UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2008
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.
(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.)
9900A CLAYTON ROAD
ST. LOUIS, MISSOURI 63124-1186
(Address of principal executive offices) (Zip Code)
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 _____
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller reporting company.
See definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer__X__ Accelerated filer ____
Non-accelerated filer ____ Smaller reporting company ____
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2008
----- -----------------------------
[Common stock, $.01 par value per share] 25,940,901 shares
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
March 31,
---------
2008 2007
---- ----
Net sales $ 135,159 108,860
Costs and expenses:
Cost of sales 78,263 66,698
Selling, general and administrative 39,546 28,568
expenses
Amortization of intangible assets 4,598 2,792
Interest expense (income), net 3,187 (176)
Other income, net (137) (10)
---- ---
Total costs and expenses 125,457 97,872
Earnings before income taxes 9,702 10,988
Income tax expense 3,620 2,035
----- -----
Net earnings from continuing operations 6,082 8,953
Earnings from discontinued operations, net
of tax of $363 - 665
---- ---
Net earnings $ 6,082 9,618
======== =====
Earnings per share:
Basic - Continuing operations $ 0.24 0.35
- Discontinued operations - 0.02
---- ----
- Net earnings $ 0.24 0.37
==== ====
Diluted - Continuing operations $ 0.23 0.34
- Discontinued operations - 0.02
---- ----
- Net earnings $ 0.23 0.36
======== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Six Months Ended
March 31,
---------
2008 2007
---- ----
Net sales $270,116 189,447
Costs and expenses:
Cost of sales 162,275 122,712
Selling, general and administrative
expenses 73,056 55,191
Amortization of intangible assets 8,195 4,818
Interest expense (income), net 4,546 (497)
Other income, net (351) (564)
---- ----
Total costs and expenses 247,721 181,660
Earnings before income taxes 22,395 7,787
Income tax expense 8,408 185
----- ---
Net earnings from continuing operations 13,987 7,602
(Loss) earnings from discontinued
operations, net of tax of $325 and $393,
respectively (115) 635
Loss on sale of discontinued operations,
net of tax of $4,809 (4,974) -
------- ------
Net (loss) earnings from discontinued
operations (5,089) 635
------ ---
Net earnings $ 8,898 8,237
======== =====
Earnings (loss) per share:
Basic - Continuing operations $ 0.54 0.29
- Discontinued operations (0.20) 0.03
----- ----
- Net earnings $ 0.34 0.32
======== ====
Diluted - Continuing operations $ 0.53 0.29
- Discontinued operations (0.19) 0.02
----- ----
- Net earnings $ 0.34 0.31
======== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
March 31, September 30,
2008 2007
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 30,973 18,638
Accounts receivable, net 100,575 85,319
Costs and estimated earnings on
long-term contracts, less progress
billings of $25,795 and $21,292, 9,001 11,520
respectively
Inventories 71,670 55,885
Current portion of deferred tax assets 15,934 25,264
Other current assets 15,985 28,054
Current assets of discontinued
operations - 35,670
------ ------
Total current assets 244,138 260,350
Property, plant and equipment, net 72,903 50,193
Goodwill 318,365 124,757
Intangible assets, net 240,540 74,624
Other assets 14,193 10,338
Other assets of discontinued operations - 55,845
------- ------
Total assets $ 890,139 576,107
========== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current
portion of long-term debt $ 15,474 -
Accounts payable 36,814 45,726
Advance payments on long-term
contracts, less costs incurred of
$6,233 and $2,902, respectively 8,006 3,408
Accrued salaries 17,937 12,348
Current portion of deferred revenue 17,665 24,621
Accrued other expenses 20,385 16,103
Current liabilities of discontinued
operations - 16,994
------- ------
Total current liabilities 116,281 119,200
Long-term portion of deferred revenue 9,240 4,514
Pension obligations 9,339 8,029
Deferred tax liabilities 82,208 18,522
Other liabilities 8,922 7,825
Long-term debt, less current portion 235,000 -
Other liabilities of discontinued operations - 2,534
------- -----
Total liabilities 460,990 160,624
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
29,279,348 and 29,159,629 shares,
respectively 293 292
Additional paid-in capital 248,061 243,131
Retained earnings 235,657 226,759
Accumulated other comprehensive income,
net of tax 5,591 6,303
----- -----
489,602 476,485
Less treasury stock, at cost: 3,383,106
and 3,416,966 common shares,
respectively (60,453) (61,002)
------- -------
Total shareholders' equity 429,149 415,483
------- -------
Total liabilities and shareholders' equity $ 890,139 576,107
========== =======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Six Months Ended
March 31,
---------
2008 2007
---- ----
Cash flows from operating activities:
Net earnings $ 8,898 8,237
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net loss (earnings)from discontinued operations,
net of tax 5,089 (635)
Depreciation and amortization 12,745 7,822
Stock compensation expense 2,326 2,636
Changes in operating working capital 1,451 (11,887)
Effect of deferred taxes 7,602 (267)
Change in deferred revenue and costs, net (859) 3,292
Other 408 (173)
--- ----
Net cash provided by operating activities -
continuing operations 37,660 9,025
Net(loss)earnings from discontinued
operations, net of tax (5,089) 635
Net cash provided by discontinued operations 125 3,479
--- -----
Net cash (used) provided by operating activities-
discontinued operations (4,964) 4,114
------ -----
Net cash provided by operating activities 32,696 13,139
------ ------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired-
continuing operations (328,829) (1,250)
Proceeds from sale of marketable securities 4,966 -
Additions to capitalized software (8,004) (15,320)
Capital expenditures - continuing operations (8,673) (5,048)
------ ------
Net cash used by investing activities-
continuing operations (340,540) (21,618)
Capital expenditures - discontinued operations (1,126) (2,132)
Proceeds from divestiture of business, net -
discontinued operations 74,370 -
------ -----
Net cash provided (used) by investing activities -
discontinued operations 73,244 (2,132)
Net cash used by investing activities (267,296) (23,750)
Cash flows from financing activities:
Net decrease in short-term borrowings - discontinued
operations (2,844) -
Proceeds from long-term debt 275,197 -
Principal payments on long-term debt (24,723) -
Debt issuance costs (2,965) -
Excess tax benefit from stock options exercised 737 73
Other 1,533 1,764
----- -----
Net cash provided by financing activities 246,935 1,837
Net increase (decrease) in cash and cash equivalents 12,335 (8,774)
Cash and cash equivalents, beginning of period 18,638 36,819
------ ------
Cash and cash equivalents, end of period $ 30,973 28,045
======== ======
See accompanying notes to consolidated financial statements.
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 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 accounting principles generally
accepted in the United States of America (GAAP). For further information
refer to the consolidated financial statements and related notes included
in the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2007. Certain 2007 amounts have been reclassified to conform
with the 2008 presentation.
The Company's business is typically not impacted by seasonality, however,
the results for the three and six-month periods ended March 31, 2008 are
not necessarily indicative of the results for the entire 2008 fiscal year.
As a result of the acquisition of Doble Engineering Company (Doble) in
November 2007, the Company changed the name of the Communications segment
to the Utility Solutions Group segment. The renaming of this segment more
accurately describes the segment's operating activities and strategically
aligns the respective operating entities to focus on a single goal of
satisfying the expanding AMI, Smart Grid, and other operational
requirements of electric, gas and water utilities worldwide. The name
change was done in conjunction with the Company's strategic integration and
rebranding of its AMI related technologies under the brand name Aclara,
and renaming the businesses as follows: Distribution Control Systems, Inc.
renamed Aclara Power-Line Systems Inc.; Hexagram, Inc. renamed Aclara RF
Systems Inc.; and Nexus Energy Software, Inc. renamed Aclara Software Inc.
2. DIVESTITURE
On November 25, 2007, the Company completed the sale of the filtration
portion of Filtertek Inc. (Filtertek) to Illinois Tool Works Inc. for $74.4
million, net, of cash. The TekPackaging division of Filtertek was not
included in the transaction. The Filtertek businesses are accounted for as
discontinued operations in accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." Accordingly, the
Filtertek businesses are reflected as discontinued operations in the
financial statements and related notes for all periods presented. A pre-tax
loss of $0.2 million related to the sale of Filtertek is reflected in the
Company's fiscal 2008 first quarter results in discontinued operations.
Filtertek's net sales were $13.7 million for the two-month period ended
November 25, 2007 and $18.2 million for the three-month period ended
December 31, 2006, respectively. Filtertek's operations were included
within the Company's Filtration segment prior to divestiture. The
operations of the TekPackaging division, currently operating as
TekPackaging LLC, are reflected in continuing operations and continue to be
included in the Filtration segment.
The major classes of discontinued assets and liabilities included in the
Consolidated Balance Sheet at September 30, 2007 are shown below (in
thousands).
September 30, 2007
------------------
Assets:
Accounts receivable, net $ 17,675
Inventories 11,986
Other current assets 6,009
-----
Current assets 35,670
Net property, plant & equipment 28,084
Goodwill 24,709
Other assets 3,052
-----
Total assets of Discontinued Operations $ 91,515
========
Liabilities:
Accounts payable $ 8,908
Accrued expenses and other current liabilities 8,086
-----
Current liabilities 16,994
Other liabilities 2,534
-----
Total liabilities of Discontinued Operations $ 19,528
========
3. ACQUISITIONS
Doble
-----
On November 30, 2007, the Company acquired the capital stock of Doble for a
purchase price of approximately $328 million, net of cash acquired. Doble,
headquartered in Watertown, Massachusetts, is a worldwide leader in
providing high-end diagnostic test solutions for the electric utility
industry. The acquisition aligns with the Company's long-term growth
strategy of expanding its products and services in the utility industry.
The acquisition was funded by a combination of the Company's existing cash,
including the proceeds from the divestiture of Filtertek, and borrowings
under a new $330 million credit facility led by National City Bank. The
operating results for Doble, since the date of acquisition, are included
within the Utility Solutions Group segment.
The acquisition was recorded by allocating the cost of completing the
acquisition to the assets acquired, including identifiable intangible
assets and liabilities assumed, based on their estimated fair values at the
acquisition date pursuant to SFAS No. 141, "Business Combinations". The
excess of the cost of the acquisition over the net amounts assigned to the
fair value of the assets acquired and the liabilities assumed was recorded
as goodwill. The final valuation of intangible assets and tax contingencies
was completed during the second quarter of 2008. The significant changes
from the preliminary valuation included a $36.6 million increase in the
value of the trade names, a $21.7 million decrease in goodwill and a $12.5
million increase in deferred tax liabilities. The final valuation of
certain tangible assets is expected to be completed prior to September 30,
2008.
The purchase price allocation is as follows:
(In thousands)
Net tangible assets $ 42,196
Identifiable intangible assets:
Trade names $ 112,290
Customer relationships 52,510
Software and databases 3,790
-----
Total identifiable intangible
assets 168,590
Goodwill 192,591
Long-term deferred tax liabilities (65,916)
-------
Total cash consideration $337,461
========
Reconciliation of purchase price:
Purchase price per agreement $319,000
Add: cash acquired 9,639
Add: short-term marketable securities
acquired 4,966
Add: transaction costs 2,574
Add: working capital adjustment, net 1,282
-----
Total cash consideration $337,461
========
The identifiable intangible assets consisting of customer relationships
will be amortized on a straight-line basis over 20 years and the software
and databases will be amortized on a straight-line basis over 5 years. The
identifiable intangible asset consisting of trade names has an indefinite
life and is not subject to amortization.
Pro Forma Results
-----------------
The following pro forma financial information for the six months ended
March 31, 2008 and 2007 presents the combined results of operations of ESCO
and Doble as if the acquisition had occurred on October 1, 2006,
respectively. The pro forma financial information for the periods presented
excludes the Filtertek business which was sold on November 25, 2007. The
combined results of operations have been adjusted for the impact of certain
acquisition-related items, including additional amortization of
identifiable intangible assets, additional financing expenses and other
direct costs. The impact of pro forma adjustments are tax-effected at the
expected future consolidated corporate tax rate.
The unaudited pro forma financial information is not intended to represent,
or be indicative of, the Company's consolidated results of operations or
financial condition that would have been reported had the acquisition been
completed as of the beginning of each of the periods presented. This
information is provided for illustrative purposes only and is not
necessarily indicative of the Company's future consolidated results of
operations or financial condition.
(In millions, except per Six Months ended
share data) March 31,
---------
2008 2007
---- ----
Net sales $286.4 228.5
EBIT 29.2 17.1
Net earnings from
continuing operations $ 13.5 10.3
Net earnings per share
Basic $0.52 0.40
===== ====
Diluted $0.51 0.39
===== ====
Other Acquisitions
------------------
In addition, during the first quarter of 2008, the Company acquired certain
assets and liabilities related to two minor acquisitions for a total
purchase price of $1 million.
All acquisitions have been accounted for by the purchase method and,
accordingly, their results are included in the Company's consolidated
financial statements from the respective dates of acquisition. Under the
purchase price method, the purchase price is allocated based on the fair
value of assets received and liabilities assumed as of the acquisition
date.
4. EARNINGS PER SHARE (EPS)
Basic EPS is calculated using the weighted average number of common shares
outstanding during the period. Diluted EPS 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 (restricted shares) by
using the treasury stock method. The number of shares used in the
calculation of earnings per share for each period presented is as follows
(in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
2008 2007 2008 2007
---- ---- ---- ----
Weighted Average Shares
Outstanding - Basic 25,847 25,895 25,803 25,885
Dilutive Options and
Restricted Shares 403 596 424 592
--- --- --- ---
Adjusted Shares- Diluted 26,250 26,491 26,227 26,477
====== ====== ====== ======
Options to purchase 554,842 shares of common stock at prices ranging from
$35.69 - $54.88 and options to purchase 582,322 shares of common stock at
prices ranging from $42.10 - $54.88 were outstanding during the three month
periods ended March 31, 2008 and 2007, respectively, but were not included
in the computation of diluted EPS because the options' exercise prices were
greater than the average market price of the common shares. The options
expire at various periods through 2013. Approximately 54,000 and 26,000
restricted shares were excluded from the computation of diluted EPS based
upon the application of the treasury stock method for the three-month
period ended March 31, 2008 and 2007, respectively.
5. 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.
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. In 2008, the Company utilized historical,
company data to develop its expected term assumption. For fiscal years 2006
and 2007, 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 the six-month period ended March 31, 2008:
expected dividend yield of 0%; expected volatility of 34.8%; risk-free
interest rate of 2.9%; and expected term of 3.8 years. Pre-tax compensation
expense related to the stock option awards was $0.5 million and $1.1
million for the three and six-month periods ended March 31, 2008,
respectively, and $0.6 million and $1.2 million for the respective prior
year periods.
Information regarding stock options awarded under the option plans is as
follows:
Aggregate Weighted-
Intrinsic Average
Weighted Value Remaining
Avg. (in Contractual
Shares Price millions) Life
------ ----- --------- ----
Outstanding at
October 1, 2007 1,558,941 $30.35
Granted 16,000 $35.82
Exercised (136,948) $20.87 $ 2.3
Cancelled (125,980) $41.87
-------- ------
Outstanding at
March 31, 2008 1,312,013 $30.30 $ 15.2 2.6 years
========= ====== ======
Exercisable at
March 31, 2008 1,029,632 $26.20 $ 15.1
========= ====== ======
The weighted-average grant-date fair value of options granted during the
six-month periods ended March 31, 2008 and 2007 was $10.98 and $12.25,
respectively.
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 $0.4 million and $0.9 million for the three
and six-month periods ended March 31, 2008, respectively, and $0.5 million
and $1.0 million for the respective prior year periods.
The following summary presents information regarding outstanding restricted
share awards as of March 31, 2008 and changes during the six-month period
then ended:
Weighted
Shares Avg. Price
------ ----------
Nonvested at October 1, 2007 164,060 $41.77
Granted 93,335 $36.97
Cancelled (8,000) $41.74
Nonvested at March 31, 2008 249,395 $39.98
Non-Employee Directors Plan
---------------------------
Pursuant to the non-employee directors compensation plan, each non-employee
director receives a retainer of 800 common shares per quarter. Pre-tax
compensation expense related to the non-employee director grants was $0.2
million and $0.3 million for the three and six-month periods ended March
31, 2008, respectively, and $0.2 million and $0.4 million for the
respective prior year periods.
The total share-based compensation cost that has been recognized in results
of operations and included within SG&A was $1.1 million and $2.3 million
for the three and six-month periods ended March 31, 2008, respectively, and
$1.3 million and $2.6 million for the three and six-month periods ended
March 31, 2007. The total income tax benefit recognized in results of
operations for share-based compensation arrangements was $0.3 million and
$0.6 million for the three and six-month periods ended March 31, 2008,
respectively, and $0.4 million and $0.7 million for the three and six-month
periods ended March 31, 2007. As of March 31, 2008, there was $12.7 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 2.7 years.
6. INVENTORIES
Inventories from continuing operations consist of the following (in
thousands):
March 31, September 30,
2008 2007
---- ----
Finished goods $ 23,681 17,652
Work in process, including long- term 14,363 13,532
contracts
Raw materials 33,626 24,701
------ ------
Total inventories $ 71,670 55,885
======== ======
7. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended March 31, 2008 and
2007 was $4.4 million and $10.2 million, respectively. Comprehensive income
for the six-month periods ended March 31, 2008 and 2007 was $8.2 million
and $9.8 million, respectively. For the six-month periods ended March 31,
2008 and 2007, the Company's comprehensive income was positively impacted
by foreign currency translation adjustments of $1.6 million and $1.6
million, respectively and negatively impacted by interest rate swaps of
$2.3 million and zero, respectively.
8. BUSINESS SEGMENT INFORMATION
The Company is organized based on the products and services that it offers.
Under this organizational structure, the Company operates in three
segments: Utility Solutions Group (formerly the Communications segment),
Test and Filtration/Fluid Flow (Filtration). As a result of the acquisition
of Doble in November 2007, the Company changed the name of the
Communications segment to the Utility Solutions Group segment. The renaming
of this segment more accurately describes the segment's operating
activities and strategically aligns the respective operating entities to
focus on a single goal of satisfying the expanding AMI, Smart Grid, and
other operational requirements of electric, gas and water utilities
worldwide. The change in segment name was made in conjunction with the
Company's strategic integration and rebranding of its AMI related
technologies under the brand name Aclara and renaming the businesses as
follows: Distribution Control Systems, Inc. renamed Aclara Power-Line
Systems Inc.; Hexagram, Inc. renamed Aclara RF Systems Inc.; and Nexus
Energy Software, Inc. renamed Aclara Software Inc. In addition to the AMI
businesses operating under the Aclarabrand, the Utility Solutions Group
also includes Comtrak Technologies, L.L.C. (Comtrak) and Doble. Doble
provides high-end, diagnostic test solutions for the electric power
delivery industry.
As a result of the divestiture of Filtertek in November 2007, the Company
re-evaluated the aggregation criteria of its remaining operating units
within the Filtration segment. The TekPackaging LLC business (formerly a
division of Filtertek) was not included in the divestiture transaction.
Prior to the divestiture of Filtertek, each of the components of the
Filtration segment were presented separately due to differing long-term
economics. However, as a result of the divestiture of Filtertek, management
believes the remaining companies within the Filtration segment now have
similar long-term economics and, therefore, will not be presented
separately beginning with the first quarter of 2008. The Filtration
segment's operations consist of: PTI Technologies Inc., VACCO Industries
and TekPackaging LLC.
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.
Management evaluates and measures the performance of its operating segments
based on "Net Sales" and "EBIT", which are detailed in the table below.
EBIT is defined as earnings from continuing operations before interest and
taxes. The table below is presented on the basis of continuing operations
and excludes discontinued operations.
(In thousands) Three Months ended Six Months ended
March 31, March 31,
--------- ---------
NET SALES 2008 2007 2008 2007
--------- ---- ---- ---- ----
Utility Solutions Group $ 74,571 49,226 153,880 79,260
Test 33,496 33,959 65,561 62,212
Filtration 27,092 25,675 47,975 50,675
------ ------ ------ ------
Consolidated totals $135,159 108,860 270,116 189,447
======== ======= ======= =======
EBIT
----
Utility Solutions Group $ 10,466 6,109 23,874 3,327
Test 2,742 4,061 4,732 6,204
Filtration 4,913 5,226 8,562 6,908
Corporate (5,232) (4,584) (10,227) (9,149)
------ ------ ------- ------
Consolidated EBIT 12,889 10,812 26,941 7,290
Add: Interest
(expense)/income (3,187) 176 (4,546) 49
------ --- ------ --
Earnings before income
taxes $ 9,702 10,988 22,395 7,787
======== ====== ====== =====
IDENTIFIABLE ASSETS
-------------------
Utility Solutions Group $190,697 122,270
Test 72,702 57,229
Filtration 57,825 59,508
Reconciliation to
consolidated totals
(Corporate assets) 568,915 290,000
------- -------
Consolidated totals $890,139 529,007
======== =======
9. DEBT
The Company's debt is summarized as follows:
(In thousands) March 31, September 30,
2008 2007
---- ----
Revolving credit facility, including current
portion $250,474 -
Current portion of long-term debt 15,474 -
------ ------
Total long-term debt, less current portion $235,000 -
======== ======
On November 30, 2007, in conjunction with the acquisition of Doble, the
Company entered into a new $330 million five-year revolving credit facility
with a $50 million increase option. This facility replaces the Company's
$100 million credit facility that would have otherwise matured in October
2009. The facility is available for direct borrowings and/or the issuance
of letters of credit. It is provided by a group of sixteen banks, led by
National City Bank as agent, with a maturity of November 30, 2012.
At March 31, 2008, the Company had approximately $77 million available to
borrow under the credit facility in addition to $31.0 million cash on hand.
At March 31, 2008, the Company had $250 million of outstanding borrowings
under the credit facility and outstanding letters of credit of $4.2 million
($3.3 million outstanding under the credit facility). The Company
classified $15.5 million as current portion on long-term debt as of March
31, 2008, as the Company intends to repay this amount within the next
twelve months.
The new credit facility requires, as determined by certain financial
ratios, a facility fee ranging from 15-25 basis points per annum on the
revolving line of credit. 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 a leverage ratio and an interest coverage ratio.
10. INCOME TAX EXPENSE
The second quarter of 2008 effective income tax rate for continuing
operations was 37.3% compared to 18.5% in the second quarter of 2007. The
effective income tax rate from continuing operations in the first six
months of 2008 was 37.5% compared to 2.4% in the prior period. The increase
in the effective income tax rate in the second quarter and first six months
of 2008 as compared to the prior year periods was due to the favorable
impact of research tax credits in 2007. The second quarter 2007 income tax
expense was favorably impacted by $2.2 million, net, research tax credits,
reducing the 2007 second quarter effective income tax rate by 20.4%. The
income tax expense in the first six months of 2007 was favorably impacted
by $3.1 million, net, research tax credits, reducing the rate for the first
six months of 2007 by 40.3%. The Company estimates the fiscal 2008 tax rate
to be approximately 37.5%, excluding the effect of discontinued operations.
Effective October 1, 2007, the Company adopted FASB Interpretation No. 48
(FIN 48), "Accounting for Uncertainty in Income Taxes." FIN 48 provides a
financial statement recognition threshold and measurement attribute for a
tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. The adoption of
FIN 48 had the following impact on the Company's financial statements:
decreased current assets by $1.5 million, decreased current liabilities by
$0.3 million, and decreased long-term liabilities by $1.2 million. As of
October 1, 2007, the Company had $6.7 million of unrecognized tax benefits
of which $5.9 million, if recognized, would affect the Company's effective
tax rate. The Company made no adjustments to retained earnings related to
the adoption.
The Company anticipates a $0.3 million reduction in the amount of
unrecognized tax benefits in the next twelve months as a result of a lapse
of the applicable statute of limitations. The Company's policy is to
include interest related to unrecognized tax benefits in income tax expense
and penalties in operating expense. As of October 1, 2007, the Company had
accrued interest related to uncertain tax positions of $0.1 million, net of
federal income tax benefit, on its consolidated balance sheet. No penalties
have been accrued due to the Company's net operating loss position.
The principal jurisdictions for which the Company files income tax returns
are U.S. federal and the various city, state, and international locations
where the Company has operations. Due to the Company's available net
operating loss, the 1995 through 2006 U.S. federal tax years remain subject
to income tax examinations. Various state years from 2003 through 2006
remain subject to income tax examinations. The Company is subject to income
tax in many jurisdictions outside the United States, none of which are
individually material to the Company's financial position, statement of
cash flows, or results of operations.
11. GOODWILL AND OTHER INTANGIBLE ASSETS
The changes in the carrying amount of goodwill attributable to each
business segment from continuing operations for the six month period ended
March 31, 2008 are presented in the table below.
Utility
(In millions) Solutions
Group Filtration Test Total
----- ---------- ---- -----
Balance as of
September 30, 2007 $ 75.4 20.3 29.1 124.8
Acquisitions 193.2 - 0.4 193.6
----- --- -----
Balance as of
March 31, 2008 $268.6 20.3 29.5 318.4
====== ==== ==== =====
The following table presents the gross carrying amount and accumulated
amortization of identifiable intangible assets, other than goodwill, at the
dates presented:
March 31, 2008 September 30, 2007
------------------------- -------------------------
Gross Accum Gross Accum
Carrying Amt Amort Net Carrying Amt Amort Net
------------ ----- --- ------------ ----- ---
Amortized intangible
assets:
Customer relationships $ 52.5 $ 0.9 $ 51.6 $ 0.0 $ 0.0 $ 0.0
Capitalized software $ 88.2 $20.1 $ 68.1 $ 79.0 $ 13.6 $ 65.4
Patents & other $ 23.4 $18.4 $ 5.0 $ 23.3 $ 17.6 $ 5.7
Unamortized intangible
assets:
Trade Names $115.8 $ 0.0 $115.8 $ 3.5 $ 0.0 $ 3.5
------ ----- ------ ------ ------ ------
Total other intangible
assets $279.9 $39.4 $240.5 $105.8 $ 31.2 $ 74.6
====== ===== ====== ====== ====== ======
Amortization of intangible assets for the three and six-month periods ended
March 31, 2008 was $4.6 million and $8.2 million, respectively. During the
three and six-month periods ended March 31, 2008, the Company recorded $2.9
million and $5.2 million, respectively, of amortization related to Aclara
Power-Line Systems TWACS NG software. Amortization of intangible assets for
fiscal years 2008 through 2012 is estimated at approximately $17 million to
$22 million per year. The increase in intangible asset amortization in
future years is related to the TWACS NG software.
12. RETIREMENT PLANS
A summary of net periodic benefit expense for the Company's defined benefit
plans for the three and six-month periods ended March 31, 2008 and 2007 is
shown in the following table. Net periodic benefit cost for each period
presented is comprised of the following:
Three Months Ended Six Months Ended
March 31, March 31,
--------- ---------
(In thousands) 2008 2007 2008 2007
-------------- ---- ---- ---- ----
Defined benefit plans
Interest cost $ 713 688 1,425 1,375
Expected return on assets (738) (700) (1,475) (1,400)
Amortization of:
Prior service cost 4 2 8 5
Actuarial loss 86 73 172 170
-- -- --- ---
Net periodic benefit cost $ 65 63 130 150
===== == === ===
13. DERIVATIVE FINANCIAL INSTRUMENTS
Market risks relating to the Company's operations result primarily from
changes in interest rates and changes in foreign currency exchange rates.
The Company is exposed to market risk related to changes in interest rates
and selectively uses derivative financial instruments, including forward
contracts and swaps, to manage these risks. During the first quarter of
2008, the Company entered into a two-year amortizing interest rate swap to
hedge some of its exposure to variability in future LIBOR-based interest
payments on variable rate debt. The swap notional amount for the first year
is $175 million amortizing to $100 million in the second year. All
derivative instruments are reported on the balance sheet at fair value. The
derivative instrument is designated as a cash flow hedge and the gain or
loss on the derivative is deferred in accumulated other comprehensive
income until recognized in earnings with the underlying hedged item.
Including the impact of interest rate swaps outstanding, the interest rates
on approximately 70% of the Company's total borrowings were effectively
fixed as of March 31, 2008.
The following is a summary of the notional transaction amounts and fair
values for the Company's outstanding derivative financial instruments by
risk category and instrument type, as of March 31, 2008.
Average
Notional Receive Average
(In thousands) Amount Rate Pay Rate Fair Value
------ ---- -------- ----------
Interest rate swaps $175,000 3.00% 3.99% ($3,687)
14. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. In February 2008, the FASB amended SFAS
157 to delay the effective date by one year for nonfinancial assets and
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. The adoption of SFAS 157 is not
expected to have a material impact to the Company's financial position or
results of operations.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations"
(SFAS 141R), which establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any
noncontrolling interest in an acquiree, including the recognition and
measurement of goodwill acquired in a business combination. The
requirements of SFAS 141R are effective for business combinations for which
the acquisition date is on or after the beginning of the first annual
reporting period beginning on or after December 15, 2008. Earlier adoption
is prohibited.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161). This statement is intended to improve transparency in financial
reporting by requiring enhanced disclosures of an entity's derivative
instruments and hedging activities and their effects on the entity's
financial position, financial performance, and cash flows. SFAS 161 is
effective prospectively for financial statements issued for fiscal years
and interim periods beginning after November 15, 2008, with early
application permitted. The adoption of SFAS 161 is not expected to have a
material impact to the Company's financial position or results of
operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
As a result of the acquisition of Doble in November 2007, the Company changed
the name of the Communications segment to the Utility Solutions Group segment.
The name change was done in conjunction with the Company's strategic integration
and rebranding of its AMI related technologies under the brand name Aclara, and
renaming the businesses as follows: Distribution Control Systems, Inc. renamed
Aclara Power-Line Systems Inc.; Hexagram, Inc. renamed Aclara RF Systems Inc.;
and Nexus Energy Software, Inc. renamed Aclara Software Inc.
The following discussion refers to the Company's results from continuing
operations, except where noted. The Filtertek businesses (excluding Tek
Packaging) are accounted for as discontinued operations in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets."
Accordingly, the Filtertek businesses are reflected as discontinued operations
in the financial statements and related notes for all periods shown. References
to the second quarters of 2008 and 2007 represent the fiscal quarters ended
March 31, 2008 and 2007, respectively.
NET SALES
Net sales increased $26.3 million, or 24.2%, to $135.2 million for the second
quarter of 2008 from $108.9 million for the second quarter of 2007 mainly due to
the current year acquisition of Doble. Net sales increased $80.7 million, or
42.6% to $270.1 million for the first six months of 2008 from $189.4 million for
the first six months of 2007. Net sales increased across all segments in the
first six months of 2008 compared to the prior year period, with the most
significant increase in the Utility Solutions Group segment of $74.6 million.
-Utility Solutions Group
------------------------
Net sales increased $25.3 million, or 51.5%, to $74.6 million for the second
quarter of 2008 from $49.2 million for the second quarter of 2007. Net sales
increased $74.6 million, or 94.1%, to $153.9 million for the first six months of
2008 from $79.3 million in the prior year period. The sales increase in the
second quarter of 2008 as compared to the prior year quarter was due to: an
increase of $21.7 million of sales from Doble; a $5.1 million increase in sales
from Aclara RF Systems Inc. primarily due to higher gas AMI deliveries at PG&E ;
partially offset by a $1.8 million decrease in sales at Aclara Power-Line
Systems driven by lower sales to investor owned utility (IOU) customers
(primarily in Texas). The sales increase in the first six months of 2008 as
compared to the prior year period was due to: a $46.0 million increase in sales
from the Aclara group; a $31.1 million increase in sales from Doble; partially
offset by a $2.5 million decrease in sales from Comtrak due to the timing of
product deliveries.
The increase in sales of $46.0 million from the Aclara Group for the first six
months of 2008 as compared to the prior year period was mainly due to: a $29.8
million increase in sales from Aclara Power-Line Systems Inc. (of which $20.5
million represented the cumulative effect of the hardware shipments to date as
TWACS NG 3.0 software was delivered to PG&E in December 2007), a $10.7 million
increase in sales to electric utility cooperative (COOP) and public power
(Municipal) customers, a $4.7 million increase in sales to the Puerto Rico
Electric Power Authority (PREPA), partially offset by a $6.0 million decrease in
sales to IOU customers; and a $16.2 million increase in net sales from Aclara RF
Systems Inc. mainly due to a $16.6 million increase in shipments to PG&E for the
gas AMI deployment.
-Test
-----
For the second quarter of 2008, net sales of $33.5 million were $0.5 million, or
1.5% lower than the $34.0 million of net sales recorded in the second quarter of
2007. Net sales increased $3.3 million, or 5.4%, to $65.6 million for the first
six months of 2008 from $62.2 million for the first six months of 2007. The
sales decrease in the second quarter of 2008 as compared to the prior year
quarter was mainly due to: a $1.1 million decrease in net sales from the
Company's U.S. operations driven by the timing of domestic chamber deliveries
which are expected to be completed in the second half of 2008. The sales
increase for the first six months of 2008 compared to the prior year period was
due to: a $2.4 million increase in net sales from the Company's European
operations driven by favorable foreign currency values and the delivery of test
chambers; and a $1.0 million increase in net sales from the Company's U.S.
operations due to the timing of test chamber sales and sales of components.
-Filtration
-----------
Net sales increased $1.4 million, or 5.5%, to $27.1 million for the second
quarter of 2008 from $25.7 million of net sales for the second quarter of 2007.
Net sales increased $2.7 million, or 5.6%, to $50.7 million for the first six
months of 2008 from $48.0 million in the prior year period. The sales increase
during the fiscal quarter ended March 31, 2008 as compared to the prior year
quarter was mainly due to a $1.6 million increase in commercial aerospace
shipments at PTI. The sales increase in the first six months of 2008 as compared
to the prior year period was mainly due to a $2.9 million increase in commercial
aerospace shipments at PTI.
ORDERS AND BACKLOG
Backlog from continuing operations was $281.9 million at March 31, 2008 compared
with $257.6 million at September 30, 2007. The Company received new orders
totaling $164.1 million in the second quarter of 2008 compared to $110.5 million
in the prior year quarter. New orders of $99.6 million were received in the
second quarter of 2008 related to Utility Solutions Group products (including
$7.0 million of Doble related backlog), $32.5 million related to Test products,
and $31.9 million related to Filtration products.
The Company received new orders totaling $294.4 million in the first six months
of 2008 compared to $237.1 million in the prior year period. New orders of
$166.9 million were received in the first six months of 2008 related to Utility
Solutions Group products (including $7.0 million of Doble related backlog),
$65.8 million related to Test products, and $61.7 million related to Filtration
products. New orders of $106.2 million were received in the first six months of
2007 related to Utility Solutions Group products, $76.0 million related to Test
products, and $54.9 million related to Filtration products. In December 2007,
the Company signed a contract with PREPA for a total value expected to be $27.0
million for the purchase of Aclara Power-Line Systems meter modules and
associated substation equipment to be released through the placement of purchase
orders over the next two-and-a-half years. During the first six months of 2008,
the Company recorded approximately $11.0 million in entered orders related to
this contract.
See "CAPITAL RESOURCES AND LIQUIDITY - Pacific Gas & Electric" below for a
discussion of PG&E contracts. The Company received orders totaling $32.3 million
and $46.5 million from PG&E under these agreements during the three and
six-month periods ended March, 31 2008, respectively. Included in the $32.3
million of orders received from PG&E during the second quarter of 2008 was a
$4.1 million order from PG&E for 88,000 Aclara RF System electric devices.
Subsequent to March 31, 2008, the Company received an additional $11.1 million
of orders from PG&E ($6.1 million of Aclara RF gas devices and $4.7 million
Aclara RF electric devices).
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $4.6 million and $8.2 million for the
three and six-month periods ended March 31, 2008, respectively, compared to $2.8
million and $4.8 million for the respective prior year periods. Amortization of
intangible assets for the three and six-month periods ended March 31, 2008
included $1.1 million and $1.9 million, respectively, of amortization of
acquired intangible assets related to recent acquisitions compared to $0.6
million and $1.2 million for the respective prior year periods. The amortization
of these acquired intangible assets are included in Corporate's operating
results, see "EBIT - Corporate". The remaining amortization expenses consist of
other identifiable intangible assets (primarily software, patents and licenses).
During the three and six-month periods ended March 31, 2008, the Company
recorded $2.9 million and $5.2 million, respectively, of amortization related to
Aclara Power-Line Systems TWACS NG software compared to $1.8 million and $2.7
million for the respective prior year periods.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the second quarter of
2008 were $39.5 million (29.3% of net sales), compared with $28.6 million (26.2%
of net sales) for the prior year quarter. For the first six months of 2008, SG&A
expenses were $73.1 million (27.0% of net sales) compared with $55.2 million
(29.1% of net sales) for the prior year period. The increase in SG&A spending in
the fiscal quarter ended March 31, 2008 as compared to the prior year quarter
was primarily due to: $7.3 million of SG&A expenses related to Doble and a $3.3
million increase in SG&A related to the Aclara Group mainly due to an increase
in sales, marketing, and engineering headcount. The increase in SG&A spending in
the first six months of 2008 as compared to the prior year period was primarily
due to $9.7 million of SG&A expenses related to Doble, and a $6.8 million
increase in SG&A related to the Aclara Group for the reasons mentioned above.
EBIT
The Company evaluates the performance of its operating segments based on EBIT,
defined below. EBIT was $12.9 million (9.5% of net sales) for the second quarter
of 2008 and $10.8 million (9.9% of net sales) for the second quarter of 2007.
For the first six months of 2008, EBIT was $26.9 million (10.0% of net sales)
and $7.3 million (3.8% of net sales) for the first six months of 2007. The
increase in EBIT for the second quarter of 2008 and first six months of 2008 as
compared to the prior year periods is primarily due to the increase in margins
in the Utility Solutions Group segment including the acquisition of Doble.
This Form 10-Q contains the financial measure "EBIT", which is not calculated in
accordance with generally accepted accounting principles in the United States of
America (GAAP). EBIT provides investors and Management with an alternative
method for assessing the Company's operating results. The Company defines "EBIT"
as earnings from continuing operations before interest and taxes. 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
within the Company and incentive compensation. The following table presents a
reconciliation of EBIT to net earnings from continuing operations.
Three Months ended Six Months ended
(In thousands) March 31, March 31,
--------- ---------
2008 2007 2008 2007
---- ---- ---- ----
Consolidated EBIT $12,889 10,812 26,941 7,290
Less: Interest (expense),
net (3,187) - (4,546) -
Add: interest income, net - 176 - 497
Less: Income tax expense (3,620) (2,035) (8,408) (185)
------ ------ ------ ----
Net earnings from
continuing operations $ 6,082 8,953 13,987 7,602
======= ===== ====== =====
-Utility Solutions Group
------------------------
EBIT in the second quarter of 2008 was $10.5 million (14.0% of net sales)
compared to $6.1 million (12.4% of net sales) in the prior year quarter. For the
first six months of 2008, EBIT was $23.9 million (15.5% of net sales) compared
to $3.3 million (4.2% of net sales) in the prior year period. The $4.4 million
increase in EBIT in the second quarter of 2008 as compared to the prior year
quarter was due to: the EBIT contribution from Doble; partially offset by a
decrease in EBIT from the Aclara Group due to an increase in amortization
expenses related to its TWACS NG software and an increase in SG&A expenses
mentioned above. The $20.6 million increase in EBIT for the first six months of
2008 compared to the prior year period was due to: an increase in EBIT from the
Aclara Group related to the increased sales volumes (of which approximately $9
million related to the recognition of deferred revenue for PG&E from Aclara
Power-Line Systems); the EBIT contribution from Doble; partially offset by a
decrease in EBIT at Comtrak due to lower sales volumes.
-Test
-----
EBIT in the second quarter of 2008 was $2.7 million (8.2% of net sales) as
compared to $4.1 million (12.0% of net sales) in the prior year quarter. For the
first six months of 2008, EBIT was $4.7 million (7.2% of net sales) as compared
to $6.2 million (10.0% of net sales) in the prior year period. EBIT decreased
$1.4 million and $1.5 million over the prior quarter and six month period,
respectively, mainly due to changes in product mix (lower sales of higher margin
components) and $0.7 million of non-recurring costs associated with the facility
consolidation in Austin, Texas that was completed in January 2008.
-Filtration
-----------
EBIT was $4.9 million (18.1% of net sales) and $5.2 million (20.3% of net sales)
in the second quarters of 2008 and 2007, respectively, and $8.6 million (16.9%
of net sales) and $6.9 million (14.4% of net sales) in the first six months of
2008 and 2007, respectively. For the second quarter of 2008 as compared to the
prior year quarter, EBIT decreased $0.3 million due to: a decrease at VACCO due
to changes in product mix; partially offset by increases at PTI and TekPackaging
LLC due to higher sales volumes. For the first six months of 2008 as compared to
the prior year period, EBIT increased $1.7 million primarily due to an increase
at PTI due to higher commercial aerospace shipments.
-Corporate
----------
Corporate costs included in EBIT were $5.2 million and $10.2 million for the
three and six-month periods ended March 31, 2008, respectively, compared to $4.6
million and $9.1 million for the respective prior year periods. The increase in
Corporate costs in the first six months of 2008 as compared to the prior year
period was due to: a $0.9 million decrease in royalty income and a $0.7 million
increase in amortization expense related to purchase accounting identifiable
intangible assets recorded at Corporate. In the first six months of 2008,
Corporate costs included $2.3 million of pre-tax stock compensation expense and
$1.9 million of pre-tax amortization of acquired intangible assets.
INTEREST EXPENSE (INCOME), NET
Interest expense was $3.2 million for the second quarter of 2008 compared to
interest income of $0.2 million in the prior year quarter. For the first six
months of 2008, interest expense was $4.5 million compared to interest income of
$0.5 million in the prior year period. The increase in interest expense in the
second quarter of 2008 and the first six months of 2008 as compared to the prior
year periods is due to the outstanding borrowings under the revolving credit
facility related to the Doble acquisition.
INCOME TAX EXPENSE
The second quarter of 2008 effective income tax rate for continuing operations
was 37.3% compared to 18.5% in the second quarter of 2007. The effective income
tax rate from continuing operations in the first six months of 2008 was 37.5%
compared to 2.4% in the prior year period. The increase in the effective income
tax rate in the second quarter and first six months of 2008 as compared to the
prior year periods was due to the favorable impact of research tax credits in
2007. The second quarter 2007 income tax expense was favorably impacted by $2.2
million, net, research tax credits, reducing the 2007 second quarter effective
income tax rate by 20.4%. The income tax expense in the first six months of 2007
was favorably impacted by $3.1 million, net, research tax credits, reducing the
rate for the first six months of 2007 by 40.3%. The Company estimates the fiscal
2008 tax rate to be approximately 37.5%, excluding the effect of discontinued
operations.
Effective October 1, 2007, the Company adopted FASB Interpretation No. 48 (FIN
48), "Accounting for Uncertainty in Income Taxes." FIN 48 provides a financial
statement recognition threshold and measurement attribute for a tax position
taken or expected to be taken in a tax return. The Company made no adjustments
to retained earnings upon adoption. The Company recorded a $5.8 million increase
in its unrecognized tax benefits in the first quarter of 2008.
CAPITAL RESOURCES AND LIQUIDITY
Working capital from continuing operations (current assets less current
liabilities) increased to $127.9 million at March 31, 2008 from $122.5 million
at September 30, 2007. Accounts receivable increased by $15.3 million and
inventories increased by $15.8 million in the first six months of 2008 primarily
related to acquisition of Doble. Accounts payable decreased by $8.9 million in
the first six months of 2008, of which approximately $4.2 million related to the
Aclara Group segment and $4.1 million related to the Test segment, both due to
timing of vendor invoicing.
Net cash provided by operating activities from continuing operations was $37.7
million and $9.0 million for the six-month periods ended March 31, 2008 and
2007, respectively. The increase is mainly due to a decrease in operating
working capital requirements.
Capital expenditures from continuing operations were $8.7 million and $5.0
million in the first six months of fiscal 2008 and 2007, respectively. The
increase in the first six months of 2008 as compared to the prior year period
included approximately $2.7 million for the ETS Austin facility expansion.
At March 31, 2008, intangible assets, net, of $240.5 million included $68.1
million of capitalized software. Approximately $58.0 million of the capitalized
software balance represents software development costs on the TWACS NG software
within the Utility Solutions Group 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. Amortization expense
of TWACS NG software is on a straight-line basis over seven years and began in
March 2006. The Company recorded $2.9 million and $5.2 million in amortization
expense related to TWACS NG in the second quarter of 2008 and in the first six
months of 2008, respectively.
Divestiture
-----------
On November 25, 2007, the Company completed the sale of the filtration portion
of Filtertek Inc. (Filtertek) to Illinois Tool Works Inc. for $74.4 million,
net, of cash. The TekPackaging division of Filtertek was not included in the
transaction. The Filtertek businesses are accounted for as discontinued
operations in accordance with SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." Accordingly, the Filtertek businesses are
reflected as discontinued operations in the financial statements and related
notes for all periods presented. A pre-tax loss of $0.2 million related to the
sale of Filtertek is reflected in the Company's fiscal 2008 first quarter
results in discontinued operations. Filtertek's net sales were $13.7 million for
the two-month period ended November 25, 2007 and $18.2 million for the
three-month period ended December 31, 2006, respectively. The operations of the
TekPackaging division, currently operating as TekPackaging LLC, are reflected in
continuing operations. The closure and relocation of the Filtertek Puerto Rico
facility was completed in March 2004. The Puerto Rico facility was included in
current assets from discontinued operations with a carrying value of $1.1
million at December 31, 2007. Effective March 31, 2008, the Company sold the
Puerto Rico facility for approximately $1.3 million, net. The cash proceeds were
received in April 2008.
Acquisitions
------------
On November 30, 2007, the Company acquired the capital stock of Doble for a
purchase price of approximately $328 million, net of cash acquired. Doble,
headquartered in Watertown, Massachusetts, is a worldwide leader in providing
high-end diagnostic test solutions for the electric utility industry. The
acquisition aligns with the Company's long-term growth strategy of expanding its
products and services in the utility industry. The acquisition was funded by a
combination of the Company's existing cash, including the proceeds from the
partial divestiture of Filtertek, and borrowings under a new $330 million credit
facility led by National City Bank. Doble's annual revenue for the trailing
twelve months ended September 30, 2007 was approximately $80 million. The
operating results for Doble, since the date of acquisition, are included within
the Utility Solutions Group segment. The Company recorded $192.6 million of
goodwill and $112.3 million of trade names as a result of transaction. The
Company also recorded $56.3 million of identifiable intangible assets consisting
primarily of customer relationships and software/databases which will be
amortized on a straight-line basis over periods ranging from five years to
twenty years.
Other Acquisitions
------------------
In addition, during the first quarter of 2008, the Company acquired certain
assets and liabilities related to two minor acquisitions for a total purchase
price of $1 million.
Credit facility
---------------
On November 30, 2007, in conjunction with the acquisition of Doble, the Company
entered into a new $330 million five-year revolving credit facility with a $50
million increase option. This facility replaces the Company's $100 million
credit facility that would have otherwise matured in October 2009. The facility
is available for direct borrowings and/or the issuance of letters of credit. It
is provided by a group of sixteen banks, led by National City Bank as agent,
with a maturity of November 30, 2012.
At March 31, 2008, the Company had approximately $77 million available to borrow
under the credit facility in addition to $31.0 million cash on hand. At March
31, 2008, the Company had $250 million of outstanding borrowings under the
credit facility and outstanding letters of credit of $4.2 million ($3.3 million
outstanding under the credit facility). The Company classified $15.5 million as
the current portion on long-term debt as of March 31, 2008, as the Company
intends to repay this amount within the next twelve months. Cash flow from
operations and borrowings under the Company's bank credit facility are expected
to meet the Company's capital requirements and operational needs for the
foreseeable future.
Pacific Gas & Electric
----------------------
Aclara Power-Line Systems Inc. (formerly known as Distribution Control Systems
Inc.) delivered the final software version (TWACS NG 3.0) to PG&E in December
2007 and, as a result, recognized deferred revenue of $20.5 million during the
first quarter of 2008. The parties continue to negotiate an amendment to the
current contract to conform to the parties' performance. Testing of Aclara RF
Systems Inc.'s (formerly known as Hexagram Inc.) RF electric solution by PG&E
began in the fiscal fourth quarter of 2007 and continues. During the second
quarter of 2008, the Company received a $4.1 million order from PG&E for 88,000
Aclara RF System electric devices. PG&E has not yet announced what changes, if
any, will be made to its AMI project plan, and therefore, the Company continues
to be unable to estimate the timing or value of orders that may be received
under the Company's PG&E contracts. Refer to "Pacific Gas & Electric" in
"Management's Discussion and Analysis" appearing in the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2007 for further discussion
about the Company's contracts with PG&E.
CRITICAL ACCOUNTING POLICIES
----------------------------
Management has evaluated the accounting policies used in the preparation of the
Company's financial statements and related notes and believes those policies to
be reasonable and appropriate. Certain of these accounting policies require the
application of significant judgment by Management in selecting appropriate
assumptions for calculating financial estimates. By their nature, these
judgments are subject to an inherent degree of uncertainty. These judgments are
based on historical experience, trends in the industry, information provided by
customers and information available from other outside sources, as appropriate.
The most significant areas involving Management judgments and estimates may be
found in the Critical Accounting Policies section of Management's Discussion and
Analysis and in Note 1 to the Consolidated Financial Statements contained in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2007 at Exhibit 13.
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 in current litigation are adequately reserved, covered by
insurance, or would not have a material adverse effect on its financial
statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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. In February 2008, the FASB amended SFAS 157 to delay the effective date by
one year for nonfinancial assets and liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. The
adoption of SFAS 157 is not expected to have a material impact to the Company's
financial position or results of operations.
In December 2007, the FASB issued SFAS No. 141R, "Business Combinations" (SFAS
141R), which establishes principles and requirements for how an acquirer
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in an
acquiree, including the recognition and measurement of goodwill acquired in a
business combination. The requirements of SFAS 141R are effective for business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Earlier
adoption is prohibited.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FASB Statement No. 133"
(SFAS 161). This statement is intended to improve transparency in financial
reporting by requiring enhanced disclosures of an entity's derivative
instruments and hedging activities and their effects on the entity's financial
position, financial performance, and cash flows. SFAS 161 is effective
prospectively for financial statements issued for fiscal years and interim
periods beginning after November 15, 2008, with early application permitted. The
adoption of SFAS 161 is not expected to have a material impact to the Company's
financial position or results of operations.
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. Forward looking statements include, but are not limited to,
those relating to the estimates or projections made in connection with the
Company's accounting policies, the timing of the final valuation of certain
tangible Doble assets, timing and amount of repayment of debt, annual effective
tax rate, the reduction in the amount of unrecognized tax benefits over the next
twelve months, the impact of SFAS 157 and SFAS 161, outcome of current claims
and litigation, future cash flow, capital requirements and operational needs for
the foreseeable future, and the ultimate values and timing of revenues under the
Aclara Power-Line Systems / PREPA contract. Investors are cautioned that such
statements are only predictions, and speak only as of the date of this report.
The Company's actual results in the future may differ materially from those
projected in the forward-looking statements due to risks and uncertainties that
exist in the Company's operations and business environment including, but not
limited to: the risk factors described in Item 1A of the Company's Annual Report
on Form 10-K for the fiscal year ended September 30, 2007, and in Part II, Item
1A of the Company's Quarterly Report on Form 10-Q for the three months ended
December 31, 2007, actions by PG&E's Board of Directors and PG&E's management
impacting PG&E's AMI projects, changes to PG&E's AMI project plan resulting from
the evaluation of other AMI vendor technologies or other factors; the Company's
successful performance under the PG&E contracts; weakening of economic
conditions in served markets; changes in customer demands or customer
insolvencies; competition; intellectual property rights; material changes in the
costs of certain raw materials including steel and copper; delivery delays or
defaults by customers; termination for convenience of customer contracts; timing
and magnitude of future contract awards; performance issues with key suppliers,
customers and subcontractors; collective bargaining and labor disputes; changes
in laws and regulations including changes in accounting standards and taxation
requirements; costs relating to environmental matters; litigation uncertainty;
and the Company's successful execution of internal operating plans and
integration of newly acquired businesses.
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. The Company is
exposed to market risk related to changes in interest rates and selectively uses
derivative financial instruments, including forward contracts and swaps, to
manage these risks. During the first quarter of 2008, the Company entered into a
two-year amortizing interest rate swap to hedge some of its exposure to
variability in future LIBOR-based interest payments on variable rate debt. The
swap notional amount for the first year is $175 million amortizing to $100
million in the second year. All derivative instruments are reported on the
balance sheet at fair value. The derivative instrument is designated as a cash
flow hedge and the gain or loss on the derivative is deferred in accumulated
other comprehensive income until recognized in earnings with the underlying
hedged item. Including the impact of interest rate swaps outstanding, the
interest rates on approximately 70% of the Company's total borrowings were
effectively fixed as of March 31, 2008.
The following is a summary of the notional transaction amounts and fair values
for the Company's outstanding derivative financial instruments by risk category
and instrument type, as of March 31, 2008.
Average
Notional Receive Average
(In thousands) Amount Rate Pay Rate Fair Value
------ ---- -------- ----------
Interest rate swaps $175,000 3.00% 3.99% ($3,687)
In addition, the Company pays 75bps spread on its outstanding debt. Refer to the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2007 for further discussion about market risk.
ITEM 4. CONTROLS AND PROCEDURES
The Company carried out an evaluation, under the supervision 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 were effective as of that date. 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 (the "Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. There has been no change in the Company's
internal control over financial reporting (as defined in Rule 13a-15(f) under
the Exchange Act) during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1A. RISK FACTORS
The discussion of risk factors in Item 1A of the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2007 refers to the Company's
Communications segment and to its subsidiaries DCSI (Distribution Controls
Systems, Inc.) and Hexagram (Hexagram, Inc.). As a result of the acquisition of
Doble in November 2007, the Company changed the name of the Communications
segment to the Utility Solutions Group segment. The name change was done in
conjunction with the Company's strategic integration and rebranding of its AMI
related technologies under the brand name Aclara and renaming the businesses
as follows: Distribution Control Systems, Inc. renamed Aclara Power-Line Systems
Inc.; Hexagram, Inc. renamed Aclara RF Systems Inc.; and Nexus Energy Software,
Inc. renamed Aclara Software Inc.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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. There were no stock repurchases during the three-month period ended March
31, 2008.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of the Company's shareholders was held on Wednesday, February
6, 2008. The voting for directors was as follows:
For Withheld Broker Non-Votes
--- -------- ----------------
L.W. Solley 19,230,354 2,119,222 0
J.D. Woods 19,225,682 2,123,894 0
The terms of J.M. McConnell, VL. Richey, Jr., J.M. Stolze and D.C. Trauscht as
directors continued after the meeting.
The voting to approve amendments to the Company's 2004 Incentive Compensation
Plan, 2001 Stock Incentive Plan and 1999 Stock Option Plan was as follows:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
13,153,855 4,247,218 2,051,533 1,896,969
The voting to ratify the Company's selection of KPMG LLP as independent public
accountants for the fiscal year ending September 30, 2008 was as follows:
For Against Abstain Broker Non-Votes
--- ------- ------- ----------------
21,190,333 102,981 52,263 0
ITEM 6. EXHIBITS
a) Exhibits
Exhibit
Number
2.1 Stock Purchase and Sale Incorporated by reference to
Agreement dated as of Current Report on Form 8-K
November 6, 2007 by and dated November 6, 2007 at
among ESCO Technologies Exhibit 2.1
Holding Inc. and ESCO
Technologies Inc.,
Doble Engineering
Company and the
Stockholders of Doble
Engineering Company
2.2 Stock Purchase Incorporated by reference to
Agreement dated as of Current Report on Form 8-K
November 25, 2007 by dated November 25, 2007 at
and among ESCO Exhibit 2.1
Technologies Holding
Inc. and ESCO
Technologies Inc. and
Illinois Tool Works Inc.
3.1 Restated Articles of Incorporated by reference to
Incorporation Form 10-K for the fiscal
year ended September 30,
1999, at Exhibit 3(a)
3.2 Amended Certificate of Incorporated by reference to
Designation Preferences Form 10-Q for the fiscal
and Rights of Series A quarter ended March 31,
Participating 2000, at Exhibit 4(e)
Cumulative Preferred
Stock of the Registrant
3.3 Articles of Merger Incorporated by reference to
effective July 10, 2000 Form 10-Q for the fiscal
quarter ended June 30, 2000,
at Exhibit 3(c)
3.4 Bylaws, as amended and Incorporated by reference to
restated as of July 10, Form 10-K for the fiscal
2000. year ended September 30,
2003, at Exhibit 3.4
3.5 Amendment to Bylaws Incorporated by reference to
effective as of Form 10-Q for the fiscal
February 2, 2007. quarter ended December 31,
2006, at Exhibit 3.5
3.6 Amendment to Bylaws Incorporate by reference to
effective as of Current Report on Form 8-K
November 9, 2007. dated November 12, 2007 at
Exhibit 3.1
4.1 Specimen Common Stock Incorporated by reference to
Certificate Form 10-Q for the fiscal
quarter ended June 30, 2000,
at Exhibit 4(a)
4.2 Specimen Rights Incorporated by reference to
Certificate Current Report on Form 8-K
dated February 3, 2000, at
Exhibit B to Exhibit 4.1
4.3 Rights Agreement dated Incorporated by reference to
as of September 24, Current Report on Form 8-K
1990 (as amended and dated February 3, 2000, at
Restated as of February Exhibit 4.1
3, 2000) between the
Registrant and
Registrar and Transfer
Company, as successor
Rights Agent
4.4 Credit Agreement dated Incorporated by reference to
as of November 30, Current Report on Form 8-K
2007 among the dated November 30, 2007, at
Registrant, National Exhibit 4.1
City Bank and the
lenders from time to
time parties thereto
31.1 Certification of Chief
Executive Officer
relating to Form 10-Q
for period ended March
31, 2008
31.2 Certification of Chief
Financial Officer
relating to Form 10-Q
for period ended March
31, 2008
32 Certification of Chief
Executive Officer and
Chief Financial
Officer relating to
Form 10-Q for period
ended March 31, 2008
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
Executive Vice President and Chief Financial Officer
(As duly authorized officer and principal accounting
officer of the registrant)
Dated: May 8, 2008