================================================================================
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 June 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 August 7, 1998, 6,212,976 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 - June 30, 1998 and March
31, 1998......................................................... 3
Condensed Consolidated Statements of Earnings - Three Months
Ended June 30, 1998 and 1997..................................... 4
Condensed Consolidated Statements of Comprehensive Earnings -
Three Months Ended June 30, 1998 and 1997........................ 5
Condensed Consolidated Statements of Cash Flows - Three Months
Ended June 30, 1998 and 1997..................................... 6
Notes to Condensed Consolidated Financial Statements............. 7-9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 10-15
Item 3. Not Applicable
PART 2. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 16
Item 2. Not Applicable
Item 3. Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders.............. 16
Item 5. Not Applicable
Item 6. Exhibits and Reports on Form 8-K................................. 16
SIGNATURES ....................................................................... 17
</TABLE>
2
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................................. $ 7,820,000 $ 9,673,000
Accounts receivable, net ................................................... 37,929,000 47,273,000
Inventories, net of progress payments ...................................... 40,007,000 38,637,000
Prepaid expenses and other current assets .................................. 2,446,000 1,849,000
------------- -------------
Total current assets ................................................. 88,202,000 97,432,000
Property, plant and equipment, less accumulated depreciation and amortization
of $33,860,000 and $32,457,000 at June 30, 1998 and March 31, 1998,
respectively ............................................................... 22,483,000 22,972,000
Intangible assets, less accumulated amortization of
$6,357,000 and $6,061,000 at June 30, 1998 and
March 31, 1998, respectively ............................................... 32,265,000 33,070,000
Other assets ....................................................................... 9,842,000 9,999,000
------------- -------------
$ 152,792,000 $ 163,473,000
============== =============
Liabilities and Stockholders' Equity
Current liabilities:
Short-term bank debt ....................................................... $ 8,589,000 $ 5,100,000
Current installments of long-term debt ..................................... 8,028,000 7,514,000
Other current liabilities .................................................. 29,545,000 42,692,000
------------- -------------
Total current liabilities ............................................ 46,162,000 55,306,000
Long-term debt, excluding current installments ..................................... 54,449,000 56,532,000
Deferred income taxes .............................................................. 3,897,000 3,897,000
Other liabilities .................................................................. 3,703,000 3,403,000
------------- -------------
Total liabilities .................................................... 108,211,000 119,138,000
Stockholders' equity:
Preferred Stock, no par value. Authorized 2,000,000 shares;
no shares issued at June 30, 1998 and March 31, 1998 ....................... $ -- $ --
Common Stock, $.01 par value per share
Authorized 20,000,000 shares; issued 6,604,437
and 6,596,237 shares at June 30, 1998 and
March 31, 1998, respectively ............................................... 66,000 66,000
Additional paid-in capital ......................................................... 19,453,000 19,399,000
Retained earnings .................................................................. 27,381,000 27,057,000
Accumulated other comprehensive earnings ........................................... (326,000) (135,000)
Treasury stock, at cost:
402,461 shares of Common Stock at
June 30, 1998 and March 31, 1998 ........................................... (1,561,000) (1,561,000)
Unamortized restricted stock compensation .......................................... (432,000) (491,000)
------------- -------------
Net stockholders' equity ................................................... 44,581,000 44,335,000
------------- -------------
Commitments and contingencies ...................................................... -- --
$ 152,792,000 $ 163,473,000
============== =============
See accompanying notes to condensed consolidated financial statements.
3
</TABLE>
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Revenues ................................................................. $ 45,988,000 $ 38,997,000
Costs and expenses ....................................................... 43,922,000 36,098,000
------------ ------------
Operating income ..................................................... 2,066,000 2,899,000
Interest and related expenses ............................................ (1,571,000) (903,000)
Interest and other income, net ........................................... 221,000 243,000
Minority interest ........................................................ (201,000) (108,000)
------------ ------------
Earnings before income taxes ......................................... 515,000 2,131,000
Income taxes ............................................................. 191,000 788,000
------------ ------------
Net earnings ......................................................... $ 324,000 $ 1,343,000
============ ============
Earnings per share of common stock:
Basic ................................................................ $ 0.05 $ 0.24
Diluted .............................................................. $ 0.05 $ 0.20
See accompanying notes to condensed consolidated financial statements.
4
</TABLE>
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Earnings
(Unaudited)
Three Months Ended
June 30,
-------------------------
1998 1997
- -----------------------------------------------------------------------------
Comprehensive earnings
Net earnings ................................... $ 324,000 $ 1,343,000
Other comprehensive earnings:
Foreign currency translation adjustment ...... (191,000) --
- -----------------------------------------------------------------------------
Comprehensive earnings ........................... $ 133,000 $ 1,343,000
- -----------------------------------------------------------------------------
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net earnings ...................................... $ 324,000 $ 1,343,000
Adjustments to reconcile net earnings to cash
flows from operating activities:
Depreciation and amortization ..................... 2,193,000 1,419,000
Other, net ........................................ 214,000 592,000
Changes in assets and liabilities, net of effects from
business combinations:
(Increase) decrease in accounts receivable ........ 8,878,000 (787,000)
(Increase) decrease in inventories ................ (1,579,000) 566,000
Increase in prepaid expenses and
other current assets ........................... (470,000) (27,000)
Decrease in current and other liabilities ......... (12,648,000) (3,023,000)
Other, net ........................................ (330,000) (135,000)
------------ ------------
Net cash used in operating activities ............. (3,418,000) (52,000)
------------ ------------
Cash flows from investing activities
Capital expenditures .............................. (1,029,000) (1,101,000)
Other, net ........................................ (211,000) (340,000)
------------ ------------
Net cash used in investing activities ............. (1,240,000) (1,441,000)
------------ ------------
Cash flows from financing activities
Net borrowings (repayments) of short-term debt .... 3,353,000 (441,000)
Payments on long-term debt ........................ (464,000) (142,000)
Other, net ........................................ 54,000 4,000
------------ ------------
Net cash provided by (used in) financing activities 2,943,000 (579,000)
------------ ------------
Effect of exchange rates on cash and cash equivalents ... (138,000) --
------------ ------------
Net decrease in cash and cash equivalents ............... (1,853,000) (2,072,000)
Cash and cash equivalents, beginning of period .......... 9,673,000 9,455,000
------------ ------------
Cash and cash equivalents, end of period ................ $ 7,820,000 $ 7,383,000
============ ============
</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 June 30, 1998, and the
results of operations, comprehensive earnings and cash flows for the
three-month periods ended June 30, 1998 and 1997. All significant
intercompany balances and transactions have been eliminated. Certain items
in the June 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 three months
ended June 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 display of
comprehensive income in a full set of general-purpose financial statements.
Comprehensive income is composed of net earnings and other nonowner changes
in 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:
June 30, 1998 March 31, 1998
------------- --------------
Work-in-process ........................ $61,687,000 $63,000,000
Raw material and finished goods ........ 5,664,000 5,813,000
----------- -----------
67,351,000 66,813,000
Less progress payments ................. (27,344,000) (30,176,000)
----------- -----------
Total .................................. $40,007,000 $38,637,000
=========== ===========
General and administrative costs included in work-in-process were
approximately $11.7 million and $9.9 million at June 30, 1998 and March 31,
1998, respectively. General and administrative expenses included in costs
and expenses amounted to approximately $8.5 million and $9.4 million for
the three months ended June 30, 1998 and 1997, respectively. Included in
those amounts are expenditures for internal research and development
amounting to approximately $.8 million and $1.0 million for the fiscal
quarters ended June 30, 1998 and 1997, respectively.
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.
7
<PAGE>
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 of Common Stock outstanding during each period. The
computation of diluted earnings per share includes the effect of shares
from the assumed exercise of dilutive stock options and, for the three
month period ended June 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 first quarter of fiscal 1999. The following table
provides the components of the per share computations:
<TABLE>
<CAPTION>
Three Months Ended
June 30,
---------------------
(in thousands, except per share data) 1998 1997
<S> <C> <C>
- ------------------------------------------------------------------------------------------
Basic EPS Computation
Net earnings ..................................................... $ 324 $ 1,343
Weighted average common shares outstanding ....................... 6,197 5,588
Basic earnings per share ......................................... $ 0.05 $ 0.24
- ------------------------------------------------------------------------------------------
Diluted EPS Computation
Net earnings ..................................................... $ 324 $ 1,343
Interest and expenses related to convertible
debentures ..................................................... -- 464
- ------------------------------------------------------------------------------------------
Adjusted earnings ................................................ $ 324 $ 1,807
Weighted average common shares outstanding ....................... 6,197 5,588
Stock options .................................................... 321 221
Convertible debentures:
8-1/2% Debentures ................................................ -- 333
9% Debentures .................................................... -- 2,825
- ------------------------------------------------------------------------------------------
Diluted common shares outstanding ................................ 6,518 8,967
Diluted earnings per share ....................................... $ 0.05 $ 0.20
==========================================================================================
</TABLE>
<PAGE>
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
Flight Safety and Communications (FS&C). Each operating unit 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 quarter ended June 30, 1997 are the results of operations from DRS
Medical Systems. Information about the Company's operations in these
segments for the fiscal quarters ended June 30, 1998 and 1997 is as
follows:
(in thousands)
<TABLE>
<CAPTION>
ESG DSG EOSG FS&C Corporate Total
-------- -------- ------- ------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended June 30, 1998
Revenues ............................ $ 23,938 $ 9,232 $ 5,919 $ 6,899 $ -- $ 45,988
Operating income .................... 1,751 161 (202) 504 (148) 2,066
Identifiable assets ................. 27,561 34,496 41,756 37,126 11,853 152,792
Depreciation and amortization ....... 257 703 602 474 157 2,193
Capital expenditures ................ 400 151 224 37 217 1,029
Quarter Ended June 30, 1997
Revenues ............................ $ 22,421 $ 10,006 $ 5,318 $ -- $ 1,252 $ 38,997
Operating income .................... 1,561 1,148 269 -- (79) 2,899
Identifiable assets ................. 24,560 33,852 20,561 -- 16,702 95,675
Depreciation and amortization ....... 326 635 341 -- 117 1,419
Capital expenditures ................ 317 538 72 -- 174 1,101
</TABLE>
7) On April 3, 1998, the Company signed a non-binding letter of intent to
acquire NAI Technologies, Inc. (NAI). NAI, based in Huntington, New York,
is a diversified, international electronics company and is a provider of
rugged computers, peripheral equipment and integrated systems for military,
government and commercial applications. NAI reported revenues of
approximately $52 million for the year ended December 31, 1997 and $24.7
million for the six months ended June 30, 1998. The transaction, which is
to be consummated via exchange of shares, is subject to the negotiation of
a definitive merger agreement and receipt of stockholder and regulatory
approvals. The Company expects to complete this transaction in the third
quarter of fiscal 1999.
On July 28, 1998, the Company entered into an agreement with Raytheon
Company and certain of its subsidiaries for the purchase of assets used to
conduct a portion of both its Second Generation Ground Electro-Optical
Systems (Ground EO) business and a portion of its Focal Plane Array (FPA)
business for approximately $45 million in cash, subject to adjustment for
changes in net assets of the businesses between December 31, 1997 and the
transaction closing date. The transaction, which is subject to approval of
the US Department of Defense and Department of Justice, is expected to
close in the second quarter of fiscal 1999. The Ground EO and FPA
businesses provide 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. The Ground EO business is based in El
Segundo, California; the FPA business is located in Dallas, Texas.
9
<PAGE>
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 June 30, 1998 and for the
three-month periods ended June 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 April 3, 1998, the Company signed a non-binding letter of intent to
acquire NAI Technologies, Inc. (NAI). NAI, based in Huntington, New York, is a
diversified, international electronics company and is a provider of rugged
computers, peripheral equipment and integrated systems for military, government
and commercial applications. NAI reported revenues of approximately $52 million
for the year ended December 31, 1997 and $24.7 million for the six months ended
June 30, 1998. The transaction, which is to be consummated via exchange of
shares, is subject to the negotiation of a definitive merger agreement and
receipt of stockholder and regulatory approvals. The Company expects to complete
this transaction in the third quarter of fiscal 1999.
On July 28, 1998, the Company entered into an agreement with Raytheon
Company and certain of its subsidiaries for the purchase of assets used to
conduct a portion of both its Second Generation Ground Electro-Optical Systems
(Ground EO) business and a portion of its Focal Plane Array (FPA) business for
approximately $45 million in cash, subject to adjustment for changes in net
assets of the businesses between December 31, 1997 and the transaction closing
date. The transaction, which is subject to approval of the US Department of
Defense and Department of Justice, is expected to close in the second quarter of
fiscal 1999. The Ground EO and FPA businesses provide 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. The Ground EO business is based
in El Segundo, California; the FPA business is located in Dallas, Texas.
10
<PAGE>
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:
- --------------------------------------------------------------------------------
Percent of Revenues
--------------------
Three Months Ended Percent
June 30, Changes
------------------- -------------
1998 1997 1998 vs. 1997
----- ----- -------------
Revenues ............................. 100.0% 100.0% 17.9%
Costs and expenses ................... 95.5 92.6 21.7%
----- -----
Operating income ................ 4.5 7.4 (28.7%)
Interest and related expenses ........ (3.4) (2.3) 74.0%
Interest and other income, net ....... 0.5 0.6 (9.1%)
Minority interest .................... (0.4) (0.3) 86.1%
----- -----
Earnings before income taxes .... 1.2 5.4 (75.8%)
Income taxes ......................... 0.4 2.0 (75.8%)
----- -----
Net earnings .................... 0.8% 3.4% (75.9%)
===== =====
- --------------------------------------------------------------------------------
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 Flight
Safety and Communications (FS&C). Each operating unit is comprised of separate
and distinct businesses. 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:
11
<PAGE>
<TABLE>
<CAPTION>
(in thousands, except for percentages)
- ------------------------------------------------------------------------------------------------------------
ESG Quarters Ended June 30, Percent Changes
---------------------------------- -----------------------------
1998 1997 1998 vs. 1997
--------- ------------ -----------------------------
<S> <C> <C> <C>
Revenues ........................... $ 23,938 $ 22,421 6.8%
Operating income ................... $ 1,751 $ 1,561 12.2%
Operating margin ................... 7.3% 7.0% 5.1%
<CAPTION>
DSG Quarters Ended June 30, Percent Changes
---------------------------------- -----------------------------
1998 1997 1998 vs. 1997
--------- ------------ -----------------------------
<S> <C> <C> <C>
Revenues ........................... $ 9,232 $ 10,006 (7.7%)
Operating income ................... $ 161 $ 1,148 (86.0%)
Operating margin ................... 1.7% 11.5% (84.8%)
<CAPTION>
EOSG Quarters Ended June 30, Percent Changes
---------------------------------- -----------------------------
1998 1997 1998 vs. 1997
--------- ------------ -----------------------------
<S> <C> <C> <C>
Revenues ........................... $ 5,919 $ 5,318 11.3%
Operating income ................... $ (202) $ 269 (175.1%)
Operating margin ................... (3.4%) 5.1% (167.5%)
<CAPTION>
FS&C Quarters Ended June 30, Percent Changes
---------------------------------- -----------------------------
1998 1997 1998 vs. 1997
--------- ------------ -----------------------------
<S> <C> <C> <C>
Revenues ........................... $ 6,899 $ -- --
Operating income ................... $ 504 $ -- --
Operating margin ................... 7.3% -- --
</TABLE>
Revenues from ESG for the three-month period ended June 30, 1998 increased
6.8% to $23.9 million from $22.4 million for the same three-month period in
fiscal 1998. The revenue growth was attributable primarily to increased
shipments of the group's military display workstations and coastal surveillance
systems. ESG's operating income for the three-month period ended June 30, 1998
increased 12.2% to $1.8 million, compared with $1.6 million reported in the
prior year. Operating income as a percentage of revenues was 7.3% and 7.0% for
the three-month periods ended June 30, 1998 and 1997, respectively. The increase
in ESG's operating income and operating income percentage for the three-month
period ended June 30, 1998 resulted from the overall increase in revenues
coupled with operating efficiencies resulting from the consolidation in fiscal
1998 of certain of the group's military display product lines.
Revenues from DSG for the three-month period ended June 30, 1998 decreased
7.7% to $9.2 million from $10.0 million for the same three-month period in
fiscal 1998. The decrease in revenues was attributable primarily to lower
magnetic head product sales due to continued effects of the slowdown in the
computer disk drive industry. DSG's operating income for the three-month period
ended June 30, 1998 decreased 86% to $0.2 million, compared with $1.1 million
reported in the prior year. Operating income as a percentage of revenues was
1.7% and 11.5% for the three-month periods ended June 30, 1998 and 1997,
respectively. The decrease in DSG's operating income and operating income
percentage in the
12
<PAGE>
three-month period ending June 30, 1998 were the result of reduced revenues and
lower margins in the Group's magnetic head business influenced, in part, by
start-up costs associated with the Group's Bulgarian manufacturing facility. The
Company expects this facility to increase production during the second quarter
of this fiscal year. Operating income for the quarter also decreased due to
additional development and production costs associated with the Group's new
military 8mm "triple-decker" recorders and costs for rework required on the
final units delivered under the AN/USH-42 Mission Recording System contract.
Revenues from EOSG for the three-month period ended June 30, 1998 increased
11.3% to $5.9 million from $5.3 million for the same three-month period in
fiscal 1998. The increase in revenues was attributable primarily to revenues
from the acquisition of Hadland Photonics Ltd. in March 1998. EOSG's operating
income for the three-month period ended June 30, 1998 decreased 175.1% to a loss
of $.2 million, compared with operating income of $.3 million for the
three-month period ended June 30, 1997. Operating income as a percentage of
revenues was -3.4% and 5.1% for the three-month periods ended June 30, 1998 and
1997, respectively. The decrease in EOSG's operating income and operating income
percentage in the first quarter of fiscal 1999 reflects the effect of the
inability of a subsidiary of the Company to ship certain boresighting systems
during the period. This was due to a government investigation, during the
period, into a product substitution allegation against an employee of the Group.
On June 26, 1998, the complaint against the employee was dismissed without
prejudice by the United States Attorney for the Eastern District of New York.
The Company currently is unable to ship certain equipment related to this case
and cannot predict when such shipments ultimately will be made, although these
delays are expected to impact fiscal 1999 second quarter results.
Revenues from FS&C were $6.9 million for the three-month period ended June
30, 1998 and were attributable to shipments from the Group's flight safety and
communications products and from contract manufacturing services. FS&C's
operating income for the three-month period ended June 30, 1998 was $.5 million
and operating income as a percentage of revenues was 7.3%. FS&C was acquired in
the second half of fiscal 1998.
Interest and related expenses were $1.6 million and $.9 million for the
three-month periods ended June 30, 1998 and 1997, respectively. The increase was
attributable primarily to the increase in debt associated with the acquisition
of FS&C.
Interest and other income, net was $.2 million for the three-month periods
ended June 30, 1998 and 1997, respectively. Minority interest increased to $.2
million for the three-month period ended June 30, 1998 from $.1 million in the
comparable prior year period. 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, including the AN/UYQ-70 Advanced Display System.
The Company's effective tax rate for the three-month periods ended June 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 June 30, 1998 and March
31, 1998 represented approximately 5% and 6%, respectively, of total assets.
During the three-month period ended June 30, 1998, cash decreased by
approximately $1.9 million. This decrease resulted from the uses of
approximately $1.0 million for capital expenditures and $.5 million for long
term debt repayments. In addition, approximately $3.4 million was used in
support of operations. Working capital as of June 30, 1998 was $42.0 million, as
compared to $42.1 million at March 31, 1998. Net short-term borrowings increased
by $3.4 million during the period.
13
<PAGE>
Capital expenditures, excluding assets acquired as a result of business
combinations, are expected to approximate $7.9 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 DRS Flight Safety and Communications,
on October 29, 1997, the Company entered into a $60 million secured credit
facility (the Secured Credit Facility) with Mellon Bank, N.A. (Mellon Bank),
consisting of a $20 million term loan and a $40 million revolving line of
credit. The Secured Credit Facility expires on March 31, 2003, and 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. As
of June 30, 1998, approximately $50.8 million was outstanding against the
Secured Credit Facility, of which $5.5 million was contingently payable under
letters of credit, as compared with amounts outstanding under the Secured Credit
Facility at March 31, 1998 of $48.3 million and $4.9 million, respectively.
The Company is in the process of obtaining a new credit facility from
Mellon Bank and is assessing certain financing alternatives to support its
near-term business objectives, particularly with respect to pending
acquisitions.
Accounts Receivable and Inventories: Accounts receivable decreased by
approximately $9.3 million in the three-month period ended June 30, 1998,
primarily due to the collection of certain progress billings from the prior
year. Included in accounts receivable at June 30, 1998 and March 31, 1998 are
$.8 million arising from retainage provisions in certain contracts with the
Canadian government, which may not be collected within one year.
Inventories increased by approximately $1.4 million from March 31, 1998,
due primarily to the delayed shipment of the Company's boresighting equipment.
- -------------------------------------------------------------------------------
June 30, 1998 March 31, 1998
- -------------------------------------------------------------------------------
Quick ratio ................................... 1.0 1.0
Current ratio ................................. 1.9 1.8
Liabilities-to-equity ratio ................... 2.4 2.7
Long-term debt (excluding current
installments) to total capitalization ........ 55.0% 56.0%
- -------------------------------------------------------------------------------
Backlog: Backlog at June 30, 1998 was approximately $182.1 million as
compared to $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 $52.8 million were booked in the three-month period ended June 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.
14
<PAGE>
Year 2000
The Company is conducting an assessment of its management information
systems with respect to the Year 2000 compliance issue. Many of the Company's
internal systems and products that have integrated software are already Year
2000 compliant. The Company plans to resolve any issues identified and ensure
Year 2000 compliance of its main business application systems by the end of
fiscal 1999. Year 2000 compliance issues at key suppliers also create risk for
the Company since their inability to operate effectively could impact our
business. The Company plans to contact its primary suppliers and other key third
parties to determine the possible impact on its business. The Company will
consider alternative providers for those third parties, which do not have plans
in place to become Year 2000 compliant. Based on the information currently
available from the work performed to date, management does not expect that the
amounts to be expensed for Year 2000 compliance activities in fiscal 1999 will
have a material impact on the Company's consolidated results of operations or
financial position.
15
<PAGE>
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
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<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: August 14, 1998 /s/ Nancy R. Pitek
-------------------------------------------
Nancy R. Pitek
Vice President, Finance and Treasurer
17
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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 JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000028630
<NAME> 0
<MULTIPLIER> 0
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 7,820,000
<SECURITIES> 0
<RECEIVABLES> 38,450,000
<ALLOWANCES> 521,000
<INVENTORY> 40,007,000
<CURRENT-ASSETS> 88,202,000
<PP&E> 56,343,000
<DEPRECIATION> 33,860,000
<TOTAL-ASSETS> 152,792,000
<CURRENT-LIABILITIES> 46,162,000
<BONDS> 54,449,000
0
0
<COMMON> 66,000
<OTHER-SE> 44,515,000
<TOTAL-LIABILITY-AND-EQUITY> 152,792,000
<SALES> 45,988,000
<TOTAL-REVENUES> 45,988,000
<CGS> 43,922,000
<TOTAL-COSTS> 43,922,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,571,000
<INCOME-PRETAX> 515,000
<INCOME-TAX> 191,000
<INCOME-CONTINUING> 324,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 324,000
<EPS-PRIMARY> 0.05
<EPS-DILUTED> 0.05
</TABLE>
