FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended June 30, 1994
Commission File No. 1-5237
E-SYSTEMS, INC.
- - ------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 75-1183105
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
P.O. Box 660248, Dallas, Texas 75266-0248
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(Address of principal executive offices) (Zip Code)
214-661-1000
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(Registrant's telephone number, including area code)
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 [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical
date:
Common Stock, $1.00 par value - 33,983,435 as of June 30, 1994
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PART I FINANCIAL INFORMATION
FINANCIAL STATEMENTS
(UNAUDITED)
E-SYSTEMS, INC. and SUBSIDIARIES
Statement of Consolidated Income
Six Months Ended June 30, 1994 and June 30, 1993
(Amounts in Thousands)
<CAPTION>
Six Months Ended
June 30, 1994 June 30, 1993
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<S> <C> <C>
Net Sales $ 983,229 $1,064,915
Other Income 2,052 4,307
---------- ----------
985,281 1,069,222
Costs and Expenses
Contract and manufacturing
costs, selling, general and
administrative expense 898,350 979,544
Interest expense 1,042 3,971
--------- ---------
899,392 983,515
--------- ---------
Income before federal
income taxes 85,889 85,707
Provision for taxes on income -
Note B 28,343 28,283
--------- ---------
NET INCOME 57,546 57,424
========= =========
Earnings Per Share $1.68 $1.70
========= =========
Dividends Per Share $0.600 $0.550
========= =========
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E-SYSTEMS, INC. and SUBSIDIARIES
Statement of Consolidated Income
Three Months Ended June 30, 1994 and June 30, 1993
(Amounts in Thousands)
<CAPTION>
Three Months Ended
June 30, 1994 June 30, 1993
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<S> <C> <C>
Net Sales $ 488,100 $ 533,474
Other Income 1,024 2,827
---------- ----------
489,124 536,301
Costs and Expenses
Contract and manufacturing
costs, selling, general and
administrative expense 444,658 489,594
Interest expense 530 1,939
--------- ---------
445,188 491,533
--------- ---------
Income before federal
income taxes 43,936 44,768
Provision for taxes on income -
Note B 14,499 14,773
--------- ---------
NET INCOME 29,437 29,995
========= =========
Earnings Per Share $0.86 $0.89
========= =========
Dividends Per Share $0.300 $0.275
========= =========
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E-SYSTEMS, INC. and SUBSIDIARIES
Consolidated Balance Sheet
(Amounts in Thousands)
<CAPTION>
ASSETS June 30, 1994 December 31, 1993
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 51,155 $ 32,638
Accounts receivable 398,367 426,404
Unreimbursed costs and fees under
cost-plus-fee contracts 220,385 207,519
Fixed-price contracts:
Fixed-price contracts in progress 115,477 54,644
Less progress and advance payments 15,344 21,580
--------- ----------
100,133 33,064
Raw materials and purchased parts 7,990 11,714
Prepaid expenses and other assets 25,067 38,623
--------- ----------
TOTAL CURRENT ASSETS 803,097 749,962
OTHER ASSETS
Prepaid pension costs 37,358 36,489
Deferred charges and other 58,525 56,653
Deferred federal income taxes 65,012 65,544
Costs in excess of net
assets acquired 69,755 62,401
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230,650 221,087
PROPERTY, PLANT AND EQUIPMENT 504,717 498,454
Less allowances for depreciation 195,549 190,330
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309,168 308,124
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$1,342,915 $1,279,173
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<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY June 30, 1994 December 31, 1993
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<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 70,147 $ 70,313
Accrued liabilities 96,202 73,495
Short-term obligations and current
portion of long-term debt 25,256 25,256
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TOTAL CURRENT LIABILITIES 191,605 169,064
LONG-TERM DEBT
Notes payable 738 738
Installment lease obligations 7,077 7,135
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7,815 7,873
DEFERRED ITEMS
Retiree health care and life
insurance benefits 288,211 290,795
Other deferred items 44,267 41,445
---------- ----------
332,478 332,240
STOCKHOLDERS' EQUITY
Common stock, par value $1.00
Authorized 50,000,000 shares;
issued and outstanding 33,983,435
shares in 1994 and 33,884,797
shares in 1993. 33,983 33,885
Additional capital 175,070 172,300
Retained earnings 601,964 563,811
---------- ----------
811,017 769,996
---------- ----------
$1,342,915 $1,279,173
========== ==========
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E-SYSTEMS, INC. and SUBSIDIARIES
Statement of Consolidated Cash Flows
Six Months Ended June 30, 1994 and June 30, 1993
(Amounts in Thousands)
<CAPTION>
1994 1993
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $57,546 $57,424
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 26,588 27,027
Gain on sale of investment securities (231) (1,627)
Changes in operating assets and liabilities:
Decrease in accounts receivable 56,970 90,295
Increase in unreimbursed costs and
fees under cost-plus-fee contracts (12,866) (13,441)
(Increase) decrease in fixed-price
contracts in progress (60,833) 3,326
Decrease in progress and advance
payments (35,169) (54,521)
Increase in prepaid pension costs (869) (5,809)
Decrease in accounts payable (168) (12,870)
Increase in accrued liabilities 15,083 16,824
Increase (decrease) in other assets
and liabilities 15,531 (11,481)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 61,582 95,147
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<CAPTION>
1994 1993
- - ---------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and
equipment (28,242) (26,513)
Proceeds from disposals of property,
plant, and equipment 2,003 80
------- -------
NET CASH USED IN INVESTING ACTIVITIES (26,239) (26,433)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under short-term agreements 0 840
Principal payments on long-term debt
and installment lease obligations (196) (528)
Proceeds from exercise of stock options 2,868 11,505
Dividends paid (19,498) (17,299)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (16,826) (5,482)
------- -------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 18,517 63,232
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 32,638 62,240
------- --------
CASH AND CASH EQUIVALENTS AT END OF
SECOND QUARTER $51,155 $125,472
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Note A -- Basis of Presentation
- - --------------------------------
The accompanying unaudited consolidated condensed financial
statements have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all
information and notes necessary for a fair presentation of
financial position, results of operations, and cash flows in
conformity with generally accepted accounting principles. In
the opinion of management, all adjustments necessary for a fair
presentation of the results of the interim period have been
made and are of a normal, recurring nature. Certain 1993
amounts have been reclassified to conform to the 1994 presentation.
Note B -- Federal Income Taxes
- - ------------------------------
The effective income tax rate for the first six months of 1994
and 1993 is less than the statutory rate due to the tax effect
of income excluded under Foreign Sales Corporation tax
regulations and the tax benefit of certain ESOP dividends.
Note C -- Earnings Per Share
- - ----------------------------
Earnings per share is computed based on the sum of the average
outstanding common shares and common equivalent shares (Quarter
ended June 30, 1994 and June 30, 1993, 34,282,000 and
33,840,000, respectively; Six months ended June 30, 1994 and
June 30, 1993, 34,343,000 and 33,773,000, respectively). Common
equivalent shares assume the exercise of all dilutive stock
options. Primary and fully dilutive earnings per share are
essentially the same.
Note D -- Contingencies
- - -----------------------
There have been no significant changes in the status of
contingencies since December 31, 1993. Refer to Management's
Discussion and Analysis for a discussion of contingencies.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
- - ------------------------------------
Analysis of liquidity and capital condition - Net working
capital increased $31 million from the prior year-end to $611
million. Net cash provided by operating activities was $62
million for the six months ended June 30, 1994 compared
to $95 million for the six months ended June 30, 1993.
This change in net cash provided by operating activities
was primarily due to costs incurred on fixed-priced programs
not yet billable to the customer and the production of
commercial inventories for EMASS storage products. Cash and
cash equivalents at the beginning of the year and funds
provided by operations were used to finance capital expenditures
of $28 million and pay dividends of $19 million.
The ratio of total debt to equity was .04 at June 30, 1994
which is unchanged from the total debt to equity ratio at
December 31, 1993.
The ratio of current assets to current liabilities was 4.2
at June 30, 1994 compared to 4.4 at December 31, 1993.
Interest expense through June 30, 1994 of $1.0 million is
down when compared to interest expense for the same period in
1993 of $4.0 million. This decrease is primarily due to the $50
million pay-off of the five year, fixed rate Senior Notes in
August 1993.
Current financing agreements provide lines of credit up to $350
million of which none was borrowed at June 30, 1994.
Management believes these lines of credit and internally
generated funds will be more than adequate to meet increased
working capital requirements, capital expansion projects,
dividend payments to shareholders and satisfy payment of the
Company's debt obligations as they mature.
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BUSINESS ENVIRONMENT
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The ongoing and dramatic geopolitical changes occurring in the
United States and throughout the world continue to result in changes
in the requirements and priorities established by Congress and the
administration. Defense spending continues to decline with FY 1994
authorization at $262 billion and an administration target of $200
billion by the end of the decade. The total intelligence budget is
expected to remain approximately flat over the next several years.
Our customer environment is also changing with a continuing
re-evaluation of roles and missions, pressure to reduce spending and
a push to combine common functions within the various departments
and agencies.
There continues to be a large number of political and military
pressure points throughout the world. The two currently dominating
are the Bosnian conflict in Eastern Europe and the uncertainty that
exists in the former Soviet Union. The number and diversity of
conflicts or potential conflicts, coupled with decreasing forces,
makes the intelligence function more important than ever. The
Company believes there will be continuing need for precision weapon
systems, expert command and control capabilities, and the collection
and distribution of precise and timely intelligence information. As
a leader in the design, development, deployment and operation of
sophisticated information-oriented collection, analysis, monitoring
and dissemination systems, the company is well-positioned to respond
to these needs.
We are also applying our technical and business strengths to markets
which are outside our traditional business. E-Systems was selected
as the prime contractor for the Royal Australian Air Force P-3C
"Orion" Maritime Patrol Aircraft and associated support facilities.
This program is the first of several major P-3 sensor upgrade
programs planned over the next several years by many nations. These
programs combined with increasing market acceptance of our EMASS
information storage and retrieval products and our continuing push
into medical image processing and information are expected to provide
a larger non-traditional business base for the Company within the next
several years.
With the above mentioned geopolitical changes, the international
market for our products and systems is taking on a new look.
Governments who previously depended on the United States and/or NATO
to provide Command, Control and Communications, surveillance and
analysis functions are now faced with providing these capabilities.
As a result we are presently seeing opportunities in several countries
and have booked projects in some. We believe this trend, along
with our increasing EMASS penetration, will continue to yield a
growing international component of our business base.
The Company is a developer and producer of high technology defense
electronic systems and services, consisting principally of systems
design, integration, hardware modification and development for the
U.S. Government or other prime government contractors. The Company's
business base consists of both cost-type and fixed price contracts
with 60 percent being cost-type. The profitability of cost-type
contracts is contingent upon several factors: customer's
evaluation of performance on contracts, costs actually incurred,
delivery schedule, quality and incentive or award fee arrangements.
Given this determination of profitability, contract costs and
related margins are not readily explainable in typical manufacturing
terms. Also, due to the nature of the products or services provided
by the Company, many contracts are highly sensitive and classified
under relevant Department of Defense regulations.
Quarter and Six Months Ended June 30, 1994 Compared to Quarter
and Six Months Ended June 30, 1993
- - ------------------------------------------------------------
Net sales for the second quarter of 1994 totaled $488 million,
down 9 percent from $533 million reported in the comparable
period of 1993. Net sales through June 30, 1994 decreased to
$983 million, or 8 percent, when compared to the same period in
1993. This decline in net sales for the quarter and six months
ended June 1994 was primarily in the Reconnaissance and Surveillance
product segment. Net sales in this segment totaled $287 million for
the second quarter of 1994, down $45 million or 13 percent, from
$332 million in the comparable period in 1993. Net sales through
June 30, 1994 decreased to $579 million, down $64 million, when
compared to net sales through June 30, 1993. The decline in sales
in this product segment is attributable to several long-term
contracts which are nearing maturity. The content of these
long-term contracts is now primarily labor as opposed to
labor and materials in the prior year. In addition, the Company has
exerienced delays in new awards in this product segment which are
expected in the last half of 1994.
Operating profits for the quarter and six months ended June 30, 1994
were, $44.8 million and $87.4 million, respectively, which is
comparable to operating profits for the same periods in 1993.
Net income for the second quarter of 1994 was $29.4 million, or
$0.86 per share, compared to $30.0 million, or $0.89 per share, for
the same period last year. Net income through June 30, 1994
approximates net income for the comparable period in 1993. Earnings
per share for the six months ended in 1994 was $1.68, a decline of
$0.02 per share, when compared to year-to-date 1993.
COMMITMENTS AND CONTINGENCIES
- - -----------------------------
Changes to procurement regulations in recent years, as well as
the Government's drive against "fraud, waste and abuse" in
defense procurement systems have increased the complexity and
cost of doing business with the Government. Some of these
changes have redefined the ability to recover various standard
business costs which the Government will not allow, in whole or
in part, as the cost of doing business on Government contracts.
Other legal and regulatory practices have increased the number
of auditors, inspectors general and investigators to the point
that the Company, like every other major Government contractor,
is the constant subject of audits, investigations and inquiries
concerning various aspects of its business practices. One
pending investigation resulted in subpoenas by the Government
for a large number of documents, and government interviews of a
large number of current and former employees. The Company
believes that this investigation, which has been ongoing for
over four years, is currently dormant. The Company is unaware
that the investigation produced credible evidence of material
wrongdoing by it or its employees and, therefore, believes that
charges or claims will not be brought against it or its
employees arising from this investigation.
The Company regards charges of violation of government
procurement regulations as extremely serious and recognizes
that such charges could have a material adverse effect on the
Company. If the Company is determined to be in noncompliance
with any of the applicable laws and regulations, the possibility
exists of penalties and debarment or suspension from receiving
additional Government contracts.
The Company is involved in other disagreements which are in the
ordinary course of the Company's business activities that are
not expected to have a material adverse effect on the Company's
financial position. In addition, the Company is involved in
certain environmental investigation matters with governmental
agencies, and pending and threatened lawsuits and claims by
current and former employees alleging variously age, race, sex and
disability discrimination or retaliatory discharge.
Management believes that the impact of these matters, if any,
on the Company's financial condition will not be material.
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PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) Date of Meeting: April 27, 1994
Annual Meeting of Stockholders
(c) Directors elected at the Meeting:
Votes
For Withheld
-----------------------
C. Roland Haden 27,046,491 615,113
Martin R. Hoffmann 27,048,142 613,462
E. Gene Keiffer 27,051,063 610,541
Francine I. Neff 27,044,818 616,786
1994 Employee Stock Option Plan:
For Against Abstain Nonvotes
---------- --------- ------- ---------
20,234,763 4,458,144 214,703 2,753,993
Item 6. Exhibits and Reports on Form 8-K
(a) Statement re Computation of Per Share Earnings
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the
Quarter ended June 30, 1994.
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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.
E-SYSTEMS, INC.
(Registrant)
Date: August 10, 1994 James W. Crowley
Vice President,
Secretary and
General Counsel
Date: August 10, 1994 James W. Pope
Vice President-
Finance and
Chief Financial
Officer
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COMPUTATION OF PER SHARE EARNINGS
(Amounts in thousands expect per share date)
<CAPTION>
Six Months Ended June 30,
-------------------------
1994 1993
<S> <C> <C>
PRIMARY
Average shares outstanding 33,964 33,202
Net effect of dilutive stock options
based on the treasury stock method
using average market price 379 571
------ ------
Total 34,343 33,773
Net Income $57,546 $57,424
======= =======
Per Share Amount $ 1.68 $ 1.70
======= =======
FULLY DILUTED
Average shares outstanding 33,964 33,202
Net effect of dilutive stock options
based on the treasury stock method
using higher of average or ending
market price 379 640
------ ------
Total 34,343 33,842
Net Income $57,546 $57,424
======= =======
Per Share Amount $ 1.68 $ 1.70
======= =======
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