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, 2001 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)
201 Evans Lane, St. Louis, Missouri 63121
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (314) 553-4000
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, 2001 was 7,370,441.
ENGINEERED SUPPORT SYSTEMS, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of January 31, 2001 and
October 31, 2000 3
Condensed Consolidated Statements of Income for the three months
ended January 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the three
months ended January 31, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Part II - Other Information
Items 1-6 13
Signatures 14
Exhibits 15
2
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
January 31 October 31
2001 2000
----------- -----------
(UNAUDITED)
ASSETS
Current Assets
Cash and cash equivalents $ 6,232 $ 719
Accounts receivable 29,087 33,964
Contracts in process and inventories 59,200 57,465
Other current assets 10,418 10,727
----------- -----------
Total Current Assets 104,937 102,875
Property, plant and equipment, less accumulated
depreciation of $24,075 and $22,432 55,927 56,883
Goodwill, less accumulated
amortization of $6,411 and $5,649 73,815 74,577
Other assets 3,972 4,017
----------- -----------
Total Assets $ 238,651 $ 238,352
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 24,000 $ 16,300
Current maturities of long-term debt 18,038 17,038
Accounts payable 19,955 26,826
Other current liabilities 24,721 25,654
----------- -----------
Total Current Liabilities 86,714 85,818
Long-term debt 57,778 63,028
Other liabilities 11,043 10,575
ESOP guaranteed bank loan 431
Shareholders' Equity
Common stock, par value $.01 per share; 10,000
shares authorized; 8,356 and 8,298 shares issued 84 83
Additional paid-in capital 50,291 49,365
Retained earnings 47,279 43,571
Accumulated other comprehensive loss (468)
----------- -----------
97,186 93,019
Less ESOP guaranteed bank loan 431
Less treasury stock at cost, 1,037 and 1,042 shares 14,070 14,088
----------- -----------
83,116 78,500
----------- -----------
Total Liabilities and Shareholders' Equity $ 238,651 $ 238,352
=========== ===========
See notes to condensed consolidated financial statements.
3
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(UNAUDITED)
Three Months Ended
January 31
-----------------------
2001 2000
--------- ---------
Net revenues $ 91,101 $ 86,526
Cost of revenues 73,131 70,467
--------- ---------
Gross profit 17,970 16,059
Selling, general and administrative
expense 9,588 9,310
--------- ---------
Income from operations 8,382 6,749
Interest expense (2,071) (2,470)
Interest income 93 11
Loss on sale of assets (3)
--------- ---------
Income before income taxes 6,401 4,290
Income tax provision 2,560 1,716
--------- ---------
Net income $ 3,841 $ 2,574
========= =========
Basic earnings per share (1) $ 0.42 $ 0.30
========= =========
Diluted earnings per share (1) $ 0.40 $ 0.29
========= =========
See notes to condensed consolidated financial statements.
(1) All earnings per share computations have been restated to reflect a
five-for-four stock split effected by the Company on March 16, 2001
as described in Note F.
4
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
Three Months Ended
January 31
------------------------
2001 2000
---------- ----------
From operating activities:
Net income $ 3,841 $ 2,574
Depreciation and amortization 2,632 2,610
Loss on sale of assets 3
---------- ----------
Cash provided before changes in operating
assets and liabilities 6,476 5,184
Net decrease in non-cash current assets 3,451 134
Net increase (decrease) in non-cash current liabilities (7,804) (8,174)
(Increase) decrease in other assets (51) 1,065
---------- ----------
Net cash provided by (used in) operating activities 2,072 (1,791)
---------- ----------
From investing activities:
Additions to property, plant and equipment (717) (592)
Proceeds from sale of property, plant and equipment 2
---------- ----------
Net cash provided by (used in) investing activities (715) (592)
---------- ----------
From financing activities:
Net borrowings under line-of-credit agreement 7,700 4,800
Payments of long-term debt (4,250) (2,509)
Exercise of stock options 837 84
Cash dividends (131) (124)
---------- ----------
Net cash provided by financing activities 4,156 2,251
---------- ----------
Net increase (decrease) in cash and cash equivalents 5,513 (132)
Cash and cash equivalents at beginning of period 719 310
---------- ----------
Cash and cash equivalents at end of period $ 6,232 $ 178
========== ==========
See notes to condensed consolidated financial statements.
5
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share data)
JANUARY 31, 2001
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, 2001 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 statements 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, 2000.
NOTE B - EARNINGS PER SHARE
Average diluted common shares outstanding include common stock
equivalents, which represent common stock options as computed based on the
treasury stock method. Average basic and diluted common shares outstanding
have been restated to reflect the five-for-four stock split described in
Note F.
Basic earnings per share for the three months ended January 31, 2001 and
2000 is based on average basic common shares outstanding of 9,101 and
8,660, respectively. Diluted earnings per share for the three months ended
January 31, 2001 and 2000 is based on average diluted common shares
outstanding of 9,604 and 8,848, respectively.
NOTE C - CONTRACTS IN PROCESS AND INVENTORIES
Contracts in process and inventories of certain of the Company's
operating subsidiaries (Systems & Electronics Inc., Engineered Air Systems,
Inc., Keco Industries, Inc. and Engineered Electric Company) 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 all other operating
subsidiaries (Engineered Specialty Plastics, Inc. and Engineered Coil
Company) 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
January 31, 2001 October 31, 2000
---------------- ----------------
Raw materials $ 5,423 $ 5,644
Work-in-process 1,287 324
Finished goods 3,067 2,518
Inventories substantially applicable to
government contracts in process, less
progress payments of $55,623 and
$51,384 49,423 48,979
---------------- ----------------
$ 59,200 $ 57,465
================ ================
NOTE D - ADOPTION OF SFAS 133
On November 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS 137 and SFAS 138.
The effect of adopting SFAS 133 was immaterial based on the fair value of
the Company's derivative instruments at the date of adoption.
In accordance with SFAS 133, derivative financial instruments are
recognized on the balance sheet at fair value. Changes in the fair value
of a derivative instrument designated as "fair value" hedges, along with
the corresponding change in fair value of the hedged asset or liability,
are recorded in current-period earnings. Changes in the fair value of
derivative instruments designated as "cash flow" hedges, to the extent the
hedges are highly effective, are recorded in other comprehensive income,
net of related tax effects. The ineffective portion of the cash flow
hedge, if any, is recognized in current-period earnings. Other
comprehensive income is relieved when current earnings are effected by the
variability of cash flows.
The Company formally documents the relationship between hedging instruments
and hedged items as well as its risk management objective and strategy for
undertaking its hedging activities. The Company formally designates
derivatives as hedging instruments on the date the derivative contract is
entered into. This process includes linking derivative instruments
designated as hedges to specific assets, liabilities or firm commitments,
or to specific forecasted transactions. The Company assesses, both at
inception of the hedge and on an ongoing basis, whether derivatives used as
hedging instruments are highly effective in offsetting the changes in the
fair value or cash flows of hedged items. If it is determined that a
derivative is not highly effective as a hedge or ceases to be highly
effective, the Company discontinues hedge accounting prospectively.
During the period ended January 31, 2001, the Company's derivative
contracts consisted only of interest rate swaps used by the Company to
convert a portion of its variable rate long-term debt to fixed rates. At
January 31, 2001, the Company recorded a liability of approximately $780
related to the fair value of those interest rate swap agreements, which are
designated as and considered highly effective cash flow hedges of the
Company's forecasted variable rate interest payments. The entire
corresponding loss was recorded in accumulated other comprehensive income
(equity), net of income tax effects. The Company does not expect to
reclassify any of this loss to current earnings during the next twelve
months.
7
NOTE E - SEGMENT INFORMATION
The Company operates in four segments: heavy military support equipment,
electronics and automation systems, light military support equipment, and
plastic products. Intersegment revenues for the three months ended January
31, 2001 and 2000, respectively were not significant. Total assets by
segment as disclosed in the Company's annual report for the year ended
October 31, 2000 have not changed materially since that date. In addition,
there have been no changes in either the basis of segmentation or the
measurement of segment profit since October 31, 2000. Information by
segment is as follows:
Three Months Ended
January 31
------------------------
2001 2000
---------- ----------
Net revenues:
Heavy military support equipment $ 29,996 $ 31,604
Light military support equipment 35,423 37,641
Electronics and automation systems 20,711 12,339
Plastic products 4,971 4,942
---------- ----------
Total $ 91,101 $ 86,526
========== ==========
Income from operations:
Heavy military support equipment $ 3,857 $ 2,164
Light military support equipment 3,180 4,088
Electronics and automation systems 1,285 566
Plastic products 60 (69)
---------- ----------
8,382 6,749
Interest expense (2,071) (2,470)
Interest income 93 11
Loss on sale of assets (3)
---------- ----------
Income before income taxes $ 6,401 $ 4,290
========== ==========
8
NOTE F - STOCK SPLIT
On March 16, 2001, the Company effected a five-for-four stock split in
the form of a stock dividend. All earnings per share amounts in this Form
10-Q have been restated to reflect this stock split.
9
ENGINEERED SUPPORT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Net Revenues. Consolidated net revenues increased $4.6 million, or
5.3%, in the first quarter of 2001 to $91.1 million from $86.5 million in
the first quarter of 2000. Net revenues from the heavy military support
equipment segment decreased by $1.6 million in the first quarter of 2001 to
$30.0 million as compared to $31.6 million in the first quarter of 2000.
Net revenues from the light military support equipment segment decreased by
$2.2 million in the first quarter of 2001 to $35.4 million as compared to
$37.6 million in the first quarter of 2000 as a result of a shift in
contract mix. Net revenues from the electronics and automation segment
increased $8.4 million in the first quarter of 2001 to $20.7 million as
compared to $12.3 million in the first quarter of 2000, as a result of
additional work on several major programs including the HPOC and Striker
contracts. Net revenues for the plastic products segment in the first
quarter of 2001 approximated those achieved in the first quarter of 2000.
Gross Profit. Consolidated gross profit for the first quarter of 2001
increased 11.9% to $18.0 million (19.7% of consolidated net revenues) from
$16.1 million (18.6% of consolidated net revenues) in the first quarter of
2000. Gross profit for the heavy military support equipment segment
increased to $7.0 million (23.4% of segment revenues) from $6.3 million
(20.0% of segment net revenues) in the first quarter of 2001 due to
improving margins on existing contracts. Gross profit for the light
military support equipment segment decreased to $6.9 million (19.4% of
segment net revenues) from $7.0 million (18.7% of segment net revenues) for
the first quarter of 2001. Gross profit for the electronics and automation
systems segment increased to $3.5 million (16.8% of segment net revenues)
from $2.1 million (17.0% of segment net revenues) as a result of increased
net revenues. Gross profit for the plastic products segment was $0.6
million (11.9% of segment revenues) in the first quarter of 2001 compared
to $0.6 million (12.6% of segment net revenues) in the prior year.
Selling, General and Administrative Expense. Consolidated selling,
general and administrative expenses increased by $0.3 million, or 3.0%, to
$9.6 million (10.5% of consolidated net revenues) in the first quarter of
2001 from $9.3 million (10.8% of consolidated net revenues) in the first
quarter of 2000. Selling, general and administrative expense for the heavy
military support equipment segment decreased to $3.2 million in the first
quarter of 2001 from $4.1 million in the first quarter of 2000. Selling,
general and administrative expense for the light military support equipment
segment increased to $3.7 million in the first quarter of 2001 from $2.9
million in the first quarter of 2000. Selling, general and administrative
expense for the electronics and automation segment increased to $2.2
million in the first quarter of 2001 from $1.5 million in the first quarter
of 2000. Selling, general and administrative expense for the plastic
products segment decreased to $0.5 million in the first quarter of 2001
from $0.7 million in the first quarter of 2000.
Income from Operations. Consolidated income from operations increased
24.2% to $8.4 million in the first quarter of 2001 from $6.7 million in the
first quarter of 2000. Income from operations for the heavy military
support equipment segment increased to $3.9 million in the first quarter of
2001 from $2.2 million in the prior year as a result of higher segment
gross margins coupled
10
with lower segment operating costs. Income from operations for the light
military support equipment segment decreased to $3.2 million in the first
quarter of 2001 from $4.1 million in the first quarter of 2000 as a result
of the decrease in segment net revenues and higher operating costs. Income
from operations for the electronics and automation systems segment
increased to $1.3 million in the first quarter of 2001 from $0.6 million in
the first quarter of 2000 as a result of significantly higher segment net
revenues. Income from operations for the plastic products segment was $0.1
million in the first quarter of 2001 compared to $(0.1) million in the
first quarter of 2000.
Interest Expense and Interest Income. Net interest expense decreased
$0.5 million to $2.0 million in the first quarter of 2001 compared to $2.5
million in the first quarter of 2000, primarily as a result of lower
borrowings on the Company's revolving and term debt facilities as compared
to the prior year.
Income Tax Provision. The effective income tax rate was 40.0% for the
quarters ended January 31, 2001 and 2000.
Net Income. As a result, net income of the Company increased by 49.2%
to $3.8 million (4.2% of net revenues) for the quarter ended January 31,
2001 from $2.6 million (3.0% of net revenues) for the first quarter of
2000.
LIQUIDITY AND CAPITAL RESOURCES
In conjunction with the acquisition of SEI in September 1999, the
Company entered into a new credit agreement to provide a $90.0 million term
loan and a $55.0 million revolving credit facility. The Company's primary
sources of short-term financing are from cost reimbursements under
contracts with the U.S. government via receipt of progress payments and
billings for delivered products, as well as from borrowings under the
revolving line of credit. As of January 31, 2001, the Company had $24.0
million outstanding against the revolving line of credit, remaining
availability under the line of credit of $23.0 million, and a cash balance
of $6.2 million.
On November 1, 2000, the Company adopted Statement of Financial
Accounting Standards No. 133 (SFAS 133), "Accounting for Derivative
Instruments and Hedging Activities", as amended by SFAS 137 and SFAS 138.
The effect of adopting SFAS 133 was immaterial based on the fair value of
the Company's derivative instruments at the date of adoption.
During the period ended January 31, 2001, the Company's derivative
contracts consisted only of interest rate swaps used by the Company to
convert a portion of its variable rate long-term debt to fixed rates. At
January 31, 2001, the Company recorded a liability of approximately $780
related to the fair value of those interest rate swap agreements, which are
designated as and considered highly effective cash flow hedges of the
Company's forecasted variable rate interest payments. The entire
corresponding loss was recorded in accumulated other comprehensive income
(equity), net of income tax effects. The Company does not expect to
reclassify any of the loss to current earnings during the next twelve
months.
At January 31, 2001, the Company's working capital and ratio of current
assets to current liabilities were $18.2 million and 1.21 to 1 as compared
with $17.1 million and 1.20 to 1 at October 31, 2000. The Company
generated $2.1 million in the first quarter of 2001 and used $1.8 million
in the
11
first quarter of 2000 in cash flow from operations. Investment in
property, plant and equipment totaled $0.7 million and $0.6 million for the
first quarters of 2001 and 2000, respectively. The Company anticipates
that capital expenditures in 2001 should not exceed $6.0 million.
Management believes that cash flow generated from operations, together with
the available line of credit, will provide the necessary resources to meet
the needs of the Company in the foreseeable future.
BUSINESS AND MARKET CONSIDERATIONS
Approximately 89% of consolidated net revenues for the three months
ended January 31, 2001 were directly or indirectly derived from defense
orders by the U.S. government and its agencies. As of January 31, 2001,
the Company's funded backlog of orders totaled $405.2 million, with related
customer options on these orders of an additional $545.9 million.
Management continues to pursue potential acquisitions, primarily of
those companies providing strategic consolidation within the defense
industry.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report includes certain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, which are intended to be covered by the
safe harbors created thereby. The forward-looking statements involve
certain risks and uncertainties, including, but not limited to
acquisitions, additional financing requirements, the decision of any of the
Company's key customers (including the U.S. government) to reduce or
terminate orders with the Company, cutbacks in defense spending by the U.S.
government and increased competition in the Company's markets, which could
cause the Company's actual results to differ materially from those
projected in, or inferred by, the forward-looking statements.
12
PART II
OTHER INFORMATION
Items 1-5 Not applicable
Item 6 (a) Exhibits
11. Statement Re: Computation of Earnings Per Share
(b) No reports on Form 8-K were filed during the three months
ended January 31, 2001.
13
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 16, 2001 By: Michael F. Shanahan Sr.
------------------------ -------------------------------------
Michael F. Shanahan Sr.
Chairman of the Board and
Chief Executive Officer
Date: March 16, 2001 By: Gary C. Gerhardt
------------------------ -------------------------------------
Gary C. Gerhardt
Vice Chairman - Administration
and Chief Financial Officer
14