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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
Quarterly Report under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the nine months ended July 31, 2003 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
--- ---
Indicate by check mark whether the Registrant is an accelerated
filer (as defined by Rule 12b-2 of the Exchange Act). Yes X No
--- ---
The number of shares of the Registrant's common stock, $.01 par
value, outstanding at August 31, 2003 was 16,356,917.
1
ENGINEERED SUPPORT SYSTEMS, INC.
INDEX
Page
----
Part I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of July 31, 2003 and
October 31, 2002..................................................... 3
Condensed Consolidated Statements of Income for the three and nine
months ended July 31, 2003 and 2002.................................. 4
Condensed Consolidated Statements of Cash Flows for the nine
months ended July 31, 2003 and 2002.................................. 5
Notes to Condensed Consolidated Financial Statements................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................. 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 21
Item 4. Controls and Procedures......................................... 21
Part II - Other Information
Items 1-6 .............................................................. 22
Signatures ................................................................ 23
Exhibits .................................................................. 26
2
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
July 31 October 31
2003 2002
------------------- -------------------
(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents $ 16,306 $ 4,793
Accounts receivable 76,315 47,407
Contracts in process and inventories 33,683 42,182
Deferred income taxes 6,660 6,660
Other current assets 4,929 5,010
Current assets of discontinued operations 10,079
------------------- -------------------
Total Current Assets 137,893 116,131
Property, plant and equipment, less accumulated
depreciation of $29,297 and $25,464 49,514 43,105
Goodwill 169,985 103,444
Deferred income taxes 6,885 6,885
Other assets 20,625 19,274
Long-term assets of discontinued operations 1,308
------------------- -------------------
Total Assets $ 384,902 $ 290,147
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable $ 81,000 $ 13,000
Current maturities of long-term debt 108 21,000
Accounts payable 40,898 28,439
Other current liabilities 54,705 32,323
Current liabilities of discontinued operations 3,793
------------------- -------------------
Total Current Liabilities 176,711 98,555
Long-term debt 118 21,000
Additional minimum pension liability 20,334 20,334
Other liabilities 10,846 15,401
Shareholders' Equity
Common stock, par value $.01 per share; 30,000
shares authorized; 17,047 and 16,991 shares issued 171 170
Additional paid-in capital 102,573 95,569
Retained earnings 114,007 84,961
Accumulated other comprehensive loss (14,098) (14,275)
------------------- -------------------
202,653 166,425
Less treasury stock at cost, 788 and 1,171 shares 25,760 31,568
------------------- -------------------
176,893 134,857
------------------- -------------------
Total Liabilities and Shareholders' Equity $ 384,902 $ 290,147
=================== ===================
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 Nine Months Ended
July 31 July 31
-------------------------------------- --------------------------------------
2003 2002 2003 2002
------------------ ------------------ ------------------ ------------------
Net revenues:
Products $ 112,383 $ 98,968 $ 338,512 $ 281,839
Services 43,286 7,631 63,877 7,826
------------------ ------------------ ------------------ ------------------
155,669 106,599 402,389 289,665
------------------ ------------------ ------------------ ------------------
Cost of revenues:
Products 81,538 74,208 254,833 215,586
Services 35,970 6,600 52,466 6,614
------------------ ------------------ ------------------ ------------------
117,508 80,808 307,299 222,200
------------------ ------------------ ------------------ ------------------
Gross profit 38,161 25,791 95,090 67,465
Selling, general and administrative expense 16,850 12,142 44,224 31,841
Restructuring expense 449 1,441 1,642 1,441
------------------ ------------------ ------------------ ------------------
Operating income from continuing operations 20,862 12,208 49,224 34,183
Interest expense (632) (867) (1,359) (2,489)
Interest income 117 21 214 106
Gain on sale of assets 11 1 17 4
------------------ ------------------ ------------------ ------------------
Income from continuing operations 20,358 11,363 48,096 31,804
Income tax provision 7,942 4,430 18,760 12,405
------------------ ------------------ ------------------ ------------------
Net income from continuing operations 12,416 6,933 29,336 19,399
Discontinued operations:
Income (loss) from discontinued operations,
net of income tax 97 294 (427)
Estimated loss on disposal, net of
income tax (352) (3,497)
------------------ ------------------ ------------------ ------------------
Net income $ 12,416 $ 6,678 $ 29,630 $ 15,475
================== ================== ================== ==================
Basic earnings per share:
Continuing operations $ 0.77 $ 0.44 $ 1.83 $ 1.25
Discontinued operations:
Income (loss) from discontinued
operations, net of income tax 0.01 0.02 (0.03)
Estimated loss on disposal, net of
income tax (0.03) (0.22)
------------------ ------------------ ------------------ ------------------
Total $ 0.77 $ 0.42 $ 1.85 $ 1.00
================== ================== ================== ==================
Diluted earnings per share:
Continuing operations $ 0.72 $ 0.43 $ 1.72 $ 1.21
Discontinued operations:
Income (loss) from discontinued
operations, net of income tax 0.01 0.02 (0.03)
Estimated loss on disposal, net of
income tax (0.03) (0.22)
------------------ ------------------ ------------------ ------------------
Total $ 0.72 $ 0.41 $ 1.74 $ 0.96
================== ================== ================== ==================
See notes to condensed consolidated financial statements.
4
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(UNAUDITED)
Nine Months Ended
July 31
----------------------------------------
2003 2002
------------------- -------------------
From operating activities:
Net income from continuing operations $ 29,336 $ 19,399
Depreciation and amortization 6,711 4,758
Gain on sale of assets (17) (4)
------------------- -------------------
Cash provided before changes in operating
assets and liabilities 36,030 24,153
Net decrease in non-cash current assets 12,117 17,032
Net increase (decrease) in non-cash current liabilities 11,070 (3,507)
Decrease in other assets 2,718 796
------------------- -------------------
Net cash provided by continuing operations 61,935 38,474
Net cash provided by (used in) discontinued operations 1,821 (37)
------------------- -------------------
Net cash provided by operating activities 63,756 38,437
------------------- -------------------
From investing activities:
Purchase of TAMSCO, net of cash acquired (77,385)
Purchase of Radian, net of cash acquired (39,992)
Purchase of UPSI, net of cash acquired (5,008) (5,497)
Additions to property, plant and equipment (8,420) (1,976)
Proceeds from sale of property, plant and equipment 37 4
------------------- -------------------
Net cash used in continuing operations (90,776) (47,461)
Net cash provided by discontinued operations 3,696 1
------------------- -------------------
Net cash used in investing activities (87,080) (47,460)
------------------- -------------------
From financing activities:
Net borrowings (payments) under line-of-credit agreement 68,000 21,300
Payments of long-term debt (42,023) (15,779)
Purchase of treasury stock (557)
Exercise of stock options 9,997 4,875
Cash dividends (580) (373)
------------------- -------------------
Net cash used in continuing operations 34,837 10,023
Net cash used in discontinued operations
------------------- -------------------
Net cash used in financing activities 34,837 10,023
------------------- -------------------
Net increase in cash and cash equivalents 11,513 1,000
Cash and cash equivalents at beginning of period 4,793 1,015
------------------- -------------------
Cash and cash equivalents at end of period $ 16,306 $ 2,015
=================== ===================
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)
JULY 31, 2003
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 nine month periods ended July 31, 2003 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, 2002.
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 three-for-two stock split effected by the
Company on October 31, 2002 in the form of a stock dividend.
Basic earnings per share for the three months ended July 31, 2003
and 2002 is based on average basic common shares outstanding of 16,171 and
15,708, respectively. Diluted earnings per share for the three months ended
July 31, 2003 and 2002 is based on average diluted common shares outstanding
of 17,194 and 16,215, respectively.
Basic earnings per share for the nine months ended July 31, 2003
and 2002 is based on average basic common shares outstanding of 16,054 and
15,510, respectively. Diluted earnings per share for the nine months ended
July 31, 2003 and 2002 is based on average diluted common shares outstanding
of 17,016 and 16,065, respectively.
NOTE C - STOCK-BASED COMPENSATION
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for all stock option plans. Accordingly, no compensation expense
has been recognized for stock option awards as all options granted have been
at fair market value at grant date. The following table illustrates the
effect on net income from continuing operations and earnings per share had
the
6
Company applied the fair value recognition provisions of Statement of
Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," to stock option awards.
Three Months Ended Nine Months Ended
July 31 July 31
---------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ----------- -----------
Reported net income from continuing operations $12,416 $ 6,933 $29,336 $19,399
Total stock-based employee compensation expense
determined under the fair value method for all stock
option awards, net of income tax 8,971 653 9,155
------------ ------------ ----------- -----------
Pro forma net income from continuing operations $12,416 $(2,038) $28,683 $10,244
============ ============ =========== ===========
Earnings per share from continuing operations:
Basic - as reported $ 0.77 $ 0.44 $ 1.83 $ 1.25
============ ============ =========== ===========
Basic - pro forma $ 0.77 $ (0.13) $ 1.79 $ 0.66
============ ============ =========== ===========
Diluted - as reported $ 0.72 $ 0.43 $ 1.72 $ 1.21
============ ============ =========== ===========
Diluted - pro forma $ 0.72 $ (0.13) $ 1.69 $ 0.64
============ ============ =========== ===========
Historically, options granted have been fully vested at grant date.
The fair value of options at the grant date was estimated using the Black-
Scholes model with the following weighted average assumptions for the three
and nine months ended July 31, 2003 and 2002: an expected life of 1.5 years,
volatility of 51%, a dividend yield of 0.16% and a risk-free interest rate
of 3.74%. The weighted average fair value of options granted in the three
and nine months ended July 31, 2003 and 2002 was $7.66.
NOTE D - ACQUISITIONS
On May 1, 2003, the Company acquired all of the outstanding common
stock of Technical and Management Services Corporation (TAMSCO), a provider
of information technology logistics and digitization services and a designer
and integrator of telecommunication systems primarily for the U.S.
Department of Defense (DoD). The purchase price was approximately $65.9
million, which is net of $0.1 million of cash acquired. Approximately $4.4
million of the purchase price has not yet been paid subject to final
determination of defined equity adjustments and collection of accounts
receivable. The Company anticipates that a minimum of $1.0 million of this
$4.4 million holdback will not be paid due to defined equity adjustments
and, accordingly, has reduced the remaining amount payable to $3.4 million.
In connection with this transaction, the Company also assumed and paid $14.9
million of TAMSCO indebtedness. The purchase of TAMSCO, net of cash
acquired, totals $77.4 million in the Condensed Consolidated Statements of
Cash Flows, which represents the $65.9 million purchase price plus assumed
indebtedness of $14.9 million and less $3.4 million of purchase price not
yet paid. The fair value of assets acquired, including goodwill of $61.5
million, was $99.6 million and liabilities assumed totaled $33.7 million.
(Assets acquired and liabilities assumed are based on preliminary valuation
information and will be adjusted upon completion of this valuation.) The
purchase price was financed with short-term borrowings under the Company's
revolving credit facility.
The following unaudited pro forma summary presents the combined
historical results of operations for the three and nine month periods ended
July 31, 2003 and 2002 as adjusted to
7
reflect the TAMSCO purchase transaction assuming the acquisition had
occurred at November 1, 2001. These pro forma results are not necessarily
indicative of the combined results that would have occurred had the
acquisition actually taken place on November 1, 2001, nor are they
necessarily indicative of the combined results that may occur in the future.
Three Months Ended Nine Months Ended
July 31 July 31
-------------------------------- --------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
Net revenues $ 155,669 $ 135,581 $ 482,343 $ 376,612
============== ============== ============== ==============
Net income from continuing operations $ 12,416 $ 7,730 $ 32,197 $ 21,789
============== ============== ============== ==============
Basic earnings per share from continuing
operations $0.77 $ 0.49 $2.01 $ 1.40
============== ============== ============== ==============
Diluted earnings per share from continuing
operations $0.72 $ 0.48 $1.89 $ 1.36
============== ============== ============== ==============
On May 10, 2002, the Company acquired all of the outstanding common
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 approximately $42.0 million, which included consideration of $2.0
million in the common stock of the Company. The purchase price is net of
$0.4 million of cash acquired. The fair value of the assets acquired,
including goodwill of $26.6 million and customer-related intangibles of
$15.3 million, was $58.3 million and liabilities assumed totaled $16.3
million. (Acquired customer-related intangibles, less $2.8 million of
amortization to date, are included on the July 31, 2003 Condensed
Consolidated Balance Sheet in Other Assets.) The cash portion of the
purchase price was financed with available cash resources and short-term
borrowings under the Company's revolving credit facility.
On June 27, 2002, the Company acquired all of the outstanding
common stock of Universal Power Systems, Inc. (UPSI), a provider of
uninterruptible power supply systems for the U.S. Department of Defense,
intelligence agencies and commercial customers. The purchase price was
approximately $5.5 million plus certain contingent cash consideration based
upon UPSI's net revenue levels through two measurement dates, December 31,
2002 and October 31, 2003. Based upon UPSI's net revenue through the
December 31, 2002 measurement date, $5.0 million of cash consideration was
added to the purchase price and paid during the quarter ended April 30,
2003. (The Company estimates the maximum amount of contingent cash
consideration related to the October 31, 2003 measurement date to be $0.6
million). The fair value of the assets acquired, including goodwill of $10.4
million, was $11.6 million and liabilities assumed totaled $1.2 million. The
purchase price was financed with short-term borrowings under the Company's
revolving credit facility.
All three acquired companies are included in the Light Military
Support Equipment segment.
8
NOTE E - OTHER COMPREHENSIVE INCOME
The Company's other comprehensive income for the three months ended
July 31, 2003 and 2002 was $0 and $181, respectively. The Company's other
comprehensive income for the nine months ended July 31, 2003 and 2002 was
$177 and $519, respectively. The components of other comprehensive income
include a minimum pension liability adjustment and an adjustment to the fair
value of derivatives.
NOTE F - GOODWILL AND INTANGIBLE ASSETS
The following disclosure presents certain information on the
Company's acquired intangible assets as of July 31, 2003 and October 31,
2002. All acquired intangible assets are being amortized over their
estimated useful lives with no estimated residual values. These amounts are
included in Other Assets in the Condensed Consolidated Balance Sheets.
Weighted Average
Amortization Gross Accumulated Net
Period Amount Amortization Amount
---------------- ------ ------------ ------
Customer-related intangibles:
July 31, 2003 5.4 years $ 15,309 $ 3,550 $ 11,759
October 31, 2002 5.4 years 15,309 1,420 13,889
The amortization expense related to acquired intangible assets was
$710 for the three months ended July 31, 2003 and $2,130 for the nine months
ended July 31, 2003. Related estimated amortization expense is $2,840
annually through the year ended October 31, 2006, and $2,529 for the year
ended October 31, 2007. Amortization expense related to acquired intangible
assets totaled $710 for the three and nine months ended July 31, 2002.
NOTE G - OPERATIONAL RESTRUCTURING
During the quarter ended July 31, 2002, the Company announced a
restructuring plan to improve both plant utilization and long-term
profitability. Under the plan, the Company's Blue Ash, Ohio and Olivette,
Missouri manufacturing locations will be closed during the year ending
October 31, 2003 with related production efforts being relocated to other
existing Company facilities. Emerging Issues Task Force No. 94-3 (ETIF
94-3), which was effective through December 31, 2002, provided specific
requirements as to the appropriate recognition of restructuring costs
associated with employee termination benefits and other exit costs. Employee
termination costs are recognized when benefit arrangements are communicated
to affected employees in sufficient detail to enable the employees to
determine the amount of benefits to be received upon termination. Other
costs resulting from the restructuring plan that are not associated with or
that do not benefit activities that will be continued are recognized at the
date of commitment to the plan subject to certain conditions. For the cost
to be accrued, it must not be associated with or incurred to generate
revenues after the commitment date, and must be either incremental to other
costs incurred prior to the commitment date or represent amounts under a
contractual obligation that existed prior to the commitment date that will
either continue after the plan is completed with no economic benefit or
which will result in a penalty to cancel the obligation. Other costs
directly related to the restructuring plan which are
9
not eligible for recognition at the commitment date, such as relocation and
other integration costs, are expensed as incurred. The plan will involve
terminating 113 employees, 110 of which had been terminated as of July 31,
2003.
During the nine months ended July 31, 2003, the Company recorded the
following costs in connection with this restructuring plan.
Accrued at Accrued at
October 31, Expensed Utilized July 31,
2002 2003
----------- -------- -------- ----------
Severance and related benefits $ 789 $ $ 548 $ 241
Other cash restructuring costs 153 153
------ ------ ----- --------
Restructuring costs, excluding non-cash items $ 942 $ $ 548 $ 394
====== ====== ===== ========
During the quarter ended April 30, 2003, the Company announced an
additional restructuring plan under which the electronics assembly work
currently performed at the Company's Sanford, Florida facility of its
Systems & Electronics Inc. (SEI) subsidiary will be relocated to alternate
SEI facilities. Statement of Financial Accounting Standards No. 146 (SFAS
146), "Accounting for Costs Associated with Exit or Disposal Activities",
applies to all disposal activities initiated after December 31, 2002 and
prospectively nullifies EITF 94-3. SFAS 146 requires that a liability for
employee termination costs associated with an exit or disposal activity be
recognized when the liability is incurred. (EITF 94-3 had previously
required that a liability for such costs be recognized at the date of the
Company's commitment to an exit or disposal plan). In accordance with SFAS
146, the Company recorded restructuring expense of $0.4 million in the
quarter ended July 31, 2003 and $1.6 million in the nine months ended July
31, 2003. The Company anticipates that it will record an additional $0.5
million of restructuring expense related to this plan, substantially all of
which will be recorded during the year ending October 31, 2003. The plan
will involve terminating 120 employees, 10 of which had been terminated as
of July 31, 2003.
During the nine months ended July 31, 2003, the Company recorded
the following costs in connection with this restructuring plan.
Accrued
at July 31,
Expensed Utilized 2003
-------- -------- -----------
Severance and related benefits $ 717 $ 17 $ 700
======== ======
Pension curtailment costs 35
Estimated loss on asset disposal 890
-------
Total Restructuring Costs $ 1,642
=======
NOTE H - DISCONTINUED OPERATIONS
During the second quarter of 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 completed the sale of ESP in the quarter ended April
30, 2003 to a private equity group. Consideration received by the
10
Company included $4.1 million of cash, a $3.3 million two-year note from the
buyers secured by the real property of ESP, and contingent consideration
based upon ESP's future revenues, net of an estimated $0.3 million working
capital adjustment payable by the Company. In conjunction with the intended
disposition of ESP, the Company had previously recorded an estimated loss on
disposal of discontinued operations of $4.2 million to reduce the carrying
value of ESP's net assets to their estimated fair value less estimated
selling costs. The completion of the sale resulted in no adjustment to this
$4.2 million loss. However, final settlement of the working capital
adjustment could result in a change in the recorded loss. The Company has
reported the results of operations of ESP as discontinued operations for the
three and nine months ended July 31, 2003 and 2002 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 October 31, 2002 Condensed Consolidated Balance Sheet.
Certain information with respect to the discontinued operations of ESP for
the three and nine month periods ended July 31, 2003 and 2002 is as follows:
Three Months Ended Nine Months Ended
July 31 July 31
-------------------------- --------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net revenues $ $ 4,904 $ 9,136 $ 11,001
============ ============ ============ ============
Income (loss) from operations, net of income tax $ $ 97 $ 294 $ (427)
Estimated loss on disposal, net of income tax (352) (3,497)
------------ ------------ ------------ ------------
Income (loss) on discontinued operations, net of income tax $ $ (255) $ 294 $ (3,924)
============ ============ ============ ============
Certain information with respect to the assets and liabilities of ESP is
summarized as follows:
October 31
2002
---------------
Accounts receivable $ 4,750
Inventories 5,329
Property, plant and equipment 1,308
---------------
Assets of Discontinued Operations $ 11,387
===============
Accounts payable $ 3,354
Accrued expenses and other liabilities 439
---------------
Liabilities of Discontinued Operations $ 3,793
===============
NOTE I - NOTES PAYABLE
Effective April 23, 2003, the Company retired all borrowings under
its existing credit facility and entered into a new bank agreement which
provided a $125 million unsecured, revolving credit facility. Borrowings
under the new agreement, which expires April 23, 2007, are subject to
interest, at the Company's option, at either the Eurodollar rate plus an
applicable margin or at the prime rate plus an applicable margin. The margin
applicable to the Eurodollar rate varies from 0.875% to 1.625% and the
margin applicable to the prime rate varies from 0.0% to 0.25% depending upon
the Company's ratio of total indebtedness to earnings before
11
interest, taxes, depreciation and amortization (leverage ratio). As of July
31, 2003, the Company had borrowings of $81.0 against the new revolving
credit facility.
NOTE J - 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., Fermont, Radian, Inc. and TAMSCO) 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 Marlo Coil and Universal
Power Systems, 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:
July 31, 2003 October 31, 2002
--------------------- ---------------------
Raw materials $ 2,768 $ 3,662
Work-in-process 1,567 2,368
Finished goods 178
Inventories substantially applicable to
government contracts in process, less
Progress payments of $61,992 and
$55,809 29,348 35,974
--------------------- ---------------------
$ 33,683 $ 42,182
===================== =====================
NOTE K - SEGMENT INFORMATION
The Company operates in three business segments: Light Military
Support Equipment, Heavy Military Support Equipment, and Electronics and
Automation Systems. The Light Military Support Equipment segment engineers
and manufactures a broad range of military support equipment primarily for
the DoD, as well as related heat-transfer and air-handling equipment for
domestic commercial and industrial users. The segment also provides
engineering services, asset protection / security systems, as well as
telecommunication system design and integration to the DoD and other
government customers. Segment products include environmental control
systems, generator sets and related power generation and distribution
systems, chemical and biological protection systems, petroleum and water
systems and other multipurpose military support equipment. The Heavy
Military Support Equipment segment engineers and manufactures load
management and transport systems primarily for the DoD. The Electronics and
Automation Systems segment engineers and manufactures airborne radar
systems, reconnaissance, surveillance and target acquisition systems and
avionics test equipment primarily for the DoD. The segment also engineers
and manufactures material-handling equipment primarily for the U.S. Postal
Service. Inter-segment revenues for the three and nine months ended July 31,
2003 and 2002, respectively, were not significant. Total assets by segment
as disclosed in the Company's annual report for the year ended October 31,
2002 have not changed materially since that date, except for the addition of
TAMSCO ($99.0 million in total assets at July 31, 2003) to the Light
Military Support Equipment segment. Goodwill by segment as of October 31,
2002 totaled $53,725 for Light
12
Military Support Equipment, $23,086 for Heavy Military Support Equipment and
$26,633 for Electronics and Automation Systems. Goodwill by segment as of
July 31, 2003 totaled $120,266 for Light Military Support Equipment, $23,086
for Heavy Military Support Equipment and $26,633 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,
2002. Information by segment is as follows:
Three Months Ended Nine Months Ended
July 31 July 31
------------------------------ ------------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Net revenues:
Light military support equipment $111,367 $ 47,871 $248,860 $124,833
Heavy military support equipment 22,705 32,790 85,348 98,235
Electronics and automation systems 21,597 25,938 68,181 66,597
------------- ------------- ------------- -------------
Total $155,669 $106,599 $402,389 $289,665
============= ============= ============= =============
Operating income from continuing operations:
Light military support equipment $ 14,535 $ 2,079 $ 28,209 $ 11,779
Heavy military support equipment 2,979 5,380 12,632 14,331
Electronics and automation systems 3,348 4,749 8,383 8,073
------------- ------------- ------------- -------------
20,862 12,208 49,224 34,183
Interest expense (632) (867) (1,359) (2,489)
Interest income 117 21 214 106
Gain on sale of assets 11 1 17 4
------------- ------------- ------------- -------------
Income from continuing operations
Before income taxes $ 20,358 $ 11,363 $ 48,096 $ 31,804
============= ============= ============= =============
13
ITEM 2. 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. Amounts representing contract change orders, claims and other
items are included in revenues, as recognized under the
percentage-of-completion method, only when these amounts can be reliably
estimated and realization is probable. Provisions for estimated losses on
contracts are recorded when identified.
During the second quarter of 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 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 nine months ended July 31, 2003 and 2002 in the Condensed
Consolidated Statements of Income. Additionally, all depreciation on the
property, plant and equipment of ESP was suspended as of the end of the
second quarter of 2002. The Company completed the sale of ESP in the second
quarter of 2003 with no resulting adjustment to the estimated loss on
disposal as of July 31, 2003.
During the third quarter of 2002, the Company announced a
restructuring plan to improve both plant utilization and long-term
profitability. Under the plan, the Company's Blue Ash, Ohio and Olivette,
Missouri manufacturing locations will be closed during the year ending
October 31, 2003 with related production efforts being relocated to other
existing Company facilities. Emerging Issues Task Force No. 94-3 (EITF 94-3)
provided specific requirements as to the appropriate recognition of
restructuring costs associated with employee termination benefits and other
exit costs. Employee termination costs are recognized when benefit
arrangements are communicated to affected employees in sufficient detail to
enable the employees to determine the amount of benefits to be received upon
termination. Other costs resulting from the restructuring plan that are not
associated with or that do not benefit activities that will be continued are
recognized at the date of commitment to the plan subject to certain
conditions. For the cost to be accrued, it must not be associated with or
incurred to generate revenues after the commitment date and must be either
incremental to other costs incurred prior to the commitment date, or
represent amounts under a contractual obligation that existed prior to the
commitment date that will either continue after the plan is completed with
no
14
economic benefit or which will result in a penalty to cancel the obligation.
Other costs directly related to the restructuring plan which are not
eligible for recognition at the commitment date, such as relocation and
other integration costs, are expensed as incurred.
During the quarter ended July 31, 2003, the Company announced an
additional restructuring plan under which the electronics assembly work
currently performed at the Company's Sanford, Florida facility of its
Systems & Electronics Inc. (SEI) subsidiary will be relocated to alternate
SEI facilities. Statement of Financial Accounting Standards No. 146 (SFAS
146), "Accounting for Costs Associated with Exit or Disposal Activities",
applies to all disposal activities initiated after December 31, 2002 and
prospectively nullifies EITF 94-3. SFAS 146 requires that a liability for
employee termination costs associated with an exit or disposal activity be
recognized when the liability is incurred. (EITF 94-3 had previously
required that a liability for such costs be recognized at the date of the
Company's commitment to an exit or disposal plan).
The following analysis should be read in this context.
RESULTS OF OPERATIONS
Consolidated net revenues from continuing operations increased
$49.1 million, or 46.0%, to $155.7 million in the third quarter of 2003
compared to $106.6 million in the third quarter of 2002. This increase was
primarily the result of $34.6 million of net revenues from Technical and
Management Services Corporation (TAMSCO), which was acquired May 1, 2003.
TAMSCO is a provider of information technology logistics and digitization
services and a designer and integrator of telecommunication systems
primarily for the U.S. Department of Defense (DoD). All other operating
subsidiaries contributed a combined 13.6% increase in net revenues during
the quarter. Gross profit from continuing operations for the three months
ended July 31, 2003 increased $12.4 million, or 48.0%, to $38.2 million
(24.5% of consolidated net revenues) from $25.8 million (24.2% of
consolidated net revenues) in the comparable 2002 period. The increase in
gross profit was a result of the significant increase in net revenues.
Selling, general and administrative expense from continuing operations
increased $4.7 million, or 38.8%, in the third quarter of 2003 to $16.8
million (10.8% of consolidated net revenues) from $12.1 million (11.4% of
consolidated net revenues) in the third quarter of 2002. In addition, the
Company recorded a restructuring expense of $0.4 million in the quarter
ended July 31, 2003 related to its announced plan to relocate electronics
assembly work currently performed at the Company's Sanford, Florida facility
of its SEI subsidiary to alternate SEI facilities. As a result of the above,
operating income from continuing operations increased $8.7 million or 70.9%,
in the quarter ended July 31, 2003 to $20.9 million from $12.2 million in
the third quarter of 2002.
Consolidated net revenues from continuing operations increased
$112.7 million, or 38.9%, to $402.4 million in the nine months ended July
31, 2003 compared to $289.7 million in the first nine months of 2002. This
increase was primarily the result of $34.6 million of net revenues from
TAMSCO (acquired May 1, 2003), $66.3 million of incremental net revenues
from Radian, Inc. (acquired May 10, 2002) and $7.4 million of incremental
net revenues from
15
Universal Power Systems, Inc. (acquired June 27, 2002). Gross profit from
continuing operations for the nine months ended July 31, 2003 increased
$27.6 million, or 40.9%, to $95.1 million (23.6% of consolidated net
revenues) from $67.5 million (23.3% of consolidated net revenues) in the
comparable 2002 period. Selling, general and administrative expense from
continuing operations increased $12.4 million, or 38.9%, in the first nine
months of 2003 to $44.2 million (11.0% of consolidated net revenues) from
$31.8 million (11.0% of consolidated net revenues) in the prior year. As a
result of the above and of a $1.6 million restructuring expense related to
the previously mentioned closing of the Company's Sanford, Florida facility,
income from continuing operations increased $15.0 million, or 44.0%, in the
nine months ended July 31, 2003 to $49.2 million from $34.2 million in the
first nine months of 2002.
LIGHT MILITARY SUPPORT EQUIPMENT. Net revenues for the Light
Military Support Equipment segment increased by $63.5 million, or 132.6%, to
$111.4 million in the third quarter of 2003 from $47.9 million in the third
quarter of 2002 primarily due to the addition of $34.6 million in net
revenues from TAMSCO. All other operating subsidiaries within the segment
contributed a combined 60.3% increase in net revenues during the quarter. In
particular, Radian's net revenues increased by $17.0 million from the third
quarter of 2002 driven by its Deployable Power Generation and Distribution
System (DPGDS) contract. For the nine months ended July 31, 2003, net
revenues for the segment increased by $124.0 million, or 99.4%, to $248.8
million from $124.8 million in the first nine months of 2002. TAMSCO, Radian
and UPSI accounted for $108.3 million of this increase. Gross profit for the
segment increased by $15.4 million, or 159.7%, in the third quarter of 2003
to $25.0 million (22.5% of segment net revenues) from $9.6 million (20.1% of
segment net revenues) in the third quarter of 2002. Likewise, gross profit
for the segment increased by $27.4 million, or 101.3%, in the nine months
ended July 31, 2003 to $54.5 million (21.9% of segment net revenues) from
$27.1 (21.7% of segment net revenues) in the first nine months of 2002.
Income from operations increased by $12.5 million, or 599.1%, in the third
quarter of 2003 to $14.5 million from $2.0 million in the third quarter of
2002, and increased by $16.4 million, or 139.5%, in the first nine months of
2003 to $28.2 million from $11.8 million in the first nine months of 2002.
HEAVY MILITARY SUPPORT EQUIPMENT. Net revenues for the Heavy
Military Support Equipment segment decreased by $10.1 million, or 30.8%, to
$22.7 million in the third quarter of 2003 from $32.8 million in the third
quarter of 2002. This decrease was primarily due to the completion of
deliveries for the M1000 semi-trailer in March 2003. M1000 contract revenues
totaled $6.0 million in the third quarter of 2002. For the nine months ended
July 31, 2003, net revenues for the segment decreased by $12.9 million, or
13.1%, to $85.3 million from $98.2 million in the first nine months of 2002,
also due to completion of the M1000 contract. Gross profit for the segment
decreased by $1.5 million, or 16.6%, in the third quarter of 2003 to $7.3
million (32.2% of segment net revenues) from $8.8 million (26.7% of segment
net revenues) in the third quarter of 2002. For the nine months ended July
31, 2003, gross profit for the segment was $23.7 million (27.8% of segment
net revenues), or $1.4 million less than gross profit of $25.1 million
(25.6% of net revenues) for the first nine months of 2002. Income from
operations decreased by $2.4 million, or 44.6%, to $3.0 million in the third
quarter of 2003 from
16
$5.4 million in the third quarter of 2002, and decreased by $1.7 million, or
11.9%, in the first nine months of 2003 to $12.6 million from $14.3 million
in the first nine months of 2002.
ELECTRONICS AND AUTOMATION SYSTEMS. Net revenues for the
Electronics and Automation Systems segment decreased by $4.3 million, or
16.7%, to $21.6 million in the third quarter of 2003 from $25.9 million in
the third quarter of 2002. This decrease was primarily due to lower
production on several of the segments electronics programs. For the nine
months ended July 31, 2003, net revenues for the segment increased by $1.6
million, or 2.4%, to $68.2 million from $66.6 million in the first nine
months of 2002. Gross profit for the segment decreased $1.6 million, or
21.3%, in the third quarter of 2003 to $5.8 million (26.9% of segment net
revenues) from $7.4 million (28.5% of segment net revenues) in the third
quarter of 2002. For the nine months ended July 31, 2003, gross profit for
the segment increased $1.6 million, or 10.6%, to $16.9 million (24.8% of
segment net revenues) from $15.3 million (22.9% of segment net revenues) in
the first nine months of 2002. Income from operations decreased by $1.4
million, or 29.5%, in the third quarter of 2003 to $3.3 million from $4.7
million in the third quarter of 2002, and increased by $0.3 million, or
3.8%, in the first nine months of 2003 to $8.4 million from $8.1 million in
the first nine months of 2002. Operating income for this segment was
negatively impacted by restructuring expense of $0.4 million for the quarter
ended July 31, 2003 and of $1.6 million for the nine months ended July 31,
2003.
Net interest expense decreased by $0.3 million to $0.5 million in
the third quarter of 2003 and by $1.2 million to $1.1 million in the nine
months ended July 31, 2003. These decreases were a result of lower
outstanding borrowings, as well as the impact of lower interest rates. The
effective income tax rate was 39.0% for the three and nine month periods
ended July 31, 2003 and 2002. As a result of the foregoing, net income from
continuing operations increased 79.1% to $12.4 million (8.0% of consolidated
net revenues) in the quarter ended July 31, 2003 as compared to $6.9 million
(6.5% of consolidated net revenues) in the third quarter of 2002. For the
nine months ended July 31, 2003, net income from continuing operations
increased 51.2% to $29.3 million (7.3% of consolidated net revenues) from
$19.4 million (6.7% of consolidated net revenues) for the first nine months
of 2002.
During the second quarter of 2002, the Company formally adopted a
plan to dispose of ESP. The Company completed the sale of ESP in the quarter
ended April 30, 2003 to a private equity group. In conjunction with the
intended disposition of ESP, the Company had previously recorded an
estimated loss on disposal of discontinued operations of $4.2 million, $3.2
million of which was recorded in the quarter ended April 30, 2002. The
completion of the sale resulted in no adjustment to this $4.2 million loss.
However, final settlement of the working capital adjustment provided for in
the sale agreement could result in a change in the recorded loss. In
addition, the Company realized income (loss) from ESP operations, net of
income tax, of $(0.3) million in the third quarter of 2002, and of $0.3
million and $(3.9) million in the nine months ended July 31, 2003 and 2002,
respectively.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS 146 provides direction
for accounting and disclosure
17
regarding specific costs related to an exit or disposal activity. These
include, but are not limited to, costs to terminate a contract that is not a
capital lease, costs to consolidate facilities or relocate employees, and
certain termination benefits provided to employees that are involuntarily
terminated under the terms of a one-time benefit arrangement. The Company
adopted SFAS 146 effective January 1, 2003.
In December 2002, the FASB issued SFAS 148, "Accounting for Stock
Based Compensation - Transition and Disclosure - an Amendment of SFAS 123."
SFAS 148 provides additional transition guidance for those entities that
elect to voluntarily adopt the provisions of SFAS 123, "Accounting for Stock
Based Compensation." Furthermore, SFAS 148 mandates new disclosures in both
interim and year-end financial statements within the Company's Significant
Accounting Policies footnote. The Company adopted these disclosure
requirements for the year ended October 31, 2002 and has applied them to its
interim financial statements in 2003.
In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 clarifies
disclosures regarding certain guarantees to be made by a guarantor in its
interim and annual financial statements. FIN 45 also clarifies that a
guarantor is required to recognize, at the inception of certain guarantees,
a liability for the fair value of the obligation undertaken in issuing the
guarantee, but does not prescribe a specific approach for subsequently
measuring the liability over its life. Recognition provisions of FIN 45 are
to be applied prospectively for guarantees issued or modified after December
31, 2002. The related disclosure requirements are effective for periods
ending after December 15, 2002. The Company adopted FIN 45 for the quarter
ended January 31, 2003 and anticipates no material financial impact as a
result of the adoption.
In April 2003, the Financial Accounting Standards Board (FASB)
issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities." SFAS 149 amends and clarifies financial reporting
for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and
for hedging activities under SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The provisions of this Statement that relate
to Statement 133 implementation issues that have been effective for fiscal
quarters that began prior to June 15, 2003, should continue to be applied in
accordance with their respective effective dates. The adoption of SFAS 149
will not have a material impact on the Company's consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity."
This statement establishes standards for the classification and measurement
of certain financial instruments with characteristics of both liabilities
and equity and requires the classification of such financial instruments as
a liability (or an asset in certain circumstances). Many of those
instruments were previously permitted to be classified as equity. SFAS 150
is effective for financial instruments entered into or modified after May
31, 2003 and is otherwise effective at the beginning of the first interim
period beginning after June 15, 2003. The adoption of SFAS 150 will not have
a material impact on the Company's consolidated financial statements.
18
LIQUIDITY AND CAPITAL RESOURCES
On April 16, 2003, the Company completed the sale of ESP to a
private equity group. Consideration received by the Company included $4.1
million of cash, a $3.3 million two-year note from the buyers secured by the
real property of ESP, and contingent consideration based upon ESP's future
revenues, net of an estimated $0.3 million working capital adjustment
payable by the Company. Final settlement of the working capital adjustment
could result in a change in sales proceeds.
Effective April 23, 2003, the Company retired all borrowings under
its existing credit facility and entered into a new bank agreement which
provided a $125 million unsecured, revolving credit facility. Borrowings
under the new agreement, which expires April 23, 2007, are subject to
interest, at the Company's option, at either the Eurodollar rate plus an
applicable margin or at the prime rate plus an applicable margin. The margin
applicable to the Eurodollar rate varies from 0.875% to 1.625% and the
margin applicable to the prime rate varies from 0.0% to 0.25% depending upon
the Company's ratio of total indebtedness to earnings before interest,
taxes, depreciation and amortization (leverage ratio). As of July 31, 2003,
the Company had borrowings of $81.0 million against the new revolving credit
facility and a cash balance of $16.3 million.
Effective May 1, 2003, the Company acquired all of the outstanding
stock of Technical and Management Services Corporation (TAMSCO), a provider
of information technology logistics and digitization services and a designer
and integrator of telecommunication systems primarily for the U.S.
Department of Defense. The purchase price of TAMSCO, net of cash acquired
and inclusive of $14.9 of TAMSCO indebtedness assumed and paid by the
Company, required $77.4 million in cash during the quarter, which the
Company financed with short-term borrowings under its revolving credit
facility.
At July 31, 2003, the Company's working capital and ratio of
current assets to current liabilities were $(38.8) million and 0.78 to 1 as
compared with $17.6 million and 1.18 to 1 at October 31, 2002. The negative
working capital amount as of July 31, 2003 is a result of $81.0 in
borrowings under the Company's revolving credit facility. The Company
generated cash flow from continuing operations of $61.9 million in the nine
months ended July 31, 2003 as compared to $38.5 million in the first nine
months of 2002. Investment in property, plant and equipment totaled $8.4
million and $2.0 million for the first nine months of 2003 and 2002,
respectively. $4.2 million of total capital expenditures for the nine months
ended July 31, 2003 were incurred at the Company's Keco Industries, Inc.
subsidiary and relate to the Company's previously discussed restructuring
plan. The Company anticipates that capital expenditures in 2003 should not
exceed $10.0 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.
There have been no material changes in the total contractual and
contingent obligations included in the Company's annual report to
shareholders for the year ended October 31, 2002.
19
BUSINESS AND MARKET CONSIDERATIONS
Approximately 96% of consolidated net revenues from continuing
operations for the nine months ended July 31, 2003 were directly or
indirectly derived from defense orders by the U.S. government and its
agencies. As of July 31, 2003, the Company's funded backlog of orders
totaled $438.5 million, with related customer options of an additional
$941.5 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.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK.
At October 31, 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. These contracts expired in
November 2002. At July 31, 2003, the Company had no derivative contracts.
ITEM 4. CONTROLS AND PROCEDURES.
As of July 31, 2003, the Company carried out an evaluation, under
the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures as defined in Rules 13a-14(c) and 15d-14(c) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based
upon the evaluation, the Company's Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. Disclosure controls and procedures are controls
and procedures that are designed to ensure that information required to be
disclosed in Company reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect those controls
subsequent to the date this evaluation was carried out, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
21
PART II
OTHER INFORMATION
Items 1-5 Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits
11. Statement Re: Computation of Earnings Per Share
99.1 Certification of Chief Executive Officer
99.2 Certification of Chief Financial Officer
(b) During the quarter ended July 31, 2003, the Company filed
the following reports on Form 8-K:
(1) Form 8-K dated May 16, 2003 regarding the purchase of
the outstanding stock of Technical and Management
Services Corporation (TAMSCO).
(2) Form 8-K dated June 2, 2003 regarding release of the
Company's financial results for the three and six
month periods ended April 30, 2003.
(3) Form 8-K/A dated July 15, 2003 regarding the
Financial Statements and Exhibits required in
connection with the purchase of the outstanding stock
of TAMSCO.
22
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: September 15, 2003 By: /s/ Gerald E. Daniels
---------------------------- ----------------------------
Gerald E. Daniels
Vice Chairman and
Chief Executive Officer
Date: September 15, 2003 By: /s/ Gary C. Gerhardt
---------------------------- ----------------------------
Gary C. Gerhardt
Vice Chairman and Chief
Financial Officer
23
CERTIFICATIONS
I, Gerald E. Daniels, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Engineered
Support Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a. designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c. disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee or
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 15, 2003
/s/ Gerald E. Daniels
- ------------------------------------------
Gerald E. Daniels
Vice Chairman and Chief Executive Officer
24
CERTIFICATIONS
I, Gary C. Gerhardt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Engineered
Support Systems, Inc.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statements of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the
registrant and have:
a. designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
c. disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee or
registrant's board of directors (or persons performing the equivalent
functions):
a. all significant deficiencies and material weakness in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
Date: September 15, 2003
/s/ Gary C. Gerhardt
- ----------------------------
Gary C. Gerhardt
Vice Chairman and Chief
Financial Officer
25