================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[ ] TRANSITION 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.
DELAWARE 13-2632319
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 SYLVAN WAY, PARSIPPANY, NEW JERSEY 07054
(973) 898-1500
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 AND 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, 1998, 6,342,206 SHARES OF 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
<TABLE>
<CAPTION>
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Balance Sheets - September 30, 1998 and
March 31, 1998....................................................... 3
Condensed Consolidated Statements of Earnings - Three and
Six Months Ended Sepember 30, 1998 and 1997.......................... 4
Condensed Consolidated Statements of Comprehensive Earnings - Three
and Six Months Ended Sepember 30, 1998 and 1997...................... 5
Condensed Consolidated Statements of Cash Flows - Six Months
Ended September 30, 1998 and 1997.................................... 6
Notes to Condensed Consolidated Financial Statements............. 7-10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 11-17
Item 3. Not Applicable
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 18
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.............. 18
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K................................. 18
SIGNATURES ....................................................................... 19
</TABLE>
2
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1998
------------------ --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13,026,000 $ 9,673,000
Accounts receivable, less allowances for
doubtful accounts of $872,000 and $486,000 at
September 30, 1998 and March 31, 1998, respectively 43,295,000 47,273,000
Inventories, net of progress payments 41,152,000 38,637,000
Prepaid expenses and other current assets 2,213,000 1,849,000
------------- -------------
Total current assets 99,686,000 97,432,000
Property, plant and equipment, less accumulated depreciation
and amortization of $35,294,000 and $32,457,000 at
September 30, 1998 and March 31, 1998, respectively 22,661,000 22,972,000
Intangible assets, less accumulated amortization of
$6,695,000 and $6,061,000 at September 30, 1998
and March 31, 1998, respectively 31,451,000 33,070,000
Other assets 9,332,000 9,999,000
------------- -------------
$ 163,130,000 $ 163,473,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank debt $ 8,543,000 $ 5,100,000
Current installments of long-term debt 2,957,000 7,514,000
Accounts payable and other current liabilities 39,956,000 42,692,000
------------- -------------
Total current liabilities 51,456,000 55,306,000
Long-term debt, excluding current installments 57,819,000 56,532,000
Deferred income taxes 3,897,000 3,897,000
Other liabilities 4,233,000 3,403,000
------------- -------------
Total liabilities 117,405,000 119,138,000
Stockholders' equity:
Preferred Stock, no par value. Authorized 2,000,000 shares;
no shares issued at September 30, 1998 and March 31, 1998 $ -- $ --
Common Stock, $.01 par value per share
Authorized 20,000,000 shares; issued 6,744,667
and 6,596,237 shares at September 30, 1998 and
March 31, 1998, respectively 67,000 66,000
Additional paid-in capital 20,446,000 19,399,000
Retained earnings 27,438,000 27,057,000
Accumulated other comprehensive earnings (291,000) (135,000)
Treasury stock, at cost:
402,461 shares of Common Stock at
September 30, 1998 and March 31, 1998 (1,561,000) (1,561,000)
Unamortized restricted stock compensation (374,000) (491,000)
------------- -------------
Net stockholders' equity 45,725,000 44,335,000
------------- -------------
Commitments and contingencies -- --
$ 163,130,000 $ 163,473,000
============= =============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
Three Months Ended September 30, Six Months Ended September 30,
--------------------------------- ------------------------------
1998 1997 1998 1997
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 46,126,000 $ 38,738,000 $ 92,114,000 $ 77,735,000
Costs and expenses 44,377,000 35,453,000 88,299,000 71,551,000
------------ ------------- ------------ ------------
Operating income 1,749,000 3,285,000 3,815,000 6,184,000
Interest and related expenses (1,542,000) (899,000) (3,113,000) (1,802,000)
Interest and other income, net 107,000 448,000 328,000 691,000
Minority interest (224,000) (504,000) (425,000) (612,000)
------------ ------------- ------------ ------------
Earnings before income taxes 90,000 2,330,000 605,000 4,461,000
Income taxes 33,000 863,000 224,000 1,651,000
------------ ------------- ------------ ------------
Net earnings $ 57,000 $ 1,467,000 $ 381,000 $ 2,810,000
============ ============= ============ ============
Earnings per share of common stock:
Basic $ 0.01 $ 0.26 $ 0.06 $ 0.50
Diluted $ 0.01 $ 0.21 $ 0.06 $ 0.42
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Earnings
(Unaudited)
Three Months Ended Six Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 1998 1997
--------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Comprehensive earnings
Net earnings $ 57,000 $1,467,000 $ 381,000 $2,810,000
Other comprehensive earnings:
Foreign currency translation adjustment (35,000) -- (156,000) --
--------- ---------- --------- ----------
Comprehensive earnings $ 22,000 $1,467,000 $ 225,000 $2,810,000
========= ========== ========= ==========
See accompanying notes to condensed consolidated financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended September 30,
------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 381,000 $ 2,810,000
Adjustments to reconcile net earnings to cash
flows from operating activities:
Depreciation and amortization 4,405,000 2,940,000
Other, net 747,000 618,000
Changes in assets and liabilities, net of effects from
business combinations:
(Increase) decrease in accounts receivable 2,973,000 (5,917,000)
Increase in inventories (2,515,000) (4,571,000)
Increase in prepaid expenses and
other current assets (380,000) (41,000)
Increase (decrease) in current and other liabilities (1,644,000) 2,399,000
Other, net (167,000) (125,000)
------------ ------------
Net cash provided by (used in) operating activities 3,800,000 (1,887,000)
------------ ------------
Cash flows from investing activities
Capital expenditures (2,301,000) (2,440,000)
Payments pursuant to business combinations,
net of cash acquired -- (290,000)
Proceeds from sale of partnership net assets -- 1,890,000
Other, net (301,000) (52,000)
------------ ------------
Net cash used in investing activities (2,602,000) (892,000)
------------ ------------
Cash flows from financing activities
Retirement of convertible subordinated debentures (4,992,000) --
Payments on long-term debt (1,140,000) (293,000)
Other borrowings, net 8,683,000 1,032,000
Other, net 192,000 20,000
------------ ------------
Net cash provided by financing activities 2,743,000 759,000
------------ ------------
Effect of exchange rates on cash and cash equivalents (588,000) --
------------ ------------
Net increase (decrease) in cash and cash equivalents 3,353,000 (2,020,000)
Cash and cash equivalents, beginning of period 9,673,000 9,455,000
------------ ------------
Cash and cash equivalents, end of period $ 13,026,000 $ 7,435,000
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<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 (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, 1998, the
results of operations, comprehensive earnings, and cash flows for the
three- and six-month periods ended September 30, 1998 and 1997. All
significant intercompany balances and transactions have been eliminated.
Certain items in the September 30, 1997 and March 31, 1998 condensed
consolidated financial statements and accompanying notes have been
reclassified to conform to the fiscal 1999 presentation. The results of
operations for the six months ended September 30, 1998 are not necessarily
indicative of the results to be expected for the full year.
2) In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes new standards for reporting and displaying
comprehensive income in a full set of general-purpose financial statements.
Comprehensive income is composed of net earnings and other nonowner changes
in the equity of a business enterprise during a reporting period. The
Company adopted SFAS 130 this fiscal year and now includes a Statement of
Comprehensive Earnings as part of its primary financial statements.
3) Inventories are summarized as follows:
September 30, 1998 March 31, 1998
------------------ --------------
Work-in-process $67,769,000 $63,000,000
Raw material and finished goods 5,656,000 5,813,000
----------- -----------
73,425,000 66,813,000
Less progress payments (32,273,000) (30,176,000)
=========== ===========
Total $41,152,000 $38,637,000
=========== ===========
General and administrative costs included in work-in-process were
approximately $12.8 million and $9.9 million at September 30, 1998 and
March 31, 1998, respectively. General and administrative expenses included
in costs and expenses amounted to approximately $8.8 million and $6.1
million, respectively, for the three-month periods ended September 30, 1998
and 1997, and approximately $17.3 million and $15.4 million, respectively,
for the six-month periods then ended. Included in those amounts are
expenditures for internal research and development amounting to
approximately $0.6 million and $1.1 million, respectively, for the fiscal
quarters ended September 30, 1998 and 1997, and approximately $1.4 million
and $2.1 million, respectively, for the six-month periods then ended.
4) In the first quarter of fiscal 1999, subpoenas were issued to the Company
by the United States Attorney for the Eastern District of New York seeking
documents related to certain equipment manufactured by DRS Photronics, Inc.
(Photronics), a subsidiary of the Company. These subpoenas were issued in
connection with United States v. Tress, a case involving a product
substitution allegation against an employee of Photronics. On June 26,
1998, the complaint against the employee was dismissed without prejudice.
5) The Company adopted Statement of Financial Accounting Standards No. 128,
"Earnings per Share", in fiscal 1998 beginning with the fiscal quarter
ended December 31, 1997. Accordingly, prior period earnings per share
amounts have been restated to conform to the provisions of the new
standard. Its adoption did not have a material impact on reported earnings
per share for current or restated prior periods.
Basic earnings per share is computed by dividing net earnings by the
weighted average number of shares of Common Stock outstanding during each
period. The computation of diluted earnings per
7
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
share includes the effect of shares from the assumed exercise of dilutive
stock options and, for the three- and six-month periods ended September 30,
1997, the effect of the assumed conversion of the Company's 9% Senior
Subordinated Convertible Debentures due October 2003 (the 9% Debentures)
and the Company's 8-1/2% Convertible Subordinated Debentures due August
1998 (the 8-1/2% Debentures). These debentures were antidilutive for the
three- and six-month periods ended September 30, 1998. The following table
provides the components of the per share computations:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ----------------
(in thousands, except per share data) 1998 1997 1998 1997
=======================================================================================================
<S> <C> <C> <C> <C>
Basic EPS Computation
Net earnings $ 57 $1,467 $ 381 $2,810
Weighted average common shares outstanding 6,252 5,591 6,224 5,589
Basic earnings per share $ 0.01 $ 0.26 $ 0.06 $ 0.50
=======================================================================================================
Diluted EPS Computation
Net earnings $ 57 $1,467 $ 381 $2,810
Interest and expenses related to convertible debentures -- 468 -- 933
=======================================================================================================
Adjusted earnings $ 57 $1,935 $ 381 $3,743
Weighted average common shares outstanding 6,252 5,591 6,224 5,589
Stock options 168 296 239 259
Convertible debentures:
8-1/2% Debentures -- 333 -- 333
9% Debentures -- 2,825 -- 2,825
=======================================================================================================
Diluted common shares outstanding 6,420 9,045 6,463 9,006
Diluted earnings per share $ 0.01 $ 0.21 $ 0.06 $ 0.42
=======================================================================================================
</TABLE>
6) The Company is organized into four principal operating segments on the
basis of products and services offered: the Electronic Systems Group (ESG),
the Data Systems Group (DSG), the Electro-Optical Systems Group (EOSG), and
the Flight Safety and Communications Group (FS&C). Each operating group is
comprised of separate and distinct businesses. Corporate operations include
the activities of the parent company, DRS Technologies, Inc., and several
non-operating subsidiaries of the Company. Included in Corporate operations
for the three- and six-month periods ended September 30, 1997 are the
results of operations from DRS Medical Systems. During the quarter ended
September 30, 1998, DRS's military recording systems subsidiary, DRS
Precision Echo, was combined with the Flight Safety and Communications
Group, due to business synergies. As a result, the information shown below
has been restated to include DRS Precision Echo with FS&C for all periods
presented. DSG now includes the operations of DRS Ahead Technology only.
Information about the Company's operations in these segments for the three-
and six-month periods ended September 30, 1998 and 1997 is as follows:
8
<PAGE>
<TABLE>
<CAPTION>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
(in thousands)
ESG DSG EOSG FS&C Corporate Total
------- -------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended September 30, 1998
Revenues $24,792 $ 5,357 $ 6,518 $ 9,459 $ -- $ 46,126
Operating income (loss) 1,938 (761) (53) 704 (79) 1,749
Identifiable assets 35,748 15,225 43,237 53,378 15,542 163,130
Depreciation and amortization 281 546 520 680 185 2,212
Capital expenditures 493 121 169 403 86 1,272
Quarter Ended September 30, 1997
Revenues $17,897 $ 6,520 $ 7,596 $ 6,267 $ 458 $ 38,738
Operating income (loss) 2,361 885 (144) 69 114 3,285
Identifiable assets 33,789 19,952 23,880 16,209 9,346 103,176
Depreciation and amortization 240 502 479 148 152 1,521
Capital expenditures 194 404 546 64 131 1,339
(in thousands)
<CAPTION>
ESG DSG EOSG FS&C Corporate Total
------- -------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended September 30, 1998
Revenues $48,730 $ 10,654 $ 12,437 $ 20,293 $ -- $ 92,114
Operating income (loss) 3,689 (690) (255) 1,298 (227) 3,815
Identifiable assets 35,748 15,225 43,237 53,378 15,542 163,130
Depreciation and amortization 538 1,092 1,122 1,311 342 4,405
Capital expenditures 893 247 393 465 303 2,301
Six Months Ended September 30, 1997
Revenues $40,318 $ 12,996 $ 12,914 $ 9,797 $ 1,710 $ 77,735
Operating income 3,922 1,698 125 404 35 6,184
Identifiable assets 33,789 19,952 23,880 16,209 9,346 103,176
Depreciation and amortization 566 991 820 294 269 2,940
Capital expenditures 511 877 618 129 305 2,440
</TABLE>
7) On August 26, 1998, the Company signed a definitive agreement to acquire
NAI Technologies, Inc. (NAI). NAI, based in Huntington, New York, is a
diversified, international electronics company and provider of rugged
computers, peripheral equipment and integrated systems for military and
governmental applications. NAI reported revenues from continuing operations
of $47.8 million for the year ended December 31, 1997 and $34.7 million for
the nine months ended September 30, 1998. The transaction, which is to be
consummated via exchange of shares, is subject to stockholder and
regulatory approvals. The Company expects to complete this transaction by
the end of fiscal 1999.
On October 20, 1998 the Company acquired, through certain of its
subsidiaries, certain assets of the Second Generation Ground Based Electro
Optics (Ground EO) and Focal Plane Array (FPA) businesses (together, the
EOS Business) of Raytheon Company and certain of its subsidiaries
(Raytheon), pursuant to an Asset Purchase Agreement dated as of July 28,
1998, between the Company and Raytheon, as amended. The Company paid
approximately $45 million in cash for the acquisition at closing; the
purchase price is subject to certain post-closing adjustments, based on
audited closing date financial statements for the EOS Business when
available. Any upward adjustment may not exceed $7 million.
9
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
The EOS Business provides products used in the detection, identification
and acquisition of targets based on infrared data. Primary programs include
the U.S. Army's Horizontal Technology Integration Second Generation FLIR
(Forward-Looking Infra-Red) (HTI SGF), the Long-Range Advanced Scout
Surveillance System (LRAS3), the Improved Bradley Acquisition System (IBAS)
and the JAVELIN missile programs. Ground EO, renamed DRS Sensor Systems,
Inc., has 47 employees based in El Segundo, California; and FPA, renamed
DRS Infared Technologies, LP, has 186 employees located in Dallas, Texas.
8) In connection with the acquisition of the EOS Business, on October 20,
1998, the Company and certain of its subsidiaries entered into a $150
million secured credit facility (Facility) with Mellon Bank, N.A.,
consisting of two term loans: the first in the principal amount of $30
million dollars (First Term Loan), and the second in the principal amount
of $50 million dollars (Second Term Loan); and a revolving line of credit
(Line of Credit) in an amount up to $70 million. The maturity dates of the
First Term Loan and the Second Term Loan are October 20, 2003 and October
20, 2005, respectively, with quarterly principal payments beginning on June
30 1999. The Line of Credit matures on October 20, 2003. The Facility
amends, restates and replaces the Company's existing $60 million secured
credit facility consisting of a $20 million term loan and a $40 million
revolving line of credit. The Second Term Loan was used to finance a
portion of the acquisition of the EOS Business. The First Term Loan and the
Line of Credit are available for working capital, general corporate
purposes and acquisitions. The Facility is secured by substantially all of
the assets of the Company. Borrowings can be made in United States dollars
at rates based on LIBOR (London Interbank Offering Rate) or United States
Prime or in Canadian dollars at rates based on LIBOR, Canadian Prime or the
Canadian Bankers Acceptance Rate. The 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.
10
<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, the Company) as of September 30, 1998 and for the
three- and six-month periods ended September 30, 1998 and 1997. 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, 1998.
The following discussion and analysis contains 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. 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 materially
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 and Related Activities
On August 26, 1998, the Company signed a definitive agreement to acquire
NAI Technologies, Inc. (NAI). NAI, based in Huntington, New York, is a
diversified, international electronics company and provider of rugged computers,
peripheral equipment and integrated systems for military and governmental
applications. NAI reported revenues from continuing operations of $47.8 million
for the year ended December 31, 1997 and $34.7 million for the nine months ended
September 30, 1998. The transaction, which is to be consummated via exchange of
shares, is subject to stockholder and regulatory approvals. The Company expects
to complete this transaction by the end of fiscal 1999.
On October 20, 1998 the Company acquired, through certain of its
subsidiaries, certain assets of the Second Generation Ground Based Electro
Optics (Ground EO) and Focal Plane Array (FPA) businesses (together, the EOS
Business) of Raytheon Company and certain of its subsidiaries (Raytheon),
pursuant to an Asset Purchase Agreement dated as of July 28, 1998, between the
Company and Raytheon, as amended. The Company paid approximately $45 million in
cash for the acquisition at closing; the purchase price is subject to certain
post-closing adjustments, based on audited closing date financial statements for
the EOS Business when available. Any upward adjustment may not exceed $7
million. The EOS Business provides products used in the detection,
identification and acquisition of targets based on infrared data. Primary
programs include the U.S. Army's Horizontal Technology Integration Second
Generation FLIR (Forward-Looking Infra-Red) (HTI SGF), the Long-Range Advanced
Scout Surveillance System (LRAS3), the Improved Bradley Acquisition System
(IBAS) and the JAVELIN missile programs. Ground EO, renamed DRS Sensor Systems,
Inc., has 47 employees based in El Segundo, California; and FPA, renamed DRS
Infared Technologies, LP, has 186 employees located in Dallas, Texas.
11
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
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:
<TABLE>
<CAPTION>
Percent of Revenues Percent of Revenues
------------------- -------------------
Three Months Ended Percent Six Months Ended Percent
September 30, Changes September 30, Changes
------------------- ------------- -------------------- -------------
1998 1997 1998 vs. 1997 1998 1997 1998 vs. 1997
------ ------ ------------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 19.1% 100.0% 100.0% 18.5%
Costs and expenses 96.2 91.5 25.2% 95.9 92.0 23.4%
----- ----- ----- -----
Operating income 3.8 8.5 (46.8%) 4.1 8.0 (38.3%)
Interest and related expenses (3.3) (2.3) 71.5% (3.4) (2.3) 72.8%
Interest and other income, net 0.2 1.2 (76.1%) 0.4 0.9 (52.5%)
Minority interest (0.5) (1.3) (55.6%) (0.5) (0.8) (30.6%)
----- ----- ----- -----
Earnings before income taxes 0.2 6.1 (96.1%) 0.6 5.8 (86.4%)
Income taxes 0.1 2.2 (96.2%) 0.2 2.1 (86.4%)
----- ----- ----- -----
Net earnings 0.1% 3.9% (96.1%) 0.4% 3.7% (86.4%)
===== ===== ===== =====
</TABLE>
The Company is organized into four principal operating segments on the
basis of products and services offered: the Electronic Systems Group (ESG), the
Data Systems Group (DSG), the Electro-Optical Systems Group (EOSG), and the
Flight Safety and Communications Group (FS&C). Each operating group is comprised
of separate and distinct businesses. During the period, DRS's military recording
systems subsidiary, DRS Precision Echo, was combined with the Flight Safety and
Communications Group, due to business synergies. As a result, the information
shown below has been restated to include DRS Precision Echo with FS&C for all
periods presented. DSG now includes the operations of DRS Ahead Technology only.
The following tables set forth, by operating segment, revenues, operating
income, operating margin and the percentage increase or decrease of those items
as compared with the prior period:
12
<PAGE>
<TABLE>
<CAPTION>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Three Months Ended Six Months Ended
September 30, Percent Changes September 30, Percent Changes
---------------------- --------------- --------------------- ---------------
1998 1997 1998 vs. 1997 1998 1997 1998 vs. 1997
------- ---------- --------------- ------- --------- ---------------
(in thousands, except for percentages)
<S> <C> <C> <C> <C> <C> <C>
ESG
Revenues $24,792 $ 17,897 38.5% $48,730 $ 40,318 20.9%
Operating income $ 1,938 $ 2,361 (17.9%) $ 3,689 $ 3,922 (5.9%)
Operating margin 7.8% 13.2% (40.7%) 7.6% 9.7% (22.2%)
DSG
Revenues $ 5,357 $ 6,520 (17.8%) $10,654 $ 12,996 (18.0%)
Operating income (loss) $ (761) $ 885 (186.0%) $ (690) $ 1,698 (140.6%)
Operating margin (14.2%) 13.6% (204.7%) (6.5%) 13.1% (149.6%)
EOSG
Revenues $ 6,518 $ 7,596 (14.2%) $12,437 $ 12,914 (3.7%)
Operating income (loss) $ (53) $ (144) (63.2%) $ (255) $ 125 (304.0%)
Operating margin (0.8%) (1.9%) (57.1%) (2.1%) 1.0% (311.8%)
FS&C
Revenues $ 9,459 $ 6,267 50.9% $20,293 $ 9,797 107.1%
Operating income $ 704 $ 69 920.3% $ 1,298 $ 404 221.3%
Operating margin 7.4% 1.1% 576.0% 6.4% 4.1% 55.1%
</TABLE>
ESG's revenue growth was attributable primarily to increased shipments of
the group's military display workstations and coastal surveillance systems. The
decrease in ESG's operating income and operating income percentage for the
three- and six-month periods ended September 30, 1998 resulted primarily from a
shift in revenue mix in the current periods to a higher percentage of revenues
from the AN/UYQ-70 Advanced Display System tactical workstation (Q-70) program
with the U.S. Navy. Margins are generally lower on the Q-70 program compared
with certain other product lines, due to its significant
commercial-off-the-shelf component content.
The decrease in revenues at DSG resulted from the continuing effects of the
sluggish global computer disk drive marketplace, competitive pricing pressure on
certain other magnetic tape head products and delays in production on certain
products transferred from the closed Dassel, Minnesota facility (Dassel
facility) to other DSG locations. The decrease in DSG's operating income and
operating income percentage in the three- and six-month periods ending September
30, 1998 was the result of lower revenues, as discussed above, and start-up
costs associated with the Group's Bulgarian manufacturing facility. These
results also included charges incurred this fiscal quarter of approximately $0.5
million for costs relating to the closing of the Dassel facility and reserves
for certain receivables and inventory, necessitated by the bankruptcy filing of
a customer. In November 1998, DSG effected a 25% reduction in force in its San
Jose, California operation in response to the decrease in sales volume. DSG
intends to continue its cost reduction efforts.
The decrease in revenues at EOSG was primarily attributable to the
continued delay in revenue recognition for boresighting systems, resulting from
the Company's inability to ship these products. This situation resulted from a
complaint filed against an employee of DRS Photronics, Inc. and a government
investigation that ensued during the first quarter. Although the complaint was
dismissed without prejudice in June, the Company has not yet received
authorization to resume shipments of these products. The Company cannot predict
when such shipments will resume, however, these delays are expected to continue
to impact overall fiscal 1999 results. This decrease was partially offset by
revenues of $1.0 million and $2.7 million for the three- and six-month periods
ended September 30, 1998, respectively, generated by DRS Hadland Ltd. acquired
in March 1998. Operating results for the three- and six-month periods ended
September 30, 1997 reflect the effect of a second quarter restructuring charge
of $471,000, associated with the relocation of the Group's boresight operations
from Hauppauge, New York to Oakland, New Jersey.
13
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
The operating losses generated for the three- and six-months ended September 30,
1998 were primarily due to the decrease in revenues caused by the Group's
inability to ship boresight product.
FS&C's revenue growth was attributable to shipments of the Group's flight
safety and communications products and to revenues from contract manufacturing
services, both generated by businesses acquired in the second half of fiscal
1998. The increase in operating income and operating margin resulted from the
increase in revenues, as explained above, partially offset by decreases in the
Group's military data recording systems product line margins resulting from
lower revenues and a change in product mix.
Interest and related expenses were approximately $1.5 million and $0.9
million for the three-month periods ended September 30, 1998 and 1997,
respectively, and $3.1 million and $1.8 million for the six-month periods ended
September 30, 1998 and 1997, respectively. The increase in interest and related
expenses was primarily attributable to increases in debt associated with the
fiscal 1998 acquisitions.
Interest and other income, net was $0.1 million and $0.4 million,
respectively, for the three-month periods ended September 30, 1998 and 1997, and
$0.3 million and $0.7 million, respectively, for the six-month periods then
ended. Included in interest and other income, net in the fiscal 1998 period was
approximately $0.3 million from the sale of the net assets of DRS Medical
Systems.
Minority interest decreased to $0.2 million and $0.4 million, respectively
for the three- and six-month periods ended September 30, 1998 from $0.5 million
and $0.6 million in the comparable prior-year periods. The decrease is
associated with the fiscal 1998 sale of DRS Medical Systems, in which the
Company had a 90% interest.
The Company's effective tax rate for the three- and six-month periods ended
September 30, 1998 and 1997 was 37%. The Company records income tax expense
based on an estimated effective income tax rate for the full fiscal year. The
provision for income taxes includes all estimated income taxes payable to
federal, state and foreign governments, as applicable.
Financial Condition and Liquidity
Cash and Cash Flow: Cash and cash equivalents at September 30, 1998 and
March 31, 1998 represented approximately 8% and 6%, respectively, of total
assets. During the six-month period ended September 30, 1998, cash increased by
approximately $3.4 million. The Company generated operating cash flow of $3.8
million, which included $7.1 million in net advance payments relating to a major
program. Net cash provided by financing activities for the period to date was
$2.7 million. Long-term debt repayments of $6.1 million included approximately
$5.0 million for the retirement of the Company's 8-1/2% convertible subordinated
debentures. Additional borrowings under the Company's credit facility were $8.7
million for the six-month period. Cash used in investing activities consisted
primarily of $2.3 million for capital expenditures. Capital expenditures,
excluding acquired businesses, are expected to approximate $6.0 million for the
fiscal year ending March 31, 1999. The majority of these expenditures will be
for computer and production-related equipment.
In connection with the acquisition of the EOS Business, on October 20,
1998, the Company and certain of its subsidiaries entered into a $150 million
secured credit facility (Facility) with Mellon Bank, N.A., consisting of two
term loans: the first in the principal amount of $30 million dollars (First Term
Loan), and the second in the principal amount of $50 million dollars (Second
Term Loan); and a revolving line of credit (Line of Credit) in an amount up to
$70 million. The maturity dates of the First Term Loan and the Second Term Loan
are October 20, 2003 and October 20, 2005, respectively, with quarterly
principal payments beginning on June 30 1999. The Line of Credit matures on
October 20, 2003. The Facility amends, restates and replaces the Company's
existing $60 million secured credit facility consisting of a $20 million term
loan and a $40 million revolving line of credit. The Second Term Loan was used
to finance a portion of the acquisition of the EOS Business. The First Term Loan
and the Line of Credit are available for working
14
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
capital, general corporate purposes and acquisitions. The Facility is secured by
substantially all of the assets of the Company. Borrowings can be made in United
States dollars at rates based on LIBOR (London Interbank Offering Rate) or
United States Prime or in Canadian dollars at rates based on LIBOR, Canadian
Prime or the Canadian Bankers Acceptance Rate. The 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. In connection with this financing, the
Company expects to record an extraordinary charge in the third quarter totaling
approximately $4.0 million, for the remaining balance of fees capitalized on the
$60 million facility and financing fees incurred for the new Facility.
With the new Facility described above, 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 decreased by
approximately $3.9 million in the six-month period ended September 30, 1998,
primarily due to the collection of certain progress billings from the prior
year. Included in accounts receivable at September 30, 1998 and March 31, 1998
are $0.7 million and $0.8 million, respectively, arising from retainage
provisions in certain contracts with the Canadian government, which may not be
collected within one year.
Inventories increased by approximately $2.5 million from March 31, 1998,
due primarily to increases in production activities.
September 30, 1998 March 31, 1998
------------------ --------------
Quick ratio 1.1 1.0
Current ratio 1.9 1.8
Liabilities-to-equity ratio 2.6 2.7
Long-term debt (excluding current
installments) to total capitalization 55.8% 56.0%
Backlog: Backlog at September 30, 1998 was approximately $211.3 million, as
compared with $177.4 million at March 31, 1998. The increase in backlog was due
to the net effect of bookings, partially offset by revenues. New contract awards
of approximately $76.0 million and $128.9 million were booked in the three- and
six-month periods ended September 30, 1998.
Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130). SFAS 130 establishes new standards for reporting and display of
comprehensive income in a full set of general-purpose financial statements. The
Company adopted SFAS 130 this fiscal year and now includes a Statement of
Comprehensive Earnings as part of its primary financial statements.
Accounting Pronouncements Not Yet Adopted
In April 1998, the AICPA issued Statement of Position (SOP) No. 98-5,
"Reporting on the Costs of Start-Up Activities." This accounting standard, which
is effective for fiscal years beginning after December 15, 1998, provides
authoritative guidance on accounting and financial reporting related to costs of
start-up activities. This SOP requires that, at the effective date of adoption,
costs of start-up activities previously capitalized be expensed and reported as
a cumulative effect of a change in accounting principle, and further requires
that such costs subsequent to adoption be expensed as incurred. The Company does
not
15
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
anticipate the effect of adopting this standard to be material to the Company's
consolidated results of operations.
Year 2000
DRS has begun the process of organizing its Year 2000 Project in order to
evaluate the issue of computer software databases and embedded computer chips
that are not able to distinguish between the year 1900 and the year 2000. DRS'
Year 2000 Project is divided into three major sections: (1) IT Systems (which
examines operating systems and business application software); (2) External
Agents (which examines third-party suppliers and customers); and (3) Product
Issues (which examines Year 2000 issues inherent in products sold by DRS).
The IT Systems section evaluates hardware and systems software. DRS has
substantially completed its evaluation of its main internal operating systems
and business application software. As a result of this evaluation, DRS has begun
the process of implementing the necessary changes in its internal systems to
achieve Year 2000 compliance in this area. This process is currently on
schedule. DRS estimates that if this process stays on schedule, IT Systems
activities are expected to be Year 2000 compliant by October 1999.
The External Agents section includes the process of identifying and
prioritizing critical suppliers and customers at the direct interface level, and
communicating with them about their plans and progress in addressing the Year
2000 problem. Year 2000 compliance issues at critical suppliers creates risk for
DRS since their inability to operate effectively could impact our business.
Possible problems for DRS could include isolated performance problems with
manufacturing or administrative systems, isolated interruption of deliveries
from critical suppliers and product liability issues. The consequences of these
issues may include increases in manufacturing and administrative costs until the
problems are resolved, lost revenues, lower cash receipts and product liability.
DRS does not have control over these third parties and, as a result, cannot
currently estimate to what extent the future operating results of DRS may be
adversely affected by the failure of these third parties to address successfully
their Year 2000 issues. Failure by critical suppliers and customers (in
particular, the U.S. Government, on which DRS is materially dependent), however,
to achieve Year 2000 compliance in a timely manner could have a material adverse
effect on the Company's operations. Detailed evaluations of the most critical
third parties have not been initiated but should commence before December 31,
1998 under the External Agents section of DRS' Year 2000 Project and should be
completed by mid-1999. These evaluations will be followed by corrective actions
and the development of contingency plans, if considered necessary.
The Product Issues section includes the process of identifying any products
sold by DRS which may not be Year 2000 compliant, determining a corrective
course of action and disseminating information with respect thereto to
customers. Although many of DRS' products that have integrated software are Year
2000 compliant, there can be no assurances that all of DRS' products are
currently Year 2000 compliant. DRS's costs to achieve Year 2000 compliance will
include the costs and expenses of fulfilling warranty obligations on
non-compliant products. Detailed evaluations of certain products have been
initiated, and completion of this phase of the Company's Year 2000 project
should be completed by mid-1999. These evaluations will be followed by
corrective actions and the development of contingency plans, if considered
necessary.
Total costs associated with required IT Systems modifications to become
Year 2000 compliant are not expected to have a material effect on the
consolidated result of operations, cash flows or financial position of DRS. To
the extent recoverable under the terms of contracts with its customers, DRS's
compliance costs will be included in establishing prices for the Company's
products and services, and therefore will be reflected in the Company's revenues
and costs and expenses. Uncertainties exist, however, as to DRS' ability to
detect in a timely manner all Year 2000 problems as well as its ability to
achieve successful and timely resolution of all Year 2000 issues. Consequently,
there can be no assurances as to the amount of total cost associated with
implementing DRS' Year 2000 Project and, as a result, the effect of such cost on
the consolidated result of operations, cash flows or financial position of DRS.
16
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect DRS' results of
operations, liquidity and financial condition. Due to the general uncertainty
inherent in the Year 2000 problem, resulting in part from the uncertainty of the
Year 2000 readiness of third-party suppliers and customers, DRS is unable to
determine at this time whether the consequences of Year 2000 failure will have a
material impact on DRS' results of operations, liquidity or financial condition.
DRS has begun the process of devising and implementing its Year 2000 Project
with the intention of significantly reducing DRS' level of risk regarding the
Year 2000 problem. DRS expects that if its Year 2000 Project is completed as
scheduled, the risk of significant interruptions of normal operations should be
reduced.
17
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In the first quarter of fiscal 1999, subpoenas were issued to the
Company by the United States Attorney for the Eastern District of New
York seeking documents related to certain equipment manufactured by DRS
Photronics, Inc. (Photronics), a subsidiary of the Company. The
subpoenas were issued in connection with United States v. Tress, a case
involving a product substitution allegation against an employee of
Photronics. On June 26, 1998, the complaint against the employee was
dismissed without prejudice.
Item 4. Submission of Matters to a Vote of Security Holders
On August 5, 1998, 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 three Class III directors, each to hold office for a
term of three years;
(ii) to consider and vote upon a proposal to ratify and approve the
designation of KPMG Peat Marwick LLP as the independent
certified public accountants for the Company; and
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):
Stuart F. Platt 4,948,526 0 31,640
William F. Heitmann 4,946,226 0 33,940
Eric J. Rosen 4,942,326 0 37,840
Proposal (ii): 4,961,035 10,095 9,036
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
18
<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 13, 1998 /s/ NANCY R. PITEK
-------------------------------------
Nancy R. Pitek
Vice President, Finance and Treasurer
19
<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, 1998 AND RESTATED INFORMATION FOR THE FISCAL QUARTER ENDED
SEPTEMBER 30,1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> 0
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<CURRENCY> U.S. $ U.S. $
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1998
<PERIOD-START> Jul-01-1998 Jul-01-1997
<PERIOD-END> Sep-30-1998 Sep-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 13,026,000 7,435,000
<SECURITIES> 0 0
<RECEIVABLES> 44,167,000 29,747,000
<ALLOWANCES> 872,000 0
<INVENTORY> 41,152,000 27,901,000
<CURRENT-ASSETS> 99,686,000 66,452,000
<PP&E> 57,955,000 50,915,000
<DEPRECIATION> 35,294,000 30,342,000
<TOTAL-ASSETS> 163,130,000 103,176,000
<CURRENT-LIABILITIES> 51,456,000 34,966,000
<BONDS> 57,819,000 25,507,000
0 0
0 0
<COMMON> 67,000 60,000
<OTHER-SE> 45,658,000 35,939,000
<TOTAL-LIABILITY-AND-EQUITY> 163,130,000 103,176,000
<SALES> 46,126,000 38,738,000
<TOTAL-REVENUES> 46,126,000 38,738,000
<CGS> 44,377,000 35,453,000
<TOTAL-COSTS> 44,377,000 35,453,000
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,542,000 899,000
<INCOME-PRETAX> 90,000 2,330,000
<INCOME-TAX> 33,000 863,000
<INCOME-CONTINUING> 57,000 1,467,000
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
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<NET-INCOME> 57,000 1,467,000
<EPS-PRIMARY> 0.01 0.26
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</TABLE>
