<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 three months ended January 31, 1998 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, 1998 was 3,160,669.
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<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, 1998 and
October 31, 1997 3
Condensed Consolidated Statements of Income for the three months ended
January 31, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the three months
ended January 31, 1998 and 1997 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 10
Signatures 11
Exhibits 12
</TABLE>
2
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<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
January 31 October 31
1998 1997
----------- ----------
(Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 4,486,393 $ 8,313,160
Accounts receivable 4,646,402 3,398,973
Contracts in process and inventories 7,167,724 7,072,377
Other current assets 1,427,854 1,423,620
----------- -----------
Total Current Assets 17,728,373 20,208,130
Property, plant and equipment, less accumulated
depreciation of $15,163,034 and $14,767,236 14,167,373 14,490,049
Intangible assets 756,788 825,406
Other assets 1,341,174 1,560,469
----------- -----------
Total Assets $33,993,708 $37,084,054
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term debt $ $ 73,273
Accounts payable 3,962,909 5,596,760
Other current liabilities 2,166,922 2,978,407
----------- -----------
Total Current Liabilities 6,129,831 8,648,440
Long-term debt 1,194,433
Deferred income taxes 2,642,295 2,642,295
ESOP guaranteed bank loan 836,400 873,300
Shareholders' Equity
Common stock, par value $.01 per share; 10,000,000
shares authorized; 3,781,873 and 3,772,573 shares issued 37,819 37,726
Additional paid-in capital 9,784,979 9,698,665
Retained earnings 18,902,241 18,026,195
----------- -----------
28,725,039 27,762,586
Less ESOP guaranteed bank loan 836,400 873,300
Less treasury stock at cost, 619,358 and 598,858 shares 3,503,457 3,163,700
----------- -----------
24,385,182 23,725,586
----------- -----------
Total Liabilities and Shareholders' Equity $33,993,708 $37,084,054
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
3
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<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<CAPTION>
Three Months Ended
January 31
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net revenues $16,238,139 $20,730,840
Cost of revenues 12,934,370 17,615,553
----------- -----------
Gross profit 3,303,769 3,115,287
Selling, general and administrative expense 1,844,460 1,744,628
----------- -----------
Income from operations 1,459,309 1,370,659
Interest expense (income) (72,852) 37,828
----------- -----------
Income before income taxes 1,532,161 1,332,831
Income tax provision 613,000 530,000
----------- -----------
Net income $ 919,161 $ 802,831
=========== ===========
Basic earnings per share $.29 $.25
=========== ===========
Diluted earnings per share $.28 $.24
=========== ===========
See notes to condensed consolidated financial statements.
</TABLE>
4
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<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<CAPTION>
Three Months Ended
January 31
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
From operating activities:
Net income $ 919,161 $ 802,831
Depreciation and amortization 464,417 473,146
----------- -----------
Cash provided (used) before changes in operating
assets and liabilities 1,383,578 1,275,977
Net (increase) decrease in non-cash current assets (1,347,010) 2,458,814
Net increase (decrease) in non-cash current liabilities (2,445,336) (2,541,198)
(Increase) decrease in other assets 219,295 (23,192)
----------- -----------
Net cash provided by (used in) operating activities (2,189,473) 1,170,401
----------- -----------
From investing activities:
Additions to property, plant and equipment (73,122) (131,219)
----------- -----------
Net cash provided by (used in) investing activities (73,122) (131,219)
----------- -----------
From financing activities:
Payments of long-term debt (1,267,706) (197,396)
Purchase of treasury stock (339,758) (205,255)
Exercise of stock options 86,407 312,372
Cash dividends (43,115) (37,019)
----------- -----------
Net cash provided by (used in) financing activities (1,564,172) (127,298)
----------- -----------
Net increase (decrease) in cash and cash equivalents (3,826,767) 911,884
Cash and cash equivalents at beginning of period 8,313,160 1,415,773
----------- -----------
Cash and cash equivalents at end of period $ 4,486,393 $ 2,327,657
=========== ===========
See notes to condenses consolidated financial statements.
</TABLE>
5
<PAGE> 6
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 1998
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, 1998 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, 1997.
NOTE B - EARNINGS PER SHARE
Basic earnings per share for the three months ended January 31, 1998
and 1997 is based on average basic common shares outstanding of 3,174,755 and
3,182,114, respectively. Diluted earnings per share for the three months
ended January 31, 1998 and 1997 is based on average diluted common shares
outstanding of 3,311,577 and 3,309,956, respectively.
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:
6
<PAGE> 7
<TABLE>
<CAPTION>
January 31, 1998 October 31, 1997
---------------- ----------------
<S> <C> <C>
Raw materials $1,853,363 $1,535,860
Work-in-process 114,449 167,043
Finished goods 963,660 804,956
Inventories substantially applicable to
government contracts in process, less
progress payments of $10,811,121 and
$9,333,930 4,236,252 4,564,518
---------- ----------
$7,167,724 $7,072,377
========== ==========
</TABLE>
NOTE D - SUBSEQUENT EVENT
On February 9, 1998, the Company agreed to acquire substantially all of
the net assets of Nuclear Cooling, Inc., d/b/a/ Marlo Coil, a manufacturer of
heat transfer and air movement equipment used in commercial, industrial, U.S.
Navy and OEM markets. This transaction was completed on February 20, 1998.
For the fiscal year ended June 30, 1997, sales of Marlo Coil were
approximately $25.8 million and assets, which consist primarily of
manufacturing facilities and working capital, were $11.5 million. The
purchase price of $25.3 million was financed with $2.8 million of available
cash resources and bank borrowings of $22.5 million. Further details of the
transaction will be provided in Form 8-K to be filed with the Securities and
Exchange Commission.
7
<PAGE> 8
ENGINEERED SUPPORT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Revenues decreased 22% in the first quarter of 1998 to $16.2 million
from $20.7 million in the first quarter of 1997. The decrease in revenues
was a result of lower shipments of production items at Engineered Air
Systems, Inc. (Engineered Air) as several major contracts, primarily the
Chemical/Biological Protected Shelter System (CBPSS) and the
Chemically/Biologically Hardened Air Mangement Plant (CHAMP), are in the
engineering and development phases. Also contributing to the revenue
decrease was a reduction in shipments of houseware products at Engineered
Specialty Plastics, Inc. (ESP) in the months of November and December 1997.
(However, by the end of the quarter, ESP sales were exceeding 1997 peak
levels).
In spite of the decrease in the net revenues, gross profit increased $
0.2 million, or 6%, over that for the comparable 1997 period reflecting a
significant margin expansion at both Engineered Air and at ESP. The gross
margin for the first quarter of 1998 was 20.3% as compared to 15.0% for the
first quarter of 1997. (The gross margin for the preceding quarter ended
October 31, 1997 was 18.5%). This margin increase was due to a more
profitable mix of contracts and the impact of favorable contract cost
experience at Engineered Air, and the impact of targeted cost reductions
at ESP.
Selling, general and administrative expense was $1.84 million and $1.74
million in the first quarters of 1998 and 1997, respectively. As a percent
of net revenues, selling, general and administrative expense increased from
8.4% in 1997 to 11.3% in 1998 as a result of the decrease in consolidated
revenues.
Interest expense decreased $111,000 in the first quarter of 1998 as
compared with the first quarter of 1997. This was the result of higher
average cash balances and lower debt levels during the first quarter of 1998.
In this regard, the Company retired its remaining term debt in January 1998.
LIQUIDITY AND CAPITAL RESOURCES
At January 31, 1998, the Company's working capital and ratio of current
assets to current liabilities were $11.6 million and 2.89 to 1 as compared to
$11.6 million and 2.34 to 1 at October 31, 1997 . As of January 31, 1998,
the Company had $6.4 million of unused credit related to its existing loan
agreement.
8
<PAGE> 9
BUSINESS AND MARKET CONSIDERATIONS
As of January 31, 1998 , Engineered Air's funded backlog of defense
orders was $37 million compared to $77 million a year ago. Options to
existing contracts totaled approximately $152 million as of the end of the
first quarter compared to $154 million in the prior year.
Historically, the Company has been heavily dependent on the U.S.
government for business. Approximately 70% of consolidated net revenues for
the three months ended January 31, 1998 were derived from 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. As indicated in Note D, the Company acquired
substantially all of the net assets of Nuclear Cooling, Inc., d/b/a Marlo
Coil on February 20, 1998. Management is continuing to pursue new
acquisitions, primarily within the defense industry.
9
<PAGE> 10
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, $.01 par value, pursuant to
the Engineered Support Systems, Inc. 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 Earnings Per Share.
27. Statement Re: Summary Financial Information
(b) No reports on Form 8-K were filed during the three months
ended January 31, 1998.
10
<PAGE> 11
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 6, 1998 By: Michael F. Shanahan Sr.
----------------------- --------------------------------
Michael F. Shanahan Sr.
Chairman of the Board, President
and Chief Executive Officer
Date: March 6, 1998 By: Gary C. Gerhardt
----------------------- --------------------------------
Gary C. Gerhardt
Executive Vice President and
Chief Financial Officer
11
<PAGE> 1
Exhibit 11
<TABLE>
ENGINEERED SUPPORT SYSTEMS, INC.
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
<CAPTION>
Three Months Ended
January 31
----------------------------
1998 1997
---------- ----------
<S> <C> <C>
NET INCOME $ 919,161 $ 802,831
========== ==========
BASIC EARNINGS PER SHARE
Average shares outstanding 3,174,755 3,182,114
========== ==========
$.29 $.25
========== ==========
DILUTED EARNINGS PER SHARE
Average shares outstanding 3,174,755 3,182,114
Net effect of dilutive stock options<F1> 136,822 127,842
---------- ----------
3,311,577 3,309,956
========== ==========
$.28 $.24
========== ==========
<FN>
<F1> Based on the treasury stock method.
</TABLE>
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q FOR THE THREE MONTHS ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> NOV-01-1997
<PERIOD-END> JAN-31-1998
<CASH> 4,486,393
<SECURITIES> 0
<RECEIVABLES> 4,938,502
<ALLOWANCES> 292,100
<INVENTORY> 7,167,724
<CURRENT-ASSETS> 17,728,373
<PP&E> 29,330,407
<DEPRECIATION> 15,163,034
<TOTAL-ASSETS> 33,993,708
<CURRENT-LIABILITIES> 6,129,831
<BONDS> 0
<COMMON> 37,819
0
0
<OTHER-SE> 24,347,363
<TOTAL-LIABILITY-AND-EQUITY> 33,993,708
<SALES> 16,238,139
<TOTAL-REVENUES> 16,238,139
<CGS> 12,934,370
<TOTAL-COSTS> 12,934,370
<OTHER-EXPENSES> 1,835,360
<LOSS-PROVISION> 9,100
<INTEREST-EXPENSE> (72,852)
<INCOME-PRETAX> 1,532,161
<INCOME-TAX> 613,000
<INCOME-CONTINUING> 919,161
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 919,161
<EPS-PRIMARY> .29
<EPS-DILUTED> .28
</TABLE>
