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 three months ended January 31, 2000 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 25, 2000 was 6,978,549.
ENGINEERED SUPPORT SYSTEMS, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of January 31, 2000 and
October 31, 1999 3
Condensed Consolidated Statements of Income for the three months
ended January 31, 2000 and 1999 4
Condensed Consolidated Statements of Cash Flows for the three months
ended January 31, 2000 and 1999 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II - Other Information
Items 1-6 13
Signatures 14
Exhibits 15
2
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
January 31 October 31
2000 1999
----------- -----------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 177,767 $ 310,446
Accounts receivable 30,710,522 23,594,040
Contracts in process and inventories 60,345,188 68,350,836
Other current assets 5,666,868 8,294,307
------------ ------------
Total Current Assets 96,900,345 100,549,629
Property, plant and equipment, less accumulated
depreciation of $18,320,662 and $16,667,784 58,953,658 60,014,422
Cost in excess of net assets acquired, less accumulated
amortization of $3,106,253 and $2,320,084 76,158,543 74,354,061
Deferred income taxes 385,867 385,867
Other assets 3,967,100 4,092,163
------------ ------------
Total Assets $236,365,513 $239,396,142
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 28,700,000 $ 23,900,000
Current maturities of long-term debt 11,787,500 10,037,500
Accounts payable 17,286,633 27,876,474
Other current liabilities 26,051,214 24,430,159
------------ ------------
Total Current Liabilities 83,825,347 86,244,133
Long-term debt 75,815,625 80,075,000
Other liabilities 9,077,211 9,077,211
ESOP guaranteed bank loan 541,200 578,100
Shareholders' Equity
Common stock, par value $.01 per share; 10,000,000
shares authorized; 7,515,854 and 7,503,854 shares
issued 75,159 75,039
Additional paid-in capital 37,938,684 37,032,274
Retained earnings 33,230,889 30,780,853
------------ ------------
71,244,732 67,888,166
Less ESOP guaranteed bank loan 541,200 578,100
Less treasury stock at cost, 537,305 and 614,896
shares 3,597,402 3,888,368
------------ ------------
67,106,130 63,421,698
------------ ------------
Total Liabilities and Shareholders' Equity $236,365,513 $239,396,142
============ ============
See notes to condensed consolidated financial statements.
3
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended
January 31
-----------------------------------
2000 1999
----------- -----------
Net revenues $86,526,480 $28,236,975
Cost of revenues 70,467,844 21,655,628
----------- -----------
Gross profit 16,058,636 6,581,347
Selling, general and administrative expense 9,309,702 3,633,948
----------- -----------
Income from operations 6,748,934 2,947,399
Interest expense (2,470,147) (693,762)
Interest income 11,382 56,766
----------- -----------
Income before income taxes 4,290,169 2,310,403
Income tax provision 1,716,000 922,000
----------- -----------
Net income $ 2,574,169 $ 1,388,403
=========== ===========
Basic earnings per share $.37 $.29
=========== ===========
Diluted earnings per share $.36 $.28
=========== ===========
See notes to condensed consolidated financial statements.
4
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended
January 31
-----------------------------------
2000 1999
----------- -----------
From operating activities:
Net income $ 2,574,169 $ 1,388,403
Depreciation and amortization 2,610,367 890,179
----------- -----------
Cash provided (used) before changes in operating
assets and liabilities 5,184,536 2,278,582
Net (increase) decrease in non-cash current assets 133,953 228,467
Net increase (decrease) in non-cash current
liabilities (8,174,278) (2,384,024)
(Increase) decrease in other assets 1,064,881 193,002
----------- -----------
Net cash provided by (used in) operating
activities (1,790,908) 316,027
----------- -----------
From investing activities:
Additions to property, plant and equipment (592,111) (399,079)
----------- -----------
Net cash provided by (used in) investing
activities (592,111) (399,079)
----------- -----------
From financing activities:
Net borrowings (payments) under line-of-credit
agreement 4,800,000
Payments of long-term debt (2,509,375) (1,759,377)
Purchase of treasury stock (65,052)
Exercise of stock options 83,850
Cash dividends (124,135) (87,402)
----------- -----------
Net cash provided by (used in) financing
activities 2,250,340 (1,911,831)
----------- -----------
Net increase (decrease) in cash and cash equivalents (132,679) (1,994,883)
Cash and cash equivalents at beginning of period 310,446 5,773,529
----------- -----------
Cash and cash equivalents at end of period $ 177,767 $ 3,778,646
=========== ===========
See notes to condensed consolidated financial statements.
5
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2000
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, 2000 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,
1999.
NOTE B - EARNINGS PER SHARE
Basic earnings per share for the three months ended January 31,
2000 and 1999 is based on average basic common shares outstanding of
6,928,043 and 4,852,342, respectively. Diluted earnings per share for
the three months ended January 31, 2000 and 1999 is based on average
diluted common shares outstanding of 7,078,202 and 5,032,339,
respectively. Average diluted common shares outstanding include common
stock equivalents, which represent common stock options as computed
based on the treasury stock method.
NOTE C - CONTRACTS IN PROCESS AND INVENTORIES
Contracts in process and inventories of Systems & Electronics Inc.,
Engineered Air Systems, Inc., Keco Industries, Inc. and Engineered
Electric Company 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 Coil Company and 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:
January 31, 2000 October 31, 1999
---------------- ----------------
Raw materials $ 5,198,193 $ 4,579,038
Work-in-process 846,263 990,727
Finished goods 1,487,089 1,357,946
Inventories substantially applicable to
government contracts in process, less
progress payments of $54,475,481 and
$63,041,677 52,813,643 61,423,125
----------- -----------
$60,345,188 $68,350,836
=========== ===========
6
NOTE D - ACQUISITIONS
On February 22, 1999, Engineered Electric Company, a wholly-owned
subsidiary of the Company, acquired substantially all of the net assets
of the Fermont division of Dynamics Corporation of America, a
manufacturer of electrical generator sets primarily for the Department
of Defense, for approximately $10.1 million. The fair value of assets
acquired was $14.4 million and liabilities assumed totaled $4.3 million.
The purchase price was financed with available cash resources and short-
term borrowings under the Company's revolving credit facility. The
operating results of Engineered Electric Company (Fermont) are included
in the Company's consolidated results of operations from the date of
acquisition.
Effective July 1, 1999, Engineered Specialty Plastics, Inc.,
a wholly-owned subsidiary of the Company, acquired the inventory, fixed
assets, existing operations and customer base of the Bossier City division
of Engineered Products, Inc. (Bossier City) for approximately $3.1 million.
The fair value of assets acquired was $3.1 million. The purchase price
was financed with short-term borrowings under the Company's revolving
credit facility. The operating results of the Bossier City division are
included in the Company's consolidated results of operations from the date
of acquisition.
Effective September 30, 1999, Engineered Systems and Electronics, Inc.,
a wholly-owned subsidiary of the Company, acquired all of the outstanding
stock of Systems & Electronics Inc. (SEI), a manufacturer of military
support equipment, from ESCO Electronics Corporation for approximately
$81.7 million. (The purchase price is net of $4.2 million of cash acquired.
The transaction will be treated as an asset purchase pursuant to Section
338(h)(10) of the Internal Revenue Code.) The fair value of the assets
acquired, including goodwill of $53.3 million, was $125.7 million and
liabilities assumed totaled $44.0 million. The purchase price was financed
with term debt as provided under the Company's credit agreement. The
operating results of SEI 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 three months ended January 31, 1999
as adjusted to reflect the purchase transactions assuming the acquisitions had
occurred at November 1, 1998. These pro forma results are not necessarily
indicative of the combined results that would have occurred had the acquisitions
actually taken place on November 1, 1998, nor are they necessarily indicative
of the combined results that may occur in the future.
Three Months Ended
January 31, 1999
------------------
Net revenues $73,790,975
===========
Net income $ 978,331
===========
Basic earnings per share $.20
===========
Diluted earnings per share $.19
===========
7
NOTE E - PUBLIC OFFERING OF COMMON STOCK
On April 23, 1999, the Company issued an additional 2,000,000
shares of common stock through a public offering, resulting in net
proceeds of $25,550,000. A portion of the proceeds was used to repay
borrowings under the Company's line-of-credit agreement with the
remainder used to repay a portion of the Company's long-term debt.
Shares outstanding at January 31, 2000 and October 31, 1999 were
6,978,549 and 6,888,958, respectively.
NOTE F - SEGMENT INFORMATION
The Company operates in four segments: heavy military support
equipment, electronics and automation systems, light military
support and related industrial/commercial equipment, and custom molded
plastic products. Intersegment revenues for the three months ended
January 31, 2000 and 1999, respectively, were not significant. Total
assets by segment as disclosed in the Company's annual report for the
year ended October 31, 1999 have not changed materially since that date.
In addition, there have been no changes in either the basis of
segmentation or the measurement of segment profit since October 31, 1999.
Information by segment is as follows:
Three Months Ended
January 31
--------------------------
2000 1999
----------- -----------
Net Revenues:
Light military support and related
industrial/commercial equipment $37,641,340 $22,321,841
Heavy military support equipment 31,603,626
Electronics and automation systems 12,339,119
Custom molded plastic products 4,942,395 5,915,134
----------- -----------
Total $86,526,480 $28,236,975
=========== ===========
Income from Operations:
Light military support and related
industrial/commercial equipment $ 4,087,993 $ 2,241,115
Heavy military support equipment 2,164,626
Electronics and automation systems 565,732
Custom molded plastic products (69,417) 706,284
----------- -----------
6,748,934 2,947,399
Interest Expense (2,470,147) (693,762)
Interest Income 11,382 56,766
----------- -----------
Income Before Income Taxes $ 4,290,169 $ 2,310,403
=========== ===========
8
NOTE G - SUBSEQUENT EVENT
The Company's three-year labor contract with Local 2782, District 9
of the International Association of Machinists and Aerospace Workers
expired February 13, 2000. This bargaining unit comprises approximately
420 of the 630 total employees at the Company's West Plains, Missouri
manufacturing facility and has elected a work stoppage since contract
expiration date. Although the Company and the bargaining unit continue
to negotiate, a new labor contract has not been agreed upon as of this
date. The Company will continue selected operations at this location
during the work stoppage.
The Company's heavy military support equipment segment consists
primarily of operations performed at the West Plains facility. Products
manufactured at this facility include the Tunner 60K Aircraft Cargo
Loader/Transporter, the M1000 Heavy Equipment Transport trailers and
various tactical bridging systems. Depending on its duration, the work
stoppage could have a material effect on the Company's results of
operations.
9
ENGINEERED SUPPORT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Revenues. Consolidated net revenues increased $58.3 million, or
206.4%, in the first quarter of 2000 to $86.5 million from $28.2 million
in the first quarter of 1999. Net revenues from the light military
support and related industrial/commercial equipment segment increased
by $15.3 million in the first quarter of 2000 to $37.6 million as
compared to $22.3 million in the first quarter of 1999. This increase
was due to an additional $11.7 million of net revenues generated by
Fermont subsequent to its acquisition on February 22, 1999 and to $3.6
million of internal growth on existing operations. Net revenues from the
heavy military support equipment and the electronics and automation systems
segments totaled $31.6 million and $12.3 million, respectively, for the
first quarter of 2000 due to the acquisition of SEI on September 30, 1999.
Net revenues for the Company's custom molded plastic products segment
decreased $1.0 million to $4.9 million in the first quarter of 2000 as
compared to $5.9 million in the first quarter of 1999 due to the loss of
a major customer.
Gross Profit. Consolidated gross profit for the first quarter of 2000
increased 144.0% to $16.1 million (18.6% of consolidated net revenues)
from $6.6 million (23.3% of consolidated net revenues) in the first quarter
of 1999. Gross profit for the light military support and related commercial/
industrial equipment segment increased to $7.0 million (18.7% of segment
net revenues) from $5.3 million (23.8% of segment net revenues) in the
first quarter of 1999. The increase in gross profit for the segment was
primarily a result of the addition of Fermont ($0.9 million). The decline
in gross margin for the segment resulted from a less profitable product mix
(generator sets) as compared to the Company's historical defense business
operations. Gross profit for the heavy military support equipment and the
electronics and automation systems segments totaled $6.3 million (20.0% of
segment net revenues) and $2.1 million (17.0% of segment net revenues),
respectively, for the first quarter of 2000 due to the acquisition of SEI.
Gross profit for the custom molded plastic products segment declined to
$0.6 million (12.6% of segment net revenues) from $1.3 million (21.6% of
segment net revenues) in the first quarter of 1999. The decreases in
both gross profit and gross margin related to a decline in sales volume for
the plastics segment.
Selling, General and Administrative Expense. Consolidated selling,
general and administrative expense increased by $5.7 million, or 156.2%,
to $9.3 million (10.8% of consolidated net revenues) in the first quarter
of 2000 from $3.6 million (12.9% of consolidated net revenues) in the
first quarter of 1999. Selling, general and administrative expense for the
light military support and related commercial/industrial equipment segment
decreased to $2.9 million from $3.1 million in the first quarter of 1999.
Selling, general and administrative expense for the heavy military
support equipment and the electronics and automation systems segments
totaled $4.1 million and $1.5 million, respectively, for the first
quarter of 2000 due to the acquisition of SEI. Selling, general and
administrative expense for the custom molded plastic products segment was
$0.7 million in the first quarter of 2000 compared to $0.6 million in
the first quarter of 1999.
10
Income from Operations. Consolidated income from operations increased
by $3.8 million, or 129.0%, to $6.7 million in the first quarter of 2000
from $2.9 million in the first quarter of 1999. Income from operations
for the light military support and related commercial/industrial equipment
segment increased to $4.1 million from $2.2 million in the first quarter
of 1999. The increase was a result of the inclusion in the first quarter
of 2000 of the operations of Fermont and of significant operating income
gains at historical operations. Income from operations for the heavy
military support equipment and the electronics and automation systems
segments totaled $2.2 million and $0.6 million, respectively, for the
first quarter of 2000 due to the acquisition of SEI. Income from operations
for the custom molded plastic products segment declined to $(0.1) million
from $0.7 million in the first quarter of 1999.
Net Interest Expense. Net interest expense increased by $1.8 million
to $2.5 million in the first quarter of 2000 primarily as a result of
higher outstanding borrowings on the Company's revolving and term debt
credit facilities as compared to the prior year. Higher borrowing levels
were required to finance the Company's acquisitions of Fermont on
February 22, 1999 and SEI on September 30, 1999 partially offset by the
receipt of net proceeds of $25.6 million in conjunction with a follow-on
public stock offering of 2.0 million shares completed in April 1999.
Income Tax Provision. The effective income tax rate was 40.0% for
the quarter ended January 31, 2000 and 39.9% for the quarter ended
January 31, 1999.
Net Income. As a result of the forgoing, the net income of the
Company increased by 85.4% to $2.6 million (3.0% of net
revenues) for the quarter ended January 31, 2000 from $1.4 million
(4.9% of net revenues) for the first quarter of 1999.
LIQUIDITY AND CAPITAL RESOURCES
In April 1999, the Company issued an additional 2.0 million
shares of common stock through a public offering, resulting in net
proceeds of $25.6 million. A portion of the proceeds was used to
repay borrowings under the Company's revolving line of credit agreement
with the remainder used to repay a portion of the Company's term
debt.
In conjunction with the acquisition of SEI in September 1999,
the Company entered into a new credit agreement to provide a $90.0
million term loan and a $55.0 million revolving credit facility. The
Company's primary sources of short-term financing are from cost
reimbursements under contracts with the U.S. government via receipt
of progress payments, billings for delivered products and borrowings
under the revolving line of credit. As of January 31, 2000, the
Company had $28.7 million outstanding against the revolving line of
credit, remaining availability under the revolving line of credit
of $18.2 million, and a cash balance of $0.2 million.
11
The Company's working capital needs are generally funded through
cash flow from operations and the revolving line of credit. At
January 31, 2000, the Company's working capital and ratio of current
assets to current liabilities were $13.1 million and 1.16 to 1 as
compared with $14.3 million and 1.17 to 1 at October 31, 1999. The
Company used $1.8 million in the first quarter of 2000 and generated
$0.3 million in the first quarter of 1999 in cash flow from operations.
Investment in property, plant and equipment totaled $0.6 million and
$0.4 million for the first quarters of 1999 and 1998, respectively.
The Company anticipates that capital expenditures in 2000 should not
exceed $6.0 million. Management believes that cash flow generated from
operations, together with the available line of credit, will provide
the necessary resources to meet the needs of the Company in the
foreseeable future.
BUSINESS AND MARKET CONSIDERATIONS
Approximately 86% of consolidated net revenues for the quarter
ended January 31, 2000 were directly or indirectly derived from
defense orders by the U.S. government and its agencies. As of
January 31, 2000, the Company's combined backlog of defense orders
totaled $364.4 million, with related government options of an
additional $713.4 million.
Management continues to pursue potential acquisitions, primarily
of those companies providing strategic consolidation within the
defense industry.
The Company's three-year labor agreement with Local 2782,
District 9 of the International Association of Machinists and
Aerospace Workers expired February 13, 2000. This bargaining unit
comprises approximately 420 of the 630 total employees at the
Company's West Plains, Missouri manufacturing facility and has
elected a work stoppage since contract expiration date. Although
the Company and the bargaining unit continue to negotiate, a new
labor contract has not been agreed upon as of this date. The Company
will continue selected operations at this location during the work
stoppage.
The Company's heavy military support equipment segment consists
primarily of operations performed at the West Plains facility.
Products manufactured at this facility include the Tunner 60K Aircraft
Cargo Loader/Transporter, the M1000 Heavy Equipment Transport trailers
and various tactical bridging systems. Depending on its duration, the
work stoppage could have a material effect on the Company's results
of operations.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report includes
certain forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, which are intended to be
covered by the safe harbors created thereby. The forward-looking
statements involve certain risks and uncertainties, including, but not
limited to acquisitions, additional financing requirements, the decision
of any of the Company's key customers (including the U.S. government) to
reduce or terminate orders with the Company, cutbacks in defense
spending by the U.S. government and increased competition in the Company's
markets, which could cause the Company's actual results to differ
materially from those projected in, or inferred by, the forward-looking
statements.
12
PART II
OTHER INFORMATION
Items 1-5 Not applicable.
Item 6 (a) Exhibits
11. Statement Re: Computation of Earnings Per Share.
27. Statement Re: Financial Data Schedule
(b) The Company filed the following reports on Form 8-K during the
three months ended January 31, 2000:
* Form 8-K, dated December 13, 1999, regarding the Company's
operating results for the quarter and year ended October 31,
1999 and its financial condition as of October 31, 1999.
* Form 8-K/A, dated December 14, 1999, regarding the Company's
acquisition of the outstanding stock of Systems & Electronics
Inc. effective September 30, 1999.
13
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 16, 2000 By: /s/ Michael F. Shanahan, Sr.
------------------- ---------------------------------
Michael F. Shanahan, Sr.
Chairman of the Board
and Chief Executive Officer
Date: March 16, 2000 By: /s/ Gary C. Gerhardt
------------------- ---------------------------------
Gary C. Gerhardt
Vice Chairman-Administration and
Chief Financial Officer
14