Engineered Support Systems, Inc.

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Engineered Support Systems, Inc.

201 Evans Lane
St. Louis, Missouri 63121
U.S.A.
Telephone: (314) 553-4000
Fax: (314) 993-4615
Web site: http://www.engineeredsupport.com

Public Company
Incorporated: 1983
Employees: 2,412
Sales: $407.95 million (2002)
Stock Exchanges: NASDAQ
Ticker Symbol: EASI
NAIC: 333319 Other Commercial and Service Industry Machinery Manufacturing; 333415 Air-Conditioning and Warm Air Heating Equipment and Commercial and Industrial Refrigeration Equipment Manufacturing; 334511 Search, Detection, Navigation, Guidance, Aeronautical, and Nautical System and Instrument Manufacturing; 335312 Motor and Generator Manufacturing

Engineered Support Systems, Inc. (ESSI) produces a number of items of specialized military gear. These include enclosed tent shelters to keep out biochemical hazards, HVAC systems and quiet generators, and the trailers used to ferry M-1 tanks to Baghdad.

CEO Gerald Daniels described the company's business as "sustainment"—giving troops the equipment and ground support they need to be deployed. As founder Michael Shanahan, Sr., puts it, "The military doesn't leave home without us." The U.S. government accounts for more than 90 percent of sales. "Acquisitions are a way of life for us," Daniels told the St. Louis Business Journal in 2003, and he set a goal of growing the company into a $1 billion business. ESSI's subsidiaries supply services as well as hardware. Through ESSIbuy.com, military personnel in the field can download manuals and order spare parts.

Origins

As the youngest of eight children of Irish immigrants, Michael F. Shanahan, Sr., learned the value of work early in life. Although only a "C" student, he confessed to the St. Louis Post-Dispatch, he eventually thrived and was able to give a great deal back to his community of St. Louis, helping out the local hockey team and supporting his alma mater, St. Louis University.

After launching his career with McDonnell Douglas Automation Co., Numerical Control Inc., and Cleveland Pneumatic Co., Shanahan cofounded Engineered Air Systems, Inc. (EAS) with Jerome V. LaBarbera. EAS was incorporated in Missouri on December 24, 1981. Shanahan served as the company's chairman and chief executive officer, and was also chairman of the St. Louis Blues Hockey Club. EAS acquired Allis-Chalmers Corporation's Defense Systems Division on March 30, 1982. In December 1983, Engineered Support Systems, Inc. (ESSI) was formed as a holding company for EAS. The company produced a variety of ground support equipment for the military, including nuclear, biological, and chemical defense systems; environmental control systems; and water and petroleum distribution systems.

Engineered Support Systems Inc. went public on the NASDAQ exchange on August 21, 1985, under the ticker symbol EASI. Revenues were $51 million in 1985; net income was about $2 million.

About 30 types of equipment produced by ESSI were used in the Persian Gulf War, including canisters in the famous Patriot missile. Water purification and laundry units were especially in demand. After the war, Pentagon cutbacks resulted in layoffs of 140 workers from a peak workforce of about 400. Sales were $67.7 million in 1991; they fell to $40.4 million in the fiscal year ended October 31, 1992, leading to a $239,000 loss.

Trying Commercial Plastics in 1993

After the post-Gulf War bust, ESSI went looking for commercial companies to acquire to bring it into new markets. According to the St. Louis Post-Dispatch, the company pored over 100 potential acquisitions in two years. In early 1993, it acquired Associated Products Inc., a plastics company based in Hot Springs, Arkansas, with sales of more than $20 million a year. Associated's two subsidiaries, Wycot Corp. and Life Time Faucets Inc., produced plastic television cabinets and plastic faucets, respectively.

Associated Products, renamed Engineered Specialty Plastics Inc., became the basis of ESSI's commercial division. Diversification came none too soon, as ESSI's defense revenues fell to $27.8 million in 1993. The plastics business contributed $14.4 million; ESSI was growing the business organically and through acquisitions and investing in increased capacity. ESSI achieved a profit of $520,000 in 1993.

It was the defense unit, rather than the commercial side, that saw the biggest growth in the mid-1990s, despite an overall decrease in military procurement in the United States. ESSI's earnings more than doubled in 1995, thanks in part to its military programs shifting from development to production phases. The commercial plastics business accounted for a third of ESSI's revenues of $65.5 million, but was barely profitable.

ESSI then shifted its acquisitions strategy to look for defense, rather than commercial, companies to acquire, particularly those whose skills it could tap in making its shelters, reported the St. Louis Post-Dispatch. The military support industry was ripe for consolidation, and ESSI aimed to be one of the survivors.

The defense slowdown of the early 1990s had one positive outcome for ESSI—it thinned the ranks of the competition. Later in the decade, the Department of Defense shifted more of the research and development burden to contractors like Engineered Support. Its products were typically unique, highly engineered, and often required hand assembly.

In 1996, EAS won a production contract for a new Kevlarcoated fabric shelter it had developed to protect Army troops from chemical or biological attack. The deal was worth at least $150 million and had a potential total value of more than $400 million.

In 1997, ESSI began developing a Humvee-mounted electronic targeting and communications system called STRIKER for the U.S. Army. It was in production within 18 months, with plans to complete 800 of the systems in ten years, a total value of more than $200 million.

Late 1990s Acquisitions Push

ESSI acquired four companies in 1998 and 1999, pushing its total revenues past $100 million. Nuclear Cooling, Inc., doing business as Marlo Coil, was acquired effective February 1, 1998. Marlo Coil produced HVAC systems for Navy and commercial use; it had revenues of about $26 million a year.

A major competitor, Keco Industries Inc., was acquired in June 1998. Keco operated a plant in Florence, Ohio, and had sales of $42 million a year. It produced HVAC equipment, water and fuel distribution systems, and shipping and storage containers.

In February 1999, ESSI announced the acquisition of Dynamics Corp. of America's fast-growing Fermont Division, which produced military generator sets. Fermont, formally named Engineered Electric Co., was based in Bridgeport, Connecticut, and had sales of $40 million a year. The $85 million acquisition of Systems & Electronics Inc. (SEI) in 1999 from Esco Corp. gave ESSI its largest facility, located in West Plains, Missouri.

ESSI grew rapidly because of acquisitions, tripling its sales in just a couple of years. Revenues were $361.5 million in 2000. ESSI had about 2,400 employees. The deployment of U.S. troops to Bosnia and numerous other trouble spots boosted the company's profile. Military procurement levels were rising again.

In February 2001, ESSI launched a web site, ESSIbuy.com, to sell spare parts and services. By going online with parts procurement, ESSI claimed to reduce the wait for some spare parts from months to days. Maintenance manuals could also be downloaded by military personnel in the field.

The September 11, 2001 terrorist attacks against the United States made defense stocks in demand again after a decade of uncertainty and downsizing following the end of the Cold War. ESSI supplied a variety of equipment to support U.S. troops in Afghanistan, from aircraft cargo loaders to quiet field generators.

Federal and state governments were expected to provide some demand for ESSI's unique product mix as the multibillion-dollar homeland security budget swelled. The potential civil defense applications of ESSI's biochemical protection shelters had already been discussed well before the terrorist attacks of September 11. ESSI ended 2001 with income of $18.6 million on $390.5 million in sales.

ESSI acquired Radian Inc., an Alexandria, Virginia-based engineering, logistics, and systems integration firm, for $42 million in May 2002. Radian had 400 employees and sales of more than $50 million a year.

Universal Power Systems, Inc. (UPSI) was acquired in June 2002. ESSI paid $5.5 million cash for the Chantilly, Virginia-based company, which had revenues of about $6 million a year. UPSI's uninterruptible power supply systems were in frontline service with a number of military branches, defense agencies, and remote industrial sites.

Company Perspectives:

Engineered Support Systems' mission is clear—to continue delivering exceptional performance with our sound strategy of internal growth, selective acquisitions and differentiated technology. Our financial results clearly underscore this performance with seven consecutive years of record revenues and profits.

Net revenues increased 12 percent to $407.9 million in 2002 (nearly five times fiscal 1998 sales), while net earnings reached a record $23.5 million. During the year, ESSI closed its plant in Olivette, near St. Louis, Missouri, home to the Engineered Air Systems subsidiary. About 40 employees were laid off. EAS's administrative functions were transferred to ESSI's headquarters in nearby Cool Valley, while production of shelters was transferred to ESSI's largest plant, in West Plains, Missouri. Another plant in Blue Ash, Ohio, was also closed, and its production transferred to a facility in Florence, Kentucky, along with the HVAC business from the Olivette plant. ESSI also maintained facilities in Hot Springs, Arkansas; Bridgeport, Connecticut; Sanford, Florida; and Bossier City, Louisiana. The Florida plant was closed in 2003.

New CEO in 2003

ESSI named Gerald (Jerry) Daniels its new chief executive officer and vice-chairman in April 2003. Daniels had been a captain in the Navy, and formerly led the Military Aircraft and Missile Systems unit of Boeing Co., and had also been an executive with McDonnell Douglas. He aimed to take ESSI to $1 billion in sales by partnering with prime defense contractors. Company cofounder and CEO since 1985, Michael Shanahan, Sr., continued as chairman.

The $66.5 million cash acquisition of Calverton, Maryland-based Technical & Management Services Corp. (TAMSCO) closed soon afterward. This pushed ESSI's 2003 revenues past $500 million. TAMSCO provided Internet and other communications services to Army and Air Force personnel in the field; it had revenues of about $115 million a year.

While it was consolidating its defense-related core, ESSI divested its marginally profitable plastic products business. Engineered Specialty Plastics Inc. and Lifetime Faucets Inc. were sold to a private equity group for $7.4 million in April 2003.

ESSI acquired Engineered Environments, Inc. (EEI), a maker of environmental control units for industry and the military, in September 2003. ESSI paid $15.5 million and paid off some of EEI's debts in the deal. Based in Cincinnati, EEI had 70 employees and 2002 revenues of $14.4 million, mostly from defense-related contracts.

Key Dates:

1981:: Engineered Air Systems, Inc. (EAS) is founded.
1983:: Engineered Support Systems, Inc. (ESSI) holding company is formed.
1985:: ESSI goes public.
1997:: The company launches a consolidation program.
1998:: Marlo Coil, McIntyre Engineering, and Keco Industries are acquired.
1999:: The Fermont Division of Dynamic Corp. of America and Systems & Electronics Inc. are acquired.
2002:: The company acquires Radian, Universal Power Systems.
2003:: Plastic Products is divested; TAMSCO, Engineered Environments is acquired.

Principal Subsidiaries

Engineered Air Systems, Inc. (EAS); Engineered Coil/Marlo Coil (MARLO); Engineered Electric/Fermont (FERMONT); Engineered Environments, Inc. (EEI); ESSIbuy.com (ESSIbuy); Keco Industries, Inc. (Keco); Radian Inc. (RADIAN); Systems & Electronics Inc. (SEI); Technical and Management Services Corporation (TAMSCO); Universal Power Systems, Inc. (UPSI).