10-Q 1 e10-q.txt QUARTERLY REPORT 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______TO______ COMMISSION FILE NUMBER 1-10596 ESCO TECHNOLOGIES INC. (formerly named ESCO Electronics Corporation) (Exact name of registrant as specified in its charter) MISSOURI 43-1554045 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8888 LADUE ROAD, SUITE 200 63124-2090 ST. LOUIS, MISSOURI (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code:(314) 213-7200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of the registrant's common stock outstanding at July 31, 2000 was 12,312,747. 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ESCO TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands, except per share amounts)
Three Months Ended June 30, ------------------- 2000 1999 ------- ------- Net sales $79,235 113,978 ------- ------- Costs and expenses: Cost of sales 54,536 86,027 Selling, general and administrative expenses 16,750 18,934 Interest expense 209 1,715 Other, net 1,873 989 ------- ------- Total costs and expenses 73,368 107,665 ------- ------- Earnings before income taxes 5,867 6,313 Income tax expense 2,159 2,241 ------- ------- Net earnings 3,708 4,072 ------- ------- Earnings per share: - Basic $ .30 .33 - Diluted .29 .32 ======= =======
See accompanying notes to consolidated financial statements. 2 3 ESCO TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (Dollars in thousands, except per share amounts)
Nine Months Ended June 30, ---------------------- 2000 1999 -------- -------- Net sales 215,162 298,385 -------- -------- Costs and expenses: Cost of sales 149,259 222,504 Selling, general and administrative expenses 45,188 54,748 Interest (income) expense (99) 5,151 Other, net 4,913 4,179 Gain on sale of property (2,239) -- -------- -------- Total costs and expenses 197,022 286,582 -------- -------- Earnings before income taxes 18,140 11,803 Income tax expense 5,860 4,169 -------- -------- Net earnings before accounting change 12,280 7,634 -------- -------- Cumulative effect of accounting change, net of tax -- (25,009) -------- -------- Net earnings (loss) 12,280 (17,375) ======== ======== Earnings (loss) per share: Earnings before accounting change: - Basic $ 1.00 .62 - Diluted .97 .61 ======== ======== Net earnings (loss) - Basic $ 1.00 (1.41) - Diluted .97 (1.41) ======== ========
See accompanying notes to consolidated financial statements 3 4 ESCO TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
June 30, September 30, 2000 1999 ----------- ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 10,510 87,709 Accounts receivable, less allowance for doubtful accounts of $966 and $574, respectively 55,124 38,669 Costs and estimated earnings on long-term contracts, less progress billings of $15,769 and $11,778, respectively 4,552 4,019 Inventories 49,709 39,590 Other current assets 4,992 3,559 --------- --------- Total current assets 124,887 173,546 --------- --------- Property, plant and equipment, at cost 109,564 109,763 Less accumulated depreciation and amortization 40,389 38,445 --------- --------- Net property, plant and equipment 69,175 71,318 Excess of cost over net assets of purchased businesses, less accumulated amortization of $8,442 and $6,631, respectively 89,693 68,950 Deferred tax assets 41,351 44,783 Other assets 21,863 19,788 --------- --------- $ 346,969 378,385 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Short-term borrowings and current maturities of long-term debt $ 18,000 20,598 Accounts payable 33,134 26,339 Advance payments on long-term contracts, less costs incurred of $1,898 and $479, respectively 2,778 682 Accrued expenses and other current liabilities 25,630 30,598 --------- --------- Total current liabilities 79,542 78,217 --------- --------- Other liabilities 10,282 9,583 Long-term debt 830 41,896 --------- --------- Total liabilities 90,654 129,696 --------- --------- Commitments and contingencies -- -- Shareholders' equity: Preferred stock, par value $.01 per share, authorized 10,000,000 shares -- -- Common stock, par value $.01 per share, authorized 50,000,000 shares; issued 13,204,197 and 12,782,663 shares, respectively 132 128 Additional paid-in capital 205,045 201,719 Retained earnings since elimination of deficit at September 30, 1993 65,003 52,723 Accumulated other comprehensive loss (4,134) (1,870) --------- --------- 266,046 252,700 Less treasury stock, at cost; 890,625 and 404,625 common shares, respectively (9,731) (4,011) --------- --------- Total shareholders' equity 256,315 248,689 --------- --------- $ 346,969 378,385 ========= =========
See accompanying notes to consolidated financial statements. 4 5 ESCO TECHNOLOGIES INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (Dollars in thousands)
Nine Months Ended June 30, ---------------------- 2000 1999 -------- -------- Cash flows from operating activities: Net earnings (loss) $ 12,280 (17,375) Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: Depreciation and amortization 10,837 13,506 Changes in operating working capital, net of accounting change (19,132) (19,582) Effect of accounting change, net of tax -- 25,009 Other 1,618 5,885 -------- -------- Net cash provided by operating activities 5,603 7,443 -------- -------- Cash flows from investing activities: Capital expenditures (7,817) (6,615) (Acquisition) divestiture of businesses, less cash acquired (28,231) -- -------- -------- Net cash used by investing activities (36,048) (6,615) -------- -------- Cash flows from financing activities: Net increase in short-term borrowings 5,494 8,000 Proceeds from long-term debt 80 96 Principal payments on long-term debt (49,238) (6,303) Purchases of common stock into treasury (5,765) (1,562) Other 2,675 193 -------- -------- Net cash (used) provided by financing activities (46,754) 424 -------- -------- Net (decrease) increase in cash and cash equivalents (77,199) 1,252 Cash and cash equivalents, beginning of period 87,709 4,241 -------- -------- Cash and cash equivalents, end of period $ 10,510 5,493 ======== ========
See accompanying notes to consolidated financial statements. 5 6 ESCO TECHNOLOGIES INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. BASIS OF PRESENTATION The accompanying consolidated financial statements, in the opinion of management, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required by generally accepted accounting principles. For further information refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1999. Certain prior year amounts have been reclassified to conform to the fiscal 2000 presentation. The results for the three and nine month periods ended June 30, 2000 are not necessarily indicative of the results for the entire 2000 fiscal year. Effective July 10, 2000, the Company changed its name from ESCO Electronics Corporation to ESCO Technologies Inc. On September 30, 1999, the Company sold its last major defense business, Systems & Electronics Inc. (SEI) for $85 million in cash, less working capital adjustments. The prior year amounts include the operating results of SEI for the entire year. The Company has provided a reconciliation of reported earnings to "adjusted" earnings within "Item 2. Management's Discussion and Analysis (MD&A)" noted below. 2. EARNINGS (LOSS) PER SHARE Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common shares outstanding during the period plus shares issuable upon the assumed exercise of dilutive common share options and performance shares by using the treasury stock method. The number of shares used in the calculation of earnings (loss) per share for each period presented is as follows (in thousands):
Three Months Ended Nine Months Ended June 30, June 30, ------------------ ----------------- 2000 1999 2000 1999 ------ ------ ------ ------ Weighted Average Shares Outstanding - Basic 12,305 12,357 12,311 12,318 Dilutive Options and Performance Shares 386 352 337 249 ------ ------ ------ ------ Adjusted Shares- Diluted 12,691 12,709 12,648 12,567 ====== ====== ====== ======
Options to purchase approximately 92,000 shares of common stock at prices ranging from $15.72-$19.22 per share and options to purchase approximately 689,000 shares of common stock at approximately $10.78 - $19.22 were outstanding during the nine month periods ended June 30, 2000 and 1999, respectively, but were not included in the respective computations of diluted EPS because the options' exercise price was greater than the average market price of the common shares during such nine month periods. These options expire in various periods through 2010. Approximately 166,000 performance shares were outstanding but unearned at June 30, 1999, and therefore, were not included in the computation of diluted EPS. 6 7 3. INVENTORIES Inventories consist of the following (dollars in thousands):
June 30, September 30, 2000 1999 -------- ------------- Finished goods $12,711 11,387 Work in process, including long-term contracts 18,636 14,517 Raw materials 18,362 13,686 ------- ------- Total inventories $49,709 39,590 ======= =======
The increase in inventories of approximately $10.1 million is primarily due to the current year acquisitions which contributed $6.4 million of the increase. 4. CHANGE IN ACCOUNTING PRINCIPLE During the first quarter of fiscal 1999, the Company adopted the provisions of Statement of Position (SOP) 98-5,"Reporting on the Costs of Start-up Activities". This SOP provides guidance on accounting for start-up activities, including precontract costs and organization costs. The adoption of SOP 98-5 resulted in a non-cash, after-tax charge of approximately $25 million, which was recognized as a cumulative effect of an accounting change in the prior year first quarter ended December 31, 1998. 5. COMPREHENSIVE INCOME (LOSS) Comprehensive income for the three-month periods ended June 30, 2000 and 1999 was $2.9 million and $4.0 million, respectively. Comprehensive income (loss) for the nine-month periods ended June 30, 2000 and 1999 was $10.0 million and ($18.5) million, respectively. The Company's comprehensive income and loss is impacted only by foreign currency translation adjustments. During the first nine months of fiscal 2000, the foreign currency adjustments were primarily impacted by the fluctuations in certain European currencies. 6. BUSINESS SEGMENT INFORMATION The Company is organized based on the products and services that it offers.
($ in millions) Three Months ended June 30, -------------------- 2000 1999 ----- ----- NET SALES Filtration/Fluid Flow $44.8 43.5 Test 21.4 8.2 Communications 10.7 8.6 Other 2.3 2.9 Divested Business -- 50.8 ----- ----- Consolidated totals $79.2 114.0 ===== ===== OPERATING PROFIT (LOSS) Filtration/Fluid Flow $ 4.1 4.0 Test 2.6 .7 Communications 2.4 1.1 Other (1.2) (1.5) Divested Business -- 4.7 ----- ----- Consolidated totals $ 7.9 9.0 ===== =====
7 8
($ in millions) Nine Months ended June 30, ---------------------- 2000 1999 ------ ------ NET SALES Filtration/Fluid Flow $133.8 124.3 Test 40.5 25.4 Communications 31.9 18.8 Other 9.0 10.3 Divested Business -- 119.6 ------ ------ Consolidated totals $215.2 298.4 ====== ====== OPERATING PROFIT (LOSS) Filtration/Fluid Flow $ 12.1 10.8 Test 4.5 2.4 Communications 6.7 1.7 Other (2.6) (2.3) Divested Business -- 8.5 ------ ------ Consolidated totals $ 20.7 21.1 ====== ======
7. ACQUISITIONS Effective April 9, 2000, the Company acquired all of the outstanding common stock of The Curran Company (doing business as Lindgren RF Enclosures) and Lindgren, Inc. (doing business as Lindgren-Rayproof) (collectively "Lindgren") for approximately $22 million in cash plus additional consideration based upon the future performance of the Company. The Company accounted for the transaction as a purchase. Lindgren has annual sales in excess of $40 million and is a leading supplier of radio frequency (RF) shielding products and components used by manufacturers of medical equipment, communications systems and electronic products. Lindgren is headquartered near Chicago, Illinois and operates facilities in Wisconsin, Florida, the United Kingdom and Singapore. The operating results for Lindgren, since the date of acquisition, are included within the Company's Test segment. The Company recorded approximately $15 million of goodwill as a result of the transaction, subject to post-closing adjustments and finalization of the purchase accounting entries. These post-closing items are expected to be completed prior to September 30, 2000. Effective June 2, 2000, the Company purchased Holaday Industries, Inc. ("Holaday") for approximately $4 million in cash. Holaday is a leading supplier of specialty measurement probes to the electromagnetic compatibility (EMC) test, health and safety, and microwave markets. The business, headquartered in Eden Prairie, Minnesota, has annual sales of approximately $5.5 million. The operating results for Holaday, since the date of acquisition, are included within the Company's Test segment. The purchase is subject to final post-closing adjustments which will be completed prior to September 30, 2000. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RECONCILIATION OF ADJUSTED NET EARNINGS - 1999 The following table is not intended to present prior year net earnings as defined within generally accepted accounting principles (GAAP), and is presented for informational purposes only. The table is comparable to the full year table presented in the 1999 Annual Report to Shareholders (page 11). The table provides a reconciliation between the 1999 reported financials and what Management believes the 1999 operating results may have been after removing certain nonrecurring items and assuming that all of the actions taken during 1999 to reposition the business were complete at the beginning of the period. Management believes the estimated 1999 adjusted operating results provide a meaningful presentation for purposes of analyzing ESCO's ongoing financial performance.
Three Months Ended June 30, 1999 ------------------------------------------ (a) (b) Elimination Adjusting ($ in millions, rounded) Reported of SEI Items Adjusted ------------------------ -------- ----------- --------- -------- Net sales $114.0 50.8 -- $ 63.2 ------ ------ ------ ------ Cost of sales 86.0 40.6 (.2) 45.2 SG&A expenses 19.0 5.4 .1 13.7 Interest expense (income) 1.7 .1 (2.3) (.7) Other, net 1.0 .1 -- .9 ------ ------ ------ ------ Total costs and expenses 107.7 46.2 (2.4) 59.1 ------ ------ ------ ------ Earnings before tax 6.3 4.6 2.4 4.1 Income tax expense 2.2 -- (.8) 1.4 ------ ------ ------ ------ Net earnings 4.1 4.6 3.2 2.7 ====== ====== ====== ======
Nine Months Ended June 30, 1999 ------------------------------------------ (a) (b) Elimination Adjusting ($ in millions, rounded) Reported of SEI Items Adjusted ------------------------ -------- ----------- --------- -------- Net sales $298.4 119.6 -- $178.8 ------ ------ ------ ------ Cost of sales 222.5 94.7 (.6) 127.2 SG&A expenses 54.8 16.4 .6 39.0 Interest expense (income) 5.1 .4 (6.1) (1.4) Other, net 4.2 .2 (.2) 3.8 ------ ------ ------ ------ Total costs and expenses 286.6 111.7 (6.3) 168.6 ------ ------ ------ ------ Earnings before tax 11.8 7.9 6.3 10.2 Income tax expense 4.2 -- (.6) 3.6 ------ ------ ------ ------ Net earnings before accounting change 7.6 7.9 6.9 6.6 Cumulative effect of accounting change, net of tax (25.0) -- 25.0 -- ------ ------ ------ ------ Net earnings (loss) $(17.4) 7.9 31.9 $ 6.6 ====== ====== ====== ======
(a) Represents the operations of SEI, which were included in the ESCO consolidated 1999 GAAP reported results of operations for the third quarter and first nine months of fiscal 1999, respectively. (b) Represents the adjusting items as explained in detail in the 1999 Annual Report to Shareholders (page 11), including: the operating results of Rantec's microwave business which has been sold; the adjustment to the corporate office operating expenses resulting from the 1999 actions; the estimated net interest impact of the SEI transaction proceeds; and any related tax adjustment. 9 10 RESULTS OF OPERATIONS NET SALES Net sales of $79.2 million for the third quarter of fiscal 2000 decreased $34.8 million from reported net sales of $114.0 million for the third quarter of fiscal 1999 due to the divestiture of SEI. The prior year amount included SEI sales of $50.8 million. Excluding SEI from the prior year amounts, third quarter sales increased $16.0 million, or 25.3% over 1999 "adjusted" third quarter sales of $63.2 million. Net sales decreased $83.2 million, or 27.9% to $215.2 million for the first nine months of fiscal 2000 from reported net sales of $298.4 million for the first nine months of fiscal 1999 due to the divestiture of SEI. The prior year amount included SEI sales of $119.6 million. Excluding SEI from the prior year amounts, sales for the first nine months of fiscal 2000 increased $36.4 million, or 20.4% over 1999 "adjusted" nine months sales of $178.8 million. Filtration/Fluid Flow Net sales of $44.8 million in the third quarter of fiscal 2000 were 3.0% higher than prior year third quarter sales of $43.5 million. Net sales increased $9.5 million, or 7.6% to $133.8 million in the first nine months of fiscal 2000 from prior year nine months sales of $124.3 million. During the third quarter of fiscal 2000, the Company experienced a reduction in sales volumes of its blood filters and a temporary slowdown in the sales of its disposable water filter cartridges. The sales increase during the first nine months of fiscal 2000 compared to prior year was mainly due to new product introductions and increases in microfiltration sales. Test Net sales increased $13.2 million or 161% to $21.4 million in the third quarter of fiscal 2000 from $8.2 million for the third quarter of fiscal 1999. Net sales of $40.5 million for the first nine months increased $15.1 million or 59.4% in fiscal 2000 over the prior period net sales of $25.4 million. The increase in both periods is primarily due to the Lindgren acquisition, which contributed approximately $10 million in sales in the fiscal 2000 third quarter, as well as additional revenue related to the General Motors contract to design and build an electromagnetic compatibility (EMC) test complex. Communications For the third quarter of fiscal 2000, net sales of $10.7 million were 24.4% higher than the $8.6 million of sales recorded in the third quarter of fiscal 1999. Net sales of $31.9 million for the first nine months of fiscal 2000 were 69.7% higher than the $18.8 million of sales recorded in the prior year period. The significant increase in both periods is the result of significantly higher shipments to the Puerto Rico Electric Power Authority (PREPA) and Wisconsin Public Service Corporation (WPS) to provide Automatic Meter Reading (AMR) systems. Other Sales were $2.3 million in the third quarter of fiscal 2000 and $2.9 million in the prior year period. In the first nine months of fiscal 2000, sales were $9.0 million compared to $10.3 million in the prior year period. The decreases are due to the sale of the Rantec microwave antenna business, which occurred in February 2000. Sales for the Rantec microwave antenna business were approximately $2.1 million and $4.9 million in fiscal 2000 and 1999, respectively. ORDERS AND BACKLOG Firm order backlog was $164.2 million at June 30, 2000, compared with $142.9 million at September 30, 1999. Orders totaling $222.5 million were received in the first nine months of fiscal 2000, with the majority of the orders relating to Filtration/Fluid Flow products. In addition, the recent acquisitions of Lindgren and Eaton Space Products contributed approximately $20.3 million in backlog. The February 2000 sale of the Rantec microwave business resulted in a decrease to backlog of $6.3 million. GROSS PROFIT The gross profit margin increased to 31.2% in the third quarter of fiscal 2000 from 24.5% in the third quarter of fiscal 1999 as reported. The "adjusted" 10 11 gross profit margin for the third quarter of fiscal 1999 was 28.5%. The gross profit margin was 30.6% in the first nine months of fiscal 2000 and 25.4% in the first nine months of fiscal 1999 as reported. The fiscal 1999 "adjusted" gross profit margin was 28.9%. The gross profit margin increased in both fiscal 2000 periods compared to the reported 1999 results primarily due to the lower margins in 1999 related to the former defense subsidiary, SEI. Gross profit margin increased in both fiscal 2000 periods compared to "adjusted" 1999 results due to operational improvements in all three primary operating segments including favorable changes in sales mix and successful cost containment programs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative (SG&A) expenses for the third quarter of fiscal 2000 were $16.8 million, or 21.1% of net sales, compared with $18.9 million, or 16.6% of net sales for the prior year period. "Adjusted" SG&A expense was $13.7 million, or 21.7% of net sales for the same period a year ago. The percentage decrease from "adjusted" 1999 SG&A expenses is the result of favorable sales leverage achieved on the higher sales volume. For the first nine months of fiscal 2000, SG&A expenses were $45.2 million, or 21.0% of net sales, compared with $54.7 million, or 18.3% of net sales for the prior year period. "Adjusted" SG&A expense was $39.0 million, or 21.8% of net sales for the same period a year ago. The decrease as a percent of sales from "adjusted" 1999 SG&A expenses is due to the favorable sales leverage achieved on the higher sales volume. OPERATING PROFIT Operating profit was $7.9 million (10.0% of sales) for the third quarter of fiscal 2000 compared to reported operating profit of $9.0 million (7.9% of sales) for the third quarter of fiscal 1999. The prior year operating profit amount included $4.7 million related to SEI. Current year third quarter operating profit increased $3.6 million, or 83.7% over prior year "adjusted" third quarter operating profit of $4.3 million. Operating profit was $20.7 million (9.6% of sales) for the first nine months of fiscal 2000 compared to reported operating profit of $21.1 million (7.1% of sales) for the first nine months of fiscal 1999. The prior year operating profit amount included $8.5 million related to SEI. Current year nine months operating profit increased $8.1 million, or 64.3% over prior year "adjusted" operating profit of $12.6 million. Filtration/Fluid Flow Operating profit increased to $4.1 million (9.2% of sales) in third quarter of fiscal 2000 from the $4.0 million (9.2% of sales) of operating profit in the prior year period. Operating profit of $12.1 million increased 12.0% in the first nine months of fiscal 2000 over the $10.8 million of operating profit in the prior year period. Operating profit has remained consistent at 9.2% of sales in the third quarter of fiscal 2000 as compared to prior year mainly due to the temporary slowdown in sales of disposable water filter cartridges and blood filters as well as increased investments in new product start-ups. Test Third quarter operating profit increased $1.9 million, or 271% to $2.6 million from $.7 million in the prior year quarter. Operating profit was $4.5 million in the first nine months of fiscal 2000 compared to $2.4 million in the prior year period. Operating profit for the current quarter and year-to-date increased primarily due to the Lindgren acquisition, which contributed approximately $1.0 million, as well as additional profit related to the General Motors contract to design and build an EMC test complex. Communications Third quarter operating profit of $2.4 million in fiscal 2000 was $1.3 million (118%) higher than the $1.1 million of operating profit in the third quarter of fiscal 1999. For the first nine months of fiscal 2000, operating profit increased $5.0 million (294%)to $6.7 million from $1.7 million in the prior year period. The large increase is the result of significantly higher shipments to PREPA and WPS as described above. 11 12 Other Operating loss was ($1.2) million and ($2.6) million for the three and nine-month periods ended June 30, 2000, respectively, compared to ($1.5) million and ($2.3) million for the respective prior year periods. The increase in the current nine month period operating loss primarily related to the operations of the Rantec microwave antenna business that was sold in February 2000. INTEREST (INCOME) EXPENSE Interest expense was $.2 million and $1.7 million for the three-month period ended June 30, 2000 and 1999, respectively. Interest income was $.1 million for the nine-month period ended June 30, 2000 compared to interest expense of $5.2 million for the nine-month period ended June 30, 1999. The decline in interest expense for the nine-month period ended June 30, 2000 is due to the lower debt level in the current year. All outstanding debt, excluding approximately $.8 million of foreign debt, was repaid in October 1999 with the proceeds from the sale of SEI. OTHER COSTS AND EXPENSES, NET Other costs and expenses, net, were $1.9 million and $4.9 million for the three and nine-month periods ended June 30, 2000, respectively, compared to $1.0 million and $4.2 million for the three and nine-month periods ended June 30, 1999, respectively. The amount for the first nine months of fiscal 2000 included amortization expense of $2.8 million related to goodwill and patents. During the third quarter of fiscal 2000, the Company recorded a charge of approximately $.7 million to write-off an investment in a third party start-up company who has filed for bankruptcy. This investment had been recorded within the Company's Test segment. The Company will be a distributor of the products. GAIN ON THE SALE OF PROPERTY In the first quarter of fiscal 2000, the Company recorded a gain of $2.2 million (or $.18 per share) on the sale of the Riverhead, New York property, used by the Company's former Hazeltine subsidiary. The property was sold for $2.6 million, consisting of $.5 million in cash and a $2.1 million interest-bearing, 18-month note receivable. INCOME TAX EXPENSE The third quarter fiscal 2000 effective income tax rate was 36.8% compared to 35.5% in the third quarter of fiscal 1999. The effective income tax rate in the first nine months of fiscal 2000 was 32.3% compared to 35.3% in the prior year period. The tax rate for the first nine months of fiscal 2000 was favorably impacted by the $2.2 million gain on the sale of property, in which the Company recognized minimal tax expense. Management estimates the annual effective tax rate for fiscal 2000 to be approximately 36%. FINANCIAL CONDITION Working capital decreased to $45.3 million at June 30, 2000 from $95.3 million at September 30, 1999. The decrease is primarily due to the use of cash to repay all of the debt outstanding at September 30, 1999, except for the $0.8 million of foreign debt outstanding at June 30, 2000. During the first nine months of fiscal 2000, accounts receivable increased by $16.5 million as a result of the recent acquisitions and sales growth of the business. Costs and estimated earnings on long-term contracts and inventories increased in the aggregate by $10.7 million primarily due to the recent acquisitions, General Motors contract to design and build an EMC test complex, and safety stock related to the West Coast plant consolidation. Accounts payable and accrued expenses increased by $1.8 million mainly due to the recent acquisitions offset by the payments related to the September 30, 1999 divestiture of SEI. Net cash provided by operating activities was $5.6 million in the first nine months of fiscal 2000 compared to $7.4 million in the same period of fiscal 1999. The cash provided by operating activities in fiscal 2000 was positively impacted by the Company's recent acquisitions which was offset by divestiture related (SEI) payments and the above mentioned inventory requirements. Net cash used by investing activities was $36.0 million in the first nine months of fiscal 2000 compared to $6.6 million in the same period of fiscal 1999. The increase in net cash used by investing activities is mainly due to the acquisitions of Lindgren, Eaton Space Products and Holaday. 12 13 Capital expenditures were $7.8 million in the first nine months of fiscal 2000 compared with $6.6 million in the comparable period of fiscal 1999. Major expenditures in the current period included manufacturing equipment used in the filtration / fluid flow business. On April 11, 2000, the Company entered into a new $75 million reducing revolving credit facility replacing its previous $40 million credit facility. The revolving credit facility is available for direct borrowings and/or the issuance of letters of credit. The maturity of the new bank credit facility is April 11, 2005. The new credit facility is provided by a group of five banks, led by Bank of America. At June 30, 2000, the Company had approximately $50 million available to borrow under the credit facility. Cash flow from operations and borrowings under the bank credit facility are expected to provide adequate resources to meet the Company's capital requirements and operational needs for the foreseeable future. During the first nine months of fiscal 2000, the Company repurchased approximately 500,000 shares of ESCO common stock as part of its ongoing open market repurchase program. Since announcing the program in fiscal 1999, the Company has repurchased approximately 700,000 shares of the 1.3 million shares authorized under the current program. In June 2000, the Company initiated an odd lot buy back program which extends through August 2000. The Company anticipates that 25,000 shares will be repurchased under the program for a total cost of approximately $.5 million. FORWARD LOOKING STATEMENTS Statements in this report that are not strictly historical are "forward looking" statements within the meaning of the safe harbor provisions of the federal securities laws. Investors are cautioned that such statements are only predictions, and speak only as of the date of this report. Actual results may differ materially due to risks and uncertainties, which are described in the Company's Form 10-K for fiscal year 1999 and on page 41 of the 1999 Annual Report to Shareholders. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Market risks relating to the Company's operations result primarily from changes in interest rates and changes in foreign currency exchange rates. Based on the current debt structure, the exposure to interest rate risk is not material. The Company is subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies. The Company hedges foreign currency commitments by purchasing foreign currency forward contracts. 13 14 PART II OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. a) Exhibits. Exhibit Number 3(a) Restated Articles of Incorporation Incorporated by reference to Form 10-K for the fiscal year ended September 30, 1999 at Exhibit 3(a) 3(b) Amended Certificate of Designation, Incorporated by reference to Preferences and Rights of Series A Form 10-Q for the quarter Participating Cumulative Preferred ended March 31, 2000 Stock of the Registrant at Exhibit 4(e) 3(c) Articles of Merger effective July 10, 2000 3(d) Bylaws, as amended 4(a) Specimen Common Stock Certificate 4(b) Specimen Rights Certificate Incorporated by reference to Exhibit B to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February 3, 2000 4(c) Rights Agreement dated as of Incorporated by reference to September 24, 1990 (as amended and Current Report on Form 8-K restated as of February 3, 2000) dated February 3, 2000, at between the Registrant and Exhibit 4.1 ChaseMellon Shareholder Services, L.L.C., as Rights Agent 4(d) Credit Agreement dated as of April 11, 2000, among the Registrant, Bank of America, N.A., as agent, and the lenders listed therein 27 Financial Data Schedule b) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended June 30, 2000. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ESCO TECHNOLOGIES INC. /s/ Gary E. Muenster ----------------------------------------- Gary E. Muenster Vice President and Corporate Controller (As duly authorized officer and principal accounting officer of the registrant) Dated: August 14, 2000 14