1
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the quarter ended January 31, 1995 Commission file number 0-13880
ENGINEERED SUPPORT SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
Missouri 43-1313242
(State of Incorporation) (IRS Employer Identification Number)
1270 North Price Road, St. Louis, Missouri 63132
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (314) 993-5880
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, $.01 par value,
outstanding at February 28, 1995 was 3,167,304.
2
ENGINEERED SUPPORT SYSTEMS, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of January 31, 1995
and October 31, 1994 3
Condensed Consolidated Statements of Income for the three
months ended January 31, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II - Other Information
Items 1-6 9
Signatures 10
Exhibits 11
3
ENGINEERED SUPPORT SYSTEMS, INC.
Condensed Consolidated Balance Sheets
January 31 October 31
1995 1994
------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash $ 26,911 $ 417,748
Accounts receivable 3,508,846 5,614,224
Contracts in process and inventories 9,709,828 9,544,444
Other current assets 689,106 612,666
------------ ------------
Total Current Assets 13,934,691 16,189,082
Property, plant and equipment, less accumulated
depreciation of $10,500,227 and $10,127,359 14,986,497 15,289,970
Intangible assets 1,622,449 1,693,163
Other assets 1,240,865 1,213,544
------------ ------------
Total assets $ 31,784,502 $ 34,385,759
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 3,451,368 $ 5,042,399
Current maturities of long-term debt 832,373 855,897
Accounts payable 4,395,835 4,705,367
Other current liabilities 1,687,995 2,464,999
------------ ------------
Total Current Liabilities 10,367,571 13,068,662
Long-term debt 3,618,640 3,848,419
Deferred income taxes 2,834,818 2,834,818
ESOP guaranteed bank loan 1,266,900 1,303,800
Shareholders' Equity
Common stock, par value $.01 per share;
10,000,000 shares authorized; 3,391,898
shares issued 33,919 33,919
Additional paid-in capital 7,670,152 7,670,152
Retained earnings 8,102,978 7,773,365
------------ ------------
15,807,049 15,477,436
Less ESOP guaranteed bank loan 1,266,900 1,303,800
Less treasury stock at cost, 224,594 shares 843,576 843,576
------------ ------------
13,696,573 13,330,060
------------ ------------
Total Liabilities and Shareholders' Equity $ 31,784,502 $ 34,385,759
============ ============
See notes to condensed consolidated financial statements.
4
ENGINEERED SUPPORT SYSTEMS, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended
January 31
-----------------------------------
1995 1994
------------ ------------
Net revenues $ 15,343,691 $ 11,433,038
Cost of revenues 13,139,770 9,694,668
------------ ------------
Gross profit 2,203,921 1,738,370
Selling, general and
administrative expense 1,450,023 1,536,189
------------ ------------
Income from operations 753,898 202,181
Interest expense 204,285 153,286
------------ ------------
Income before income taxes 549,613 48,895
Income tax provision 220,000 20,000
------------ ------------
Net income $ 329,613 $ 28,895
============ ============
Net income per share $ .10 $ .01
===== =====
See notes to condensed consolidated financial statements.
5
ENGINEERED SUPPORT SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flow
(Unaudited)
Three Months Ended
January 31
----------------------------
1995 1994
------------- -------------
From operating activities:
Net income $ 329,613 $ 28,895
Depreciation and amortization 472,677 501,571
------------- --------------
Cash provided (used) before changes in
operating assets and liabilities 802,290 530,466
Net (increase) decrease in non-cash
current assets 1,863,554 (102,601)
Net increase (decrease) in non-cash current
liabilities (1,086,536) (1,047,153)
(Increase) decrease in other assets (53,871) (264,592)
------------- --------------
Net cash provided by (used in) operating
activities 1,525,437 (883,880)
------------- --------------
From investing activities:
Additions to property, plant and equipment (140,790) (525,472)
Disposal of property, plant and equipment 68,850
------------- --------------
Net cash provided by (used in) investing
activities (71,940) (525,472)
------------- --------------
From financing activities:
Net borrowing (payments) under
line-of-credit agreements (1,591,031) 1,460,872
Proceeds of long-term debt 1,500,000
Payments of long-term debt (253,303) (1,723,072)
Exercise of stock options 53,262
------------- --------------
Net cash provided by (used in) financing
activities (1,844,334) 1,291,062
------------- --------------
Net increase (decrease) in cash (390,837) (118,290)
Cash at beginning of period 417,748 265,015
------------- --------------
Cash at end of period $ 26,911 $ 146,725
============== ==============
See notes to condensed consolidated financial statements.
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ENGINEERED SUPPORT SYSTEMS, INC.
Notes to Condensed Consolidated
Financial Statements (Unaudited)
January 31, 1995
Note A - Basis of Presentation
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit. In the opinion of management, all
adjustments (including normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three
month period ended January 31, 1995 are not necessarily indicative of the
results to be expected for the entire fiscal year.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. For further information,
refer to the consolidated financial statements and footnotes thereto
included in the Company's annual report to shareholders for the year ended
October 31, 1994.
Note B - Net Income per Share
Net income per share for the three months ended January 31, 1995 and 1994
is based on the weighted average number of common and common equivalent
shares outstanding of 3,370,632 and 3,567,999, respectively. Common
equivalent shares represent common stock options as computed based on the
treasury stock method. Primary and fully diluted earnings per share are
substantially the same for each of the periods presented.
Note C - Long-Term Debt
In December 1994, the Company retired the outstanding balance of the
Industrial Development Refunding Revenue Bonds with proceeds generated upon
restructuring its existing bank term loan. As a result, the balance of the
term loan increased from $865,091 at October 31, 1994 to $2,768,088. The
restructured term loan bears interest at 1.75% above the bank's prime rate
and is payable in 45 monthly installments of $60,402 plus interest
commencing January 1, 1995.
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Note D - Contracts in Process and Inventories
Contracts in process and inventories are comprised of the following:
January 31, 1995 October 31, 1994
---------------- ----------------
Raw materials $1,856,290 $1,790,459
Work-in-process 65,848 91,945
Finished goods 335,733 241,730
Inventories substantially applicable to
government contracts in process, less
progress payments of $13,200,979 and
$11,682,475 7,451,957 7,420,310
---------- ---------
$9,709,828 $9,544,444
========== ==========
The contracts in process and inventories of EASI represent accumulated
contract costs, estimated earnings thereon based upon the percentage of
completion method and contract inventories reduced by the contract value of
delivered items. ESP inventories are valued at the lower of cost or market
using the first-in, first-out method.
8
ENGINEERED SUPPORT SYSTEMS, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Revenues increased 34% in the first quarter of 1995 to $15.3 million from
$11.4 million in the first quarter of 1994. The increase in revenues was
generated primarily by the Company's defense subsidiary, Engineered Air
Systems, Inc. (EASI). After several years of significant first article
testing and development, EASI is now in full production on several major
contracts, primarily its MA-3D and C-5 flight line air conditioners.
Gross profit for the first quarter of 1995 increased $0.5 million, or 27%,
over the amount for the comparable 1994 period primarily reflecting an
increase in production volume at EASI. The gross margin for the first
quarter of 1995 was 14.4% as compared to 15.2% for the first quarter of
1994.
Selling, general and administrative expense was $1.45 million and $1.54
million in the first quarter of 1995 and 1994, respectively. The 5%
decrease in 1995 is due to expense reductions at ESP.
Net interest expense increased $51,000, or 33%, in the first quarter of
1995 as compared with the first quarter of 1994. This was primarily the
result of increased borrowing levels due to significant capital
expenditures by ESP in 1994.
Liquidity and Capital Resources
At January 31, 1995, the Company's working capital and ratio of current
assets to current liabilities were $3.6 million and 1.34 to 1 as compared
to $3.1 million and 1.24 to 1 at October 31, 1994. This improvement is
primarily a result of the impact of quarterly earnings. As of January 31,
1995, the Company had $2.3 million of unused credit related to its loan
agreement.
Business and Market Considerations
As of January 31, 1995, EASI's funded backlog of defense orders was $92
million compared to $59 million a year ago. Options to existing contracts
total approximately $130 million as of the end of the first quarter.
Historically, the Company has been heavily dependent on the U.S. Government
for business. However, because of declining defense budgets and increased
competition within the current defense market, the Company began a plan of
diversification in 1993 with the acquisition of ESP. This acquisition
provided expansion into the commercial marketplace. Management intends to
continue to pursue new acquisitions and business opportunities to
complement existing product lines and provide strategic diversification.
9
PART II
Other Information
Item 1-5 Not applicable
Item 6 (a) Exhibits
4. (i) Indenture of Trust dated as of April 1, 1990 by and between the
Industrial Development Authority of St. Louis County, Missouri (the
Issuer) and Mark Twain Bank, and Loan Agreement dated April 1, 1990
by and between the Issuer and Engineered Air Systems, Inc.
evidencing long-term debt of the Company is incorporated herein by
reference from Form 10-K Annual Report filed January 29, 1991.
(ii) Registration Statement Number 33-14504 on Form S-8 dated May 22,
1987 for the registration of 340,000 shares of Engineered Support
Systems, Inc. common stock, $.01 par value, pursuant to the Amended
and Restated Engineered Air Systems, Inc. Employee Equity Plan, is
incorporated herein by reference.
(iii) Registration Statement Number 33-36818 on Form S-8 dated October 3,
1990, for the registration of 150,000 shares of Engineered Support
Systems, Inc. common stock, $.01 par value, pursuant to the
Engineered Air Systems, Inc. 1990 Stock Equity Plan, is incorporated
herein by reference.
(iv) Registration Statement Number 33-77340 on Form S-8 dated March 25,
1994 for the registration of 150,000 shares of Engineered Support
Systems, Inc. common stock, $.01 par value, pursuant to the
Engineered Air Systems, Inc. 1991 Stock Equity Plan, is incorporated
herein by reference.
(v) Registration Statement Number 33-77342 on Form S-8 dated March 25,
1994 for the registration of 30,000 shares of Engineered Support
Systems, Inc. common stock, $.01 par value, pursuant to the
Engineered Support Systems, Inc. 1992 Stock Option Plan for
Non-employee Directors, is incorporated herein by reference.
(vi) Registration Statement Number 33-77338 on Form S-8 dated March 25,
1994 for the registration of 150,000 shares of Engineered Support
Systems, Inc. common stock, $.01 par value, pursuant to the
Engineered Support Systems, Inc. 1993 Stock Option Plan, is
incorporated herein by reference.
11. Statement Re: Computation of Net Income Per Share.
(b) No reports on Form 8-K were filed during the quarter ended January 31,
1995.
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SIGNATURES
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.
ENGINEERED SUPPORT SYSTEMS, INC.
Date: March 15, 1995 By: /s/ MICHAEL F. SHANAHAN SR.
-------------- --------------------------------------
MICHAEL F. SHANAHAN SR.
Chairman of the Board, President
and Chief Executive Officer
Date: March 15, 1995 By: /s/ GARY C. GERHARDT
-------------- --------------------------------------
GARY C. GERHARDT
Executive Vice President and
Chief Financial Officer
11
Exhibit 11
ENGINEERED SUPPORT SYSTEMS, INC.
Statement Re: Computation of Net Income Per Share
Three Months Ended
January 31
----------------------------
1995 1994
-------------- -------------
NET INCOME $ 329,613 $ 28,895
============= ============
NET INCOME PER SHARE
Average shares outstanding 3,167,304 3,358,947
============= ============
Net income $ .10 $ .01
============= ============
PRIMARY EARNINGS PER SHARE
Average shares outstanding 3,167,304 3,358,947
Net effect of dilutive
stock options (1) 203,328 208,925
------------- ------------
3,370,632 3,567,872
============= ============
Net income $ .10 $ .01
============= ============
FULLY DILUTED EARNING PER SHARE
Average shares outstanding 3,167,304 3,358,947
Net effect of dilutive stock
options (1) 203,328 209,052
------------- ------------
3,370,632 3,567,999
============= ============
Net income $ .10 $ .01
============= ============
(1) Based on the treasury stock method