================================================================================
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, 1999
[_] 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 12, 1999, 9,716,833 SHARES OF REGISTRANT'S COMMON STOCK, $.01
PAR VALUE, WERE OUTSTANDING (EXCLUSIVE OF 440,939 SHARES HELD IN TREASURY).
================================================================================
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
-------------------
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets - September 30, 1999 and
March 31, 1999................................................. 1
Condensed Consolidated Statements of Earnings - Three and
Six Months Ended September 30, 1999 and 1998................... 2
Condensed Consolidated Statements of Cash Flows - Six Months
Ended September 30, 1999 and 1998.............................. 3
Notes to Condensed Consolidated Financial Statements........... 4-6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 7-12
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk... 12
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................ 13
ITEM 4. Submission of Matters to a Vote of Security Holders ........ 13
ITEM 6. Exhibits and Reports on Form 8-K............................. 13
SIGNATURES ............................................................... 14
<PAGE>
PART FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30, 1999 March 31, 1999
------------------ --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................ $ 6,832,000 $ 10,154,000
Accounts receivable, net ............................. 75,254,000 76,135,000
Inventories, net of progress payments ................ 73,906,000 72,907,000
Prepaid expenses and other current assets ............ 4,663,000 4,316,000
------------ ------------
Total current assets ....................... 160,655,000 163,512,000
------------ ------------
Property, plant and equipment, less
accumulated depreciation and amortization
of $43,643,000 and $38,730,000 at
September 30, 1999 and March 31, 1999,
respectively ......................................... 32,135,000 34,163,000
------------ ------------
Goodwill and related intangible assets, less accumulated
amortization of $12,495,000 and $9,163,000 at
September 30, 1999 and March 31, 1999, respectively . 129,457,000 122,335,000
------------ ------------
Deferred income taxes and other noncurrent assets ...... 8,662,000 10,334,000
------------ ------------
$330,909,000 $330,344,000
============ ============
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Current liabilities:
Current installments of long-term debt .................. $ 5,314,000 $ 5,844,000
Short-term bank debt .................................... 25,513,000 9,169,000
Accounts payable ........................................ 40,974,000 42,470,000
Accrued expenses and other current liabilities .......... 27,662,000 33,344,000
Customer advances ....................................... 8,182,000 15,973,000
Unearned income and accrual for future costs
related to acquired contracts ......................... 35,081,000 43,221,000
------------ ------------
Total current liabilities ...................... 142,726,000 150,021,000
Long-term debt, excluding current installments ............. 105,723,000 102,091,000
Other noncurrent liabilities ............................... 5,721,000 4,790,000
------------ ------------
Total liabilities .............................. 254,170,000 256,902,000
Stockholders' equity:
Preferred Stock, no par value. Authorized 2,000,000 shares;
no shares issued at September 30, 1999 and March 31, 1999 $ -- $ --
Common Stock, $.01 par value per share
Authorized 20,000,000 shares; issued 9,716,833
and 9,615,933 shares at September 30, 1999 and
March 31, 1999, respectively ............................ 97,000 96,000
Additional paid-in capital ................................. 48,484,000 48,038,000
Retained earnings .......................................... 29,765,000 27,737,000
Accumulated other comprehensive earnings (losses) .......... 980,000 (139,000)
Treasury stock, at cost:
440,939 and 385,164 shares of Common Stock at
September 30, 1999 and March 31, 1999, respectively ..... (1,988,000) (1,493,000)
Unamortized restricted stock compensation .................. (599,000) (797,000)
------------ ------------
Net stockholders' equity ................................ 76,739,000 73,442,000
------------ ------------
Commitments and contingencies .............................. -- --
$330,909,000 $330,344,000
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Six Months Ended September 30,
-------------------------------- ------------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
<S> <C> <C> <C> <C>
Revenues .......................... $ 90,933,000 $ 46,126,000 $ 179,108,000 $ 92,114,000
Costs and expenses ................ 86,024,000 44,377,000 169,259,000 88,299,000
------------- ------------- ------------- -------------
Operating income ............ 4,909,000 1,749,000 9,849,000 3,815,000
Interest and other income, net .... 198,000 107,000 298,000 328,000
Interest and related expenses ..... (2,934,000) (1,542,000) (6,081,000) (3,113,000)
Minority interests ................ (291,000) (224,000) (570,000) (425,000)
------------- ------------- ------------- -------------
Earnings before income taxes 1,882,000 90,000 3,496,000 605,000
Income taxes ...................... 822,000 33,000 1,468,000 224,000
------------- ------------- ------------- -------------
Net earnings ................ $ 1,060,000 $ 57,000 $ 2,028,000 $ 381,000
============= ============= ============= =============
Earnings per share of common stock:
Basic ....................... $ 0.11 $ 0.01 $ 0.22 $ 0.06
Diluted ..................... $ 0.11 $ 0.01 $ 0.22 $ 0.06
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended September 30,
------------------------------
1999 1998
------------ --------------
<S> <C> <C>
Cash flows from operating activities
Net earnings ...................................... $ 2,028,000 $ 381,000
Adjustments to reconcile net earnings to
cash flows from operating activities:
Depreciation and amortization ..................... 9,082,000 4,405,000
Other, net ........................................ 46,000 747,000
Changes in assets and liabilities, net of
effects from business combinations:
Decrease in accounts receivable ................... 3,163,000 2,973,000
Decrease (increase) in inventories ................ 1,529,000 (2,515,000)
Decrease (increase) in prepaid expenses and
other current assets ........................... 1,129,000 (380,000)
Decrease in current and other liabilities ......... (11,429,000) (9,147,000)
(Decrease) increase in customer advances .......... (8,064,000) 6,960,000
Decrease in unearned income and accrual for
future costs related to acquired contracts ...... (8,140,000) --
Other, net ........................................ 658,000 376,000
------------ ------------
Net cash (used in) provided by operating activities (9,998,000) 3,800,000
------------ ------------
Cash flows from investing activities
Capital expenditures .............................. (2,258,000) (2,301,000)
Payments pursuant to business combinations,
net of cash acquired ............................ (8,364,000) --
Other, net ........................................ -- (301,000)
------------ ------------
Net cash used in investing activities ............. (10,622,000) (2,602,000)
------------ ------------
Cash flows from financing activities
Net borrowings of short-term debt ................. 12,391,000 3,443,000
Other long-term borrowings ........................ 8,000,000 5,240,000
Payments on long-term debt ........................ (2,477,000) (1,140,000)
Retirement of convertible debt ................... (690,000) (4,992,000)
Other, net ........................................ 8,000 192,000
------------ ------------
Net cash provided by financing activities ......... 17,232,000 2,743,000
------------ ------------
Effect of exchange rates on cash and
cash equivalents ................................... 66,000 (588,000)
------------ ------------
Net (decrease) increase in cash and
cash equivalents ................................... (3,322,000) 3,353,000
Cash and cash equivalents, beginning of period ....... 10,154,000 9,673,000
------------ ------------
Cash and cash equivalents, end of period ............. $ 6,832,000 $ 13,026,000
============ ============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
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, 1999, and
the results of operations and cash flows for the three- and six-month
periods ended September 30, 1999 and 1998. All significant intercompany
balances and transactions have been eliminated. Certain items in the March
31, 1999 and September 30, 1998 condensed consolidated financial statements
and accompanying notes have been reclassified to conform to the fiscal 2000
presentation. The results of operations for the six months ended September
30, 1999 are not necessarily indicative of the results to be expected for
the full year.
2. BUSINESS COMBINATIONS
In July 1999, a subsidiary of the Company, DRS Rugged Systems (Europe)
Ltd., acquired Global Data Systems Ltd. and its wholly owned subsidiary,
European Data Systems Ltd. (EDSL), for approximately $7.8 million in cash
and potential future consideration, not to exceed a total of $10.2 million.
EDSL is a leading provider in the design and development of rugged
computers and peripherals primarily for military applications. The
acquisition has been accounted for using the purchase method of accounting.
The excess of cost over the estimated fair value of net assets acquired was
approximately $9.4 million and is being amortized on a straight-line basis
over twenty years. Purchase price allocation has not yet been finalized,
and actual purchase price allocation may differ from that used in these
Condensed Consolidated Financial Statements. The financial position and
results of operations of EDSL were not significant to those of the Company
as of the acquisition date.
3. INVENTORIES
Inventories are summarized as follows:
September 30, 1999 March 31, 1999
------------------ --------------
Work-in-process ......... $ 103,835,000 $ 95,392,000
Raw material and finished
goods ................. 14,313,000 14,309,000
------------- -------------
118,148,000 109,701,000
Less progress payments .. (44,242,000) (36,794,000)
------------- -------------
Total ................... $ 73,906,000 $ 72,907,000
============= =============
General and administrative costs included in work-in-process were
approximately $11.6 million and $13.0 million at September 30, 1999 and
March 31, 1999, respectively. General and administrative expenses included
in costs and expenses amounted to approximately $17.1 million and $8.8
million for the three-month periods ended September 30, 1999 and 1998,
respectively, and approximately $32.8 and $17.3 for the six-month periods
then ended. Included in those amounts are expenditures for internal
research and development amounting to approximately $2.4 million and $0.6
million for the fiscal quarters ended September 30, 1999 and 1998,
respectively, and approximately $3.8 million and $1.4 million,
respectively, for the six-month periods then ended.
4
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. EARNINGS PER SHARE
The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings per share (EPS):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
September 30, September 30,
------------------ ---------------------
1999 1998 1999 1998
------ ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Basic EPS Computation
Net earnings ............................. $1,060 $ 57 $2,028 $ 381
------ ------ ------ ------
Weighted average common shares outstanding 9,276 6,252 9,260 6,224
------ ------ ------ ------
Basic earnings per share ................. $ 0.11 $ 0.01 $ 0.22 $ 0.06
====== ====== ====== ======
Diluted EPS Computation
Net earnings ............................. $1,060 $ 57 $2,028 $ 381
------ ------ ------ ------
Weighted average common shares outstanding 9,276 6,252 9,260 6,224
Stock options and other .................. 169 168 151 239
------ ------ ------ ------
Diluted common shares outstanding ........ 9,445 6,420 9,411 6,463
------ ------ ------ ------
Diluted earnings per share ............... $ 0.11 $ 0.01 $ 0.22 $ 0.06
====== ====== ====== ======
</TABLE>
In the computation of diluted earnings per common share for the three- and
six-month periods ended September 30, 1999, the assumed conversion of the
Company's 9% Debentures was excluded because their inclusion would have
been antidilutive. For the three-and six-month periods ended September 30,
1998 the assumed conversions of the Company's 9% and 8 1/2% Debentures were
excluded because their inclusion would have been antidilutive. The 8 1/2%
Debentures were redeemed at maturity on August 1, 1998.
5. COMPREHENSIVE EARNINGS
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, September 30,
------------------------- ------------------------
1999 1998 1999 1998
------------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Net earnings .............................. $1,060,000 $ 57,000 $2,028,000 $ 381,000
Other comprehensive earnings (losses):
Foreign currency translation adjustment 959,000 (35,000) 1,119,000 (156,000)
---------- -------- ---------- ---------
Comprehensive earnings .................... $2,019,000 $ 22,000 $3,147,000 $ 225,000
========== ======== ========== =========
</TABLE>
5
<PAGE>
6. OPERATING SEGMENTS
DRS is organized into operating segments on the basis of products and
services offered: the Electronic Systems Group (ESG); the Electro-Optical
Systems Group (EOSG); the Flight Safety and Communications Group (FSCG);
the Data Systems Group (DSG) and Corporate operations. Each operating unit
is comprised of separate and distinct businesses. Information about the
Company's operations in these segments for the fiscal quarters ended
September 30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
ESG EOSG FSCG DSG Corporate Total
--------- --------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Quarter Ended September 30, 1999
Revenues ....................................... $ 41,684 $ 34,239 $ 10,037 $ 4,973 $ -- $ 90,933
Operating income (loss) ........................ 2,872 1,837 778 (401) (177) 4,909
Identifiable assets ............................ 96,807 155,309 48,499 13,438 16,856 330,909
Depreciation and amortization .................. 902 2,107 666 627 220 4,522
Capital expenditures ........................... 408 167 73 168 134 950
Quarter Ended September 30, 1998
Revenues ....................................... $ 24,792 $ 6,518 $ 9,459 $ 5,357 $- $ 46,126
Operating income (loss) ........................ 1,938 (53) 704 (761) (79) 1,749
Identifiable assets ............................ 35,748 43,237 53,378 15,225 15,542 163,130
Depreciation and amortization .................. 281 520 680 546 185 2,212
Capital expenditures ........................... 493 169 403 121 86 1,272
<CAPTION>
ESG EOSG FSCG DSG Corporate Total
--------- --------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Six Months Ended September 30, 1999
Revenues ....................................... $ 85,235 $ 65,538 $ 18,951 $ 9,384 $ -- $ 179,108
Operating income (loss) ........................ 6,059 3,445 1,791 (1,148) (298) 9,849
Identifiable assets ............................ 96,807 155,309 48,499 13,438 16,856 330,909
Depreciation and amortization .................. 1,707 4,352 1,328 1,312 383 9,082
Capital expenditures ........................... 777 565 321 251 344 2,258
Six Months Ended September 30, 1998
Revenues ....................................... $ 48,730 $ 12,437 $ 20,293 $ 10,654 $ -- $ 92,114
Operating income (loss) ........................ 3,689 (255) 1,298 (690) (227) 3,815
Identifiable assets ............................ 35,748 43,237 53,378 15,225 15,542 163,130
Depreciation and amortization .................. 538 1,122 1,311 1,092 342 4,405
Capital expenditures ........................... 893 393 465 247 303 2,301
</TABLE>
6
<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 or DRS) as of September 30, 1999 and for
the three-and six-month periods ended September 30, 1999 and 1998. This
discussion should be read in conjunction with the audited consolidated financial
statements and 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 year ended March 31, 1999.
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 risks and uncertainties are inherent to forward-looking
statements. Accordingly, the Company's actual results could differ materially
from those suggested by such forward-looking statements.
ACQUISITIONS AND RELATED ACTIVITIES
In July 1999, a subsidiary of the Company, DRS Rugged Systems (Europe) Ltd.,
acquired Global Data Systems Ltd. and its wholly owned subsidiary, European Data
Systems Ltd. (EDSL), for approximately $7.8 million in cash and potential future
consideration, not to exceed a total $10.2 million. EDSL is a leading provider
in the design and development of rugged computers and peripherals primarily for
military applications. The acquisition has been accounted for using the purchase
method of accounting. The excess of cost over the estimated fair value of net
assets acquired was approximately $9.4 million and is being amortized on a
straight-line basis over twenty years. Purchase price allocation has not yet
been finalized, and actual purchase price allocation may differ from that used
in these Condensed Consolidated Financial Statements. The financial position and
results of operations of EDSL were not significant to those of the Company as of
the acquisition date.
RESULTS OF OPERATIONS
The Company's operating cycle is long-term and involves various types of
production contracts and varying production delivery schedules. Accordingly,
results of a particular quarter, or quarter-to-quarter comparisons of recorded
revenues and earnings, may not be indicative of future operating results. The
following comparative analysis should be viewed in this context. This table sets
forth items in the Condensed Consolidated Statements of Earnings as a percent of
revenues and presents the percentage dollar 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
---------------------- --------------- --------------------- ------------
1999 1998 1999 vs. 1998 1999 1998 1999 vs. 1998
<S> <C> <C> <C> <C> <C> <C>
Revenues .................................... 100.0% 100.0% 97.1% 100.0% 100.0% 94.4%
Costs and expenses .......................... 94.6 96.2 93.8% 94.5 95.9 91.7%
----- ----- ----- ------
Operating income ........................ 5.4 3.8 180.7% 5.5 4.1 158.2%
Interest and other income, net .............. 0.2 0.2 85.0% 0.2 0.4 -9.1%
Interest and related expenses ............... (3.2) (3.3) 90.3% (3.4) (3.4) 95.3%
Minority interest ........................... (0.3) (0.5) 29.9% (0.3) (0.5) 34.1%
----- ----- ----- ------
Earnings before income taxes ............ 2.1 0.2 1991.1% 2.0 0.6 477.9%
Income taxes ................................ 0.9 0.1 2390.9% 0.8 0.2 555.4%
----- ----- ----- ------
Net earnings ............................ 1.2% 0.1% 1759.6% 1.2% 0.4% 432.3%
===== ===== ===== ======
</TABLE>
Consolidated revenues for the three-and six-month periods ended September 30,
1999 increased $44.8 million and $87.0 million respectively as compared with
three-and six-month periods ended September 30, 1998.
7
<PAGE>
Consolidated operating income for the three-and six-month periods ended
September 30, 1999 increased $3.2 million and $6.0 million respectively as
compared with the three-and six-month periods ended September 30, 1998. These
increases are primarily attributable to the inclusion of the operations of the
Company's fiscal 1999 third and fourth quarter acquisitions, which are not
included in the consolidated results for the three-and six-month periods ended
September 30, 1998. See discussion of operating segments below for additional
information.
Interest and related expenses were approximately $2.9 million and $1.5 million
for the three-month periods ended September 30, 1999 and 1998, respectively, and
$6.1 million and $3.1 million for the six-month periods then ended. This
increase was primarily attributable to debt associated with the Company's
October 1998 acquisition of certain assets of the Second Generation Ground-Based
Electro-Optical and Focal Plane Array businesses of the Raytheon Company and
certain of its subsidiaries (the EOS Business) and the July 1999 acquisition of
EDSL. Interest also has increased as a result of higher average working capital
borrowings in the first half of fiscal 2000, as compared with the first half of
fiscal 1999.
The provision for income taxes for the first half of fiscal 2000 reflects an
annual estimated effective income tax rate of 42%, versus 37% for fiscal 1999.
The effective rate for fiscal 2000 assumes continued growth in domestic
earnings, which are taxed at higher overall rates in comparison to the Company's
foreign tax jurisdictions. The effective rate has also increased, due to the
effect of non-deductible goodwill associated with the acquisition of NAI
Technologies, Inc. (NAI) in February 1999 and EDSL in July 1999.
OPERATING SEGMENTS
DRS is organized into four principal operating segments, the first three of
which compete in the defense industry: the Electronic Systems Group (ESG); the
Electro-Optical Systems Group (EOSG); the Flight Safety and Communications Group
(FSCG); and the Data Systems Group (DSG). Each group is comprised of separate
and distinct businesses.
The following tables set forth, by operating segment, revenues, operating
income, and operating margin and the percentage increase or decrease of those
items as compared with the prior period:
<TABLE>
<CAPTION>
Three Months Three Months Ended Six Months Six Months Ended
Ended September 30, Percent Changes Ended September 30, Percent Changes
---------------------------- ------------------- ----------------------------- -------------------
1999 1998 1999 vs. 1998 1999 1998 1999 vs. 1998
-------------- ------------ ------------------- -------------- ------------- -------------------
(in thousands, except for percentages)
<S> <C> <C> <C> <C> <C> <C>
ESG
Revenues $ 41,684 $ 24,792 68.1% $ 85,235 $ 48,730 74.9%
Operating income $ 2,872 $ 1,938 48.2% $ 6,059 $ 3,689 64.2%
Operating margin 6.9% 7.8% (11.9%) 7.1% 7.6% (6.1%)
EOSG
Revenues $ 34,239 $ 6,518 425.3% $ 65,538 $ 12,437 427.0%
Operating income (loss) $ 1,837 $ (53) 3566.0% $ 3,445 $ (255) 1451.0%
Operating margin 5.4% (0.8%) 759.8% 5.3% (2.1%) 356.4%
FSCG
Revenues $ 10,037 $ 9,459 6.1% $ 18,951 $ 20,293 (6.6%)
Operating income $ 778 $ 704 10.5% $ 1,791 $ 1,298 38.0%
Operating margin 7.8% 7.4% 4.1% 9.5% 6.4% 47.8%
DSG
Revenues $ 4,973 $ 5,357 (7.2%) $ 9,384 $ 10,654 (11.9%)
Operating income (loss) $ (401) $ (761) 47.3% $ (1,148) $ (690) (66.4%)
Operating margin (8.1%) (14.2%) 43.2% (12.2%) (6.5%) (88.9%)
</TABLE>
8
<PAGE>
ESG: ESG's increase in revenue and operating income for the three-and six-month
periods ended September 30, 1999, as compared with the prior corresponding
periods, was due primarily to the inclusion of the operating results of the
Company's fiscal 1999 fourth quarter acquisition of NAI. The NAI acquisition
contributed to the ESG operating segment approximately $12.6 million and $27.2
million in additional revenues for the three-and six-month periods ended
September 30, 1999, respectively, and approximately $0.8 million and $1.8
million of operating income for the three-and six-month periods ended September
30, 1999, respectively. The overall increases in revenues and operating income
were also attributable to continued growth of the Company's military display
workstation programs, primarily the AN/UYQ-70 Advanced Display System (Q-70).
EOSG: The increase in revenues and operating income for the three-and six-month
periods ended September 30, 1999, as compared with the prior corresponding
periods, was primarily attributable to the October 1998 acquisition of certain
assets of the Second Generation Ground-Based Electro-Optical and Focal Plane
Array businesses of the Raytheon Company and certain of its subsidiaries (the
EOS Business). This acquisition contributed to the EOSG operating segment
approximately $29.0 million and $53.1 million in additional revenues for the
three-and six-month periods ended September 30, 1999, respectively, and $2.5
million and $4.6 million of operating income for the three-and six month periods
ended September 30, 1999, respectively. Exclusive of the contributions of the
EOS Business, EOSG's operating income decreased by $0.6 million and $0.9 million
for the three- and six month periods ended September 30, 1999, respectively. The
decrease in operating income for the fiscal quarter ended September 30, 1999 was
primarily attributable to continued delays in boresight shipments, reduced
shipments of certain night vision products pending the exercise of a contractual
option, and an increase in foreign general and administrative costs, which are
treated as period costs. EOSG's operating income for the six-month period ended
September 30, 1999 includes a charge of $0.5 million for anticipated costs to be
incurred in connection with certain product warranty issues.
FSCG: For the six-months ended September 30, 1999 revenues decreased by
approximately $1.3 million, as compared with prior year results for the same
period, while operating income improved by 38% to $1.8 million. The decrease in
revenues for the first half of Fiscal 2000 was due to lower volume for contract
manufacturing services, especially for commercial aerospace applications, and a
decline in shipments of mission data recording systems. The Group currently is
developing new mission data recording systems under contract with the U.S. Navy
and anticipates an award for initial production units in the second half of
fiscal 2000. The margin impact of revenues was mitigated by a change in revenue
mix in favor of higher margin products and services, including other contract
manufacturing services and deployable flight incident recorders.
DSG: DSG's revenues for the three- and six-month periods ended September 30,
1999 decreased by $0.4 million and $1.3 million, respectively, as compared with
prior corresponding periods. The decrease in revenues at DSG resulted from the
continuing effects of the sluggish global computer disk drive marketplace and
competitive pricing pressure on certain other magnetic tape head products.
Orders for the Group's disk drive products continue to decline as a result of
these market conditions. Operating losses for the fiscal quarter ended September
30, 1999 were approximately $0.4 million less than those posted in the
comparable prior year period, whereas operating losses for the six-month period
then ended increased by $0.5 million. The increase in DSG's year-to-date
operating losses and the corresponding decline in operating margin were the
result of lower revenues and margins attributable to pricing pressure and less
favorable absorption of fixed operating expenses. The adverse impact of these
market conditions have been partially offset this fiscal quarter by the effect
of previously implemented cost reduction initiatives. Also, operating losses
reported in the second quarter of fiscal 1998 included charges of approximately
$0.6 million relating to the closing of the Dassel, Minnesota facility and
establishing reserves for certain receivables and inventory, necessitated by the
bankruptcy filing of a customer. DSG is continuing to identify and implement
cost reduction measures to ensure that costs are reduced to a level commensurate
with expected revenues.
9
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
Cash and Cash Flow
The following table provides cash flow statement data for the Company for the
six-month periods ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Six Months Ended September 30,
-----------------------------------
1999 1998
---------------- ----------------
<S> <C> <C>
Net cash (used in) provided by operating activities $ (9,998,000) $ 3,800,000
Net cash used in investing activities $ (10,622,000) $ (2,602,000)
Net cash provided by financing activities $ 17,232,000 $ 2,743,000
</TABLE>
The $13.8 million change in net cash (used in) provided by operating activities
in the first six months of fiscal 2000, as compared with the first six months of
fiscal 1999, is primarily due to the liquidation of net advance payments
(against associated progress billings) relating to the Q-70 program.
Net cash used in investing activities in the six-month period ended September
30, 1999 consisted of capital expenditures and the cost of fiscal 2000
acquisitions (primarily the cost of the EDSL acquisition). The Company expects
that its capital expenditures for fiscal 2000 will be approximately $8.8
million.
The $14.5 million increase in net cash provided by financing activities is due
to increased borrowings under the Company's $70 million (subject to a borrowing
base calculation) revolving line of credit with Mellon Bank, N.A, as agent,
maturing on October 20, 2003 (Line of Credit). The increased borrowings under
the Line of Credit were primarily due to increased working capital requirements
and the EDSL acquisition. Other than cash flows from operations, the Line of
Credit is the Company's primary source of liquidity. As of September 30, 1999,
the Company had approximately $22.7 million available under the Line of Credit,
after satisfaction of its borrowing base requirement. The increase in borrowings
was partially offset by the Company's payments on long-term debt of $2.5 million
and the $0.7 million liquidation of the remaining balance of the Company's 12%
Convertible Subordinated Promissory Notes assumed in connection with the NAI
Acquisition.
The Company currently is reviewing its present working capital position and
available bank financing to ensure that the amounts available are sufficient to
support its operational needs and near-term business objectives.
Backlog
Backlog at September 30, 1999 was approximately $359.0 million (including $11.2
million in backlog added as a result of recent acquisitions), as compared with
$365.8 million at March 31, 1999. The Company booked approximately $160.0
million in new orders in the first six months of fiscal 2000.
YEAR 2000
DRS has a Year 2000 readiness plan focused on identification and remediation of
processes which may not function correctly at the beginning of the Year 2000.
The plan, developed as a company-wide effort, is directed by each group
president with each operating group's progress monitored by the corporate Y2K
committee as they proceed through the phases of awareness, assessment, and
remediation. Such remediation may include implementing new systems or devising
fixes to existing systems. It is the Company's policy to establish contingency
plans where Year 2000-related problems could potentially disrupt normal
operations.
Each DRS operating group has appointed its own Year 2000 project staff,
responsible for implementation of the plan and for reporting progress and costs
through the group and to the corporate Y2K committee.
10
<PAGE>
This committee, in turn, reports the corporation's overall Year 2000 status to
the Board of Directors. The Corporation's overall status is, therefore, a
composite of the readiness efforts of the DRS operating groups. On an aggregate
basis, DRS currently estimates that the costs of its Year 2000 readiness will
total approximately $1.2 million, of which approximately $1.0 million has been
spent to date. Although the various operating groups are currently at varying
phases of the readiness process, the Company believes that substantially all
mission-critical systems have been protected from material failure.
Within each DRS operating group, the Year 2000 effort is directed towards: (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 relates to internal hardware and systems software. DRS
substantially has completed its evaluation of its main internal operating
systems and business application software. The Company is nearing completion of
the process of implementing the necessary changes in its internal systems to
achieve Year 2000 readiness in this area and, at this time, believes that
substantially all its mission-critical systems are Year 2000 ready. The Company
has successfully passed two significant milestone dates identified as potential
Y2K problem areas, including the beginning of our fiscal year, FY 2000, on April
1, 1999, and September 9, 1999, both of which could have created problems for
some software programs.
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 readiness issues at critical suppliers create 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
affected adversely 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 readiness in a timely manner could have a material adverse
effect on the Company's operations.
Evaluations of critical third party suppliers were initiated earlier this year,
and each operating group has reported a response rate in excess of 80% through
September 30, 1999. Although responses to inquiries concerning suppliers' Year
2000 readiness have been favorable, certain operating units have opted to
develop contingency plans and take other precautionary measures to avoid
potential short-term operating disruptions. These measures include the
identification of alternate suppliers and, on a limited basis, procurement of
safety stocks for critical components and materials.
The Product Issues section includes the process of identifying any products sold
by DRS which may not be Year 2000 ready, determining a corrective course of
action and disseminating information with respect thereto to customers. Although
many of DRS's products that have integrated software are Year 2000 compliant,
there can be no assurances that all of DRS's products are currently Year 2000
compliant. DRS's costs to achieve Year 2000 readiness will include the costs and
expenses of fulfilling warranty obligations on non-compliant products. Detailed
evaluations of certain products were undertaken and were substantially complete
as of September 30, 1999. At this time, the Company does not believe that it has
any significant potential liability with respect to Year 2000 related product
failures. At a projected $1.2 million, total costs associated with required or
projected modifications to become Year 2000 ready are not expected to have a
material effect on the consolidated results of operations, cash flows or
financial position of DRS. To the extent recoverable under the terms of
contracts with its customers, DRS's readiness 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's 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
11
<PAGE>
amount of total cost associated with implementing DRS's 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.
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's results of
operations, liquidity and financial condition. DRS implemented its Year 2000
Project with the intention of significantly reducing DRS's level of risk
regarding the Year 2000 problem, and believes that its Year 2000 Project has
reduced the risk of significant interruptions of normal operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risks
relating to fluctuations in interest rates and foreign currency exchange risk.
The Company does not enter into derivatives or other financial instruments for
trading or speculative purposes.
Interest Rate Risk
As the Company seeks debt financing to maintain its ongoing operations and
sustain its growth, it is exposed to interest rate risk. Borrowings under the
Company's $150 million secured credit facility with Mellon Bank, N.A are
sensitive to changes in interest rates as such borrowings bear interest at
variable rates. In April 1998 and 1999, the Company entered into three interest
rate collar agreements to limit the impact of interest rate fluctuations on cash
flow and interest expense. A summary of the interest rate collar agreements in
place as of September 30, 1999 follows:
<TABLE>
<CAPTION>
Weighted
Average
Effective Termination Notional Variable Ceiling Floor Interest
Date Date Amount Rate Base Rate Rate Rate
-------------- ---------------- ------------ ----------- ------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Collar No.1 April 8, 1998 January 8, 2001 $ 6,200,000 CAD-BA* 6.35% 4.84% 4.75%
Collar No.2 April 26, 1999 January 26, 2002 $20,000,000 LIBOR** 5.75% 4.80% 5.21%
Collar No.3 April 26, 1999 January 26, 2000 $20,000,000 LIBOR** 5.75% 4.77% 5.21%
</TABLE>
- -----------------
* - Canadian Bankers Acceptance Rate
** - London Interbank Offered Rate
Foreign Currency Exchange Risk
DRS operates and conducts business in foreign countries and as a result is
exposed to movements in foreign currency exchange rates. More specifically, our
net equity is impacted by the conversion of the net assets of foreign
subsidiaries for which the functional currency is not the U.S. Dollar for U.S.
reporting purposes. The Company's exposure to foreign currency exchange risk
related to its foreign operations is not material to the Company's results of
operations, cash flows or financial position. The Company, at present, does not
hedge this risk, but continues to evaluate such foreign currency translation
risk exposure.
12
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is a party to various legal actions and claims in the
ordinary course of business. The Company believes that it has adequate
legal defenses for each of the actions and claims and that their
ultimate disposition will not have a material adverse affect on its
consolidated financial position or results of operations.
In April and May 1998, subpoenas were issued to the Company by the
United States Attorney for the Eastern District of New York seeking
documents related to a governmental investigation of certain equipment
manufactured by DRS Photronics, Inc. (DRS Photronics). These subpoenas
were issued in connection with United States v. Tress, a case
involving a product substitution allegation against an employee of DRS
Photronics. On June 26, 1998, the complaint against the employee was
dismissed without prejudice. Although an additional subpoena was
issued to the Company on August 12, 1999, to date, no claim has been
made against the Company or DRS Photronics. During the pendancy of the
Government's investigation, DRS Photronics was unable to ship certain
equipment related to the case, resulting in delays in the Company's
recognition of revenues. On October 29, 1999, DRS Photronics received
authorization to ship its first boresight system since the start of
investigation. At this time, however, the Company is unable to
quantify the effect of the delayed shipments on its future operations
or financial position, or to predict when regular shipments ultimately
will resume, although the delays are expected to continue to impact
the Company's fiscal year 2000 results.
We are presently involved in a dispute in arbitration with Spar
Aerospace Limited (SPAR) with respect to the working capital
adjustment, if any, provided for in the purchase agreement between the
Company and Spar dated as of September 19, 1997, pursuant to which we
acquired, through certain of our subsidiaries, certain assets of Spar.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 5, 1999, 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 I 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 LLP as the independent certified public
accountants for the Company;
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 S. Newman 7,893,321 0 17,317
Donald C. Fraser 7,897,621 0 13,017
Steven S. Honigman 7,892,446 0 18,192
Proposal (ii): 7,900,155 2,879 7,604
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
13
<PAGE>
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 12, 1999 /s/ RICHARD A. SCHNEIDER
------------------------------------------
Richard A. Schneider
Executive Vice President, Chief Financial
Officer and Treasurer
14
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
DRS TECHNOLOGIES, INC.
ARTICLE 5 OF REGULATION S-X
(UNAUDITED)
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM DRS TECHNOLOGIES, INC. FORM 10-Q FOR THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<EXCHANGE-RATE> 1
<CASH> 6,832,000
<SECURITIES> 0
<RECEIVABLES> 76,564,000
<ALLOWANCES> 1,310,000
<INVENTORY> 73,906,000
<CURRENT-ASSETS> 160,655,000
<PP&E> 75,778,000
<DEPRECIATION> 43,643,000
<TOTAL-ASSETS> 330,909,000
<CURRENT-LIABILITIES> 142,726,000
<BONDS> 105,723,000
0
0
<COMMON> 97,000
<OTHER-SE> 75,662,000
<TOTAL-LIABILITY-AND-EQUITY> 330,909,000
<SALES> 90,933,000
<TOTAL-REVENUES> 90,933,000
<CGS> 86,024,000
<TOTAL-COSTS> 86,024,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,934,000
<INCOME-PRETAX> 1,882,000
<INCOME-TAX> 822,000
<INCOME-CONTINUING> 1,060,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,060,000
<EPS-BASIC> 0.11
<EPS-DILUTED> 0.11
</TABLE>
