================================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number 1-8533
DRS TECHNOLOGIES, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-2632319
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 SYLVAN WAY, PARSIPPANY, NEW JERSEY 07054
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(973) 898-1500
----------------------------------------------------
(Registrant's telephone number, including area code)
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
--- ---
As of November 10, 1997, 5,613,605 shares of the registrant's Common Stock,
$.01 par value were outstanding (exclusive of 402,461 shares held in treasury).
================================================================================
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page
----
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -- September 30, 1997
and March 31, 1997.......................................... 3
Condensed Consolidated Statements of Earnings -- Three and
Six Months Ended September 30, 1997 and 1996................ 4
Condensed Consolidated Statements of Cash Flows -- Three and
Six Months Ended September 30, 1997 and 1996................ 5
Notes to Condensed Consolidated Financial Statements.......... 6-8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9-14
PART 2. OTHER INFORMATION
Item 1. Not Applicable
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders............ 15
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K............................... 15
SIGNATURES ................................................................. 16
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
September 30, March 31,
1997 1997
------------ -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents .............................. $ 7,435,000 $ 9,455,000
Accounts receivable, net ............................... 29,747,000 24,343,000
Inventories, net of progress payments .................. 27,901,000 25,169,000
Prepaid expenses and other current assets .............. 1,369,000 1,389,000
------------ -----------
TOTAL CURRENT ASSETS .............................. 66,452,000 60,356,000
Property, plant and equipment, less accumulated
depreciation and amortization of $30,342,000
and $28,299,000 at September 30, 1997 and
March 31, 1997, respectively ........................... 20,573,000 19,987,000
Intangible assets, less accumulated amortization of
$5,286,000 and $4,827,000 at September 30, 1997
and March 31, 1997, respectively ....................... 9,961,000 10,915,000
Other assets ............................................... 6,190,000 6,415,000
------------ -----------
$103,176,000 $97,673,000
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt ................. $ 7,256,000 $ 2,255,000
Other current liabilities .............................. 27,710,000 25,263,000
------------ -----------
TOTAL CURRENT LIABILITIES ......................... 34,966,000 27,518,000
Long-term debt, excluding current installments ............. 25,507,000 30,801,000
Deferred income taxes ...................................... 3,367,000 3,367,000
Other liabilities .......................................... 3,337,000 3,000,000
------------ -----------
TOTAL LIABILITIES ................................. 67,177,000 64,686,000
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value per share
Authorized 20,000,000 shares; issued 6,015,066
and 6,007,786 shares at September 30, 1997 and
March 31, 1997, respectively ........................... 60,000 60,000
Additional paid-in capital ................................. 14,629,000 14,208,000
Retained earnings .......................................... 23,495,000 20,685,000
------------ -----------
38,184,000 34,953,000
Treasury Stock, at cost:
402,461 and 420,893 shares of Common Stock at
September 30, 1997 and March 31, 1997, respectively .... (1,561,000) (1,622,000)
Unamortized restricted stock compensation .................. (624,000) (344,000)
------------ -----------
NET STOCKHOLDERS' EQUITY ............................... 35,999,000 32,987,000
------------ -----------
Commitments and contingencies .............................. $103,176,000 $97,673,000
============ ===========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
--------------------------- ---------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenues ...................................... $38,738,000 $33,440,000 $77,735,000 $60,863,000
Costs and expenses ............................ 34,853,000 30,408,000 70,917,000 55,363,000
Restructuring Charge .......................... 600,000 -- 634,000 --
----------- ----------- ----------- -----------
Operating income .................... 3,285,000 3,032,000 6,184,000 5,500,000
Interest and related expenses ................. (899,000) (903,000) (1,802,000) (1,735,000)
Interest and other income, net ................ 448,000 226,000 691,000 464,000
Minority interest ............................. (504,000) (66,000) (612,000) (104,000)
----------- ----------- ----------- -----------
Earnings before income taxes ........ 2,330,000 2,289,000 4,461,000 4,125,000
Income taxes .................................. 863,000 893,000 1,651,000 1,609,000
----------- ----------- ----------- -----------
Net earnings ........................ $ 1,467,000 $ 1,396,000 $ 2,810,000 $ 2,516,000
=========== =========== =========== ===========
Earnings per share of common stock:
Primary ............................. $ 0.25 $ 0.24 $ 0.48 $ 0.44
Fully Diluted ....................... $ 0.21 $ 0.21 $ 0.41 $ 0.38
Weighted average number of shares of
common stock outstanding:
Primary ............................. 5,887,000 5,743,000 5,848,000 5,712,000
Fully Diluted ....................... 9,111,000 8,907,000 9,044,000 8,892,000
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
September 30,
----------------------------
1997 1996
----------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings ........................................... $ 2,810,000 $ 2,516,000
Adjustments to reconcile net earnings to cash
flows from operating activities:
Depreciation and amortization .......................... 3,094,000 2,235,000
Other, net ............................................. 464,000 (188,000)
Changes in assets and liabilities, net of effects from
business combinations and divestitures:
(Increase) decrease in accounts receivable ............. (5,917,000) (5,219,000)
(Increase) decrease in inventories ..................... (4,571,000) (751,000)
(Increase) decrease in prepaid expenses and
other current assets ................................ (41,000) 74,000
Increase (decrease) in current and other liabilities ... 2,399,000 (7,901,000)
Other, net ............................................. (125,000) 85,000
----------- ------------
NET CASH USED IN OPERATING ACTIVITIES .................. (1,887,000) (9,149,000)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures ................................... (2,440,000) (1,619,000)
Sale of fixed assets ................................... 1,000 122,000
Payments pursuant to business combinations,
net of cash acquired ................................ (290,000) (3,892,000)
Proceeds from sale of partnership net assets ........... 1,890,000 --
Other, net ............................................. (53,000) --
----------- ------------
Net cash used in investing activities .................. (892,000) (5,389,000)
----------- ------------
Cash flows from financing activities
Net proceeds from short-term borrowings ................ 1,032,000 667,000
Payments on long-term debt ............................. (293,000) (465,000)
Other, net ............................................. 20,000 47,000
----------- ------------
NET CASH USED IN FINANCING ACTIVITIES .................. 759,000 249,000
----------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS .................. (2,020,000) (14,289,000)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ............. 9,455,000 22,785,000
----------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................... $ 7,435,000 $ 8,496,000
=========== ============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) In the opinion of management, the accompanying unaudited condensed
consolidated financial statements of DRS Technologies, Inc. and
subsidiaries (hereinafter, "DRS" or the "Company") contain all adjustments
(consisting of only normal and recurring adjustments) necessary for the
fair presentation of the Company's consolidated financial position as of
September 30, 1997, the results of operations for the three- and six-month
periods ended September 30, 1997 and 1996, and cash flows for the six-month
periods ended September 30, 1997 and 1996. All significant intercompany
balances and transactions have been eliminated. Certain items in the
September 30, 1996 and March 31, 1997 condensed consolidated financial
statements and accompanying notes have been reclassified to conform to the
fiscal 1998 presentation. The results of operations for the six months
ended September 30, 1997 are not necessarily indicative of the results to
be expected for the full year.
2) Inventories are summarized as follows:
September 30, March 31,
1997 1997
------------ ------------
Work-in-process ......................... $ 40,599,000 $ 38,740,000
Raw material, unallocated stock and
finished goods ........................ 7,084,000 3,874,000
------------ ------------
47,683,000 42,614,000
Less progress payments .................. (19,782,000) (17,445,000)
============ ============
Total ............................... $ 27,901,000 $ 25,169,000
============ ============
General and administrative costs included in work-in-process were
approximately $8.8 million and $9.4 million at September 30, 1997 and March
31, 1997, respectively. General and administrative expenses included in
costs and expenses amounted to approximately $6.1 million and $7.5 million,
respectively, for the three-month periods ended September 30, 1997 and
1996, and approximately $15.4 million and $13.0 million, respectively, for
the six-month periods then ended.
3) The Company's industrial revenue bonds due January 1, 1998 (the "Bonds")
are supported by an irrevocable, direct-pay letter of credit. The Company
has collateralized the letter of credit with accounts receivable and has
also agreed to certain financial covenants. As a result of the issuance of
the Company's $25,000,000 aggregate principal amount of 9% Senior
Subordinated Convertible Debentures (the "9% Debentures") in fiscal 1996,
the ratio of consolidated tangible net worth to total debt (the "Debt
Ratio"), as defined under the related letter of credit agreement, was below
the required minimum ratio at March 31, 1997. As of September 30, 1997, the
Debt Ratio was above the required minimum ratio. The Company has obtained a
waiver, expiring on the maturity date of the Bonds, from the issuing bank
of the required Debt Ratio and is in compliance with all covenants under
the letter of credit.
4) On May 13, 1997, DRS Ahead Technology, Inc., a second-tier subsidiary of
the Company ("Ahead"), acquired approximately 80 percent of the outstanding
equity of Magnetic Heads Company, Ltd. ("MHC") for approximately $.3
million. Located in Razlog, Bulgaria, MHC is a manufacturer and supplier of
magnetic recording heads used primarily for commercial applications. In
connection with this acquisition. Ahead has agreed to make additional
investments in MHC totaling approximately $2.3 million over a five-year
period. For purposes of this agreement, investments include transfer of
technology and related intangible assets, transfer of inventory and other
productive assets, employee training and other similar transfers and
expenditures. The acquisition of the equity of MHC has been accounted for
using the purchase method of accounting. Accordingly, the results of
operations of MHC have been included in the Company's reported operating
results as of the effective date of the acquisition. The financial position
and results of operations of MHC were not significant to those of the
Company as of the effective date of acquisition.
5) On September 12, 1997, the Company sold substantially all of the net assets
of DRS Medical Systems to United States Surgical Corporation for
approximately $1.9 million in cash. DRS Medical Systems was formed February
6, 1996, when a wholly-owned subsidiary of DRS entered into a partnership
with Universal Sonics Corporation, a privately-held company. The sale
resulted in a gain of approximately $149,000 and the reversal of accrued
obligations of $324,000. DRS Medical Systems accounted for approximately 2
percent of DRS' fiscal 1997 revenues.
6) During the second quarter of fiscal 1998, the Company completed the move of
certain of its military display workstation product lines from the
Company's facility in Oakland, New Jersey to its operation in Gaithersburg,
Maryland.
6
<PAGE>
The Company expects to complete the relocation of its multi-platform
boresighting equipment product lines, presently located and operating in
Hauppauge, New York, to Oakland, New Jersey in the third quarter of fiscal
1998. In connection with this relocation, the Company also plans to sell
the land and building owned in Hauppauge, New York. The Company recorded a
restructuring charge of $600,000 and $634,000 in the three- and six-month
periods ended September 30, 1997, respectively, in connection with these
relocations. This restructuring charge does not include costs associated
with the relocation of employees, equipment and inventory, nor does it
include retraining costs for new personnel and the cost of leasehold
improvements for the Oakland, NJ production facility. These costs will be
charged to operations or capitalized, as appropriate, when incurred.
The following table reconciles the restructuring charge to the related
reserve account balance as of September 30, 1997:
Total
---------
Fiscal 1998 Restructuring
Charge .......................... $ 634,000
Cash outflows for severance
payments* ....................... (253,000)
---------
Balance at September 30, 1997 ..... $ 381,000
=========
----------
* Cash outflows for idle plant costs are expected to occur in the third
and fourth quarters of fiscal 1998.
The Company believes that the overall reduction in its infrastructure
resulting from this reorganization plan will have a positive effect on the
Company's operating results for the fiscal year.
7) On October 29, 1997 (the "Closing Date"), DRS acquired, through certain of
its subsidiaries, the assets of the Applied Systems Division of Spar
Aerospace Limited ("Spar"), a Canadian corporation, and 100% of the stock
of Spar Aerospace (UK) Limited, incorporated under the laws of England and
Wales (the "Acquisition"), pursuant to a Purchase Agreement (the
"Agreement") dated as of September 19, 1997, between DRS and Spar. The
Company paid approximately $29 million in cash for the Acquisition.
Headquartered in Kanata, Ontario, Canada, and now operating under the name
DRS Flight Safety and Communications, Spar Applied Systems Division has
been an international provider of aviation and defense systems for over 30
years. It designs, manufactures and markets sophisticated flight safety
systems, naval communications systems and other advanced electronics for
government and commercial customers around the world. It also provides
custom manufacturing services for complex electronic assemblies and
systems.
The Acquisition will be accounted for using the purchase method of
accounting. Accordingly, the results of operations of DRS Flight Safety and
Communications will be included in the Company's reported operating results
subsequent to the Closing Date.
8) In connection with the Acquisition, on October 29, 1997, the Company
entered into a $60 million secured credit facility (the "Secured Credit
Facility") with Mellon Bank, N.A., consisting of a $20 million term loan
(the "Term Loan") and a $40 million revolving line of credit (the "Line of
Credit"). The Secured Credit Facility expires on March 31, 2003 and
replaces the Company's existing $15 million unsecured revolving line of
credit and $5 million secured equipment line of
7
<PAGE>
credit/term loan facility. The Term Loan was used to finance a portion of
the Acquisition. The Line of Credit was used to finance the remaining
balance due in connection with the Acquisition and to repay outstanding
borrowings on the $15 million unsecured revolving line of credit and the $5
million secured equipment line of credit/term loan facility. The Line of
Credit is available for working capital, general corporate purposes and
acquisitions, and contains certain covenants and restrictions, including a
restriction on the payment of dividends on the capital stock of the
Company, a limitation on the issuance of additional debt and certain other
restrictions.
8
<PAGE>
DRS TECHNOLOGIES, INC AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following is management's discussion and analysis of the consolidated
financial condition and results of operations of DRS Technologies, Inc. and
subsidiaries (hereinafter, "DRS" or the "Company") as of September 30, 1997 and
for the three- and six-month periods ended September 30, 1997 and 1996. This
discussion should be read in conjunction with the condensed consolidated
financial statements, related notes and other financial information included in
this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form
10-K for the fiscal year ended March 31, 1997.
The following discussion and analysis includes certain forward-looking
statements. Forward-looking statements in this report are made pursuant to the
safe-harbor provisions of the Private Securities Litigation Reform Act of 1995.
Persons reading this report are cautioned that such forward-looking statements
involve risks and uncertainties that could cause the Company's actual results to
differ from the results suggested by these forward-looking statements. Factors
that could cause actual results to differ materially from the forward-looking
statements include, without limitation: the effect of the Company's acquisition
strategy on future operating results; the uncertainty of acceptance of new
products and successful bidding for new contracts; the effect of technological
changes or obsolescence relating to the Company's products and services; the
effects of government regulation or shifts in government policy as they may
relate to the Company's products and services; competition and other matters
referred to in this report.
ACQUISITIONS, DIVESTITURES AND RELATED ACTIVITIES
On May 13, 1997, DRS Ahead Technology, Inc., a second-tier subsidiary of
the Company ("Ahead"), acquired approximately 80 percent of the outstanding
equity of Magnetic Heads Company, Ltd. ("MHC") for approximately $0.3 million in
cash. Located in Razlog, Bulgaria, MHC is a manufacturer and supplier of
magnetic recording heads used primarily for commercial applications. In
connection with this acquisition, Ahead has agreed to make additional
investments in MHC totaling approximately $2.3 million over a five-year period.
For purposes of this agreement, investments include transfer of technology and
related intangible assets, transfer of inventory and other productive assets,
employee training and other similar transfers and expenditures. The acquisition
of the equity of MHC has been accounted for using the purchase method of
accounting. Accordingly, the results of operations of MHC have been included in
the Company's reported operating results as of the effective date of the
acquisition. The financial position and results of operations of MHC were not
significant to those of the Company as of the effective date of acquisition.
On September 12, 1997, the Company sold substantially all of the net assets
of DRS Medical Systems to United States Surgical Corporation for approximately
$1.9 million. DRS Medical Systems was formed February 6, 1996, when a
wholly-owned subsidiary of DRS entered into a partnership with Universal Sonics
Corporation, a privately-held company. The sale resulted in a gain of
approximately $149,000 and the reversal of accrued obligations of $324,000. DRS
Medical Systems accounted for approximately 2 percent of DRS's fiscal 1997
revenues.
On October 29, 1997 (the "Closing Date"), DRS acquired, through certain of
its subsidiaries, the assets of the Applied Systems Division of Spar Aerospace
Limited ("Spar"), a Canadian corporation, and 100% of the stock of Spar
Aerospace (UK) Limited, incorporated under the laws of England and Wales (the
"Acquisition"), pursuant to a Purchase Agreement (the "Agreement") dated as of
September 19, 1997, between DRS and Spar. The Company paid approximately $29
million in cash for the Acquisition. (see "Financial Condition and Liquidity").
Headquartered in Kanata, Ontario, Canada, and now operating under the name
DRS Flight Safety and Communications, Spar Applied Systems Division has been an
international provider of aviation and defense systems for over 30 years. It
designs, manufactures and markets sophisticated flight safety systems, naval
communications systems and other advanced electronics for government and
commercial customers around the world. It also provides custom manufacturing
services for complex electronic assemblies and systems.
The Acquisition will be accounted for using the purchase method of
accounting. Accordingly, the results of operations of DRS Flight Safety and
Communications will be included in the Company's reported operating results
subsequent to the Closing Date.
REORGANIZATION PLAN
During the second quarter of fiscal 1998, the Company completed the move of
certain of its military display workstation product lines from the Company's
facility in Oakland, New Jersey to its operation in Gaithersburg, Maryland.
9
<PAGE>
The Company expects to complete the relocation of its multi-platform
boresighting equipment product lines, presently located and operating in
Hauppauge, New York, to Oakland, New Jersey in the third quarter of fiscal 1998.
In connection with this relocation, the Company also plans to sell the land and
building owned in Hauppauge, New York. The Company recorded a restructuring
charge of $600,000 and $634,000 in the three- and six-month periods ended
September 30, 1997, respectively, in connection with these relocations. This
restructuring charge does not include costs associated with the relocation of
employees, equipment and inventory, nor does it include retraining costs for new
personnel and the costs of leasehold improvements for the Oakland, NJ production
facility. These costs will be charged to operations or capitalized, as
appropriate, when incurred.
The following table reconciles the restructuring charge to the related reserve
account balance as of September 30, 1997:
Total
---------
Fiscal 1998 Restructuring Charge ........ $ 634,000
Cash outflows for severance payments* ... (253,000)
---------
Balance at September 30, 1997 ........... $ 381,000
=========
- ----------
* Cash outflows for idle plant costs are expected to occur in the third and
fourth quarters of fiscal 1998.
The Company believes that the overall reduction in its infrastructure
resulting from this reorganization plan will have a positive effect on the
Company's operating results for the fiscal year.
10
<PAGE>
<TABLE>
RESULTS OF OPERATIONS
The following table sets forth items in the Condensed Consolidated
Statements of Earnings as a percent of revenues and presents the percentage
increase or decrease of those items as compared to the prior period.
<CAPTION>
Percent of Revenues Percent of Revenues
------------------- -------------------
Three Months Ended Percent Six Months Ended Percent
September 30, Changes September 30, Changes
------------------- ------- ------------------- -------
1997 1996 1997 vs. 1996 1997 1996 1997 vs. 1996
------- ------- ------------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ................. 100.0% 100.0% 015.8% 100.0% 100.0% 27.7%
Costs and expenses ....... 90.0 90.9 14,4 91.2 91.0 28.1
Restructuring Charge ..... 1.5 0.0 NA 0.8 0.0 NA
----- ----- ----- -----
Operating income ..... 8.5 9.1 8.3 8.0 9.0 12.4
Interest and related
expenses ............... (2.3) (2.7) (0.4) (2.3) (2.9) 3.9
Interest and other
income, net ............ 1.1 0.7 98.2 0.8 0.8 48.9
Minority interest ........ (1.3) (0.2) 663.6 (0.8) (0.2) 488.5
----- ----- ----- -----
Earnings before
income taxes ....... 6.0 6.9 1.8 5.7 6.7 8.1
Income taxes ............. 2.2 2.7 (3.4) 2.1 2.6 2.6
----- ----- ----- -----
Net earnings ......... 3.8% 4.2% 5.1% 3.6% 4.1% 11.7%
===== ===== ===== =====
</TABLE>
Revenues for the three-month period ended September 30, 1997 increased
15.8% to $38.7 million from $33.4 million for the same three-month period in
fiscal 1997. Revenues were $77.7 million and $60.9 million for the six-month
periods ended September 30, 1997 and 1996, respectively. The revenue growth
during the second quarter was attributable primarily to shipments associated
with the Company's military display workstation product lines; increases over
last year in commercial product sales, which include revenues from businesses
acquired during fiscal 1997; and product shipments relating to the Company's
electro-optical system product lines. Higher revenues for the six-month period
were due primarily to shipments relating to the company's military display
workstation, data recording and electro-optical systems product lines, as well
as to increases in commercial product sales.
Operating income for the three-month period ended September 30, 1997
increased 8.3% to $3.3 million from $3.0 million for the same three-month period
in fiscal 1997. Operating income was $6.2 million and $5.5 million for the
six-month periods ended September 30, 1997 and 1996, respectively. Operating
income, as a percentage of revenue was 8.5% and 8.0% for the three and six-month
periods ended September 30, 1997, respectively, as compared with 9.1% and 9.0%
in the comparable prior year periods. The increase in operating income was due
to the overall increase in revenues and to higher income generated by certain of
the Company's military display workstation and data storage system product
lines. The decrease in operating income as a percentage of revenue in the second
quarter was primarily due to the effect of the restructuring
11
<PAGE>
charge (see "Reorganization Plan"), offset, in part, by the reversal of
approximately $0.3 million of accrued obligations associated with the sale of
the net assets of DSR Medical Systems. Operating income as a percentage of
revenue was also lower in the six-month period ended September 30, 1997 as a
result of lower margins on revenues from commercial product line sales, due to a
seasonal downturn effecting the specialty magnetic head market.
Interest and related expenses were approximately $0.9 million for each of
the three-month periods ended September 30, 1997 and 1996, and $1.8 million and
$1.7 million for the six-month periods ended September 30, 1997 and 1996,
respectively.
Interest and other income, net was $0.4 million and $0.2 million,
respectively, for the three month periods ended September 30, 1997 and 1996, and
$0.7 million and $0.5 million, respectively, for the six-month periods then
ended. This increase was primarily due to the gain on the sale of the net assets
of DRS Medical Systems.
Minority interest increased to $0.5 million and $0.6 million for the three
and six-month periods ended September 30, 1997 from $66,000 and $0.1 million in
the comparable prior year periods. The increase was due to the growth of the DRS
Laurel Technologies partnership ("Laurel"), in which the Company has an 80%
interest. Laurel manufactures many of the Company's military display
workstations.
The Company's effective tax rates for both the three and six-month periods
ended September 30, 1997 and 1996 were 37% and 39%, respectively. The Company
records income tax expense based on an estimated effective income tax rate for
the full fiscal year. The lower effective income tax rate for the fiscal periods
ended September 30, 1997 reflects the anticipated benefit of certain
transactions to be completed by the Company this fiscal year in connection with
a reorganization plan (see "Reorganization Plan"). The provision for income
taxes includes all estimated income taxes payable to federal and state
governments, as applicable.
FINANCIAL CONDITION AND LIQUIDITY
CASH AND CASH FLOW: Cash and cash equivalents at September 30, 1997 and
March 31, 1997 represented approximately 7% and 10%, respectively, of total
assets. During the six-month period ended September 30, 1997, cash decreased by
approximately $2.0 million. This decrease resulted from the uses of
approximately $2.4 million and $0.3 million for capital expenditures and
acquisitions, respectively, offset by $1.9 million provided from the divestiture
of DRS Medical Systems and $0.7 million in net borrowings. In addition,
approximately $1.9 million was used in support of operations.
Capital expenditures, excluding assets acquired as a result of business
combinations, are expected to approximate $4.8 million for the fiscal year
ending March 31, 1998. The majority of these expenditures will be for computer
and production-related equipment, as well as leasehold improvements.
Working capital as of September 30, 1997 was $31.5 million, as compared to
$32.8 million at March 31, 1997. The decrease was primarily due to an increase
in current installments of long term debt and accounts payables, offset in part
by higher accounts receivable and inventory balances resulting from the growth
of the company.
As of September 30, 1997, approximately $6.8 million was outstanding
against the Company's $15 million unsecured revolving line of credit facility
(the "Unsecured Facility"), of which $4.1 million was contingently payable under
letters of credit, as compared with $5.3 million and $2.3 million, respectively,
at March 31, 1997. The net increase was primarily
12
<PAGE>
attributable to the issuance of additional letters of credit for $1.8 million,
partially offset by net repayments of $0.3 million. Approximately $0.8 million
and $0.6 million of debt outstanding on the Unsecured Facility was classified as
long-term debt at September 30, 1997 and March 31, 1997, respectively.
Approximately $1.2 million was outstanding against the Company's $5 million
secured equipment line of credit/term loan agreement (the "Equipment Facility")
at September 30, 1997; there were no outstanding borrowings as of March 31,
1997.
In connection with the Acquisition, on October 29, 1997, the Company
entered into a $60 million secured credit facility (the "Secured Credit
Facility") with Mellon Bank, N.A., consisting of a $20 million term loan (the
"Term Loan") and a $40 million revolving line of credit (the "Secured Line of
Credit"). The Secured Credit Facility expires on March 31, 2003 and replaces the
Company's Unsecured Facility and Equipment Facility. The Term Loan was used to
finance a portion of the Acquisition. The Secured Line of Credit was used to
finance the remaining balance due in connection with the Acquisition and to
repay outstanding borrowings on the Unsecured Facility and Equipment Facility.
The Secured Line of Credit is available for working capital, general corporate
purposes and acquisitions. The Secured Credit Facility contains certain
covenants and restrictions, including a restriction on the payment of dividends
on the capital stock of the Company, a limitation on the issuance of additional
debt and certain other restrictions.
The Company believes that its current working capital position and
available bank financing are sufficient to support its current operational
needs, as well as its near-term business objectives.
ACCOUNTS RECEIVABLE AND INVENTORIES: Accounts receivable increased by
approximately $5.4 million in the six-month period ended September 30, 1997,
primarily due to an increase in unbilled accounts receivable related to the
AN/UYQ-65 display workstations. Generally, there are no contract provisions for
retainage, and all accounts receivable are expected to be collected within one
year.
Inventories increased by approximately $2.7 million from March 31, 1997,
due primarily to increased material procurement associated with production
activity.
September 30, 1997 March 31, 1997
------------------ --------------
Quick ratio .............................. 1.1 1.2
Current ratio ............................ 1.9 2.2
Liabilities-to-equity ratio .............. 1.9 2.0
Long-term debt, excluding current
installments, to capitalization ........ 41.5% 48.3%
BACKLOG: Backlog at September 30, 1997 was approximately $157.6 million as
compared to $118.4 million at March 31, 1997. The increase in backlog was due to
the increase in bookings, partially offset by revenues. New contract awards of
approximately $83.4 million and $119.9 million were booked in the three and six
month periods ended September 30, 1997, respectively. Included in second quarter
awards was a contract valued at approximately $64 million to manufacture
AN/UYQ-70 Advanced Display System tactical workstations for the U.S. Navy.
LETTER OF CREDIT
The Company's industrial revenue bonds due January 1, 1998 (the "Bonds")
are supported by an irrevocable, direct-pay letter of credit. The Company has
collateralized the letter of credit with accounts receivable and has also agreed
to certain financial covenants. As a result of the issuance of the Company's
$25,000,000 aggregate principal amount of 9% Senior Subordinated Convertible
13
<PAGE>
Debentures (the "9% Debentures") in fiscal 1996, the ratio of consolidated
tangible net worth to total debt (the "Debt Ratio"), as defined under the
related letter of credit agreement, was below the required minimum ratio at
March 31, 1997. The Company has obtained a waiver, expiring on the maturity date
of the Bonds, from the issuing bank of the required Debt Ratio and is in
compliance with all covenants under the letter of credit. As of September 30,
1997, the Debt Ratio was above the required minimum ratio.
ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). This
statement simplifies the current standards for computing earnings per share
("EPS"), as specified in Accounting Principles Board Opinion No. 15, "Earnings
per Share" ("APB 15"). Under SFAS 128, the presentation of primary EPS will be
replaced by the presentation of basic EPS. For companies with complex capital
structures, the presentation of fully diluted EPS will be replaced by diluted
EPS. Diluted EPS is computed similarly to fully diluted EPS pursuant to APB 15.
The Company will adopt this standard in the current fiscal year, beginning with
the fiscal quarter ending December 31, 1997. Had the Company adopted this
standard in the second quarter of fiscal 1998, basic EPS would have been $0.26
and $0.25, respectively, for the three-month periods ended September 30, 1997
and 1996, and $0.50 and $0.46, respectively, for the six-month periods then
ended. Diluted EPS would have been $0.21 for the three-month periods ended
September 30, 1997 and 1996, and $0.42 and $0.39 for the six-month periods ended
September 30, 1997 and 1996, respectively.
14
<PAGE>
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 6, 1997, the Company held its Annual Meeting of Stockholders
at the offices of Skadden, Arps, Slate, Meagher & Flom LLP, 919 Third
Avenue, New York, New York. The following matters were submitted to a
vote of stockholders:
(i) to elect two Class II directors, each to hold office for a term
of three years;
(ii) to consider and act upon a proposal to change the Company's name
to DRS Technologies, Inc.
With respect to the aforementioned matters, votes were tabulated and the
stockholders of the Company approved both proposals as follows:
For Against Withheld
--------- ------- --------
Proposal (i):
Mark N. Kaplan .............. 4,722,251 0 25,980
Ira Albom ................... 4,724,398 0 23,833
Proposal (ii): ................. 4,494,433 2,643 251,155
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Schedule of Computations of Per Share Earnings
27. Financial Data Schedule
(b) Reports on Form 8-K
Filed as of August 14, 1997: At the annual meeting of
stockholders held on August 6, 1997, the stockholders of
Diagnostic/Retrieval Systems, Inc. d.b.a. DRS Technologies, Inc.
(the "Company" or the "Registrant") approved a proposal to amend
the Company's Amended and Restated Certificate of Incorporation
(the "Certificate") changing the name of the corporation to DRS
Technologies, Inc. A Certificate of Amendment was filed with the
Secretary of State of the State of Delaware and became effective
on August 8, 1997.
The Registrant is now referred to as DRS
Technologies, Inc. in all subsequent filings.
15
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
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.
DRS TECHNOLOGIES, INC.
Registrant
Date: November 14, 1997 /s/ NANCY R. PITEK
--------------------------------------
Nancy R. Pitek
Vice President, Finance and Treasurer
16
<TABLE>
DRS TECHNOLOGIES, INC.
EXHIBIT 11
SCHEDULE OF COMPUTATIONS OF PER SHARE EARNINGS
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
-------------------------- --------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
PRIMARY
Net earnings for primary earnings per share .................... $1,467,000 $1,396,000 $2,810,000 $2,516,000
========== ========== ========== ==========
Weighted average number of shares outstanding .................. 5,591,000 5,510,000 5,589,000 5,492,000
Add -- common equivalent shares (determined using the
"treasury stock" method) representing shares issuable
upon exercise of employee stock options ...................... 296,000 233,000 259,000 220,000
---------- ---------- ---------- ----------
Weighted average number of shares used in calculation
of primary earnings per share ................................ 5,887,000 5,743,000 5,848,000 5,712,000
========== ========== ========== ==========
Primary earnings per share ..................................... $ 0.25 $ 0.24 $ 0.48 $ 0.44
========== ========== ========== ==========
FULLY DILUTED
Net earnings ................................................... $1,467,000 $1,396,000 $2,810,000 $2,516,000
Add -- interest on 8-1/2% Convertible Subordinated
Debentures, net of applicable income taxes ................... 67,000 65,000 134,000 130,000
Add -- interest on 9% Senior Subordinated Convertible
Debentures, net of applicable income taxes ................... 362,000 351,000 721,000 698,000
Add -- amortization of deferred issuance costs relating
to 9% Senior Subordinated Convertible Debentures,
net of applicable income taxes ............................... 39,000 36,000 78,000 72,000
---------- ---------- ---------- ----------
Net earnings for fully diluted earnings per share .............. $1,935,000 $1,848,000 $3,743,000 $3,416,000
========== ========== ========== ==========
Weighted average number of shares used in calculation
of primary earnings per share ................................ 5,887,000 5,743,000 5,848,000 5,712,000
Add (deduct) incremental shares representing:
Shares issuable upon exercise of stock options
included in primary earnings per share calculation ......... (296,000) (233,000) (259,000) (220,000)
Shares issuable upon exercise of stock options based
on period-end market prices ................................ 362,000 239,000 297,000 242,000
Shares issuable upon conversion of 8-1/2% Convertible
Subordinated Debentures .................................... 333,000 333,000 333,000 333,000
Shares issuable upon conversion of 9% Senior
Subordinated Convertible Debentures ........................ 2,825,000 2,825,000 2,825,000 2,825,000
---------- ---------- ---------- ----------
Weighted average number of shares used in calculation
of fully diluted earnings per share .......................... 9,111,000 8,907,000 9,044,000 8,892,000
========== ========== ========== ==========
Fully diluted earnings per share ............................... $ 0.21 $ 0.21 $ 0.41 $ 0.38
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM DRS TECHNOLOGIES, INC. FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 7,435,000
<SECURITIES> 0
<RECEIVABLES> 29,747,000
<ALLOWANCES> 0
<INVENTORY> 27,901,000
<CURRENT-ASSETS> 66,452,000
<PP&E> 50,915,000
<DEPRECIATION> 30,342,000
<TOTAL-ASSETS> 103,176,000
<CURRENT-LIABILITIES> 34,966,000
<BONDS> 25,507,000
0
0
<COMMON> 60,000
<OTHER-SE> 35,939,000
<TOTAL-LIABILITY-AND-EQUITY> 103,176,000
<SALES> 38,738,000
<TOTAL-REVENUES> 38,738,000
<CGS> 35,453,000
<TOTAL-COSTS> 35,453,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 899,000
<INCOME-PRETAX> 2,330,000
<INCOME-TAX> 863,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,467,000
<EPS-PRIMARY> 0.25
<EPS-DILUTED> 0.21
</TABLE>
