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, 1996 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 29, 1996 was 3,034,133. 2 ENGINEERED SUPPORT SYSTEMS, INC. INDEX Page ---- Part I - Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of January 31, 1996 and October 31, 1995 3 Condensed Consolidated Statements of Income for the three months ended January 31, 1996 and 1995 4 Condensed Consolidated Statements of Cash Flows for the three months ended January 31, 1996 and 1995 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 1996 1995 ------------ ------------ (Unaudited) ASSETS Current Assets Cash $ 348,047 $ 386,609 Accounts receivable 4,284,884 3,510,596 Contract in process and inventories 13,793,072 12,117,479 Other current assets 757,791 614,295 ------------ ------------ Total Current Assets 19,183,794 16,628,979 Property, plant and equipment, less accumulated depreciation of $12,024,269 and $11,626,806 14,471,820 14,601,129 Intangible assets 1,156,499 1,219,699 Other assets 1,391,177 1,341,805 ------------ ------------ Total Assets $ 36,203,290 $ 33,791,612 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Notes payable $ 39,326 $ 1,124,041 Current maturities of long-term debt 790,491 827,371 Accounts payable 11,174,734 7,702,941 Other current liabilities 2,002,335 2,274,919 ------------ ------------ Total Current Liabilities 14,006,886 11,929,272 Long-term debt 2,590,281 2,755,157 Deferred income taxes 2,722,059 2,722,059 ESOP guaranteed bank loan 1,131,600 1,168,500 Shareholders' Equity Common stock, par value $.01 per share; 10,000,000 shares authorized; 3,463,961 and 3,456,961 shares issued 34,640 34,570 Additional paid-in capital 7,953,172 7,917,844 Retained earnings 10,673,107 10,217,090 ------------ ------------ 18,660,919 18,169,504 Less ESOP guaranteed bank loan 1,131,600 1,168,500 Less treasury stock at cost, 473,828 and 475,835 shares 1,776,855 1,784,380 ------------ ------------ 15,752,464 15,216,624 ------------ ------------ Total Liabilities and Shareholders' Equity $ 36,203,290 $ 33,791,612 ============ ============ See notes to condensed consolidated financial statements. 4 ENGINEERED SUPPORT SYSTEMS, INC. Condensed Consolidated Statements of Income (Unaudited) Three Months Ended January 31 ----------------------------------- 1996 1995 ------------ ------------ Net revenues $ 17,047,573 $ 15,343,691 Cost of revenues 14,567,185 13,139,770 ------------ ------------ Gross profit 2,480,388 2,203,921 Selling, general and administrative expense 1,535,673 1,450,023 ------------ ------------ Income from operations 944,715 753,898 Interest expense 135,887 204,285 ------------ ------------ Income before income taxes 808,828 549,613 Income tax provision 323,000 220,000 ------------ ------------ Net income $ 485,828 $ 329,613 ============ ============ Net income per share $ .15 $ .10 ===== ===== See notes to condensed consolidated financial statements. 5 ENGINEERED SUPPORT SYSTEMS, INC. Condensed Consolidated Statements of Cash Flows (Unaudited) Three Months Ended January 31 ---------------------------- 1996 1995 ------------- ------------- From operating activities: Net income $ 485,828 $ 329,613 Depreciation and amortization 467,836 472,677 ------------- -------------- Cash provided (used) before changes in operating assets and liabilities 953,664 802,290 Net (increase) decrease in non-cash current assets (2,593,377) 1,863,554 Net increase (decrease) in non-cash current liabilities 3,199,210 (1,086,536) (Increase) decrease in other assets (42,997) (53,871) ------------- -------------- Net cash provided by (used in) operating activities 1,516,500 1,525,437 ------------- -------------- From investing activities: Additions to property, plant and equipment (268,155) (140,790) Disposal of property, plant and equipment 68,850 ------------- -------------- Net cash provided by (used in) investing activities (268,155) (71,940) ------------- -------------- From financing activities: Net payments under line-of-credit agreements (1,084,715) (1,591,031) Payments of long-term debt (201,756) (253,303) Exercise of stock options 29,375 Cash dividend (29,811) ------------- -------------- Net cash provided by (used in) financing activities (1,286,907) (1,844,334) ------------- -------------- Net increase (decrease) in cash (38,562) (390,837) Cash at beginning of period 386,609 417,748 ------------- -------------- Cash at end of period $ 348,047 $ 26,911 ============== ============== See notes to condensed consolidated financial statements. 6 ENGINEERED SUPPORT SYSTEMS, INC. Notes to Condensed Consolidated Financial Statements (Unaudited) January 31, 1996 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, 1996 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, 1995. Note B - Net Income per Share Net income per share for the three months ended January 31, 1996 and 1995 is based on the weighted average number of common and common equivalent shares outstanding of 3,221,091 and 3,370,632, 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, as amended in September 1995, bears interest at the bank's prime rate and is payable in monthly installments of $60,402 plus interest through 1998. 7 Note D - Contracts in Process and Inventories Contracts in process and inventories are comprised of the following: January 31, 1996 October 31, 1995 ---------------- ---------------- Raw materials $1,635,381 $1,594,199 Work-in-process 176,272 142,615 Finished goods 488,049 368,400 Inventories substantially applicable to government contracts in process, less progress payments of $20,963,133 and $15,182,542 11,493,370 10,012,265 ----------- ----------- $13,793,072 $12,117,479 =========== =========== 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 increased 11% in the first quarter of 1996 to $17.0 million from $15.3 million in the first quarter of 1995. The increase in revenues was generated primarily by the Company's defense subsidiary, Engineered Air Systems, Inc. (Engineered Air). Production levels remained high at Engineered Air, driven by its contracts for C-5 and MA-3D Flight Line Air Conditioners, Harvest Falcon Water Distribution Systems, Army Space Heaters and Revetment Kits. Gross profit for the first quarter of 1996 increased $0.3 million, or 13%, over the amount for the comparable 1995 period primarily reflecting the increase in production volume at Engineered Air. The gross margin for the first quarter of 1996 was 14.5% as compared to 14.4% for the first quarter of 1995. Selling, general and administrative expense was $1.54 million and $1.45 million in the first quarter of 1996 and 1995, respectively. As a percent of net revenues, selling, general and administrative expense decreased from 9.5% in 1995 to 9.0% in 1996 as a result of management's continuing efforts to limit the growth of overhead expenses while increasing consolidated revenues. Interest expense decreased $68,000, or 33%, in the first quarter of 1996 as compared with the first quarter of 1995. This was primarily the result of continuing strong cash flow at Engineered Air. Liquidity and Capital Resources At January 31, 1996, the Company's working capital and ratio of current assets to current liabilities were $5.2 million and 1.37 to 1 as compared to $4.7 million and 1.39 to 1 at October 31, 1995. As of January 31, 1996, the Company had $6.3 million of unused credit related to its loan agreement. Business and Market Considerations As of January 31, 1996, Engineered Air's funded backlog of defense orders was $102 million compared to $92 million a year ago. Historically, the Company has been heavily dependent on the U.S. Government for business. However, 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) 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. (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. Statement Re: Summary Financial Information (b) No reports on Form 8-K were filed during the quarter ended January 31, 1996. 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: March 15, 1996 By: /s/ MICHAEL F. SHANAHAN SR. -------------- -------------------------------------- MICHAEL F. SHANAHAN SR. Chairman of the Board, President and Chief Executive Officer Date: March 15, 1996 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 ---------------------------- 1996 1995 -------------- ------------- NET INCOME $ 485,828 $ 329,613 ============= ============ NET INCOME PER SHARE Average shares outstanding 2,983,443 3,167,304 ============= ============ Net income $ .16 $ .10 ============= ============ PRIMARY EARNINGS PER SHARE Average shares outstanding 2,983,443 3,167,304 Net effect of dilutive stock options (1) 230,445 203,328 ------------- ------------ 3,213,888 3,370,632 ============= ============ Net income $ .15 $ .10 ============= ============ FULLY DILUTED EARNINGS PER SHARE Average shares outstanding 2,983,443 3,167,304 Net effect of dilutive stock options (1) 237,648 203,328 ------------- ------------ 3,221,091 3,370,632 ============= ============ Net income $ .15 $ .10 ============= ============ (1) Based on the treasury stock method