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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 six months ended April 30, 1998 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 May 29, 1998 was 3,196,895.
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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 April 30, 1998 and
October 31, 1997 3
Condensed Consolidated Statements of Income for the three and six months
ended April 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the three and six
months ended April 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Part II - Other Information
Items 1-6 11
Signatures 13
Exhibits 14
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ENGINEERED SUPPORT SYSTEMS, INC.
Condensed Consolidated Balance Sheets
April 30 October 31
1998 1997
----------- -----------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 6,061,319 $ 8,313,160
Accounts receivable 8,972,433 3,398,973
Contracts in process and inventories 10,783,656 7,072,377
Other current assets 1,852,302 1,423,620
----------- -----------
Total Current Assets 27,669,710 20,208,130
Property, plant and equipment, less accumulated
depreciation of $14,850,007 and $14,767,236 18,749,912 14,490,049
Intangible assets 17,461,719 825,406
Other assets 747,884 1,560,469
----------- -----------
Total Assets $64,629,225 $37,084,054
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 2,333,336 $ 73,273
Accounts payable 5,988,974 5,596,760
Other current liabilities 6,832,475 2,978,407
----------- -----------
Total Current Liabilities 15,154,785 8,648,440
Long-term debt 20,166,664 1,194,433
Deferred income taxes 2,642,295 2,642,295
ESOP guaranteed bank loan 799,500 873,300
Shareholders' Equity
Common stock, par value $.01 per share; 10,000,000
shares authorized; 3,798,073 and 3,772,573 shares issued 37,981 37,726
Additional paid-in capital 10,042,982 9,698,665
Retained earnings 20,226,320 18,026,195
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30,307,283 27,762,586
Less ESOP guaranteed bank loan 799,500 873,300
Less treasury stock at cost, 623,178 and 598,858 shares 3,641,802 3,163,700
----------- -----------
25,865,981 23,725,586
----------- -----------
Total Liabilities and Shareholders' Equity $64,629,225 $37,084,054
=========== ===========
See notes to condensed consolidated financial statements.
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ENGINEERED SUPPORT SYSTEMS, INC.
Condensed Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
April 30 April 30
----------------------------- -----------------------------
1998 1997 1998 1997
----------- ----------- ----------- -----------
Net Revenues $23,011,706 $22,851,462 $39,249,845 $43,582,302
Cost of revenues 17,363,247 19,172,750 30,297,617 36,788,303
----------- ----------- ----------- -----------
Gross profit 5,648,459 3,678,712 8,952,228 6,793,999
Selling, general and administrative
expense 3,063,586 1,854,077 4,908,046 3,598,705
----------- ----------- ----------- -----------
Income from operations 2,584,873 1,824,635 4,044,182 3,195,294
Interest expense (income) 380,794 (8,670) 307,942 29,158
----------- ----------- ----------- -----------
Income before income taxes 2,204,079 1,833,305 3,736,240 3,166,136
Income tax provision 880,000 735,000 1,493,000 1,265,000
----------- ----------- ----------- -----------
Net income $ 1,324,079 $ 1,098,305 $ 2,243,240 $ 1,901,136
=========== =========== =========== ===========
Basic earnings per share $.42 $.35 $.71 $.60
=========== =========== =========== ===========
Diluted earnings per share $.40 $.33 $.68 $.57
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
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ENGINEERED SUPPORT SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
April 30
------------------------------------
1998 1997
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From operating activities:
Net income $ 2,243,240 $ 1,901,136
Depreciation and amortization 1,155,657 946,850
Gain on sale of assets (151,125)
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Cash provided (used) before changes in operating
assets and liabilities 3,247,772 2,847,986
Net (increase) decrease in non-cash current assets (1,015,931) 4,943,143
Net increase (decrease) in non-cash current liabilities (110,579) (1,793,727)
(Increase) decrease in other assets 1,042,612 191,124
------------ -----------
Net cash provided by (used in) operating activities 3,163,874 6,188,526
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From investing activities:
Purchase of Marlo Coil, net of cash acquired (25,297,717)
Additions to property, plant and equipment (157,041) (1,058,673)
Proceeds from sale of property, plant and equipment 151,125
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Net cash provided by (used in) investing activities (25,303,633) (1,058,673)
------------ -----------
From financing activities:
Net payments under line-of-credit agreement (1,075,961)
Payments of long-term debt (1,267,706) (1,422,823)
Proceeds of long-term debt 22,500,000
Purchase of treasury stock (495,652) (823,597)
Exercise of stock options 270,352 340,028
Cash dividends (43,115) (35,855)
------------ -----------
Net cash provided by (used in) financing activities 19,887,918 (1,942,247)
------------ -----------
Net increase (decrease) in cash and cash equivalents (2,251,841) 3,187,606
Cash and cash equivalents at beginning of period 8,313,160 1,415,773
------------ -----------
Cash and cash equivalents at end of period $ 6,061,319 $ 4,603,379
============ ===========
See notes to condensed consolidated financial statements.
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ENGINEERED SUPPORT SYSTEMS, INC.
Notes to Condensed Consolidated
Financial Statements (Unaudited)
April 30, 1998
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 and
six month periods ended April 30, 1998 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 statements 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,
1997.
Note B - Earnings per Share
Basic earnings per share for the three months ended April 30, 1998 and
1997 is based on average basic common shares outstanding of 3,165,217 and
3,177,411, respectively. Diluted earnings per share for the three months
ended April 30, 1998 and 1997 is based on average diluted common shares
outstanding of 3,313,672 and 3,293,500, respectively.
Basic earnings per share for the six months ended April 30, 1998 and
1997 is based on average basic common shares outstanding of 3,170,065 and
3,179,802, respectively. Diluted earnings per share for the six months ended
April 30, 1998 and 1997 is based on average diluted common shares outstanding
of 3,312,607 and 3,313,512, respectively.
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. and Engineered Coil Company 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:
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April 30, 1998 October 31, 1997
-------------- ----------------
Raw materials $ 4,365,823 $1,535,860
Work-in-process 1,332,590 167,043
Finished goods 647,203 804,956
Inventories substantially applicable to
government contracts in process, less
progress payments of $8,751,612 and
$9,333,930 4,438,040 4,564,518
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$10,783,656 $7,072,377
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Note D - Acquisition of Net Assets of Nuclear Cooling, Inc.
Effective February 1, 1998, Engineered Coil Company, a wholly-owned
subsidiary of Engineered Support Systems, Inc., acquired substantially all of
the net assets of Nuclear Cooling, Inc., d/b/a Marlo Coil, a manufacturer of
heat transfer and air movement equipment, from an investor group for
approximately $25.3 million. The fair value of assets acquired, including
goodwill of $16.9 million, was $31.0 million and liabilities assumed totaled
$5.7 million. The purchase price was financed with approximately $2.8
million of available cash resources and bank term debt of $22.5 million. The
operating results of Engineered Coil Company (Marlo Coil) are included in the
Company's consolidated results of operations from the date of acquisition.
The following unaudited pro forma summary presents the combined
historical results of operations for the six months ended April 30, 1998 and
1997 as adjusted to reflect the purchase transaction assuming the acquisition
had occurred at November 1, 1996. These pro forma results are not
necessarily indicative of the combined results that would have occurred had
the acquisition actually taken place on November 1, 1996, nor are they
necessarily indicative of the combined results that may occur in the future.
Six Months Ended
April 30
-----------------------------------
1998 1997
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Net revenues $45,958,088 $57,006,926
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Net income $ 2,315,259 $ 1,911,946
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Basic earnings per share $.73 $.60
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Diluted earnings per share $.70 $.58
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Note E - Subsequent Event (Acquisition of Keco Industries, Inc.)
On May 15, 1998, the Company agreed to acquire the common stock of Keco
Industries, Inc. (Keco), a manufacturer of military ground support equipment.
This transaction is contingent upon receiving government approval under the
Hart Scott Rodino Act.
For the fiscal year ended December 31, 1997, sales of Keco were
approximately $42 million and assets, which consist primarily of
manufacturing facilities and working capital, were $18.4 million. The
purchase price was $25.0 million. (The Stock Purchase Agreement also
provides for an additional payment by the Company if it elects treatment of
the transaction pursuant to Section 338(h)(10) of the Internal Revenue Code).
The purchase price will be financed with bank borrowings of $22.5 million and
available cash resources. Further details of the transaction will be
provided in Form 8-K to be filed with the Securities and Exchange Commission.
Note F - Subsequent Event (Stock Split)
On May 21, 1998, the Company's Board of Directors approved a
three-for-two stock split, which will be effected in the form of a 50% stock
dividend. The new shares will be distributed on June 26, 1998 to shareholders of
record as of the close of business on June 12, 1998.
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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 1% in the second quarter of 1998 to $23.0 million
from $22.9 million in the second quarter of 1997, and decreased 10% to $39.2
million in the first six months of 1998 from $43.6 million in the first half
of 1997. Revenues for the second quarter of 1998 were favorably impacted by
the Marlo Coil acquisition (see Note D) which was effective February 1, 1998.
Revenues for Engineered Air Systems, Inc. (Engineered Air) decreased 47% and
35%, respectively, for the three and six month periods ended April 30, 1998.
This decrease was a result of lower shipments of production items as several
major contracts, primarily the Chemical/Biological Protected Shelter System
(CBPSS) and the Chemically/Biologically Hardened Air Management Plan (CHAMP),
are in the engineering and development phase. Engineered Specialty Plastics,
Inc. (ESP) posted its highest quarterly revenues ever in the three months
ended April 30, 1998, up 6% from the second quarter of 1997. For the
year-to-date, however, ESP's revenues were 6% lower than those generated in
1997 due to a reduction in shipments of houseware products in November and
December 1997.
Gross profit for the second quarter of 1998 increased $2.0 million, or
54%, over the amount for the comparable 1997 period. This increase is
primarily the result of significant margin expansion at ESP (due to increased
volume) and at Engineered Air (due to a more profitable mix of contracts), as
well as the addition of Marlo Coil which generates gross margins
significantly above those provided by the other two subsidiaries. The gross
margin for the second quarter was 24.5% and 16.1% in 1998 and 1997,
respectively. The gross margin for the first six months of the year was
22.8% and 15.6% in 1998 and 1997, respectively.
Selling, general and administrative expense was $3.1 million and $1.9
million in the second quarter of 1998 and 1997, respectively. This increase
was due to the addition of Marlo Coil. As a percentage of net revenues,
selling, general and administrative expense increased from 8.1% in the second
quarter of 1997 to 13.3% in 1998. For the six months ended April 30, 1998,
this percentage was 12.5% compared to 8.3% for the first half of 1997.
Interest expense increased $390,000 in the second quarter of 1998 as
compared with the second quarter of 1997. This increase was a result of the
$25.3 million Marlo Coil acquisition, which was financed with $22.5 million
of bank term debt and $2.8 million of available cash resources. However,
strong operational cash flow at all three subsidiaries partially offset the
impact of the acquisition on interest expense.
Liquidity and Capital Resources
At April 30, 1998, the Company's working capital and ratio of current
assets to current liabilities were $12.5 million and 1.83 to 1 as compared to
$11.6 million and 2.34 to 1 at October 31, 1997. As of April 30, 1998, the
Company had cash and cash equivalents of $6.1 million and unused credit
related to its loan agreement of $5.0 million.
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As discussed in Note E, the Company has agreed to acquire Keco
Industries, Inc. (Keco), a manufacturer of military ground support equipment.
The purchase price will be financed with $22.5 million of bank term debt and
available cash resources. The Company believes that cash flow generated from
operations will provide the necessary resources to meet the needs of the
Company in the foreseeable future, including debt service on bank borrowings
associated with the Marlo Coil and Keco acquisitions.
Business and Market Considerations
Approximately 55% of consolidated net revenues for the six months ended
April 30, 1998 were derived from defense orders by the U.S. government and
its agencies. (This percentage will increase following the completion of the
Keco acquisition.) As of April 30, 1998, the Company's combined backlog of
defense orders at Engineered Air and Marlo Coil totaled $61.3 million, with
related government options of an additional $139.4 million.
Management continues to pursue potential acquisitions, primarily of
those companies providing strategic consolidation within the defense
industry.
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PART II
Other Information
Items 1-3 Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders
(a) The Company's annual shareholders meeting was
held on March 10, 1998.
(b) The following individuals were nominated and
elected to the Board of Directors for a term of
three years (2001):
LTG Kenneth E. Lewi (Retired)
John J. Wichlenski
Earl W Wims
The following directors continued in service of
their terms following the meeting:
Michael F. Shanahan Sr.
W. Raymond Barrett
Thomas J. Guilfoil
Alexander M. Cornwell
Earl E. Walker
Michael F. Shanahan Jr.
(c) The proposal for approval of the Engineered
Support Systems, Inc. 1998 Stock Option Plan
for officers, key employees and consultants,
and the allocation of 400,000 shares of
Engineered Support Systems, Inc. common stock
was ratified.
Item 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.
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(ii) 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. Inc. 1993 Stock Option Plan, is
incorporated herein by reference.
(iii) Registration Statement Number 333-27695 on Form S-8
dated May 23, 1997 for the registration of 50,000
shares of Engineered Support Systems, Inc. common
stock, $.01 par value, pursuant to the Engineered
Support Systems, Inc. 1997 Stock Option Plan for Non-
employee Directors, is incorporated herein by
reference.
(iv) Registration Statement Number 333-52753 on Form S-8
dated May 15, 1998 for the registration of 400,000
shares of Engineered Support Systems, Inc. common
stock, $.01 par value, pursuant to the Engineered
Support Systems, Inc. 1998 Stock Option Plan, is
incorporated herein by reference.
(v) Restated and Amended Credit Agreement dated as of
March 17, 1998 and between the Several Lenders From
Time to Time Party Hereto and Nations Bank N.A., as
agent, and Engineered Support Systems, Inc. and its
subsidiaries.
11. Statement Re: Computation of Earnings Per Share.
27. Statement Re: Summary Financial Information
(b) Form 8-K was filed on May 29, 1998 related to the acquisition of
Keco Industries, Inc. (Keco) on May 15, 1998. Because it was
impractical to provide the required financial statements for
Keco at the time of this filing, these statements will be filed
on Form 8-K/A as soon as practical but no later than July 28,
1998.
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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: June 5, 1998 By: /s/ Michael F. Shanahan Sr.
-------------------- -------------------------------------
Michael F. Shanahan Sr.
Chairman of the Board, President
and Chief Executive Officer
Date: June 5, 1998 By: /s/ Gary C. Gerhardt
-------------------- -------------------------------------
Gary C. Gerhardt
Executive Vice President and
Chief Financial Officer
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