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, 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 May 31, 2001 was 9,314,271.
ENGINEERED SUPPORT SYSTEMS, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 2001 and
October 31, 2000 3
Condensed Consolidated Statements of Income for the three and six months
ended April 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows for the six
months ended April 30, 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 9
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)
April 30 October 31
2001 2000
------------- -------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 2,036 $ 719
Accounts receivable 31,207 33,964
Contracts in process and inventories 57,229 57,465
Other current assets 8,873 10,727
------------- -------------
Total Current Assets 99,345 102,875
Property, plant and equipment, less accumulated
depreciation of $25,724 and $22,432 54,729 56,883
Goodwill, less accumulated
amortization of $6,411 and $5,649 73,020 74,577
Other assets 3,697 4,017
------------- -------------
Total Assets $ 230,791 $ 238,352
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 13,000 $ 16,300
Current maturities of long-term debt 19,038 17,038
Accounts payable 19,214 26,826
Other current liabilities 27,297 25,654
------------- -------------
Total Current Liabilities 78,549 85,818
Long-term debt 52,519 63,028
Other liabilities 10,732 10,575
ESOP guaranteed bank loan 431
Shareholders' Equity
Common stock, par value $.01 per share; 30,000
shares authorized; 10,283 and 8,298 shares issued 103 83
Additional paid-in capital 51,939 49,365
Retained earnings 51,700 43,571
Accumulated other comprehensive loss (616)
------------- -------------
103,126 93,019
Less ESOP guaranteed bank loan 431
Less treasury stock at cost, 1,033 and 1,042 shares 14,135 14,088
------------- -------------
88,991 78,500
------------- -------------
Total Liabilities and Shareholders' Equity $ 230,791 $ 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 Six Months Ended
April 30 April 30
------------------------------ -----------------------------
2001 2000 2001 2000
------------ ------------- ------------ ------------
Net revenues $ 100,059 $ 86,015 $ 191,160 $ 172,542
Cost of revenues 80,646 69,941 153,777 140,409
------------ ------------- ------------ ------------
Gross profit 19,413 16,074 37,383 32,133
Selling, general and administrative
expense 10,338 9,577 19,926 18,896
------------ ------------- ------------ ------------
Income from operations 9,075 6,497 17,457 13,237
Interest expense (1,702) (2,316) (3,773) (4,787)
Interest income 32 49 125 70
Gain (loss) on sale of assets 2 51 (1) 51
------------ ------------- ------------ ------------
Income before income taxes 7,407 4,281 13,808 8,571
Income tax provision 2,963 1,711 5,523 3,427
------------ ------------- ------------ ------------
Net income $ 4,444 $ 2,570 $ 8,285 $ 5,144
============ ============= ============ ============
Basic earnings per share (1) $ 0.48 $ 0.29 $ 0.90 $ 0.59
============ ============= ============ ============
Diluted earnings per share (1) $ 0.45 $ 0.29 $ 0.85 $ 0.58
============ ============= ============ ============
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.
4
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
Six Months Ended
April 30
----------------------------
2001 2000
----------- -----------
From operating activities:
Net income $ 8,285 $ 5,144
Depreciation and amortization 5,281 5,242
(Gain) loss on sale of assets 1 (51)
----------- -----------
Cash provided (used) before changes in operating
assets and liabilities 13,567 10,335
Net (increase) decrease in non-cash current assets 4,847 8,068
Net increase (decrease) in non-cash current liabilities (5,969) (9,839)
(Increase) decrease in other assets (302) 1,107
----------- -----------
Net cash provided by (used in) operating activities 12,143 9,671
----------- -----------
From investing activities:
Additions to property, plant and equipment (1,170) (1,458)
Proceeds from sale of property, plant and equipment 4 51
----------- -----------
Net cash provided by (used in) investing activities (1,166) (1,407)
----------- -----------
From financing activities:
Net borrowings (payments) under line-of-credit
agreement (3,300) 1,100
Payments of long-term debt (8,509) (5,019)
Purchase of treasury stock (92)
Exercise of stock options 2,395 116
Cash dividends (154) (124)
----------- -----------
Net cash provided by (used in) financing activities (9,660) (3,927)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,317 4,337
Cash and cash equivalents at beginning of period 719 310
----------- -----------
Cash and cash equivalents at end of period $ 2,036 $ 4,647
=========== ===========
See notes to condensed consolidated financial statements.
5
ENGINEERED SUPPORT SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
(in thousands, except per share amounts)
APRIL 30, 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 and six month periods ended April 30,
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 a five-for-four stock split
effected by the Company on March 16, 2001 in the form of a stock
dividend.
Basic earnings per share for the three months ended April 30, 2001
and 2000 is based on average basic common shares outstanding of 9,220
and 8,730, respectively. Diluted earnings per share for the three
months ended April 30, 2001 and 2000 is based on average diluted common
shares outstanding of 9,866 and 8,951, respectively.
Basic earnings per share for the six months ended April 30, 2001
and 2000 is based on average basic common shares outstanding of 9,160
and 8,692, respectively. Diluted earnings per share for the six months
ended April 30, 2001 and 2000 is based on average diluted common shares
outstanding of 9,733 and 8,896, 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
6
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:
April 30, 2001 October 31, 2000
-------------- ----------------
Raw materials $ 5,977 $ 5,644
Work-in-process 1,607 324
Finished goods 2,611 2,518
Inventories substantially applicable to
government contracts in process, less
progress payments of $63,846 and
$51,384 47,034 48,979
----------- -----------
$ 57,229 $ 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 evaluates, 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 April 30, 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 April 30, 2001, the Company recorded a liability of $1,026 ($616 after
income tax effects) 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
7
tax effects. The Company does not expect to reclassify any of this loss
to current earnings during the next twelve months.
NOTE E - SEGMENT INFORMATION
The Company operates in four segments: light military support
equipment, heavy military support equipment, electronics and automation
systems, and plastic products. Intersegment revenues for the three and
six months ended April 30, 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 Six Months Ended
April 30 April 30
----------------------------- ----------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Net revenues:
Light military support equipment $ 39,699 $ 43,038 $ 75,122 $ 80,680
Heavy military support equipment 33,659 23,322 63,655 54,926
Electronics and automation systems 21,192 13,157 41,903 25,496
Plastic products 5,509 6,498 10,480 11,440
----------- ----------- ----------- -----------
Total $ 100,059 $ 86,015 $ 191,160 $ 172,542
=========== =========== =========== ===========
Income from operations:
Light military support equipment $ 4,047 $ 4,803 $ 7,227 $ 8,882
Heavy military support equipment 2,983 665 6,840 2,828
Electronics and automation systems 1,946 1,063 3,231 1,629
Plastic products 99 (34) 159 (102)
----------- ----------- ----------- -----------
9,075 6,497 17,457 13,237
Interest expense (1,702) (2,316) (3,773) (4,787)
Interest income 32 49 125 70
Gain (loss) on sale of assets 2 51 (1) 51
----------- ----------- ----------- -----------
Income before income taxes $ 7,407 $ 4,281 $ 13,808 $ 8,571
=========== =========== =========== ===========
8
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 $14.1 million,
or 16.3%, in the second quarter of 2001 to $100.1 million from $86.0
million in the second quarter of 2000. For the six months ended April
30, 2001 consolidated net revenues were $191.2 million compared to
$172.5 million for the first half of 2000, representing an increase of
10.8%. Net revenues from the light military support equipment segment
decreased by $3.3 million in the second quarter of 2001 to $39.7 million
as compared to $43.0 million in the second quarter of 2000. Net
revenues for the light military support segment decreased $5.6 million
for the six months ended April 30, 2001 to $75.1 million from $80.7
million for the first half of 2001. Net revenues from the heavy
military support equipment segment increased by $10.4 million in the
second quarter of 2001 to $33.7 million as compared to $23.3 million in
the second quarter of 2000. Net revenues for this segment increased by
$8.8 million for the six months ended April 30, 2001 to $63.7 million
from $54.9 million for the first half of 2000. The increase in revenues
is partly due to the impact of the work stoppage that occurred at this
segment's manufacturing facilities in the second quarter of the prior
year. As a result, segment revenues were negatively impacted by
between $6.0 to $7.0 million. Net revenues from the electronics and
automation segment increased $8.0 million in the second quarter of 2001
to $21.2 million as compared to $13.2 million in the second quarter of
2000 and increased $16.4 million for the six months ended April 30, 2001
to $41.9 million from $25.5 million. This increase was due to
additional work performed on several major programs during the period.
Net revenues for the plastic products segment decreased $1.0 million in
the second quarter of 2001 to $5.5 million as compared to $6.5 million
for the second quarter of 2000 and decreased $0.9 million for the six
months ended April 30, 2001 to $10.5 million from $11.4 million.
Gross Profit. Consolidated gross profit for the second quarter of
2001 increased 20.8% to $19.4 million (19.4% of consolidated net
revenues) from $16.1 million (18.7% of consolidated net revenues) in the
second quarter of 2000. For the six months ended April 30, 2001
consolidated gross profit increased 16.3% to $37.4 million (19.6% of
consolidated net revenues) from $32.1 million (18.6% of consolidated net
revenues) in the first half of 2000. Gross profit for the light
military support equipment segment increased to $7.9 million (19.8% of
segment net revenues) from $7.6 million (17.7% of segment net revenues)
for the second quarter of 2000. For the six months ended April 30,
2001, gross profit for the light military segment was $14.7 million
(19.6% of segment net revenues) compared to $14.7 million (18.2% of
segment net revenues) for the first half of 2000. Gross profit for the
heavy military segment increased to $6.6 million (19.6% of segment
revenues) from $4.6 million (19.5% of segment net revenues) in the
second quarter of 2000, and for the six months ended April 30, 2001
gross profit increased to $13.6 million (21.4% of segment revenues) from
$10.9 million (19.8% of segment revenues) in the first half of 2000.
These increases coincide with the increase in net revenues for the same
period as a result of the work stoppage previously mentioned. Gross
profit for the electronics and automation systems segment increased to
$4.2 million (19.8% of segment net revenues) from $3.2 million (24.5%
of segment net revenues). For the six months ended April 30,
9
2001, gross profit for the electronics and automation segment increased
to $7.7 million (18.3% of segment net revenues) from $5.3 million (20.9%
of segment net revenues). These increases are a result of the increase
in segment revenues for the period. Gross profit for the plastic
products segment was $0.7 million (13.2% of segment revenues) in the
second quarter of 2001 compared to $0.7 million (10.2% of segment net
revenues). For the six months ended April 30, 2001, gross profit for
the plastic product segment was $1.3 million (12.6% of segment revenues)
compared to $1.3 million (11.2% of segment net revenues) for the same
period in 2000.
Selling, General and Administrative Expense. Consolidated
selling, general and administrative expenses increased by $0.7 million,
or 7.9%, to $10.3 million (10.3% of consolidated net revenues) in the
second quarter of 2001 from $9.6 million (11.1% of consolidated net
revenues) in the second quarter of 2000. For the first half of 2001,
consolidated selling, general and administrative expense increased by
$1.0 million, or 5.5%, to $19.9 million (10.4% of consolidated net
revenues) from $18.9 million (11.0% of consolidated net revenues) for
the first six months of 2000.
Income from Operations. Consolidated income from operations
increased by $2.6 million, or 39.7%, to $9.1 million in the second
quarter of 2001 from $6.5 million in the second quarter of 2000. For
the first half of 2001, consolidated income from operations increased by
$4.3 million, or 31.9% to $17.5 million from $13.2 million for the same
period in 2000. Income from operations for the light military support
equipment segment decreased to $4.0 million in the second quarter of
2001 from $4.8 million in the second quarter of 2000, and decreased to
$7.2 million for the first six months of 2001 from $8.9 million for the
first half of 2000. The decrease is a result of the decreased segment
net revenues and higher operating costs. Income from operations for the
heavy military support equipment segment increased to $3.0 million in
the second quarter of 2001 from $0.7 million in the prior year, and
increased to $6.8 million for the six months ended April 30, 2001 from
$2.8 million for the same period in 2000. These increases are a result
of higher segment revenues resulting from the work stoppage in the prior
year and lower operating costs for the fiscal 2001 periods. The Company
estimates that income from operations for the second quarter of 2000 was
reduced by approximately $1.2 to $1.5 million as a result of the
stoppage. Income from operations for the electronics and automation
systems segment increased to $1.9 million in the second quarter of 2001
from $1.1 million in the second quarter of 2000, and increased to $3.2
million for the first six months of 2001 from $1.6 million for the first
half of 2000 as a result of the higher segment net revenues. Income
from operations for the plastic products segment was $0.1 million in the
second quarter of 2001 compared to breakeven in the second quarter of
2000, and increased to $0.2 million for the first six months of 2001
from a loss of $0.1 million for the same period of 2000.
Interest Expense and Interest Income. Net interest expense
decreased $0.6 million to $1.7 million in the second quarter of 2001
compared to $2.3 million in the second quarter of 2000, and decreased by
$1.1 million to $3.6 million in the first six months of 2001 compared to
$4.7 million in the prior year as a result of lower borrowings on the
Company's revolving and term debt facilities as compared to the prior
year and a decrease in interest rates in 2001.
Income Tax Provision. The effective income tax rate was 40.0% for
the quarters ended April 30, 2001 and 2000, and was 40.0% for the six
month periods ended April 30, 2001 and 2000.
Net Income. As a result of the forgoing, net income of the
Company increased by 72.9% to $4.4 million (4.4% of net revenues) for
the quarter ended April 30, 2001 from $2.6 million (3.0% of
10
net revenues) for the second quarter of 2000. For the first half of
2001, net income increased by 61.1% to $8.3 million (4.3% of net
revenues) from $5.1 million (3.0% of net revenues) for the comparable
period in 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, billings for delivered products and borrowings under the
revolving line of credit. As of April 30, 2001, the Company had $13.0
million outstanding against the revolving line of credit, remaining
availability under the line of credit of $35.4 million, and a cash
balance of $2.0 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 April 30, 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 April 30, 2001, the Company recorded a liability of approximately
$1.0 million 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 April 30, 2001, the Company's working capital and ratio of
current assets to current liabilities were $20.8 million and 1.26 to 1
as compared with $17.1 million and 1.20 to 1 at October 31, 2000. The
Company generated cash flow from operations of $12.1 million in the six
months ended April 30, 2001 as compared to $9.7 million in the first
half of 2000. Investment in property, plant and equipment totaled $1.2
million and $1.5 million for the first six months of 2001 and 2000,
respectively. The Company anticipates that capital expenditure in 2001
should not exceed $5.0 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 six months
ended April 30, 2001 were directly or indirectly derived from defense
orders by the U.S. government and its agencies. As of April 30, 2001,
the Company's funded backlog of orders totaled $364.8 million, with
related customer options of an additional $517.5 million.
Management continues to pursue potential acquisitions, primarily
of those companies providing strategic consolidation within the defense
industry.
11
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 April 30, 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: June 14, 2001 By: /s/ Michael F. Shanahan Sr.
-------------------------- ----------------------------------
Michael F. Shanahan Sr.
Chairman of the Board and
Chief Executive Officer
Date: June 14, 2001 By: /s/ Gary C. Gerhardt
-------------------------- ----------------------------------
Gary C. Gerhardt
Vice Chairman - Administration
and Chief Financial Officer
14