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 September 30, 1994
Commission File No. 1-5237
E-SYSTEMS, INC.
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(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 - 34,033,245 as of September 30, 1994
<PAGE>
<TABLE>
PART I FINANCIAL INFORMATION
FINANCIAL STATEMENTS
(UNAUDITED)
E-SYSTEMS, INC. and SUBSIDIARIES
Statement of Consolidated Income
Nine Months Ended September 30, 1994 and September 30, 1993
(Amounts in Thousands)
<CAPTION>
Nine Months Ended
September 30, 1994 September 30, 1993
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<S> <C> <C>
Net Sales $1,475,253 $1,573,531
Other Income 3,662 7,730
---------- ----------
1,478,915 1,581,261
Costs and Expenses
Contract and manufacturing
costs, selling, general and
administrative expense 1,354,654 1,444,048
Special Charges - Note F 24,495 --
Interest expense 1,594 5,468
--------- ---------
1,380,743 1,449,516
--------- ---------
Income before federal
income taxes 98,172 131,745
Provision for taxes on income -
Note B 32,397 41,763
--------- ---------
NET INCOME $ 65,775 $ 89,982
========= =========
Earnings Per Share $1.92 $2.65
========= =========
Dividends Per Share $0.900 $0.825
========= =========
</TABLE>
<PAGE>
<TABLE>
E-SYSTEMS, INC. and SUBSIDIARIES
Statement of Consolidated Income
Three Months Ended September 30, 1994 and September 30, 1993
(Amounts in Thousands)
<CAPTION>
Three Months Ended
September 30, 1994 September 30, 1993
- ---------------------------------------------------------------------
<S> <C> <C>
Net Sales $ 492,024 $ 508,616
Other Income 1,610 3,423
---------- ----------
493,634 512,039
Costs and Expenses
Contract and manufacturing
costs, selling, general and
administrative expense 456,304 464,504
Special Charges - Note F 24,495 --
Interest expense 552 1,497
--------- ---------
481,351 466,001
--------- ---------
Income before federal
income taxes 12,283 46,038
Provision for taxes on income -
Note B 4,054 13,480
--------- ---------
NET INCOME $ 8,229 $ 32,558
========= =========
Earnings Per Share $0.24 $0.95
========= =========
Dividends Per Share $0.300 $0.275
========= =========
</TABLE>
<PAGE>
<TABLE>
E-SYSTEMS, INC. and SUBSIDIARIES
Consolidated Balance Sheet
(Amounts in Thousands)
<CAPTION>
ASSETS September 30, 1994 December 31, 1993
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 71,236 $ 32,638
Accounts receivable 405,624 426,404
Unreimbursed costs and fees under
cost-plus-fee contracts 195,447 207,519
Fixed-price contracts:
Fixed-price contracts in progress 109,961 54,644
Less progress and advance payments 12,055 21,580
--------- ----------
97,906 33,064
Raw materials and purchased parts 8,247 11,714
Prepaid expenses and other assets 36,310 38,623
--------- ----------
TOTAL CURRENT ASSETS 814,770 749,962
OTHER ASSETS
Prepaid pension costs 38,420 36,489
Deferred charges and other 62,434 56,653
Deferred federal income taxes 64,975 65,544
Costs in excess of net
assets acquired 77,111 62,401
---------- ----------
242,940 221,087
PROPERTY, PLANT AND EQUIPMENT 494,870 498,454
Less allowances for depreciation 200,930 190,330
---------- ----------
293,940 308,124
---------- ----------
$1,351,650 $1,279,173
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY September 30, 1994 December 31, 1993
- ---------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 75,495 $ 70,313
Accrued liabilities 101,054 73,495
Short-term obligations and current
portion of long-term debt 24,000 25,256
---------- ----------
TOTAL CURRENT LIABILITIES 200,549 169,064
LONG-TERM DEBT
Notes payable 738 738
Installment lease obligations 6,328 7,135
---------- ----------
7,066 7,873
DEFERRED ITEMS
Retiree health care and life
insurance benefits 287,651 290,795
Other deferred items 45,698 41,445
---------- ----------
333,349 332,240
STOCKHOLDERS' EQUITY
Common stock, par value $1.00
Authorized 50,000,000 shares;
issued and outstanding 34,033,245
shares in 1994 and 33,884,797
shares in 1993. 34,033 33,885
Additional capital 176,588 172,300
Retained earnings 600,065 563,811
---------- ----------
810,686 769,996
---------- ----------
$1,351,650 $1,279,173
========== ==========
</TABLE>
<PAGE>
<TABLE>
E-SYSTEMS, INC. and SUBSIDIARIES
Statement of Consolidated Cash Flows
Nine Months Ended September 30, 1994 and September 30, 1993
(Amounts in Thousands)
<CAPTION>
1994 1993
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $65,775 $89,982
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 40,214 41,137
Provision for deferred income taxes -- (1,727)
Gain on sale of investment securities (616) (1,866)
Changes in operating assets and liabilities:
Decrease in accounts receivable 133,346 56,051
Decrease in unreimbursed costs and
fees under cost-plus-fee contracts 12,072 814
(Increase) decrease in fixed-price
contracts in progress (55,317) 7,726
Decrease in progress and advance
payments (122,091) (37,983)
Increase in prepaid pension costs (1,931) (7,827)
Increase (decrease) in accounts payable 5,180 (24,714)
Increase in accrued liabilities 25,041 10,862
Decrease in other assets and liabilities (873) (9,122)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 100,800 123,333
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and
equipment (31,647) (40,934)
Proceeds from disposals of property,
plant, and equipment 2,012 143
Business acquisitions (5,003) --
------- -------
NET CASH USED IN INVESTING ACTIVITIES (34,638) (40,791)
<PAGE>
<CAPTION>
1994 1993
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<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under short-term agreements -- 1,076
Principal payments on long-term debt
and installment lease obligations (2,307) (51,581)
Proceeds from exercise of stock options 4,436 22,870
Dividends paid (29,693) (26,452)
------- -------
NET CASH USED IN FINANCING ACTIVITIES (27,564) (54,087)
------- -------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 38,598 28,455
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 32,638 62,240
------- --------
CASH AND CASH EQUIVALENTS AT END OF
THIRD QUARTER $71,236 $90,695
======= =======
</TABLE>
<PAGE>
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 nine 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 September 30, 1994 and September 30, 1993, 34,327,000 and
34,228,000, respectively; Nine months ended September 30, 1994 and
September 30, 1993, 34,331,000 and 33,942,000, 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.
Note E - Shareholder Rights Plan
- --------------------------------
On September 28, 1994, the Board of Directors adopted a Stockholder
Rights Plan designed to deter coercive takeover tactics including the
accumulation of common shares in the open market, or through private
transactions, and to prevent an acquirer from gaining control of the
Company without offering a fair price to all of the Company's
stockholders.
Under the Plan, rights will be distributed as a dividend at the rate
of one right for each share of common stock held by stockholders of
record at the close of business on October 17, 1994. Each right will
initially entitle stockholders to buy one share of preferred stock
for $130. The rights are not currently exercisable, but would become
exercisable if certain events occurred relating to a person or group
acquiring or attempting to acquire 15 percent or more of the
outstanding shares of common stock.
The rights may be redeemed by the Company at $0.01 per right at any
time until 10 days following a public announcement that a 15 percent
position has been acquired. The rights will expire on October 17,
2004.
Note F - Special Charges
- ------------------------
During the third quarter, the Company reassessed the investments it
had made in several nontraditional business areas such as mass
storage, medical and others. As a result of this assessment, the
Company concluded it was necessary to write-down $24.5 million in
costs associated with some of these ventures. The $24.5 million in
special charges consists of the following: mass storage, $15.6
million, medical, $7.1 million, and miscellaneous other areas, $1.8
million.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
- ------------------------------------
Analysis of liquidity and capital condition - Net working
capital increased $33 million from the prior year-end to $614
million. Net cash provided by operating activities was $101
million for the nine months ended September 30, 1994 compared
to $123 million for the nine months ended September 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 $32 million and pay dividends of $30 million.
The ratio of total debt to equity was .04 at September 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 4.1
at September 30, 1994 compared to 4.4 at December 31, 1993.
Interest expense through September 30, 1994 of $1.6 million is
down when compared to interest expense for the same period in
1993 of $5.5 million. This decrease is primarily due to the $50
million pay-off of the five year, fixed rate Senior Notes in
August 1993.
During October 1994, the Company terminated two revolving credit
agreements totaling $250 million and replaced them with a single $250
million revolving credit agreement terminating October 19, 1998.
This resulted in lines of credit totaling $350 million of which none
was borrowed at September 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.
BUSINESS ENVIRONMENT
- --------------------
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 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. The spin-off of the our
mass storage operations into a wholly-owned subsidiary, EMASS, Inc.,
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. In addition, E-Systems
was selected as the prime contractor for the Royal Australian Air
Force P-3C "Orion" Maritime Patrol Aircraft and associated support
facilities in the second quarter and subsequently selected as the
prime contractor on the U.S. Navy P-3C equivalent. These programs
are the first of several major P-3 sensor upgrade programs planned
over the next several years by many nations. We believe these
programs, 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 Nine Months Ended September 30, 1994 Compared to
Quarter and Nine Months Ended September 30, 1993
- ------------------------------------------------------------
Net sales for the third quarter of 1994 totaled $492 million,
down 3 percent from $509 million reported in the comparable
period of 1993. Net sales through September 30, 1994 decreased to
$1.475 billion, or 6 percent, when compared to the same period in
1993. This decline in net sales for the quarter and nine months
ended September 1994 was primarily in the Reconnaissance and
Surveillance product segment. Net sales in this segment totaled $278
million for the third quarter of 1994, down $26 million or 9 percent,
from $304 million in the comparable period in 1993. Net sales
through September 30, 1994 decreased to $857 million, down $90
million, when compared to net sales through September 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.
During the third quarter, the Company reassessed the investments it
had made in several nontraditional business areas such as mass
storage, medical and others. As a result of this assessment, the
Company concluded it was necessary to write-down certain
productization costs associated with some of these ventures resulting
in a decrease in operating profits for the quarter and nine months
ended September 30, 1994. (See Note F to the interim financial
statements). Operating profits for the quarter ended September 30,
1994 totaled $21.3 compared to $45.5 million in the same period last
year. Operating profits through September 30, 1994 were $108.7
million, down 18 percent when compared to year-to-date 1993.
Net income for the third quarter of 1994 was $8.2 million, or $0.24
per share, compared to $32.6 million, or $0.95 per share, for the
same period last year. Net income through September 30, 1994 was
$65.8 million, or $1.92 per share, which is down when compared to net
income for the same period in 1993 of $90.0 million, or $2.65 per
share. The decrease in net income is primarily due to the special
charges discussed above and an additional net-of-tax charge of $5.6
million to reflect a lawsuit judgment and associated legal expenses
recently rendered in the Air Sea Forwarders Case.
<PAGE>
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.
In January 1994, a former Industrial Security Investigator for
the Company, Mr. John R. Lanting, Jr., resigned his job and filed
a wrongful termination lawsuit against the Company in the State
District Court in Houston, Texas. Mr. Lanting alleged constructive
termination caused by his refusal to perform alleged illegal acts.
The Court has dismissed Mr. Lanting's claims. The lawsuit has since
been amended to seek damages for constructive termination based on
"severe disappointment, indignation, wounded pride, shame, despair
and public humiliation", causing mental anguish, emotional distress
and loss of wages. The case seeks $3 million in actual damages and
punitive damages of four times the actual damages.
Subsequently, the Company became aware through press reports of the
filing by Mr. Lanting of a second civil lawsuit in the United States
District Court for the Southern District of Texas (Galveston),
brought under the so-called qui tam provisions of the False Claims
Act, which permit an individual to bring suit in the name of the
Government and share in any recovery received by the Government. Mr.
Lanting's second lawsuit is currently under seal while the Justice
Department conducts an investigation to determine whether it should
intervene in the prosecution of the case. Although the Company is,
therefore, unaware of the nature of Mr. Lanting's allegations in the
second lawsuit, the Company is also unaware of any conduct which
would support a qui tam recovery by Mr. Lanting.
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 if there is any impact of the foregoing
matters on the Company's financial condition it will not be
material. In the Lanting qui tam case the allegations are unknown
and are not subject to evaluation at this time; however, management
is not aware of any matters in relation to this case which would
result in amounts material to the Company's financial condition.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Statement re Computation of Per Share Earnings
(b) Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the
Quarter ended September 30, 1994.
<PAGE>
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: November 11, 1994 James W. Crowley
Vice President,
Secretary and
General Counsel
Date: November 11, 1994 James W. Pope
Vice President-
Finance and
Chief Financial
Officer
<TABLE>
COMPUTATION OF PER SHARE EARNINGS
(Amounts in thousands expect per share data)
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1994 1993
<S> <C> <C>
PRIMARY
Average shares outstanding 33,977 33,354
Net effect of dilutive stock options
based on the treasury stock method
using average market price 354 588
------- -------
Total 34,331 33,942
Net Income $65,775 $89,982
======= =======
Per Share Amount $ 1.92 $ 2.65
======= =======
FULLY DILUTED
Average shares outstanding 33,977 33,354
Net effect of dilutive stock options
based on the treasury stock method
using higher of average or ending
market price 354 676
------- -------
Total 34,331 34,030
Net Income $65,775 $89,982
======= =======
Per Share Amount $ 1.92 $ 2.64
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THE SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM STATEMENT OF
CONSOLIDATED INCOME, CONSOLIDATED BALANCE
SHEET AND STATEMENT OF CONSOLIDATED CASH
FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 71,236
<SECURITIES> 0
<RECEIVABLES> 601,071
<ALLOWANCES> 0
<INVENTORY> 106,153
<CURRENT-ASSETS> 814,770
<PP&E> 494,870
<DEPRECIATION> 200,930
<TOTAL-ASSETS> 1,351,650
<CURRENT-LIABILITIES> 200,549
<BONDS> 0
<COMMON> 34,033
0
0
<OTHER-SE> 776,653
<TOTAL-LIABILITY-AND-EQUITY> 1,351,650
<SALES> 1,475,253
<TOTAL-REVENUES> 1,478,915
<CGS> 1,354,654
<TOTAL-COSTS> 1,379,149
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,594
<INCOME-PRETAX> 98,172
<INCOME-TAX> 32,397
<INCOME-CONTINUING> 65,775
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 65,775
<EPS-PRIMARY> 1.92
<EPS-DILUTED> 1.92
</TABLE>
