<PAGE> 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, 1995 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, 1995 was 2,963,356.
<PAGE> 2
ENGINEERED SUPPORT SYSTEMS, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of July 31, 1995
and October 31, 1994 3
Condensed Consolidated Statements of Income for the three
months and nine months ended July 31, 1995 and 1994 4
Condensed Consolidated Statements of Cash Flows for the
nine months ended July 31, 1995 and 1994 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II - Other Information
Items 1-6 9
Signatures 11
Exhibits 12
<PAGE> 3
ENGINEERED SUPPORT SYSTEMS, INC.
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
July 31 October 31
1995 1994
------------ ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash $ 125,977 $ 417,748
Accounts receivable 3,954,337 5,614,224
Contracts in process and inventories 10,228,455 9,544,444
Other current assets 950,473 612,666
------------ ------------
Total Current Assets 15,259,242 16,189,082
Property, plant and equipment, less accumulated
depreciation of $11,284,341 and $10,127,359 14,829,128 15,289,970
Intangible assets 1,481,703 1,693,163
Other assets 996,705 1,213,544
------------ ------------
Total Assets $ 32,566,778 $ 34,385,759
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 3,973,996 $ 5,042,399
Current maturities of long-term debt 827,371 855,897
Accounts payable 4,311,923 4,705,367
Other current liabilities 2,144,957 2,464,999
------------ ------------
Total Current Liabilities 11,258,247 13,068,662
Long-term debt 2,946,892 3,848,419
Deferred income taxes 2,834,818 2,834,818
ESOP guaranteed bank loan 1,205,400 1,303,800
Shareholders' Equity
Common stock, par value $.01 per share;
10,000,000 shares authorized; 3,440,461
and 3,391,898 shares issued 34,405 33,919
Additional paid-in capital 7,852,397 7,670,152
Retained earnings 9,432,912 7,773,365
------------ ------------
17,319,714 15,477,436
Less ESOP guaranteed bank loan 1,205,400 1,303,800
Less treasury stock at cost, 478,105
and 224,594 shares 1,792,893 843,576
------------ ------------
14,321,421 13,330,060
------------ ------------
Total Liabilities and Shareholders' Equity $ 32,566,778 $ 34,385,759
============ ============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 4
ENGINEERED SUPPORT SYSTEMS, INC.
Condensed Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31 July 31
---------------------- ---------------------
1995 1994 1995 1994
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Net revenues $ 15,453,962 $ 15,570,832 $ 48,452,631 $ 38,234,272
Cost of revenues 12,739,072 13,650,309 40,674,201 32,788,239
------------ ------------ ------------ ------------
Gross profit 2,714,890 1,920,523 7,778,430 5,446,033
Selling, general and
administrative expense 1,334,492 1,406,488 4,275,007 4,326,952
------------ ------------ ------------ ------------
Income from operations 1,380,398 514,035 3,503,423 1,119,081
Interest expense 243,357 230,300 690,539 588,354
------------ ------------ ------------ ------------
Income before income
taxes 1,137,041 283,735 2,812,884 530,727
Income tax provision 453,000 111,000 1,124,000 211,000
------------ ------------ ------------ ------------
Net income $ 684,041 $ 172,735 $ 1,688,884 $ 319,727
============ ============ ============ ============
Net income per share $ .21 $ .05 $ .51 $ .09
============ ============ ============ ============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 5
ENGINEERED SUPPORT SYSTEMS, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
July 31
----------------------------
1995 1994
------------- -------------
<S> <C> <C>
From operating activities:
Net income $ 1,688,884 $ 319,727
Depreciation and amortization 1,451,732 1,468,511
------------- --------------
Cash provided (used) before changes in
operating assets and liabilities 3,140,616 1,788,238
Net (increase) decrease in non-cash
current assets 638,068 (4,798,211)
Net increase (decrease) in non-cash current
liabilities (713,487) 2,913,331
(Increase) decrease in other assets 137,191 (438,868)
------------- --------------
Net cash provided by (used in) operating
activities 3,202,388 (535,510)
------------- --------------
From investing activities:
Additions to property, plant and equipment (772,880) (2,136,782)
Disposals of property, plant and equipment 73,100
------------- --------------
Net cash provided by (used in) investing
activities (699,780) (2,136,782)
------------- --------------
From financing activities:
Net borrowings (payments) under
line-of-credit agreements (1,068,403) 3,312,152
Proceeds of long-term debt 1,500,000
Payments of long-term debt (930,053) (2,311,901)
Purchase of treasury stock (972,586)
Issuance of treasury stock 30,127
Cash dividend (29,337)
Exercise of stock options 175,873 58,063
------------- --------------
Net cash provided by (used in) financing
activities (2,794,379) 2,558,314
------------- --------------
Net increase (decrease) in cash (291,771) (113,978)
Cash at beginning of period 417,748 265,015
------------- --------------
Cash at end of period $ 125,977 $ 151,037
============== ==============
</TABLE>
See notes to condensed consolidated financial statements.
<PAGE> 6
ENGINEERED SUPPORT SYSTEMS, INC.
Notes to Condensed Consolidated
Financial Statements (Unaudited)
July 31, 1995
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 nine
month period ended July 31, 1995 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 information 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, 1994.
Note B - Net Income per Share
Net income per share is based on the weighted average number of common and
common equivalent shares outstanding of 3,184,918 and 3,594,615 for the
three months ended July 31, 1995 and 1994, respectively, and 3,325,425 and
3,584,863 for the nine months ended July 31, 1995 and 1994, respectively.
Common equivalent shares represent common stock options as computed based
on the treasury stock method. Primary and fully diluted earnings per share
are substantially the same for each of the periods presented.
Note C - Long-Term Debt
In December 1994, the Company retired the outstanding balance of the
Industrial Development Refunding Revenue Bonds with proceeds generated upon
restructuring its existing bank term loan. As a result, the balance of the
term loan increased from $865,091 at October 31, 1994 to $2,768,088. The
restructured term loan bears interest at 1.75% above the bank's prime rate
and is payable in 45 monthly installments of $60,402 plus interest which
commenced January 1, 1995.
<PAGE> 7
Note D - Contracts in Process and Inventories
Contracts in process and inventories are comprised of the following:
<TABLE>
<CAPTION>
July 31, 1995 October 31, 1994
---------------- ----------------
<S> <C> <C>
Raw materials $1,926,141 $1,790,459
Work-in-process 41,416 91,945
Finished goods 490,250 241,730
Inventories substantially applicable to
government contracts in process, less
progress payments of $10,862,182 and
$11,682,475 7,770,648 7,420,310
---------- ---------
$10,228,455 $9,544,444
=========== ==========
</TABLE>
The contracts in process and inventories of Engineered Air Systems, 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. The inventories of Engineered Specialty
Plastics, Inc. are valued at the lower of cost or market using the first-
in, first-out method.
<PAGE> 8
ENGINEERED SUPPORT SYSTEMS, INC.
Management's Discussion and Analysis
of Financial Condition and Results of Operations
Results of Operations
Revenues decreased 1% in the third quarter of 1995 to $15.5 million from
$15.6 million in the third quarter of 1994, and increased 27% to $48.5
million in the first nine months of 1995 from $38.2 million for the
comparable period in 1994. The Company's defense subsidiary, Engineered Air
Systems, Inc. (Engineered Air), experienced a 62% increase in revenues for
the first nine months of 1995. After several years of significant first
article testing and development, Engineered Air has been in full production
on several major contracts, primarily its MA-3D and C-5 flight line air
conditioners. Revenues for Engineered Specialty Plastics, Inc. (ESP), the
Company's commercial plastics subsidiary, decreased 13% during the first
nine months of 1995. Significantly all of this decrease occurred during
the third quarter of 1995 when its primary customer halted ESP's shipments
of television cabinets for approximately six weeks due to excess
inventories. ESP resumed shipments of television cabinets to this customer
late in the third quarter.
Gross profit for the third quarter of 1995 increased $0.8 million, or 41%,
over that for the comparable 1994 period primarily reflecting a significant
improvement in margins at Engineered Air. Engineered Air has realized
significant margin expansion in 1995 as a result of both a very profitable
mix of contracts and of a high level of capacity utilization. The
consolidated gross margin for the third quarter of 1995 was 17.6% as
compared to 12.3% for the third quarter of 1994.
Selling, general and administrative expense was $1.34 million and $1.41
million in the third quarter of 1995 and 1994, respectively, and $4.28
million and $4.33 million for the nine months ended July 31, 1995 and 1994,
respectively. These slight decreases reflect management's continuing
efforts to limit the growth of overhead expenses while increasing
consolidated revenues.
Interest expense increased $13,000, or 6%, in the third quarter of 1995 as
compared with the third quarter of 1994.
Liquidity and Capital Resources
At July 31, 1995, the Company's working capital and ratio of current assets
to current liabilities were $4.0 million and 1.36 to 1 as compared to $3.1
million and 1.24 to 1 at October 31, 1994. The improvement in working
capital is primarily a result of $1.7 million of net income for the first
nine months of 1995 as offset by a $1.0 million purchase of 259,716 shares
of treasury stock during the second quarter of 1995. As of July 31, 1995,
the Company had $2.1 million of unused credit related to its loan
agreement.
Business and Market Considerations
As of July 31, 1995, Engineered Air's funded backlog of defense orders was
$88 million compared to $80 million a year ago. Options to existing
contracts total approximately $124 million as of the end of the third
quarter.
Historically, the Company has been heavily dependent on the U.S. Government
for business. However, because of declining defense budgets and increased
competition within the current defense market, the Company began a plan of
diversification in 1993 with the acquisition of ESP. This acquisition
provided expansion into the commercial marketplace. Management continues
to pursue new acquisitions and business opportunities to complement
existing product lines and provide strategic diversification.
<PAGE> 9
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 Engineered Air Systems, Inc. Employee Stock Ownership Plan,
is incorporated herein by reference.
(ii) Registration Statement Number 33-36818 on Form S-8 dated October
3, 1990, for the registration of 150,000 shares of Engineered
Support Systems, Inc. common stock, $.01 par value, pursuant to
the Engineered Air Systems, Inc. 1990 Stock Equity Plan, is
incorporated herein by reference.
(iii) Registration Statement Number 33-77340 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 Air Systems, Inc. 1991 Stock Equity Plan, is
incorporated herein by reference.
(iv) Registration Statement Number 33-77342 on Form S-8 dated March
25, 1994 for the registration of 30,000 shares of Engineered
Support Systems, Inc. common stock, $.01 par value, pursuant to
the Engineered Support Systems, Inc. 1992 Stock Option Plan for
Non-employee Directors, is incorporated herein by reference.
(v) 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. 1993 Stock Option Plan, is
incorporated herein by reference.
11. Statement Re: Computation of Net Income Per Share.
25. Statements Re: Summary Financial Information.
(b) No reports on Form 8-K were filed during the nine months ended July
31, 1995.
<PAGE> 10
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 11, 1995 By: /s/ MICHAEL F. SHANAHAN SR.
-------------- --------------------------------------
MICHAEL F. SHANAHAN SR.
Chairman of the Board, President
and Chief Executive Officer
Date: September 11, 1995 By: /s/ GARY C. GERHARDT
-------------- --------------------------------------
GARY C. GERHARDT
Executive Vice President and
Chief Financial Officer
<PAGE> 11
Exhibit 11
ENGINEERED SUPPORT SYSTEMS, INC.
Statement Re: Computati on of Net Income Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31 July 31
--------------------------- -----------------------
1995 1994 1995 1994
------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
NET INCOME $ 684,041 $ 172,735 $ 1,688,884 $ 319,727
============= ============= =========== ===========
NET INCOME PER SHARE
Average shares
outstanding 2,931,503 3,371,898 3,057,903 3,367,046
============= ============= =========== ===========
Net income $ .23 $ .05 $ .55 $ .09
============= ============= =========== ===========
PRIMARY EARNINGS
PER SHARE
Average shares
outstanding 2,931,503 3,371,898 3,057,903 3,367,046
Net effect of
dilutive stock
options (1) 252,597 222,717 222,809 210,782
------------- ------------- ----------- -----------
3,184,100 3,594,615 3,280,712 3,577,828
============= ============= =========== ===========
Net income $ .21 $ .05 $ .51 $ .09
============= ============= =========== ===========
FULLY DILUTED EARNINGS
PER SHARE
Average shares
outstanding 2,931,503 3,371,898 3,057,903 3,367,046
Net effect of dilutive
stock options (1) 253,415 222,717 267,522 217,817
------------- ------------- ----------- -----------
3,184,918 3,594,615 3,325,425 3,584,863
============= ============= =========== ===========
Net income $ .21 $ .05 $ .51 $ .09
============= ============= =========== ===========
</TABLE>
(1) Based on the treasury stock method
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
FOR THE NINE MONTHS ENDED JULY 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1995
<PERIOD-END> JUL-31-1995
<CASH> 125,977
<SECURITIES> 0
<RECEIVABLES> 4,046,094
<ALLOWANCES> 91,757
<INVENTORY> 10,228,455
<CURRENT-ASSETS> 15,259,242
<PP&E> 26,113,469
<DEPRECIATION> 11,284,341
<TOTAL-ASSETS> 32,566,778
<CURRENT-LIABILITIES> 11,258,247
<BONDS> 4,152,292
<COMMON> 34,405
0
0
<OTHER-SE> 14,287,016
<TOTAL-LIABILITY-AND-EQUITY> 32,566,778
<SALES> 48,452,631
<TOTAL-REVENUES> 48,452,631
<CGS> 40,674,201
<TOTAL-COSTS> 40,674,201
<OTHER-EXPENSES> 4,243,500
<LOSS-PROVISION> 31,507
<INTEREST-EXPENSE> 690,539
<INCOME-PRETAX> 2,812,884
<INCOME-TAX> 1,124,000
<INCOME-CONTINUING> 1,688,884
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,688,884
<EPS-PRIMARY> .51
<EPS-DILUTED> .51
</TABLE>
