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 JUNE 30, 2009
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)
(314) 213-7200
(Registrant's telephone number, including area code)
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 has submitted electronically
and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T
(232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files).
Yes 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 the 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
---- ----
(Do not check if a 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 July 31, 2009
-------------------------------------- ----------------------------
Common stock, $.01 par value per share 26,297,437 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
June 30,
--------
2009 2008
---- ----
Net sales $ 148,102 151,351
Costs and expenses:
Cost of sales 88,040 89,787
Selling, general and administrative expenses 36,636 37,896
Amortization of intangible assets 4,792 4,444
Interest expense, net 1,587 2,572
Other expenses, net 2,617 514
----- ---
Total costs and expenses 133,672 135,213
Earnings before income taxes 14,430 16,138
Income tax expense 3,337 3,737
----- -----
Net earnings from continuing operations 11,093 12,401
Earnings from discontinued operations, net
of tax benefit of $456 and tax expense of
$560, respectively 332 907
--- ---
Net earnings $ 11,425 13,308
======== ======
Earnings per share:
Basic - Continuing operations $ 0.42 0.48
- Discontinued operations 0.02 0.03
---- ----
- Net earnings $ 0.44 0.51
======== ====
Diluted - Continuing operations $ 0.42 0.47
- Discontinued operations 0.01 0.03
---- ----
- Net earnings $ 0.43 0.50
======== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine Months Ended
June 30,
--------
2009 2008
---- ----
Net sales $ 449,615 421,023
Costs and expenses:
Cost of sales 272,880 251,858
Selling, general and administrative expenses 114,158 108,882
Amortization of intangible assets 14,379 12,377
Interest expense, net 5,961 7,101
Other expenses, net 2,860 164
----- ---
Total costs and expenses 410,238 380,382
Earnings before income taxes 39,377 40,641
Income tax expense 11,839 12,945
------ ------
Net earnings from continuing operations 27,538 27,696
Earnings (loss) from discontinued
operations, net of tax benefit of $568 and
$565, respectively 135 (516)
Loss on sale from discontinued operations,
net of tax benefit of $905 and tax expense
of $4,809, respectively (32) (4,974)
--- ------
Net earnings (loss) from discontinued
operations 103 (5,490)
--- ------
Net earnings $ 27,641 22,206
======== ======
Earnings (loss) per share:
Basic - Continuing operations $ 1.05 1.07
- Discontinued operations 0.01 (0.21)
---- -----
- Net earnings $ 1.06 0.86
======== ====
Diluted - Continuing operations $ 1.04 1.05
- Discontinued operations - (0.21)
-------- -----
- Net earnings $ 1.04 0.84
======== ====
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
June 30, September 30,
2009 2008
---- ----
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 29,450 28,667
Accounts receivable, net 113,102 134,710
Costs and estimated earnings on long-term
contracts, less progress billings of
$20,753 and $34,978, respectively 3,395 9,095
Inventories 86,983 65,019
Current portion of deferred tax assets 16,635 15,368
Other current assets 22,110 14,888
Current assets from discontinued operations - 2,889
------ ------
Total current assets 271,675 270,636
Property, plant and equipment, net 69,895 72,353
Goodwill 330,090 328,878
Intangible assets, net 224,304 236,192
Other assets 18,588 17,665
Other assets from discontinued operations - 2,349
------- -------
Total assets $914,552 928,073
======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and current portion
of long-term debt $ 50,000 50,000
Accounts payable 40,541 48,982
Advance payments on long-term contracts,
less costs incurred of $18,735 and
$7,880, respectively 6,503 7,467
Accrued salaries 17,206 20,409
Current portion of deferred revenue 20,431 18,226
Accrued other expenses 21,598 22,058
Current liabilities from discontinued
operations - 1,541
------- -------
Total current liabilities 156,279 168,683
Pension obligations 10,507 12,172
Deferred tax liabilities 81,519 83,515
Other liabilities 13,182 11,816
Long-term debt, less current portion 152,485 183,650
------- -------
Total liabilities 413,972 459,836
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
29,640,982 and 29,465,154 shares,
respectively 296 295
Additional paid-in capital 260,756 254,240
Retained earnings 301,111 273,470
Accumulated other comprehensive (loss)
income, net of tax (1,487) 556
------ -------
560,676 528,561
Less treasury stock, at cost: 3,361,046 and
3,375,106 common shares, respectively (60,096) (60,324)
------- -------
Total shareholders' equity 500,580 468,237
------- -------
Total liabilities and shareholders' equity $914,552 928,073
======== =======
See accompanying notes to consolidated financial statements.
ESCO TECHNOLOGIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
Nine Months Ended
June 30,
--------
2009 2008
---- ----
Cash flows from operating activities:
Net earnings $ 27,641 22,206
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Net(earnings)loss from discontinued operations (103) 5,490
Depreciation and amortization 22,692 19,474
Stock compensation expense 3,176 3,230
Changes in current assets and liabilities (14,098) (6,199)
Effect of deferred taxes (4,646) 8,549
Change in deferred revenue and costs, net 2,311 (317)
Other 10 372
------- ------
Net cash provided by operating activities -
continuing operations 36,983 52,805
------ ------
Net earnings (loss) from discontinued
operations, net of tax 103 (5,490)
Net cash provided (used) by discontinued
operations 39 (444)
------ ------
Net cash provided (used) by operating
activities discontinued operations 142 (5,934)
------ ------
Net cash provided by operating activities 37,125 46,871
------ ------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (1,250) (330,796)
Proceeds from sale of marketable securities - 4,966
Additions to capitalized software (3,419) (9,225)
Capital expenditures - continuing operations (6,898) (12,618)
------ -------
Net cash used by investing activities -
continuing operations (11,567) (347,673)
------- --------
Capital expenditures - discontinued operations - (1,140)
Proceeds from divestiture of business, net -
discontinued operations 3,100 74,370
----- ------
Net cash provided by investing activities -
discontinued operations 3,100 73,230
----- ------
Net cash used by investing activities (8,467) (274,443)
------ --------
Cash flows from financing activities:
Proceeds from long-term debt 29,000 276,197
Principal payments on long-term debt (60,165) (45,723)
Debt issuance costs - (2,965)
Proceeds from exercise of stock options 3,155 4,827
Other 1,080 366
Net decrease in short-term borrowings - discontinued
operations - (2,844)
------- ------
Net cash (used) provided by financing activities (26,930) 229,858
Effect of exchange rate changes on cash and cash
equivalents (945) 1,893
---- -----
Net increase in cash and cash equivalents 783 4,179
Cash and cash equivalents, beginning of period 28,667 18,638
------ ------
Cash and cash equivalents, end of period $ 29,450 22,817
======== ======
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 for annual financial statements 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, 2008. In connection with
the preparation of the consolidated financial statements and in accordance
with the recently issued Statement of Financial Accounting Standards No.
165, "Subsequent Events" (SFAS 165), the Company evaluated subsequent
events after the balance sheet date of June 30, 2009 through August 5,
2009.
The Company's business is typically not impacted by seasonality: however,
the results for the three-month period ended June 30, 2009 are not
necessarily indicative of the results for the entire 2009 fiscal year.
References to the third quarters of 2009 and 2008 represent the fiscal
quarters ended June 30, 2009 and 2008, respectively.
The business and most of the assets of Comtrak Technologies, LLC (Comtrak)
were sold during the second quarter of fiscal 2009. In addition, the
Filtertek businesses (excluding TekPackaging LLC) were sold during fiscal
2008. Comtrak and Filtertek are accounted for as discontinued operations in
accordance with GAAP.
2. DIVESTITURES
On March 13, 2009, the Company completed the sale of the business and most
of the assets of Comtrak for $3.1 million, net, of cash (referred to as the
"Comtrak sale") and is reflected as a discontinued operation in the
financial statements and related notes for all periods presented. Comtrak's
operations were previously included within the Company's Utility Solutions
Group segment. A pretax loss of $0.9 million related to the Comtrak sale is
reflected in the Company's fiscal 2009 second quarter results in
discontinued operations. Comtrak's net sales were $3.4 million and $6.8
million for the nine-month periods ended June 30, 2009 and 2008,
respectively. The major classes of discontinued assets and liabilities
included in the Consolidated Balance Sheet at September 30, 2008 are not
significant and, therefore, have not been disclosed separately.
During the third quarter of 2009, the Company recorded $0.3 million of net
earnings from discontinued operations representing a true-up adjustment
related to the sale of the international operations of Filtertek Inc.
3. 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 Nine Months Ended
June 30, June 30,
-------- --------
2009 2008 2009 2008
---- ---- ---- ----
Weighted Average Shares
Outstanding - Basic 26,241 25,977 26,176 25,862
Dilutive Options and
Restricted Shares 345 425 318 428
--- --- --- ---
Adjusted Shares - Diluted 26,586 26,402 26,494 26,290
====== ====== ====== ======
Options to purchase 582,916 shares of common stock at prices ranging from
$36.70 - $54.88 and options to purchase 265,672 shares of common stock at
prices ranging from $43.71 - $54.88 were outstanding during the three month
periods ended June 30, 2009 and 2008, 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 2014. Approximately 175,000 and 132,000
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 June 30, 2009 and 2008, respectively.
4. 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 fair value of each option award is estimated as of the date of grant
using the Black-Scholes option pricing model. The weighted average
assumptions for the periods indicated are noted below. Expected volatility
is based on historical volatility of the Company's stock calculated over
the expected term of the option. 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 nine-month period ended
June 30, 2009: expected dividend yield of 0%; expected volatility of 39.3%;
risk-free interest rate of 1.9%; and expected term of 3.8 years. Pretax
compensation expense related to the stock option awards was $0.4 million
and $1.2 million for the three and nine-month periods ended June 30, 2009,
respectively, and $0.5 million and $1.7 million for the respective prior
year periods.
Information regarding stock options awarded under the option plans is as
follows:
Weighted
Aggregate Avg.
Weighted Intrinsic Remaining
Avg. Value Contractual
Shares Price (in millions) Life
------ ----- ------------- ----
Outstanding at
October 1, 2008 1,139,201 $30.40
Granted 129,300 $37.42
Exercised (190,718) $19.56 $ 3.4
Cancelled (38,632) $45.01
------- ------
Outstanding at
June 30, 2009 1,039,151 $32.73 $13.1 2.1 years
========= ====== =====
Exercisable at
June 30, 2009 828,283 $30.80 $12.1
======= ====== =====
The weighted-average grant-date fair value of options granted during the
nine-month periods ended June 30, 2009 and 2008 was $12.11 and $10.98,
respectively.
Performance-accelerated Restricted Share Awards
-----------------------------------------------
Pretax compensation expense related to the restricted share awards was $0.5
million and $1.6 million for the three and nine-month periods ended June
30, 2009, respectively, and $0.2 million and $1.1 million for the
respective prior year periods.
The following summary presents information regarding outstanding restricted
share awards as of June 30, 2009 and changes during the nine-month period
then ended:
Weighted
Shares Avg. Price
Nonvested at October 1, 2008 202,895 $41.15
Granted 98,459 $37.35
------ ------
Nonvested at June 30, 2009 301,354 $39.91
======= ======
Non-Employee Directors Plan
---------------------------
Pretax compensation expense related to the non-employee director grants was
$0.2 million and $0.5 million for the three and nine-month periods ended
June 30, 2009, respectively, and $0.2 million and $0.5 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 $3.2 million
for the three and nine-month periods ended June 30, 2009, respectively, and
$0.9 million and $3.1 million for the three and nine-month periods ended
June 30, 2008, respectively. The total income tax benefit recognized in
results of operations for share-based compensation arrangements was $0.3
million and $1.0 million for the three and nine-month periods ended June
30, 2009, respectively, and $0.2 million and $0.8 million for the three and
nine-month periods ended June 30, 2008, respectively. As of June 30, 2009,
there was $8.9 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 2.4 years.
5. INVENTORIES
Inventories from continuing operations consist of the following (in
thousands):
June 30, September 30,
2009 2008
---- ----
Finished goods $36,524 19,866
Work in process, including long-term contracts 20,931 15,736
Raw materials 29,528 29,417
------ ------
Total inventories $86,983 65,019
======= ======
6. COMPREHENSIVE INCOME
Comprehensive income for the three-month periods ended June 30, 2009 and
2008 was $14.5 million and $14.9 million, respectively. Comprehensive
income for the nine-month periods ended June 30, 2009 and 2008 was $25.6
million and $23.1 million, respectively. For the nine-month period ended
June 30, 2009, the Company's comprehensive income was negatively impacted
by foreign currency translation adjustments and interest rate swaps
totaling $2.0 million. For the nine-month period ended June 30, 2008, the
Company's comprehensive income was positively impacted by foreign currency
translation adjustments of $1.9 million and negatively impacted by interest
rate swaps of $1.0 million.
7. 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 (USG), RF Shielding and Test (Test) and
Filtration/Fluid Flow (Filtration). The USG segment's operations consist
of: Aclara Power-Line Systems Inc. (Aclara PLS), Aclara RF Systems Inc.
(Aclara RF), Aclara Software, and Doble Engineering Company (Doble). The
Aclara companies are suppliers of special purpose fixed network
communications systems for electric, gas and water utilities, including
hardware and software to support advanced metering applications. Doble
provides high-end, diagnostic test solutions for the electrical power
delivery industry and is a leading supplier of partial discharge testing
instruments used to assess the integrity of high voltage power delivery
equipment. Test segment operations consist of ETS-Lindgren L.P. (ETS) and
Lindgren R.F. Enclosures, Inc. (Lindgren). The Test segment is principally
involved in the design and manufacture of electromagnetic compatability
test equipment, test chambers, and electromagnetic absorption materials.
The Filtration segment's operations consist of: PTI Technologies Inc.
(PTI), VACCO Industries (VACCO) and TekPackaging LLC. PTI and VACCO develop
and manufacture a wide range of filtration products and are leading
suppliers of filters to the commercial and defense aerospace, satellite and
industrial markets.
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 Nine Months ended
June 30, June 30,
-------- --------
NET SALES 2009 2008 2009 2008
--------- ---- ---- ---- ----
USG $ 91,113 87,335 273,380 240,771
Test 29,108 33,039 98,310 98,599
Filtration 27,881 30,977 77,925 81,653
------ ------ ------ ------
Consolidated totals $148,102 151,351 449,615 421,023
======== ======= ======= =======
EBIT
----
USG $ 13,158 16,182 39,851 42,147
Test 3,400 2,794 10,382 7,526
Filtration 4,837 5,216 11,927 13,778
Corporate (loss) (5,378) (5,482) (16,822) (15,709)
------ ------ ------- -------
Consolidated EBIT 16,017 18,710 45,338 47,742
Less: Interest expense (1,587) (2,572) (5,961) (7,101)
------ ------ ------ ------
Earnings before income
taxes $ 14,430 16,138 39,377 40,641
======== ====== ====== ======
8. DEBT
The Company's debt is summarized as follows:
(In thousands) June 30, September 30,
2009 2008
---- ----
Revolving credit facility, including current
portion $202,485 233,650
Current portion of long-term debt (50,000) (50,000)
------- -------
Total long-term debt, less current portion $152,485 183,650
======== =======
At June 30, 2009, the Company had $170.2 million available to borrow
comprised of: approximately $120.2 million available under the credit
facility, plus a $50.0 million increase option, in addition to $29.5
million cash on hand. At June 30, 2009, the Company had $202.5 million of
outstanding borrowings under the credit facility and outstanding letters of
credit of $7.3 million. The Company classified $50 million as the current
portion on long-term debt as of June 30, 2009, as the Company intends to
repay this amount within the next twelve months; however, the Company has
no contractual obligation to repay such amount during the next twelve
months.
The credit facility requires, as determined by certain financial ratios, a
facility fee ranging from 15 to 25 basis points per annum on the unused
portion. The terms of the facility provide that interest on borrowings may
be calculated at a spread over the London Interbank Offered Rate (LIBOR) or
based on the prime rate, at the Company's election. The facility is secured
by the unlimited guaranty of the Company's material domestic subsidiaries
and a 65% pledge of the material foreign subsidiaries' share equity. The
financial covenants of the credit facility also include a leverage ratio
and an interest coverage ratio.
9. OTHER EXPENSES, NET
Other expenses, net, were $2.6 million and $0.5 million for the three-month
periods ended June 30, 2009 and 2008, respectively. Other expenses, net,
were $2.9 million and $0.2 million for the first nine months of 2009 and
2008, respectively. The principal component of other expenses, net, for the
three and nine-month periods ended June 30, 2009 consisted of $2.3 million
of operating facility exit/relocation charges incurred in connection with
the move of the Aclara RF facility. These charges consisted of leasehold
improvement write-offs, lease contract termination costs and physical move
costs. There were no individually significant items in other expenses, net,
for the three and nine-month periods ended June 30, 2008.
10. INCOME TAX EXPENSE
The third quarter 2009 effective income tax rate for continuing operations
was 23.1% compared to 23.2% in the third quarter of 2008. The effective
income tax rate from continuing operations in the first nine months of 2009
was 30.1% compared to 31.9% in the prior year period. The decrease in the
effective income tax rate in the third quarter and first nine months of
2009 as compared to the prior year periods was due to the favorable impact
of research tax credits as a result of a decrease in unrecognized tax
benefits this quarter. The income tax expense for the third quarter of 2009
as well as the first nine months of 2009 was favorably impacted by $1.7
million, net, of research tax credits, reducing the effective income tax
rate by 12.0% and 4.4%, respectively. The income tax expense for the third
quarter of 2008 as well as the first nine months of 2008 was favorably
impacted by $2.2 million of tax benefits ($1.6 million export incentive and
a $0.6 million research tax credit) reducing the effective income tax rate
by 12.4% and 5.5%, respectively. The Company estimates the annual effective
tax rate for fiscal 2009 to be approximately 33.0%, excluding the effect of
discontinued operations.
During the fourth quarter of 2008, the Internal Revenue Service commenced
an examination of the Company's U.S. Federal income tax return for the
periods ended September 30, 2003 through September 30, 2006 (fiscal
2003-2006). During the third quarter of 2009, the IRS proposed an
adjustment to the research credit. Based on this proposal, the Company
decreased the balance of unrecognized tax benefits related to the 2004
through 2009 research credits by $2.0 million. Various state tax years from
2003 through 2008 remain subject to income tax examinations.
The Company anticipates a $0.5 million reduction in the amount of
unrecognized tax benefits in the next twelve months, of which $0.3 million
would affect the effective tax rate. The reduction is a result of potential
IRS settlements, as well as a lapse of the applicable statute of
limitations.
11. RETIREMENT PLANS
A summary of net periodic benefit expense for the Company's defined benefit
plans for the three and nine-month periods ended June 30, 2009 and 2008 is
shown in the following table. Net periodic benefit cost for each period
presented is comprised of the following:
Three Months Ended Nine Months Ended
June 30, June 30,
-------- --------
(In thousands) 2009 2008 2009 2008
---- ---- ---- ----
Defined benefit plans
Interest cost $ 724 713 2,161 2,138
Expected return on assets (776) (738) (2,289) (2,213)
Amortization of:
Prior service cost 4 4 11 11
Actuarial loss 79 86 211 259
-- -- --- ---
Net periodic benefit cost $ 31 65 94 195
===== == == ===
12. 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
was $175 million amortizing to $100 million in the second year. In
addition, during the second quarter of 2009, the Company entered into two
$40 million one-year forward interest rate swaps effective October 5, 2009
to hedge some of its exposure to variability in future LIBOR-based interest
payments on variable rate debt. 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. Based on the interest rate swaps outstanding,
the interest rates on approximately 50% of the Company's total borrowings
were effectively fixed as of June 30, 2009.
The following is a summary of the notional transaction amounts and fair
values for the Company's outstanding derivative financial instruments as of
June 30, 2009.
Average
Notional Receive Average
(In thousands) Amount Rate Pay Rate Fair Value
Interest rate swap $100,000 0.63% 3.99% ($1,477)
Interest rate swaps * $ 80,000 N/A 1.52% ($413)
* These swaps represent forward contracts and will be effective in
October 2009.
13. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS
No. 168, "The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles", a replacement of FASB Statement
No. 162 (SFAS 168). The Codification will become the new source of
authoritative GAAP recognized by the FASB to be applied by nongovernmental
entities. Rules and interpretive releases of the SEC under authority of
federal securities laws are also sources of authoritative GAAP for
nongovernmental entities. On the effective date of SFAS 168, the
Codification will supersede all then-existing non-SEC accounting and
reporting standards. SFAS 168 is effective for financial statements issued
for interim and annual periods ending after September 15, 2009. This
Statement is not expected to have a material impact on the Company's
financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" (SFAS 165),
which establishes general standards of accounting for and disclosure of
events that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In accordance with
this Statement, an entity should apply the requirements to interim or
annual financial periods ending after June 15, 2009. This Statement is not
expected to have a material impact on the Company's financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following discussion refers to the Company's results from continuing
operations, except where noted. The business and most of the assets of Comtrak
were sold during the second quarter of fiscal 2009. Accordingly, the Comtrak
business is reflected as discontinued operations in the financial statements and
related notes for all periods shown. In addition, the Filtertek businesses
(excluding TekPackaging LLC) were sold during fiscal 2008 and are accounted for
as discontinued operations. References to the third quarters of 2009 and 2008
represent the fiscal quarters ended June 30, 2009 and 2008, respectively.
NET SALES
Net sales decreased $3.2 million, or 2.1%, to $148.1 million for the third
quarter of 2009 from $151.4 million for the third quarter of 2008 mainly due to
decreases of $3.9 million in net sales from the Test segment and $3.1 million
from the Filtration segment, partially offset by an increase of $3.8 million in
the USG segment. Net sales increased $28.6 million, or 6.8%, to $449.6 million
for the first nine months of 2009 from $421.0 million for the prior year period
mainly due to a significant increase in net sales from Aclara RF and the impact
of a full nine months of Doble's operations versus seven months in the prior
year period. The Company acquired Doble on November 30, 2007.
-Utility Solutions Group
------------------------
Net sales increased $3.8 million, or 4.3%, to $91.1 million for the third
quarter of 2009 from $87.3 million for the third quarter of 2008. Net sales
increased $32.6 million, or 13.5%, to $273.4 million for the first nine months
of 2009 from $240.8 million in the prior year period. The sales increase in the
third quarter of 2009 as compared to the prior year quarter was mainly due to a
$8.0 million increase in net sales from Aclara RF primarily due to higher gas
product Advanced Metering Infrastructure (AMI) deliveries at Pacific Gas &
Electric (PG&E) and the shipment of additional water AMI products primarily for
the New York City water project partially offset by a $4.1 million decrease in
net sales at Aclara PLS mainly due to lower sales to PREPA. The sales increase
for the first nine months of 2009 as compared to the prior year period was due
to: a $50.6 million increase in net sales from Aclara RF; a $11.6 million
increase in net sales from Doble reflecting the impact of a full nine months of
operations versus seven months in the prior year period; a $3.3 million increase
in net sales at Aclara Software, partially offset by a $32.9 million decrease in
sales at Aclara PLS driven mainly by a decrease in power-line AMI sales to PG&E
due to the prior year recognition of deferred revenue. In the first quarter of
2008, the Company recorded revenue of $20.5 million representing the cumulative
effect of the recognition of deferred revenue related to the hardware shipments
to PG&E to date, as TWACS NG 3.0 software was delivered to PG&E in December
2007.
-Test
-----
For the third quarter of 2009, net sales of $29.1 million were $3.9 million, or
11.8%, lower than the $33.0 million of net sales recorded in the third quarter
of 2008. Net sales decreased $0.3 million to $98.3 million for the first nine
months of 2009 from $98.6 million for the first nine months of 2008. The sales
decrease for the three month period ended June 30, 2009 as compared to the prior
year quarter was mainly due to: a $2.8 million decrease in net sales from the
segment's European operations due to the timing of large chamber deliveries to
the international wireless and electronics end-markets, a decrease in component
shipments, and unfavorable foreign currency values. The sales decrease for the
first nine months of 2009 compared to the prior year period was due to: a $4.7
million decrease in net sales from the segment's European operations due to the
reasons mentioned above; partially offset by a $3.0 million increase in net
sales from the segment's U.S. operations driven by the timing of domestic
chamber deliveries; and a $1.4 million increase in net sales from the segment's
Asian operations due to an increase in large chamber deliveries to the
international wireless and electronics end-markets.
-Filtration
-----------
For the third quarter of 2009, net sales of $27.9 million were $3.1 million, or
10.0%, lower than the $31.0 million of net sales recorded in the third quarter
of 2008. Net sales decreased $3.8 million, or 4.6%, to $77.9 million for the
first nine months of 2009 from $81.7 million for the first nine months of 2008.
The sales decrease during the fiscal quarter ended June 30, 2009 as compared to
the prior year quarter was mainly due to: a $2.7 million decrease in net sales
at PTI due to lower commercial aerospace shipments; a $1.4 million decrease in
net sales at TekPackaging due to timing of deliveries; partially offset by a
$1.1 million increase in net sales at VACCO driven by higher military / defense
aircraft product shipments. The sales decrease in the first nine months of 2009
as compared to the prior year period was mainly due to: a $7.8 million decrease
in net sales at PTI; a $1.3 million decrease in net sales at TekPackaging;
partially offset by a $5.4 million increase in net sales at VACCO all due to the
reasons mentioned above.
ORDERS AND BACKLOG
Backlog from continuing operations was $270.3 million at June 30, 2009 compared
with $266.1 million at September 30, 2008. The Company received new orders
totaling $157.6 million in the third quarter of 2009 compared to $152.4 million
in the prior year quarter. New orders of $103.6 million were received in the
third quarter of 2009 related to USG products, $32.8 million related to Test
products, and $21.2 million related to Filtration products. New orders of $89.7
million were received in the third quarter of 2008 related to USG products,
$34.1 million related to Test products, and $28.6 million related to Filtration
products. The Company received orders totaling $18.1 million and $73.4 million
from PG&E during the three and nine-month periods ended June 30, 2009,
respectively, compared to $31.0 million and $77.5 million for the three and
nine-month periods ended June 30, 2008.
The Company received new orders totaling $453.8 million in the first nine months
of 2009 compared to $445.6 million in the prior year period. New orders of
$285.8 million were received in the first nine months of 2009 related to USG
products, $88.7 million related to Test products, and $79.3 million related to
Filtration products. New orders of $255.4 million were received in the first
nine months of 2008 related to USG products, $100.0 million related to Test
products, and $90.2 million related to Filtration products.
Orders from PG&E for AMI gas products in the third quarter of 2009 were $18.1
million bringing the total gas project-to-date to approximately 3.4 million
units, or $193.0 million. Orders of $13.3 million were recorded in the third
quarter of 2009 for the New York City water project bringing the total water
project-to-date to 427,000 units, or $34.3 million.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative (SG&A) expenses for the third quarter of
2009 were $36.6 million (24.7% of net sales), compared with $37.9 million (25.0%
of net sales) for the prior year quarter. For the first nine months of 2009,
SG&A expenses were $114.2 million (25.4% of net sales) compared with $108.9
million (25.9% of net sales) for the prior year period. The $5.3 million
increase in SG&A spending in the first nine months of 2009 as compared to the
prior year period was primarily due to a $6.2 million increase in SG&A expenses
related to Doble, reflecting a full nine months of SG&A expenses versus seven
months in the prior year period.
AMORTIZATION OF INTANGIBLE ASSETS
Amortization of intangible assets was $4.8 million and $14.4 million for the
three and nine-month periods ended June 30, 2009, respectively, compared to $4.4
million and $12.4 million for the respective prior year periods. Amortization of
intangible assets for the three and nine-month periods ended June 30, 2009
included $1.2 million and $3.5 million, respectively, of amortization of
acquired intangible assets related to recent acquisitions compared to $1.2
million and $3.0 million for the respective prior year periods. The amortization
of these acquired intangible assets are included in Corporate's operating
results; see "EBIT - Corporate". During the three and nine-month periods ended
June 30, 2009, the Company recorded $3.1 million and $9.1 million, respectively,
of amortization related to Aclara PLS TWACS NG software compared to $2.9
million and $8.1 million for the respective prior year periods. The remaining
amortization expenses consist of other identifiable intangible assets (primarily
software, patents and licenses).
OTHER EXPENSES, NET
Other expenses, net, were $2.6 million and $0.5 million for the three-month
periods ended June 30, 2009 and 2008, respectively. Other expenses, net, were
$2.9 million and $0.2 million for the first nine months of 2009 and 2008,
respectively. The principal component of other expenses, net, for the three and
nine-month periods ended June 30, 2009 consisted of $2.3 million of operating
facility exit/relocation charges incurred in connection with the move of the
Aclara RF facility. These charges consisted of leasehold improvement write-offs,
lease contract termination costs and physical move costs. There were no
individually significant items in other expenses, net, for the three and
nine-month periods ended June 30, 2008.
EBIT
The Company evaluates the performance of its operating segments based on EBIT,
defined below. EBIT was $16.0 million (10.8% of net sales) for the third quarter
of 2009 and $18.7 million (12.4% of net sales) for the third quarter of 2008.
For the first nine months of 2009, EBIT was $45.3 million (10.1% of net sales)
compared with $47.7 million (11.3% of net sales) for the prior year period. The
results for the third quarter of 2009 included a pretax charge of $2.3 million
related to the Aclara RF facility relocation which was completed in June 2009.
This Form 10-Q contains the financial measure "EBIT", which is not calculated in
accordance with 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 Nine Months ended
(In thousands) June 30, June 30,
-------- --------
2009 2008 2009 2008
---- ---- ---- ----
Consolidated EBIT $16,017 18,710 45,338 47,742
Less: Interest expense, net (1,587) (2,572) (5,961) (7,101)
Less: Income tax expense (3,337) (3,737) (11,839) (12,945)
------ ------ ------- -------
Net earnings from
continuing operations $11,093 12,401 27,538 27,696
======= ====== ====== ======
-Utility Solutions Group (USG)
------------------------------
EBIT in the third quarter of 2009 was $13.2 million (14.4% of net sales)
compared to $16.2 million (18.5% of net sales) in the prior year quarter. For
the first nine months of 2009, EBIT was $39.9 million (14.6% of net sales)
compared to $42.1 million (17.5% of net sales) in the prior year period. The
$3.0 million decrease in EBIT in the third quarter of 2009 as compared to the
prior year quarter was driven by lower margins on product sales and a $2.3
million charge related to the Aclara RF facility relocation. The $2.2 million
decrease in EBIT in the first nine months of 2009 compared to the prior year
period was due to: a decrease in EBIT at Aclara PLS resulting from lower sales
to PG&E ; Aclara RF facility relocation costs; additional TWACS NG software
amortization; and additional costs to support business development efforts
related to the pursuit of international AMI market opportunities; partially
offset by an increase in EBIT at Aclara RF and Aclara Software due to the sales
increases mentioned above.
-Test
-----
EBIT in the third quarter of 2009 was $3.4 million (11.7% of net sales) as
compared to $2.8 million (8.5% of net sales) in the prior year quarter. For the
first nine months of 2009, EBIT was $10.4 million (10.6% of net sales) as
compared to $7.5 million (7.6% of net sales) in the prior year period. EBIT
increased $0.6 million and $2.9 million over the prior year quarter and
nine-month period, respectively, mainly due to favorable changes in sales mix
and a reduction of the segment's SG&A expenses.
-Filtration
-----------
EBIT was $4.8 million (17.3% of net sales) and $5.2 million (16.8% of net sales)
in the third quarters of 2009 and 2008, respectively, and $11.9 million (15.3%
of net sales) and $13.8 million (16.9% of net sales) in the first nine months of
2009 and 2008, respectively. For the third quarter of 2009 as compared to the
prior year quarter, EBIT decreased $0.4 million mainly due to a decrease at
Tekpackaging due to lower sales volumes. For the first nine months of 2009 as
compared to the prior year period, EBIT decreased due to lower sales at PTI, an
increase in research and development costs and higher bid and proposal costs
incurred in the pursuit of a significant number of Space related projects.
-Corporate
----------
Corporate costs included in EBIT were $5.4 million and $16.8 million for the
three and nine-month periods ended June 30, 2009, respectively, compared to $5.5
million and $15.7 million for the respective prior year periods. The increase in
Corporate costs for the first nine months of 2009 as compared to the prior year
period was primarily due to a $0.5 million increase in amortization expense
related to acquired intangible assets recorded at Corporate. In the first nine
months of 2009, Corporate costs included $3.2 million of pretax stock
compensation expense and $3.5 million of pretax amortization of acquired
intangible assets. In the first nine months of 2008, Corporate costs included
$3.2 million of pretax stock compensation expense and $3.0 million of pretax
amortization of acquired intangible assets.
INTEREST EXPENSE, NET
Interest expense was $1.6 million and $6.0 million for the three and nine-month
periods ended June 30, 2009, respectively, and $2.6 million and $7.1 million for
the three and nine-month periods ended June 30, 2008. The decrease in interest
expense in the second quarter of 2009 and the first nine months of 2009 as
compared to the prior year periods is due to lower interest rates and lower
average outstanding borrowings under the revolving credit facility.
INCOME TAX EXPENSE
The third quarter 2009 effective income tax rate for continuing operations was
23.1% compared to 23.2% in the third quarter of 2008. The effective income tax
rate from continuing operations in the first nine months of 2009 was 30.1%
compared to 31.9% in the prior year period. The decrease in the effective income
tax rate in the third quarter and first nine months of 2009 as compared to the
prior year periods was due to the favorable impact of research tax credits as a
result of a decrease in unrecognized tax benefits this quarter. The income tax
expense for the third quarter of 2009 as well as the first nine months of 2009
was favorably impacted by $1.7 million, net, of research tax credits, reducing
the effective income tax rate by 12.0% and 4.4%, respectively. The income tax
expense for the third quarter of 2008 as well as the first nine months of 2008
was favorably impacted by $2.2 million of tax benefits ($1.6 million export
incentive and a $0.6 million research tax credit) reducing the effective income
tax rate by 12.4% and 5.5%, respectively. The Company estimates the annual
effective tax rate for fiscal 2009 to be approximately 33.0%, excluding the
effect of discontinued operations.
During the fourth quarter of 2008, the Internal Revenue Service commenced an
examination of the Company's U.S. Federal income tax return for the periods
ended September 30, 2003 through September 30, 2006 (fiscal 2003-2006). During
the third quarter of 2009, the IRS proposed an adjustment to the research
credit. Based on this proposal, the Company decreased the balance of
unrecognized tax benefits related to the 2004 through 2009 research credits by
$2.0 million. Various state tax years from 2003 through 2008 remain subject to
income tax examinations.
The Company anticipates a $0.5 million reduction in the amount of unrecognized
tax benefits in the next twelve months, of which $0.3 million would affect the
effective tax rate. The reduction is a result of potential IRS settlements, as
well as a lapse of the applicable statute of limitations.
CAPITAL RESOURCES AND LIQUIDITY
Working capital from continuing operations (current assets less current
liabilities) increased to $115.4 million at June 30, 2009 from $100.6 million at
September 30, 2008. Accounts receivable decreased by $21.6 million in the first
nine months of 2009, of which $10.0 million related to the USG segment and
approximately $9.0 million related to the Test segment, both driven by timing
and volume of sales and increased cash collections. Inventories increased by
$22.0 million in the first nine months of 2009 primarily related to an increase
of approximately $17.0 million in the USG segment and $6.0 million in the
Filtration segment to meet forecasted sales for the remainder of 2009.
Capital expenditures from continuing operations were $6.9 million and $12.6
million in the first nine months of fiscal 2009 and 2008, respectively. The
decrease in the first nine months of 2009 as compared to the prior year period
is mainly due to $4.0 million of expenditures for the ETS Austin facility
expansion (Test segment) which occurred in 2008. Additions to capitalized
software were $3.4 million and $9.2 million in the first nine months of 2009 and
2008, respectively, with the decrease being due to lower spending on the TWACS
NG software in 2009 as compared to the prior year.
Credit facility
---------------
At June 30, 2009, the Company had $170.2 million available to borrow comprised
of: approximately $120.2 million available under the credit facility, plus a
$50.0 million increase option, in addition to $29.5 million cash on hand. At
June 30, 2009, the Company had $202.5 million of outstanding borrowings under
the credit facility and outstanding letters of credit of $7.3 million. The
Company classified $50 million as the current portion on long-term debt as of
June 30, 2009, as the Company intends to repay this amount within the next
twelve months; however, the Company has no contractual obligation to repay such
amount during 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.
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,
2008 at Exhibit 13.
OTHER MATTERS
Contingencies
-------------
As a normal incident of the business in which the Company is engaged, various
claims, charges and litigation are asserted or commenced against the Company.
The Company has received notice from PG&E asserting certain claims for damages
in connection with the Company's RF electric product. The Company believes that
it has meritorious legal and factual defenses to PG&E's claims. 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,
2008 for discussion about the Company's contracts with PG&E. Given the
information currently available, it is the opinion of Management that final
judgments and negotiated settlements, if any, which might be rendered or
reached, in connection with such claims, charges and litigation are adequately
reserved, covered by insurance, or would not have a material adverse effect on
its financial statements.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2009, the Financial Accounting Standards Board (FASB) issued SFAS No.
168, "The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles", a replacement of FASB Statement No. 162 (SFAS
168). The Codification will become the new source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for nongovernmental entities. On the
effective date of SFAS 168, the Codification will supersede all then-existing
non-SEC accounting and reporting standards. SFAS 168 is effective for financial
statements issued for interim and annual periods ending after September 15,
2009. This Statement is not expected to have a material impact on the Company's
financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" (SFAS 165), which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. In accordance with this Statement, an entity should
apply the requirements to interim or annual financial periods ending after June
15, 2009. This Statement is not expected to have a material impact on the
Company's financial statements.
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, timing and amount of repayment of debt, annual
effective tax rate, the impact of SFAS 168 and 165, the reduction in the amount
of unrecognized tax benefits over the next twelve months, outcome of current
claims and litigation, future cash flow, capital requirements and operational
needs for the foreseeable future. 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, 2008, the effect of the
American Recovery and Reinvestment Act of 2009, actions by PG&E impacting PG&E's
AMI projects, the Company's successful performance of large AMI 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 was $175 million amortizing to $100
million in the second year. In addition, during the second quarter of 2009, the
Company entered into two $40 million one-year forward interest rate swaps
effective October 5, 2009 to hedge some of its exposure to variability in future
LIBOR-based interest payments on variable rate debt. 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. Based on the interest rate swaps outstanding,
the interest rates on approximately 50% of the Company's total borrowings were
effectively fixed as of June 30, 2009.
The following is a summary of the notional transaction amounts and fair values
for the Company's outstanding derivative financial instruments as of June 30,
2009.
Average
Notional Receive Average
(In thousands) Amount Rate Pay Rate Fair Value
------ ---- -------- ----------
Interest rate swap $100,000 0.63% 3.99% ($1,477)
Interest rate swaps * $ 80,000 N/A 1.52% ($413)
* These swaps represent forward contracts and will be effective in October 2009.
In addition, the Company pays 57.5 basis points spread on its outstanding debt.
Refer to the Company's Annual Report on Form 10-K for the fiscal year ended
September 30, 2008 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 6. EXHIBITS
a) Exhibits
Exhibit
Number
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 Incorporated 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 June
30, 2009
*31.2 Certification of Chief
Financial Officer
relating to Form 10-Q
for period ended June
30, 2009
*32 Certification of Chief
Executive Officer and
Chief Financial
Officer relating to
Form 10-Q for period
ended June 30, 2009
* Denotes filed or furnished herewith.
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: August 6, 2009