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, 1997 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) 213-7 200 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, 1998: 11,844,478 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> Three Months Ended December 31, ------------------ 1997 1996 ---- ---- <S> <C> <C> Net sales $ 78,077 68,899 ------- ------ Costs and expenses: Cost of sales 56,048 51,939 Selling, general and administrative expenses15,532 12,951 Interest expense 1,691 277 Other, net 1,071 730 ------ ------ Total costs and expenses 74,342 65,897 ------ ------ Earnings before income taxes 3,735 3,002 Income tax expense 1,125 820 ------ ------ Net earnings $ 2,610 2,182 ======= ====== Earnings per share: - Basic $ .22 .18 ======= ====== - Diluted .21 .18 ======= ====== See accompanying notes to condensed consolidated financial statements. </TABLE> ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Dollars in thousands) <TABLE> December 31, September 30, 1997 1997 <S> <C> <C> Assets (Unaudited) Current assets: Cash and cash equivalents $ 1,735 5,818 Accounts receivable, less allowance for doubtful accounts of $415 and $462, respectively 44,107 48,612 Costs and estimated earnings on long-term contracts, less progress billings of $60,774 and $56,451, respectively 52,373 54,633 Inventories 66,098 45,110 Other current assets 3,933 2,794 ------- ------- Total current assets 168,246 156,967 ------- ------- Property, plant and equipment, at cost 138,765 135,002 Less accumulated depreciation and amortization 42,557 38,470 ------- ------- Net property, plant and equipment 96,208 96,532 Excess of cost over net assets of purchased businesses, less accumulated amortization of $3,152 and $2,735, respectively 57,647 54,996 Deferred tax assets 47,451 48,510 Other assets 21,043 21,182 ------- ------- $390,595 378,187 ======= ======= Liabilities and Shareholders' Equity Current liabilities: Short-term borrowings and current maturities of long-term debt $ 44,000 25,500 Accounts payable 33,061 38,238 Advance payments on long-term contracts, less costs incurred of $1,422 and $1,624, respectively 5,548 6,348 Accrued expenses and other current liabilities 24,481 24,590 ------- ------- Total current liabilities 107,090 94,676 ------- ------- Other liabilities 26,535 28,548 Long-term debt 49,000 50,000 ------- ------- Total liabilities 182,625 173,224 ------- ------- 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 12,490,674 and 12,478,328 shares, respectively 125 125 Additional paid-in capital 195,115 194,663 Retained earnings since elimination of deficit of $60,798 at September 30, 1993 18,591 15,981 Cumulative foreign currency translation adjustment (101) 196 Minimum pension liability (181) (181) ------- ------- 213,549 210,784 Less treasury stock, at cost; 656,445 and 689,945 common shares, respectively (5,579) (5,821) ------- ------- Total shareholders' equity 207,970 204,963 ------- ------- $390,595 378,187 ======= ======= See accompanying notes to condensed consolidated financial statements. </TABLE> ESCO ELECTRONICS CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited) (Dollars in thousands) <TABLE> Three Months Ended December 31, ------------------ 1997 1996 ---- ---- <S> <C> <C> Cash flows from operating activities: Net earnings $ 2,610 2,182 Adjustments to reconcile net earnings to net cash used by operating activities: Depreciation and amortization 4,773 2,558 Changes in operating working capital (21,448) (6,374) Other 219 365 ------- ------- Net cash used by operating activities(13,846) (1,269) ------- ------- Cash flows from investing activities: Capital expenditures (3,747) (1,753) Acquisition of business, less cash acquired (3,460) - ------- ------- Net cash used by investing activities (7,207) (1,753) ------- ------- Cash flows from financing activities: Net increase in short-term borrowings 18,500 - Principal payments on long-term debt (1,000) (325) Other (530) 15 ------- ------- Net cash provided (used) by financing activities 16,970 (310) ------- ------- Net decrease in cash and cash equivalents (4,083) (3,332) Cash and cash equivalents, beginning of period 5,818 22,209 ------- ------- Cash and cash equivalents, end of period $ 1,735 18,877 ====== ====== See accompanying notes to condensed consolidated financial statements. </TABLE> 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, 1997. Certain prior year amounts have been reclassified to conform with the fiscal 1998 presentation. The results for the three month period ended December 31, 1997 are not necessarily indicative of the results for the entire 1998 fiscal year. 2. Earnings Per Share During the three months ended December 31, 1997, the Company adopted the provisions of Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." Basic earnings per share is calculated using the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated using the weighted average number of common shares outstanding during the period plus shares issuable upon the assumed exercise of dilutive common share options and performance shares by using the treasury stock method. The number of shares used in the calculation of earnings per share for each period presented is as follows (in thousands): <TABLE> Three Months Ended December 31, ------------------ 1997 1996 ---- ---- <S> <C> <C> Weighted Average Shares Outstanding - Basic 11,818 11,818 Dilutive Options and Performance Shares 764 227 ------ ------ Adjusted Shares - Diluted 12,582 12,045 ====== ====== </TABLE> Options to purchase 22,750 shares of common stock at $18.00 per share were outstanding during the quarter ended December 31, 1997, but were not included in the computation of diluted EPS because the options' exercise price was greater than the average market price of the common shares. These options expire in 2007. At December 31, 1996 all outstanding options were included in the computation of dilutive EPS. Approximately 167,000 and 498,000 performance shares were outstanding but unearned at December 31, 1997, and 1996, 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): <TABLE> December 31, September 30, 1997 1997 ------------ ------------- <S> <C> <C> Finished Goods $ 8,923 8,542 Work in process, including long-term contracts 42,146 22,971 Raw materials 15,029 13,597 ------ ------ Total inventories $ 66,098 45,110 ======== ====== </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 $2.7 million and $3.2 million at December 31, 1997 and September 30, 1997, respectively. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations - Three months ended December 31, 1997 compared with three months ended December 31, 1996. Net sales of $78.1 million for the first quarter of fiscal 1998 increased $9.2 million (13.3%) from net sales of $68.9 million for the first quarter of fiscal 1997. The sales increase in the current quarter reflects additional commercial sales resulting from the Filtertek acquisition ($18.0 million) and higher volume at PTI and Rantec, offset by lower defense sales at Systems & Electronics Inc. (SEI). Commercial sales were $46.7 million (59.8%) and defense sales were $31.4 million (40.2%) for the first quarter of fiscal 1998, compared with commercial and defense sales of $26.5 million (38.5%) and $42.4 million (61.5%), respectively, in the first quarter of fiscal 1997. The Filtertek acquisition effectively increases the commercial content of the Company's annualized sales in fiscal 1998 to over 50%. Order backlog at December 31, 1997 was $238.9 million, compared with $228.2 million at September 30, 1997. During the fiscal 1998 first quarter, new orders aggregating $88.8 million were received, compared with $57.1 million in the first quarter of fiscal 1997. The increase in fiscal 1998 orders includes $18.9 million related to Filtertek. The most significant orders in the current period were for filtration/fluid flow products, airborne radar systems and fire support mission equipment. The gross profit percentage was 28.2% in the first quarter of fiscal 1998 and 24.6% in the first quarter of fiscal 1997. The margin improvement in the first quarter of fiscal 1998 is due to an improved sales mix throughout the Company. Selling, general and administrative (SG&A) expenses for the first quarter of fiscal 1998 were $15.5 million, or 19.9% of net sales, compared with $13 million, or 18.8% of net sales, for the same period a year ago. The increase in fiscal 1998 SG&A expenses is primarily due to the addition of Filtertek. Interest expense increased to $1.7 million in fiscal 1998 from $.3 million in fiscal 1997 as a result of higher average outstanding borrowings. A significant amount of the outstanding borrowings in 1998 were incurred in February 1997 with the acquisition of Filtertek. Other costs and expenses, net, were $1.1 million in the first quarter of fiscal 1998 compared to $.7 million in the same period of fiscal 1997. The increase in fiscal 1998 primarily reflects additional goodwill amortization expense associated with the acquisition of Filtertek in February 1997. The effective income tax rate in the first quarter of fiscal 1998 was 30.1% compared to 27.3% in the first quarter of fiscal 1997. The fiscal 1998 effective tax rate was favorably impacted by the earnings contributed from the Company's Puerto Rican operations, and refunds received relating to state and local taxes. The effective tax rate during the first quarter of fiscal 1997 was favorably impacted by the settlement of a state tax liability. Management estimates the annual effective tax rate for fiscal year 1998 to be approximately 34%. Financial Condition Working capital decreased to $61.2 million at December 31, 1997 from $62.3 million at September 30, 1997. During the first three months of fiscal 1998: accounts receivable decreased by $4.5 million as a result of cash collections; costs and estimated earnings on long-term contracts and inventories increased in the aggregate by $18.7 million as a result of near-term production requirements (primarily TUNNER 60K Loader); and accounts payable and accrued expenses decreased by $5.3 million through payments necessary to satisfy commitments outstanding at September 30, 1997. Net cash used by operating activities was $13.8 million in the first three months of fiscal 1998 and $1.3 million in the same period of fiscal 1997. The 1998 cash usage was primarily due to the TUNNER 60K Loader inventory requirements at SEI. Capital expenditures were $3.7 million in the first three months of fiscal 1998 compared with $1.8 million in the comparable period of fiscal 1997. Major expenditures in the current period include manufacturing equipment at Filtertek and PTI. On December 31, 1997, the Company completed the purchase of Euroshield OY for approximately $3.5 million. Euroshield, based in Eura, Finland, designs and manufactures high quality shielding products used in the electromagnetic compatibility (EMC) industry. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. a) Exhibits Exhibit Number 4 Credit Agreement dated as of September 23, 1990 (as most recently amended and restated as of February 7, 1997 and amended as of November 21, 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, 1997. 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 financial Dated: February 12, 1998 officer of the registrant)