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 nine months ended July 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 August 31, 1995 was 2,963,356. 2 ENGINEERED SUPPORT SYSTEMS, INC. INDEX Page ---- Part I - Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of July 31, 1995 and October 31, 1994 3 Condensed Consolidated Statements of Income for the three months and nine months ended July 31, 1995 and 1994 4 Condensed Consolidated Statements of Cash Flows for the nine months ended July 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 11 Exhibits 12 3 ENGINEERED SUPPORT SYSTEMS, INC. Condensed Consolidated Balance Sheets July 31 October 31 1995 1994 ------------ ------------ (Unaudited) ASSETS Current Assets Cash $ 125,977 $ 417,748 Accounts receivable 3,954,337 5,614,224 Contracts in process and inventories 10,228,455 9,544,444 Other current assets 950,473 612,666 ------------ ------------ Total Current Assets 15,259,242 16,189,082 Property, plant and equipment, less accumulated depreciation of $11,284,341 and $10,127,359 14,829,128 15,289,970 Intangible assets 1,481,703 1,693,163 Other assets 996,705 1,213,544 ------------ ------------ Total Assets $ 32,566,778 $ 34,385,759 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable $ 3,973,996 $ 5,042,399 Current maturities of long-term debt 827,371 855,897 Accounts payable 4,311,923 4,705,367 Other current liabilities 2,144,957 2,464,999 ------------ ------------ Total Current Liabilities 11,258,247 13,068,662 Long-term debt 2,946,892 3,848,419 Deferred income taxes 2,834,818 2,834,818 ESOP guaranteed bank loan 1,205,400 1,303,800 Shareholders' Equity Common stock, par value $.01 per share; 10,000,000 shares authorized; 3,440,461 and 3,391,898 shares issued 34,405 33,919 Additional paid-in capital 7,852,397 7,670,152 Retained earnings 9,432,912 7,773,365 ------------ ------------ 17,319,714 15,477,436 Less ESOP guaranteed bank loan 1,205,400 1,303,800 Less treasury stock at cost, 478,105 and 224,594 shares 1,792,893 843,576 ------------ ------------ 14,321,421 13,330,060 ------------ ------------ Total Liabilities and Shareholders' Equity $ 32,566,778 $ 34,385,759 ============ ============ See notes to condensed consolidated financial statements. 4 ENGINEERED SUPPORT SYSTEMS, INC. Condensed Consolidated Statements of Income (Unaudited) Three Months Ended Nine Months Ended July 31 July 31 ---------------------- --------------------- 1995 1994 1995 1994 --------- ---------- --------- ---------- Net revenues $ 15,453,962 $ 15,570,832 $ 48,452,631 $ 38,234,272 Cost of revenues 12,739,072 13,650,309 40,674,201 32,788,239 ------------ ------------ ------------ ------------ Gross profit 2,714,890 1,920,523 7,778,430 5,446,033 Selling, general and administrative expense 1,334,492 1,406,488 4,275,007 4,326,952 ------------ ------------ ------------ ------------ Income from operations 1,380,398 514,035 3,503,423 1,119,081 Interest expense 243,357 230,300 690,539 588,354 ------------ ------------ ------------ ------------ Income before income taxes 1,137,041 283,735 2,812,884 530,727 Income tax provision 453,000 111,000 1,124,000 211,000 ------------ ------------ ------------ ------------ Net income $ 684,041 $ 172,735 $ 1,688,884 $ 319,727 ============ ============ ============ ============ Net income per share $ .21 $ .05 $ .51 $ .09 ============ ============ ============ ============ See notes to condensed consolidated financial statements. 5 ENGINEERED SUPPORT SYSTEMS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended July 31 ---------------------------- 1995 1994 ------------- ------------- From operating activities: Net income $ 1,688,884 $ 319,727 Depreciation and amortization 1,451,732 1,468,511 ------------- -------------- Cash provided (used) before changes in operating assets and liabilities 3,140,616 1,788,238 Net (increase) decrease in non-cash current assets 638,068 (4,798,211) Net increase (decrease) in non-cash current liabilities (713,487) 2,913,331 (Increase) decrease in other assets 137,191 (438,868) ------------- -------------- Net cash provided by (used in) operating activities 3,202,388 (535,510) ------------- -------------- From investing activities: Additions to property, plant and equipment (772,880) (2,136,782) Disposals of property, plant and equipment 73,100 ------------- -------------- Net cash provided by (used in) investing activities (699,780) (2,136,782) ------------- -------------- From financing activities: Net borrowings (payments) under line-of-credit agreements (1,068,403) 3,312,152 Proceeds of long-term debt 1,500,000 Payments of long-term debt (930,053) (2,311,901) Purchase of treasury stock (972,586) Issuance of treasury stock 30,127 Cash dividend (29,337) Exercise of stock options 175,873 58,063 ------------- -------------- Net cash provided by (used in) financing activities (2,794,379) 2,558,314 ------------- -------------- Net increase (decrease) in cash (291,771) (113,978) Cash at beginning of period 417,748 265,015 ------------- -------------- Cash at end of period $ 125,977 $ 151,037 ============== ============== See notes to condensed consolidated financial statements. 6 ENGINEERED SUPPORT SYSTEMS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) July 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 nine month period ended July 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 is based on the weighted average number of common and common equivalent shares outstanding of 3,184,918 and 3,594,615 for the three months ended July 31, 1995 and 1994, respectively, and 3,325,425 and 3,584,863 for the nine months ended July 31, 1995 and 1994, 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 which commenced January 1, 1995. 7 Note D - Contracts in Process and Inventories Contracts in process and inventories are comprised of the following: July 31, 1995 October 31, 1994 ---------------- ---------------- Raw materials $1,926,141 $1,790,459 Work-in-process 41,416 91,945 Finished goods 490,250 241,730 Inventories substantially applicable to government contracts in process, less progress payments of $10,862,182 and $11,682,475 7,770,648 7,420,310 ---------- --------- $10,228,455 $9,544,444 =========== ========== The contracts in process and inventories of Engineered Air Systems, Inc. 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. The inventories of Engineered Specialty Plastics, Inc. 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 decreased 1% in the third quarter of 1995 to $15.5 million from $15.6 million in the third quarter of 1994, and increased 27% to $48.5 million in the first nine months of 1995 from $38.2 million for the comparable period in 1994. The Company's defense subsidiary, Engineered Air Systems, Inc. (Engineered Air), experienced a 62% increase in revenues for the first nine months of 1995. After several years of significant first article testing and development, Engineered Air has been in full production on several major contracts, primarily its MA-3D and C-5 flight line air conditioners. Revenues for Engineered Specialty Plastics, Inc. (ESP), the Company's commercial plastics subsidiary, decreased 13% during the first nine months of 1995. Significantly all of this decrease occurred during the third quarter of 1995 when its primary customer halted ESP's shipments of television cabinets for approximately six weeks due to excess inventories. ESP resumed shipments of television cabinets to this customer late in the third quarter. Gross profit for the third quarter of 1995 increased $0.8 million, or 41%, over that for the comparable 1994 period primarily reflecting a significant improvement in margins at Engineered Air. Engineered Air has realized significant margin expansion in 1995 as a result of both a very profitable mix of contracts and of a high level of capacity utilization. The consolidated gross margin for the third quarter of 1995 was 17.6% as compared to 12.3% for the third quarter of 1994. Selling, general and administrative expense was $1.34 million and $1.41 million in the third quarter of 1995 and 1994, respectively, and $4.28 million and $4.33 million for the nine months ended July 31, 1995 and 1994, respectively. These slight decreases reflect management's continuing efforts to limit the growth of overhead expenses while increasing consolidated revenues. Interest expense increased $13,000, or 6%, in the third quarter of 1995 as compared with the third quarter of 1994. Liquidity and Capital Resources At July 31, 1995, the Company's working capital and ratio of current assets to current liabilities were $4.0 million and 1.36 to 1 as compared to $3.1 million and 1.24 to 1 at October 31, 1994. The improvement in working capital is primarily a result of $1.7 million of net income for the first nine months of 1995 as offset by a $1.0 million purchase of 259,716 shares of treasury stock during the second quarter of 1995. As of July 31, 1995, the Company had $2.1 million of unused credit related to its loan agreement. Business and Market Considerations As of July 31, 1995, Engineered Air's funded backlog of defense orders was $88 million compared to $80 million a year ago. Options to existing contracts total approximately $124 million as of the end of the third 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 continues to pursue new acquisitions and business opportunities to complement existing product lines and provide strategic diversification. 9 PART II Other Information Items 1-5 Not applicable Item 6 (a) Exhibits 4. (i) 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 Engineered Air Systems, Inc. Employee Stock Ownership Plan, is incorporated herein by reference. (ii) 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. (iii) 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. (iv) 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. (v) 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. 25. Statements Re: Summary Financial Information. (b) No reports on Form 8-K were filed during the nine months ended July 31, 1995. 10 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: September 11, 1995 By: /s/ MICHAEL F. SHANAHAN SR. -------------- -------------------------------------- MICHAEL F. SHANAHAN SR. Chairman of the Board, President and Chief Executive Officer Date: September 11, 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: Computati on of Net Income Per Share Three Months Ended Nine Months Ended July 31 July 31 --------------------------- ----------------------- 1995 1994 1995 1994 ------------- ------------- ----------- ----------- NET INCOME $ 684,041 $ 172,735 $ 1,688,884 $ 319,727 ============= ============= =========== =========== NET INCOME PER SHARE Average shares outstanding 2,931,503 3,371,898 3,057,903 3,367,046 ============= ============= =========== =========== Net income $ .23 $ .05 $ .55 $ .09 ============= ============= =========== =========== PRIMARY EARNINGS PER SHARE Average shares outstanding 2,931,503 3,371,898 3,057,903 3,367,046 Net effect of dilutive stock options (1) 252,597 222,717 222,809 210,782 ------------- ------------- ----------- ----------- 3,184,100 3,594,615 3,280,712 3,577,828 ============= ============= =========== =========== Net income $ .21 $ .05 $ .51 $ .09 ============= ============= =========== =========== FULLY DILUTED EARNINGS PER SHARE Average shares outstanding 2,931,503 3,371,898 3,057,903 3,367,046 Net effect of dilutive stock options (1) 253,415 222,717 267,522 217,817 ------------- ------------- ----------- ----------- 3,184,918 3,594,615 3,325,425 3,584,863 ============= ============= =========== =========== Net income $ .21 $ .05 $ .51 $ .09 ============= ============= =========== =========== (1) Based on the treasury stock method