-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, EVRtbdjDq5t6ugPECM5+FGSfMmV7nvvv1mY4Jbz60jfvPdZ/XOgKR+J1SgNyozq2 nLeTNebjSzyS8raoxYqpHw== 0000950114-98-000398.txt : 19980907 0000950114-98-000398.hdr.sgml : 19980907 ACCESSION NUMBER: 0000950114-98-000398 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980731 FILED AS OF DATE: 19980904 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ENGINEERED SUPPORT SYSTEMS INC CENTRAL INDEX KEY: 0000772891 STANDARD INDUSTRIAL CLASSIFICATION: AIR COND & WARM AIR HEATING EQUIP & COMM & INDL REFRIG EQUIP [3585] IRS NUMBER: 431313242 STATE OF INCORPORATION: MO FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-13880 FILM NUMBER: 98704619 BUSINESS ADDRESS: STREET 1: 1270 N PRICE RD CITY: ST LOUIS STATE: MO ZIP: 63132 BUSINESS PHONE: 3149935880 MAIL ADDRESS: STREET 1: 1270 N PRICE RD CITY: ST LOUIS STATE: MO ZIP: 63132 10-Q 1 QUARTERLY REPORT 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, 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 August 31, 1998 was 4,856,082. 2 ENGINEERED SUPPORT SYSTEMS, INC. INDEX
Page ---- Part I - Financial Information Item 1. Financial Statements (Unaudited) Condensed Consolidated Balance Sheets as of July 31, 1998 and October 31, 1997 3 Condensed Consolidated Statements of Income for the three and nine months ended July 31, 1998 and 1997 4 Condensed Consolidated Statements of Cash Flows for the three and nine months ended July 31, 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 12 Signatures 13 Exhibits 14
2 3 ENGINEERED SUPPORT SYSTEMS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS
July 31 October 31 1998 1997 ----------- ----------- (Unaudited) ASSETS Current Assets Cash and cash equivalents $ 4,742,551 $ 8,313,160 Accounts receivable 9,558,881 3,398,973 Contracts in process and inventories 19,244,765 7,072,377 Other current assets 1,864,454 1,423,620 ----------- ----------- Total Current Assets 35,410,651 20,208,130 Property, plant and equipment, less accumulated depreciation of $15,381,658 and $14,767,236 27,172,391 14,490,049 Intangible assets 25,396,787 825,406 Other assets 941,292 1,560,469 ----------- ----------- Total Assets $88,921,121 $37,084,054 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities Current maturities of long-term debt $ 6,454,174 $ 73,273 Accounts payable 4,801,088 5,596,760 Other current liabilities 7,850,664 2,978,407 ----------- ----------- Total Current Liabilities 19,105,926 8,648,440 Long-term debt 38,705,201 1,194,433 Deferred income taxes 2,642,295 2,642,295 ESOP guaranteed bank loan 762,600 873,300 Shareholders' Equity Common stock, par value $.01 per share; 10,000,000 shares authorized; 5,422,104 and 3,772,573 shares issued 54,221 37,726 Additional paid-in capital 10,466,227 9,698,665 Retained earnings 21,583,781 18,026,195 ----------- ----------- 32,104,229 27,762,586 Less ESOP guaranteed bank loan 762,600 873,300 Less treasury stock at cost, 621,772 and 598,858 shares 3,636,530 3,163,700 ----------- ----------- 27,705,099 23,725,586 ----------- ----------- Total Liabilities and Shareholders' Equity $88,921,121 $37,084,054 =========== =========== See notes to condensed consolidated financial statements.
3 4 ENGINEERED SUPPORT SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended Nine Months Ended July 31 July 31 -------------------------- --------------------------- 1998 1997 1998 1997 -------------------------- --------------------------- Net revenues $24,927,269 $23,926,087 $64,177,114 $67,508,389 Cost of revenues 19,047,032 19,852,518 49,344,649 56,640,821 ----------- ----------- ----------- ----------- Gross profit 5,880,237 4,073,569 14,832,465 10,867,568 Selling, general and administrative expense 3,035,326 1,935,323 7,943,372 5,534,028 ----------- ----------- ----------- ----------- Income from operations 2,844,911 2,138,246 6,889,093 5,333,540 Interest expense (income) 434,919 (23,411) 742,861 5,747 ----------- ----------- ----------- ----------- Income before income taxes 2,409,992 2,161,657 6,146,232 5,327,793 Income tax provision 963,000 864,000 2,456,000 2,129,000 ----------- ----------- ----------- ----------- Net income $ 1,446,992 $ 1,297,657 $ 3,690,232 $ 3,198,793 =========== =========== =========== =========== Basic earnings per share $.30 $.27 $.77 $.67 =========== =========== =========== =========== Diluted earnings per share $.29 $.26 $.74 $.65 =========== =========== =========== =========== See notes to condensed consolidated financial statements.
4 5 ENGINEERED SUPPORT SYSTEMS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months Ended July 31 ------------------------------- 1998 1997 ----------- ---------- From operating activities: Net income $3,690,232 $3,198,793 Depreciation and amortization 1,906,899 1,421,428 Gain on sale of assets (151,125) ----------- ---------- Cash provided (used) before changes in operating assets and liabilities 5,446,006 4,620,221 Net (increase) decrease in non-cash current assets (100,823) 4,407,801 Net increase (decrease) in non-cash current liabilities (2,242,549) (760,981) (Increase) decrease in other assets 988,767 180,856 ----------- ---------- Net cash provided by (used in) operating activities 4,091,401 8,447,897 ----------- ---------- From investing activities: Purchase of Marlo Coil, net of cash acquired (25,314,467) Purchase of Keco Industries, net of cash acquired (22,731,913) Purchase of manufacturing and distribution rights for McIntyre Engineering products (1,367,192) Additions to property, plant and equipment (1,116,706) (1,497,893) Proceeds from sale of property, plant and equipment 151,125 ----------- ---------- Net cash provided by (used in) investing activities (50,379,153) (1,497,893) ----------- ---------- From financing activities: Net payments under line-of-credit agreement (1,075,961) Payments of long-term debt (1,267,706) (1,439,691) Proceeds of long-term debt 45,000,000 Purchase of treasury stock (495,652) (957,091) Exercise of stock options 689,108 516,228 Cash dividends (132,646) (78,911) ----------- ---------- Net cash provided by (used in) financing activities 42,717,143 (1,959,465) ----------- ---------- Net increase (decrease) in cash and cash equivalents (3,570,609) 4,990,539 Cash and cash equivalents at beginning of period 8,313,160 1,415,773 ----------- ---------- Cash and cash equivalents at end of period $4,742,551 $6,406,312 =========== ========== See notes to condensed consolidated financial statements.
5 6 ENGINEERED SUPPORT SYSTEMS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) JULY 31, 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 nine month periods ended July 31, 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 All earnings per share amounts have been computed after giving effect to the stock split described in Note E. Average diluted common shares outstanding include common stock equivalents, which represent common stock options as computed based on the treasury stock method. Basic earnings per share for the three months ended July 31, 1998 and 1997 is based on average basic common shares outstanding of 4,790,372 and 4,726,484, respectively. Diluted earnings per share for the three months ended July 31, 1998 and 1997 is based on average diluted common shares outstanding of 5,019,260 and 4,929,858, respectively. Basic earnings per share for the nine months ended July 31, 1998 and 1997 is based on average basic common shares outstanding of 4,766,985 and 4,755,138, respectively. Diluted earnings per share for the nine months ended July 31, 1998 and 1997 is based on average diluted common shares outstanding of 4,985,906 and 4,945,067, respectively. NOTE C - CONTRACTS IN PROCESS AND INVENTORIES Contracts in process and inventories of Engineered Air Systems, Inc. and Keco Industries, 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 6 7 lower of cost or market using the first-in, first-out method. Contracts in process and inventories are comprised of the following:
July 31, 1998 October 31, 1997 ------------- ---------------- Raw materials $4,208,511 $1,535,860 Work-in-process 1,362,890 167,043 Finished goods 575,754 804,956 Inventories substantially applicable to government contracts in process, less progress payments of $13,145,417 and $9,333,930, respectively 13,097,610 4,564,518 ----------- ---------- $19,244,765 $7,072,377 =========== ==========
NOTE D - ACQUISITIONS On February 1, 1998, Engineered Coil Company, a wholly-owned subsidiary of the Company, 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, for approximately $25.4 million, including acquisition costs. The fair value of assets acquired, including goodwill of $17.0 million, was $31.0 million and liabilities assumed totaled $5.6 million. The purchase price was financed with approximately $2.9 million of available cash resources and bank term debt of $22.5 million. On June 24, 1998, the Company acquired all of the outstanding stock of Keco Industries, Inc., a manufacturer of military ground support equipment, for $25.6 million, including acquisition costs. (The purchase agreement also provides for an additional payment if the Company elects treatment of the transaction pursuant to Section 338(h)(10) of the Internal Revenue Code. The Company will make this election if it determines that the resulting income tax benefits exceed the additional purchase price. No consideration for this election is included in the purchase price above). The fair value of the assets acquired, including goodwill of $6.9 million, was $28.0 million and liabilities assumed totaled $2.4 million. The purchase price was financed with approximately $3.1 million of available cash resources and bank term debt of $22.5 million. The following unaudited pro forma summary presents the combined historical results of operations for the nine months ended July 31, 1998 and 1997 as adjusted to reflect the purchase transactions assuming the acquisitions had occurred at November 1, 1996. 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, 1996, nor are they necessarily indicative of the combined results that may occur in the future. 7 8
Nine Months Ended July 31 ------- 1998 1997 ----------- ------------ Net revenues $97,281,453 $120,903,665 =========== ============ Net income $3,843,809 $3,760,693 =========== ============ Basic earnings per share $.81 $.79 =========== ============ Diluted earnings per share $.77 $.76 =========== ============
NOTE E - STOCK SPLIT On June 26, 1998, the Company effected a 3-for-2 stock split in the form of a 50% stock dividend. All earnings per share amounts in this Form 10-Q have been restated to reflect this stock split. 8 9 ENGINEERED SUPPORT SYSTEMS, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS Net Revenues. Net revenues increased 4.2% in the third quarter of 1998 to $24.9 million from $23.9 million in the third quarter of 1997, and decreased 4.9% to $64.2 million in the first nine months of 1998 from $67.5 million in the comparable 1997 period. Net revenues from DoD contracts and sales of commercial air handling equipment decreased by $0.6 million to $17.5 million for the third quarter of 1998 from $18.1 million for the prior year period. This was despite an additional $7.4 million of net revenues generated by Marlo Coil, which was acquired February 1, 1998, and an additional $3.2 million of net revenues generated by Keco Industries, Inc. (Keco), which was acquired June 24, 1998. Net revenues from sales of injection molded plastic products increased $1.6 million to $7.4 million for the third quarter of 1998 from $5.8 million in the prior year. Net revenues for the nine months ended July 31, 1998 decreased by 4.9% to $64.2 million from $67.5 million for the comparable period in 1997. This decrease was due primarily to the fact that several significant DoD contracts completed, or were nearing completion of, their production cycles, including those for Aviation Ground Power Units, C-5/MA-3D Flight Line Air Conditioners, Harvest Falcon Water Distribution Systems and Revetment Kits. Net revenues from DoD contracts and sales of commercial air handling equipment decreased by $4.1 million to $44.4 million for the first nine months of 1998 from $48.5 million for the prior year period. This was despite an additional $14.6 million of net revenues generated by Marlo Coil and an additional $3.2 million generated by Keco subsequent to their respective acquisitions. Although several major contracts, primarily the Chemical/Biological Protected Shelter System (CBPSS), the Chemically/Biologically Hardened Air Management Plant (CHAMP), and the Field Deployable Environmental Control Units (FDECU), underwent significant engineering and development efforts during the nine months ended July 31, 1998, substantial revenues derived from the production phases of these contracts are not expected to begin until fiscal 1999. Net revenues from sales of injection molded plastic products increased $0.8 million to $19.8 million for the first nine months of 1998 from $19.0 million in the comparable 1997 period. Gross Profit. Gross profit for the third quarter of 1998 increased 44.4% to $5.9 million (23.6% of net revenues) from $4.1 million (17.0% of net revenues) in the prior year. Gross profit for the first nine months of 1998 increased 36.5% to $14.8 million (23.1% of net revenues) from $10.9 million (16.1% of net revenues) for the comparable period in 1997. These increases were primarily the result of higher margins within the Company's historical operations due to a more profitable mix of contracts and products, as well as the addition of Marlo Coil which generated gross margins above those provided by the Company's historical operations. 9 10 Selling, General and Administrative Expense. Selling, general and administrative expense increased by $1.1 million to $3.0 million (12.2% of net revenues) for the quarter ended July 31, 1998 from $1.9 million (8.1% of net revenues) for the third quarter of 1997, and increased by $2.4 million to $7.9 million (12.4% of net revenues) for the nine months ended July 31, 1998 from $5.5 million (8.2% of net revenues) for the comparable period in 1997. These increases were due to the addition of selling, general and administrative expense generated by the two businesses acquired. Net Interest Expense. Net interest expense increased by $0.5 million to $0.4 million for the quarter ended July 31, 1998 and by $0.7 million to $0.7 million for the nine months ended July 31, 1998 as compared to the respective prior year periods. These increases were a result of debt incurred in conjunction with the Marlo Coil and Keco acquisitions. Income Tax Provision. The effective income tax rate for the three and nine month periods ended July 31, 1998 and 1997 was 40.0%. Net Income. As a result of the forgoing, the net income of the Company increased by 11.5% to $1.4 million (5.8% of net revenues) for the quarter ended July 31, 1998 from $1.3 million (5.4% of net revenues) for the third quarter of 1997, and increased by 15.4% to $3.7 million (5.8% of net revenues) for the nine months ended July 31, 1998 from $3.2 million (4.7% of net revenues) for the comparable period in 1997. LIQUIDITY AND CAPITAL RESOURCES In March 1998, the Company restated and amended its credit facility to provide a $45.0 million term loan to finance the Marlo Coil and Keco acquisitions and to provide a $10.0 million revolving credit facility. Principal payments on the term loan are scheduled to begin September 1, 1998, with the final payment due May 1, 2003. The Company may choose an interest rate calculated at either LIBOR plus an applicable margin or at the prime rate less 0.5%. The margin applicable to LIBOR varies from 0.5% to 1.5% depending upon the Company's ratio of total indebtedness to earnings before interest, taxes, depreciation and amortization (leverage ratio).Pursuant to the terms of the related and amended credit facility, the Company is subject to various financial and operating covenants. Although the Company is currently in compliance with all such covenants, the failure of the Company to comply with any of these covenants would constitute a default which, if not timely corrected or waived, could result in an acceleration of the maturity of certain of the debt obligations of the Company. 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 bank borrowings under its $10.0 million revolving line of credit. On July 31, 1998, the Company's working capital and ratio of current assets to current liabilities were $16.3 million and 1.85 to 1. The Company generated $4.1 million and $8.4 million in cash flow from operations in the nine months ended July 31, 1998 and 1997, respectively, which was used, in part, to finance investment in property, plant and equipment of $1.1 million and $1.5 million, respectively, in such periods. During the first nine months of 1998, the Company also acquired substantially all of the net assets of Marlo Coil for $25.4 million and all of the capital stock of Keco for $25.6 million. These acquisitions were financed 10 11 with term loan borrowings under the restated and amended credit facility and available cash resources. See Note D of the July 31, 1998 condensed consolidated financial statements for further discussion. BUSINESS AND MARKET CONSIDERATIONS Approximately 56% of consolidated net revenues for the nine months ended July 31, 1998 were derived from defense orders by the U.S. government and its agencies. (This percentage will increase as a result of the Keco acquisition.) As of July 31, 1998, the Company's combined backlog of defense orders at Engineered Air, Marlo Coil and Keco totaled $74.9 million, with related government options of an additional $359.2 million. Management continues to pursue potential acquisitions, primarily of those companies providing strategic consolidation within the defense industry. 11 12 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 33-77338 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/A, amendments 1 and 2, were filed on July 2 and August 13, 1998 related to the acquisition of Keco Industries, Inc. 12 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: September 4, 1998 By: /s/ Michael F. Shanahan Sr. ----------------------------- ------------------------------------ Michael F. Shanahan Sr. Chairman of the Board, President and Chief Executive Officer Date: September 4, 1998 By: /s/ Gary C. Gerhardt ----------------------------- ------------------------------------ Gary C. Gerhardt Executive Vice President and Chief Financial Officer 13 EX-11 2 COMPUTATION OF EARNINGS 1 Exhibit 11 ENGINEERED SUPPORT SYSTEMS, INC. STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Nine Months Ended July 31 July 31 ------------------------- -------------------------- 1998 1997 1998 1997 ---------- ---------- ---------- ---------- NET INCOME $1,446,992 $1,297,657 $3,690,232 $3,198,793 ========== ========== ========== ========== BASIC EARNINGS PER SHARE Average shares outstanding 4,790,372 4,726,484 4,766,985 4,755,138 ========== ========== ========== ========== $.30 $.27 $.77 $.67 ========== ========== ========== ========== DILUTED EARNINGS PER SHARE Average shares outstanding 4,790,372 4,726,484 4,766,985 4,755,138 Net effect of dilutive stock options 228,888 203,374 218,921 189,929 ---------- ---------- ---------- ---------- 5,019,260 4,929,858 4,985,906 4,945,067 ========== ========== ========== ========== $.29 $.26 $.74 $.65 ========== ========== ========== ========== Based on the treasury stock method.
14 EX-27 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM 10-Q FOR THE NINE MONTHS ENDED JULY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 9-MOS OCT-31-1998 NOV-01-1997 JUL-31-1998 4,742,551 0 9,758,381 199,500 19,244,765 35,410,651 42,554,049 15,381,658 88,921,121 19,105,926 39,467,801 54,221 0 0 27,650,878 88,921,121 64,177,114 64,177,114 49,344,649 49,344,649 7,952,872 (9,500) 742,861 6,146,232 2,456,000 3,690,232 0 0 0 3,690,232 .77 .74
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