Engineered Support Systems (NASDAQ:EASI)
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Engineered Support Announces Second Quarter Results; Revises Full
Year 2005 Earnings Guidance
- Quarterly Revenues up 25% to a Record $263.8 Million
ST. LOUIS, June 1 /PRNewswire-FirstCall/ -- Engineered Support Systems, Inc.
(NASDAQ:EASI) reported record net revenues of $263.8 million for the quarter
ended April 30, 2005, an increase of 25% compared to the second quarter last
year. Net earnings from continuing operations of $20.1 million, or $.46 per
diluted share on a post-split basis, for the second quarter of 2005 compared
favorably to the $18.3 million, or $.44 per diluted share (post- split), for
the second quarter last year. The recently completed quarter's results were
affected by temporary production delays and increased estimated costs related
to one of the Company's major defense programs, the Deployable Power Generation
and Distribution System (DPGDS). As a result, pre-tax income from continuing
operations was negatively impacted by a combined amount of approximately $8
million during the current period compared to the earnings levels previously
forecasted by the Company for the second quarter of 2005, according to Gerald
A. Potthoff, Vice Chairman and CEO.
Second quarter operating income from continuing operations of $33.3 million
increased 11% from $30.0 million reported for the second quarter in the prior
year. As a percentage of net revenues, operating income from continuing
operations was 12.6% for the most recently completed quarter as compared to
14.3% for the second quarter of fiscal 2004. Earnings before interest, income
taxes, depreciation and amortization (EBITDA) for the current quarter rose 12%
to $38.4 million, or 14.6% of net revenues.
Quarterly net revenue growth resulted from overall increases at existing
business units with more recently acquired subsidiaries, Prospective Computer
Analysts, or PCA (purchased January 7, 2005), and Spacelink International LLC,
or Spacelink (purchased effective February 1, 2005), adding a combined $25.4
million of incremental revenues during the second quarter of 2005. Quarterly
net revenues for the DPGDS program of $8.5 million were approximately $2
million lower than those for the second quarter of the prior year, but, more
notably, were substantially below the program's expected revenue level for the
second quarter of 2005 due to certain production delays as explained below.
Net income from continuing operations for the second quarter advanced 10% to
$20.1 million (7.6% of net revenues) compared to $18.3 million (8.7% of net
revenues) for the second quarter last year. Reduced profit contributions
during the recently completed quarter from the DPGDS program were largely
offset by net earnings growth in the Company's other existing business areas
combined with the inclusion of results for the recent acquisitions of PCA and
Spacelink.
The second quarter's financial results reflect the impact of production delays
combined with increased estimated costs on its DPGDS program, a large, mobile
power generation system used by military forces deployed around the globe. The
Company has addressed the underlying causes of performance issues with the
primary power units, a key component of the DPGDS, and is in the process of
implementing a remediation plan. Program revenues and operating profit
contributions of approximately $26 million and $9 million, respectively, had
been previously expected to be derived from the DPGDS program for the second
quarter of 2005. However, the combination of the curtailment of primary power
unit production during the second quarter, which resulted in a negative impact
on operating profit of approximately $5 million, combined with increased
estimated costs of nearly $3 million required for the extensive testing and
retrofit costs of fielded units, contributed to diminished overall
profitability for the period.
Pending the timely and successful implementation of its identified solutions,
management expects that the DPGDS program will return to full rate production
early in the fourth quarter of 2005. Accordingly, the Company has revised its
revenue and earnings expectations for fiscal 2005 to reflect these and other
recent business developments as further explained below.
Potthoff stated, "Although our second quarter produced overall solid revenue
growth in several areas of our business, the impact on earnings of the
temporary DPGDS production curtailment and the estimated retrofit costs proved
too significant an obstacle to overcome on such a short-term basis. Even with
the DPGDS revenue shortfall included within our results for the current period,
organic revenue growth was still in excess of 13% for the second quarter of
2005 with contributions from Spacelink and PCA adding another 12% to our
recurring revenue base. Likewise, operating earnings from continuing
operations for the second quarter would have been substantially higher absent
the negative impact of the DPGDS program -- financial performance much more
indicative of the Company's longer term trends."
Also during the second quarter of 2005, the Company settled the previously
reported arbitration with the purchasers of its discontinued Plastics business
unit disposed of in April 2003. The settlement resulted in the modification of
the terms of the Company's note receivable from the buyers to include the
suspension of interest charges and payments for an 18-month period, extension
of the note's repayment term to a balloon payment now due in April 2009 and the
release of the underlying real estate collateral securing the note. Due to the
above developments, the Company recorded an after-tax, non-cash charge of $1.0
million, or $.02 per diluted share (post-split), during the second quarter of
2005 to reserve for potential uncollectibility of the note. This charge was
reflected within the discontinued operations section of the Company's unaudited
statements of operations in the financial information accompanying this
release.
During the second quarter a total of $137.4 million was used to fund the
upfront cash portion of the Spacelink acquisition, which was provided from
available funds and borrowings under the Company's expanded line of credit
agreement. Free cash flow of $31 million during the second quarter reflected
solid earnings combined with a decrease in net working capital levels. Free
cash flow of approximately $75 million is now expected for the full fiscal
year, despite the temporary programmatic impact of the DPGDS contract.
For the first six months of 2005, net income from continuing operations totaled
$40.7 million, or $.95 per diluted share (post-split), compared to $34.1
million, or $.82 per diluted share (post-split), for the first six months of
2004. Net revenues for the first half of 2005 were $497.3 million compared to
$405.3 million for the first six months of the prior year.
Business Segment Results
For the second quarter, the Support Systems segment reported net revenues of
$126.7 million compared to $130.0 million (prior to the elimination of
inter-segment revenues in each period) for the second quarter in the prior
year, a 3% decrease. Net revenues for the segment reflected additional work on
several Support Systems programs during the recently completed quarter
including the refurbishment of M1000 Heavy Equipment Transporters and
intersegment revenues for vehicle add-on armor kits. Offsetting these
increases were lower revenues on the Tunner 60-K Aircraft Cargo Loader (Tunner)
as the production phase of this long-term program wound down during the
recently completed quarter as well as reduced deliveries of MSTAR perimeter
security systems as a large base security subcontract with Northrop Grumman was
completed late last fiscal year. The inclusion of the post- acquisition
revenues for PCA contributed $4.1 million in net revenues during the period.
Second quarter operating income for the Support Systems segment declined to
$24.2 million (19.1% of segment net revenues) compared to $28.3 million (21.8%
of segment net revenues) for the second quarter of last year. The slight drop
in revenues and a change in business mix away from certain relatively higher
margin programs such as Tunner and MSTAR led to the overall lower operating
performance for the Support Systems segment.
Net revenues of the Support Services segment for the second quarter increased
73% to $150.1 million compared to $86.5 million (prior to the elimination of
inter-segment revenues in each period) for the second quarter of 2004 due both
to overall organic growth and acquisitions. Additional satellite
communications support business and expansion of vehicle add-on armor kit
activities were partially offset by relatively lower revenues on the DPGDS
program compared to the second quarter of the prior year. The inclusion of
post-acquisition net revenues for Spacelink accounted for $21.3 million of the
quarter-over-quarter increase for the Support Services segment.
Second quarter operating income for the Support Services segment was $9.1
million (6.0% of segment net revenues) compared to $1.7 million (1.9% of
segment net revenues) for the second quarter of last year. Segment operating
profit for the second quarter of 2004 was abnormally low due to the inclusion
of a significant amount of lower margin "pass-through" revenues on certain
contracts as well as $2.2 million in non-cash amortization charges for
customer-related intangibles from the May 2003 acquisition of TAMSCO. Services
segment profit margins for the recently completed quarter were negatively
impacted as a result of the temporary production delays and increased estimated
costs on the DPGDS program totaling a combined $8 million from levels
previously forecasted by the Company for the second quarter of 2005.
Revised Outlook for 2005
As a result of the foregoing, the Company now forecasts consolidated net
revenues for the full fiscal year 2005 of between $1.02 billion and $1.05
billion, which includes contributions from its three most recently completed
acquisitions, PCA, Spacelink and Mobilized Systems, Inc., or MSI (acquired
effective May 1, 2005). However, as a result of reduced revenue and earnings
contributions from the DPGDS program, net earnings from continuing operations
are now expected to be in the range of $2.00 to $2.03 per fully diluted share
(post-split) versus the Company's previous guidance of between $2.09 and $2.12
per share (post-split). The revised earnings forecast compares favorably to
the Company's record earnings level for fiscal 2004.
"Although obviously disappointed with these recent developments," Potthoff
continued, "I remain very encouraged about how our team has actively addressed
the DPGDS performance issues with the customer. And, having laid out a clear
path forward, I fully believe the future of that program to be bright indeed.
Unfortunately, until DPGDS reliability testing is completed and work
recommences later this summer, our financial performance for the second half of
2005 will continue to be negatively impacted to a degree. We continue to work
closely with our strongly supportive military customers to resolve any
remaining performance issues on the program and are looking forward to getting
back into full production on the primary power units at our West Plains
facility as soon as possible. We remain committed to providing the U.S.
military not just an acceptable product, but an optimum capability for
expeditionary power generation and distribution on the battlefield."
The Company's revised net revenues and earnings forecast reflects the impact of
several new business opportunities recently developed in various areas
including vehicle add-on armor kits, the repair and replacement of military
support equipment and telecommunications support activities. These increases
have partially offset the temporary unfavorable impact of the DPGDS program
which is expected to be largely mitigated by the end of the current year. The
recent enactment of the $82 billion 2005 Supplemental spending bill may
positively impact the Company's currently forecasted fiscal 2005 results, but
any incremental spending would have much more bearing on its financial results
for fiscal 2006 and future years pending the timing of any contract awards
thereunder.
Entered Orders and Backlog
For the first half of 2005 entered orders totaled $453 million, resulting in a
quarter-end funded contract backlog of $599 million. Due to a series of recent
multi-year contract awards, total backlog including primarily unfunded options
on long-term contracts has risen to a record $2.1 billion at April 30, 2005.
Including recent acquisitions and the expected timely resolution of the
performance issues surrounding the DPGDS program, the Company continues to
target fiscal 2005 entered orders of approximately $1.1 billion with a
significant amount of contract funding activity expected to occur in the second
half of the year.
Potthoff stated, "As our shareholders have seen via our recent contract
announcements, several of the new, multi-year program opportunities we've been
pursuing for some time have now been captured, which will add substantially to
our future business base. Various newly funded initiatives involving the
reset, or recapitalization, of the vast array of equipment being utilized in
Southwest Asia have recently come to the fore as well with strong activity in
this area expected going forward.
"We remain very confident of the prospects for continued, profitable growth for
Engineered Support for the foreseeable future, obstacles such as the pending
DPGDS reliability testing notwithstanding. Our capabilities are vast and
ever-expanding, our positioning in the military sustainment arena is unique and
our overall track record for the capture and execution of programs to meet our
customers' vital needs has been exceptional. That is a winning combination for
success which will endure the temporary setback we are faced with today,"
Potthoff concluded.
In conjunction with this release, Engineered Support Systems will host a
conference call which will be simulcast over the Internet. Gerald A. Potthoff,
Vice Chairman and CEO, Gary C. Gerhardt, Vice Chairman and CFO, and Daniel A.
Rodrigues, President and COO will host the call, which is scheduled for today,
June 1, 2005 at 11 a.m. EDT. Listeners can access the conference call live via
the Company's website at http://www.engineeredsupport.com/ . The webcast will
be archived online available one hour after completion of the call.
Engineered Support Systems, Inc. designs, manufactures and supplies integrated
military electronics, support equipment and technical and logistics services
for all branches of America's armed forces and certain foreign militaries,
homeland security forces and selected government and intelligence agencies.
The Company also produces specialized equipment and systems for commercial and
industrial applications.
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: Except for historical information contained herein, the matters set
forth in this news release are forward-looking statements. The forward-
looking statements set forth above involve a number of risks and uncertainties
that could cause actual results to differ materially from any such statement.
Important factors which could cause the Company's actual results to differ
materially from those projected in, or inferred by, forward- looking statements
include, but are not limited to, the following: 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;
increased competition in the Company's markets; the Company's ability to
achieve and integrate acquisitions; and other risks discussed in the Company's
reports filed with the Securities and Exchange Commission from time to time.
ENGINEERED SUPPORT SYSTEMS, INC.
SUMMARY FINANCIAL DATA
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
April 30 April 30
2005 2004 2005 2004
Net Revenues from Continuing
Operations $263,768 $210,136 $497,301 $405,266
EBITDA From Continuing Operations* $38,428 $34,428 $74,607 $62,940
Depreciation and Amortization 5,151 4,432 8,340 6,701
Operating Income from Continuing
Operations 33,277 29,996 66,267 56,239
Net Interest Expense 870 203 616 847
Income Tax Provision 12,314 11,470 24,947 21,326
Net Income from Continuing
Operations 20,093 18,323 40,704 34,066
Net Loss on Discontinued
Operations 1,048 - 1,048 -
Net Income $19,045 $18,323 $39,656 $34,066
Basic Earnings per Share:
Continuing Operations $0.49 $0.47 $1.00 $0.89
Discontinued Operations (0.03) - (0.03) -
Total $0.46 $0.47 $0.97 $0.89
Diluted Earnings per Share:
Continuing Operations $0.46 $0.44 $0.95 $0.82
Discontinued Operations (0.02) - (0.03) -
Total $0.44 $0.44 $0.92 $0.82
* Earnings before interest, income taxes, depreciation and amortization.
(1) All share and per share amounts have been adjusted to reflect a
3-for-2 stock split as of April 15, 2005.
ENGINEERED SUPPORT SYSTEMS, INC.
SUMMARY FINANCIAL DATA
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
April 30 April 30
2005 2004 2005 2004
EBITDA From Continuing Operations* $38,428 $34,428 $74,607 $62,940
Net Interest Expense (870) (203) (616) (847)
Income Tax Provision (12,314) (11,470) (24,947) (21,326)
Net Decrease (Increase) in Working
Capital and Other Assets 8,394 21,601 (18,929) (20,099)
Net Cash Provided By Continuing
Operations $33,638 $44,356 $30,115 $20,668
* Earnings before interest, income taxes, depreciation and amortization
(EBITDA) is, in the opinion of Company management, a valuable
analytical tool useful by both the Company and the investment
community in determining financial performance relative to the
Company's historical results of operations, as well as those of its
peers. EBITDA is a non-GAAP financial measure.
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
April 30 April 30
2005 2004 % Change 2005 2004 % Change
Net revenues $263,768 $210,136 25.5% $497,301 $405,266 22.7%
Cost of revenues 203,444 156,711 29.8% 379,433 305,570 24.2%
Gross profit 60,324 53,425 12.9% 117,868 99,696 18.2%
Selling, general
and administrative
expense 27,068 23,389 15.7% 51,621 43,386 19.0%
Restructuring
expense - 39 - 66
Gain (loss) on
sale of assets 21 (1) 20 (5)
Operating income
from continuing
operations 33,277 29,996 10.9% 66,267 56,239 17.8%
Net interest
expense 870 203 328.6% 616 847 (27.3)%
Income from
continuing
operations 32,407 29,793 8.8% 65,651 55,392 18.5%
Income tax
provision 12,314 11,470 7.4% 24,947 21,326 11.7%
Net income
from continuing
operations 20,093 18,323 9.7% 40,704 34,066 19.5%
Discontinued
operations:
Estimated loss
on disposal,
net of income
tax 1,048 - 1,048 -
Net income $19,045 $18,323 3.9% $39,656 $34,066 16.4%
Basic earnings
per share (1):
Continuing
operations $0.49 $0.47 4.3% $1.00 $0.89 12.4%
Discontinued
operations (0.03) - (0.03) -
Total $0.46 $0.47 (2.1)% $0.97 $0.89 9.0%
Diluted earnings
per share (1):
Continuing
operations $0.46 $0.44 4.5% $0.95 $0.82 15.9%
Discontinued
operations (0.02) - (0.03) -
Total $0.44 $0.44 0.0% $0.92 $0.82 12.2%
Weighted average
common shares
outstanding (1):
Basic 41,541 38,883 6.8% 40,878 38,234 6.9%
Diluted 43,312 41,787 3.6% 42,909 41,556 3.3%
(1) All share and per share amounts have been adjusted to reflect a
3-for-2 stock split as of April 15, 2005.
ENGINEERED SUPPORT SYSTEMS, INC.
BUSINESS SEGMENT RESULTS
(In thousands)
Three Months Ended Six Months Ended
April 30 April 30
2005 2004 % Change 2005 2004 % Change
(Unaudited) (Unaudited)
Net Revenues:
Support Systems $126,691 $130,034 (2.6)% $246,576 $241,828 2.0%
Support Services 150,100 86,515 73.5% 273,072 175,657 55.5%
Intersegment
Revenues (13,023) (6,413) (22,347) (12,219)
Total $263,768 $210,136 25.5% $497,301 $405,266 22.7%
Operating Income
from Continuing
Operations:
Support Systems $24,197 $28,339 (14.6)% $45,629 $47,317 (3.6)%
Support Services 9,080 1,657 448.0% 20,638 8,922 131.3%
33,277 29,996 10.9% 66,267 56,239 17.8%
Net Interest
Expense (870) (203) 328.6% (616) (847) (27.3)%
Income from
Continuing
Operations
before Income
Taxes $32,407 $29,793 8.8% $65,651 $55,392 18.5%
ENGINEERED SUPPORT SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
April 30 October 31
2005 2004
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $27,726 $33,153
Accounts receivable 156,698 139,191
Contracts in process and
inventories 83,794 61,009
Deferred income taxes 6,921 6,921
Other current assets 6,547 2,846
Total current assets 281,686 243,120
Property, plant and equipment 51,861 46,946
Goodwill 312,275 167,358
Acquired customer-related intangibles 54,369 38,314
Other assets 14,961 15,396
Total Assets $715,152 $511,134
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $116,000
Current maturities of long-term debt 335 340
Accounts payable 63,748 71,796
Other current liabilities 68,290 58,936
Total current liabilities 248,373 131,072
Long-term debt 1,132 781
Other liabilities 43,065 42,325
Shareholders' Equity 422,582 336,956
Total Liabilities and
Shareholders' Equity $715,152 $511,134
Funded Backlog of Orders $598,941 $588,061
Options on Existing Orders 1,460,132 849,157
$2,059,073 $1,437,218
DATASOURCE: Engineered Support Systems, Inc.
CONTACT: Gary C. Gerhardt of Engineered Support Systems, Inc.,
+1-314-553-4982
Web site: http://www.engineeredsupport.com/