--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 December 31, 1996 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 Number of common stock trust receipts outstanding at January 31, 1997: 11,806,997 receipts. PART I. FINANCIAL INFORMATION Item 1. Financial Statements ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited) (Dollars in thousands, except per share amounts) <TABLE> <CAPTION> Three Months Ended December 31, 1996 1995 <S> <C> <C> Net sales $ 68,899 112,610 Costs and expenses: Cost of sales 51,939 89,190 Selling, general and administrative expenses 12,951 16,891 Interest expense 277 1,389 Other, net 730 1,756 Total costs and expenses 65,897 109,226 Earnings before income taxes 3,002 3,384 Income tax expense 820 1,462 Net earnings $ 2,182 1,922 Earnings per share, primary and fully diluted $ .18 .17 </TABLE> See accompanying notes to condensed consolidated financial statements. ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollars in thousands) <TABLE> <CAPTION> December 31, September 30, 1996 1996 <S> <C> <C> Assets(Unaudited) Current assets: Cash and cash equivalents $ 18,877 22,209 Accounts receivable, less allowance for doubtful accounts of $320 and $273, respectively 27,228 34,664 Costs and estimated earnings on long-term contracts, less progress billings of $68,646 and $70,671, respectively 52,987 51,585 Inventories 45,848 51,187 Other current assets 2,874 3,005 Total current assets 147,814 162,650 Property, plant and equipment, at cost 82,460 80,351 Less accumulated depreciation and amortization 28,747 26,325 Net property, plant and equipment 53,713 54,026 Excess of cost over net assets of purchased businesses, less accumulated amortization of $1,736 and $1,597 respectively 20,256 20,395 Deferred tax asset 53,147 53,326 Other assets 16,898 17,435 $291,828 307,832 Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings and current maturities of long-term debt $ 1,300 1,300 Accounts payable 27,347 40,057 Advance payments on long-term contracts, less costs incurred of $15,333 and $5,478, respectively 7,057 8,336 Accrued expenses and other current liabilities 22,882 26,771 Total current liabilities 58,586 76,464 Other liabilities 28,793 28,860
Long-term debt 11,050 11,375 Total liabilities 98,429 116,699 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 12,416,216 and 12,415,346 shares, respectively 124 124 Additional paid-in capital 193,147 192,967 Retained earnings since elimination of deficit of $60,798 at September 30, 1993 6,366 4,184 Cumulative foreign currency translation adjustment 516 107 Minimum pension liability (1,869) (1,869) 198,284 195,513 Less treasury stock, at cost; 617,045 and 566,622 common shares, respectively (4,885) (4,380) Total shareholders' equity 193,399 191,133 $ 291,828 307,832 </TABLE> See accompanying notes to condensed consolidated financial statements. ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands) [CAPTION] <TABLE> Three Months Ended December 31, 1996 1995 <S> <C> <C> Cash flows from operating activities: Net earnings $ 2,182 1,922 Adjustments to reconcile net earnings to net cash used by operating activities: Depreciation and amortization 2,558 3,545 Changes in operating working capital (6,374) (13,135) Other 365 1,093 Net cash used by operating activities (1,269) (6,575) Cash flows from investing activities: Capital expenditures (1,753) (2,176) Cash flows from financing activities: Net increase in short-term borrowings 12,500 Principal payments on long-term debt (325) (518) Other 15 25 Net cash provided (used) by financing activities (310) 12,007 Net increase (decrease) in cash and cash equivalents (3,332) 3,256 Cash and cash equivalents at beginning of period 22,209 320 Cash and cash equivalents at end of period $ 18,877 3,576 </TABLE> See accompanying notes to condensed consolidated financial statements. ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Basis of Presentation The accompanying condensed 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 condensed 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, 1996. Certain prior year amounts have been reclassified to conform with the fiscal 1997 presentation. The results for the three month period ended December 31, 1996 are not necessarily indicative of the results for the entire 1997 fiscal year. 2. Earnings Per Share Earnings per share are based on the weighted average number of common shares outstanding plus shares issuable upon the assumed exercise of dilutive common share options and performance shares by using the treasury stock method. For the three month period ended December 31, 1996, primary and fully diluted earnings per share are computed using 12,044,760 and 12,055,254 common shares and common share equivalents outstanding, respectively. For the quarter ended December 31, 1995, primary and fully diluted earnings per share are computed using 11,450,808 and 11,519,743 common shares and common share equivalents outstanding, respectively. 3. Inventories Inventories consist of the following (dollars in thousands): <TABLE> <CAPTION> December 31, September 30, 1996 1996 <S> <C> <C> Finished Goods $ 5,669 5,927 Work in process, including long-term contracts 26,857 32,071 Raw materials 13,322 13,189 Total inventories $ 45,848 51,187 </TABLE> Under the contractual arrangements by which progress payments are received, the U.S. Government has a security interest in the inventories associated with specific contracts. Inventories are net of progress payment receipts of $5.3 million and $1.2 million at December 31, 1996 and September 30, 1996, respectively. Hazeltine Divestiture 1996 On July 22, 1996, the Company completed the sale of its Hazeltine subsidiary to GEC-Marconi Electronic Systems Corporation (GEC). The Company sold 100% of the common stock of Hazeltine for $110 million in cash. Certain assets and liabilities of Hazeltine were retained by the Company. Included in the condensed consolidated statement of operations for the three months ended December 31, 1995 are the operating results of Hazeltine prior to its divestiture as follows (dollars in thousands): <TABLE> <S> <C> Net sales $ 27,493 Cost of sales 21,953 Selling, general and administrative expenses 3,730 Other costs and expenses, net 203 Earnings before income taxes $ 1,607 </TABLE> Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations - Three months ended December 31, 1996 compared with three months ended December 31, 1995. Net sales of $68.9 million for the first quarter of fiscal 1997 decreased $43.7 million (38.8%) from net sales of $112.6 million for the first quarter of fiscal 1996. The decrease was primarily due to the sale of Hazeltine in July 1996. Net sales at the remainder of the Company s operating units decreased approximately $16 million due to lower defense sales at Systems & Electronics Inc. (SEI) in the current period. Defense sales were $42.4 million and commercial sales were $26.5 million for the first quarter of fiscal 1997, compared with defense and commercial sales of $83 million and $29.6 million, respectively, in the first quarter of fiscal 1996. Hazeltine s defense and commercial sales were $24.3 million and $3.2 million, respectively in the first quarter of fiscal 1996. Adjusted for the sale of Hazeltine, prior year first quarter defense and commercial sales were $58.7 million and $26.4 million, respectively. The backlog of firm orders at December 31, 1996 was $234.9 million, compared with $246.7 million at September 30, 1996. During the first quarter of fiscal 1997, new orders aggregating $57.1 million were received, compared with $71.5 million in the first quarter of fiscal 1996, excluding Hazeltine. First quarter fiscal 1996 orders, as reported including Hazeltine, were $108.5 million. The most significant orders in the current period were for filtration/fluid flow products, airborne radar systems, and integrated mail handling and sorting systems. The gross profit percentage was 24.6% in the first quarter of fiscal 1997 and 20.8% in the first quarter of fiscal 1996. The gross profit percentage in the first quarter fiscal 1996 excluding Hazeltine was 21%. The fiscal 1997 first quarter gross profit percentage increased from fiscal 1996 due to an improved sales mix in both the defense and commercial segments. Selling, general and administrative expenses for the first quarter of fiscal 1997 were $13 million, or 18.8% of net sales, compared with $16.9 million, or 15% of net sales, for the same period a year ago. Excluding Hazeltine, prior year first quarter selling, general and administrative expense was $13.2 million or 15.5% of adjusted sales. The fiscal 1997 first quarter selling, general and administrative expenses increased as a percentage of adjusted sales due to the reduced sales volume in first quarter fiscal 1997. Interest expense decreased to $.3 million from $1.4 million as a result of significantly lower borrowings in the first quarter of fiscal 1997 as compared to the first quarter of fiscal 1996. A significant amount of fiscal 1996 borrowings was repaid in July 1996 with a portion of the proceeds from the sale of Hazeltine. Other costs and expenses, net, were $.7 million in the first quarter of fiscal 1997 compared to $1.8 million in the same period of fiscal 1996. The decrease in fiscal 1997 partially reflects the absence of amortization of a contract guarantee fee previously paid to Emerson Electric Co. The effective income tax rate in the first quarter of fiscal 1997 was 27.3% compared with 43.2% for the first quarter of fiscal 1996. The effective income tax rate in the first quarter of fiscal 1997 was favorably impacted by the settlement of a state tax liability assumed by the Company upon the fiscal 1996 divestiture of Hazeltine. Management estimates the annual effective tax rate for fiscal year 1997 to be approximately 40%.The tax provision for the first quarter of fiscal 1996 was impacted by the Corporate Readjustment implemented in fiscal 1993. Consistent with the policy implemented during fiscal 1995, the Company decreased its deferred tax valuation allowance by $.8 million during the quarter ended December 31, 1995. The impact of the Federal tax provision and the reduction in the deferred tax valuation allowance were accounted for as credits to additional paid-in capital for the first quarter of fiscal 1996. Financial Condition Working capital increased to $89.2 million at December 31, 1996 from $86.2 million at September 30, 1996. During the first three months of fiscal 1997, accounts receivable decreased by $7.4 million as a result of cash collections, and costs and estimated earnings on long-term contracts and inventories decreased in the aggregate by $3.9 million as a result of near-term delivery requirements. Accounts payable and accrued expenses were reduced by $16.6 million during the first quarter of fiscal 1997 through payments necessary to satisfy commitments outstanding at September 30, 1996. Net cash used by operating activities was $1.3 million in the first three months of fiscal 1997 and $6.6 million in the same period of fiscal 1996, primarily due to the changes in operating working capital mentioned above. Capital expenditures were $1.8 million in the first three months of fiscal 1997 compared with $2.2 million in the first three months of fiscal 1996. Major expenditures in the current period include routine capitalized facility costs at SEI. In December 1996, the Company entered into a definitive agreement to acquire the Filtertek business of Schawk, Inc. for $92 million in cash plus working capital adjustments. On February 7, 1997, the Company completed the purchase of Filtertek. The purchase was financed with cash and borrowings from the Company s bank credit facility. The existing bank credit facility was amended and restructured dated February 7, 1997, to increase the available credit facility to $140 million. The maturity of the amended bank credit facility was extended to September 30, 2000. PART II. OTHER INFORMATION Item 5. Other Information. The Company, on February 7, 1997, completed its acquisition of the Filtertek and the thermoform packaging businesses of Schawk, Inc. ( Schawk ). Filtertek is a leader in the manufacture of plastic insert injection molded filter assemblies. The transaction involved the purchase of assets and stock of subsidiary corporations of Schawk. The assets included manufacturing and office facilities, equipment, inventories and accounts receivable, and the Company intends to continue the use of these assets in the on-going operation of the above-mentioned businesses. The consideration paid was $92 million in cash plus working capital adjustments, which was funded by cash and borrowings from the Company s bank credit facility. The banks involved are listed in Exhibit 4 to this Form 10-Q. The consideration was arrived at through arms-length negotiations between the parties. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits Exhibit Filed Herewith or Number Description Incorporated by Reference 2(a) Acquisition Agreement dated December 18, 1996 between the Company and Schawk, Inc. Certain schedules and attachments have been omitted due to immateriality. The Registrant agrees to furnish supplementally a copy of any omitted schedule or attachment to the Commission upon request. 2(b) First Amendment dated as of February 7, 1997 to Acquisition Agreement listed as Exhibit 2(a) above 4 Credit Agreement dated as of September 23, 1990 (as most recently amended and restated as of February 7, 1997) among the Company, Defense Holding Corp., the Banks listed therein and Morgan Guaranty Trust Company of New York, as agent (b) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended December 31, 1996. The information reported in Item 5 above satisfies the requirements of Item 2 of Form 8-K. The Company will file a Form 8-K not later than 60 days after February 22, 1997 containing the financial statement and pro forma financial information required by Item 7 of Form 8-K. 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/ Philip M. Ford Philip M. Ford Senior Vice President and Chief Financial Officer (as duly authorized officer and principal Dated: February 13, 1997 financial officer of the registrant)