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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
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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
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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 9, 1999, 9,716,833 SHARES OF REGISTRANT'S COMMON STOCK, $.01
PAR VALUE, WERE OUTSTANDING (EXCLUSIVE OF 440,939 SHARES HELD IN TREASURY).
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<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
-------------------
INDEX TO QUARTERLY REPORT ON FORM 10-Q
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets -- June 30, 1999 and
March 31, 1999................................................ 1
Condensed Consolidated Statements of Operations -- Three
Months Ended June 30, 1999 and 1998........................... 2
Condensed Consolidated Statements of Cash Flows -- Three
Months Ended June 30, 1999 and 1998........................... 3
Notes to Condensed Consolidated Financial Statements.......... 4-5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 6-10
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.... 11
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................. 12
ITEM 6. Exhibits and Reports on Form 8-K.............................. 12
SIGNATURES ............................................................... 13
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<CAPTION>
June 30, 1999 March 31, 1999
------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 7,971,000 $ 10,154,000
Accounts receivable, net ..................................... 68,865,000 76,135,000
Inventories, net of progress payments ........................ 74,230,000 72,907,000
Prepaid expenses and other current assets .................... 3,883,000 4,316,000
------------ ------------
Total current assets ................................... 154,949,000 163,512,000
------------ ------------
Property, plant and equipment, less accumulated depreciation and
amortization of $41,237,000 and $38,730,000 at June 30, 1999
and March 31, 1999, respectively ............................. 32,944,000 34,163,000
------------ ------------
Goodwill and related intangible assets, less accumulated
amortization of $10,823,000 and $9,163,000 at
June 30, 1999 and March 31, 1999, respectively ............... 121,749,000 122,335,000
------------ ------------
Deferred income taxes and other noncurrent assets .............. 9,895,000 10,334,000
------------ ------------
$319,537,000 $330,344,000
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt ....................... $ 5,099,000 $ 5,844,000
Short-term bank debt ......................................... 20,142,000 9,169,000
Accounts payable ............................................. 40,186,000 42,470,000
Accrued expenses and other current liabilities ............... 26,148,000 33,344,000
Customer advances ............................................ 7,429,000 15,973,000
Unearned income and accrual for future costs
related to acquired contracts ................................ 39,465,000 43,221,000
------------ ------------
Total current liabilities .............................. 138,469,000 150,021,000
Long-term debt, excluding current installments ................. 101,137,000 102,091,000
Other noncurrent liabilities ................................... 5,310,000 4,790,000
------------ ------------
Total liabilities ...................................... 244,916,000 256,902,000
Stockholders' equity:
Preferred Stock, no par value. Authorized 2,000,000 shares;
no shares issued at June 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 June 30, 1999 and
March 31, 1999, respectively ................................. 97,000 96,000
Additional paid-in capital ..................................... 48,466,000 48,038,000
Retained earnings .............................................. 28,705,000 27,737,000
Accumulated other comprehensive earnings (losses) .............. 21,000 (139,000)
Treasury stock, at cost:
440,939 and 385,164 shares of Common Stock at
June 30, 1999 and March 31, 1999 ............................. (1,988,000) (1,493,000)
Unamortized restricted stock compensation ...................... (680,000) (797,000)
------------ ------------
Net stockholders' equity ..................................... 74,621,000 73,442,000
------------ ------------
Commitments and contingencies .................................. -- --
$319,537,000 $330,344,000
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
1
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
Three Months Ended June 30,
-------------------------------
1999 1998
------------ ------------
Revenues ................................... $ 88,175,000 $ 45,988,000
Costs and expenses ......................... 83,235,000 43,922,000
------------ ------------
Operating income .................. 4,940,000 2,066,000
Interest and other income, net ............. 100,000 221,000
Interest and related expenses .............. (3,147,000) (1,571,000)
Minority interests ......................... (279,000) (201,000)
------------ ------------
Earnings before income taxes ...... 1,614,000 515,000
Income taxes ............................... 646,000 191,000
------------ ------------
Net earnings ...................... $ 968,000 $ 324,000
============ ============
Earnings per share of common stock:
Basic ............................. $ 0.10 $ 0.05
Diluted ........................... $ 0.10 $ 0.05
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
<TABLE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Three Months Ended June 30,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net earnings ......................................... $ 968,000 $ 324,000
Adjustments to reconcile net earnings to cash flows
from operating activities:
Depreciation and amortization ........................ 4,560,000 2,193,000
Other, net ........................................... (134,000) 214,000
Changes in assets and liabilities, net of effects
from business combinations:
Decrease in accounts receivable ...................... 7,370,000 8,878,000
Increase in inventories .............................. (1,949,000) (1,579,000)
Decrease (increase) in prepaid expenses and
other current assets ............................... 610,000 (470,000)
Decrease in current and other liabilities ............ (9,628,000) (12,728,000)
(Decrease) increase in customer advances ............. (8,557,000) 80,000
Decrease in unearned income and accrual for
future costs related to acquired contracts ......... (3,756,000) --
Other, net ......................................... 525,000 (330,000)
------------ ------------
Net cash used in operating activities ................ (9,991,000) (3,418,000)
------------ ------------
Cash flows from investing activities
Capital expenditures ................................. (1,308,000) (1,029,000)
Other, net ........................................... -- (211,000)
------------ ------------
Net cash used in investing activities ................ (1,308,000) (1,240,000)
------------ ------------
Cash flows from financing activities
Net borrowings of short-term debt .................... 10,973,000 3,353,000
Payments on long-term debt ........................... (1,239,000) (464,000)
Retirement of 12% Convertible Subordinated
Promissory Notes ................................... (690,000) --
Other, net ........................................... 8,000 54,000
------------ ------------
Net cash provided by financing activities ............ 9,052,000 2,943,000
------------ ------------
Effect of exchange rates on cash and cash equivalents .... 64,000 (138,000)
------------ ------------
Net decrease in cash and cash equivalents ................ (2,183,000) (1,853,000)
Cash and cash equivalents, beginning of period ........... 10,154,000 9,673,000
------------ ------------
Cash and cash equivalents, end of period ................. $ 7,971,000 $ 7,820,000
============ ============
See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>
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 June 30, 1999, and the
results of operations and cash flows for the three-month periods ended June
30, 1999 and 1998. All significant intercompany balances and transactions
have been eliminated. Certain items in the March 31, 1999 and June 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 three months ended June 30, 1999 are not necessarily
indicative of the results to be expected for the full year.
2. INVENTORIES
Inventories are summarized as follows:
June 30, 1999 March 31, 1999
-------------- --------------
Work-in-process ........................... $ 96,754,000 $ 95,392,000
Raw material and finished goods ........... 15,234,000 14,309,000
------------ ------------
111,988,000 109,701,000
------------ ------------
Less progress payments .................... (37,758,000) (36,794,000)
------------ ------------
Total ..................................... $ 74,230,000 $ 72,907,000
============ ============
General and administrative costs included in work-in-process were
approximately $10.4 million and $13.0 million at June 30, 1999 and March
31, 1999, respectively. General and administrative expenses included in
costs and expenses amounted to approximately $17.2 million and $9.6 million
for the three months ended June 30, 1999 and 1998, respectively. Included
in those amounts are expenditures for internal research and development
amounting to approximately $1.4 million and $.8 million for the fiscal
quarters ended June 30, 1999 and 1998, respectively.
3. EARNINGS PER SHARE
The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings per share (EPS):
Three Months
Ended June 30,
-----------------
1999 1998
------ ------
(in thousands, except
per share data)
Basic EPS Computation
Net earnings .................................. $ 968 $ 324
------ ------
Weighted average common shares outstanding .... 9,245 6,197
------ ------
Basic earnings per share ...................... $ 0.10 $ 0.05
====== ======
Diluted EPS Computation
Net earnings .................................. $ 968 $ 324
------ ------
Weighted average common shares outstanding .... 9,245 6,197
Stock options & other ......................... 131 321
------ ------
Diluted common shares outstanding ............. 9,376 6,518
------ ------
Diluted earnings per share .................... $ 0.10 $ 0.05
====== ======
4
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Unaudited)
In the computation of diluted earnings per common share for the three-month
period ended June 30, 1999, the assumed conversion of the Company's 9%
Debentures was excluded because their inclusion would have been
antidilutive. For the three-month period ended June 30, 1998 the assumed
conversion of the Company's 9% and 8 1/2% Debentures was excluded because
their inclusion would have been antidilutive. The 8 1/2% Debentures were
redeemed at maturity on August 1, 1998.
4. COMPREHENSIVE EARNINGS
Three Months Ended
June 30,
-----------------------
1999 1998
---------- ----------
Comprehensive earnings
Net earnings ............................... $ 968,000 $ 324,000
Other comprehensive earnings:
Foreign currency translation adjustment .. 160,000 (191,000)
---------- ----------
Comprehensive earnings ..................... $1,128,000 $ 133,000
========== ==========
5. 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 June
30, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
ESG EOSG FSCG DSG Corporate Total
------- -------- ------- ------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
(in thousands)
Quarter Ended June 30, 1999
Revenues ........................ $43,551 $ 31,299 $ 8,914 $ 4,411 $ -- $ 88,175
Operating income (loss) ......... $ 3,187 $ 1,608 $ 1,013 $ (747) $ (121) $ 4,940
Identifiable assets ............. $79,562 $161,955 $49,294 $13,610 $14,960 $319,381
Depreciation and amortization ... $ 805 $ 2,245 $ 662 $ 685 $ 163 $ 4,560
Capital expenditures ............ $ 369 $ 398 $ 248 $ 83 $ 210 $ 1,308
Quarter Ended June 30, 1998
Revenues ........................ $23,938 $ 5,919 $10,834 $ 5,297 $ -- $ 45,988
Operating income (loss) ......... $ 1,751 $ (202) $ 594 $ 71 $ (148) $ 2,066
Identifiable assets ............. $27,561 $ 41,756 $55,151 $16,471 $11,853 $152,792
Depreciation and amortization ... $ 257 $ 602 $ 631 $ 546 $ 157 $ 2,193
Capital expenditures ............ $ 400 $ 224 $ 62 $ 126 $ 217 $ 1,029
</TABLE>
6. SUBSEQUENT EVENT
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 $8.0 million in cash
and certain future consideration, not to exceed $10.2 million. EDSL is a
leading provider in the design and development of rugged computers and
peripherals primarily for military applications. The acquisition will be
accounted for using the purchase method of accounting.
5
<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 June 30, 1999 and for the
three-month periods ended June 30, 1999 and 1998. This discussion should be read
in conjunction with the audited consolidated financial statements and related
notes.
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 $8.0 million in cash and certain future
consideration, not to exceed $10.2 million. EDSL is a leading provider in the
design and development of rugged computers and peripherals primarily for
military applications. The acquisition will be accounted for using the purchase
method of accounting.
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:
Percent of Revenues
---------------------
Three Months Ended Percent
June 30, Changes
--------------------- -------------
1999 1998 1999 vs. 1998
------- -------- -------------
Revenues ............................. 100.0 % 100.0 % 91.7%
Costs and expenses ................... 94.4 95.5 89.5%
----- -----
Operating income .................... 5.6 4.5 139.1%
Interest and other income, net ....... 0.1 0.5 (54.8%)
Interest and related expenses ........ (3.6) (3.4) 100.3%
Minority interest .................... (0.3) (0.4) 38.8%
----- -----
Earnings before income taxes ........ 1.8 1.2 213.4%
Income taxes ......................... 0.7 0.4 238.2%
----- -----
Net earnings .................... 1.1 % 0.8 % 198.8%
===== =====
Consolidated revenues and operating income for the three-month period ended June
30, 1999 increased $42.2 million and $2.9 million respectively as compared with
three-month period ended June 30, 1998. These increases are primarily
attributable to the inclusion of the operations of the Company's fiscal 1999
6
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
third and fourth quarter acquisitions, which are not included in the
consolidated results for the three-month period ended June 30, 1998. See
discussion of operating segments below for additional information.
Interest and related expenses were approximately $3.1 million and $1.6 million
for the three-month periods ended June 30, 1999 and 1998, respectively. 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 higher average working
capital borrowings in the first quarter of fiscal 2000, as compared with the
first quarter of fiscal 1999.
The provision for income taxes for the first quarter of fiscal 2000 reflects an
annual estimated effective income tax rate of 40%, versus 37% for fiscal 1999.
The effective rate for fiscal 2000 assumes improvement in domestic earnings,
which are taxed at higher overall rates in comparison to the Company's foreign
tax jurisdictions. The domestic 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.
OPERATING SEGMENTS
DRS is organized into four principal operating segments, the first three of
which compete in the defense electronics 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>
(in thousands, except for percentages) Quarters Ended June 30, Percent Changes
-----------------------------------------------------------
ESG 1999 1998 1999 vs. 1998
----------------- ---------------- ---------------------
<S> <C> <C> <C>
Revenues ...................................... $ 43,551 $ 23,938 81.9%
Operating income .............................. $ 3,187 $ 1,751 82.0%
Operating margin .............................. 7.3% 7.3% 0.0%
Quarters Ended June 30, Percent Changes
-----------------------------------------------------------
EOSG 1999 1998 1999 vs. 1998
----------------- ---------------- ---------------------
Revenues ...................................... $ 31,299 $ 5,919 428.8%
Operating income (loss) ....................... $ 1,608 $ (202) 896.0%
Operating margin .............................. 5.1% (3.4%) 250.5%
Quarters Ended June 30, Percent Changes
-----------------------------------------------------------
FSCG 1999 1998 1999 vs. 1998
----------------- ---------------- ---------------------
Revenues ...................................... $ 8,914 $ 10,834 (17.7%)
Operating income .............................. $ 1,013 $ 594 70.5%
Operating margin .............................. 11.4% 5.5% 107.3%
Quarters Ended June 30, Percent Changes
-----------------------------------------------------------
DSG 1999 1998 1999 vs. 1998
----------------- ---------------- ---------------------
Revenues ...................................... $ 4,411 $ 5,297 (16.7%)
Operating income (loss) ....................... $ (747) $ 71 (1152.1%)
Operating margin .............................. (16.9%) 1.3% (1363.4%)
</TABLE>
7
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
ESG: ESG's increase in revenue and operating income for the three-month period
ended June 30, 1999, as compared with the prior corresponding period, 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 approximately
$14.6 million in additional revenues, and $1.0 million of operating income to
the ESG operating segment in the first quarter of fiscal 2000. The overall
increase was also attributable to continued growth of the Company's military
display workstation programs.
EOSG: The increase in revenues and operating income for the three-month period
ended June 30, 1999, as compared with the prior corresponding period, 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 approximately $24.1 million in additional revenues, and
$2.0 million of operating income to the EOSG operating segment in the first
quarter of fiscal 2000. EOSG's operating income for the three-month period ended
June 30, 1999 includes a charge of $450,000 for anticipated costs to be incurred
in connection with certain product warranty issues.
FSCG: FSCG's revenues decreased by approximately $1.9 million, as compared with
prior year results, while operating income improved by 70.5% to $1.0 million.
The decline in revenues was primarily the result of 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: 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. The
decrease in DSG's operating income and operating margin was 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 by the effect of previously implemented
cost reduction initiatives. DSG is currently in the process of assessing
additional cost reduction measures to ensure that costs are reduced to a level
commensurate with expected revenues.
FINANCIAL CONDITION AND LIQUIDITY
CASH AND CASH FLOW
The following table provides cash flow statement data for the Company for the
three-month periods ended June 30, 1999 and 1998:
Three Months Ended June 30,
-----------------------------
1999 1998
----------- ------------
Net cash used in operating activities ........ $(9,991,000) $(3,418,000)
Net cash used in investing activities ........ $(1,308,000) $(1,240,000)
Net cash provided by financing activities .... $ 9,052,000 $ 2,943,000
8
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
The $6.6 million increase in net cash used in operating activities in the first
quarter of fiscal 2000, as compared with the first quarter 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 three month period ended June 30,
1999 consisted solely of capital expenditures. The Company expects that its
capital expenditures for fiscal 2000 will be approximately $8.0 million.
The $6.1 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.
Other than cash flows from operations, the Line of Credit is the Company's
primary source of liquidity. As of June 30, 1999, the Company had approximately
$26.9 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 $1.2 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 June 30, 1999 was approximately $353.4 million, as compared with
$365.8 million at March 31, 1999. The Company booked approximately $76.0 million
in new orders in the first quarter of fiscal 2000.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133).
SFAS 133 provides authoritative guidance on accounting and financial reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. On July 7, 1999, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 137, which officially delays the
effective date of SFAS 133 for one year, to fiscal years beginning after June
15, 2000. Adoption of SFAS 133 is not expected to have a material impact on the
Company's financial position or results of operations.
YEAR 2000
DRS has initiated a Year 2000 readiness plan focused on identification and
remediation of information processes which may not function correctly at the
beginning of the Year 2000. The plan, developed as a company-wide effort and
directed by a corporate Y2K committee, monitors the DRS operating groups'
performance as the groups proceed through the phases of awareness, assessment
and remediation.
Each DRS operating group has appointed its own Year 2000 project staff,
responsible for implementation of the plan and for reporting progress and costs
to the corporate Y2K committee. 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 compliance
efforts of the DRS operating groups. On an aggregate basis, DRS estimates that
the costs of its Year 2000 readiness will total approximately $1.3 million, of
which approximately $.9 million has been spent to date. Although the various
operating groups are currently at varying phases of the readiness process, the
company expects that information systems will be protected from material failure
by mid fiscal 2000 and that company products will have achieved such readiness
by November of this year.
9
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
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 evaluates hardware and systems software. DRS
substantially has 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. Based on the current
schedule, the Company's IT Systems 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 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 compliance in a timely manner could have a material adverse
effect on the Company's operations. Evaluations of critical third parties have
been initiated 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'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 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 the fall of
1999. These evaluations will be followed by corrective actions and the
development of contingency plans, if considered necessary.
At a projected $1.3 million, total costs associated with required IT Systems
modifications to become Year 2000 compliant 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 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'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 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. 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's results of operations, liquidity or financial
condition. DRS implemented its Year 2000 Project with the intention of
significantly reducing DRS's level of risk regarding the Year
10
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
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.
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 June 30, 1999 follows:
<TABLE>
<CAPTION>
Weighted
Average
Notional Variable Ceiling Floor Interest
Effective Date Termination 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% 4.79%
Collar No. 2 April 26, 1999 January 26, 2002 $20,000,000 LIBOR** 5.75% 4.80% 5.04%
Collar No. 3 April 26, 1999 January 26, 2000 $20,000,000 LIBOR** 5.75% 4.77% 5.04%
</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.
11
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are party to various legal actions and claims in the ordinary course of
our business. In our opinion, we have adequate legal defenses for each of
the actions and claims and we believe that their ultimate disposition will
not have a material adverse affect on our consolidated financial position
or results of operations.
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.
(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. To date, no claim has been made
or threatened against the Company or DRS Photronics. DRS Photronics is
currently unable to ship certain equipment related to the case, resulting
in delays in the Company's recognition of revenues. At this time, the
Company is unable to quantify the effect of the delayed shipments on its
future operations or financial position, or to predict when such shipments
ultimately will be made, although the delays are expected to impact the
Company's fiscal year 2000 first half 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
12
<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 13, 1999 /s/ RICHARD A. SCHNEIDER
-----------------------------------------
Richard A. Schneider
Executive Vice President,
Chief Financial Officer and Treasurer
<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,
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> JUN-30-1999
<EXCHANGE-RATE> 1
<CASH> 7,971,000
<SECURITIES> 0
<RECEIVABLES> 69,386,000
<ALLOWANCES> 521,000
<INVENTORY> 74,230,000
<CURRENT-ASSETS> 154,949,000
<PP&E> 66,804,000
<DEPRECIATION> 33,860,000
<TOTAL-ASSETS> 319,537,000
<CURRENT-LIABILITIES> 138,469,000
<BONDS> 101,137,000
0
0
<COMMON> 97,000
<OTHER-SE> 74,503,000
<TOTAL-LIABILITY-AND-EQUITY> 319,537,000
<SALES> 88,175,000
<TOTAL-REVENUES> 88,175,000
<CGS> 83,235,000
<TOTAL-COSTS> 83,235,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,147,000
<INCOME-PRETAX> 1,614,000
<INCOME-TAX> 646,000
<INCOME-CONTINUING> 968,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 968,000
<EPS-BASIC> 0.10
<EPS-DILUTED> 0.10
</TABLE>
