 7, 2003*
|
|
Incorporated by Reference,
Exhibit 10.29[4]
|
|
|
|
|
|
|
|
10.25
|
|
Sixth Amendment and Restatement of
Employee Stock Purchase Plan effective as
of October 15, 2003*
|
|
Incorporated by Reference,
Appendix C[18]
|
|
|
|
|
|
|
|
10.26
|
|
Second Amendment to Employment Agreement
with V.L. Richey, Jr.
|
|
Incorporated by Reference,
Exhibit 10.1[19]
|
|
|
|
|
|
|
|
10.27
|
|
Second Amendment to Employment Agreement
with G.E. Muenster (identical document
with A.S. Barclay)*
|
|
Incorporated by Reference,
Exhibit 10.2[19]
|
|
|
|
|
|
|
|
10.28
|
|
Notice of Award — restricted stock award
to V.L. Richey, Jr. (identical documents
except for number of shares awarded for:
|
|
Incorporated by Reference,
Exhibit 10.3[19]
|
|
|
|
C.J. Kretschmer — 4,750 shares; G.E.
Muenster — 2,400 shares; A.S. Barclay —
1,800 shares)*
|
|
|
|
|
|
|
|
|
|
10.29
|
|
2004 Incentive Compensation Plan*
|
|
Incorporated by Reference,
Appendix B[18]
|
|
|
|
|
|
|
|
10.30
|
|
Summary of Non-Employee Directors’
Compensation*
|
|
Incorporated by Reference,
Exhibit 10.1[20]
|
|
|
|
|
|
|
|
10.31
|
|
Performance Compensation Plan Amended and
Restated as of November 25, 2002*
|
|
Incorporated by Reference,
Exhibit 10.2[20]
|
|
|
|
|
|
|
|
10.32
|
|
2005 Performance Measures and Evaluation
Criteria under Performance Compensation
Plan*
|
|
Incorporated by Reference,
Exhibit 10.3[20]
|
|
|
|
|
|
|
|
10.33
|
|
Awards to Executive Officers Not Reported
on Form 8-K, October 4, 2004*
|
|
Incorporated by Reference,
Exhibit 10.4[20]
|
|
|
|
|
|
|
|
10.34
|
|
Form of Notice of
Award—Performance-Accelerated Restricted
Stock under 2001 Stock Incentive Plan*
|
|
Incorporated by Reference,
Exhibit 10.5[20]
|
|
|
|
|
|
|
|
10.35
|
|
Form of Incentive Stock Option Agreement
under 2004 Incentive Compensation Plan*
|
|
Incorporated by Reference,
Exhibit 10.6[20]
|
|
|
|
|
|
|
|
10.36
|
|
Form of Nonqualified Stock Option
Agreement under 2004 Incentive
Compensation Plan*
|
|
Incorporated by Reference,
Exhibit 10.7[20]
|
|
|
|
|
|
|
|
10.37
|
|
Form of Incentive Stock Option Agreement
under 2001 Stock Incentive Plan*
|
|
Incorporated by Reference,
Exhibit 10.8[20]
|
|
|
|
|
|
|
|
10.38
|
|
Form of Nonqualified Stock Option
Agreement under 2001 Stock Incentive Plan*
|
|
Incorporated by Reference,
Exhibit 10.9[20]
|
|
|
|
|
|
|
|
10.39
|
|
Second Amendment to 2001 Stock Incentive
Plan effective August 3, 2006*
|
|
Incorporated by Reference,
Exhibit 10.39[22]
|
21
|
|
|
|
|
|
|
|
|
|
|
Filed Herewith or Incorporated by
|
|
Exhibit
|
|
|
|
Reference to Document Indicated By
|
|
Number
|
|
Description
|
|
Footnote
|
|
|
|
|
|
|
|
10.40
|
|
First Amendment to 2004 Incentive
Compensation Plan effective August 3, 2006*
|
|
Incorporated by Reference,
Exhibit 10.40[22]
|
|
|
|
|
|
|
|
10.41
|
|
Employment Agreement with C.J. Kretschmer
effective October 1, 2006*
|
|
Incorporated by Reference,
Exhibit 10.41[22]
|
|
|
|
|
|
|
|
10.42
|
|
Form of Exhibits (“Non-Compete” and
“Change of Control”) to Option Agreements
listed as 10.35 and 10.36, above*
|
|
|
|
|
|
|
|
|
|
10.43
|
|
Third Amendment to Directors’ Extended
Compensation Plan effective October 3,
2007*
|
|
|
|
|
|
|
|
|
|
10.44
|
|
Second Amendment to 2004 Incentive
Compensation Plan effective October 3,
2007*
|
|
|
|
|
|
|
|
|
|
10.45
|
|
Third Amendment to 2001 Stock Incentive
Plan effective October 3, 2007*
|
|
|
|
|
|
|
|
|
|
10.46
|
|
First Amendment to Incentive Compensation
Plan for Executive Officers effective
October 3, 2007*
|
|
|
|
|
|
|
|
|
|
10.47
|
|
Amendment to 1999 Stock Option Plan
effective October 3, 2007*
|
|
|
|
|
|
|
|
|
|
10.48
|
|
Amendment to Severance Plan effective
October 3, 2007*
|
|
|
|
|
|
|
|
|
|
10.49
|
|
Amendment to Performance Compensation Plan
effective October 3, 2007*
|
|
|
|
|
|
|
|
|
|
10.50
|
|
Amendment to Compensation Plan for
Non-Employee Directors effective October
3, 2007*
|
|
|
|
|
|
|
|
|
|
13
|
|
The following-listed sections of the
Annual Report to Stockholders for the year
ended September 30, 2007:
|
|
|
|
|
•
|
|
Management’s Discussion and
Analysis (pgs. 12-22)
|
|
|
|
|
|
•
|
|
Consolidated Financial Statements
(pgs. 23-42) and Report of Independent
Registered Public Accounting Firm (p. 44)
|
|
|
|
|
|
•
|
|
Management’s Report on Internal
Control over Financial Reporting (p. 43)
|
|
|
|
|
|
•
|
|
Report of Independent Registered
Public Accounting Firm (p.45)
|
|
|
|
|
|
•
|
|
Five-year Financial Summary (p. 46)
|
|
|
|
|
|
•
|
|
Common Stock Market Price (p. 46)
|
|
|
|
|
|
•
|
|
Shareholders’ Summary—Capital
Stock Information (p. 48)
|
|
22
|
|
|
|
|
|
|
|
|
|
|
Filed Herewith or Incorporated by
|
|
Exhibit
|
|
|
|
Reference to Document Indicated By
|
|
Number
|
|
Description
|
|
Footnote
|
|
|
|
|
|
|
|
21
|
|
Subsidiaries of ESCO
|
|
|
|
|
|
23
|
|
Consent of Independent Registered Public
Accounting Firm
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer
|
|
|
|
|
|
32
|
|
Certification of Chief Executive Officer
and Chief Financial Officer
|
|
|
|
|
|
|
|
[1] Incorporated by reference to Form 10-K for the fiscal year ended September 30, 1999,
at the Exhibit indicated.
|
|
|
|
|
|
[2] Incorporated by reference to Form 10-Q for the fiscal quarter ended March 31, 2000,
at the Exhibit indicated.
|
|
|
|
|
|
[3] Incorporated by reference to Form 10-Q for the fiscal quarter ended June 30, 2000,
at the Exhibit indicated.
|
|
|
|
|
|
[4] Incorporated by reference to Form 10-K for the fiscal year ended September 30, 2003,
at the Exhibit indicated.
|
|
|
|
|
|
[5] Incorporated by reference to Current Report on Form 8-K dated February 3, 2000, at
the Exhibit indicated.
|
|
|
|
|
|
[6] Incorporated by reference to Form 10-K for the fiscal year ended September 30, 2004,
at the Exhibit indicated.
|
|
|
|
|
|
[7] Incorporated by reference to Form l0-K for the fiscal year ended September 30, l991,
at the Exhibit indicated.
|
|
|
|
|
|
[8] Incorporated by reference to Form 10-K for the fiscal year ended September 30, 1993,
at the Exhibit indicated.
|
|
|
|
|
|
[9] Incorporated by reference to Form 10-K for the fiscal year ended September 30, 2001,
at the Exhibit indicated.
|
|
|
|
|
|
[10] Incorporated by reference to Form 10-K for the fiscal year ended September 30,
2000, at the Exhibit indicated.
|
|
|
|
|
|
[11] Incorporated by reference to Form 10-Q for the fiscal quarter ended December 31,
2000, at the Exhibit indicated.
|
|
|
|
|
|
[12] Incorporated by reference to Form 10-Q for the fiscal quarter ended June 30, 2002,
at the Exhibit indicated.
|
|
|
|
|
|
[13] Incorporated by reference to Form 10-Q for the fiscal quarter ended March 31, 2002,
at the Exhibit indicated.
|
|
|
|
|
|
[14] Identical Employment Agreements between ESCO and executive officers A.S. Barclay,
G.E. Muenster and V.L. Richey, Jr., except that in the cases of Ms. Barclay and Mr.
Muenster the minimum annual salary is $94,000 and $108,000, respectively.
|
|
|
|
|
|
[15] Identical Amendments to Employment Agreements between ESCO and executive officers
A.S. Barclay, G.E. Muenster and V.L. Richey, Jr.
|
23
|
|
|
|
|
|
|
[16] Incorporated by reference to Notice of Annual Meeting of the Stockholders and Proxy
Statement dated December 11, 2000, at the Exhibit indicated.
|
|
|
|
|
|
[17] Incorporated by reference to Form 10-K for the fiscal year ended September 30,
2002, at the Exhibit indicated.
|
|
|
|
|
|
[18] Incorporated by reference to Notice of Annual Meeting of the Stockholders and Proxy
Statement dated December 29, 2003, at the Appendix indicated.
|
|
|
|
|
|
[19] Incorporated by reference to Form 10-Q for the fiscal quarter ended June 30, 2004,
at the Exhibit indicated.
|
|
|
|
|
|
[20] Incorporated by reference to Form 10-Q for the fiscal quarter ended December 31,
2004, at the Exhibit indicated.
|
|
|
|
|
|
[21] Incorporated by reference to Current Report on Form 8-K dated February 2, 2006, at
the Exhibit indicated.
|
|
|
|
|
|
[22] Incorporated by reference to Form 10-K for the fiscal year ended September 30,
2006, at the Exhibit indicated.
|
|
|
|
|
|
[23] Incorporated by reference to Current Report on Form 8-K dated November 12, 2007, at
the Exhibit indicated.
|
|
|
|
*
|
|
Represents a management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Form 10-K pursuant to Item 15(c) of this Part IV.
|
|
|
|
(b)
|
|
Exhibits: Reference is made to the list of exhibits in this Part IV, Item 15(a)3 above.
|
|
|
|
(c)
|
|
Financial Statement Schedules: Reference is made to Part IV, Item 15(a)2 above.
|
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(D) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
|
|
|
|
|
|
|
ESCO TECHNOLOGIES INC.
|
|
|
Date: November 26, 2007
|
By
|
/s/ V.L. Richey, Jr.
|
|
|
|
|
V.L. Richey, Jr.
|
|
|
|
|
Chief Executive Officer
|
|
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below effective November 26, 2007, by the following persons on behalf of the registrant and
in the capacities indicated.
|
|
|
|
|
SIGNATURE
|
|
TITLE
|
|
|
|
|
/s/ V.L. Richey, Jr.
V.L. Richey, Jr.
|
|
Chairman, President, Chief Executive Officer and Director
|
|
|
|
|
/s/ G.E. Muenster
G.E. Muenster
|
|
Senior Vice President and Chief Financial Officer,
Principal Accounting Officer
|
|
|
|
|
/s/ J.M. McConnell
J.M. McConnell
|
|
Director
|
|
|
|
|
/s/ L.W. Solley
L.W. Solley
|
|
Director
|
|
|
|
|
/s/ J.M. Stolze
J.M. Stolze
|
|
Director
|
|
|
|
|
/s/ D.C. Trauscht
D.C. Trauscht
|
|
Director
|
|
|
|
|
/s/ J.D. Woods
J.D. Woods
|
|
Director
|
25
INDEX TO EXHIBITS
Exhibits are listed by numbers corresponding to the Exhibit Table of Item 601 in Regulation S-K.
|
|
|
|
|
Exhibit No.
|
|
Exhibit
|
|
|
|
|
|
10.42
|
|
Form of Exhibits (“Non-Compete” and “Change of Control”) to Option
Agreements
|
|
|
|
|
|
10.43
|
|
Third Amendment to Directors’ Extended Compensation Plan effective
October 3, 2007
|
|
|
|
|
|
10.44
|
|
Second Amendment to 2004 Incentive Compensation Plan effective
October 3, 2007
|
|
|
|
|
|
10.45
|
|
Third Amendment to 2001 Stock Incentive Plan effective October 3,
2007
|
|
|
|
|
|
10.46
|
|
First Amendment to Incentive Compensation Plan for Executive
Officers effective October 3, 2007
|
|
|
|
|
|
10.47
|
|
Amendment to 1999 Stock Option Plan effective October 3, 2007
|
|
|
|
|
|
10.48
|
|
Amendment to Severance Plan effective October 3, 2007
|
|
|
|
|
|
10.49
|
|
Amendment to Performance Compensation Plan effective October 3, 2007
|
|
|
|
|
|
10.50
|
|
Amendment to Compensation Plan for Non-Employee Directors effective
October 3, 2007
|
|
|
|
|
|
13
|
|
The following-listed sections of the Annual Report to Stockholders
for the year ended September 30, 2007:
|
|
|
•
|
|
Management’s Discussion and Analysis (pgs. 12-22)
|
|
|
|
|
•
|
|
Consolidated Financial Statements (pgs. 23-42) and Report of
Independent Registered Public Accounting Firm (p. 44)
|
|
|
|
|
•
|
|
Management’s Report on Internal Control over Financial
Reporting (p. 43)
|
|
|
|
|
•
|
|
Report of Independent Registered Public Accounting Firm
(p.45)
|
|
|
|
|
•
|
|
Five-year Financial Summary (p. 46)
|
|
|
|
|
•
|
|
Common Stock Market Price (p. 46)
|
|
|
|
|
•
|
|
Shareholders’ Summary—Capital Stock Information (p. 48)
|
|
|
|
|
|
21
|
|
Subsidiaries of ESCO
|
|
|
|
|
|
23
|
|
Consent of Independent Registered Public Accounting Firm
|
|
|
|
|
|
31.1
|
|
Certification of Chief Executive Officer
|
|
|
|
|
|
31.2
|
|
Certification of Chief Financial Officer
|
26
|
|
|
|
|
Exhibit No.
|
|
Exhibit
|
|
32
|
|
Certification of Chief Executive Officer and Chief Financial Officer
|
See Item 15(a)3 for a list of exhibits incorporated by reference.
27
Exhibit
13
Management’s Discussion and Analysis
The following discussion should be read in conjunction with the Consolidated Financial Statements
and Notes thereto. The years 2007, 2006 and 2005 represent the fiscal years ended September 30,
2007, 2006 and 2005, respectively, and are used throughout the document.
Introduction
ESCO Technologies Inc. and its wholly owned subsidiaries (ESCO, the Company) are organized into
three reporting units: Communications, Filtration/Fluid Flow (Filtration), and RF Shielding and
Test (Test). The Company’s business segments are comprised of the following primary operating
entities:
|
4
|
|
Communications: Distribution Control Systems, Inc. (DCSI), Hexagram, Inc. (Hexagram), acquired on
February 1, 2006, Nexus Energy Software, Inc. (Nexus), acquired on November 29, 2005, and Comtrak
Technologies, L.L.C. (Comtrak),
|
|
|
|
4
|
|
Filtration: PTI Technologies Inc. (PTI), VACCO Industries (VACCO), and the Filtertek companies
(Filtertek),
|
|
|
|
4
|
|
Test: EMC Group companies consisting primarily of ETS-Lindgren L.P. (ETS) and Lindgren R.F.
Enclosures, Inc. (Lindgren).
|
The Communications unit is a proven supplier of special purpose fixed network communications
systems for electric, gas and water utilities, including hardware and software to support advanced
metering applications. DCSI’s Two-Way Automatic Communications System, known as TWACS
®
, is
currently used for automatic meter reading (AMR) and related advanced metering infrastructure (AMI)
functions serving over 200 utilities, as well as having load management capabilities. Hexagram’s
STAR
®
system, the premier wireless AMI system, delivers two-way and one-way operation on secure
licensed radio frequencies for more than 100 utilities serving electric, gas and water customers.
Nexus provides best-in-class utility data management solutions to more than 85 leading energy
companies that add value to existing billing and metering infrastructure to allow both the
utilities and their customers to better manage energy-driven transactions and decision making.
Comtrak’s SecurVision
®
product line provides digital video surveillance and security functions for
large commercial enterprises and alarm monitoring companies. The Filtration unit develops,
manufactures and markets a broad range of filtration products used in the purification and
processing of liquids. These engineered filtration products utilize membrane, precision screen and
other technologies to protect critical processes and equipment from contaminants. Major
applications include the removal of contaminants in fuel, lubrication and hydraulic systems,
various health care applications, industrial processing, satellite propulsion systems, and oil
processing. The Test unit is the industry leader in providing its customers with the ability to
identify, measure and contain magnetic, electromagnetic and acoustic energy.
ESCO continues to operate with meaningful growth prospects in its primary served markets and with
considerable financial flexibility. The Company continues to focus on new products that incorporate
proprietary design and process technologies. Management is committed to delivering shareholder
value through internal growth, ongoing performance improvement initiatives, and selective
acquisitions.
Highlights of 2007 Operations
|
4
|
|
Sales, net earnings and earnings per share were $527.5 million, $33.7 million and $1.28 per
share, respectively.
|
|
|
|
4
|
|
Net cash provided by operating activities was $45.3 million.
|
|
|
|
4
|
|
At September 30, 2007, cash on hand was $18.6 million.
|
|
|
|
4
|
|
The Company received $49.1 million in orders from Pacific Gas & Electric (PG&E) related to its
electric and gas AMI deployment.
|
|
|
|
4
|
|
Successful deployment of upgraded TWACS system software called “TWACS NG” (formerly referred to
as TNG) Version 1.6.3 at PG&E, with Version 2.0 delivered in October 2007.
|
|
|
|
4
|
|
Hexagram received a $13.5 million order for a water AMR project in Kansas City, Missouri.
|
|
|
|
4
|
|
The Company repurchased $10 million or 265,000 shares of its common stock during 2007.
|
Results of Operations
NET SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
Fiscal year ended
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
vs. 2006
|
|
|
vs. 2005
|
|
|
|
|
Communications
|
|
$
|
197.6
|
|
|
|
156.2
|
|
|
|
138.0
|
|
|
|
26.5
|
%
|
|
|
13.2
|
%
|
|
Filtration
|
|
|
188.4
|
|
|
|
174.1
|
|
|
|
171.7
|
|
|
|
8.2
|
%
|
|
|
1.4
|
%
|
|
Test
|
|
|
141.5
|
|
|
|
128.6
|
|
|
|
119.4
|
|
|
|
10.0
|
%
|
|
|
7.7
|
%
|
|
|
|
Total
|
|
$
|
527.5
|
|
|
|
458.9
|
|
|
|
429.1
|
|
|
|
14.9
|
%
|
|
|
6.9
|
%
|
|
|
Communications
The 26.5% or $41.4 million increase in net sales in 2007 as compared to the prior year was due to:
an increase of $30.5 million at Hexagram; an increase of $6.5 million at DCSI; an increase in sales
of $4.6 million at Nexus; partially offset by a $0.2 million decrease in sales of Comtrak’s video
security products.
The $30.5 million increase in sales of Hexagram’s RF AMI products in 2007 as compared to 2006 was
due to: a $21.6 million increase in sales to PG&E related to their gas deployment; and a $3.1
million increase in sales from the advanced metering project in Kansas City, Missouri. In addition,
Hexagram’s current year results represent twelve months of sales compared to eight months in the
prior year.
12
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Management’s Discussion and Analysis
The $6.5 million increase in sales of DCSI’s AMR products in 2007 as compared to 2006 was due to: a
$14.7 million increase in sales to the electric utility cooperative (COOP) market; a $1.1 million
increase in sales to Puerto Rico Electric Power Authority (PREPA); partially offset by $9.4 million
of lower AMR product sales to investor owned utilities (IOUs). Sales to IOUs decreased in 2007 as
compared to the prior year due to: a $21.0 million decrease in sales to TXU (Oncor), partially
offset by increases in sales to: Duke Energy of $6.0 million, EDESur of $4.5 million, and Florida
Power & Light of $2.6 million.
The $18.2 million or 13.2% increase in net sales in 2006 as compared
to 2005 was due to: the acquisitions of Hexagram and Nexus with sales of $18.6 million and $9.6
million, respectively; partially offset by an $8.6 million decrease in sales of Comtrak’s video
security products; and $1.5 million of lower shipments of DCSI’s AMR products.
The $1.5 million decrease in sales of DCSI’s AMR products in 2006 as compared to 2005 was due to:
an increase in sales to TXU of $19.9 million and other IOUs of $3.0 million; offset by $16.2
million of lower COOP sales; and an $8.1 million decrease in sales to PREPA.
Comtrak’s sales were $7.3 million, $7.5 million, and $16.1 million in 2007, 2006 and 2005,
respectively. The decrease in sales in 2006 as compared to the prior year was due to an
acceleration of shipments in 2005 to meet the customer’s schedule.
Filtration
Net sales in 2007 increased $14.3 million or 8.2% compared to the prior year primarily as a result
of higher commercial aerospace shipments at PTI of $6.4 million; a sales increase of $4.9 million
at VACCO driven by higher defense spares and T-700 shipments; and a net sales increase at Filtertek
of $3.2 million driven primarily by higher commercial shipments.
Net sales in 2006 increased $2.4 million or 1.4% compared to 2005 primarily as a result of higher
commercial aerospace shipments at PTI of $5.6 million, a net sales increase at Filtertek of $3.3
million driven by higher commercial shipments, partially offset by lower defense spares and T-700
shipments at VACCO of $6.6 million.
Test
The net sales increase of $12.9 million or 10.0% in 2007 as compared to the prior year was mainly
due to: a $10.6 million increase in net sales driven by project milestones on a large aircraft
chamber and completion of other test chambers; a $3.2 million increase in net sales from the
Company’s Asian operations; partially offset by a $0.9 million decrease in net sales from the
Company’s European operations.
The net sales increase of $9.2 million or 7.7% in 2006 as compared to 2005 was mainly due to: a
$10.2 million increase in net sales from the Company’s U.S. operations driven by sales of
additional test chambers and higher component sales, a $0.6 million increase in net sales from the
Company’s Asian operations; partially offset by a $1.6 million decrease in net sales from the
Company’s European operations due to the prior year completion of several test chamber projects.
ORDERS AND BACKLOG
New orders received in 2007 were $562.2 million, resulting in an order backlog of $288.1 million at
September 30, 2007 as compared to an order backlog of $253.4 million at September 30, 2006. In
2007, the Company recorded $201.8 million of new orders related to Communications products, $214.9
million related to Filtration products, and $145.5 million related to Test products.
See “CAPITAL
RESOURCES AND LIQUIDITY — Pacific Gas & Electric” on page 17 for a discussion of PG&E contracts.
The Company received orders totaling $49.1 million from PG&E under these agreements during 2007.
During 2007, Hexagram received a $13.5 million order for a water AMR project in Kansas City,
Missouri.
In 2006, the Company recorded $187.5 million of new orders related to Communications products
(including $19.0 million of new orders and $6.0 million of acquired backlog from Hexagram and $16.7
million of new orders and $9.0 million of acquired backlog from Nexus), $172.1 million related to
Filtration products, and $119.6 million related to Test products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses (SG&A) were $122.5 million, or 23.2% of net sales in
2007, $106.9 million, or 23.3% of net sales in 2006, and $84.2 million, or 19.6% of net sales in
2005.
The increase in SG&A expenses in 2007 as compared to the prior year was primarily due to: a
$4.8 million increase in SG&A related to Hexagram (due to a full twelve months of SG&A expenses
compared to eight months included in the prior year); an increase of $4.3 million at DCSI mainly
due to an increase in engineering head count; a $2.9 million increase related to Nexus (due to a
full twelve months compared to ten months in the prior year) and an increase in software
development head count; an increase of $2.1 million incurred in the Test segment primarily to
support new growth opportunities in Asia; and an $0.8 million increase at Corporate mainly due to
the increase in stock option expense.
The increase in SG&A in 2006 as compared to the prior year was primarily due to: $7.5 million of
SG&A expenses related to Nexus; $6.8 million of SG&A expenses related to Hexagram; $2.3 million of
stock option expense and higher costs related to engineering and new product development.
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
13
Management’s Discussion and Analysis
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $10.7 million in 2007, $6.9 million in 2006 and $2.0 million
in 2005. Amortization of intangible assets included $2.1 million and $2.7 million of amortization
of acquired intangible assets related to the Hexagram and Nexus acquisitions in 2007 and 2006,
respectively. The amortization of acquired intangible assets related to Hexagram and Nexus are
included in the Corporate operating segment’s results. The remaining amortization expenses consist
of other identifiable intangible assets (primarily software, patents and licenses). The Company
recorded $6.2 million and $2.2 million in 2007 and 2006, respectively, related to DCSI’s TWACS NG
capitalized software.
OTHER (INCOME) AND EXPENSES, NET
Other (income) and expenses, net, were $2.5 million, $(2.8) million and $(1.6) million in 2007,
2006 and 2005, respectively. Other (income) and expenses, net, in 2007 consisted primarily of: $2.6
million of expenses within the Test segment related to the adverse arbitration award related to the
delivery and installation contract completed in 2005 for a shielded communication room in an
international location; partially offset by $(1.4) million of royalty income.
Other (income) and expenses, net, in 2006 consisted primarily of: a $(1.8) million non-cash gain
representing the reversal of a liability related to an indemnification obligation with respect to a
previously divested subsidiary; $(2.3) million of royalty income; partially offset by a $0.2
million charge related to the termination of a subcontract manufacturer.
Other (income) and expenses, net, in 2005 consisted primarily of: $(2.2) million of royalty income;
and a $0.5 million charge related to the termination of a supply agreement with a medical device
customer.
ASSET IMPAIRMENT — 2005
In June 2005, the Company abandoned its plans to commercialize certain sensor products within the
Filtration segment resulting in an asset impairment charge of $0.8 million to write off certain
patents and a related licensing agreement.
EARNINGS BEFORE INTEREST AND TAXES (EBIT)
The Company evaluates the performance of its operating segments based on EBIT, which the Company
defines as earnings before interest and taxes.
EBIT is not a defined GAAP measure. However, the Company believes that EBIT provides investors and
Management with a valuable and alternative method for assessing the Company’s operating results.
Management evaluates the performance of its operating segments based
on EBIT and believes that EBIT is useful to investors to demonstrate
the operational profitability of the Company’s business segments
by excluding interest and taxes, which are generally accounted for
across the entire company on a consolidated basis. EBIT is also one
of the measures Management uses to determine resource allocations and
incentive compensation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
Change
|
|
|
|
|
Fiscal year ended
|
|
|
2007
|
|
|
2006
|
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
vs. 2006
|
|
|
vs. 2005
|
|
|
|
|
Communications
|
|
$
|
22.0
|
|
|
|
28.3
|
|
|
|
38.8
|
|
|
|
(22.3
|
)%
|
|
|
(27.1
|
)%
|
|
% of net sales
|
|
|
11.1
|
%
|
|
|
18.1
|
%
|
|
|
28.1
|
%
|
|
|
(7.0
|
)%
|
|
|
(10.0
|
)%
|
|
Filtration
|
|
|
23.4
|
|
|
|
19.5
|
|
|
|
22.4
|
|
|
|
20.0
|
%
|
|
|
(12.9
|
)%
|
|
% of net sales
|
|
|
12.4
|
%
|
|
|
11.2
|
%
|
|
|
13.1
|
%
|
|
|
1.2
|
%
|
|
|
(1.9
|
)%
|
|
Test
|
|
|
14.4
|
|
|
|
15.0
|
|
|
|
12.2
|
|
|
|
(4.0
|
)%
|
|
|
23.0
|
%
|
|
% of net sales
|
|
|
10.2
|
%
|
|
|
11.7
|
%
|
|
|
10.2
|
%
|
|
|
(1.5
|
)%
|
|
|
1.5
|
%
|
|
Corporate
|
|
|
(17.8
|
)
|
|
|
(15.2
|
)
|
|
|
(11.4
|
)
|
|
|
17.1
|
%
|
|
|
33.3
|
%
|
|
|
|
Total
|
|
$
|
42.0
|
|
|
|
47.6
|
|
|
|
62.0
|
|
|
|
(11.8
|
)%
|
|
|
(23.2
|
)%
|
|
% of net sales
|
|
|
8.0
|
%
|
|
|
10.4
|
%
|
|
|
14.4
|
%
|
|
|
(2.4
|
)%
|
|
|
(4.0
|
)%
|
|
|
The reconciliation of EBIT to a GAAP financial measure is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
EBIT
|
|
$
|
42.0
|
|
|
|
47.6
|
|
|
|
62.0
|
|
|
Add: Interest income
|
|
|
0.7
|
|
|
|
1.3
|
|
|
|
1.9
|
|
|
Less: Income taxes
|
|
|
(9.0
|
)
|
|
|
(17.6
|
)
|
|
|
(20.4
|
)
|
|
|
|
Net earnings from continuing operations
|
|
$
|
33.7
|
|
|
|
31.3
|
|
|
|
43.5
|
|
|
|
Communications
The decrease in EBIT in 2007 as compared to 2006 was due to: a $10.8 million decrease at DCSI due
to an increase in TWACS NG software amortization expense of $4 million, an increase of $4.3 million
in SG&A expenses mainly due to an increase in engineering head count, an increase in PG&E program
support costs and TWACS NG maintenance of $1.5 million, and higher shipping expense of $0.9
million; partially offset by an increase of $4.4 million in EBIT at Hexagram due to the increase in
sales volumes related to the PG&E deployment.
The decrease in EBIT in 2006 as compared to 2005 was due to: a $7.8 million decrease at DCSI due to
changes in product mix gross margins (IOU vs. COOP), charges related to a terminated subcontract
manufacturer, higher warranty costs and amortization of TWACS NG software; a $3.8 million decrease
at Comtrak due to lower shipments; a $0.7 million loss at Nexus due to the timing of customer
deployments and additional SG&A spending related to engineering and new product initiatives;
partially offset by $1.8 million from Hexagram.
14
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Management’s Discussion and Analysis
Filtration
EBIT increased in 2007 as compared to 2006 primarily due to: a $2.8 million increase at PTI due to
higher commercial aerospace shipments; a $1.7 million increase at VACCO due to higher defense
spares shipments; partially offset by a $0.6 million decrease at Filtertek due to increased raw
material costs.
EBIT decreased in 2006 as compared to 2005 primarily due to: a $4.3 million decrease at VACCO due
to significantly lower defense spares shipments; a $1.4 million decrease at Filtertek partly due to
increased material costs; partially offset by a $2.8 million increase at PTI due to higher
shipments of aerospace products. The 2005 operating results for Filtertek included a $1.9 million
gain related to the termination of a supply agreement with a medical device customer that was not
repeated in 2006.
Test
The decrease in EBIT in 2007 as compared to 2006 was mainly due to: a $1.1 million decrease in EBIT
from the Company’s European operations as a result of lower sales volumes and U.K. facility move
costs; partially offset by a $0.4 million increase in EBIT from the Company’s Asian operations on
the higher sales volumes. In addition, the Company’s current year U.S. operations were negatively
impacted by $2.6 million of total costs associated with the arbitration judgment related to a 2005
U.S. Government project.
The increase in EBIT in 2006 as compared to the prior year was mainly due to: a $2.1 million
increase in EBIT from the Company’s U.S. operations driven by sales of additional test chambers and
higher component sales; a $0.4 million increase in EBIT from the Company’s European operations; and
a $0.3 million increase in EBIT from the Company’s Asian operations.
Corporate
Corporate office operating charges included in consolidated EBIT increased by $2.6 million in 2007
as compared to 2006 mainly due to: the 2007 absence of a $1.8 million non-cash gain recorded in
2006 related to an indemnification obligation with respect to a previously divested subsidiary; a
$0.7 million increase in pre-tax stock option expense; $0.4 million of additional professional fees
incurred to support a research tax project; partially offset by a $0.6 million decrease in pre-tax
amortization of acquired intangible assets related to Nexus and Hexagram.
Corporate office operating charges included in consolidated EBIT increased by $3.8 million in 2006
as compared to 2005 mainly due to: $2.7 million of pre-tax amortization of acquired intangible
assets related to Nexus and Hexagram; $2.3 million of pre-tax stock option expense; partially
offset by a $1.8 million non-cash gain representing the reversal of a liability related to an
indemnification obligation with respect to a previously divested subsidiary. The “Reconciliation to
Consolidated Totals (Corporate)” in Note 14 to the Consolidated Financial Statements represents
Corporate office operating charges.
INTEREST INCOME
Interest income was $0.7 million in 2007, $1.3 million in 2006 and $1.9 million in 2005. The
decrease in interest income in 2007 and 2006 as compared to the prior year periods was due to lower
average cash balances on hand resulting from the 2006 acquisitions.
INCOME TAX EXPENSE
The 2007 effective tax rate was 21.1% compared to 36.0% in 2006 and 31.9% in 2005. The decrease in
the 2007 effective tax rate as compared to the prior year was due to: the favorable impact of the
research tax credit reduced 2007 income tax expense by $4.4 million and the effective tax rate by
10.3%; resolution of certain tax exposure items reduced current year income tax expense by $2.3
million and the effective tax rate by 5.3%; the release of a portion of the valuation allowance on
capital loss carryforward reduced income tax expense by $0.8 million and the effective tax rate by
1.8%; and the effect of deferring U.S. tax on foreign earnings and favorable adjustments to foreign
tax accruals reduced 2007 tax expense by $1.1 million and the effective tax rate by 2.7%. During
2007, the Company determined that certain tax accounts had not been accurately recorded in the
financial statements for fiscal years 2001 to 2006. The effect in any individual year was not
material to the Company’s results of operations, financial position or cash flows. The Company
recorded $1.3 million as a cumulative credit adjustment to tax expense to correct previously
recorded tax accounts during the fourth quarter of 2007.
The increase in the effective tax rate in 2006 as compared to the prior year was due to: the effect
of the foreign earnings repatriation increased 2006 income tax expense by $2.4 million and the
effective rate by 4.8%; the adoption of SFAS 123(R) increased tax expense by $0.7 million and the
effective rate by 1.4%; the lower volume of profit contributions of the Company’s foreign
operations (primarily Puerto Rico due to the lower sales to PREPA) adversely impacted the tax rate;
partially offset by the effect of a favorable change in tax contingencies not related to the
research tax credit which decreased tax expense by $1.4 million and the effective tax rate by 2.9%
and the net effect of the research tax credit which favorably impacted tax expense by $2.5 million
and the effective tax rate by 5%.
Capital Resources and Liquidity
Working capital (current assets less current liabilities) increased to $141.2 million at September
30, 2007 from $131.4 million at September 30, 2006.
During 2007, cash and cash equivalents decreased $18.2 million, primarily due to an increase in
operating working capital requirements. The $19.2 million increase in accounts receivable at
September 30, 2007 is mainly due to: $9.9 million related to the Communications segment and $5.7
million related to the Test
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT 15
Management’s Discussion and Analysis
segment, both due to timing and increased volume of sales. The $16.9 million increase in
inventories at September 30, 2007 is mainly due to an $11.7 million increase within the
Communications segment primarily related to the PG&E deployment. Accounts payable increased by
$15.1 million at September 30, 2007, of which $6.0 million related to the Test segment and $3.1
million related to the Communications segment, both due to the timing of vendor payments on the
higher level of inventory.
Net cash provided by operating activities was $45.3 million, $58.6 million and $68.6 million in
2007, 2006 and 2005, respectively. The decrease in 2007 is related to an increase in operating
working capital requirements. The decrease in 2006 is related to lower net earnings.
Capital expenditures were $19.5 million, $9.1 million and $8.8 million in 2007, 2006 and 2005,
respectively. The increase in 2007 compared to 2006 included: approximately $4 million of
manufacturing equipment for the More Energy project at Filtertek Ireland (Filtration segment);
approximately $2 million for the Cedar Park facility expansion (Test segment); approximately $1
million for the DCSI facility expansion (Communications segment). There were no commitments
outstanding that were considered material for capital expenditures at September 30, 2007.
At September 30, 2007, intangible assets, net, of $77.2 million included $65.7 million of
capitalized software. Approximately $58.6 million of the capitalized software balance represents
software development costs on the TWACS NG software within the Communications segment to further
penetrate the IOU market. This software is being deployed to efficiently handle the additional
levels of communications dictated by the size of the utility service territories and the frequency
of meter reads that are required under time-of-use or critical peak pricing scenarios to meet the
requirements of large IOUs. At September 30, 2007, the Company had approximately $2 million of
commitments related to the development of TWACS NG versions 2.0 and 3.0 which is expected to be
spent during the first quarter of fiscal 2008. The Company expects to spend up to approximately $6
million in fiscal 2008 on TWACS NG. Amortization is on a straight-line basis over seven years and
began in March 2006. The Company recorded $6.2 million and $2.2 million in amortization expense
related to TWACS NG during 2007 and 2006, respectively.
At September 30, 2007, the Company had an
available net operating loss (NOL) carryforward for U.S. Federal tax purposes of approximately $35
million. This NOL will expire between 2019 and 2025, and will be available to reduce future Federal
income tax cash payments.
The closure and relocation of the Filtertek Puerto Rico facility was completed in March 2004. The
Puerto Rico facility is included in other current assets with a carrying value of $3.6 million at
September 30, 2007. The facility is being marketed for sale.
During 2005, the Company reached a
settlement in the defense of a certain revenue-generating patent used in the Filtration business.
Under the terms of the agreement, the Company received a cash payment of $1.5 million, and in 2005
the Company recognized a gain of $0.3 million, after deducting $0.2 million of professional fees
related to the settlement. The unrecognized gain is being recorded on a straight-line basis in
Other (income) and expenses, net, over the remaining patent life, through 2011.
ACQUISITIONS
On August 10, 2007, the Company acquired the assets and certain liabilities of Wintec, LLC (Wintec)
for a purchase price of $6 million. Wintec is engaged in the design, manufacture and sale of
metallic elements, filters, and strainers for pneumatic/hydraulic applications and surface tension
devices for propellant management fluid control with annual revenues of approximately $3.5 million.
The assets acquired consist of accounts receivable, inventory and property, plant and equipment.
The Company recorded approximately $5 million of goodwill in connection with the transaction. In
addition, the Company recorded $0.2 million of amortizable intangible assets consisting of customer
contracts and order backlog which are being amortized on a straight-line basis over periods ranging
from nine months to seventeen months. The operating results for Wintec, since the date of
acquisition, are included within VACCO in the Filtration segment.
On February 1, 2006, the Company acquired the capital stock of Hexagram for a purchase price of
approximately $66 million. The acquisition agreement also provides for contingent consideration of
up to $6.3 million over a five-year period following the acquisition if Hexagram exceeds certain
sales targets. During 2007, the Company paid $1.3 million of contingent consideration. Hexagram is
a radio-frequency (RF) fixed network AMI company headquartered in Cleveland, Ohio. Hexagram
broadens the Company’s served market and provides an RF based AMI system serving primarily
electric, gas and water utilities. The operating results for Hexagram, since the date of
acquisition, are included within the Communications unit. The Company recorded approximately $51
million of goodwill and $3.5 million of trademarks as a result of the transaction. The Company also
recorded $6.6 million of identifiable intangible assets consisting primarily of patents and
proprietary know-how, customer contracts, and order backlog which are being amortized on a
straight-line basis over periods ranging from six months to seven years.
On November 29, 2005, the Company acquired Nexus through an all cash for shares merger transaction
for approximately $29 million in cash plus contingent cash consideration over the four-year period
16
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Management’s Discussion and Analysis
following the merger if Nexus exceeds certain sales targets. Nexus is a software company
headquartered in Wellesley, Massachusetts. Nexus broadens the Company’s served market and provides
software solutions that allow utilities to fully utilize the information produced by the Company’s
AMI systems. The operating results for Nexus, since the date of acquisition, are included within
the Communications unit. The Company recorded approximately $24 million of goodwill as a result of
the transaction. The Company also recorded $2.7 million of identifiable intangible assets
consisting of customer contracts and backlog value which are being amortized on a straight-line
basis over periods ranging from one year to three 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.
PACIFIC GAS & ELECTRIC
In November 2005, DCSI entered into a contract to provide equipment, software and services to
Pacific Gas & Electric (PG&E) in support of the electric portion of PG&E’s Advanced Metering
Infrastructure (AMI) project. Under this contract, equipment is purchased by PG&E only upon
issuance of purchase orders and release authorizations. These orders were initially expected to
total approximately $310 million over a five-year period although significant future developments
explained in the following paragraph have impacted these expectations and the Company now expresses
no opinion as to the amount of orders anticipated under the contract. Under the contract, PG&E
continues to retain the right to purchase products or services from other suppliers for the
electric portion of the AMI project. DCSI has agreed to deliver to PG&E versions of its newly
developed TWACS NG software as it becomes available and is tested. Delivery of the final software
version for which DCSI has committed was required in the fourth quarter of fiscal 2007 and is
currently anticipated in the first quarter of fiscal 2008. The parties are negotiating an amendment
to the current contract to conform to the parties’ performance, including DCSI’s anticipated
software delivery date. In accordance with U.S. generally accepted accounting standards, the
Company will defer all revenue related to DCSI’s arrangement with PG&E until all software is
delivered and acceptance criteria have been met. The contract provides for liquidated damages in
the event of DCSI’s late development or delivery of hardware and software, and includes
indemnification and other customary provisions. The contract may be terminated by PG&E for
default, for its convenience and in the event of a force majeure lasting beyond certain prescribed
periods. The Company has guaranteed the obligations of DCSI under the contract. If PG&E terminates
the contract for its convenience, DCSI will be entitled to recover certain costs.
During the third quarter of 2007, PG&E announced its plans to request information and proposals
from a small group of vendors in order to evaluate such vendors’ ability to address potential
future functionality requirements for the electric portion of its service territory currently
included in DCSI’s contract. In July 2007, PG&E issued requests for proposals (RFPs) to a group of
vendors, including the Company, for PG&E’s electric requirements. Prior to PG&E’s issuance of this
RFP, Hexagram agreed to provide 2,000 of its RF fixed network electric units for PG&E testing.
Testing of Hexagram’s electric solution began in the fourth quarter of 2007. PG&E’s current
activities will impact the timing and/or receipt of future orders from PG&E for its electric
deployment and, until PG&E completes this evaluation and determines whether it will modify its AMI
project plan, the Company cannot estimate the total value or the timing of orders that may be
received under the DCSI PG&E contract.
In November 2005, Hexagram entered into a contract to
provide equipment, software and services to PG&E in support of the gas utility portion of PG&E’s
AMI project. Hexagram’s contract also provided PG&E the option to purchase an RF based electric
product from Hexagram. The total anticipated contract revenue from commencement through the
five-year full deployment is expected to be up to approximately $225 million excluding any
potential purchases of Hexagram’s RF based electric product. As with DCSI’s contract with PG&E,
equipment will be purchased only upon issuance of purchase orders and release authorizations, and
PG&E will continue to have the right to purchase products or services from other suppliers for the
gas utility portion of the AMI project. The contract provides for liquidated damages in the event
of late deliveries, includes indemnification and other customary provisions, and may be terminated
by PG&E for default, for its convenience and in the event of a force majeure lasting beyond certain
prescribed periods. The Company has guaranteed the performance of the contract by Hexagram.
BANK CREDIT FACILITY
Effective October 6, 2004, the Company entered into a $100 million five-year revolving bank credit
facility with a $50 million increase option that has a final maturity and expiration date of
October 6, 2009. The credit facility is available for direct borrowings and/or the issuance of
letters of credit, and is provided by a group of six banks, led by Wells Fargo Bank as agent.
The credit facility requires, as determined by certain financial ratios, a commitment fee ranging
from 17.5 to 27.5 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 LIBOR or based on the prime
rate, at the Company’s election. The credit facility is secured by the unlimited guaranty of the
Company’s material domestic subsidiaries and a 65% pledge of the material foreign subsidiaries’
share equity. The financial covenants of the credit facility include limitations on leverage,
minimum consolidated EBITDA and minimum net worth.
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT 17
Management’s Discussion and Analysis
At September 30, 2007, the Company had approximately $96.4 million available to borrow under the
credit facility in addition to its $18.6 million cash on hand. At September 30, 2007, the Company
had outstanding short-term borrowings of $2.8 million, and outstanding letters of credit of $3.6
million ($0.8 million outstanding under the credit facility). As of September 30, 2007, the Company
was in compliance with all bank covenants.
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.
Subsequent to September 30, 2007, the Company announced its intention to enter into a new credit
facility led by National City Bank in connection with the acquisition of Doble Engineering Company.
See “Subsequent Events” under Management’s Discussion and Analysis.
CONTRACTUAL OBLIGATIONS
The following table shows the Company’s contractual obligations as of September 30, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Payments due by period
|
|
|
|
|
|
|
|
|
Less
|
|
|
|
|
|
|
|
|
|
|
More
|
|
|
Contractual
|
|
|
|
|
|
than
|
|
|
1 to 3
|
|
|
3 to 5
|
|
|
than
|
|
|
Obligations
|
|
Total
|
|
|
1 year
|
|
|
years
|
|
|
years
|
|
|
5 years
|
|
|
|
|
Long-Term Debt
Obligation
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Capital Lease
Obligations
|
|
|
0.9
|
|
|
|
0.3
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
—
|
|
|
Operating Lease
Obligations
|
|
|
26.4
|
|
|
|
6.6
|
|
|
|
9.7
|
|
|
|
6.7
|
|
|
|
3.4
|
|
|
Purchase
Obligations
(1)
|
|
|
2.0
|
|
|
|
2.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Total
|
|
$
|
29.3
|
|
|
|
8.9
|
|
|
|
10.1
|
|
|
|
6.9
|
|
|
|
3.4
|
|
|
|
|
|
|
|
|
(1)
|
|
A purchase obligation is defined as a legally binding and enforceable agreement to
purchase goods and services that specifies all significant terms. Since the majority of the
Company’s purchase orders can be cancelled, they are not included in the table above. TWACS NG
software development costs for version 2.0 and version 3.0 are included.
|
The Company has no off balance sheet arrangements outstanding at September 30, 2007.
SHARE REPURCHASES
In August 2006, the Company’s Board of Directors authorized an open market common stock repurchase
program for up to 1.2 million shares, subject to market conditions and other factors which covers
the period through September 30, 2008. The Company repurchased $10 million or 265,000 shares in
2007 under this program. There were no stock repurchases during 2006. The Company repurchased $25
million or 670,072 shares in 2005 under a previously authorized program.
PENSION FUNDING REQUIREMENTS
The minimum cash funding requirements related to the Company’s defined benefit pension plans are
approximately $0.5 million in 2008, approximately $1.75 million in 2009 and approximately $1.25
million in 2010. The Company made a voluntary cash contribution of $1.4 million in 2006.
SUBSEQUENT EVENTS
On November 7, 2007, the Company announced an agreement to acquire the stock of Doble Engineering
Company, headquartered in Watertown, Massachusetts, for $319 million in cash, subject to adjustment
for differences in working capital and cash on hand at closing. The Company intends to fund the
acquisition by a combination of existing cash and borrowings under a new credit facility led by
National City Bank. The transaction is expected to close in the quarter ending December 31, 2007.
On November 26, 2007, the Company announced it had completed the sale of the filtration portion of
Filtertek Inc. to Illinois Tool Works Inc. (ITW) for approximately $77.5 million in cash, subject
to closing working capital adjustments. The Tek Packaging division of Filtertek is not included in
the transaction. The net cash proceeds from the sale, estimated at $70 million after taxes and
expenses, will be used to pay down a portion of the debt associated with the Doble Engineering
Company acquisition, mentioned above. The Company expects to record a gain on the sale for both
financial reporting and tax purposes, with a portion of the tax gain being shielded from cash
payments through the utilization of the Company’s existing capital loss carryforward which was
generated from prior divestitures.
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 and remediation 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.
18
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Management’s Discussion and Analysis
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.
At September 30, 2007 and 2006, the Company had no obligations related to interest rate swaps.
The Company is also subject to foreign currency exchange rate risk inherent in its sales
commitments, anticipated sales, anticipated purchases and assets and liabilities denominated in
currencies other than the U.S. dollar. The foreign currency most significant to the Company’s
operations is the Euro. Net sales to customers outside of the United States were $121.2 million,
$103.0 million, and $103.8 million in 2007, 2006 and 2005, respectively. The Company hedges certain
foreign currency commitments by purchasing foreign currency forward contracts. The estimated fair
value of open forward contracts at September 30, 2007 was not material.
Critical Accounting Policies
The preparation of financial statements in conformity with GAAP requires Management to make
estimates and assumptions in certain circumstances that affect amounts reported in the accompanying
Consolidated Financial Statements. In preparing these financial statements, Management has made its
best estimates and judgments of certain amounts included in the financial statements, giving due
consideration to materiality. The Company does not believe there is a great likelihood that
materially different amounts would be reported under different conditions or using different
assumptions related to the accounting policies described below. However, application of these
accounting policies involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these estimates. The Company’s
senior Management discusses the critical accounting policies described below with the Audit and
Finance Committee of the Company’s Board of Directors on a periodic basis.
The following discussion of critical accounting policies is intended to bring to the attention of
readers those accounting policies which Management believes are critical to the Consolidated
Financial Statements and other financial disclosure. It is not intended to be a comprehensive list
of all significant accounting policies that are more fully described in Note 1 of Notes to
Consolidated Financial Statements.
REVENUE RECOGNITION
Communications Unit:
Within the Communications unit, approximately 95% of the unit’s revenue
arrangements (approximately 35% of consolidated revenues) contain software components. Revenue
under these arrangements is recognized in accordance with Statement of Position 97-2 (SOP 97-2),
“Software Revenue Recognition,” as amended by SOP 98-9, “Modification of SOP 97-2, Software Revenue
Recognition, with Respect to Certain Transactions.” The application of software revenue recognition
requires judgment, including the determination of whether a software arrangement includes multiple
elements and estimates of the fair value of the elements, or vendor-specific objective evidence of
fair value (“VSOE”). Changes to the elements in a software arrangement, and the ability to identify
VSOE for those elements could materially impact the amount of earned and/or deferred revenue. There
have been no material changes to these estimates for the financial statement periods presented and
the Company believes that these estimates generally should not be subject to significant variation
in the future. The remaining 5% of the unit’s revenues represent products sold under a single
element arrangement and are recognized when products are delivered to unaffiliated customers.
Filtration Unit:
Within the Filtration operating unit, approximately 80% of operating unit revenues
(approximately 30% of consolidated revenues) are recognized when products are delivered (when title
and risk of ownership transfers) or when services are performed for unaffiliated customers.
Approximately 20% of operating unit revenues (approximately 5% of consolidated revenues) are
recorded under the percentage-of-completion provisions of SOP 81-1, “Accounting for Performance of
Construction-Type and Certain Production-Type Contracts” because the Company manufactures complex
products for aerospace and military customers under production contracts. The
percentage-of-completion method of accounting involves the use of various estimating techniques to
project costs at completion. These estimates involve various assumptions and projections relative
to the outcome of future events over a period of several years, including future labor productivity
and availability, the nature and complexity of the work to be performed, availability of materials,
the impact of delayed performance, and the timing of product deliveries. These estimates are based
on Management’s judgment and the Company’s substantial experience in developing these types of
estimates. Changes in underlying assumptions/estimates may adversely affect financial performance
if they increase estimated project costs at completion, or positively affect financial performance
if they decrease estimated
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
19
Management’s Discussion and Analysis
project costs at completion. Due to the nature of these contracts and the operating unit’s cost
estimating process, the Company believes that these estimates generally should not be subject to
significant variation in the future. There have been no material changes to these estimates for the
financial statement periods presented. The Company regularly reviews its estimates to assess
revisions in contract values and estimated costs at completion.
Test Unit:
Within the Test unit, approximately 50% of revenues (approximately 15% of consolidated
revenues) are recognized when products are delivered (when title and risk of ownership transfers)
or when services are performed for unaffiliated customers. Certain arrangements contain multiple
elements which are accounted for under the provisions of EITF 00-21, “Revenue Arrangements with
Multiple Deliverables.” The application of EITF 00-21 requires judgment as to whether the
deliverables can be divided into more than one unit of accounting and whether the separate units of
accounting have value to the customer on a stand-alone basis. Changes to these elements could
affect the timing of revenue recognition. There have been no material changes to these elements for
the financial statement periods presented.
Approximately 50% of the unit’s revenues (approximately 15% of consolidated revenues) are recorded
under the percentage-of-completion provisions of SOP 81-1, “Accounting for the Performance of
Construction-Type and Certain Production-Type Contracts” due to the complex nature of the
enclosures that are designed and produced under these contracts. As discussed above, this method of
accounting involves the use of various estimating techniques to project costs at completion, which
are based on Management’s judgment and the Company’s substantial experience in developing these
types of estimates. Changes in underlying assumptions/ estimates may adversely or positively affect
financial performance. Due to the nature of these contracts and the operating unit’s cost
estimating process, the Company believes that these estimates generally should not be subject to
significant variation in the future. There have been no material changes to these estimates for the
financial statement periods presented. The Company regularly reviews its contract estimates to
assess revisions in contract values and estimated costs at completion.
INVENTORY
Inventories are valued at the lower of cost (first-in, first-out) or market value. Management
regularly reviews inventories on hand compared to historical usage and estimated future usage and
sales. 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 unliquidated progress
payments. 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
may not be realized within one year.
INCOME TAXES
The Company operates in numerous taxing jurisdictions and is subject to examination by various U.S.
Federal, state and foreign jurisdictions for various tax periods. Additionally, the Company has
retained tax liabilities and the rights to tax refunds in connection with various divestitures of
businesses in prior years. The Company’s income tax positions are based on research and
interpretations of the income tax laws and rulings in each of the jurisdictions in which the
Company does business. Due to the subjectivity of interpretations of laws and rulings in each
jurisdiction, the differences and interplay in tax laws between those jurisdictions, as well as the
inherent uncertainty in estimating the final resolution of complex tax audit matters, Management’s
estimates of income tax liabilities may differ from actual payments or assessments.
While the Company has support for the positions taken on its tax returns, taxing authorities are
increasingly asserting alternate interpretations of laws and facts, and are challenging cross
jurisdictional transactions. Cross jurisdictional transactions between the Company’s subsidiaries
involving transfer prices for products and services, as well as various U.S. Federal, state and
foreign tax matters, comprise the Company’s income tax exposures. Management regularly assesses the
Company’s position with regard to tax exposures and records liabilities for these uncertain tax
positions and related interest and penalties, if any, according to the principles of SFAS No. 5,
“Accounting for Contingencies.” The Company has recorded an accrual that reflects Management’s
estimate of the likely outcome of current and future audits. A final determination of these tax
audits or changes in Management’s estimates may result in additional future income tax expense or
benefit.
At the end of each interim reporting period, Management estimates the effective tax rate expected
to apply to the full fiscal year. The estimated effective tax rate contemplates the expected
jurisdiction where income is earned, as well as tax planning strategies. Current and projected
growth in income in higher tax jurisdictions may result in an increasing effective tax rate over
time. If the actual results differ from Management’s estimates, Management may have to adjust the
effective tax rate in the interim period such determination is made.
20
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Management’s Discussion and Analysis
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 may be reduced by a valuation allowance if it is more likely than not
that some portion 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. The Company regularly reviews its deferred tax assets for recoverability and
establishes a valuation allowance when Management believes it is more likely than not such assets
will not be recovered, taking into consideration historical operating results, expectations of
future earnings, tax planning strategies, and the expected timing of the reversals of existing
temporary differences.
GOODWILL AND OTHER LONG-LIVED ASSETS
In accordance with SFAS 142, Management annually reviews goodwill and other long-lived assets with
indefinite useful lives for impairment or whenever events or changes in circumstances indicate the
carrying amount may not be recoverable. If the Company determines that the carrying value of the
long-lived asset may not be recoverable, a permanent impairment charge is recorded for the amount
by which the carrying value of the long-lived asset exceeds its fair value. Fair value is measured
based on a discounted cash flow method using a discount rate determined by Management to be
commensurate with the risk inherent in the Company’s current business model. The estimates of cash
flows and discount rate are subject to change due to the economic environment, including such
factors as interest rates, expected market returns and volatility of markets served. Management
believes that the estimates of future cash flows and fair value are reasonable; however, changes in
estimates could result in impairment charges. SFAS 142 also requires that intangible assets with
estimable useful lives be amortized over their respective estimated useful lives to their estimated
residual values, and reviewed for impairment in accordance with SFAS 144.
PENSION PLANS AND OTHER POSTRETIREMENT BENEFIT PLANS
The measurement of liabilities related to pension plans and other post-retirement benefit plans is
based on Management’s assumptions related to future events including interest rates, return on
pension plan assets, rate of compensation increases, and health care cost trend rates. Actual
pension plan asset performance will either decrease or increase unamortized pension losses that
will affect net earnings in future years. Depending upon the performance of the equity and bond
markets in 2008, the Company could be required to record a charge to equity. In addition, if the
discount rate was decreased by 25 basis points from 6.25% to 6.00%, the projected benefit
obligation for the defined benefit plan would increase by approximately $1.0 million and result in
an additional after-tax charge to shareholders’ equity of approximately $1.0 million. The discount
rate used in measuring the Company’s pension and postretirement welfare obligations was developed
by matching yields of actual high-quality corporate bonds to expected future pension plan cash
flows (benefit payments). Over 500 Aa-rated, non-callable bonds with a wide range of maturities
were used in the analysis. After using the bond yields to determine the present value of the plan
cash flows, a single representative rate that resulted in the same present value was developed.
Other Matters
CONTINGENCIES
As a normal incident 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 are adequately reserved, covered by
insurance, or are not likely to have a material adverse effect on its financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company’s operations result primarily from changes in interest rates
and changes in foreign currency exchange rates. At September 30, 2007 and 2006, the Company had no
obligations related to interest rate swaps. See further discussion in “Management’s Discussion and
Analysis — Market Risk Analysis” regarding the Company’s market risks.
CONTROLS AND PROCEDURES
The Company carried out an evaluation under the supervision of and with the participation of
Management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the Company’s disclosure controls and procedures as of
the end of the period covered by this report. Based upon that evaluation, the Company’s Chief
Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and
procedures are effective. Disclosure controls and procedures are controls and procedures that are
designed to ensure that information required to be disclosed in company reports filed or submitted
under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within
time periods specified in the Securities and Exchange Commission’s rules and forms. There have been
no significant changes in the Company’s internal controls or in other factors during the period
covered by this report that have materially affected, or are reasonably likely to materially affect
those controls and procedures.
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT 21
Management’s Discussion and Analysis
New Accounting Pronouncements
In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income
Taxes, an Interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition
threshold and measurement process for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company estimates that the adoption of FIN 48 will result in
an increase to the opening balance of retained earnings as of October 1, 2007 in the range of zero
to $5 million for income tax benefits not previously recognized.
In September 2006, the FASB issued
SFAS No. 158, “Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans”
(SFAS 158), which amends SFAS 87 and SFAS 106 to require recognition of the overfunded or
underfunded status of pension and other postretirement benefit plans on the balance sheet. Under
SFAS 158, gains and losses, prior service costs and credits, and any remaining transition amounts
under SFAS 87 and SFAS 106 that have not yet been recognized through net periodic benefit cost will
be recognized in accumulated other comprehensive income, net of tax effects. The measurement date —
the date at which the benefit obligation and plan assets are measured — is required to be the
Company’s fiscal year-end, which is the date the Company currently uses. SFAS 158 is effective for
publicly held companies for fiscal years ending after December 15, 2006. The Company adopted the
provisions of SFAS 158 as of September 30, 2007 and recorded a pre-tax credit of $0.9 million to
accumulated other comprehensive income in equity.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which
defines fair value in generally accepted accounting principles and expands disclosures about fair
value measurements. This Statement is effective for financial statements issued for fiscal years
beginning after November 15, 2007. The adoption of SFAS 157 is not expected to have a material
impact to the Company’s financial position or results of operations.
Forward-Looking Information
Statements regarding future events and the Company’s future results that are based on current
expectations, estimates, forecasts and projections about the Company’s performance and the
industries in which the Company operates, the Company’s ability to utilize NOLs, adequacy of the
Company’s credit facilities and future cash flows, estimates of anticipated contract costs and
revenues, the timing, amount and success of claims for research credits, the timing and success of
software development efforts and resulting costs, acceptance by PG&E of the final version of DCSI’s
TWACS NG software, the anticipated value of the PG&E contract, timing of closing the Doble
acquisition, the outcome of current litigation, claims and charges, recoverability of deferred tax
assets, continued reinvestment of foreign earnings, the impact of FIN 48 and SFAS 157, future costs
relating to environmental matters, share repurchases, investments, sustained performance
improvement, performance improvement initiatives, growth opportunities, new product development,
the Company’s ability to increase shareholder value, acquisitions, and the beliefs and assumptions
of Management contained in the Letter to Our Shareholders (pages 1-2), the Report of the Chief
Financial Officer (page 12), and Management’s Discussion and Analysis and other statements
contained herein which are not strictly historical are considered “forward-looking statements”
within the meaning of the safe harbor provisions of the Federal securities laws. Words such as
expects, anticipates, targets, goals, projects, intends, plans, believes, estimates, variations of
such words, and similar expressions are intended to identify such forward-looking statements.
Investors are cautioned that such statements are only predictions, speak only as of the date of
this report, and the Company undertakes no duty to update. 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 those described under “Item 1A. Risk Factors” in the Company’s Annual Report on Form
10-K for the fiscal years ended September 30, 2007 and the following: actions by the California
Public Utility Commission; PG&E’s Board of Directors or PG&E’s management impacting PG&E’s AMI
projects; the timing and success of DCSI’s software development efforts; the timing and content of
purchase order releases under the PG&E contracts; and DCSI’s and Hexagram’s successful performance
of the PG&E contracts; satisfaction of closing conditions to the Doble acquisition; the timing and
execution of real estate sales; termination for convenience of customer contracts; timing and
magnitude of future contract awards; weakening of economic conditions in served markets; the
success of the Company’s competitors; changes in customer demands or customer insolvencies;
competition; intellectual property rights; technical difficulties; the availability of selected
acquisitions; the timing, pricing and availability of shares offered for sale; delivery delays or
defaults by customers; performance issues with key customers, suppliers and subcontractors;
material changes in the costs of certain raw materials; the successful sale of the Company’s Puerto
Rico facility; collective bargaining and labor disputes; changes in laws and regulations including
but not limited to changes in accounting standards and taxation requirements; costs relating to
environmental matters; litigation uncertainty; and the Company’s successful execution of internal
operating plans.
22
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Years ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Net sales
|
|
$
|
527,537
|
|
|
|
458,865
|
|
|
|
429,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
349,891
|
|
|
|
300,309
|
|
|
|
281,654
|
|
|
Selling, general and administrative expenses
|
|
|
122,502
|
|
|
|
106,882
|
|
|
|
84,241
|
|
|
Amortization of intangible assets
|
|
|
10,705
|
|
|
|
6,872
|
|
|
|
1,973
|
|
|
Interest income, net
|
|
|
(744
|
)
|
|
|
(1,286
|
)
|
|
|
(1,900
|
)
|
|
Other (income) and expenses, net
|
|
|
2,455
|
|
|
|
(2,814
|
)
|
|
|
(1,550
|
)
|
|
Asset impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
790
|
|
|
|
|
Total costs and expenses
|
|
|
484,809
|
|
|
|
409,963
|
|
|
|
365,208
|
|
|
|
|
Earnings before income tax
|
|
|
42,728
|
|
|
|
48,902
|
|
|
|
63,907
|
|
|
Income tax expense
|
|
|
9,015
|
|
|
|
17,622
|
|
|
|
20,363
|
|
|
|
|
Net earnings
|
|
$
|
33,713
|
|
|
|
31,280
|
|
|
|
43,544
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1.30
|
|
|
|
1.22
|
|
|
|
1.71
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
1.28
|
|
|
|
1.19
|
|
|
|
1.66
|
|
|
|
|
Average common shares outstanding (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
25,865
|
|
|
|
25,718
|
|
|
|
25,511
|
|
|
Diluted
|
|
|
26,387
|
|
|
|
26,386
|
|
|
|
26,306
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT 23
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Years ended September 30,
|
|
2007
|
|
|
2006
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
18,638
|
|
|
|
36,819
|
|
|
Accounts receivable, less allowance for doubtful accounts of
$638 and $798 in 2007 and 2006, respectively
|
|
|
102,994
|
|
|
|
83,816
|
|
|
Costs and estimated earnings on long-term contracts, less progress
billings of $3,881 and $4,405 in 2007 and 2006, respectively
|
|
|
11,520
|
|
|
|
1,345
|
|
|
Inventories
|
|
|
67,871
|
|
|
|
50,984
|
|
|
Current portion of deferred tax assets
|
|
|
25,264
|
|
|
|
24,251
|
|
|
Other current assets
|
|
|
34,063
|
|
|
|
10,042
|
|
|
|
|
Total current assets
|
|
|
260,350
|
|
|
|
207,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment:
|
|
|
|
|
|
|
|
|
|
Land and land improvements
|
|
|
5,543
|
|
|
|
5,497
|
|
|
Buildings and leasehold improvements
|
|
|
48,767
|
|
|
|
46,089
|
|
|
Machinery and equipment
|
|
|
101,076
|
|
|
|
86,312
|
|
|
Construction in progress
|
|
|
5,184
|
|
|
|
1,444
|
|
|
|
|
|
|
|
160,570
|
|
|
|
139,342
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization
|
|
|
82,293
|
|
|
|
70,588
|
|
|
|
|
Net property, plant and equipment
|
|
|
78,277
|
|
|
|
68,754
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
149,466
|
|
|
|
143,450
|
|
|
Intangible assets, net
|
|
|
77,242
|
|
|
|
59,202
|
|
|
Other assets
|
|
|
10,772
|
|
|
|
10,031
|
|
|
|
|
|
|
$
|
576,107
|
|
|
|
488,694
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
24 ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
Years ended September 30,
|
|
2007
|
|
|
2006
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Short-term borrowings and current maturities of long-term debt
|
|
$
|
2,844
|
|
|
|
—
|
|
|
Accounts payable
|
|
|
54,634
|
|
|
|
39,496
|
|
|
Advance payments on long-term contracts, less costs incurred
of $20,314 and $19,532 in 2007 and 2006, respectively
|
|
|
3,408
|
|
|
|
7,367
|
|
|
Accrued salaries
|
|
|
15,114
|
|
|
|
13,932
|
|
|
Current portion of deferred revenue
|
|
|
25,239
|
|
|
|
3,569
|
|
|
Accrued other expenses
|
|
|
17,961
|
|
|
|
11,531
|
|
|
|
|
Total current liabilities
|
|
|
119,200
|
|
|
|
75,895
|
|
|
|
|
Long-term portion of deferred revenue
|
|
|
6,411
|
|
|
|
7,458
|
|
|
Pension obligations
|
|
|
8,029
|
|
|
|
13,143
|
|
|
Deferred tax liabilities
|
|
|
18,522
|
|
|
|
3,750
|
|
|
Other liabilities
|
|
|
8,462
|
|
|
|
12,014
|
|
|
Long-term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Total liabilities
|
|
|
160,624
|
|
|
|
112,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 29,159,629 and 29,030,995 shares in 2007 and 2006, respectively
|
|
|
292
|
|
|
|
290
|
|
|
Additional paid-in capital
|
|
|
243,131
|
|
|
|
236,390
|
|
|
Retained earnings
|
|
|
226,759
|
|
|
|
193,046
|
|
|
Accumulated other comprehensive income (loss), net of tax
|
|
|
6,303
|
|
|
|
(2,070
|
)
|
|
|
|
|
|
|
476,485
|
|
|
|
427,656
|
|
|
|
|
|
|
|
|
|
|
|
|
Less treasury stock, at cost (3,416,966 and 3,166,026 common shares in
2007 and 2006, respectively)
|
|
|
(61,002
|
)
|
|
|
(51,222
|
)
|
|
|
|
Total shareholders’ equity
|
|
|
415,483
|
|
|
|
376,434
|
|
|
|
|
|
|
$
|
576,107
|
|
|
|
488,694
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT 25
Consolidated Statements of Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Common Stock
|
|
|
Paid-in
|
|
|
Retained
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
Years ended September 30,
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Earnings
|
|
|
Income (Loss)
|
|
|
Stock
|
|
|
Total
|
|
|
|
|
Balance, September 30, 2004
|
|
|
14,149
|
|
|
$
|
142
|
|
|
|
221,711
|
|
|
|
115,963
|
|
|
|
(3,698
|
)
|
|
|
(26,502
|
)
|
|
|
307,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,544
|
|
|
|
—
|
|
|
|
—
|
|
|
|
43,544
|
|
|
Translation adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
680
|
|
|
|
—
|
|
|
|
680
|
|
|
Minimum pension liability, net of tax of $1,372
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,548
|
)
|
|
|
—
|
|
|
|
(2,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and stock compensation plans, net of
tax benefit of $(3,032)
|
|
|
222
|
|
|
|
1
|
|
|
|
6,606
|
|
|
|
—
|
|
|
|
—
|
|
|
|
53
|
|
|
|
6,660
|
|
|
Purchases into treasury
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(24,928
|
)
|
|
|
(24,928
|
)
|
|
100 percent stock dividend
|
|
|
14,368
|
|
|
|
144
|
|
|
|
—
|
|
|
|
(144
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Balance, September 30, 2005
|
|
|
28,739
|
|
|
|
287
|
|
|
|
228,317
|
|
|
|
159,363
|
|
|
|
(5,566
|
)
|
|
|
(51,377
|
)
|
|
|
331,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAB 108 Cumulative effect adjustment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,403
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,403
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,280
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,280
|
|
|
Translation adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,448
|
|
|
|
—
|
|
|
|
1,448
|
|
|
Minimum pension liability, net of tax of $(1,103)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,048
|
|
|
|
—
|
|
|
|
2,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options and stock compensation plans, net of
tax benefit of $(3,173)
|
|
|
292
|
|
|
|
3
|
|
|
|
8,073
|
|
|
|
—
|
|
|
|
—
|
|
|
|
155
|
|
|
|
8,231
|
|
|
|
|
Balance, September 30, 2006
|
|
|
29,031
|
|
|
|
290
|
|
|
|
236,390
|
|
|
|
193,046
|
|
|
|
(2,070
|
)
|
|
|
(51,222
|
)
|
|
|
376,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,713
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,713
|
|
|
Translation adjustments
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,252
|
|
|
|
—
|
|
|
|
4,252
|
|
|
Minimum pension liability, net of tax of $(1,622)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,558
|
|
|
|
—
|
|
|
|
3,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
41,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS 158 adjustment, net of tax of $(358)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
563
|
|
|
|
—
|
|
|
|
563
|
|
|
Stock options and stock compensation plans, net of
tax benefit of $(828)
|
|
|
129
|
|
|
|
2
|
|
|
|
6,741
|
|
|
|
—
|
|
|
|
—
|
|
|
|
227
|
|
|
|
6,970
|
|
|
|
|
Purchases into treasury
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(10,007
|
)
|
|
|
(10,007
|
)
|
|
|
|
Balance, September 30, 2007
|
|
|
29,160
|
|
|
$
|
292
|
|
|
|
243,131
|
|
|
|
226,759
|
|
|
|
6,303
|
|
|
|
(61,002
|
)
|
|
|
415,483
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
26 ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Consolidated Statements of Cash Flow
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Years ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
33,713
|
|
|
|
31,280
|
|
|
|
43,544
|
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
22,176
|
|
|
|
17,303
|
|
|
|
12,184
|
|
|
Stock compensation expense
|
|
|
5,299
|
|
|
|
4,790
|
|
|
|
2,649
|
|
|
Changes in operating working capital
|
|
|
(37,663
|
)
|
|
|
1,162
|
|
|
|
(4,634
|
)
|
|
Effect of deferred taxes on tax provision
|
|
|
12,873
|
|
|
|
3,596
|
|
|
|
15,221
|
|
|
Pension contributions
|
|
|
—
|
|
|
|
(1,350
|
)
|
|
|
—
|
|
|
Change in deferred revenue and costs, net
|
|
|
9,339
|
|
|
|
1,133
|
|
|
|
396
|
|
|
Other
|
|
|
(474
|
)
|
|
|
712
|
|
|
|
(804
|
)
|
|
|
|
Net cash provided by operating activities
|
|
|
45,263
|
|
|
|
58,626
|
|
|
|
68,556
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of businesses, net of cash acquired
|
|
|
(8,250
|
)
|
|
|
(91,968
|
)
|
|
|
—
|
|
|
Capital expenditures
|
|
|
(19,503
|
)
|
|
|
(9,117
|
)
|
|
|
(8,848
|
)
|
|
Additions to capitalized software
|
|
|
(30,094
|
)
|
|
|
(27,977
|
)
|
|
|
(8,342
|
)
|
|
|
|
Net cash used by investing activities
|
|
|
(57,847
|
)
|
|
|
(129,062
|
)
|
|
|
(17,190
|
)
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt
|
|
|
—
|
|
|
|
52,000
|
|
|
|
—
|
|
|
Principal payments on long-term debt
|
|
|
—
|
|
|
|
(52,000
|
)
|
|
|
(519
|
)
|
|
Net increase in short-term borrowings
|
|
|
2,844
|
|
|
|
—
|
|
|
|
—
|
|
|
Purchases of common stock into treasury
|
|
|
(10,007
|
)
|
|
|
—
|
|
|
|
(24,928
|
)
|
|
Excess tax benefit from stock options exercised
|
|
|
73
|
|
|
|
1,569
|
|
|
|
—
|
|
|
Proceeds from exercise of stock options
|
|
|
1,843
|
|
|
|
2,761
|
|
|
|
3,037
|
|
|
Other
|
|
|
(350
|
)
|
|
|
(1,559
|
)
|
|
|
3,247
|
|
|
|
|
Net cash (used) provided by financing activities
|
|
|
(5,597
|
)
|
|
|
2,771
|
|
|
|
(19,163
|
)
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(18,181
|
)
|
|
|
(67,665
|
)
|
|
|
32,203
|
|
|
Cash and cash equivalents at beginning of year
|
|
|
36,819
|
|
|
|
104,484
|
|
|
|
72,281
|
|
|
|
|
Cash and cash equivalents at end of year
|
|
$
|
18,638
|
|
|
|
36,819
|
|
|
|
104,484
|
|
|
|
|
Changes in operating working capital:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
(18,775
|
)
|
|
|
(10,029
|
)
|
|
|
8,910
|
|
|
Costs and estimated earnings on long-term contracts, net
|
|
|
(10,175
|
)
|
|
|
3,047
|
|
|
|
(1,916
|
)
|
|
Inventories
|
|
|
(16,627
|
)
|
|
|
1,822
|
|
|
|
(4,358
|
)
|
|
Other current assets
|
|
|
(11,877
|
)
|
|
|
737
|
|
|
|
(1,856
|
)
|
|
Accounts payable
|
|
|
15,138
|
|
|
|
7,675
|
|
|
|
(3,156
|
)
|
|
Advance payments on long-term contracts, net
|
|
|
(3,959
|
)
|
|
|
594
|
|
|
|
2,468
|
|
|
Accrued expenses
|
|
|
8,612
|
|
|
|
(2,684
|
)
|
|
|
(4,726
|
)
|
|
|
|
|
|
$
|
(37,663
|
)
|
|
|
1,162
|
|
|
|
(4,634
|
)
|
|
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
109
|
|
|
|
456
|
|
|
|
33
|
|
|
Income taxes paid (including state, foreign & AMT)
|
|
|
3,731
|
|
|
|
10,768
|
|
|
|
6,269
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT 27
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
A. PRINCIPLES OF CONSOLIDATION
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 2007 presentation.
B. BASIS OF PRESENTATION
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, 2007 and 2006.
C. NATURE OF OPERATIONS
The Company has three industry operating units:
Communications, Filtration/Fluid Flow (Filtration), and Test.
The Communications unit is a proven supplier of special
purpose communications systems for electric, gas and water
utilities, including hardware and software to support advanced
metering applications. The Filtration unit develops,
manufactures and markets a broad range of filtration products
used in the purification and processing of liquids and gases.
The Test unit is an industry leader in providing its customers
with the ability to identify, measure and contain magnetic,
electromagnetic and acoustic energy.
D. USE OF ESTIMATES
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
of America (GAAP) 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
Communications Unit:
Within the Communications unit,
approximately 95% of the unit’s revenue arrangements
(approximately 35% of consolidated revenues) contain software
components. Revenue under these arrangements is recognized in
accordance with Statement of Position 97-2 (SOP 97-2),
“Software Revenue Recognition,” as amended by SOP 98-9,
“Modification of SOP 97-2, Software Revenue Recognition, with
Respect to Certain Transactions.” The unit’s software revenue
arrangements generally include multiple products and
services, or “elements” consisting of meter and substation
hardware, meter reading system software, program management
support during the deployment period and software support
(post-contract customer support, “PCS”). These arrangements
typically require the Company to deliver software at the
inception of the arrangement
while the hardware and program management support are
delivered over the contractual deployment period. Software
support is provided during deployment and subsequent thereto.
The software element included in such arrangements is
essential to the functionality of the hardware and, therefore,
the hardware is considered to be software-related. Hardware is
considered a specified element in the software arrangement and
vendor-specific objective evidence of fair value (“VSOE”) has
been established for this element. VSOE for the hardware
element is determined based on the price when sold separately
to customers. These revenue arrangements are divided into
separate units of accounting if the delivered item(s) has
value to the customer on a stand-alone basis, there is
objective and reliable evidence of the fair value of the
undelivered item(s) and delivery/ performance of the
undelivered item(s) is probable. For multiple element
arrangements, revenue is allocated to the
individual elements based on VSOE of the individual elements.
The application of these principles requires judgment,
including the determination of whether a software arrangement
includes multiple elements and estimates of the fair value of
the elements. The VSOE of the fair value of undelivered
elements is determined based on the historical evidence of
stand-alone sales of these elements to customers. Hardware
revenues are generally recognized at the time of shipment or
receipt by customer depending upon contract terms. VSOE
generally does not exist for the software element; therefore,
the Company uses the residual method to recognize revenue when
VSOE exists for all other undelivered elements. Under the
residual method, the fair value of the undelivered elements is
deferred and the remaining portion of the arrangement fee is
recognized as revenue.
SOP 97-2 requires the seller of software that includes
post-contract customer support (PCS) to establish VSOE of the
undelivered element of the contract in order to account
separately for the PCS revenue. The Company determines VSOE by
a consistent pricing of PCS and PCS renewals as a percentage
of the software license fees or by reference to contractual
renewals, when the renewal terms are substantive. Revenues for
PCS are recognized ratably over the maintenance term specified
in the contract (generally in 12 monthly increments). Revenues
for program management support are recognized when services
have been provided. The Company determines VSOE for program
management support based on hourly rates when services are
performed separately.
In November 2005, DCSI and Hexagram entered into arrangements
with a large utility company to provide software, program
management services, training and PCS that includes an option
for the customer to purchase a significant quantity of
hardware over an initial deployment period of approximately
five years and subsequently over the remaining initial
contract term of up to fifteen years. The software, program
management services and training will be delivered over the
initial hardware deployment period of approximately five
years. PCS will be provided at no charge during the first year
of the initial deployment period, after which it will be
provided over subsequent annual periods throughout the
contract term if the customer chooses to continue PCS. Because
the program
28 ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Notes to Consolidated Financial Statements
management services are based on a fixed price per month
rather than on a time and materials basis, the Company is
unable to establish VSOE for the program management services
in this arrangement. The Company is able to establish VSOE for
the PCS based on contractual renewal rates that are consistent
with other arrangements and for the training based on pricing
when sold separately. For the DCSI arrangement, the pricing
for the optional hardware includes a discount that the Company
has determined to be more-than-insignificant. In accordance
with applicable software revenue recognition guidance, the
Company will defer all revenue related to the DCSI arrangement
until all software is delivered and acceptance criteria have
been met. At that time, revenue otherwise allocable to the
software, program management services, training and initial
bundled PCS will be reduced by the rate of the significant
incremental discount offered on the hardware products. The
portion of the arrangement consideration allocated to the
significant incremental discount will be recognized ratably
over the discount period (up to twenty years) similar to a
subscription. The remaining arrangement consideration will be
recognized ratably over the period the program management
services will be performed (the initial deployment period of
approximately five years). Additional annual fees are payable
in each subsequent year that PCS is provided and will be
recognized over the respective PCS period. The amount paid by
the customer for optional purchases of hardware during the
deployment period related to both the DCSI and Hexagram
arrangements will be recognized upon delivery and acceptance,
if applicable, assuming all other revenue recognition criteria
have been met.
Approximately 5% of unit revenues are recognized when
products are delivered (when title and risk of ownership
transfers) or when services are performed for unaffiliated
customers. Products include the SecurVision
®
digital video
surveillance systems.
Filtration Unit:
Within the Filtration operating unit,
approximately 80% of operating unit revenues (approximately
30% of consolidated revenues) are recognized when products are
delivered (when title and risk of ownership transfers) or when
services are performed for unaffiliated customers.
Approximately 20% of operating unit revenues (approximately 5%
of consolidated revenues) are recorded under the
percentage-of-completion provisions of SOP 81-1, “Accounting
for Performance of Construction-Type and Certain
Production-Type Contracts.” Products accounted for under SOP
81-1 include the design, development and manufacture of
complex fluid control products, quiet valves, manifolds and
systems primarily for the aerospace and military markets. For
arrangements that are accounted for under SOP 81-1, the
Company estimates profit as the difference between total
estimated revenue and total estimated cost of a contract and
recognizes these revenues and costs based on units delivered.
The percentage-of-completion method of accounting involves the
use of various techniques to estimate expected costs at
completion.
Test Unit:
Within the Test unit, approximately 50% of revenues
(approximately 15% of consolidated revenues) are recognized
when products are delivered (when title and risk of ownership
transfers)
or when services are performed for unaffiliated customers.
Certain arrangements contain multiple elements which are
accounted for under the provisions of EITF 00-21, “Revenue
Arrangements with Multiple Deliverables.” The multiple
elements generally consist of materials and installation
services used in the construction and installation of standard
shielded enclosures to measure and contain magnetic and
electromagnetic energy. The installation process does not
involve changes to the features or capabilities of the
equipment and does not require proprietary information about
the equipment in order for the installed equipment to perform
to specifications. There is objective and reliable evidence of
fair value for each of the units of accounting, as a result,
the arrangement revenue is allocated to the separate units of
accounting based on their relative fair values. Typically,
fair value is the price of the deliverable when it is
regularly sold on a stand-alone basis.
Approximately 50% of the unit’s revenues (approximately 15% of
consolidated revenues) are recorded under the
percentage-of-completion provisions of SOP 81-1, “Accounting
for the Performance of Construction-Type and Certain
Production-Type Contracts” due to the complex nature of the
enclosures that are designed and produced under these
contracts. Products accounted for under SOP 81-1 include the
construction and installation of complex test chambers to a
buyer’s specifications that provide its customers with the
ability to measure and contain magnetic, electromagnetic and
acoustic energy. As discussed above, for arrangements that are
accounted for under SOP 81-1, the Company estimates profit as
the difference between total estimated revenue and total
estimated cost of a contract and recognizes these revenues and
costs based on either (a)
units delivered or (b) contract milestones.
If a reliable measure of output cannot be established (which
applies in less than 8% of Test unit revenues or 2% of
consolidated revenues), input measures (e.g., costs incurred)
are used to recognize revenue. Given the nature of the
Company’s operations related to these contracts, costs
incurred represent an appropriate measure of progress towards
completion.
The percentage-of-completion method of accounting involves the
use of various techniques to estimate expected costs at
completion. These estimates are based on Management’s judgment
and the Company’s substantial experience in developing these
types of estimates.
F. CASH AND CASH EQUIVALENTS
Cash equivalents include temporary investments that are
readily convertible into cash, such as Eurodollars,
commercial paper and treasury bills with original maturities
of three months or less.
G. ACCOUNTS RECEIVABLE
Accounts receivable have been reduced by an allowance for
amounts that the Company estimates are uncollectible in the
future. This estimated allowance is based on Management’s
evaluation of the financial condition of the customer and
historical write-off experience.
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT 29
Notes to Consolidated Financial Statements
H. COSTS AND ESTIMATED EARNINGS ON LONG-TERM CONTRACTS
Costs and estimated earnings on long-term contracts
represent unbilled revenues, including accrued profits,
accounted for under the percentage-of-completion method, net
of progress billings.
I. INVENTORIES
Inventories are valued at the lower of cost (first-in,
first-out) or market value. Inventories under long-term
contracts reflect accumulated production costs, factory
overhead, initial cooling and other related costs less the
portion of such costs charged to cost of sales and any
unliquidated progress payments. 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.
J. 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.
K. GOODWILL AND OTHER LONG-LIVED ASSETS
Goodwill represents the excess of purchase costs over the fair
value of net identifiable assets acquired in business
acquisitions. The Company accounts for goodwill as required by
Statement of Financial Accounting Standards (SFAS) 142,
“Goodwill and Other Intangible Assets.” Management annually
reviews goodwill and other long-lived assets with indefinite
useful lives for impairment or whenever events or changes in
circumstances indicate the carrying amount may not be
recoverable. If the Company determines that the carrying value
of the long-lived asset may not be recoverable, a permanent
impairment charge is recorded for the amount by which the
carrying value of the long-lived asset exceeds its fair value.
Fair value is measured based on a discounted cash flow method
using a discount rate determined by Management to be
commensurate with the risk inherent in the Company’s current
business model. Other intangible assets represent costs
allocated to identifiable intangible assets, principally
capitalized software, patents, trademarks, and technology
rights. See Note 4 regarding goodwill and other intangible
assets activity.
L. CAPITALIZED SOFTWARE
The costs incurred for the development of computer software
that will be sold, leased, or otherwise marketed are charged
to expense when incurred as research and development until
technological feasibility has been established for the
product. Technological feasibility is typically established
upon completion of a detailed program design. Costs incurred
after this point are capitalized on a project-by-project
basis in accordance with SFAS No. 86, “Accounting for the
Costs of Computer Software to be Sold, Leased or
Otherwise Marketed.” Costs that are capitalized primarily
consist of external development costs. Upon general release of
the product to customers, the Company ceases capitalization
and begins amortization, which is calculated on a
project-by-project basis as the greater of (1) the ratio of
current gross revenues for a product to the total of current
and anticipated future gross revenues for the product or (2)
the straight-line method over the estimated economic life of
the product. The Company generally amortizes the software
development costs over a three- to seven-year period based
upon the estimated future economic life of the product.
Factors considered in determining the estimated future
economic life of the product include anticipated future
revenues, and changes in software and hardware technologies.
The carrying values of capitalized costs are evaluated for
impairment on an annual basis to determine if circumstances
exist which indicate the carrying value of the asset may not
be recoverable. If expected cash flows are insufficient to
recover the carrying amount of the asset, then an impairment
loss is recognized to state the asset at its net realizable
value.
M. 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 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.
N. 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 may be 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. The Company regularly reviews its deferred
tax assets for recoverability and establishes a valuation
allowance when Management believes it is more likely than not
such assets will not be recovered, taking into consideration
historical operating results, expectations of future earnings,
tax planning strategies, and the expected timing of the
reversals of existing temporary differences.
O. 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
30 ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Notes to Consolidated Financial Statements
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. Customer-sponsored research and development
costs refer to certain situations whereby customers provide
funding to support specific contractually defined research and
development costs. As the Company incurs costs under these
specific funding contracts, the costs are “inventoried” until
billed to the customer for reimbursement, consistent with
other program costs. Once billed/invoiced, these costs are
transferred to accounts receivable until the cash is received
from the customer. All research and development costs incurred
in excess of the contractual funding amount, or costs incurred
outside the scope of the contractual research and development
project, are expensed as incurred.
P. FOREIGN CURRENCY TRANSLATION
The financial statements of the Company’s foreign operations
are translated into U.S. dollars in accordance with SFAS 52
“Foreign Currency Translation” (SFAS 52). The resulting
translation adjustments are recorded as a separate component
of accumulated other comprehensive income.
Q. 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 vesting of performance-accelerated
restricted shares using the treasury stock method.
The number of shares used in the calculation of earnings per
share for each year presented is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Weighted Average Shares
Outstanding — Basic
|
|
|
25,865
|
|
|
|
25,718
|
|
|
|
25,511
|
|
|
Dilutive Options and performance-
accelerated restricted stock
|
|
|
522
|
|
|
|
668
|
|
|
|
795
|
|
|
|
|
Adjusted Shares — Diluted
|
|
|
26,387
|
|
|
|
26,386
|
|
|
|
26,306
|
|
|
|
Options to purchase 602,731 shares at prices ranging from
$36.07 - $54.88 were outstanding during the year ended
September 30, 2007, but were not included in the respective
computation of diluted EPS because the options’ exercise price
was greater than the average market price of the common
shares. Options to purchase 264,430 shares at prices ranging
from $42.99 – $54.88 were outstanding during the year ended
September 30, 2006, but were not included in the respective
computation of diluted EPS because the options’ exercise price
was greater than the average market price of the common
shares. Options to purchase 34,967 shares at prices ranging
from $35.18 – $50.26 were outstanding during the year ended
September 30, 2005, but were not included in the respective
computation 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 2013.
Approximately 14,000, 9,000 and 36,000 restricted shares were
outstanding but unearned at September 30, 2007, 2006 and 2005,
respectively, and, therefore, were not included in the
respective years’ computations of diluted EPS.
R. SHARE-BASED COMPENSATION
Prior to October 1, 2005, the Company accounted for its stock
option plans using the intrinsic value method of accounting
provided under APB Opinion No. 25, “Accounting for Stock
Issued to Employees,” (APB 25) and related Interpretations, as
permitted by FASB Statement No. 123, “Accounting for
Stock-Based Compensation,” (SFAS 123) under which no
compensation expense was recognized for stock option grants.
Accordingly, share-based compensation for stock options was
included as a pro forma disclosure in the financial statement
footnotes for periods prior to fiscal 2006.
Effective October 1, 2005, the Company adopted the fair value
recognition provisions of FASB Statement No. 123(R),
“Share-Based Payment,” (SFAS 123(R)) using the
modified-prospective
transition method. Results for prior periods have not been
restated.
The Company provides compensation benefits to certain key
employees under several share-based plans providing for
employee stock options and/or performance-accelerated
restricted shares (restricted shares), and to non-employee
directors under a non-employee directors compensation plan.
S. COMPREHENSIVE INCOME (LOSS)
SFAS 130, “Reporting Comprehensive Income” 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.
Accumulated other comprehensive income (loss) as shown on the
consolidated balance sheet of $6.3 million and $(2.1) million
at September 30, 2007 and 2006, respectively, consisted of
$8.8 million and $4.5 million related to currency translation
adjustments; $(2.5) million and $(6.6) million related to the
minimum pension liability, respectively.
T. DEFERRED REVENUE AND COSTS
Deferred revenue and costs are recorded for products or
services that have not been provided but have been invoiced
under contractual agreements or paid for by a customer, or
when products or services have been provided but the criteria
for revenue recognition have not been met. If there is a
customer acceptance provision or there is uncertainty about
customer acceptance, revenue and costs are deferred until the
customer has accepted the product or service. At September 30,
2007, approximately $12 million of deferred costs are included
within other current assets on the consolidated balance sheet.
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT 31
Notes to Consolidated Financial Statements
Deferred revenue also includes the long-term portion of
unearned income related to two intellectual property
agreements. The amount is being amortized into income on a
straight-line basis over the remaining patent life through
2011. The current portion of approximately $0.6 million is
included in the current portion of deferred revenue on the
consolidated balance sheet.
U. NEW ACCOUNTING STANDARDS
In June 2006, the FASB issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes, an Interpretation
of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a
recognition threshold and measurement process for the
financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. FIN 48
is effective for fiscal years beginning after December 15,
2006. The Company estimates that the adoption of FIN 48 will
result in an increase to the opening balance of retained
earnings as of October 1, 2007 in the range of zero to $5
million for income tax benefits not previously recognized.
In
September 2006, the FASB issued SFAS No. 158, “Employer’s
Accounting for Defined Benefit Pension and Other
Postretirement Plans” (SFAS 158), which amends SFAS 87 and
SFAS 106 to require recognition of the overfunded or
underfunded status of pension and other postretirement benefit
plans on the balance sheet. Under SFAS 158, gains and losses,
prior service costs and credits, and any remaining transition
amounts under SFAS 87 and SFAS 106 that have not yet been
recognized through net periodic benefit cost will be
recognized in accumulated other comprehensive income, net of
tax effects. The measurement date — the date at which the
benefit obligation and plan assets are measured — is required
to be the Company’s fiscal year-end, which is the date the
Company currently uses. SFAS 158 is effective for
publicly-held companies for fiscal years ending after December
15, 2006. The Company adopted the provisions of SFAS 158 as of
September 30, 2007 and recorded a pre-tax credit of $0.9
million to accumulated other comprehensive income in equity.
In September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements” (SFAS 157), which defines fair value in
generally accepted accounting principles and expands
disclosures about fair value measurements. This Statement is
effective for financial statements issued for fiscal years
beginning after November 15, 2007. The adoption of SFAS 157 is
not expected to have a material impact to the Company’s
financial position or results of operations.
2. Acquisitions
On August 10, 2007, the Company acquired the assets and
certain liabilities of Wintec, LLC (Wintec) for a purchase
price of $6 million. Wintec is engaged in the design,
manufacture and sale of metallic elements, filters, and
strainers for pneumatic/hydraulic applications and surface
tension devices for propellant management fluid control
with annual revenues of approximately $3.5 million. The assets
acquired consist of accounts receivable, inventory and
property, plant and equipment. The Company recorded
approximately $5 million of goodwill in connection with the
transaction. In addition, the Company recorded $0.2 million of
amortizable intangible assets consisting of customer contracts
and order backlog which are being amortized on a straight-line
basis over periods ranging from nine months to seventeen
months. The operating results for Wintec, since the date of
acquisition, are included within VACCO in the Filtration
segment.
On February 1, 2006, the Company acquired the capital stock of
Hexagram, Inc. (Hexagram) for a purchase price of
approximately $66 million. The acquisition agreement also
provides for contingent consideration of up to $6.25 million
over the five-year period following the acquisition if
Hexagram exceeds certain sales targets. During 2007, the
Company paid $1.3 million of contingent consideration.
Hexagram is an RF fixed network AMI company headquartered in
Cleveland, Ohio. Hexagram broadens the Company’s served market
and provides an RF based AMI system serving primarily
electric, gas and water utilities. The operating results for
Hexagram, since the date of acquisition, are included within
the Communications unit. The Company recorded $6.6 million of
amortizable identifiable intangible assets consisting
primarily of patents and proprietary know-how, customer
contracts, and order backlog which are being amortized on a
straight-line basis over periods ranging from six months to
seven years.
On November 29, 2005, the Company acquired Nexus Energy
Software, Inc. (Nexus) through an all
cash for shares merger transaction for approximately $29
million in cash plus contingent cash consideration over the
four-year period following the merger if Nexus exceeds certain
sales targets. Nexus is a software company headquartered in
Wellesley, Massachusetts. Nexus broadens the Company’s served
market and provides software solutions that allow utilities to
fully utilize the information produced by the Company’s AMI
systems. The operating results for Nexus, since the date of
acquisition, are included within the Communications unit. The
Company recorded $2.7 million of identifiable intangible
assets consisting primarily of customer contracts and order
backlog which are being amortized on a straight-line basis
over periods ranging from one year to three years. In
connection with the acquisition of Nexus, the Company acquired
approximately $13 million of net operating loss carryforward
that will expire between 2017 and 2025 and is subject to a
Section 382 limitation.
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
32 ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Notes to Consolidated Financial Statements
from the date of acquisition. Pro forma financial information related to the Hexagram and
Nexus acquisitions was not presented as it was not significant to the Company’s results of
operations. None of the goodwill recorded as part of the Nexus or Hexagram acquisitions is expected
to be deductible for U.S. Federal or state income tax purposes.
3. Asset Impairment
In June 2005, the Company abandoned its plans to commercialize certain sensor products within the
Filtration segment resulting in an asset impairment charge of $0.8 million to write off certain
patents and a related licensing agreement.
4. Goodwill and Other Intangible Assets
Included on the Company’s Consolidated Balance Sheets at September 30, 2007 and 2006 are the
following intangible assets gross carrying amounts and accumulated amortization:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
158.4
|
|
|
|
152.4
|
|
|
Less: accumulated amortization
|
|
|
8.9
|
|
|
|
8.9
|
|
|
|
|
Net
|
|
$
|
149.5
|
|
|
|
143.5
|
|
|
|
|
Intangible assets with determinable lives:
|
|
|
|
|
|
|
|
|
|
Patents
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
17.9
|
|
|
|
17.6
|
|
|
Less: accumulated amortization
|
|
|
14.7
|
|
|
|
13.9
|
|
|
|
|
Net
|
|
$
|
3.2
|
|
|
|
3.7
|
|
|
|
|
Capitalized software
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
83.4
|
|
|
|
55.2
|
|
|
Less: accumulated amortization
|
|
|
17.7
|
|
|
|
10.0
|
|
|
|
|
Net
|
|
$
|
65.7
|
|
|
|
45.2
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
$
|
9.9
|
|
|
|
9.5
|
|
|
Less: accumulated amortization
|
|
|
5.1
|
|
|
|
2.8
|
|
|
|
|
Net
|
|
$
|
4.8
|
|
|
|
6.7
|
|
|
|
|
Intangible assets with indeterminable lives:
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
$
|
3.5
|
|
|
|
3.5
|
|
|
|
The Company performed its annual evaluation of goodwill and intangible assets for impairment during
the fourth quarter of fiscal 2007 and concluded no impairment existed at September 30, 2007.
The changes in the carrying amount of goodwill attributable to each business segment for the years
ended September 30, 2007 and 2006 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Communications
|
|
|
Filtration
|
|
|
Test
|
|
|
|
|
Balance as of
September 30, 2005
|
|
$
|
—
|
|
|
|
39.8
|
|
|
|
29.1
|
|
|
Acquisitions
(Hexagram and Nexus)
|
|
|
74.6
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Balance as of
September 30, 2006
|
|
|
74.6
|
|
|
|
39.8
|
|
|
|
29.1
|
|
|
Acquisitions
|
|
|
0.8
|
|
|
|
5.2
|
|
|
|
—
|
|
|
|
|
Balance as of
September 30, 2007
|
|
$
|
75.4
|
|
|
|
45.0
|
|
|
|
29.1
|
|
|
|
Amortization expense related to intangible assets with determinable lives was $10.7 million, $6.9
million and $2.0 million in 2007, 2006 and 2005, respectively. The increase in amortization expense
in 2007 as compared to the prior year was due to the Company’s TWACS NG software. The Company recorded $6.2 million and $2.2
million of amortization expense related to DCSI’s TWACS NG software in 2007 and 2006, respectively.
Patents are amortized over the life of the patents, generally 17 years. Capitalized software is
amortized over the estimated useful life of the software, generally three to seven years. Estimated
intangible assets amortization for fiscal year 2008 is approximately $14 million. Intangible asset
amortization for fiscal years 2009 through 2012 is estimated at approximately $16 million to $19
million per year. The increase in intangible asset amortization is related to the additional costs
associated with the TWACS NG software.
5. Accounts Receivable
Accounts receivable, net of the allowance for doubtful accounts, consist of the following at
September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
Commercial
|
|
$
|
97,714
|
|
|
|
81,986
|
|
|
U.S. Government and prime contractors
|
|
|
5,280
|
|
|
|
1,830
|
|
|
|
|
Total
|
|
$
|
102,994
|
|
|
|
83,816
|
|
|
|
6. Inventories
Inventories consist of the following at September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
Finished goods
|
|
$
|
22,211
|
|
|
|
12,834
|
|
|
Work in process — including
long-term contracts
|
|
|
17,660
|
|
|
|
13,211
|
|
|
Raw materials
|
|
|
28,000
|
|
|
|
24,939
|
|
|
|
|
Total
|
|
$
|
67,871
|
|
|
|
50,984
|
|
|
|
ESCO
TECHNOLOGIES INC. 2007 ANNUAL REPORT
33
Notes to Consolidated Financial Statements
7. Property, Plant and Equipment
Depreciation expense of property, plant and equipment for the years ended September 30, 2007, 2006
and 2005 was $11.5 million, $10.4 million and $10.1 million, 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, 2007, 2006
and 2005 was $7.8 million, $7.3 million and $6.3 million, 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, 2007 are:
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
Years ending September 30:
|
|
|
|
|
|
|
|
2008
|
|
$
|
6,639
|
|
|
2009
|
|
|
5,428
|
|
|
2010
|
|
|
4,238
|
|
|
2011
|
|
|
3,516
|
|
|
2012 and thereafter
|
|
|
6,619
|
|
|
|
|
Total
|
|
$
|
26,440
|
|
|
|
8. Income Tax Expense
The components of income before income taxes consisted of the following for the years ended
September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
United States
|
|
$
|
37,051
|
|
|
|
43,920
|
|
|
|
52,543
|
|
|
Foreign
|
|
|
5,677
|
|
|
|
4,982
|
|
|
|
11,364
|
|
|
|
|
Total income before income taxes
|
|
$
|
42,728
|
|
|
|
48,902
|
|
|
|
63,907
|
|
|
|
The principal components of income tax expense from
continuing operations for the years ended September
30, 2007, 2006 and 2005 consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Federal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current (including Alternative
Minimum Tax)
|
|
$
|
(6,419
|
)
|
|
|
3,571
|
|
|
|
874
|
|
|
Deferred
|
|
|
11,473
|
|
|
|
10,291
|
|
|
|
15,313
|
|
|
State and local:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,051
|
|
|
|
2,673
|
|
|
|
2,414
|
|
|
Deferred
|
|
|
2,066
|
|
|
|
(518
|
)
|
|
|
(21
|
)
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,510
|
|
|
|
1,213
|
|
|
|
1,854
|
|
|
Deferred
|
|
|
(666
|
)
|
|
|
392
|
|
|
|
(71
|
)
|
|
|
|
Total
|
|
$
|
9,015
|
|
|
|
17,622
|
|
|
|
20,363
|
|
|
|
The actual income tax expense from continuing
operations for the years ended September 30, 2007,
2006 and 2005 differs from the expected tax expense
for those years (computed by applying the U.S.
Federal corporate statutory rate) as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Federal corporate statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
State and local, net of Federal benefits
|
|
|
2.8
|
|
|
|
2.4
|
|
|
|
2.4
|
|
|
Foreign — Puerto Rico
|
|
|
(0.6
|
)
|
|
|
0.5
|
|
|
|
(4.6
|
)
|
|
Foreign — Other
|
|
|
(2.1
|
)
|
|
|
(0.5
|
)
|
|
|
(1.6
|
)
|
|
Foreign earnings repatriation
|
|
|
—
|
|
|
|
4.8
|
|
|
|
—
|
|
|
Research credit
|
|
|
(10.3
|
)
|
|
|
(5.0
|
)
|
|
|
—
|
|
|
SFAS 123(R)
|
|
|
3.8
|
|
|
|
1.4
|
|
|
|
—
|
|
|
Change in tax contingencies
|
|
|
(5.3
|
)
|
|
|
(2.9
|
)
|
|
|
—
|
|
|
Release of valuation allowance
|
|
|
(1.8
|
)
|
|
|
—
|
|
|
|
—
|
|
|
Other, net
|
|
|
(0.4
|
)
|
|
|
0.3
|
|
|
|
0.7
|
|
|
|
|
Effective income tax rate
|
|
|
21.1
|
%
|
|
|
36.0
|
%
|
|
|
31.9
|
%
|
|
|
During 2007, the Company determined that certain tax
accounts had not been accurately recorded in the
financial statements for fiscal years 2001 to 2006.
The effect in any individual year was not material
to the Company’s results of operations, financial
position or cash flows. The Company recorded $1.3
million as a cumulative credit adjustment to tax
expense to correct previously recorded tax accounts
during the fourth quarter of 2007.
The tax effects of temporary differences that give
rise to significant portions of the deferred tax
assets and liabilities at September 30, 2007 and 2006
are presented below.
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Inventories, long-term contract accounting,
contract cost reserves and others
|
|
$
|
3,828
|
|
|
|
1,858
|
|
|
Pension and other postretirement benefits
|
|
|
3,339
|
|
|
|
5,449
|
|
|
Net operating loss carryforward — domestic
|
|
|
12,311
|
|
|
|
5,103
|
|
|
Net operating loss carryforward — foreign
|
|
|
3,092
|
|
|
|
2,895
|
|
|
Alternative Minimum Tax credit carryforward
|
|
|
779
|
|
|
|
3,306
|
|
|
Capital loss carryforward
|
|
|
7,888
|
|
|
|
7,381
|
|
|
Other compensation-related costs
and other cost accruals
|
|
|
11,285
|
|
|
|
15,178
|
|
|
Research credit carryforward
|
|
|
13,979
|
|
|
|
6,635
|
|
|
|
|
Total deferred tax assets
|
|
|
56,501
|
|
|
|
47,805
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
Plant and equipment, depreciation methods,
acquisition asset allocations, and other
|
|
|
(38,780
|
)
|
|
|
(17,028
|
)
|
|
|
|
Net deferred tax asset before
valuation allowance
|
|
|
17,721
|
|
|
|
30,777
|
|
|
Less valuation allowance
|
|
|
(10,979
|
)
|
|
|
(10,276
|
)
|
|
|
|
Net deferred tax assets
|
|
$
|
6,742
|
|
|
|
20,501
|
|
|
|
34 ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Notes to Consolidated Financial Statements
Management believes that, based on the Company’s historical pretax income, together with the
projection of future taxable income, and after consideration of the valuation allowance, it is
more likely than not that the Company will realize the benefits of the net deferred tax assets
existing at September 30, 2007. In order to realize this net deferred tax asset, the Company will
need to generate future taxable income of approximately $19 million. At September 30, 2007, the
Company had an available net operating loss (NOL) for U.S. Federal tax purposes of approximately
$35 million. This NOL will expire between 2019 and 2025 and will be available to reduce future
Federal income tax cash payments. The Company anticipates being able to utilize the NOL
carryforward to reduce future Federal income tax cash payments.
The Company has established a valuation allowance of $7.9 million against the capital loss
carryforward generated in 2004, as such loss carryforward may not be realized in future periods.
In addition, the Company has established a valuation allowance against certain NOL carryforwards
in foreign jurisdictions which may not be realized in future periods. The valuation allowance
established against the foreign NOL carryforwards was $3.1 million and $2.9 million at September
30, 2007 and 2006, respectively. The Company classifies its valuation allowance related to
deferred taxes on a pro rata basis.
The Company completed its analysis of available research credits for fiscal years 2000 through
2006 and recorded total research credit claims, net, of $5.6 million. The Company expects the net
research credits related to fiscal year 2007 to be approximately $1.4 million. The expiration of
the research credits is between 2020 and 2027. The Company anticipates being able to utilize the
research credits to reduce future Federal and state income tax cash payments.
No deferred taxes have been provided on the accumulated unremitted earnings of the Company’s
foreign subsidiaries as of September 30, 2007. The Company’s intention is to reinvest these
earnings indefinitely. In the event these foreign entities’ earnings were distributed, it is
estimated that U.S. taxes, net of available foreign tax credits, of approximately $3.2 million
would be due, which would correspondingly reduce the Company’s net earnings.
On October 22, 2004, the American Jobs Creation Act (the “AJCA”) was signed into law. The AJCA
includes a deduction of 85% of certain foreign earnings that are repatriated, as defined in the
AJCA. In 2006, the Company recognized a charge of $2.4 million for the accrual of income taxes
associated with the repatriation under the AJCA of approximately $39.5 million of foreign
earnings.
During 2006, the Company adopted the provisions of SEC Staff Accounting Bulletin No. 108 and
recorded $2.4 million as a cumulative state tax expense adjustment to 2006 beginning retained
earnings.
The Company operates within multiple taxing jurisdictions and is subject to audit in these
jurisdictions. These audits can involve complex issues which may require an extended period of
time to resolve. The Company regularly reviews its potential tax liabilities for tax years subject
to audit. Changes in the Company’s potential tax liability occurred during the year ended
September 30, 2007, and may occur in the future as the Company’s assessment changes based on
examinations in various jurisdictions and/or changes in tax laws, regulations and case law.
Accordingly, the Company’s estimate of income tax liabilities may differ from actual payments or
assessments.
9. Debt
At September 30, 2007 and 2006, there were $2.8 million and zero outstanding borrowings under the
revolving credit facility, respectively. Effective October 6, 2004, the Company entered into a
$100 million five-year revolving bank credit facility with a $50 million increase option that has
a final maturity and expiration date of October 6, 2009. The credit facility is available for
direct borrowings and/or the issuance of letters of credit, and is provided by a group of six
banks, led by Wells Fargo Bank as agent. At September 30, 2007, the Company had approximately
$96.4 million available to borrow under the credit facility in addition to $18.6 million cash on
hand. At September 30, 2007, the Company had outstanding letters of credit of $3.6 million ($0.8
million outstanding under the credit facility).
The credit facility requires, as determined by certain financial ratios, a commitment fee ranging
from 17.5 to 27.5 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. The facility is secured by the
unlimited guaranty of the Company’s material domestic subsidiaries and a 65% pledge of the
material foreign subsidiaries’ share equity. The financial covenants of the credit facility
include limitations on leverage, minimum consolidated EBITDA and minimum net worth.
During 2007 and 2006, the maximum aggregate short-term borrowings at any month-end were $9 million
and $47 million, respectively; the average aggregate short-term borrowings outstanding based on
month-end balances were $1.7 million and $3.9 million, respectively; and the weighted average
interest rates were 6.24%, 5.25%, and not applicable in 2005. The letters of credit issued and
outstanding under the credit facility totaled $0.8 million and $0.8 million at September 30, 2007,
and 2006, respectively.
Subsequent to September 30, 2007, the Company announced its intention to enter into a new credit
facility led by National City Bank in connection with the acquisition of Doble Engineering
Company. See further discussion in Note 16 “Subsequent Events” in the Notes to the Consolidated
Financial Statements.
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT 35
Notes to Consolidated Financial Statements
10. Capital Stock
The 29,159,629 and 29,030,995 common shares as presented in the accompanying Consolidated Balance
Sheets at September 30, 2007 and 2006 represent the actual number of shares issued at the
respective dates. The Company held 3,416,966 and 3,166,026 common shares in treasury at September
30, 2007 and 2006, respectively.
In August 2006, the Company’s Board of Directors authorized an open market common stock repurchase
program for up to 1.2 million shares, subject to market conditions and other factors which covers
the period through September 30, 2008. The Company repurchased 265,000 shares during 2007 under
this program. There were no stock repurchases during 2006. The Company repurchased 670,072 shares
in 2005 under a previously authorized program.
11. Share-Based Compensation
The Company provides compensation benefits to certain key employees under several share-based
plans providing for employee stock options and/or performance-accelerated restricted shares
(restricted shares), and to non-employee directors under a non-employee directors compensation
plan. During fiscal 2004, the Board of Directors authorized and the shareholders approved, the
2004 Incentive Compensation Plan, which states, in part, that on February 5, 2004, there shall be
2,000,000 shares added to the authorized shares allocated for the grant of stock options, stock
appreciation rights, performance-accelerated restricted stock, or other full value awards. Of
these, shares up to 600,000 may be utilized for performance-accelerated restricted stock or other
full value awards. At September 30, 2007, the maximum number of full value shares available for
issue under the 2004 Incentive Compensation Plan and the 2001 Stock Incentive Plan was 600,000 and
270,502 shares, respectively.
Stock Option Plans
The Company’s stock option awards are generally subject to graded vesting over a three-year
service period. All outstanding options were granted at prices equal to fair market value at the
date of grant. The options granted prior to September 30, 2003 have a ten-year contractual life
from date of issuance, expiring in various periods through 2013. Beginning in fiscal 2004, the
options granted have a five-year contractual life from date of issuance. Beginning with fiscal
2006 awards, the Company recognizes compensation cost on a straight-line basis over the requisite
service period for the entire award. Prior to fiscal 2006, the Company calculated the pro forma
compensation cost using the graded vesting method.
The fair value of each option award is estimated as of the date of grant using a Black-Scholes
option pricing model. The weighted average assumptions for the periods indicated are noted below.
Expected volatility is based on historical volatility of ESCO’s stock calculated over the expected
term of the option. The expected term was calculated in accordance with Staff Accounting Bulletin
No. 107 using the simplified method for “plain-vanilla” options. The risk-free rate for the
expected term of the option is based on the U.S. Treasury yield curve in effect at the date of
grant. 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 2007, 2006 and 2005, respectively: expected dividend yield of 0% in all periods; expected
volatility of 27.3%, 28.0% and 23.5%; risk-free interest rate of 4.6%, 4.6% and 3.9%; and expected
term of 3.50 years, 3.50 years and 3.58 years.
Information regarding stock options awarded under the option plans is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FY2007
|
|
|
FY2006
|
|
|
FY2005
|
|
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
Estimated
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Shares
|
|
|
Avg. Price
|
|
|
Shares
|
|
|
Avg. Price
|
|
|
Shares
|
|
|
Avg. Price
|
|
|
|
|
October 1
|
|
|
1,387,348
|
|
|
$
|
26.60
|
|
|
|
1,324,548
|
|
|
$
|
20.48
|
|
|
|
1,356,094
|
|
|
$
|
13.63
|
|
|
Granted
|
|
|
296,280
|
|
|
$
|
45.71
|
|
|
|
328,080
|
|
|
$
|
44.63
|
|
|
|
376,200
|
|
|
$
|
35.55
|
|
|
Exercised
|
|
|
(101,683
|
)
|
|
$
|
21.56
|
|
|
|
(232,371
|
)
|
|
$
|
15.95
|
|
|
|
(388,340
|
)
|
|
$
|
10.94
|
|
|
Cancelled
|
|
|
(23,004
|
)
|
|
$
|
40.59
|
|
|
|
(32,909
|
)
|
|
$
|
35.77
|
|
|
|
(19,406
|
)
|
|
$
|
24.96
|
|
|
|
|
September 30,
|
|
|
1,558,941
|
|
|
$
|
30.35
|
|
|
|
1,387,348
|
|
|
$
|
26.60
|
|
|
|
1,324,548
|
|
|
$
|
20.48
|
|
|
|
|
At September 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserved for future grant
|
|
|
878,238
|
|
|
|
|
|
|
|
1,146,741
|
|
|
|
|
|
|
|
1,428,032
|
|
|
|
|
|
|
Exercisable
|
|
|
951,066
|
|
|
$
|
21.99
|
|
|
|
753,415
|
|
|
$
|
16.46
|
|
|
|
755,612
|
|
|
$
|
12.29
|
|
|
|
|
36
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
|
Notes to Consolidated Financial Statements
The aggregate intrinsic value of options exercised during 2007, 2006 and 2005 was $2.4 million,
$7.9 million and $12.4 million, respectively. The aggregate intrinsic value of stock options
outstanding and exercisable at September 30, 2007 was $12.3 million. The weighted-average
contractual life of stock options outstanding at September 30, 2007 was 3.0 years. The
weighted-average fair value of stock options granted in 2007, 2006, and 2005 was $12.25, $12.17,
and $11.28, respectively.
Summary information regarding stock options outstanding at September 30, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
Remaining
|
|
|
Average
|
|
|
Range of
|
|
Outstanding at
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Exercise Prices
|
|
Sept. 30, 2007
|
|
|
Life
|
|
|
Price
|
|
|
|
|
$ 5.39 - $10.72
|
|
|
201,426
|
|
|
2.0 years
|
|
$
|
7.19
|
|
|
$12.64 - $14.52
|
|
|
268,486
|
|
|
4.5 years
|
|
$
|
13.76
|
|
|
$17.29 - $32.32
|
|
|
186,455
|
|
|
1.7 years
|
|
$
|
23.51
|
|
|
$35.18 - $42.10
|
|
|
303,630
|
|
|
2.0 years
|
|
$
|
35.31
|
|
|
$42.99 - $54.88
|
|
|
598,944
|
|
|
3.6 years
|
|
$
|
45.20
|
|
|
|
|
|
|
|
1,558,941
|
|
|
3.0 years
|
|
$
|
30.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number
|
|
|
|
|
|
Average
|
|
|
Range of
|
|
Exercisable at
|
|
|
|
|
|
Exercise
|
|
|
Exercise Prices
|
|
Sept. 30, 2007
|
|
|
|
|
|
Price
|
|
|
|
|
$ 5.39 - $10.72
|
|
|
201,426
|
|
|
|
|
$
|
7.19
|
|
|
$12.64 - $14.52
|
|
|
268,486
|
|
|
|
|
$
|
13.76
|
|
|
$17.29 - $32.32
|
|
|
186,455
|
|
|
|
|
$
|
23.51
|
|
|
$35.18 - $54.88
|
|
|
294,699
|
|
|
|
|
$
|
38.64
|
|
|
|
|
|
|
|
951,066
|
|
|
|
|
$
|
21.99
|
|
|
|
Performance-accelerated Restricted Share Awards
The performance-accelerated restricted shares (restricted shares) vest over five years with
accelerated vesting if certain performance targets are achieved. In these cases, if it is probable
that the performance condition will be met, the Company recognizes compensation cost on a
straight-line basis over the shorter performance period; otherwise, it will recognize compensation
cost over the longer service period. Compensation cost for the majority of the outstanding
restricted share awards is being recognized over the longer performance period as it is not
probable the performance condition will be met. The
restricted share award grants were valued at the stock price on the date of grant. Pre-tax
compensation expense related to the restricted share awards was $1.5 million, $1.5 million and $1.9
million for fiscal years ended September 30, 2007, 2006 and 2005, respectively.
The following summary presents information regarding outstanding restricted share awards as of
September 30, 2007 and changes during the period then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Shares
|
|
|
Avg. Price
|
|
|
|
|
Nonvested at October 1, 2006
|
|
|
155,730
|
|
|
$
|
34.33
|
|
|
Granted
|
|
|
63,530
|
|
|
$
|
45.75
|
|
|
Vested
|
|
|
(51,200
|
)
|
|
$
|
24.60
|
|
|
Cancelled
|
|
|
(4,000
|
)
|
|
$
|
34.80
|
|
|
|
|
Nonvested at September 30, 2007
|
|
|
164,060
|
|
|
$
|
41.77
|
|
|
|
Non-Employee Directors Plan
The non-employee directors compensation plan provides to each non-employee director a retainer of
800 common shares per quarter. Compensation expense related to the non-employee director grants was
$0.8 million, $1.0 million and $0.7 million for the years ended September 30, 2007, 2006 and 2005,
respectively.
The total share-based compensation cost that has been recognized in results of operations and
included within SG&A was $5.3 million, $4.8 million and $2.6 million for the years ended September
30, 2007, 2006 and 2005, respectively. The total income tax benefit recognized in results of
operations for share-based compensation arrangements was $1.2 million, $1.2 million and $1.0
million for the years ended September 30, 2007, 2006 and 2005, respectively. The Company has
elected to use tax law ordering rules when calculating the income tax benefit associated with its
share-based payment arrangements. In addition, the Company elected to use the simplified method of
calculating the pool of excess tax benefits available to absorb tax deficiencies recognized
subsequent to the adoption of SFAS No. 123(R)-3, “Transition Election related to Accounting for the
Tax Effects of Share-Based Payment Awards.” As of September 30, 2007, there was $10.2 million of
total unrecognized compensation cost related to share-based compensation arrangements. That cost is
expected to be recognized over a weighted-average period of 3.0 years.
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
37
Notes to Consolidated Financial Statements
Pro Forma Net Earnings
The following table provides pro forma net earnings
and earnings per share had the Company applied the
fair value method of SFAS 123 for the year ended
September 30, 2005:
|
|
|
|
|
|
|
Pro forma (Unaudited)
|
|
|
|
|
(Dollars in thousands,
|
|
|
|
|
except per share amounts)
|
|
2005
|
|
|
|
|
Net earnings, as reported
|
|
$
|
43,544
|
|
|
|
|
Add: stock-based employee
compensation expense included
in reported net earnings, net of tax
|
|
|
1,165
|
|
|
Less: total stock-based employee
compensation expense determined
under fair value based methods, net of tax
|
|
|
(3,476
|
)
|
|
|
|
Pro forma net earnings
|
|
$
|
41,233
|
|
|
|
|
Net earnings per share:
|
|
|
|
|
|
Basic — as reported
|
|
$
|
1.71
|
|
|
Basic — pro forma
|
|
|
1.62
|
|
|
|
|
Diluted — as reported
|
|
|
1.66
|
|
|
Diluted — pro forma
|
|
|
1.57
|
|
|
|
12. Retirement and Other Benefit Plans
Substantially all domestic employees are covered by the defined contribution pension plan
maintained by the Company. Effective December 31, 2003, the Company’s defined benefit plan was
frozen and no additional benefits will be accrued after that date. As a result, the accumulated
benefit obligation and projected benefit obligation are equal. These frozen retirement income
benefits are provided to employees under defined benefit pay-related and flat-dollar plans, which
are noncontributory. The annual contributions to retirement plans equal or exceed the minimum
funding requirements of the Employee Retirement Income Security Act or applicable local
regulations. 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. Effective December 31,
2004, no new retirees are eligible for life insurance benefits.
The Company adopted Statement of Financial Accounting Standards No. 158, “Employer’s Accounting
for Defined Benefit Pension and Other Postretirement Plans” (SFAS 158) as of September 30, 2007.
SFAS 158 requires an employer to recognize the overfunded or underfunded status of a defined
benefit postretirement plan as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur through
comprehensive income. As a result of adopting the provisions of SFAS 158, the Company recorded a
pre-tax credit of $0.9 million to accumulated other comprehensive income in equity as of September
30, 2007.
The Company uses a measurement date of September 30 for its pension and other postretirement
benefit plans. The Company has an accrued benefit liability of $0.7 million and $1.8 million at
September 30, 2007 and 2006, respectively, related to its other postretirement benefit
obligations. All other information related to its postretirement benefit plans is not considered
material to the Company’s results of operations or financial condition.
The following tables provide a reconciliation of the changes in the pension plans and fair value
of assets over the two-year period ended September 30, 2007, and a statement of the funded status
as of September 30, 2007 and 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Reconciliation of benefit obligation
|
|
|
|
|
|
|
|
|
|
|
|
Net benefit obligation at beginning of year
|
|
$
|
48.2
|
|
|
|
50.2
|
|
|
Service cost
|
|
|
—
|
|
|
|
—
|
|
|
Interest cost
|
|
|
2.7
|
|
|
|
2.6
|
|
|
Actuarial (gain) loss
|
|
|
(2.9
|
)
|
|
|
(2.9
|
)
|
|
Plan amendments
|
|
|
—
|
|
|
|
0.1
|
|
|
Gross benefits paid
|
|
|
(1.8
|
)
|
|
|
(1.8
|
)
|
|
|
|
Net benefit obligation at end of year
|
|
$
|
46.2
|
|
|
|
48.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Reconciliation of fair value of plan assets
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
35.1
|
|
|
|
32.7
|
|
|
Actual return on plan assets
|
|
|
4.7
|
|
|
|
2.6
|
|
|
Employer contributions
|
|
|
0.2
|
|
|
|
1.6
|
|
|
Gross benefits paid
|
|
|
(1.8
|
)
|
|
|
(1.8
|
)
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
38.2
|
|
|
|
35.1
|
|
|
|
|
38
|
|
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
|
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Funded Status
|
|
|
|
|
|
|
|
|
|
Funded status at end of year
|
|
$
|
(8.0
|
)
|
|
|
(13.1
|
)
|
|
Unrecognized prior service cost
|
|
|
—
|
|
|
|
0.1
|
|
|
Unrecognized net actuarial (gain) loss
|
|
|
—
|
|
|
|
10.1
|
|
|
|
|
Accrued benefit cost
|
|
|
(8.0
|
)
|
|
|
(2.9
|
)
|
|
|
|
Amounts recognized in the Balance Sheet
consist of:
|
|
|
|
|
|
|
|
|
|
Current liability
|
|
|
(0.2
|
)
|
|
|
—
|
|
|
Noncurrent liability
|
|
|
(7.8
|
)
|
|
|
—
|
|
|
Accrued benefit cost
|
|
|
—
|
|
|
|
(2.9
|
)
|
|
Additional minimum liability
|
|
|
—
|
|
|
|
(10.3
|
)
|
|
Intangible asset
|
|
|
—
|
|
|
|
0.1
|
|
|
Accumulated other comprehensive income
(before tax effect)
|
|
|
—
|
|
|
|
10.2
|
|
|
|
|
Accrued benefit liability
|
|
|
(8.0
|
)
|
|
|
(2.9
|
)
|
|
|
|
Amounts recognized in Accumulated Other
Comprehensive Income consist of:
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
|
5.0
|
|
|
|
—
|
|
|
Prior service cost
|
|
|
0.1
|
|
|
|
—
|
|
|
|
|
Accumulated Other Comprehensive Income
|
|
$
|
5.1
|
|
|
|
—
|
|
|
|
The following table provides the components of net periodic benefit cost for the plans for the
years ended September 30, 2007, 2006 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
(Dollars in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Service cost
|
|
$
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Interest cost
|
|
|
2.7
|
|
|
|
2.6
|
|
|
|
2.6
|
|
|
Expected return on plan assets
|
|
|
(2.8
|
)
|
|
|
(2.7
|
)
|
|
|
(2.9
|
)
|
|
Net actuarial (gain) loss
|
|
|
0.4
|
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
|
Net periodic benefit cost
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
(0.1
|
)
|
|
Defined contribution plans
|
|
|
3.6
|
|
|
|
2.9
|
|
|
|
2.4
|
|
|
|
|
Total
|
|
$
|
3.9
|
|
|
|
3.2
|
|
|
|
2.3
|
|
|
|
The discount rate used in measuring the Company’s pension obligations was developed by matching
yields of actual high-quality corporate bonds to expected future pension plan cash flows (benefit
payments). Over 500 Aa-rated, non-callable bonds with a wide range of maturities were used in the
analysis. After using the bond yields to determine the present value of the plan cash flows, a
single representative rate that resulted in the same present value was developed. The expected
long-term rate of return on plan assets assumption was determined by reviewing the actual
investment return of the plans since inception and evaluating those returns in relation to
expectations of various investment organizations to determine whether long-term future returns are
expected to differ significantly from the past.
The following weighted-average assumptions were used to determine the net periodic benefit cost for
the pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Discount rate
|
|
|
5.75
|
%
|
|
|
5.25
|
%
|
|
|
6.00
|
%
|
|
Rate of increase in
compensation levels
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
N/A
|
|
|
Expected long-term rate of
return on assets
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
8.25
|
%
|
|
|
The following weighted-average assumptions were used to determine the net periodic benefit
obligations for the pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Discount rate
|
|
|
6.25
|
%
|
|
|
5.75
|
%
|
|
Rate of increase in
compensation levels
|
|
|
N/A
|
|
|
|
N/A
|
|
|
|
The assumed rate of increase in compensation levels is not applicable in 2007, 2006 and 2005 as
the plan was frozen as of December 31, 2003.
The asset allocation for the Company’s pension plans at the end of 2007 and 2006, the Company’s
acceptable range and the target allocation for 2008, by asset category, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
Acceptable
|
|
|
|
Percentage of Plan
|
|
|
|
|
Allocation
|
|
|
Range
|
|
|
Assets at Year-end
|
|
|
Asset Category
|
|
2008
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Equity securities
|
|
|
60
|
%
|
|
|
50-70
|
%
|
|
|
69
|
%
|
|
|
66
|
%
|
|
Fixed income
|
|
|
40
|
%
|
|
|
30-50
|
%
|
|
|
29
|
%
|
|
|
32
|
%
|
|
Cash/cash equivalents
|
|
|
0
|
%
|
|
|
0-5
|
%
|
|
|
2
|
%
|
|
|
2
|
%
|
|
|
The Company’s pension plan assets are managed by outside investment managers and assets are
rebalanced when the target ranges are exceeded. Pension plan assets consist principally of
marketable securities including common stocks, bonds, and interest-bearing deposits. The Company’s
investment strategy with respect to pension assets is to achieve a total rate of return (income and
capital appreciation) that is sufficient to accomplish the purpose of providing retirement benefits
to all eligible and future retirees of the pension plan. The Company regularly monitors performance
and compliance with investment guidelines.
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT 39
Notes to Consolidated Financial Statements
EXPECTED CASH FLOWS
Information about the expected cash flows for the pension and other postretirement benefit plans
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
|
|
|
Other
|
|
|
(Dollars in millions)
|
|
Benefits
|
|
|
Benefits
|
|
|
|
|
Expected Employer Contributions — 2008
|
|
$
|
0.2
|
|
|
|
0.1
|
|
|
|
|
Expected Benefit Payments
|
|
2008
|
|
|
2.4
|
|
|
|
0.1
|
|
|
2009
|
|
|
2.5
|
|
|
|
0.1
|
|
|
2010
|
|
|
2.6
|
|
|
|
0.1
|
|
|
2011
|
|
|
2.7
|
|
|
|
0.1
|
|
|
2012-2016
|
|
$
|
15.0
|
|
|
|
0.3
|
|
|
|
13. Other Financial Data
Items charged to operations during the years ended
September 30, 2007, 2006 and 2005 included the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Salaries and wages
(including fringes)
|
|
$
|
137,999
|
|
|
|
119,286
|
|
|
|
100,372
|
|
|
Maintenance and repairs
|
|
|
5,545
|
|
|
|
4,719
|
|
|
|
3,897
|
|
|
|
|
Research and development
(R&D) costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-sponsored
|
|
$
|
25,357
|
|
|
|
20,043
|
|
|
|
16,829
|
|
|
Customer-sponsored
|
|
|
7,618
|
|
|
|
6,323
|
|
|
|
5,687
|
|
|
|
|
Total R&D
|
|
$
|
32,975
|
|
|
|
26,366
|
|
|
|
22,516
|
|
|
Other engineering costs
|
|
|
9,082
|
|
|
|
9,069
|
|
|
|
7,763
|
|
|
|
|
Total R&D and other
engineering costs
|
|
$
|
42,057
|
|
|
|
35,435
|
|
|
|
30,279
|
|
|
|
|
As a % of net sales
|
|
|
8.0
|
%
|
|
|
7.7
|
%
|
|
|
7.1
|
%
|
|
|
Customer-sponsored R&D is defined in Note 1(O) of
Notes to Consolidated Financial Statements.
A reconciliation of the changes in accrued product
warranty liability for the years ended September 30,
2007, 2006, and 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Balance as of October 1
|
|
$
|
1,422
|
|
|
|
1,487
|
|
|
|
2,147
|
|
|
Additions charged to expense
|
|
|
1,771
|
|
|
|
2,357
|
|
|
|
1,108
|
|
|
Deductions
|
|
|
(1,732
|
)
|
|
|
(2,422
|
)
|
|
|
(1,768
|
)
|
|
|
|
Balance as of September 30
|
|
$
|
1,461
|
|
|
|
1,422
|
|
|
|
1,487
|
|
|
|
14. Business Segment Information
The Company is organized based on the products and services that it offers. Under this
organizational structure, the Company has three reporting units: Communications, Filtration and
Test. The Communications unit is a proven supplier of special purpose fixed network communications
systems for electric, gas and water utilities, including hardware and software to support advanced
metering applications. DCSI’s Two-Way Automatic Communications System, known as TWACS
®
, is
currently used for automatic meter reading (AMR) and related advanced metering infrastructure (AMI)
functions serving over 200 utilities, as well as having load
management capabilities. Hexagram’s STAR
®
system, the premier wireless AMI system, delivers two-way and one-way operation on
secure licensed radio frequencies for more than 100 utilities serving electric, gas and water
customers. Nexus provides best-in-class utility data management solutions to more than 85 leading
energy companies that add value to existing billing and metering infrastructure to allow both the
utilities and their customers to better manage energy-driven transactions and decision making.
Comtrak’s SecurVision
®
product line provides digital video surveillance and security functions for
large commercial enterprises and alarm monitoring companies. The Filtration unit’s primary
operations consist of: PTI Technologies Inc. (PTI), VACCO Industries (VACCO) and the Filtertek
companies (Filtertek). PTI and VACCO develop and manufacture a wide range of filtration products
and are leading suppliers of filters to the commercial and defense aerospace, satellite and
industrial markets. 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. Each of the components of the Filtration segment is presented separately due to
differing long-term economics. Test segment operations represent the EMC Group, consisting
primarily of ETS-Lindgren L.P. (ETS) and Lindgren R.F. Enclosures, Inc. (Lindgren). The EMC Group
is principally involved in the design and manufacture of EMC test equipment, test chambers, and
electromagnetic absorption materials. The EMC Group also manufactures radio frequency (RF)
shielding products and components used by manufacturers of medical equipment, communications
systems, electronic products, and shielded rooms for high security data processing and secure
communication. Accounting policies of the segments are the same as those described in the summary
of significant accounting policies in Note 1 to the Consolidated Financial Statements.
In accordance with SFAS 131, the Company evaluates the performance of its operating units based on
EBIT, which is defined as: Earnings Before Interest and Taxes. Intersegment sales and transfers are
not significant. Segment assets consist primarily of customer receivables, inventories, capitalized
software and fixed assets directly associated with the production processes of the segment. Segment
depreciation and amortization is based upon the direct assets listed above.
40 ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Notes to Consolidated Financial Statements
NET SALES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Communications
|
|
$
|
197.6
|
|
|
|
156.2
|
|
|
|
138.0
|
|
|
|
|
PTI
|
|
|
52.7
|
|
|
|
46.4
|
|
|
|
40.7
|
|
|
VACCO
|
|
|
37.2
|
|
|
|
32.3
|
|
|
|
38.9
|
|
|
Filtertek
|
|
|
98.5
|
|
|
|
95.4
|
|
|
|
92.1
|
|
|
|
|
Filtration subtotal
|
|
|
188.4
|
|
|
|
174.1
|
|
|
|
171.7
|
|
|
Test
|
|
|
141.5
|
|
|
|
128.6
|
|
|
|
119.4
|
|
|
|
|
Consolidated totals
|
|
$
|
527.5
|
|
|
|
458.9
|
|
|
|
429.1
|
|
|
|
No customers exceeded 10% of net sales in the periods presented.
EBIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Communications
|
|
$
|
22.0
|
|
|
|
28.3
|
|
|
|
38.8
|
|
|
|
|
PTI
|
|
|
9.4
|
|
|
|
6.6
|
|
|
|
3.8
|
|
|
VACCO
|
|
|
7.8
|
|
|
|
6.1
|
|
|
|
10.4
|
|
|
Filtertek
|
|
|
6.2
|
|
|
|
6.8
|
|
|
|
8.2
|
|
|
|
|
Filtration subtotal
|
|
|
23.4
|
|
|
|
19.5
|
|
|
|
22.4
|
|
|
Test
|
|
|
14.4
|
|
|
|
15.0
|
|
|
|
12.2
|
|
|
Reconciliation to consolidated
totals (Corporate)
|
|
|
(17.8
|
)
|
|
|
(15.2
|
)
|
|
|
(11.4
|
)
|
|
|
|
Consolidated EBIT
|
|
|
42.0
|
|
|
|
47.6
|
|
|
|
62.0
|
|
|
Add: interest income
|
|
|
0.7
|
|
|
|
1.3
|
|
|
|
1.9
|
|
|
|
|
Earnings before income tax
|
|
$
|
42.7
|
|
|
|
48.9
|
|
|
|
63.9
|
|
|
|
IDENTIFIABLE ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Communications
|
|
$
|
151.6
|
|
|
|
97.9
|
|
|
|
52.4
|
|
|
|
|
PTI
|
|
|
32.5
|
|
|
|
32.0
|
|
|
|
36.7
|
|
|
VACCO
|
|
|
16.8
|
|
|
|
15.7
|
|
|
|
19.7
|
|
|
Filtertek
|
|
|
68.6
|
|
|
|
62.9
|
|
|
|
91.5
|
|
|
|
|
Filtration subtotal
|
|
|
117.9
|
|
|
|
110.6
|
|
|
|
147.9
|
|
|
Test
|
|
|
72.0
|
|
|
|
50.3
|
|
|
|
80.7
|
|
|
Reconciliation to consolidated
totals (Corporate assets)
|
|
|
234.6
|
|
|
|
229.9
|
|
|
|
142.8
|
|
|
|
|
Consolidated totals
|
|
$
|
576.1
|
|
|
|
488.7
|
|
|
|
423.8
|
|
|
|
Corporate assets consist primarily of goodwill,
deferred taxes, acquired intangible assets and
cash balances.
CAPITAL EXPENDITURES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Communications
|
|
$
|
7.0
|
|
|
|
3.4
|
|
|
|
1.9
|
|
|
|
|
PTI
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
1.0
|
|
|
VACCO
|
|
|
0.6
|
|
|
|
1.0
|
|
|
|
0.7
|
|
|
Filtertek
|
|
|
7.4
|
|
|
|
3.8
|
|
|
|
4.0
|
|
|
|
|
Filtration subtotal
|
|
|
8.4
|
|
|
|
5.0
|
|
|
|
5.7
|
|
|
Test
|
|
|
4.0
|
|
|
|
0.7
|
|
|
|
1.2
|
|
|
Corporate
|
|
|
0.1
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
Consolidated totals
|
|
$
|
19.5
|
|
|
|
9.1
|
|
|
|
8.8
|
|
|
|
DEPRECIATION AND AMORTIZATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Communications
|
|
$
|
10.3
|
|
|
|
5.0
|
|
|
|
2.0
|
|
|
|
|
PTI
|
|
|
1.4
|
|
|
|
1.5
|
|
|
|
1.5
|
|
|
VACCO
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
0.7
|
|
|
Filtertek
|
|
|
6.2
|
|
|
|
6.0
|
|
|
|
6.2
|
|
|
|
|
Filtration subtotal
|
|
|
8.4
|
|
|
|
8.2
|
|
|
|
8.4
|
|
|
Test
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
1.4
|
|
|
Reconciliation to consolidated
totals (Corporate)
|
|
|
2.2
|
|
|
|
2.8
|
|
|
|
0.4
|
|
|
|
|
Consolidated totals
|
|
$
|
22.2
|
|
|
|
17.3
|
|
|
|
12.2
|
|
|
|
GEOGRAPHIC INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
United States
|
|
$
|
406.3
|
|
|
|
355.9
|
|
|
|
325.3
|
|
|
Europe
|
|
|
45.9
|
|
|
|
40.2
|
|
|
|
56.0
|
|
|
Far East
|
|
|
38.0
|
|
|
|
36.1
|
|
|
|
29.6
|
|
|
Other
|
|
|
37.3
|
|
|
|
26.7
|
|
|
|
18.2
|
|
|
|
|
Consolidated totals
|
|
$
|
527.5
|
|
|
|
458.9
|
|
|
|
429.1
|
|
|
|
Long-lived assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
Year ended September 30,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
United States
|
|
$
|
54.6
|
|
|
|
51.3
|
|
|
|
50.3
|
|
|
Europe
|
|
|
14.0
|
|
|
|
10.6
|
|
|
|
10.9
|
|
|
Other
|
|
|
9.7
|
|
|
|
6.9
|
|
|
|
6.0
|
|
|
|
|
Consolidated totals
|
|
$
|
78.3
|
|
|
|
68.8
|
|
|
|
67.2
|
|
|
|
Net sales are attributed to countries based on
location of customer. Long-lived assets are
attributed to countries based on location of the
asset.
ESCO
TECHNOLOGIES INC. 2007 ANNUAL REPORT 41
Notes to Consolidated Financial Statements
15. Commitments and Contingencies
At September 30, 2007, the Company had $3.6 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. With respect to
claims and litigation asserted or commenced against
the Company, it is the opinion of Management, that
final judgments, if any, which might be rendered
against the Company are adequately reserved, covered
by insurance, or are not likely to have a material
adverse effect on its financial condition or results
of operation.
16. Subsequent Events
On November 7, 2007, the Company announced an
agreement to acquire the stock of Doble Engineering
Company, headquartered in Watertown, Massachusetts,
for $319 million in cash, subject to adjustment for
differences in working capital and cash on hand at
closing. The Company intends to fund the
acquisition by a combination of existing cash and
borrowings under a new credit facility led by
National City Bank. The transaction is expected to
close in the quarter ending December 31, 2007.
On November 26, 2007, the Company announced it had
completed the sale of the filtration portion of
Filtertek Inc. to Illinois Tool Works Inc. (ITW) for
approximately $77.5 million in cash, subject to
closing working capital adjustments. The Tek
Packaging division of Filtertek is not included in
the transaction. The net cash proceeds from the
sale, estimated at $70 million after taxes and
expenses, will be used to pay down a portion of the
debt associated with the Doble Engineering Company
acquisition, mentioned above. The Company expects to
record a gain on the sale for both financial
reporting and tax purposes, with a portion of the
tax gain being shielded from cash payments through
the utilization of the Company’s existing capital
loss carryforward which was generated from prior
divestitures. As discussed in Note 8 to the
Consolidated Financial Statements, there is a
valuation allowance established against the capital
loss carryforward as of September 30, 2007.
17. Quarterly Financial Information (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Fiscal
|
|
|
(Dollars in thousands, except per share amounts)
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Year
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
98,813
|
|
|
|
129,068
|
|
|
|
137,523
|
|
|
|
162,133
|
|
|
|
527,537
|
|
|
Net earnings (loss)
|
|
|
(1,381
|
)
|
|
|
9,618
|
|
|
|
8,854
|
|
|
|
16,622
|
|
|
|
33,713
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
|
(.05
|
)
|
|
|
.37
|
|
|
|
.34
|
|
|
|
.65
|
|
|
|
1.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss)
|
|
$
|
(.05
|
)
|
|
|
.36
|
|
|
|
.33
|
|
|
|
.64
|
|
|
|
1.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
90,586
|
|
|
|
122,884
|
|
|
|
123,626
|
|
|
|
121,769
|
|
|
|
458,865
|
|
|
Net earnings
|
|
|
2,204
|
|
|
|
7,343
|
|
|
|
11,163
|
|
|
|
10,570
|
|
|
|
31,280
|
|
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
|
.09
|
|
|
|
.29
|
|
|
|
.43
|
|
|
|
.41
|
|
|
|
1.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
.08
|
|
|
|
.28
|
|
|
|
.42
|
|
|
|
.40
|
|
|
|
1.19
|
|
|
|
During 2007, the Company determined that certain tax
accounts had not been accurately recorded in the
financial statements for fiscal years 2001 to 2006.
The effect in any individual year was not material
to the Company’s results of operations, financial
position or cash flows. The Company recorded $1.3
million as a cumulative credit adjustment to tax
expense to correct previously recorded tax accounts
during the fourth quarter of 2007.
42 ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Management’s Statement of Financial Responsibility
The Company’s Management is responsible for the fair
presentation of the Company’s financial statements
in accordance with accounting principles generally
accepted in the United States of America, and for
their integrity and accuracy. Management is
confident that its financial and business processes
provide accurate information on a timely basis.
Management, with the oversight of ESCO’s Board of
Directors, has established and maintains a strong
ethical climate in which the Company’s affairs are
conducted. Management also has established an
effective system of internal controls that provide
reasonable assurance as to the integrity and
accuracy of the financial statements, and
responsibility for the Company’s assets. KPMG LLP,
the
Company’s independent accountants, reports directly
to the Audit and Finance Committee of the Board of
Directors. The Audit and Finance Committee has
established policies consistent with newly enacted
corporate reform laws for auditor independence. In
accordance with corporate governance listing
requirements of the New York Stock Exchange:
|
4
|
|
A majority of Board members are independent of the Company and its Management.
|
|
|
|
4
|
|
All members of the key Board committees — the Audit and Finance, the Human Resources and Compensation and the Nominating and Corporate Governance Committees — are independent.
|
|
|
|
4
|
|
The independent members of the Board meet regularly without the presence of Management.
|
|
|
|
4
|
|
The Company has a clear code of ethics and a conflict of interest policy to ensure that key corporate decisions are made by individuals who do not have a financial interest in the outcome, separate from their interest as Company officials.
|
|
|
|
4
|
|
The charters of the Board committees clearly establish their respective roles and responsibilities.
|
|
|
|
4
|
|
The Company has an ethics officer and an ombudsman hot line available to all domestic employees and all foreign employees have local ethics officers and access to the Company’s ombudsman.
|
The Company has a strong financial team, from its
executive leadership to each of its individual
contributors. Management monitors compliance with
its financial policies and practices over critical
areas including internal controls, financial
accounting and reporting, accountability, and
safeguarding of its corporate assets. The internal
audit control function maintains oversight over the
key areas of the business and financial processes
and controls, and reports directly to the Audit and
Finance Committee. Additionally, all employees are
required to adhere to the ESCO Code of Business
Conduct and Ethics, which is monitored by the ethics
officer.
Management is dedicated to ensuring that the
standards of financial accounting and reporting that
are established are maintained. The Company’s
culture demands integrity and a commitment to strong
internal practices and policies.
The Consolidated Financial Statements have been
audited by KPMG LLP, whose report is included
herein.
|
|
|
|
|
|
|
|
|
Victor L. Richey
|
|
Gary E. Muenster
|
|
Chairman, Chief Executive Officer,
|
|
Senior Vice President
|
|
and President
|
|
and Chief Financial Officer
|
Management’s Report on Internal Control Over Financial Reporting
The Company’s Management is responsible for
establishing and maintaining adequate internal
control over financial reporting (as defined in the
Securities Exchange Act Rule 13a-15(f)). Our
internal control over financial reporting is
designed to provide reasonable assurance regarding
the reliability of financial reporting and the
preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles in the United States of
America.
Because of its inherent limitations, any system of
internal control over financial reporting, no matter
how well designed, may not prevent or detect
misstatements due to the possibility that a control
can be circumvented or overridden or that
misstatements due to error or fraud may occur that
are not detected. Also, because of changes in
conditions, internal control effectiveness may vary
over time.
Management assessed the effectiveness of the
Company’s internal control over financial reporting
as of September 30, 2007 using criteria established
in
Internal Control — Integrated Framework
issued
by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) and concluded that the
Company maintained effective internal control over
financial reporting as of September 30, 2007 based
on these criteria.
Our internal control over financial reporting as of
September 30, 2007, as well as our assessment of the
effectiveness of our internal control over financial
reporting as of September 30, 2007, have been
audited by KPMG LLP, an independent registered
public accounting firm, as stated in the report
which is included herein.
|
|
|
|
|
|
|
|
|
Victor L. Richey
|
|
Gary E. Muenster
|
|
Chairman, Chief Executive Officer,
|
|
Senior Vice President
|
|
and President
|
|
and Chief Financial Officer
|
ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT 43
Report of Independent Registered Public Accounting Firm
The Board of Directors and
Shareholders
ESCO Technologies Inc.:
We have audited the accompanying consolidated balance
sheets of ESCO Technologies Inc. and subsidiaries
(the Company) as of September 30, 2007 and 2006, 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,
2007. 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 the
standards of the Public Company Accounting Oversight
Board (United States). 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 previously present fairly, in all
material respects, the financial position of ESCO
Technologies Inc. and subsidiaries as of September
30, 2007 and 2006, and the results of their
operations and their cash flows for each of the years
in the three-year period ended September 30, 2007, in
conformity with U.S. generally accepted accounting
principles.
As discussed in Notes 1 and 12 to the consolidated
financial statements, the Company adopted Statement
of Financial Accounting Standards No. 158,
Employers’ Accounting for Defined Benefit Pension
and Other Postretirement Plans
, as of September 30,
2007. Additionally, as discussed in Note 1 to the
consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards
No. 123(R),
Share-Based Payment
, effective October
1, 2005 and, as discussed in Note 8 to the
consolidated financial statements, the Company
changed its method of quantifying errors in 2006.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of ESCO
Technologies Inc.’s internal control over financial
reporting as of September 30, 2007, based on criteria
established in
Internal Control — Integrated
Framework
issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and
our report dated November 29, 2007, expressed an
unqualified opinion on management’s assessment of,
and the effective operation of, internal control over
financial reporting.
St. Louis, Missouri
November 29, 2007
44 ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
ESCO Technologies Inc.:
We have audited management’s assessment, included in
the accompanying
Management’s Report on Internal
Control Over Financial Reporting
, that ESCO
Technologies Inc. (the Company) maintained effective
internal control over financial reporting as of
September 30, 2007, based on criteria established
in
Internal Control — Integrated Framework
issued by
the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). ESCO Technologies Inc.’s
management is responsible for maintaining effective
internal control over financial reporting and for
its assessment of the effectiveness of internal
control over financial reporting. Our responsibility
is to express an opinion on management’s assessment
and an opinion on the effectiveness of the Company’s
internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight
Board (United States). Those standards required that
we plan and perform the audit to obtain reasonable
assurance about whether effective internal control
over financial reporting was maintained in all
material respects. Our audit included obtaining an
understanding of internal control over financial
reporting, evaluating management’s assessment,
testing and evaluating the design and operating
effectiveness of internal control, and performing
such other procedures as we considered necessary in
the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A company’s internal control over financial reporting
is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and
the preparation of financial statements for external
purposes in accordance with generally accepted
accounting principles. A company’s internal control
over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of
records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of
the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary
to permit preparation of financial statements
in accordance with generally accepted accounting
principles, and the receipts and expenditures of the
company are being made only in accordance with
authorizations of management and directors of the
company; and (3) provide reasonable assurance
regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect
on the financial statements.
Because of its inherent limitations, internal
control over financial reporting may not prevent or
detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are
subject to the risk that controls may become
inadequate because of changes in conditions, or
that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management’s assessment that ESCO
Technologies Inc. maintained effective internal
control over financial reporting as of September 30,
2007, is fairly stated, in all material respects,
based on criteria established in
Internal Control —
Integrated Framework
issued by COSO. Also, in our
opinion, ESCO Technologies Inc. maintained, in all
material respects, effective internal control over
financial reporting as of September 30, 2007, based
on criteria established in
Internal Control —
Integrated Framework
issued by COSO.
We also have audited, in accordance with the
standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance
sheets of ESCO Technologies Inc. and subsidiaries as
of September 30, 2007 and 2006, 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, 2007, and our
report dated November 29, 2007, expressed an
un-qualified opinion on those consolidated financial
statements.
St. Louis, Missouri
November 29, 2007
ESCO
TECHNOLOGIES INC. 2007 ANNUAL REPORT 45
Five-Year Financial Summary
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
For years ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
527.5
|
|
|
|
458.9
|
|
|
|
429.1
|
|
|
|
422.1
|
|
|
|
396.7
|
|
|
Net earnings from continuing operations
|
|
|
33.7
|
|
|
|
31.3
|
|
|
|
43.5
|
|
|
|
37.8
|
|
|
|
26.7
|
|
|
Net earnings (loss) from discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2.1
|
)
|
|
|
(66.5
|
)
|
|
Net earnings (loss) before accounting change
|
|
|
33.7
|
|
|
|
31.3
|
|
|
|
43.5
|
|
|
|
35.7
|
|
|
|
(39.7
|
)
|
|
Net earnings (loss)
|
|
|
33.7
|
|
|
|
31.3
|
|
|
|
43.5
|
|
|
|
35.7
|
|
|
|
(41.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
1.30
|
|
|
|
1.22
|
|
|
|
1.71
|
|
|
|
1.47
|
|
|
|
1.05
|
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.09
|
)
|
|
|
(2.62
|
)
|
|
Cumulative effect of accounting change, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.06
|
)
|
|
|
|
Net earnings (loss)
|
|
|
1.30
|
|
|
|
1.22
|
|
|
|
1.71
|
|
|
|
1.38
|
|
|
|
(1.63
|
)
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
|
1.28
|
|
|
|
1.19
|
|
|
|
1.66
|
|
|
|
1.42
|
|
|
|
1.02
|
|
|
Discontinued operations
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.08
|
)
|
|
|
(2.53
|
)
|
|
Cumulative effect of accounting change, net of tax
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(0.06
|
)
|
|
|
|
Net earnings (loss)
|
|
|
1.28
|
|
|
|
1.19
|
|
|
|
1.66
|
|
|
|
1.34
|
|
|
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
|
141.2
|
|
|
|
131.4
|
|
|
|
197.2
|
|
|
|
165.2
|
|
|
|
120.5
|
|
|
Total assets
|
|
|
576.1
|
|
|
|
488.7
|
|
|
|
423.8
|
|
|
|
402.4
|
|
|
|
393.4
|
|
|
Long-term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.4
|
|
|
|
0.5
|
|
|
Shareholders’ equity
|
|
$
|
415.5
|
|
|
|
376.4
|
|
|
|
331.0
|
|
|
|
307.6
|
|
|
|
275.4
|
|
|
|
See Note 2 of Notes to Consolidated Financial Statements for discussion of acquisition activity.
Common Stock Market Price
ESCO’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 common stock for each quarter of fiscal 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Quarter
|
|
High
|
|
|
Low
|
|
|
High
|
|
|
Low
|
|
|
|
|
First
|
|
$
|
49.28
|
|
|
|
41.88
|
|
|
$
|
50.75
|
|
|
|
32.57
|
|
|
Second
|
|
|
49.20
|
|
|
|
40.67
|
|
|
|
52.76
|
|
|
|
43.84
|
|
|
Third
|
|
|
52.41
|
|
|
|
34.73
|
|
|
|
58.03
|
|
|
|
47.65
|
|
|
Fourth
|
|
|
43.50
|
|
|
|
29.63
|
|
|
|
58.42
|
|
|
|
45.30
|
|
|
|
ESCO historically has not paid cash dividends on its common stock. Management continues to evaluate
its cash dividend policy. There are no current plans to initiate a dividend.
46 ESCO TECHNOLOGIES INC. 2007 ANNUAL REPORT
Shareholders’ Summary
SHAREHOLDERS’ ANNUAL MEETING
The Annual Meeting of the shareholders of ESCO
Technologies Inc. will be held at 9:30 a.m.
Wednesday, February 6, 2008, at the Company’s
Corporate headquarters, 9900A Clayton Road, St.
Louis, Missouri 63124. Notice of the meeting and a
proxy statement were sent to shareholders with this
Annual Report.
CERTIFICATIONS
Pursuant to New York Stock Exchange (NYSE)
requirements, the Company submitted to the NYSE the
annual certifications, dated February 23, 2007 and
February 27, 2006, by the Company’s chief executive
officer that he was not aware of any violations by
the Company of NYSE’s
corporate governance listing standards. In
addition, the Company filed with the Securities and
Exchange Commission the certifications by the
Company’s chief executive officer and chief
financial officer required under Section 302 of the
Sarbanes-Oxley Act of 2002 as exhibits to the
Company’s Forms 10-K for its fiscal years ended
September 30, 2007 and September 30, 2006.
10-K REPORT
A copy of the Company’s 2007 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., 9900A Clayton Road, St. Louis, Missouri
63124.
The Form 10-K is also available on the
Company’s web site at www.escotechnologies.com.
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 web site at www.escotechnologies.com or
via e-mail to pmoore@escotechnologies.com.
TRANSFER AGENT AND REGISTRAR
Shareholder inquiries concerning lost certificates,
transfer of shares or address changes should be
directed to:
Registrar and Transfer Company
10 Commerce Drive
Cranford, NJ 07016-3572
1 (800) 368-5948
E-mail: info@rtco.com
CAPITAL STOCK INFORMATION
ESCO Technologies Inc. common stock shares
(symbol ESE) are listed on the New York Stock
Exchange. There were approximately 2,700
holders of record of shares of common stock at
November 15, 2007.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
KPMG LLP
10 South Broadway, Suite 900
St. Louis, Missouri 63102
ESCO
TECHNOLOGIES INC. 2007 ANNUAL REPORT
48
