ESCO Technologies Inc.

NEW CHIEF EXECUTIVE: 1992

19TH-CENTURY LINEAGE

Esco was spun off from Emerson Electric Co., which was established in St. Louis in 1890 to make electric motors and fans designed by a pair of Scotland-born brothers, Alexander W. Meston and Charles R. Meston. The company took the name of their financial backer, John Wesley Emerson, a Missouri judge and Union army officer. In the beginning Emerson focused on the sale of electric fans, a product that the company pioneered, but soon it applied its technology to any number of household, office, farm, and industrial products, including sewing machines, power tools, dental drills, and even player pianos. During World War II Emerson began its defense work. Just one day after the attack on Pearl Harbor, December 7, 1941, which led to the United States’ entry into the war, Emerson received a contract to manufacture aircraft gun turrets. By the end of the war, the company had completed $100 million worth of defense contracts.

During the postwar years, Emerson struggled to reestablish itself. Defense work dwindled to just $1.5 million in 1947, while the company also had to contend with giants General Electric and Westinghouse providing stiff competition in the commercial sector. Emerson launched a diversification effort in the 1950s, focusing on high-growth markets, a plan accomplished in large part through strategic acquisitions. The company also managed to build up its defense contracting, which contributed 30 percent of revenues in 1956. However, Emerson suffered a pair of setbacks in the 1960s that soured management on military work. In 1962 an aircraft fire-control systems contract was canceled, followed by the 1969 cancellation of the Cheyenne helicopter program, which in one stroke halved Emerson’s defense-related sales. Management decided that it wanted no more than 15 percent of its annual revenues tied to military work.

Emerson benefited from the military buildup during the Reagan administration of the 1980s. The company owned six subsidiaries involved in the manufacture of such equipment as radar systems, electronic test equipment for jet fighters, heavy trailers used to transport M-1 tanks, mobile bridges, launching systems for the TOW antitank missile, antisubmarine systems, and valves and filters to keep submarines quiet and less susceptible to detection. These units included St. Louis-based Electronics & Space Corp.; Southwest Mobile Systems Corp., and Distribution Control Systems Inc.; Greenlawn, New York-based Hazeltine Corp.; Calabasas, California-based Rantec Microwave and Electronics Inc.; and South El Monte, California-based Vacco Industries. By the end of the 1980s these companies combined for nearly $600 million in sales, or about 8 percent of the parent company’s $7.1 billion in total sales.

The prospects for Emerson’s military business appeared dim, however. The surprisingly sudden end to the Cold War led to a contraction in the U.S. defense budget. Further complicating matters, the company had been embroiled in controversy with the government. In January 1989 a pair of Hazeltine executives pled guilty to making false statements and defrauding the government, and the company paid $1.9 million in criminal and civil fines. The company was also having problems making progress on a new tail-end radar system for B-52 bombers that was adversely impacting relations with the U.S. Air Force. Meanwhile, Electronics & Space Corp. was accused of making false statements connected to four contracts between 1984 and 1986. This matter would be settled in May 1990 when Emerson entered a guilty plea and agreed to a $14 million settlement payment. The company’s ability to bid on Pentagon contracts was placed under review. Emerson was also having trouble with the Federal Aviation Administration over delays in building a microwave landing system for airports.

Even as Emerson’s defense operations were being reviewed by the government, the Emerson board of directors, according to the St. Louis Business Journal, “considered three alternatives: continuing the defense operations as part of Emerson, pursuing a joint venture or spinning off the business. After failing to find a joint venture partner, Emerson opted for the spinoff.” In August 1990 Emerson formed a new company that took the name Esco Electronics Corp. after the October spinoff was completed. Emerson shareholders received one Esco share for every 20 Emerson shares they owned.

Heading Esco as chairman and chief executive officer was J. Joe Adorjan, who for the previous three years had overseen Emerson’s defense subsidiaries. The company was listed on the New York Stock Exchange, where it was met with a tepid welcome. After opening at $5.25 a share, the price of Esco stock quickly tumbled. Investors concluded that Emerson was “discarding something that they can’t sell,” according to defense analyst Howard Rubell, quoted by Reuters. He added, “If Emerson thought this was such a good business, it would keep it.”

COMPANY PERSPECTIVES

Esco Technologies is a proven supplier of special purpose communications systems for electric, gas and water utilities, including hardware and software to support advanced metering applications. In addition, the Company provides engineered filtration products to the transportation, healthcare and process markets worldwide, and is the industry leader in RF shielding and EMC test products.

Despite the Persian Gulf War, military budgets continued to decline, leading to steady layoffs at Esco in 1991. When the fiscal year came to a close in September 1991, the company posted a net loss of $67.4 million, much of it related to charges taken for contract cancellations and cost overruns. Essentially the only nondefense assets the company had to offer were a pair of communications products: a meter reading communications system and video surveillance technology that had monitored automated teller machines and stores. Esco was interested in diversifying further into commercial businesses, but was cautious. “It is our view,” Adorjan told the St. Louis Post-Dispatch, “that if you do an autopsy of dead corporations in the defense industry in the next few years, one of the primary causes of death will be their rush into commercial business.”

NEW CHIEF EXECUTIVE: 1992

In October 1992 Adorjan resigned to return to Emerson, where he took over as president. He was replaced as chairman and CEO at Esco by Dennis J. Moore, the company’s president and chief operating officer. A 1961 graduate of the U.S. Naval Academy, Moore served as a U.S. Navy pilot in the Vietnam War. After his discharge in 1967 he went to work in the aerospace industry. Twenty years later he moved to St. Louis to become president of Electronics & Space Corp., and in 1989 became a group vice-president of Emerson’s defense subsidiaries. Under Moore’s guidance, Esco began to execute a diversification plan. While remaining a defense contractor, the company looked to pursue areas that fit in with its capabilities. Five areas were targeted: valves and filters; utility communications; test instrumentation; communications and antennas; and motion control. The company looked to grow internally by adapting some of its defense-based technologies to commercial use and externally through strategic acquisitions.

The first step taken in the diversification plan through external means was the $28 million September 1992 acquisition of Textron Filtration Systems, a California company that manufactured commercial and industrial filtration systems and parts used by chemical-processing, fluid-power, and aviation customers. The operation, renamed PTI Technologies Inc., was meant to complement Esco’s Vacco Industries unit, which made submarine filters and valves. Next, in March 1993, Esco bought Electro-Mechanics Company, Inc. (EMCO), in a $4.6 million deal that added to the Rantec test business. Esco then added more filter assets to PTI in December 1993 with the $7.6 million acquisition of Schumacher Filters, Ltd., a U.K. company that gave PTI a European presence. A year later Esco acquired Ray Proof North America, maker of RF shielding, a material that prevented damage from electromagnetic radiation. Ray Proof was then joined with Rantec and EMCO to establish EMC Test Systems.

Esco enjoyed a strong year in fiscal 1993. Sales grew 13 percent to $459.7 million and net income increased 271 percent to $5.2 million. Nevertheless, a few months later the company was forced to make layoffs at Electronics & Space because of continuing defense cuts. While defense work remained important, Esco in the second half of the 1990s began divesting defense assets while adding to its commercial business. “[Defense] was a good business for an operating unit with a $10 billion corporation,” Moore told Investor’s Business Daily to explain why Esco was too small to compete against such giant defense contractors as Raytheon. “But the projects are just too large and unwieldy for us. If you experience some delays, you could end up taking a $10 million to $15 million hit.”

Hazeltine was sold to GEC-Marconi Electronics Systems Corporation for $110 million in cash in July 1996. As a result, defense work fell to about 70 percent of total revenues in fiscal 1996. Esco then beefed up its filter business with the $92 million acquisition of Filter-Tek and the thermoform packaging business of Schawk, Inc., in February 1997. This move pushed Esco’s commercial sales past the 50 percent mark on an annualized basis. In fiscal 1997 revenues totaled $378.5 million and the company recorded net earnings of $11.8 million. While the defense business returned to profitability, Esco continued to take steps to exit the field while adding commercial assets.

In July 1998 Esco acquired Advanced Membrane Technology, which was then incorporated into PTI. This addition helped to fuel further growth in commercial sales, which increased to 57 percent of Esco’s total sales of $365.1 million in fiscal 1998. As the year came to a close the company hired J.P. Morgan to provide advice on whether to divest Systems & Electronics, Esco’s largest remaining defense unit. Because business conditions were not favorable, Esco elected to hold onto the subsidiary until September 1999 when it was sold for $92 million in cash to Engineered Support Systems, Inc. By unloading Systems & Electronics, Esco completed its transformation from a company that derived 95 percent of revenues from defense contracts in 1990 to one that had defense sales in the 10 percent range. Esco could devote more attention to its new major businesses, filtration/fluid flow, test, and communications.

KEY DATES

1990:: Emerson Electric spins off Esco Electronics Corp.
1992:: Dennis J. Moore is named chairman and CEO.
1996:: Hazeltine unit is sold.
1999:: Systems & Electronics is sold.
2000:: Name changes to ESCO Technologies Inc.
2003:: Moore retires.

NEW CENTURY, NEW NAME

In keeping with its new focus, Esco changed its name to ESCO Technologies, Inc., in 2000. All three major business areas enjoyed double-digit sales growth, as overall sales improved 23 percent to $300.2 million, compared to $243.3 million the year before when adjusted for the sale of Systems & Electronics. The company enjoyed internal growth through the introduction of new products and completed a pair of acquisitions over the course of the year. In March 2000, Esco bought the $7 million-per-year space products business of Eaton Corp., a California unit that manufactured fluid control components for launchers and aircraft. A month later Esco spent $25 million to acquire the Curran Company and an affiliated company, Lindren, Inc., suppliers of radio frequency shielding products used in electronics, communications systems, and medical equipment. The assets were folded into Esco’s Test segment.

Esco completed another acquisition in 2001, paying $13.5 million for BEA Filtri S.p.A., an Italian supplier of microfiltration products to pharmaceutical, food and beverage, healthcare, and petrochemical customers. Not only did Esco add filtration products, it increased its European presence. In fiscal 2001, sales improved 15 percent to $344.9 million and earnings grew to $30.1 million. A year later sales reached $367.5 million and the company recorded net earnings of $21.8 million.

At the start of fiscal 2003, in October 2002, Moore turned over the chief executive officer role to Victor L. Richey, Jr. A former military intelligence officer, Richey had joined Emerson in 1985 and was part of the Esco spinoff. As a senior executive he made a valuable contribution to Esco’s successful transition from defense to commercial work. He assumed the chairmanship as well in April 2003 when Moore retired as planned.

With Richey at the helm, Esco continued to make acquisitions to grow the business. In January 2003, the company paid $4 million for Austin Acoustics System, Inc., a Texas company that produced noise control chambers for the test, medical, and broadcast and music industries. The assets were added to Esco’s Test segment. Later in the year, Esco divested its Power Systems and Microfiltration businesses for a combined $29.5 million. In addition, in fiscal 2003, Esco closed a filtration plant in Puerto Rico, transferring the production to other plants in Mexico and Illinois. Wall Street approved of the moves, as the price of Esco stock improved about 80 percent over the course of fiscal 2004.

More acquisitions followed. In November 2005, Esco acquired Nexus Energy Software, Inc., for $28.5 million, adding energy data management software to the company’s meter reading systems. In February 2006, Esco paid $67.5 million for Hexagram, Inc., a radio frequency fixed-network automatic meter-reading company. When fiscal 2006 came to a close, Esco recorded an increase in revenues to $458.9 million and net income to $31.3 million.

Ed Dinger