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, 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 August 31, 1996 was 3,148,245.
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ENGINEERED SUPPORT SYSTEMS, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of July 31, 1996
and October 31, 1995 3
Condensed Consolidated Statements of Income for the three
months and nine months ended July 31, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended July 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 7
Part II - Other Information
Items 1-6 8
Signatures 9
Exhibits 10
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ENGINEERED SUPPORT SYSTEMS, INC.
Condensed Consolidated Balance Sheets
July 31 October 31
1996 1995
------------ ------------
(Unaudited)
ASSETS
Current Assets
Cash $ 134,343 $ 386,609
Accounts receivable 4,822,979 3,510,596
Contract in process and inventories 10,443,435 12,117,479
Other current assets 874,882 614,295
------------ ------------
Total Current Assets 16,275,639 16,628,979
Property, plant and equipment, less accumulated
depreciation of $12,767,948 and $11,626,806 14,082,771 14,601,129
Intangible assets 1,030,099 1,219,699
Other assets 1,445,703 1,341,805
------------ ------------
Total assets $ 32,834,212 $ 33,791,612
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 11,889 $ 1,124,041
Current maturities of long-term debt 790,491 827,371
Accounts payable 5,824,832 7,702,941
Other current liabilities 2,344,410 2,274,919
------------ ------------
Total Current Liabilities 8,971,622 11,929,272
Long-term debt 2,194,521 2,755,157
Deferred income taxes 2,722,059 2,722,059
ESOP guaranteed bank loan 1,057,800 1,168,500
Shareholders' Equity
Common stock, par value $.01 per share;
10,000,000 shares authorized; 3,617,273
and 3,456,961 shares issued 36,173 34,570
Additional paid-in capital 8,651,730 7,917,844
Retained earnings 12,270,765 10,217,090
------------ ------------
20,958,668 18,169,504
Less ESOP guaranteed bank loan 1,057,800 1,168,500
Less treasury stock at cost, 502,528
and 475,835 shares 2,012,658 1,784,380
------------ ------------
17,888,210 15,216,624
------------ ------------
Total Liabilities and Shareholders' Equity $ 32,834,212 $ 33,791,612
============ ============
See notes to condensed consolidated financial statements.
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ENGINEERED SUPPORT SYSTEMS, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine Months Ended
July 31 July 31
---------------------- ---------------------
1996 1995 1996 1995
--------- ---------- --------- ----------
Net revenues $ 21,623,122 $ 15,453,962 $ 57,594,493 $ 48,452,631
Cost of revenues 18,359,046 12,739,072 48,881,762 40,674,201
------------ ------------ ------------ ------------
Gross profit 3,264,076 2,714,890 8,712,731 7,778,430
Selling, general and
administrative expense 1,661,494 1,334,492 4,821,127 4,275,007
------------ ------------ ------------ ------------
Income from operations 1,602,582 1,380,398 3,891,604 3,503,423
Interest expense 77,188 243,357 363,174 690,539
------------ ------------ ------------ ------------
Income before income
taxes 1,525,394 1,137,041 3,528,430 2,812,884
Income tax provision 609,000 453,000 1,409,000 1,124,000
------------ ------------ ------------ ------------
Net income $ 916,394 $ 684,041 $ 2,119,430 $ 1,688,884
============ ============ ============ ============
Net income per share $ .28 $ .21 $ .65 $ .51
============ ============ ============ ============
See notes to condensed consolidated financial statements.
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ENGINEERED SUPPORT SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
July 31
----------------------------
1996 1995
------------- -------------
From operating activities:
Net income $ 2,119,430 $ 1,688,884
Depreciation and amortization 1,352,261 1,451,732
------------- --------------
Cash provided (used) before changes in
operating assets and liabilities 3,471,691 3,140,616
Net (increase) decrease in non-cash
current assets 101,074 638,068
Net increase (decrease) in non-cash current
liabilities (1,808,618) (713,487)
(Increase) decrease in other assets (83,231) 167,318
------------- --------------
Net cash provided by (used in) operating
activities 1,680,916 3,232,515
------------- --------------
From investing activities:
Additions to property, plant and equipment (622,784) (772,880)
Disposals of property, plant and equipment 73,100
------------- --------------
Net cash provided by (used in) investing
activities (622,784) (699,780)
------------- --------------
From financing activities:
Net payments under line-of-credit
agreement (1,112,152) (1,068,403)
Payments of long-term debt (597,516) (930,053)
Purchase of treasury stock (250,544) (972,586)
Exercise of stock options 715,568 175,873
Cash dividends (65,754) (29,337)
------------- --------------
Net cash provided by (used in) financing
activities (1,310,398) (2,824,506)
------------- --------------
Net increase (decrease) in cash (252,266) (291,771)
Cash at beginning of period 386,609 417,748
------------- --------------
Cash at end of period $ 134,343 $ 125,977
============== ==============
See notes to condensed consolidated financial statements.
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ENGINEERED SUPPORT SYSTEMS, INC.
Notes to Condensed Consolidated
Financial Statements (Unaudited)
July 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 nine
month period ended July 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 is based on the weighted average number of common and
common equivalent shares outstanding of 3,269,781 and 3,184,918 for the
three months ended July 31, 1996 and 1995, respectively, and 3,250,222 and
3,325,425 for the nine months ended July 31, 1996 and 1995, 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 - Contracts in Process and Inventories
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. Inventories of Engineered Specialty
Plastics, Inc. are valued at the lower of cost or market using the first-
in, first-out method. Contracts in process and inventories are comprised of
the following:
July 31, 1996 October 31, 1995
---------------- ----------------
Raw materials $1,797,634 $1,594,199
Work-in-process 119,740 142,615
Finished goods 334,861 368,400
Inventories substantially applicable to
government contracts in process, less
progress payments of $20,190,315 and
$15,182,542 8,191,200 10,012,265
----------- -----------
$10,443,435 $12,117,479
=========== ===========
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ENGINEERED SUPPORT SYSTEMS, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Revenues increased 40% in the third quarter of 1996 to $21.6 million from
$15.5 million in the third quarter of 1995, and increased 19% to $57.6
million in the first nine months of 1996 from $48.5 million in the first
nine months 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 Flight Line Air Conditioners, Water Distribution Systems,
Army Space Heaters, Revetment Kits and Aviation Ground Power Units.
Gross profit for the third quarter of 1996 increased $0.5 million, or 20%
over the amount for the comparable 1995 period, primarily reflecting the
increase in production volume at Engineered Air. The gross margin for the
third quarter of 1996 was 15.1% as compared to 17.6% for the third quarter
of 1995.
Selling, general and administrative expense was $1.67 million and $1.33
million in the third quarter of 1996 and 1995, respectively. As a percent
of net revenues, selling, general and administrative expense decreased from
8.6% in the third quarter of 1995 to 7.7% in 1996. For the nine months
ended July 31, 1996, this percentage was 8.4% compared to 8.8% for the
first nine months of 1995.
Interest expense decreased $166,000, or 68%, in the third quarter of 1996
as compared with the third quarter of 1995. This was primarily the result
of continuing strong cash flow at Engineered Air.
Liquidity and Capital Resources
At July 31, 1996, the Company's working capital and ratio of current assets
to current liabilities were $7.3 million and 1.81 to 1 as compared to $4.7
million and 1.39 to 1 at October 31, 1995. As of July 31, 1996, the
Company had $6.4 million of unused credit related to its loan agreement.
Business and Market Considerations
As of July 31, 1996, Engineered Air's funded backlog of defense orders was
$92 million compared to $88 million a year ago.
The Company is heavily dependent on the U.S. Government for business.
(Approximately 70% of consolidated net revenues for the nine months ended
July 31, 1996 were derived from contracts with the U.S. Government and its
agencies). The Company began a plan of diversification in 1993 with the
acquisition of ESP. This acquisition provided expansion into the commercial
merketplace. Management continues to pursue new acquisitions and business
opportunities to complement exisiting product lines and provide strategic
diversification.
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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 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.
27. Statement Re: Summary Financial Information.
(b) No reports on Form 8-K were filed during the nine months ended July
31, 1996.
9
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 6, 1996 By: /s/ MICHAEL F. SHANAHAN SR.
----------------- --------------------------------------
MICHAEL F. SHANAHAN SR.
Chairman of the Board, President
and Chief Executive Officer
Date: September 6, 1996 By: /s/ GARY C. GERHARDT
----------------- --------------------------------------
GARY C. GERHARDT
Executive Vice President and
Chief Financial Officer
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Exhibit 11
ENGINEERED SUPPORT SYSTEMS, INC.
Statement Re: Computation of Net Income Per Share
Three Months Ended Nine Months Ended
July 31 July 31
--------------------------- -----------------------
1996 1995 1996 1995
------------- ------------- ----------- -----------
NET INCOME $ 916,394 $ 684,041 $ 2,119,430 $ 1,688,884
============= ============= =========== ===========
NET INCOME PER SHARE
Average shares
outstanding 3,098,075 2,931,503 3,035,894 3,057,903
============= ============= =========== ===========
Net income $ .30 $ .23 $ .70 $ .55
============= ============= =========== ===========
PRIMARY EARNINGS
PER SHARE
Average shares
outstanding 3,098,075 2,931,503 3,035,894 3,057,903
Net effect of
dilutive stock
options (1) 171,881 252,597 204,992 222,809
------------- ------------- ----------- -----------
3,269,956 3,184,100 3,240,886 3,280,712
============= ============= =========== ===========
Net income $ .28 $ .21 $ .65 $ .51
============= ============= =========== ===========
FULLY DILUTED EARNINGS
PER SHARE
Average shares
outstanding 3,098,075 2,931,503 3,035,894 3,057,903
Net effect of dilutive
stock options (1) 171,706 253,415 214,328 267,522
------------- ------------- ----------- -----------
3,269,781 3,184,918 3,250,222 3,325,425
============= ============= =========== ===========
Net income $ .28 $ .21 $ .65 $ .51
============= ============= =========== ===========
(1) Based on the treasury stock method.