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, 2002 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, 2002 was 10,452,526.
1
ENGINEERED SUPPORT SYSTEMS, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of April 30, 2002 and
October 31, 2001........................................................... 3
Condensed Consolidated Statements of Income for the three and six
months ended April 30, 2002 and 2001....................................... 4
Condensed Consolidated Statements of Cash Flows for the six months
ended April 30, 2002 and 2001.............................................. 5
Notes to Condensed Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 11
Part II - Other Information
Items 1-6..................................................................... 16
Signatures.......................................................................... 17
Exhibits............................................................................ 18
2
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
April 30 October 31
2002 2001
---------- ----------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 21,297 $ 1,015
Accounts receivable 27,600 31,430
Contracts in process and inventories 43,541 49,391
Deferred income taxes 14,385 19,901
Other current assets 3,220 2,316
Current assets of discontinued operations 6,884 7,184
---------- ----------
Total Current Assets 116,927 111,237
Property, plant and equipment, less accumulated
depreciation of $23,333 and $21,007 43,467 44,072
Goodwill 71,427 71,427
Deferred income taxes 773
Other assets 5,271 5,099
Long-term assets of discontinued operations 2,995 8,600
---------- ----------
Total Assets $ 240,860 $ 240,435
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ $ 700
Current maturities of long-term debt 21,019 21,038
Accounts payable 17,153 20,396
Other current liabilities 27,819 25,778
Current liabilities of discontinued operations 2,379 2,060
---------- ----------
Total Current Liabilities 68,370 69,972
Long-term debt 31,500 42,000
Deferred income taxes 1,142
Other liabilities 16,759 17,929
Shareholders' Equity
Common stock, par value $.01 per share; 30,000
shares authorized; 11,698 and 11,672 shares issued 117 117
Additional paid-in capital 90,912 85,682
Retained earnings 70,434 61,823
Accumulated other comprehensive loss (5,216) (5,554)
---------- ----------
156,247 142,068
Less treasury stock at cost, 1,291 and 1,467 shares 32,016 32,676
---------- ----------
124,231 109,392
---------- ----------
Total Liabilities and Shareholders' Equity $ 240,860 $ 240,435
========== ==========
See notes to condensed consolidated financial statements.
3
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Three Months Ended Six Months Ended
April 30 April 30
------------------------ --------------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
Net revenues $ 91,780 $ 94,550 $ 183,066 $ 180,680
Cost of revenues 70,018 75,866 141,392 144,619
--------- --------- ---------- ----------
Gross profit 21,762 18,684 41,674 36,061
Selling, general and administrative
expense 10,305 9,749 19,699 18,804
--------- --------- ---------- ----------
Operating income from continuing
operations 11,457 8,935 21,975 17,257
Interest expense (756) (1,702) (1,619) (3,773)
Interest income 60 32 82 125
Gain (loss) on sale of assets 2 3 (1)
--------- --------- ---------- ----------
Income from continuing operations 10,761 7,267 20,441 13,608
Income tax provision 4,197 2,907 7,975 5,443
--------- --------- ---------- ----------
Net income from continuing
operations 6,564 4,360 12,466 8,165
Discontinued operations:
Income (loss) from discontinued operations,
net of income tax (143) 84 (524) 120
Estimated loss on disposal,
net of income tax (3,145) (3,145)
--------- --------- ---------- ----------
Net income $ 3,276 $ 4,444 $ 8,797 $ 8,285
========= ========= ========== ==========
Basic earnings per share (1):
Continuing operations $ 0.63 $ 0.47 $ 1.21 $ 0.89
Discontinued operations:
Income (loss) (0.01) 0.01 (0.05) 0.01
Estimated loss on disposal (0.30) (0.30)
--------- --------- ---------- ----------
Total $ 0.32 $ 0.48 $ 0.86 $ 0.90
========= ========= ========== ==========
Diluted earnings per share (1):
Continuing operations $ 0.61 $ 0.44 $ 1.17 $ 0.84
Discontinued operations:
Income (loss) (0.01) 0.01 (0.05) 0.01
Estimated loss on disposal (0.29) (0.29)
--------- --------- ---------- ----------
Total $ 0.31 $ 0.45 $ 0.83 $ 0.85
========= ========= ========== ==========
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
------------------------
2002 2001
--------- ---------
From operating activities:
Net income of continuing operations $ 12,466 $ 8,165
Depreciation and amortization 2,678 4,819
(Gain) loss on sale of assets (3) 1
--------- ---------
Cash provided before changes in operating
assets and liabilities 15,141 12,985
Net decrease in non-cash current assets 14,524 3,536
Net decrease in non-cash current liabilities (1,565) (5,059)
(Increase) decrease in other assets 927 (319)
--------- ---------
Net cash provided by continuing operations 29,027 11,143
Net cash provided by discontinued operations 552 1,000
--------- ---------
Net cash provided by operating activities 29,579 12,143
--------- ---------
From investing activities:
Additions to property, plant and equipment (1,739) (1,027)
Proceeds from sale of property, plant and equipment 3 4
--------- ---------
Net cash used in continuing operations (1,736) (1,023)
Net cash provided by (used in) discontinued operations 1 (143)
--------- ---------
Net cash used in investing activities (1,735) (1,166)
--------- ---------
From financing activities:
Net payments under line-of-credit agreement (700) (3,300)
Payments of long-term debt (10,519) (8,509)
Purchase of treasury stock (92)
Exercise of stock options 3,842 2,395
Cash dividends (185) (154)
--------- ---------
Net cash used in continuing operations (7,562) (9,660)
Net cash used in discontinued operations
--------- ---------
Net cash used in financing activities (7,562) (9,660)
--------- ---------
Net increase in cash and cash equivalents 20,282 1,317
Cash and cash equivalents at beginning of period 1,015 719
--------- ---------
Cash and cash equivalents at end of period $ 21,297 $ 2,036
========= =========
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, 2002
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, 2002 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, 2001.
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, 2002
and 2001 is based on average basic common shares outstanding of 10,317 and
9,220, respectively. Diluted earnings per share for the three months ended
April 30, 2002 and 2001 is based on average diluted common shares
outstanding of 10,703 and 9,866, respectively.
Basic earnings per share for the six months ended April 30, 2002
and 2001 is based on average basic common shares outstanding of 10,272 and
9,160, respectively. Diluted earnings per share for the six months ended
April 30, 2002 and 2001 is based on average diluted common shares
outstanding of 10,659 and 9,733, respectively.
NOTE C - OTHER COMPREHENSIVE INCOME (LOSS)
The Company's other comprehensive income (loss) for the three
months ended April 30, 2002 and 2001 was $188 and $(148), respectively, and
for the six months ended April 30, 2002 and 2001 was $338 and $(616),
respectively. The components of other
6
comprehensive income (loss) include a minimum pension liability adjustment
and an adjustment to the fair value of derivatives.
NOTE D - DISCONTINUED OPERATIONS
During the quarter ended April 30, 2002, the Company formally
adopted a plan to dispose of Engineered Specialty Plastics, Inc. (ESP), a
wholly-owned subsidiary representing the entirety of the Plastic Products
business segment. The Company expects that the disposition through sale of
ESP will be completed by the end of fiscal 2002. In conjunction with this
plan, the Company recorded an estimated loss on disposal of discontinued
operations of $3.1 million in the quarter ended April 30, 2002 to reduce the
carrying value of ESP's net assets to their estimated fair value less
estimated selling costs. Accordingly, the Company has reported the results
of operations of ESP as discontinued operations for the three and six months
ended April 30, 2002 and 2001 in the Condensed Consolidated Statements of
Income. All assets and liabilities associated with ESP have been
reclassified as assets and liabilities of discontinued operations on the
April 30, 2002 and October 31, 2001 Condensed Consolidated Balance Sheets.
Certain information with respect to the discontinued operations of ESP for
the three and six month periods ended April 30, 2002 and 2001 is as follows:
Three Months Ended Six Months Ended
April 30 April 30
---------------------- ----------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net revenues $ 3,266 $ 5,509 $ 6,096 $ 10,480
======== ======== ======== ========
Income (loss) from operations, net of income tax $ (143) $ 84 $ (524) $ 120
Estimated loss on disposal, net of income tax (3,145) (3,145)
-------- -------- -------- --------
Income (loss) on discontinued operations, net of income tax $ (3,276) $ 84 $ (3,669) $ 120
======== ======== ======== ========
Certain information with respect to the assets and liabilities of ESP is
summarized as follows:
April 30 October 31
2002 2001
-------- ----------
Accounts receivable $ 2,415 $ 2,598
Inventories 4,450 4,593
Other assets 19 (7)
Property, plant and equipment 2,995 8,600
-------- --------
Assets of Discontinued Operations $ 9,879 $ 15,784
======== ========
Accounts payable $ 1,905 $ 1,544
Accrued expenses and other liabilities 474 516
-------- --------
Liabilities of Discontinued Operations $ 2,379 $ 2,060
======== ========
7
NOTE E - 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 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, 2002 October 31, 2001
-------------- ----------------
Raw materials $ 4,746 $ 3,137
Work-in-process 1,851 1,448
Inventories substantially applicable to
government contracts in process, less
progress payments of $40,316 and
$59,069 36,944 44,806
-------------- ----------------
$ 43,541 $ 49,391
============== ================
NOTE F - GOODWILL AND INTANGIBLE ASSETS
In June 2001, the Financial Accounting Standards Board (FASB)
issued Statements of Financial Accounting Standards No. 141 (SFAS 141),
"Business Combinations," and No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets." Under SFAS 142, goodwill and other intangible assets
deemed to have indefinite lives will no longer be amortized but will be
subject to periodic impairment tests. All other intangible assets will be
amortized over their useful lives. In addition, SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations.
The Company adopted SFAS 141 and SFAS 142 as of November 1, 2001.
The Company has identified its reporting units to be its operating
subsidiaries with the exception of Systems & Electronics Inc., which
comprises two reporting units: the Heavy Military Support Equipment and the
Electronics and Automation Systems operating segments of the Company. The
carrying value of each reporting unit as of November 1, 2001 was determined
by assigning assets and liabilities, including existing goodwill and
intangible assets, to the reporting units. Upon adoption of SFAS 142,
amortization of goodwill ceased. The Company has performed a transitional
goodwill impairment assessment which resulted in no impairment of goodwill.
An annual impairment test will be performed in the fourth quarter of each
fiscal year.
The following pro forma information reconciles reported net income
from continuing operations for the three and six months ended April 30, 2001
to adjusted net income from continuing operations, which reflects the
adoption of SFAS 142:
8
Three Months Ended Six Months Ended
April 30 April 30
------------------------- --------------------------
2002 2001 2002 2001
---------- ---------- ----------- ----------
Reported net income from continuing operations $ 6,564 $ 4,360 $ 12,466 $ 8,165
Goodwill amortization, net of tax benefit 477 934
---------- ---------- ----------- ----------
Adjusted net income from continuing operations $ 6,564 $ 4,837 $ 12,466 $ 9,099
========== ========== =========== ==========
Basic earnings per share:
Reported net income from continuing operations $ 0.63 $ 0.47 $ 1.21 $ 0.89
Goodwill amortization, net of tax benefit 0.05 0.10
---------- ---------- ----------- ----------
Adjusted net income from continuing operations $ 0.63 $ 0.52 $ 1.21 $ 0.99
========== ========== =========== ==========
Diluted earnings per share:
Reported net income from continuing operations $ 0.61 $ 0.44 $ 1.17 $ 0.84
Goodwill amortization, net of tax benefit 0.05 0.09
---------- ---------- ----------- ----------
Adjusted net income from continuing operations $ 0.61 $ 0.49 $ 1.17 $ 0.93
========== ========== =========== ==========
Discontinued operations had no goodwill amortization in the three and six
month periods ended April 30, 2001.
NOTE G - DERIVATIVES AND HEDGING ACTIVITY
During the six months ended April 30, 2002, 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, 2002, the Company recorded a liability of $895 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, net of income tax, is recorded in shareholders' equity
as accumulated other comprehensive loss.
NOTE H - SEGMENT INFORMATION
The Company operates in three segments: Light Military Support
Equipment, Heavy Military Support Equipment, and Electronics and Automation
Systems. Inter-segment revenues for the three and six months ended April 30,
2002 and 2001, respectively, were not significant. Total assets by segment
as disclosed in the Company's annual report for the year ended October 31,
2001 have not changed materially since that date. Goodwill by segment as of
both October 31, 2001 and April 30, 2002 totaled $21,708 for Light Military
Support Equipment, $25,650 for Heavy Military Support Equipment and $24,069
for Electronics and Automation Systems. In addition, there have been no
changes in either the basis of segmentation or the measurement of segment
income since October 31, 2001. Information by segment is as follows:
9
Three Months Ended Six Months Ended
April 30 April 30
------------------------ --------------------------
2002 2001 2002 2001
--------- --------- ---------- ----------
Net revenues:
Light military support equipment $ 37,379 $ 39,699 $ 76,962 $ 75,122
Heavy military support equipment 34,421 33,659 65,445 63,655
Electronics and automation systems 19,980 21,192 40,659 41,903
--------- --------- ---------- ----------
Total $ 91,780 $ 94,550 $ 183,066 $ 180,680
========= ========= ========== ==========
Income from continuing operations:
Light military support equipment $ 4,350 $ 4,006 $ 9,700 $ 7,186
Heavy military support equipment 5,664 2,983 8,951 6,840
Electronics and automation systems 1,443 1,946 3,324 3,231
--------- --------- ---------- ----------
11,457 8,935 21,975 17,257
Interest expense (756) (1,702) (1,619) (3,773)
Interest income 60 32 82 125
Gain (loss) on sale of assets 2 3 (1)
--------- --------- ---------- ----------
Income from continuing operations
before income taxes $ 10,761 $ 7,267 $ 20,441 $ 13,608
========= ========= ========== ==========
NOTE I - SUBSEQUENT EVENT
Effective May 10, 2002, the Company acquired all of the outstanding
stock of Radian, Inc., a supplier of engineering, logistics support and
systems integration services to the U.S. Department of Defense. The purchase
price was $41.8 million, consisting of $39.8 million in cash and $2.0
million in common stock of the Company. The Company financed the cash
portion of the transaction with existing cash balances and with short-term
borrowings under the revolving credit facility.
10
ENGINEERED SUPPORT SYSTEMS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Revenues on long-term contracts performed within the Company's
Light Military Support Equipment, Heavy Military Support Equipment and
Electronics and Automation Systems segments, substantially all of which are
with the U.S. Government, are recognized under the percentage of completion
method and include a proportion of the earnings that are expected to be
realized on the contract in the ratio that production measures, primarily
labor, incurred bear to the estimated production measures for the contract.
Earnings expectations are based upon estimates of contract values and costs
at completion. Contracts in process are reviewed on a periodic basis.
Adjustments to revenues and earnings are made in the current accounting
period based upon revisions in contract values and estimated costs at
completion. Provisions for estimated losses on contracts are recorded when
identified.
During the quarter ended April 30, 2002, the Company formally
adopted a plan to dispose of Engineered Specialty Plastics, Inc. (ESP), a
wholly-owned subsidiary representing the entirety of the Plastic Products
business segment. In conjunction with this plan, the Company recorded an
estimated loss on disposal totaling $3.1 million, or $.29 per diluted common
share, in the quarter ended April 30, 2002 to reduce the carrying value of
ESP's net assets to their estimated fair value less estimated selling costs.
Accordingly, the Company has reported the results of operations of ESP as
discontinued operations for the three and six months ended April 30, 2002
and 2001 in the Condensed Consolidated Statements of Income. Additionally,
all depreciation on the property, plant and equipment of ESP was suspended
as of April 30, 2002.
The following analysis should be read in this context.
RESULTS OF OPERATIONS
Consolidated net revenues from continuing operations decreased $2.8
million, or 2.9%, to $91.8 million in the second quarter of 2002 compared to
$94.6 million in the second quarter of 2001. The decrease was primarily the
result of lower net revenues in the Light Military Support Equipment segment
due to lower production levels on several programs throughout the quarter.
Gross profit from continuing operations for the three months ended April 30,
2002 increased $3.1 million, or 16.5%, to $21.8 million (23.7% of
consolidated net revenues) from $18.7 million (19.8% of consolidated net
revenues) in the comparable 2001 period. The increase in gross profit was
primarily a result of improved operating performance in the Heavy Military
Support Equipment segment. Selling, general and administrative expense from
continuing operations increased $0.6 million, or 5.7%, in the second quarter
of 2002 to $10.3 million (11.2% of consolidated net revenues) from $9.7
million (10.3% of consolidated net revenues) in the second quarter of 2001.
As a result of the above, operating income from continuing operations
increased $2.5 million, or
11
28.2%, in the quarter ended April 30, 2002 to $11.4 million from $8.9
million in the second quarter of 2001.
Consolidated net revenues from continuing operations increased $2.4
million, or 1.3%, to $183.1 million in the six months ended April 30, 2002
compared to $180.7 million in the first half of 2001. Marginal increases in
the Light Military Support Equipment and Heavy Military Support Equipment
segments were slightly offset by lower revenues in the Electronics and
Automation Systems segment. Gross profit from continuing operations for the
six months ended April 30, 2002 increased $5.6 million, or 15.6%, to $41.7
million (22.8% of consolidated net revenues) from $36.1 million (20.0% of
consolidated net revenues) in the comparable 2001 period. Selling, general
and administrative expense from continuing operations increased $0.9
million, or 4.8%, in the first half of 2002 to $19.7 million (10.8% of
consolidated net revenues) from $18.8 million (10.4% of consolidated net
revenues) in the prior year. As a result of the above, income from
continuing operations increased $4.7 million, or 27.3%, in the six months
ended April 30, 2002 to $22.0 million from $17.3 million in the first half
of 2001.
LIGHT MILITARY SUPPORT EQUIPMENT. Net revenues for the Light
Military Support Equipment segment decreased by $2.3 million, or 5.8%, to
$37.4 million in the second quarter of 2002 from $39.7 million in the second
quarter of 2001 due to lower production levels on several programs
throughout the period. However, in the six months ended April 30, 2002, net
revenues for the segment increased by $1.8 million, or 2.4%, to $76.9
million from $75.1 million in the first half of 2001. Gross profit for the
segment increased by $0.4 million, or 5.1%, in the second quarter of 2002 to
$8.3 million (22.2% of segment net revenues) from $7.9 million (19.8% of
segment net revenues) in the second quarter of 2001. Likewise, gross profit
for the segment increased by $2.7 million, or 18.2%, in the six months ended
April 30, 2002 to $17.4 million (22.6% of segment net revenues) from $14.7
million (19.6% of segment net revenues) in the first half of 2001.
Significant gross margin improvements resulted from certain key Light
Military Support Equipment programs including contracts for Tactical Quiet
Generators and for the Chemical/Biological Protection Shelter systems.
Income from operations increased by $0.4 million, or 8.6%, in the second
quarter of 2002 to $4.4 million from $4.0 million in the second quarter of
2001, and increased by $2.5 million, or 35.0%, in the first half of 2002 to
$9.7 million from $7.2 million in the first half of 2001, as a result of the
gross profit gains noted above and due to the elimination of goodwill
amortization, which totaled $0.3 million in the second quarter of 2001 and
$0.5 million in the first half of 2001, in accordance with the adoption of
SFAS 142.
HEAVY MILITARY SUPPORT EQUIPMENT. Net revenues for the Heavy
Military Support Equipment segment increased by $0.8 million, or 2.3%, to
$34.4 million in the second quarter of 2002 from $33.6 million in the second
quarter of 2001. For the six months ended April 30, 2002, net revenues for
the segment increased by $1.8 million, or 2.8%, to $65.4 million from $63.6
million in the first half of 2001. Gross profit for the segment increased by
$3.1 million, or 46.9%, in the second quarter of 2002 to $9.7 million (28.2%
of segment net revenues) from $6.6 million (19.6% of segment net revenues)
in the second quarter of 2001. For the six months ended April 30, 2002,
gross profit for the
12
segment increased by $2.7 million, or 20.0%, to $16.3 million (25.0% of
segment net revenues) from $13.6 million (21.4% of segment net revenues) in
the first half of 2001. Significant gross margin improvements for the three
and six month periods ended April 30, 2002 were realized on the Tunner 60-K
Aircraft Cargo Loader/Transporter and on the M1000 Heavy Equipment
Transporter. Income from operations increased by $2.7 million, or 89.9%, in
the second quarter of 2002 to $5.7 million from $3.0 million in the second
quarter of 2001, and increased by $2.1 million, or 30.9%, in the first half
of 2002 to $9.0 million from $6.9 million in the first half of 2001, as a
result of the gross profit gains noted above and due to the elimination of
goodwill amortization, which totaled $0.3 million in the second quarter of
2001 and $0.6 million in the first half of 2001, in accordance with the
adoption of SFAS 142.
ELECTRONICS AND AUTOMATION SYSTEMS. Net revenues for the
Electronics and Automation Systems segment decreased by $1.2 million, or
5.7%, to $20.0 million in the second quarter of 2002 from $21.2 million in
the second quarter of 2001. For the six months ended April 30, 2002, net
revenues for the segment decreased by $1.2 million, or 3.0%, to $40.7
million from $41.9 million in the first half of 2001. These decreases were
primarily due to lower revenues from the U.S. Postal Service. Gross profit
for the segment decreased by $0.4 million, or 10.2%, in the second quarter
of 2002 to $3.8 million (18.9% of segment net revenues) from $4.2 million
(19.8% of segment net revenues) in the second quarter of 2001. For the six
months ended April 30, 2002, gross profit for the segment increased by $0.2
million, or 2.7%, to $7.9 million (19.4% of segment net revenues) from $7.7
million (18.3% of segment net revenues) in the first half of 2001. Income
from operations decreased by $0.5 million, or 25.8%, in the second quarter
of 2002 to $1.4 million from $1.9 million in the second quarter of 2001, and
increased by $0.1 million, or 2.9%, in the first half of 2002 to $3.3
million from $3.2 million in the first half of 2001, as a result of the
above and due to the elimination of goodwill amortization, which totaled
$0.2 million in the second quarter of 2001 and $0.4 million in the first
half of 2001, in accordance with the adoption of SFAS 142.
Net interest expense decreased by $1.0 million to $0.7 million in
the second quarter of 2002 and by $2.1 million to $1.5 million in the six
months ended April 30, 2002. These decreases were primarily a result of
lower outstanding borrowings on the Company's revolving and term-debt credit
facilities, as well as the impact of lower interest rates. The effective
income tax rate was 39.0% for the three and six months ended April 30, 2002
as compared to 40.0% for the three and six months ended April 30, 2001. The
reduction in the Company's effective income tax rate resulted from the
implementation of various tax planning strategies in fiscal 2001. As a
result of the foregoing, net income from continuing operations increased
50.6% to $6.6 million (7.2% of consolidated net revenues) in the quarter
ended April 30, 2002 as compared to $4.4 million (4.6% of consolidated net
revenues) in the second quarter of 2001. For the six months ended April 30,
2002, net income from continuing operations increased 52.7% to $12.5 million
(6.8% of consolidated net revenues) from $8.2 million (4.5% of consolidated
net revenues for the first half of 2001.
13
As previously noted, in the second quarter of 2002 the Company
recorded an estimated loss, net of income tax, of $3.1 million related to
the disposal of ESP. In addition, the Company realized income (loss) from
ESP operations, net of income tax, of $(0.1) million and $0.1 million in the
second quarter of 2002 and 2001, respectively, and of $(0.5) million and
$0.1 million in the six months ended April 30, 2002 and 2001, respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB)
issued Statements of Financial Accounting Standards No. 141 (SFAS 141),
"Business Combinations", and No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets". Under SFAS 142, goodwill and other intangible assets
deemed to have indefinite lives will no longer be amortized, but will be
subject to periodic impairment tests. All other intangible assets will be
amortized over their useful lives. In addition, SFAS 141 eliminates the
pooling-of-interests method of accounting for business combinations. The
Company adopted SFAS 141 and SFAS 142 as of November 1, 2001 and had no
impairment of goodwill as a result of its transitional assessment.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". SFAS 144 addresses the
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS 121. The Company adopted SFAS 144
effective November 1, 2001. In the quarter ended April 30, 2002, the Company
accounted for the planned disposition through sale of ESP as discontinued
operations in accordance with SFAS 144.
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, 2002, the Company had no borrowings against the revolving line of
credit, remaining availability under the line of credit of $42.3 million and
a cash balance of $21.3 million.
During the period ended April 30, 2002, 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, 2002, the Company recorded a liability of $0.9 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,
net of income tax, was recorded in shareholders' equity as accumulated other
comprehensive loss.
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At April 30, 2002, the Company's working capital and ratio of
current assets to current liabilities were $48.6 million and 1.71 to 1 as
compared with $41.3 million and 1.59 to 1 at October 31, 2001. The Company
generated cash flow from continuing operations of $29.0 million in the six
months ended April 30, 2002 as compared to $11.1 million in the first six
months of 2001. Investment in property, plant and equipment totaled $1.7
million and $1.0 million for the first six months of 2002 and 2001,
respectively. The Company anticipates that capital expenditures in 2002
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 95% of consolidated net revenues from continuing
operations for the six months ended April 30, 2002 were directly or
indirectly derived from defense orders by the U.S. government and its
agencies. As of April 30, 2002, the Company's funded backlog of orders
totaled $359.5 million, with related customer options of an additional
$581.6 million.
Management continues to pursue potential acquisitions, primarily of
those companies providing strategic consolidation within the defense
industry. Effective May 10, 2002, the Company acquired all of the
outstanding stock of Radian, Inc., a supplier of engineering, logistics
support and systems integration services to the U.S. Department of Defense.
The purchase price was $41.8 million consisting of $39.8 million in cash and
$2.0 million in common stock of the Company. Radian, Inc. generated revenues
of approximately $53 million for the year ended December 31, 2001.
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.
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PART II
OTHER INFORMATION
Items 1-3 Not applicable.
Item 4 Submission of Matters to a Vote of Security Holders.
(a) A special meeting of shareholders of the Company was held on
June 4, 2002.
(b) Not applicable.
(c) The proposal for the approval of the Engineered Support
Systems, Inc. 2002 Stock Option Plan and the allocation of
1,150,000 shares of Engineered Support Systems, Inc. common
stock to the Plan was ratified. There were 6,961,927 votes for
the proposal, 914,953 votes against the proposal and 19,886
votes representing abstentions.
(d) Not applicable.
Item 5 Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits
11. Statement Re: Computation of Earnings Per Share
(b) No reports on Form 8-K were filed during the six months ended
April 30, 2002.
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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 13, 2002 By: /s/ Michael F. Shanahan, Sr.
--------------------------------- ------------------------------
Michael F. Shanahan, Sr.
Chairman of the Board and
Chief Executive Officer
Date: June 13, 2002 By: /s/ Gary C. Gerhardt
-------------------------------- -------------------------------
Gary C. Gerhardt
Vice Chairman - Administration
and Chief Financial Officer
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