<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 quarter ended January 31, 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 February 28, 1997 was 3,188,507.
<PAGE> 2
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
INDEX
<CAPTION>
Page
----
<S> <C>
Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of January 31, 1997
and October 31, 1996 . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income for the three
months ended January 31, 1997 and 1996 . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows for the
three months ended January 31, 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
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
January 31 October 31
1997 1996
---------- ----------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash and cash equivalents. . . . . . . . . $ 2,327,657 $ 1,415,773
Accounts receivable . . . . . . . . . . . 6,971,445 4,855,330
Contracts in process and inventories . . . 5,267,989 10,014,627
Other current assets . . . . . . . . . . . 1,320,763 1,149,054
------------ ------------
Total Current Assets . . . . . . . . 15,887,854 17,434,784
Property, plant and equipment, less accumulated
depreciation of $13,579,175 and $13,176,403 13,825,374 14,096,927
Intangible assets . . . . . . . . . . . . . . . 903,034 966,234
Other assets . . . . . . . . . . . . . . . . . 1,625,644 1,594,186
------------ ------------
Total Assets . . . . . . . . . . . . . $ 32,241,906 $ 34,092,131
============ ============
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
Current Liabilities
Current maturities of long-term debt . . . $ 786,802 $ 786,802
Accounts payable . . . . . . . . . . . . . 4,025,100 5,834,454
Other current liabilities . . . . . . . . 1,727,473 2,459,315
------------ ------------
Total Current Liabilities . . . . . . 6,539,375 9,080,571
Long-term debt . . . . . . . . . . . . . . . . 1,740,409 1,937,805
Deferred income taxes . . . . . . . . . . . . 2,801,639 2,801,639
ESOP guaranteed bank loan . . . . . . . . . . 984,000 1,020,900
Shareholders' Equity
Common stock, par value $.01 per share;
10,000,000 shares authorized; 3,737,773
and 3,687,273 shares issued . . . . . . 37,378 36,873
Additional paid-in capital . . . . . . . . 9,321,869 8,998,489
Retained earnings . . . . . . . . . . . . 14,231,504 13,465,694
------------ ------------
23,590,751 22,501,056
Less ESOP guaranteed bank loan . . . . . . 984,000 1,020,900
Less treasury stock at cost, 541,266 and
522,313 shares . . . . . . . . . . . . . 2,430,268 2,228,940
------------ ------------
20,176,483 19,251,216
------------ ------------
Total Liabilities and Shareholders'
Equity . . . . . . . . . . . . . . $ 32,241,906 $ 34,092,131
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE> 4
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended
January 31
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
Net revenues . . . . . . . . . . . . . . . . $ 20,730,840 $ 17,047,573
Cost of revenues . . . . . . . . . . . . . . 17,615,553 14,567,185
------------ ------------
Gross profit . . . . . . . . . . . . . . . . 3,115,287 2,480,388
Selling, general and
administrative expense . . . . . . . . . 1,744,628 1,535,673
------------ ------------
Income from operations . . . . . . . . . . . 1,370,659 944,715
Interest expense . . . . . . . . . . . . . . 37,828 135,887
------------ ------------
Income before income taxes . . . . . . . . . 1,332,831 808,828
Income tax provision . . . . . . . . . . . . 530,000 323,000
------------ ------------
Net income . . . . . . . . . . . . . . . . . $ 802,831 $ 485,828
============ ============
Net income per share . . . . . . . . . . . . $ .24 $ .15
===== =====
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE> 5
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
January 31
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
From operating activities:
Net income . . . . . . . . . . . . . . $ 802,831 $ 485,828
Depreciation and amortization . . . . . 473,146 467,836
------------ ------------
Cash provided (used) before changes in
operating assets and liabilities . . 1,275,977 953,664
Net (increase) decrease in non-cash
current assets . . . . . . . . . . . . 2,458,814 (2,593,377)
Net increase (decrease) in non-cash
current liabilities . . . . . . . . . (2,541,198) 3,199,210
(Increase) decrease in other assets . . (23,192) (42,997)
------------ ------------
Net cash provided by (used in)
operating activities . . . . . . . . 1,170,401 1,516,500
------------ ------------
From investing activities:
Additions to property, plant and
equipment . . . . . . . . . . . . . . (131,219) (268,155)
------------ ------------
Net cash provided by (used in)
investing activities . . . . . . . . (131,219) (268,155)
------------ ------------
From financing activities:
Net payments under line-of-credit
agreement . . . . . . . . . . . . . . (1,084,715)
Payments of long-term debt . . . . . . . (197,396) (201,756)
Purchase of treasury stock . . . . . . . (205,255)
Exercise of stock options . . . . . . . 312,372 29,375
Cash dividends . . . . . . . . . . . . . (37,019) (29,811)
------------ ------------
Net cash provided by (used in)
financing activities . . . . . . . . (127,298) (1,286,907)
------------ ------------
Net increase (decrease) in cash and
cash equivalents . . . . . . . . . . . . . 911,884 (38,562)
Cash and cash equivalents at beginning
of period . . . . . . . . . . . . . . . . 1,415,773 386,609
------------ ------------
Cash and cash equivalents at end of period $ 2,327,657 $ 348,047
============ ============
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE> 6
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 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 three
month period ended January 31, 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 for the three months ended January 31, 1997 and
1996 is based on the weighted average number of common and common
equivalent shares outstanding of 3,332,995 and 3,221,091, 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>
January 31, 1997 October 31, 1996
---------------- ----------------
<S> <C> <C>
Raw material $2,018,121 $ 1,643,824
Work-in-process 135,929 142,604
Finished goods 557,763 557,900
Inventories substantially applicable to
government contracts in process, less
progress payments of $19,050,508 and
$17,619,487 2,556,176 7,670,299
---------- -----------
$5,267,989 $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 22% in the first quarter of 1997 to $20.7 million from
$17.0 million in the first quarter of 1996. The increase in revenues was
generated primarily by the Company's defense subsidiary, Engineered Air
Systems, Inc. (Engineered Air). Production levels remained high at
Engineered Air, driven by its contracts for Flight Line Air Conditioners,
Water Distribution Systems, Revetment Kits and Aviation Ground Power Units.
Gross profit for the first quarter of 1997 increased $0.6 million, or
26%, over the amount for the comparable 1996 period reflecting an increase
in production volume at Engineered Air and a significant margin expansion
at Engineered Specialty Plastics, Inc. (ESP). The gross margin for the first
quarter of 1997 was 15.0% as compared to 14.5% for the first quarter of 1996.
Selling, general and administrative expense was $1.74 million and $1.54
million in the first quarters of 1997 and 1996, respectively. As a percent
of net revenues, selling, general and administrative expense decreased from
9.0% in 1996 to 8.4% in 1997 as a result of management's continuing efforts
to limit the growth of overhead expenses while increasing consolidated
revenues.
Interest expense decreased $98,000, or 72%, in the first quarter of 1997
as compared with the first quarter of 1996. This was the result of strong
operational cash flow at both Engineered Air and ESP.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1997, the Company's working capital and ratio of current
assets to current liabilities were $9.3 million and 2.43 to 1 as compared
to $8.4 million and 1.92 to 1 at October 31, 1996. As of January 31, 1997,
the Company had $6.4 million of unused credit related to its loan agreement.
BUSINESS AND MARKET CONSIDERATIONS
As of January 31, 1997, EASI's funded backlog of defense orders was
$77 million, with a related $154 million of government options. This
compares to $102 million of funded backlog, with a related $87 million of
government options at January 31, 1996.
The Company is heavily dependent on the U.S. Government for business.
Approximately 71% of consolidated net revenues for the three months ended
January 31, 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 expansion into the commercial
marketplace. Management is continuing to pursue 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.
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 quarter ended
January 31, 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: March 14, 1997 By: /s/ MICHAEL F. SHANAHAN SR.
---------------- ----------------------------------------
MICHAEL F. SHANAHAN SR.
Chairman of the Board, President
and Chief Executive Officer
Date: March 14, 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
January 31
-----------------------------
1997 1996
------------ ------------
<S> <C> <C>
NET INCOME $ 802,831 $ 485,828
============ ============
NET INCOME PER SHARE
Average shares outstanding 3,182,114 2,983,443
============ ============
Net income $ .25 $ .16
============ ============
PRIMARY EARNINGS PER SHARE
Average shares outstanding 3,182,114 2,983,443
Net effect of dilutive stock options <F1> 127,842 230,445
------------ ------------
3,309,956 3,213,888
============ ============
Net income $ .24 $ .15
============ ============
FULLY DILUTED EARNINGS PER SHARE
Average shares outstanding 3,182,114 2,983,443
Net effect of dilutive stock options <F1> 150,881 237,648
------------ ------------
3,332,995 3,221,091
============ ============
Net income $ .24 $ .15
============ ============
<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 THREE MONTHS ENDED JANUARY 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JAN-31-1997
<CASH> 2,327,657
<SECURITIES> 0
<RECEIVABLES> 7,252,772
<ALLOWANCES> 281,327
<INVENTORY> 5,267,989
<CURRENT-ASSETS> 15,887,854
<PP&E> 27,404,549
<DEPRECIATION> 13,579,175
<TOTAL-ASSETS> 32,241,906
<CURRENT-LIABILITIES> 6,539,375
<BONDS> 2,724,409
<COMMON> 37,378
0
0
<OTHER-SE> 20,139,105
<TOTAL-LIABILITY-AND-EQUITY> 32,241,906
<SALES> 20,730,840
<TOTAL-REVENUES> 20,730,840
<CGS> 17,615,553
<TOTAL-COSTS> 17,615,553
<OTHER-EXPENSES> 1,734,301
<LOSS-PROVISION> 10,327
<INTEREST-EXPENSE> 37,828
<INCOME-PRETAX> 1,332,831
<INCOME-TAX> 530,000
<INCOME-CONTINUING> 802,831
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 802,831
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
</TABLE>
