<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 six months ended April 30, 1997 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 May 15, 1997 was 3,140,319.
<PAGE> 2
ENGINEERED SUPPORT SYSTEMS, INC.
<TABLE>
INDEX
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of April 30, 1997
and October 31, 1996 3
Condensed Consolidated Statements of Income for the three
months and six months ended April 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
for the six months ended April 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 7
Part II - Other Information
Items 1-6 8
Signatures 9
Exhibits 10
</TABLE>
2
<PAGE> 3
ENGINEERED SUPPORT SYSTEMS, INC.
<TABLE>
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
April 30 October 31
1997 1996
-------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash $ 4,603,379 $ 1,415,773
Accounts receivable 4,799,084 4,855,330
Contracts in process and inventories 4,431,353 10,014,627
Other current assets 1,845,431 1,149,054
----------- -----------
Total Current Assets 15,679,247 17,434,784
Property, plant and equipment, less accumulated
depreciation of $13,982,507 and $13,176,403 14,349,496 14,096,927
Intangible assets 839,834 966,234
Other assets 1,404,154 1,594,186
----------- -----------
Total Assets $32,272,731 $34,092,131
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ 61,978 $ 786,802
Accounts payable 4,122,591 5,834,454
Other current liabilities 2,377,451 2,459,315
----------- -----------
Total Current Liabilities 6,562,020 9,080,571
Long-term debt 1,239,806 1,937,805
Deferred income taxes 2,801,639 2,801,639
ESOP guaranteed bank loan 947,100 1,020,900
Shareholders' Equity
Common stock, par value $.01 per share; 10,000,000 shares
authorized; 3,741,773 and 3,687,273 shares issued 37,418 36,873
Additional paid-in capital 9,349,485 8,998,489
Retained earnings 15,330,974 13,465,694
----------- -----------
24,717,877 22,501,056
Less ESOP guaranteed bank loan 947,100 1,020,900
Less treasury stock at cost, 592,266 and 522,313 shares 3,048,611 2,228,940
----------- -----------
20,722,166 19,251,216
----------- -----------
Total Liabilities and Shareholders' Equity $32,272,731 $34,092,131
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE> 4
ENGINEERED SUPPORT SYSTEMS, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended Six Months Ended
April 30 April 30
------------------------------- -------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues $22,851,462 $18,923,798 $43,582,302 $35,971,371
Cost of revenues 19,172,750 15,955,531 36,788,303 30,522,716
----------- ----------- ----------- -----------
Gross profit 3,678,712 2,968,267 6,793,999 5,448,655
Selling, general and
administrative expense 1,854,077 1,623,960 3,598,705 3,159,633
----------- ----------- ----------- -----------
Income from operations 1,824,635 1,344,307 3,195,294 2,289,022
Interest expense (interest) (8,670) 150,099 29,158 285,986
----------- ----------- ----------- -----------
Interest before income taxes 1,833,305 1,194,208 3,166,136 2,003,036
Income tax provision 735,000 477,000 1,265,000 800,000
----------- ----------- ----------- -----------
Net income $ 1,098,305 $ 717,208 $ 1,901,136 $ 1,203,036
=========== =========== =========== ===========
Net income per share $ .33 $ .22 $ .57 $ .37
===== ===== ===== =====
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE> 5
ENGINEERED SUPPORT SYSTEMS, INC.
<TABLE>
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Six Months Ended
April 30
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
From operating activities:
Net income $ 1,901,136 $ 1,203,036
Depreciation and amortization 946,850 919,214
----------- -----------
Cash provided (used) before changes in operating
assets and liabilities 2,847,986 2,122,250
Net (increase) decrease in non-cash current assets 4,943,143 (452,663)
Net increase (decrease) in non-cash current liabilities (1,793,727) (302,180)
(Increase) decrease in other assets 191,124 (76,052)
----------- -----------
Net cash provided by (used in) operating activities 6,188,526 1,291,355
----------- -----------
From investing activities:
Additions to property, plant and equipment (1,058,673) (471,646)
----------- -----------
Net cash provided by (used in) investing activities (1,058,673) (471,646)
----------- -----------
From financing activities:
Net payments under line-of-credit agreement (838,336)
Payments of long-term debt (1,422,823) (399,764)
Purchase of treasury stock (823,597) (51,422)
Exercise of stock options 340,028 245,539
Cash dividends (35,855) (29,811)
----------- -----------
Net cash provided by (used in) financing activities (1,942,247) (1,073,794)
----------- -----------
Net increase (decrease) in cash and cash equivalents 3,187,606 (254,085)
Cash and cash equivalents at beginning of period 1,415,773 386,609
----------- -----------
Cash and cash equivalents at end of period $ 4,603,379 $ 132,524
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE> 6
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 1997
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 six month
period ended April 30, 1997 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, 1996.
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 3,293,471 and 3,256,495 for the three
months ended April 30, 1997 and 1996, respectively, and 3,313,512 and 3,247,858
for the six months ended April 30, 1997 and 1996, 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 - CONTRACTS IN PROCESS AND INVENTORIES
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. Inventories of Engineered Specialty
Plastics, Inc. are valued at the lower of cost or market using the first-in,
first-out method. Contracts in process and inventories are comprised of the
following:
<TABLE>
<CAPTION>
April 30, 1997 October 31, 1996
-------------- ----------------
<S> <C> <C>
Raw materials $ 1,716,286 $ 1,643,824
Work-in-process 172,904 142,604
Finished goods 722,297 557,900
Inventories substantially applicable to
government contracts in process, less
progress payments of $14,013,299 and
$17,619,487 1,819,866 7,670,299
----------- -----------
$ 4,431,353 $10,014,627
=========== ===========
</TABLE>
6
<PAGE> 7
ENGINEERED SUPPORT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues increased 21% in the second quarter of 1997 to $22.9 million
from $18.9 million in the second quarter of 1996, and increased 21% to $43.6
million in the first six months of 1997 from $36.0 million in the first half
of 1996. The increase in revenues was a result of higher volume at both
subsidiaries. Revenues for Engineered Specialty Plastics, Inc. (ESP)
increased 27% to $7.1 million in the second quarter of 1997 and increased
22% to $13.2 million in the first six months of 1997. These strong gains are
the direct result of an intensified marketing effort at this subsidiary.
Revenues for Engineered Air Systems, Inc. (Engineered Air) increased 18% to
$15.7 million in the second quarter of 1997 and increased 21% to $30.4 in
the first half of 1997. The most significant production contracts for
Engineered Air included the Aviation Groud Power Units, C-5 and MA-3D Flight
Line Air Conditioners, Revetment Kits, Harvest Falcon Water Distribution
Systems, and B-1B Air Conditioners. In addition, the defense subsidiary has
performed significant developmental work during the period on the Chemical
and Biological Protected Shelter System (CBPSS) and the Chemically/Biologically
Hardened Air Management Plant (CHAMP).
Gross profit for the second quarter of 1997 increased $0.7 million, or
24%, over the amount for the comparable 1996 period reflecting both the
increase in production volume and significantly higher margins at ESP. The
gross margin for the second quarter was 16.1% and 15.7% in 1997 and 1996,
respectively. The gross margin for the first six months of the year was 15.6%
and 15.1% in 1997 and 1996, respectively.
Selling, general and administrative expense was $1.85 million and $1.62
million in the second quarter of 1997 and 1996, respectively. As a percent of
net revenues, selling, general and administrative expense decreased from 8.6%
in the second quarter of 1996 to 8.1% in 1997. For the six months ended April
30, 1997, this percentage was 8.3% compared to 8.8% for the first half of 1996.
Interest expense decreased $159,000 in the second quarter of 1997 as
compared with the second quarter of 1996. This was the result of strong cash
flow at both subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At April 30, 1997, the Company's working capital and ratio of current
assets to current liabilities were $9.1 million and 2.39 to 1 as compared to
$8.4 million and 1.92 to 1 at October 31, 1996. As of April 30, 1997, the
Company had cash and cash equivalents of $4.6 million and unused credit
related to its loan agreement of $6.4 million.
BUSINESS AND MARKET CONSIDERATIONS
As of April 30, 1997, Engineered Air's funded backlog of defense orders
was $71 million compared to $104 million a year ago.
The Company is heavily dependent on the U.S. Government for business.
Approximately 70% of consolidated net revenues for the six months ended
April 30, 1997 were derived from contracts with the U.S. Government and its
agencies. The Company began a plan of diversification in 1993 with the
acquisition of ESP. This acquisition provided diversification into commercial
markets. Management is currently pursuing potential acquisitions, primarily
within the defense industry.
7
<PAGE> 8
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 33-77342 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.
(iii) 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.
(iv) 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.
11. Statement Re: Computation of Net Income Per Share.
27. Statement Re: Summary Financial Information
(b) No reports on Form 8-K were filed during the six months ended
April 30, 1997.
8
<PAGE> 9
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: May 30, 1997 By: /s/ MICHAEL F. SHANAHAN SR.
--------------- ------------------------------------
MICHAEL F. SHANAHAN SR.
Chairman of the Board, President
and Chief Executive Officer
Date: May 30, 1997 By: /s/ GARY C. GERHARDT
--------------- ------------------------------------
GARY C. GERHARDT
Executive Vice President and
Chief Financial Officer
9
<PAGE> 1
EXHIBIT 11
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF NET INCOME PER SHARE
<CAPTION>
Three Months Ended Six Months Ended
April 30 April 30
------------------------------ ------------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET INCOME $1,098,305 $ 717,208 $1,901,136 $1,203,036
========== ========== ========== ==========
NET INCOME PER SHARE
Average shares outstanding 3,177,412 3,025,947 3,179,802 3,004,461
========== ========== ========== ==========
Net income $ .35 $ .24 $ .60 $ .40
========== ========== ========== ==========
PRIMARY EARNINGS PER SHARE
Average shares outstanding 3,177,412 3,025,947 3,179,802 3,004,461
Net effect of dilutive
stock options <F1> 116,088 212,821 122,062 221,730
---------- ---------- ---------- ----------
3,293,500 3,238,768 3,301,864 3,226,191
========== ========== ========== ==========
Net income $ .33 $ .22 $ .58 $ .37
========== ========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE
Average shares outstanding 3,177,412 3,025,947 3,179,802 3,004,461
Net effect of dilutive
stock options <F1> 116,059 230,548 133,710 243,397
---------- ---------- ---------- ----------
3,293,471 3,256,495 3,313,512 3,247,858
========== ========== ========== ==========
Net income $ .33 $ .22 $ .57 $ .37
========== ========== ========== ==========
<FN>
<F1> Based on the treasury stock method.
</TABLE>
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
FORM 10-Q FOR THE SIX MONTHS ENDED APRIL 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> APR-30-1997
<CASH> 4,603,379
<SECURITIES> 0
<RECEIVABLES> 5,062,086
<ALLOWANCES> 263,002
<INVENTORY> 4,431,353
<CURRENT-ASSETS> 15,679,247
<PP&E> 28,332,003
<DEPRECIATION> 13,982,507
<TOTAL-ASSETS> 32,272,731
<CURRENT-LIABILITIES> 6,562,020
<BONDS> 2,186,906
<COMMON> 37,418
0
0
<OTHER-SE> 20,684,748
<TOTAL-LIABILITY-AND-EQUITY> 32,272,731
<SALES> 43,582,302
<TOTAL-REVENUES> 43,582,302
<CGS> 36,788,303
<TOTAL-COSTS> 36,788,303
<OTHER-EXPENSES> 3,590,455
<LOSS-PROVISION> 8,250
<INTEREST-EXPENSE> 29,158
<INCOME-PRETAX> 3,166,136
<INCOME-TAX> 1,265,000
<INCOME-CONTINUING> 1,901,136
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,901,136
<EPS-PRIMARY> .58
<EPS-DILUTED> .57
</TABLE>
