<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, 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 August 15, 1997 was 3,165,500.
<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 July 31, 1997
and October 31, 1996. . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income for the three months
and nine months ended July 31, 1997 and 1996. . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
for the nine months ended July 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>
July 31 October 31
1997 1996
----------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,406,312 $ 1,415,773
Accounts receivable . . . . . . . . . . . . . . . . . . . 4,280,998 4,855,330
Contracts in process and inventories. . . . . . . . . . . 5,555,776 10,014,627
Other current assets. . . . . . . . . . . . . . . . . . . 1,774,436 1,149,054
----------- -----------
Total Current Assets . . . . . . . . . . . . . . . . . 18,017,522 17,434,784
Property, plant and equipment, less accumulated
depreciation of $14,386,712 and $13,176,403 . . . . . . . 14,384,511 14,096,927
Intangible assets. . . . . . . . . . . . . . . . . . . . . . 776,634 966,234
Other assets . . . . . . . . . . . . . . . . . . . . . . . . 1,432,676 1,594,186
----------- -----------
Total Assets. . . . . . . . . . . . . . . . . . . . $34,611,343 $34,092,131
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt. . . . . . . . . . . $ 61,978 $ 786,802
Accounts payable. . . . . . . . . . . . . . . . . . . . . 4,820,872 5,834,454
Other current liabilities . . . . . . . . . . . . . . . . 2,711,916 2,459,315
----------- -----------
Total Current Liabilities. . . . . . . . . . . . . . . 7,594,766 9,080,571
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . 1,222,938 1,937,805
Deferred income taxes. . . . . . . . . . . . . . . . . . . . 2,801,639 2,801,639
ESOP guaranteed bank loan. . . . . . . . . . . . . . . . . . 910,200 1,020,900
Shareholder's Equity
Common stock, par value $.01 per share; 10,000,000 shares.
authorized; 3,762,773 and 3,687,273 shares issued. . . . 37,628 36,873
Additional paid-in capital . . . . . . . . . . . . . . . . 9,542,230 8,998,489
Retained earnings. . . . . . . . . . . . . . . . . . . . . 16,585,577 13,465,694
----------- -----------
26,165,435 22,501,056
Less ESOP guaranteed bank loan . . . . . . . . . . . . . . 910,200 1,020,900
Less treasury stock at cost, 601,454 and 522,313 shares. . 3,173,435 2,228,940
----------- -----------
22,081,800 19,251,216
----------- -----------
Total Liabilities and Shareholders' Equity $34,611,343 $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 Nine Months Ended
July 31 July 31
-------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net revenues. . . . . . . . . . . $23,926,087 $21,623,122 $67,508,389 $57,594,493
Cost of revenues. . . . . . . . . 19,852,518 18,359,046 56,640,821 48,881,762
----------- ----------- ----------- -----------
Gross profit. . . . . . . . . . . 4,073,569 3,264,076 10,867,568 8,712,731
Selling, general and
administrative expense. . . . . 1,935,323 1,661,494 5,534,028 4,821,127
----------- ----------- ----------- -----------
Income from operations. . . . . . 2,138,246 1,602,582 5,333,540 3,891,604
Interest expense (income) . . . . (23,411) 77,188 5,747 363,174
----------- ----------- ----------- -----------
Income before income taxes. . . . 2,161,657 1,525,394 5,327,793 3,528,430
Income tax provision. . . . . . . 864,000 609,000 2,129,000 1,409,000
----------- ----------- ----------- -----------
Net income. . . . . . . . . . . . $ 1,297,657 $ 916,394 $ 3,198,793 $ 2,119,430
=========== =========== =========== ===========
Net income per share. . . . . . . $ .39 $ .28 $ .96 $ .65
===== ===== ===== =====
See notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE> 5
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Nine Months Ended
July 31
---------------------------
1997 1996
----------- -----------
<S> <C> <C>
From operating activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . $ 3,198,793 $ 2,119,430
Depreciation and amortization . . . . . . . . . . . . . . 1,421,428 1,352,261
----------- -----------
Cash provided (used) before changes in operating
assets and liabilities . . . . . . . . . . . . . . . 4,620,221 3,471,691
Net (increase) decrease in non-cash current assets . . . . 4,407,801 101,074
Net increase (decrease) in non-cash current liabilities. . (760,981) (1,808,618)
(Increase) decrease in other assets. . . . . . . . . . . . 180,856 (83,231)
----------- -----------
Net cash provided by (used in) operating activities. . 8,447,897 1,680,916
----------- -----------
From investing activities:
Additions to property, plant and equipment. . . . . . . . (1,497,893) (622,784)
----------- -----------
Net cash provided by (used in) investing activities. . (1,497,893) (622,784)
----------- -----------
From financing activities:
Net payments under line-of-credit agreement . . . . . . . (1,112,152)
Payments of long-term debt. . . . . . . . . . . . . . . . (1,439,691) (597,516)
Purchase of treasury stock. . . . . . . . . . . . . . . . (957,091) (250,544)
Exercise of stock options . . . . . . . . . . . . . . . . 516,228 715,568
Cash dividends. . . . . . . . . . . . . . . . . . . . . . (78,911) (65,754)
----------- -----------
Net cash provided by (used in) financing activities . . (1,959,465) (1,310,398)
----------- -----------
Net increase (decrease) in cash and cash equivalents . . . . 4,990,539 (252,266)
Cash and cash equivalents at beginning of period . . . . . . 1,415,773 386,609
----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . $ 6,406,312 $ 134,343
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE> 6
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
JULY 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 nine
month period ended July 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 is based on the weighted average number of common and
common equivalent shares outstanding of 3,302,337 and 3,269,781 for the three
months ended July 31, 1997 and 1996, respectively, and 3,330,430 and 3,250,222
for the nine months ended July 31, 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>
July 31, 1997 October 31, 1996
------------- ----------------
<S> <C> <C>
Raw materials $1,410,348 $ 1,643,824
Work-in-process 156,456 142,604
Finished goods 656,178 557,900
Inventories substantially applicable to
government contracts in process, less
progress payments of $12,079,182 and
$17,619,487 3,332,794 7,670,299
---------- -----------
$5,555,776 $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 11% in the third quarter of 1997 to $23.9 million from
$21.6 million in the third quarter of 1996, and increased 17% to $67.5 million
in the first nine months of 1997 from $57.6 million in the first nine months of
1996. The increase in revenues was a result of higher volume at both
subsidiaries. Revenues for Engineered Specialty Plastics, Inc. (ESP) increased
19% to $5.9 million in the third quarter of 1997 and increased 21% to $19.0
million in the first nine 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 8% to $18.1 million in
the third quarter of 1997 and increased 16% to $48.5 in the first nine months of
1997. The most significant production contracts for Engineered Air included the
Aviation Ground Power Units, C-5 and MA-3D Flight Line Air Conditioners,
Revetment Kits and B-1B Air Conditioners. In addition, the defense subsidiary
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 third quarter of 1997 increased $0.8 million, or 25%,
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 third quarter was 17.0% and 15.1% in 1997 and 1996, respectively. The gross
margin for the first nine months of the year was 16.1% and 15.1% in 1997 and
1996, respectively.
Selling, general and administrative expense was $1.94 million and $1.67
million in the third quarter of 1997 and 1996, respectively. As a percent of
net revenues, selling, general and administrative expense decreased from 8.4%
in the nine months ended July 31, 1996 to 8.2% in 1997.
Interest expense decreased $101,000 in the third quarter of 1997 as
compared with the third quarter of 1996. This was the result of strong cash
flow at both subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company's working capital and ratio of current
assets to current liabilities were $10.4 million and 2.37 to 1 as compared to
$8.4 million and 1.92 to 1 at October 31, 1996. As of July 31, 1997, the
Company had cash and cash equivalents of $6.4 million and unused credit related
to its loan agreement of $6.4 million.
BUSINESS AND MARKET CONSIDERATIONS
As of July 31, 1997, Engineered Air's funded backlog of defense orders was
$55 million compared to $92 million a year ago.
The Company is heavily dependent on the U.S. Government for business.
(Approximately 72 of consolidated net revenues for the nine months ended July
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 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 33-77338 on Form S-8 dated
March 25, 1994 for the registration of 150,000 shares of
Engineered Support Systems, Inc. common stock, $0.01 par
value, pursuant to the Engineered Support Systems, Inc.
1993 Stock Option Plan, is incorporated herein by
reference.
(iii) 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 nine months ended
July 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: August 29, 1997 By: /s/ Michael F. Shanahan Sr.
---------------- ---------------------------------------
MICHAEL F. SHANAHAN SR.
Chairman of the Board, President
and Chief Executive Officer
Date: August 29, 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 Nine Months Ended
July 31 July 31
------------------------ ------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET INCOME $1,297,657 $ 916,394 $3,198,793 $2,119,430
========== ========== ========== ==========
NET INCOME PER SHARE
Average shares outstanding 3,150,989 3,098,075 3,170,092 3,035,894
========== ========== ========== ==========
Net income $ .41 $ .30 $1.01 $ .70
========== ========== ========== ==========
PRIMARY EARNINGS PER SHARE
Average shares outstanding 3,150,989 3,098,075 3,170,092 3,035,894
Net effect of dilutive
stock options<F1> 135,583 171,881 126,619 204,992
---------- ---------- ---------- ----------
3,286,572 3,269,956 3,296,711 3,240,886
========== ========== ========== ==========
Net income $ .39 $ .28 $ .97 $ .65
========== ========== ========== ==========
FULLY DILUTED EARNINGS PER SHARE
Average shares outstanding 3,150,989 3,098,075 3,170,092 3,035,894
Net effect of dilutive stock
options<F1> 151,348 171,706 160,338 214,328
---------- ---------- ---------- ----------
3,302,337 3,269,781 3,330,430 3,250,222
========== ========== ========== ==========
Net income $ .39 $ .28 $ .96 $ .65
========== ========== ========== ==========
<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 NINE MONTHS ENDED JULY 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-START> NOV-01-1996
<PERIOD-END> JUL-31-1997
<CASH> 6,406,312
<SECURITIES> 0
<RECEIVABLES> 4,554,075
<ALLOWANCES> 273,077
<INVENTORY> 5,555,776
<CURRENT-ASSETS> 18,017,522
<PP&E> 28,771,223
<DEPRECIATION> 14,386,712
<TOTAL-ASSETS> 34,611,343
<CURRENT-LIABILITIES> 7,594,766
<BONDS> 2,133,138
<COMMON> 37,628
0
0
<OTHER-SE> 22,044,172
<TOTAL-LIABILITY-AND-EQUITY> 34,611,343
<SALES> 67,508,389
<TOTAL-REVENUES> 67,508,389
<CGS> 56,640,821
<TOTAL-COSTS> 56,640,821
<OTHER-EXPENSES> 5,515,703
<LOSS-PROVISION> 18,325
<INTEREST-EXPENSE> 5,747
<INCOME-PRETAX> 5,327,793
<INCOME-TAX> 2,129,000
<INCOME-CONTINUING> 3,198,793
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,198,793
<EPS-PRIMARY> .97
<EPS-DILUTED> .96
</TABLE>
