Los Angeles Times
February 23, 2005
WASHINGTON — The Iraq war helped bring record earnings to St. Louis-based defense contractor Engineered Support Systems Inc., and new financial data show that the firm's war-related profits have trickled down to a familiar family name — Bush.
William H.T. "Bucky" Bush, uncle of the president and youngest brother of former President George H.W. Bush, cashed in ESSI stock options last month with a net value of nearly half a million dollars.
"Uncle Bucky," as he is known to the president, is on the board of the company, which supplies armor and other materials to U.S. troops. The company's stock prices have soared to record heights since before the invasion, benefiting in part from contracts to rapidly refit fleets of military vehicles with extra armor.
William Bush exercised options on 8,438 shares of company stock Jan. 18, according to reports filed with the U.S. Securities and Exchange Commission. He acknowledged in an interview that the transaction was worth about $450,000.
In an earnings report issued Tuesday, the firm disclosed that net earnings for the first quarter ending Jan. 31 reached a record $20.6 million, while quarterly revenue hit $233.5 million, up 20% from a year ago. As a result, the company boosted its projected annual revenue to between $990 million and $1 billion.
William Bush, 66, a onetime St. Louis bank executive and head of an investment firm, joined the board in 2000, eight months before his nephew won the White House.
The president's uncle said in an interview that he never used his family connections to help the company win contracts.
"I don't make any calls to the 202 area code," he said, referring to the long-distance dialing code for Washington.
He also said he sought legal advice before accepting appointment to the ESSI board to be certain there would be no problems.
Dan Kreher, vice president of industrial relations for ESSI, said Bush was one of several people added to the company board about five years ago, and that he was selected because he had "a long history of involvement in the local business community. We've known him for a long time."
"Having a Bush doesn't hurt," said Kreher, who acknowledged that the company was routinely engaged in Washington lobbying efforts. But, he said, Democrats, including a party fundraiser, also serve on the panel.
"It certainly doesn't hurt to have people who know who to talk to," Kreher said, adding that the president's uncle played no role in winning the firm's government contracts.
Some of the firm's Defense Department work has included no-bid, sole-source contracts, including a $48.8-million deal to refurbish military trailers.
Other Iraq-related contracts won by the firm include an $18-million pact awarded early last year under which a Maryland-based subsidiary was picked to provide communications support services to the Coalition Provisional Authority.
In March 2003, in announcing the U.S. Army's purchase of $19-million worth of its protective shelters for chemical and biological weapons, then-ESSI Chairman and Chief Executive Michael Shanahan stated: "The potential threat of our troops facing a chemical or biological attack during the current conflict in Iraq remains very real."
Other company contracts have raised questions.
Last week, Defense Department officials disclosed that ESSI contracts issued in 2002 with a cumulative value of $158 million had been referred to the Pentagon inspector general's office for investigation. The contracts were supervised by a former Defense official who was sentenced to prison for improperly aiding another contractor, Boeing Co.
Pentagon Acting Undersecretary Michael Wynne said he had referred the contracts "that appear to have anomalies in them." Wynne and his aides would not elaborate on those anomalies. Other contracts referred for review included pacts with Accenture (formerly called Andersen Consulting), Boeing and Lockheed Martin.
In a briefing with stock analysts Tuesday, Gerald A. Potthoff, ESSI president, played down the significance of the probe, stating that the company contracts were under review simply because they were awarded on a sole-source basis.
He said he was confident it would "have no effect" on the company and that the probe was focused on the actions of government officials, not ESSI.
"We will cooperate fully," he added.
The ESSI contracts now being reviewed by the inspector general came in a series of awards by the U.S. Air Force for a piece of equipment known as a Tunner.
Named after a former Air Force major general, the Tunner is in wide use by the Air Force to swiftly load and unload large military transport aircraft. It can handle 60,000 pounds of cargo at a time.
The Tunner has also proven a valuable workhorse for ESSI, accounting for the bulk of a $35.1-million or 20% boost in its revenues in ESSI's heavy military division in 2002.
Shortly before the disclosure of the investigation, the Air Force announced that it had awarded the ESSI subsidiary another $9-million contract under the Tunner program.
The company describes itself as "a diversified supplier of high-tech, integrated military electronics, support equipment and logistics services for all branches of America's armed forces and certain foreign militaries."
Company officials acknowledge the war is an economic boon to the firm.
In its quarterly earnings report a year ago, then-Vice Chairman and Chief Executive Gerald L. Daniels said: "The increasing likelihood for a prolonged military involvement in Southwest Asia by U.S. forces well into 2006 has created a fertile environment for the type of support products and services that we offer."
Other ESSI products that have seen use in the current conflicts include radar and detection services, field medical stations and field electric generator units.
The company's record growth has come from increased orders coupled with an aggressive buyout strategy. William Bush's company, Bush-O'Donnell, was paid $125,000 to serve as a consultant in ESSI's buyout of a military contractor three years ago.
With about 3,500 employees, some stationed in Iraq, ESSI's North America operations stretch from Nova Scotia to Florida. Most recently the company announced its purchase of Spacelink International LLC, a Virginia military contractor, for $150.5 million.
SEC filings also cite major contracts with the military in Saudi Arabia and China.
While some of ESSI's military contracts have been awarded through a competitive bidding process, others have not. Many of its contracts are "indefinite date-indefinite quantity" contracts, under which the size of the contracts depends on the need of the agency.
The company preference for sole-source contracts was evident early this year, with the $37.6-million purchase of Prospective Computer Analysts Inc., an electronic test equipment and engineering services firm. ESSI officials made special note that the Garden City, N.Y., firm had "a lot of sole-source contracts."
William Bush was named to the board of ESSI in 2000, eight months before his nephew was elected president of the United States.
In an interview Tuesday, the uncle said he decided to cash in the options because they would soon expire.
"The deadline was coming up, and we put in a bid on a house in Florida," William Bush said. He said he declared in advance to the company president his intentions to exercise those options.
Asked whether he was troubled by the fact that the company had earned significant revenue from the military engagements in Iraq and Afghanistan, the president's uncle said he would "prefer there was no business in Iraq. Unfortunately, we live in a troubled world."
He called ESSI an excellent company, and said exercising the options was "certainly not" to express any dissatisfaction with its performance.
"I'm very proud of it. They've done a wonderful job," William Bush said.
According to SEC filings, the St. Louis business executive still has options on 45,000 more shares of the company stock. He said the options he cashed in were granted when he first joined the company board.
Bush, who also sits on the company's audit committee, is paid a little less than $40,000 a year for his board and committee duties, including an annual stockholders meeting scheduled for next week. He and other board member accrue additional stock options annually.
Bush exercised the expiring options shortly after a series of announcements that the company had won additional orders totaling about $77 million to supply kits to re-armor and refurbish military equipment being used by U.S. forces in Iraq. The company has 35 employees stationed in Iraq to install the protective gear.
The company estimates the refurbishing work in Iraq ultimately could bring revenues of $200 million or more.
News of the armoring and refurbishment contracts boosted ESSI's stock to a record $60.39 per share earlier this year. The stock closed Tuesday at $54.34.
In the conference call with analysts Tuesday, ESSI's Potthoff expressed optimism that the Bush administration's proposed $82-billion supplemental defense budget submitted last week could mean substantial additional opportunities for the company in Iraq and elsewhere.
"Personally, I could not be more happy about our company's prospects," Potthoff told stock analysts.