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, 2000 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______to______ Commission file number 1-10596 ESCO ELECTRONICS CORPORATION (Exact name of registrant as specified in its charter) Missouri 43-1554045 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 8888 Ladue Road, Suite 200 63124-2090 St. Louis, Missouri (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code:(314) 213-7200 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares of the registrant's common stock outstanding at April 30, 2000 was 12,306,793. PART I. FINANCIAL INFORMATION Item 1. Financial Statements ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share amounts) Three Months Ended March 31, --------- 2000 1999 ---- ---- Net sales $ 70,062 96,214 Costs and expenses: ------- ------ Cost of sales 48,486 71,178 Selling, general and administrative expenses14,686 18,593 Interest (income) expense (157) 1,704 Other, net 1,449 1,580 ------ ------ Total costs and expenses 64,464 93,055 ------ ------ Earnings before income taxes 5,598 3,159 Income tax expense 2,081 1,112 ------ ------ Net earnings 3,517 2,047 ------ ------ Earnings per share: - Basic $ .29 .17 - Diluted .28 .16 === === See accompanying notes to consolidated financial statements. ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share amounts) Six Months Ended March 31, --------- 2000 1999 ---- ---- Net sales 135,927 184,407 ------- ------- Costs and expenses: Cost of sales 94,723 136,477 Selling, general and administrative expenses 28,438 35,814 Interest (income) expense (308) 3,436 Other, net 3,040 3,190 Gain on sale of property (2,239) - ------- ------- Total costs and expenses 123,654 178,917 ------- ------- Earnings before income taxes 12,273 5,490 Income tax expense 3,700 1,928 ------- ------- Net earnings before accounting change 8,573 3,562 ------- ------- Cumulative effect of accounting change, net of tax - (25,009) ------- ------- Net earnings (loss) 8,573 (21,447) ======= ======= Earnings (loss) per share: Earnings before accounting change: - Basic $ .70 .29 - Diluted .68 .28 === === Net earnings (loss) - Basic $ .70 (1.74) - Diluted .68 (1.74) === ====== See accompanying notes to consolidated financial statements ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets (Dollars in thousands) March 31,September 30, 2000 1999 ---- ---- Assets (Unaudited) Current assets: Cash and cash equivalents $ 11,928 87,709 Accounts receivable, less allowance for doubtful accounts of $629 and $574, respectively 43,415 38,669 Costs and estimated earnings on long-term contracts, less progress billings of $10,698 and $11,778, respectively 7,801 4,019 Inventories 41,431 39,590 Other current assets 4,560 3,559 ------- ------- Total current assets 109,135 173,546 ------- ------- Property, plant and equipment, at cost 106,719 109,763 Less accumulated depreciation and amortization 38,177 38,445 ------- ------- Net property, plant and equipment 68,542 71,318 Excess of cost over net assets of purchased businesses, less accumulated amortization of $7,684 and $6,631, respectively 72,537 68,950 Deferred tax assets 41,351 44,783 Other assets 21,651 19,788 ------- ------- $313,216 378,385 ======= ======= Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings and current maturities of long-term debt $ - 20,598 Accounts payable 27,485 26,339 Advance payments on long-term contracts, less costs incurred of $2,256 and $479, respectively 1,916 682 Accrued expenses and other current liabilities 20,105 30,598 ------- ------- Total current liabilities 49,506 78,217 ------- ------- Other liabilities 10,127 9,583 Long-term debt 849 41,896 ------- ------- Total liabilities 60,482 129,696 ------- ------- Commitments and contingencies - - Shareholders' equity: Preferred stock, par value $.01 per share, authorized 10,000,000 shares - - Common stock, par value $.01 per share, authorized 50,000,000 shares; issued 13,180,504 and 12,782,663 shares, respectively 132 128 Additional paid-in capital 204,428 201,719 Retained earnings since elimination of deficit at September 30, 1993 61,296 52,723 Accumulated other comprehensive loss (3,376) (1,870) ------- ------- 262,480 252,700 Less treasury stock, at cost; 892,425 and 404,625 common shares, respectively (9,746) (4,011) ------- ------- Total shareholders' equity 252,734 248,689 ------- ------- $313,216 378,385 ======= ======= See accompanying notes to consolidated financial statements. ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands) Six Months Ended March 31, --------- 2000 1999 ---- ---- Cash flows from operating activities: Net earnings (loss) $ 8,573 (21,447) Adjustments to reconcile net earnings (loss) to net cash (used) provided by operating activities: Depreciation and amortization 7,046 9,022 Changes in operating working capital, net of accounting change (17,864) (13,107) Effect of accounting change, net of tax - 25,009 Other (415) 3,649 ------- ------- Net cash (used) provided by operating activities (2,660) 3,126 ------- ------- Cash flows from investing activities: Capital expenditures (4,360) (4,295) Acquisition (divestiture) of businesses, less cash acquired (3,900) - -------- -------- Net cash used by investing activities (8,260) (4,295) -------- -------- Cash flows from financing activities: Net increase (decrease) in short-term borrowings (12,506) 9,000 Proceeds from long-term debt 80 96 Principal payments on long-term debt (49,219) (4,241) Purchases of common stock into treasury (5,765) (1,562) Other 2,549 138 -------- ------- Net cash (used) provided by financing activities (64,861) 3,431 -------- ------- Net (decrease) increase in cash and cash equivalents (75,781) 2,262 Cash and cash equivalents, beginning of period 87,709 4,241 -------- ------- Cash and cash equivalents, end of period $ 11,928 6,503 ======== ======= See accompanying notes to consolidated financial statements. ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying consolidated financial statements, in the opinion of management, include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results for the interim periods presented. The consolidated financial statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all the disclosures required by generally accepted accounting principles. For further information refer to the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 1999. Certain prior year amounts have been reclassified to conform to the fiscal 2000 presentation. The results for the three and six month periods ended March 31, 2000 are not necessarily indicative of the results for the entire 2000 fiscal year. On September 30, 1999, the Company sold its last major defense business, Systems & Electronics Inc. (SEI) for $85 million in cash, less working capital adjustments. The prior year amounts include the operating results of SEI for the entire year. The Company has provided a reconciliation of reported earnings to "adjusted" earnings within "Item 2. Management's Discussion and Analysis (MD&A)" noted below. 2. Earnings (Loss) Per Share Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common shares outstanding during the period plus shares issuable upon the assumed exercise of dilutive common share options and performance shares by using the treasury stock method. The net earnings per share for the first six months of fiscal 2000, for both basic and diluted earnings per share, is calculated using the weighted average number of common shares outstanding during the period. The number of shares used in the calculation of earnings (loss) per share for each period presented is as follows (in thousands): Three Months Ended Six Months Ended March 31, March 31, --------- --------- 2000 1999 2000 1999 ---- ---- ---- ---- Weighted Average Shares Outstanding - Basic 12,275 12,274 12,312 12,294 Dilutive Options and Performance Shares 324 300 317 294 ------ ------ ------ ------ Adjusted Shares- Diluted 12,599 12,574 12,629 12,588 ====== ====== ====== ====== Options to purchase approximately 125,000 shares of common stock at prices ranging from $12.91-$19.22 per share and options to purchase 691,000 shares of common stock at approximately $10.00 - $19.22 were outstanding during the six month periods ended March 31, 2000 and 1999, respectively, but were not included in the respective computations of diluted EPS because the options' exercise price was greater than the average market price of the common shares. These options expire in various periods through 2010. Approximately 20,000 and 166,000 performance shares were outstanding but unearned at March 31, 2000, and 1999, respectively, and therefore, were not included in the respective computations of diluted EPS. The unearned performance shares expire in 2001. 3. Inventories Inventories consist of the following (dollars in thousands): March 31, September 30, 2000 1999 ---- ---- Finished goods $ 11,444 11,387 Work in process, including long-term contracts 15,234 14,517 Raw materials 14,753 13,686 ------ ------ Total inventories $ 41,431 39,590 ====== ====== 4. Change in Accounting Principle During the first quarter of fiscal 1999, the Company adopted the provisions of Statement of Position (SOP) 98-5,"Reporting on the Costs of Start-up Activities". This SOP provides guidance on accounting for start-up activities, including precontract costs and organization costs. The adoption of SOP 98-5 resulted in a non-cash, after-tax charge of approximately $25 million, which was recognized as a cumulative effect of an accounting change in the prior year first quarter ended December 31, 1998. 5. Comprehensive Income (Loss) Comprehensive income for the three-month periods ended March 31, 2000 and 1999 was $2.6 million and $1.0 million, respectively. Comprehensive income (loss) for the six-month periods ended March 31, 2000 and 1999 was $7.1 million and ($22.5) million, respectively. The Company's comprehensive income and loss is impacted only by foreign currency translation adjustments. During the second quarter of fiscal 2000, the foreign currency adjustments were primarily impacted by the fluctuations in certain European currencies. 6. Business Segment information The Company is organized based on the products and services that it offers. Beginning with the first quarter of fiscal 2000, the operating results of Comtrak Technologies, L.L.C (Comtrak) are included within the Company's Communications segment. This change from September 30, 1999 is the result of the consolidation of Distribution Control Systems, Inc. (DCSI) and Comtrak under common management, and the move of Comtrak operations into the DCSI operating facility. This consolidation occurred in the quarter ended December 31, 1999. ($ in millions) Three Months ended March 31, --------- Net Sales 2000 1999 ---- ---- Filtration/Fluid Flow $45.9 40.8 Test 10.3 10.1 Communications 10.7 5.4 Other 3.2 3.7 Divested Business - 36.2 ---- ---- Consolidated totals $70.1 96.2 ==== ==== Operating Profit (Loss) Filtration/Fluid Flow $ 4.6 3.4 Test 1.2 1.2 Communications 2.1 .3 Other (1.0) (.6) Divested Business - 2.1 --- --- Consolidated totals $ 6.9 6.4 === === ($ in millions) Six Months ended March 31, --------- Net Sales 2000 1999 ---- ---- Filtration/Fluid Flow $89.0 80.8 Test 19.0 17.2 Communications 21.2 10.2 Other 6.7 7.5 Divested Business - 68.7 ---- ---- Consolidated totals $135.9 184.4 ===== ===== Operating Profit (Loss) Filtration/Fluid Flow $ 8.0 6.8 Test 1.9 1.7 Communications 4.4 .6 Other (1.5) (.7) Divested Business - 3.7 --- --- Consolidated totals $ 12.8 12.1 ==== ==== 7. Acquisitions / Divestitures During February 2000, the Company completed the sale of its microwave antenna product line, which had historically operated as part of Rantec Microwave & Electronics, Inc. The operating results for this business, prior to the divestiture, have been included within the Company's Other segment. The Company sold the contract order backlog and operating assets of the microwave antenna product line for $2.1 million in cash, plus contingent consideration based on future operating results over the next two years. The Company retained the land and buildings related to this business. On March 31, 2000, the Company acquired the Eaton space products business (Eaton), for approximately $6 million in cash and accounted for the transaction as a purchase. Eaton manufactures specialty valves and other fluid flow components for satellite launch vehicles and aircraft applications. With annual sales of approximately $7 million, this newly acquired product line will be integrated into the existing VACCO operations which is included in the Company's Filtration / Fluid Flow segment. Eaton's assets and liabilities are included in the Company's consolidated balance sheet at March 31, 2000. 8. Subsequent Events Effective April 9, 2000, the Company acquired all of the outstanding common stock of The Curran Company (doing business as Lindgren RF Enclosures) and Lindgren, Inc. (doing business as Lindgren-Rayproof) (collectively "Lindgren") for approximately $25 million in cash and accounted for the transaction as a purchase. Lindgren has annual sales in excess of $40 million and is a leading supplier of radio frequency (RF) shielding products and components used by manufacturers of medical equipment, communications systems and electronic products. Lindgren is headquartered near Chicago, IL and operates facilities in Wisconsin, Florida, the United Kingdom and Singapore. The operating results for Lindgren will be included within the Company's Test segment. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Reconciliation of Adjusted Net Earnings - 1999 The following table is not intended to present prior year net earnings as defined within generally accepted accounting principles (GAAP), and is presented for informational purposes only. The table is comparable to the full year table presented in the 1999 Annual Report to Shareholders (page 11). The table provides a reconciliation between the 1999 reported financials and what Management believes the 1999 operating results may have been after removing certain nonrecurring items and assuming that all of the actions taken during 1999 to reposition the business were complete at the beginning of the period. Management believes the estimated 1999 adjusted operating results provide a meaningful presentation for purposes of analyzing ESCO's ongoing financial performance. Three Months Ended March 31, 1999 --------------------------------- (a) (b) Elimination Adjusting ($ in millions, rounded) Reported of SEI Items Adjusted - ----------------------- -------- ------ ----- -------- Net sales $96.2 36.2 - $60.0 ---- ---- ---- ---- Cost of sales 71.2 28.4 (.2) 42.6 SG&A expenses 18.6 5.7 .1 13.0 Interest expense (income) 1.7 .1 (2.0) (.4) Other, net 1.6 .1 - 1.5 ---- ---- ---- ---- Total costs and expenses 93.1 34.3 (2.1) 56.7 ---- ---- ---- ---- Earnings before tax 3.1 1.9 2.1 3.3 Income tax expense 1.1 - .1 1.2 ---- ---- ---- ---- Net earnings 2.0 1.9 2.0 2.1 Six Months Ended March 31, 1999 ------------------------------- (a) (b) Elimination Adjusting ($ in millions, rounded) Reported of SEI Items Adjusted - ------------------------ -------- ------ ----- -------- Net sales $184.4 68.7 - $115.7 ----- ---- ----- ----- Cost of sales 136.5 54.1 (.4) 82.0 SG&A expenses 35.8 10.9 .3 25.2 Interest expense (income) 3.5 .3 (3.8) (.6) Other, net 3.2 .2 - 3.0 ----- ----- ----- ----- Total costs and expenses 179.0 65.5 (3.9) 109.6 ----- ----- ----- ----- Earnings before tax 5.4 3.2 3.9 6.1 Income tax expense 1.9 - .3 2.2 ----- ----- ----- ----- Net earnings before accounting change 3.5 3.2 3.6 3.9 Cumulative effect of accounting change, net of tax (25.0) - 25.0 - ----- ----- ----- ----- Net earnings (loss) $(21.5) 3.2 28.6 $3.9 ===== ===== ===== ===== (a) Represents the operations of SEI, which were included in the ESCO consolidated 1999 GAAP reported results of operations for the first three and six months of fiscal 1999, respectively. (b) Represents the adjusting items as explained in detail in the 1999 Annual Report to Shareholders (page 11), including: the operating results of Rantec's microwave business which has been sold; the adjustment to the corporate office operating expenses resulting from the 1999 actions; the estimated net interest impact of the SEI transaction proceeds; and any related tax adjustment. Results of Operations Net Sales Net sales of $70.1 million for the second quarter of fiscal 2000 decreased $26.1 million from reported net sales of $96.2 million for the second quarter of fiscal 1999 due to the divestiture of SEI. The prior year amount included SEI sales of $36.2 million. Excluding SEI from the prior year amounts, second quarter sales increased $10.1 million, or 16.8% over 1999 "adjusted" sales of $60.0 million. Net sales decreased $48.5 million to $135.9 million for the first six months of fiscal 2000 from reported net sales of $184.4 million for the first six months of fiscal 1999 due to the divestiture of SEI. The prior year amount included SEI sales of $68.7 million. Excluding SEI from the prior year amounts, sales for the first six months of fiscal 2000 increased $20.2 million, or 17.5% over 1999 "adjusted" sales of $115.7 million. Filtration/Fluid Flow Net sales of $45.9 million in the second quarter of fiscal 2000 were 12.5% higher than prior year sales of $40.8 million. Net sales increased $8.2 million, or 10% to $89.0 million in the first six months of fiscal 2000 from prior year sales of $80.8 million. The increase was mainly due to new product introductions and increases in microfiltration sales. Increased shipments of disposable water filter cartridges and automotive transmission sump filters and fuel filters also contributed to the sales growth. Test Net sales were $10.3 million and $10.1 million for the second quarter of fiscal 2000 and 1999, respectively. Net sales of $19.0 million for the first six months increased $1.8 million or 10.5% in fiscal 2000 over the prior period net sales of $17.2 million. The increase in both periods is primarily due to additional revenue related to the General Motors contract to design and build an electromagnetic compatibility (EMC) test complex. Communications For the second quarter of fiscal 2000, net sales were $10.7 million and were 98.1% higher than the $5.4 million of sales recorded in the second quarter of fiscal 1999. Net sales of $21.2 million for the first six months of fiscal 2000 were 107.8% higher than the $10.2 million of sales recorded in the prior year period. The significant increase in both periods is the result of significantly higher shipments to the Puerto Rico Electric Power Authority (PREPA) and Wisconsin Public Service Corporation (WPS) to provide Automatic Meter Reading (AMR) systems. Other Sales were $3.2 million in the second quarter of fiscal 2000 and $3.7 million in fiscal 1999. In the first six months of fiscal 2000, sales were $6.7 million compared to $7.5 million in the prior year period. The decreases are due to the sale of the Rantec microwave antenna business, which occurred in February 2000. Orders and Backlog Firm order backlog was $150.4 million at March 31, 2000, compared with $142.9 million at September 30, 1999. Orders totaling $149.8 million were received in the first six months of fiscal 2000, with the majority of the orders relating to Filtration/Fluid Flow products. The sale of the Rantec microwave business resulted in a decrease to backlog of $6.3 million. The backlog related to the Eaton acquisition has not been included as of March 31, 2000. Gross Profit The gross profit margin increased to 30.8% in the second quarter of fiscal 2000 from 26.0% in the second quarter of fiscal 1999 as reported. The "adjusted" gross margin for the second quarter of fiscal 1999 was 28.9%. The gross profit margin was 30.3% in the first six months of fiscal 2000 and 26.0% in the first six months of fiscal 1999 as reported. The fiscal 1999 "adjusted" gross margin was 29.1%. The gross margin increased in both periods compared to the reported 1999 results primarily due to the lower margins in 1999 related to the former defense subsidiary, SEI. Gross profit margin increased in both periods compared to "adjusted" 1999 due to operational improvements in all three primary operating segments and changes in sales mix. Selling, General and Administrative Expenses Selling, general and administrative (SG&A) expenses for the second quarter of fiscal 2000 were $14.7 million, or 21.0% of net sales, compared with $18.6 million, or 19.3% of net sales for the prior year period. "Adjusted" SG&A expense was $13.0 million, or 21.7% of net sales for the same period a year ago. The percentage decrease from "adjusted" 1999 is the result of favorable sales leverage achieved on the higher sales volume. For the first six months of fiscal 2000, SG&A expenses were $28.4 million, or 20.9% of net sales, compared with $35.8 million, or 19.4% of net sales for the prior year period. "Adjusted" SG&A expense was $25.2 million, or 21.8% of net sales for the same period a year ago. The decrease as a percent of sales from "adjusted" 1999 is due to the favorable sales leverage achieved on the higher sales volume. Operating Profit Operating profit increased to $6.9 million (9.8% of sales) for the second quarter of fiscal 2000 from reported operating profit of $6.4 million (6.7% of sales) for the second quarter of fiscal 1999. The prior year operating profit amount included $2.1 million related to SEI. Current year operating profit increased $2.5 million, or 56.8% over prior year "adjusted" operating profit of $4.4 million. Operating profit of $12.8 million (9.4% of sales) for the first six months of fiscal 2000 increased from reported operating profit of $12.1 million (6.6% of sales) for the first six months of fiscal 1999. The prior year operating profit amount included $3.7 million related to SEI. Current year operating profit increased $4.3 million, or 50.6% over prior year "adjusted" operating profit of $8.5 million. Filtration/Fluid Flow Operating profit increased $1.2 million or 35.3% to $4.6 million (10.0% of sales) in second quarter of fiscal 2000 over the $3.4 million (8.3% of sales) of operating profit in fiscal 1999. Operating profit of $8.0 million increased 17.6% in the first six months of fiscal 2000 over the $6.8 million of operating profit in fiscal 1999. The improved operating profit in the second quarter is mainly due to increasing new product sales and productivity gains. Test Second quarter operating profit was $1.2 million in both periods presented. Operating profit was $1.9 million in the first six months of fiscal 2000 compared to $1.7 million in the prior year period. Operating profit increased in the current year-to-date period primarily due to additional revenue related to the General Motors contract. Communications Second quarter operating profit of $2.1 million in fiscal 2000 was $1.8 million (600%) higher than the $.3 million of operating profit in the second quarter of fiscal 1999. For the first six months of fiscal 2000, operating profit increased $3.8 million (633%)to $4.4 million from $.6 million in fiscal 1999. The large increase is the result of significantly higher shipments to PREPA and WPS as described above. Other Operating loss was ($1.0) million and ($1.5) million for the three and six-month periods ended March 31, 2000, respectively, compared to ($.6) million and (.7) million for the respective prior year periods. The increase in the current period operating loss primarily related to the operations of the Rantec microwave antenna business that was sold in February 2000. Interest (Income) Expense Interest income was $.2 million and $.3 million for the three and six-month periods ended March 31, 2000, respectively, compared to interest expense of $1.7 million and $3.4 million for the three and six-month periods ended March 31, 1999, respectively. The fluctuation in interest is due to the decrease in debt during the first six months of fiscal 2000. All outstanding debt, excluding approximately $.9 million of foreign debt, was repaid in October 1999 with the proceeds from the sale of SEI. Other Costs and Expenses, Net Other costs and expenses, net, were $1.4 million and $3.0 million for the three and six-month periods ended March 31, 2000, respectively, compared to $1.6 million and $3.2 million for the three and six-month periods ended March 31, 1999, respectively. The amount for the first six months of fiscal 2000 included amortization expense of $1.7 million related to goodwill and patents. The balance relates to miscellaneous costs. Gain on the Sale of Property In the first quarter of fiscal 2000, the Company recorded a gain on the sale of the Riverhead, New York property, used by the Company's former Hazeltine subsidiary. The property was sold for $2.6 million, consisting of $.5 million in cash and a $2.1 million interest-bearing, 18-month note receivable. Income Tax Expense The second quarter fiscal 2000 effective income tax rate was 37.2% compared to 35.2% in the second quarter of fiscal 1999. The effective income tax rate in the first six months of fiscal 2000 was 30.1% compared to 35.1% in the prior year period. The tax rate for the first six months of fiscal 2000 was favorably impacted by the $2.2 million gain on the sale of property, in which the Company recognized zero tax expense. Management estimates the annual effective tax rate for fiscal 2000 to be approximately 35%. Financial Condition Working capital decreased to $59.6 million at March 31, 2000 from $95.3 million at September 30, 1999. The decrease is primarily due to the use of cash to repay all of the debt outstanding at September 30, 1999, except for the $0.8 million of foreign debt outstanding at March 31, 2000. During the first six months of fiscal 2000, accounts receivable increased by $4.7 million as a result of the sales growth of the business. Costs and estimated earnings on long-term contracts and inventories increased in the aggregate by $5.6 million primarily due to the General Motors contract to design and build an EMC test complex and safety stock related to the West Coast plant consolidation. Accounts payable and accrued expenses decreased by $9.3 million mainly due to the timing of payments related to the September 30, 1999 divestiture of SEI. Net cash used by operating activities was $2.7 million in the first six months of fiscal 2000 compared to net cash provided by operating activities of $3.1 million in the same period of fiscal 1999. The cash used by operating activities in fiscal 2000 was primarily a result of divestiture related (SEI) payments and the above mentioned inventory requirements. On April 11, 2000, the Company entered into a new $75 million reducing revolving credit facility replacing its previous $40 million credit facility. The revolving credit facility is available for direct borrowings and/or the issuance of letters of credit. The maturity of the new bank credit facility is April 11, 2005. The new credit facility is provided by a group of five banks, led by Bank of America. Cash flow from operations and borrowings under the bank credit facility are expected to provide adequate resources to meet the Company's capital requirements and operational needs for the foreseeable future. During the first six months of fiscal 2000, the Company repurchased approximately 500,000 shares of ESCO common stock as part of its ongoing open market repurchase program. Since announcing the program in fiscal 1999, the Company has repurchased approximately 700,000 shares of the 1.3 million shares authorized under the current program. Capital expenditures were $4.4 million in the first six months of fiscal 2000 compared with $4.3 million in the comparable period of fiscal 1999. Major expenditures in the current period included manufacturing equipment used in the filtration / fluid flow business. Forward Looking Statements Statements in this report that are not strictly historical are "forward looking" statements within the meaning of the safe harbor provisions of the federal securities laws. Investors are cautioned that such statements are only predictions, and speak only as of the date of this report. Actual results may differ materially due to risks and uncertainties, which are described in the Company's Form 10-K for fiscal year 1999 and on page 41 of the 1999 Annual Report to Shareholders. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Market risks relating to the Company's operations result primarily from changes in interest rates and changes in foreign currency exchange rates. Based on the current debt structure, the exposure to interest rate risk is not material. The Company is subject to foreign currency exchange rate risk relating to receipts from customers and payments to suppliers in foreign currencies. The Company hedges foreign currency commitments by purchasing foreign currency forward contracts. PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. a) Exhibits. Exhibit Number 3(a) Restated Articles of Incorporated by reference to Incorporation Form 10-K for the fiscal year ended September 30, 1999 at Exhibit 3(a) 3(b) By laws, as amended Incorporated by reference to Form 10-K for the fiscal year ended September 30, 1991 at Exhibit 3(b) 4(a) Specimen Common Stock Certificate 4(b) Specimen Right Certificate Incorporated by reference to Exhibit B to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated February 3, 2000 4(c) Rights Agreement dated as of Incorporated by reference to September 24, 1990 (as Current Report on Form 8-K amended and restated as of dated February 3, 2000 at February 3, 2000) between at Exhibit 4.1 the Registrant and ChaseMellon Shareholder Services, L.L.C., as Rights Agent 4(d) Fifth Amendment, dated as of January 7, 2000, to the Credit Agreement dated as of September 23, 1990, as most recently amended and restated as of February 7, 1997 and as subsequently amended, among the Registrant, Defense Holding Corp., the Banks listed therein and Morgan Guaranty Trust Company of New York, as agent. 4(e) Amended Certificate of Designation, Preferences and Rights of Series A Participating Cumulative Preferred Stock of the Registrant b) Reports on Form 8-K. The Company filed a Current Report on Form 8-K, dated February 3, 2000, during the quarter ended March 31, 2000 which reported the restatement and amendment of the Company's shareholder rights plan under "Item 5. Other Events" and "Item 7. Financial Statements, Pro Forma Financial Information and Exhibits". 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 ELECTRONICS CORPORATION /s/ Gary E. Muenster Gary E. Muenster Vice President and Corporate Controller (As duly authorized officer and principal accounting officer of the registrant) Dated: May 12, 2000