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 March 31, 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 - 33,974,526 as of March 31,
1994
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PART I FINANCIAL INFORMATION
FINANCIAL STATEMENTS
(UNAUDITED)
E-SYSTEMS, INC. and SUBSIDIARIES
Statement of Consolidated Income
Three Months Ended March 31, 1994 and March 31, 1993
(Amounts in Thousands)
<CAPTION>
Three Months Ended
March 31, 1994 March 31, 1993
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<S> <C> <C>
Net Sales $ 495,129 $ 531,441
Other Income 1,028 1,480
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496,157 532,921
Costs and Expenses
Contract and manufacturing
costs, selling, general and
administrative expense 453,692 489,950
Interest expense 512 2,032
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454,204 491,982
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Income before federal
income taxes 41,953 40,939
Provision for taxes on income -
Note B 13,844 13,510
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NET INCOME $ 28,109 $ 27,429
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Earnings Per Share $0.82 $0.81
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Dividends Per Share $0.300 $0.275
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E-SYSTEMS, INC. and SUBSIDIARIES
Consolidated Balance Sheet
(Amounts in Thousands)
<CAPTION>
ASSETS March 31, 1994 December 31, 1993
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<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 58,506 $ 32,638
Accounts receivable 435,559 426,404
Unreimbursed costs and fees under
cost-plus-fee contracts 221,022 207,519
Fixed-price contracts:
Fixed-priced contracts in progress 80,762 54,644
Less progress and advance payments 20,550 21,580
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60,212 33,064
Raw materials and purchased parts 8,701 11,714
Prepaid expenses and other assets 20,046 38,623
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TOTAL CURRENT ASSETS 804,046 749,962
OTHER ASSETS
Prepaid pension costs 36,296 36,489
Deferred charges and other 59,132 56,653
Deferred federal income taxes 64,874 65,544
Costs in excess of net
assets acquired 61,911 62,401
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222,213 221,087
PROPERTY, PLANT AND EQUIPMENT 499,701 498,454
Less allowances for depreciation 189,561 190,330
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310,140 308,124
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$1,336,399 $1,279,173
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<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY March 31, 1994 December 31, 1993
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<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 75,486 $ 70,313
Accrued liabilities 94,114 73,495
Short-term obligations and current
portion of long-term debt 25,256 25,256
Federal income taxes payable 10,432 0
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TOTAL CURRENT LIABILITIES 205,288 169,064
LONG-TERM DEBT
Long-term debt 738 738
Installment lease obligations 7,103 7,135
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7,841 7,873
DEFERRED ITEMS
Retiree health care and life
insurance benefits 288,770 290,795
Other deferred items 42,733 41,445
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331,503 332,240
STOCKHOLDERS' EQUITY
Common stock, par value $1.00
Authorized 50,000,000 shares;
issued and outstanding 33,974,526
shares in 1994 and 33,884,797
shares in 1993. 33,975 33,885
Additional capital 174,814 172,300
Retained earnings 582,978 563,811
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791,767 769,996
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$1,336,399 $1,279,173
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E-SYSTEMS, INC. and SUBSIDIARIES
Statement of Consolidated Cash Flows
Three Months Ended March 31, 1994 and March 31, 1993
(Amounts in Thousands)
<CAPTION>
1994 1993
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $28,109 $27,429
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 13,288 13,344
Gain on sale of investment securities (219) (372)
Changes in operating assets and liabilities:
(Increase) decrease in accounts
receivable (7,064) 95,643
(Increase) decrease in unreimbursed costs
and fees under cost-plus-fee contracts (13,503) 4,784
(Increase) decrease in fixed-price
contracts in progress (26,118) 9,660
Decrease in progress and
advance payments (3,121) (87,950)
Decrease (increase) in prepaid
pension costs 193 (2,843)
Increase (decrease) in accounts payable 5,171 (13,001)
Increase (decrease) in accrued
liabilities 19,813 (1,618)
Increase in other assets and liabilities 30,841 15,147
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NET CASH PROVIDED BY OPERATING ACTIVITIES 47,390 60,223
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and
equipment (16,594) (16,743)
Proceeds from disposals of property,
plant, and equipment 1,879 20
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NET CASH USED IN INVESTING ACTIVITIES (14,715) (16,723)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under short-term agreements 0 360
Principal payments on long-term debt
and installment lease obligations (98) (266)
Proceeds from exercise of stock options 2,604 7,079
Dividends paid (9,313) (8,187)
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NET CASH USED IN FINANCING ACTIVITIES (6,807) (1,014)
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NET INCREASE IN CASH AND
CASH EQUIVALENTS 25,868 42,486
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 32,638 62,240
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CASH AND CASH EQUIVALENTS AT END OF
FIRST QUARTER $58,506 $104,726
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Note A -- Basis of Presentation
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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
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The effective income tax rate for the first three 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 are computed based on the sum of the average
outstanding common shares and common equivalent shares (Quarter
ended March 31, 1994 and March 31, 1993, 34,425,000 and
33,705,000, 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
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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
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Analysis of liquidity and capital condition - Net working
capital increased $18 million from the prior year-end to $599
million. Net cash provided by operating activities was $47
million for the three months ended March 31, 1994 compared
to $60 million for the three months ended March 31, 1993.
This change in net cash provided by operating activities
was primarily due to the timing of the collection of
receivables at March 31, 1994. Cash and cash equivalents at
the beginning of the year and funds provided by operations
were used to finance capital expenditures of $17 million and
pay dividends of $9 million.
The ratio of total debt to equity was .04 at March 31, 1994
which is unchanged from the total debt to equity ratio at
December 31, 1993.
The ratio of current assets to current liabilities was 3.9
at March 31, 1994 compared to 4.4 at December 31, 1993.
Interest expense through March 31, 1994 of $0.5 million is
down when compared to interest expense for the same period in
1993 of $2.0 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 March 31, 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.
In the first quarter of 1994, the Company adopted Financial
Accounting Standards Board Statement No. 115, Accounting for
Certain Investments in Debt and Equity Securities. This
Statement requires companies to present investments in marketable
equity securities and many debt securities at fair value.
The adoption of this Statement had no effect on the Company's
earnings but resulted in an unrealized gain of $1.2 million booked
directly to Retained Earnings.
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. This is evidenced by
contract awards from the Department of Education for the development
and operation of the national data base for student loans and grants
and the FAA for the flight inspection aircraft program. The total
value of this FAA contract including options exercisable through
FY 1996 is approximately $400 million. 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.
In January 1993, the Company was notified by the German
government that it did not plan on proceeding with the GAFECS
reconnaissance and surveillance program at that time. Though
the loss of this program will have an impact on the Company's
short-term international business goals, we believe there are
opportunities in the international arena that will sustain
the growth of our international business.
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 electronic
systems and services, consisting principally of systems design,
integration, hardware modification and development for the
United States 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 U. S. Government regulations.
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Three Months Ended March 31, 1994 Compared to Three Months
Ended March 31, 1993
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Net sales for the first quarter of 1994 totaled $495 million,
down 7 percent from $531 million reported in the comparable
period of 1993. This decline in net sales for the first quarter
1994 was primarily in the Reconnaissance and Surveillance and
Navigation and Controls product segments. Net sales in the
Reconnaissance and Surveillance segment totaled $292 million for
the first quarter of 1994, down $20 million or 6 percent, from
$312 million in the comparable period in 1993. The decline in net
sales in this product segment is primarily attributable to the
cancellation of the German reconnaissance and surveillance program.
Net sales in the Navigation and Controls product segment decreased to
$21 million, down $13 million when compared to net sales through March
31, 1993 primarily due to reduced activity on the Data Distribution
Systems (DDS) development program.
Operating profits, of $42.6 million, in the first quarter of 1994
is comparable to operating profits in the first quarter of 1993.
Pretax income for the first quarter of 1994 increased 2 percent
compared to the first quarter of 1993.
Net income for the first quarter of 1994 was $28 million, or
$0.82 per share compared to $27 million or $0.81 per share for
the same period last year.
COMMITMENTS AND CONTINGENCIES
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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 three 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 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 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the
Quarter ended March 31, 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: May 4, 1994 James W. Crowley
Vice President,
Secretary and
General Counsel
Date: May 4, 1994 James W. Pope
Vice President-
Finance and
Chief Financial
Officer
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Exhibit 11
COMPUTATION OF PER SHARE EARNINGS
(Amounts in thousands expect per share date)
<CAPTION>
Quarter Ended March 31,
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1994 1993
<S> <C> <C>
PRIMARY
Average shares outstanding 33,948 33,119
Net effect of dilutive stock options
based on the treasury stock method
using average market price 477 586
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Total 34,425 33,705
Net Income $28,109 $27,429
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Per Share Amount $ .82 $ .81
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FULLY DILUTED
Average shares outstanding 33,948 33,119
Net effect of dilutive stock options
based on the treasury stock method
using average market price 477 610
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Total 34,425 33,729
Net Income $28,109 $27,429
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Per Share Amount $ .82 $ .81
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