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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 June 30, 2000
|_| 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 11, 2000, 9,632,390 shares of registrant's Common Stock,
$.01 par value, were outstanding (net 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 - June 30,
2000 and March 31, 2000.................................. 1
Condensed Consolidated Statements of Earnings -
Three Months Ended June 30, 2000 and 1999 ............... 2
Condensed Consolidated Statements of Cash Flows -
Three Months Ended June 30, 2000 and 1999................ 3
Notes to Condensed Consolidated Financial Statements..... 4-9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................... 10-15
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk..................................................... 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings........................................ 17
ITEM 6. Exhibits and Reports on Form 8-K......................... 17
SIGNATURES................................................................ 18
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
(in thousands, except share data)
June 30, 2000 March 31, 2000
------------- --------------
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,391 $ 3,778
Accounts receivable, net 80,659 80,894
Inventories, net of progress payments 71,815 62,326
Prepaid expenses and other current assets 5,682 6,326
Net current assets of discontinued operations 5,505 5,309
--------- ---------
Total current assets 170,052 158,633
--------- ---------
Property, plant and equipment, less accumulated
depreciation and amortization of $33,097 and
$28,033 at June 30, 2000 and March 31, 2000,
respectively 29,779 29,006
--------- ---------
Goodwill and related intangible assets, less accumulated
amortization of $16,392 and $14,821 at
June 30, 2000 and March 31, 2000, respectively 128,209 125,321
--------- ---------
Deferred income taxes and other noncurrent assets 6,677 7,138
--------- ---------
$ 334,717 $ 320,098
--------- ---------
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 5,873 $ 5,699
Short-term bank debt 24,801 17,781
Accounts payable 25,378 28,295
Accrued expenses and other current liabilities 85,364 85,474
--------- ---------
Total current liabilities 141,416 137,249
Long-term debt, excluding current installments 102,512 97,695
Other noncurrent liabilities 8,214 6,970
--------- ---------
Total liabilities 252,142 241,914
Stockholders' equity:
Preferred Stock, no par value. Authorized 2,000,000 shares;
no shares issued at June 30, 2000 and March 31, 2000 $ -- $ --
Common Stock, $.01 par value per share
Authorized 20,000,000 shares; issued 10,073,329
and 9,717,020 shares at June 30, 2000 and
March 31, 2000, respectively 101 97
Additional paid-in capital 52,584 48,584
Retained earnings 33,945 32,047
Accumulated other comprehensive losses (1,657) (86)
Treasury stock, at cost:
440,939 shares of Common Stock at June 30, 2000
and March 31, 2000 (1,988) (1,988)
Unamortized restricted stock compensation (410) (470)
--------- ---------
Net stockholders' equity 82,575 78,184
--------- ---------
Commitments and contingencies
$ 334,717 $ 320,098
========= =========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(Unaudited)
(in thousands,
except per share data)
Three Months Ended June 30,
-----------------------
2000 1999
-------- --------
Revenues $ 94,521 $ 85,646
Costs and expenses (87,366) (80,372)
-------- --------
Operating income 7,155 5,274
Interest and other income, net (74) (100)
Interest and related expenses 3,107 3,145
-------- --------
Earnings from continuing operations before
minority interests and income taxes 4,122 2,229
Minority interests 325 279
-------- --------
Earnings from continuing operations before
income taxes 3,797 1,950
Income taxes 1,899 747
-------- --------
Earnings from continuing operations 1,898 1,203
Loss from discontinued operations, net of tax
benefit of $101 -- (235)
-------- --------
Net earnings $ 1,898 $ 968
======== ========
Earnings per share of common stock
Basic earnings per share:
Earnings from continuing operations $ 0.20 $ 0.13
Loss from discontinued operations, net of tax -- (0.03)
Net earnings $ 0.20 $ 0.10
Diluted earnings per share:
Earnings from continuing operations $ 0.18 $ 0.13
Loss from discontinued operations, net of tax -- (0.03)
Net earnings $ 0.18 $ 0.10
See accompanying Notes to Condensed Consolidated Financial Statements.
2
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)
Three Months Ended June 30,
-------- --------
2000 1999
-------- --------
Cash flows from operating activities
Net earnings $ 1,898 $ 968
Adjustments to reconcile net earnings to cash
flows from operating activities:
Net loss from discontinued operations -- 235
Depreciation and amortization 4,142 4,455
Other, net (1,542) (454)
Changes in assets and liabilities, net of
effects from business combinations:
Decrease in accounts receivable 3,041 7,156
Increase in inventories (2,986) (1,586)
Decrease in prepaid expenses and
other current assets 479 638
Decrease in accounts payable (3,266) (2,318)
Decrease in accrued expenses and other
current liabilities (3,463) (19,907)
Other, net 803 525
-------- --------
Net cash used in operating activities of
continuing operations (894) (10,288)
Net cash provided by operating activities of
discontinued operations -- 292
Net cash used in operating activities (894) (9,996)
-------- --------
Cash flows from investing activities
Capital expenditures (2,580) (1,239)
Payments pursuant to business combination,
net of cash acquired (6,757) --
Other, net 40 --
-------- --------
Net cash used in investing activities of
continuing operations (9,297) (1,239)
Net cash used in investing activities of
discontinued operations -- (69)
-------- --------
Net cash used in investing activities (9,297) (1,308)
-------- --------
Cash flows from financing activities
Net borrowings of short-term debt 7,056 10,973
Payments on long-term debt (1,902) (1,929)
Net proceeds from acquisition-related debt 7,000 --
Other, net 7 8
-------- --------
Net cash provided by financing activities 12,161 9,052
-------- --------
Effect of exchange rates on cash and cash
equivalents 643 64
-------- --------
Net increase (decrease) in cash and cash
equivalents 2,613 (2,188)
Cash and cash equivalents, beginning of period 3,778 10,031
-------- --------
Cash and cash equivalents, end of period $ 6,391 $ 7,843
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(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, 2000, and the
results of operations and cash flows for the three-month periods ended June
30, 2000 and June 30, 1999. All significant intercompany balances and
transactions have been eliminated. On May 18, 2000, the Company's Board of
Directors approved an agreement to sell its magnetic tape head business
units located in St. Croix Falls, Wisconsin and Razlog, Bulgaria.
Accordingly, the Company has restated its financial statements for the
period ended June 30, 1999 to present the operating results of these
business units as discontinued operations. Management anticipates that the
sale will be completed in the second quarter of fiscal 2001. Certain other
items in the accompanying notes to the June 30, 1999 condensed consolidated
financial statements have been reclassified to conform to the fiscal 2001
presentation. The results of operations for the three months ended June 30,
2000 are not necessarily indicative of the results to be expected for the
full year.
2. BUSINESS COMBINATIONS
On June 14, 2000, a newly formed subsidiary of the Company acquired the
assets of General Atronics Corporation for $7.0 million in cash and $4.0
million in stock (approximately 355,000 shares of DRS Common Stock).
Located in Wyndmoor, Pennsylvania, and now operating as DRS Communications
Company, LLC (DRS Communications Company), the company designs, develops
and manufactures military data link components and systems, high-frequency
communication modems, tactical and secure digital telephone components, and
radar surveillance systems for U.S. and international militaries. DRS
Communications Company will be managed as part of the DRS Flight Safety and
Communications Group. The acquisition has been accounted for using the
purchase method of accounting. The excess of costs over the estimated fair
value of the net tangible assets acquired was approximately $5.3 million,
including estimated costs of approximately $1.0 million for professional
fees and other expenses related to the acquisition, and is being amortized
on a straight-line basis over periods not to exceed 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
DRS Communications Company, were not significant to those of the Company as
of the acquisition date or for the period presented.
4
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
In the fourth quarter of fiscal 2000 the Company closed its Longmont,
Colorado facility, which was acquired as part of the Company's
acquisition of NAI Technologies, Inc. in the fourth quarter of fiscal 1999.
Engineering and production performed at this facility were transferred to
other DRS locations. Approximately $1.5 million was recorded in fiscal
2000, as an adjustment to acquisition cost, for costs incurred in
connection with closing the facility. The following table reconciles the
related liability at March 31, 2000 to the liability as of June 30, 2000:
(in thousands)
LIABILITY AT UTILIZED LIABILITY AT
MARCH 31, FISCAL JUNE 30,
2000 2001 2000
------ ------ ------
Severance / Employee costs $1,195 $1,195 $ --
Estimated lease commitments and
related facility costs 215 215 --
------ ------ ------
Total $1,410 $1,410 $ --
====== ====== ======
3. INVENTORIES
Inventories are summarized as follows:
(in thousands)
JUNE 30, MARCH 31,
2000 2000
-------- --------
Work-in-process $ 88,085 $ 79,058
Raw material and finished
goods 8,788 10,917
-------- --------
96,873 89,975
-------- --------
Less progress payments (25,058) (27,649)
-------- --------
Total $ 71,815 $ 62,326
======== ========
General and administrative costs included in work-in-process were
approximately $13.1 million and $12.7 million at June 30, 2000 and March
31, 2000, respectively. General and administrative expenses included in
costs and expenses amounted to approximately $18.7 million and $14.8
million for the three months ended June 30, 2000 and June 30, 1999,
respectively. Included in those amounts are expenditures for internal
research and development amounting to approximately $2.2 million and $1.4
million for the fiscal quarters ended June 30, 2000 and June 30, 1999,
respectively.
5
<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>
(in thousands, except share data)
THREE MONTHS ENDED JUNE 30,
--------------------------
2000 1999
------- -------
<S> <C> <C>
Basic EPS Computation
Net earnings from continuing operations $ 1,898 $ 1,203
Net loss from discontinued operations, net of tax -- (235)
------- -------
Net earnings $ 1,898 $ 968
------- -------
Weighted average common shares outstanding 9,349 9,245
------- -------
Basic earnings (losses) per share:
Net earnings from continuing operations $ 0.20 $ 0.13
Net loss from discontinued operations, net of tax -- (0.03)
------- -------
Net earnings $ 0.20 $ 0.10
======= =======
Diluted EPS Computation
Net earnings from continuing operations $ 1,898 $ 1,203
Interest and expenses related to convertible debentures 240 --
------- -------
Adjusted net earnings from continuing operations 2,138 1,203
Net loss from discontinued operations, net of tax -- (235)
------- -------
Adjusted net earnings $ 2,138 $ 968
------- -------
Diluted common shares outstanding:
Weighted average common shares outstanding 9,349 9,245
Stock options 452 131
Convertible debentures 2,162 --
------- -------
Diluted common shares outstanding 11,963 9,376
------- -------
Diluted earnings (losses) per share:
Net earnings from continuing operations $ 0.18 $ 0.13
Net loss from discontinued operations, net of tax -- (0.03)
------- -------
Net earnings $ 0.18 $ 0.10
======= =======
</TABLE>
In the computation of earnings per common share for the three-month period
ended June 30, 1999, the assumed conversion of the Company's 9% Senior
Subordinated Convertible Debentures and 12% Convertible Notes were excluded
because their inclusion would have been antidilutive.
6
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
5. COMPREHENSIVE EARNINGS
(in thousands)
THREE MONTHS
ENDED JUNE 30,
-------------------
2000 1999
------- -------
Comprehensive earnings
Net earnings $ 1,898 $ 968
Other comprehensive earnings;
Foreign curency translation adjustment (1,571) 160
------- -------
Comprehensive earnings $ 327 $ 1,128
======= =======
6. RESTRUCTURING CHARGE
During fiscal 2000, the Company recorded restructuring charges totalling
approximately $2.2 million. The Company's restructuring initiatives
impacted the Electro-Optical Systems Group (EOSG) and Flight Safety and
Communications Group (FSCG) operating segments and DRS Corporate
Headquarters. EOSG recorded a restructuring charge of aproximately $831,000
primarily for costs relating to consolidating two facilities into one in
Oakland, New Jersey, as of March 31, 2000. FSCG recorded a restructuring
charge of approximately $669,000 and $143,000 at its DRS Hadland Ltd. ("DRS
Hadland") and DRS Precision Echo, Inc. operating units, respectively, for
severance and other employee related costs. The DRS Hadland restructuring
charge was recorded in connection with the transition of the day-to-day
management of DRS Hadland's operations from EOSG to FSCG in the second half
of fiscal 2000. In addition, DRS Corporate Headquarters recorded a
restructuring charge of approximately $560,000 for severance and other
employee related costs. Severance and other employee costs were recorded in
connection with the termination of 13 employees. As of March 31, 2000, all
terminations had occurred. A portion of the termination benefits will be
paid in accordance with contractual terms over the next two years. The
following table reconciles the restructuring liability at March 31, 2000 to
the restructuring liability as of June 30, 2000:
(in thousands)
LIABILITY AT UTILIZED LIABILITY AT
MARCH 31, FISCAL JUNE 30,
2000 2001 2000
------ ------ -----
Estimated lease commitments
and related facility costs $ 328 $ 97 $ 231
Severance / Employee costs 690 101 589
------ ----- -----
Total $1,018 $ 198 $ 820
====== ===== =====
7
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
7. OPERATING SEGMENTS
DRS operates in three principal business segments on the basis of products
and services offered. Each operating unit is comprised of separate and
distinct businesses: the Electronic Systems Group (ESG); the
Electro-Optical Systems Group (EOSG), and the Flight Safety and
Communications Group (FSCG). All other operations are grouped in "Other."
Information about the Company's operations in these segments for the fiscal
quarters ended June 30, 2000 and June 30, 1999 is as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
ESG EOSG FSCG OTHER TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Quarter Ended June 30, 2000
Revenues $ 41,537 $ 39,511 $ 11,291 $ 2,182 $ 94,521
Operating income (loss) $ 2,500 $ 3,830 $ 945 $ (120) $ 7,155
Identifiable assets $ 92,942 $145,816 $ 74,622 $ 15,832 $329,212
Depreciation and amortization $ 881 $ 1,918 $ 795 $ 548 $ 4,142
Capital expenditures $ 495 $ 843 $ 1,043 $ 199 $ 2,580
Quarter Ended June 30, 1999
Revenues $ 43,551 $ 29,029 $ 11,184 $ 1,882 $ 85,646
Operating income (loss) $ 3,187 $ 2,059 $ 912 $ (884) $ 5,274
Identifiable assets $ 79,562 $152,083 $ 59,607 $ 19,970 $311,222
Depreciation and amortization $ 912 $ 2,162 $ 746 $ 635 $ 4,455
Capital expenditures $ 369 $ 371 $ 275 $ 224 $ 1,239
</TABLE>
During the three months ended June 30, 2000, EOSG recorded inter-segment
revenues of $35,000. During the three months ended June 30, 1999, EOSG and
FSCG recorded inter-segment revenues of approximately $400,000 and $48,000,
respectively.
8. CASH FLOW INFORMATION
(in thousands)
Three Months Ended
June 30,
------------------
2000 1999
------ ------
Cash paid for:
Income taxes $2,054 $4,130
Interest $3,223 $3,920
8
<PAGE>
9. CONTINGENCIES
The Company is party to various legal actions and claims arising in the
ordinary course of its business. In Management's opinion, the Company has
adequate legal defenses for each of the actions and claims and that their
ultimate disposition will not have a material adverse effect on the
Company's 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. (Photronics). These subpoenas were issued in
connection with United States v. Treas, 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.
Although additional subpoenas were issued to the Company on August 12, 1999
and May 10, 2000, to date, no claim has been made against the Company or
Photronics. During the Government's investigation, until October 29, 1999,
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, Photronics received authorization to ship its first boresight
system since the start of the 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
impact the Company's fiscal year 2001 results.
The Company is 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 the Company acquired,
through certain of its subsidiaries, certain assets of Spar. The Company is
also in a dispute with Raytheon Company (Raytheon) with respect to the
working capital adjustment (not to exceed $7.0 million), if any, provided
for in the purchase agreement between the Company and Raytheon dated as of
July 28, 1998, pursuant to which the Company acquired, through certain
subsidiaries, certain assets of Raytheon.
9
<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 continuing operations of DRS Technologies,
Inc. and Subsidiaries (hereinafter, the Company or DRS) as of June 30, 2000 and
for the three-month periods ended June 30, 2000 and June 30, 1999. 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.
BUSINESS COMBINATIONS
On June 14, 2000, a newly formed subsidiary of the Company acquired the assets
of General Atronics Corporation for $7.0 million in cash and $4.0 million in
stock (approximately 355,000 shares of DRS Common Stock). Located in Wyndmoor,
Pennsylvania, and now operating as DRS Communications Company, LLC (DRS
Communications Company), the company designs, develops and manufactures military
data link components and systems, high-frequency communication modems, tactical
and secure digital telephone components, and radar surveillance systems for U.S.
and international militaries. DRS Communications Company will be managed as part
of the DRS Flight Safety and Communications Group. The acquisition of DRS
Communications Company added approximately $25.5 million to the Company's
backlog as of June 30, 2000. The acquisition has been accounted for using the
purchase method of accounting. The excess of costs over the estimated fair value
of the net tangible assets acquired was approximately $5.3 million, including
estimated costs of approximately $1.0 million for professional fees and other
expenses related to the acquisition, and is being amortized on a straight-line
basis over periods not to exceed 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 DRS Communications Company were not
significant to those of the Company as of the acquisition date and for the
period presented.
RESTRUCTURING CHARGE
During fiscal 2000, the Company recorded restructuring charges totaling
approximately $2.2 million. The Company's restructuring initiatives impacted the
Electro-Optical Systems Group (EOSG) and Flight Safety and Communications Group
(FSCG) operating segments and DRS Corporate Headquarters. EOSG recorded a
restructuring charge of approximately $831,000 primarily for costs relating to
consolidating two facilities into one in Oakland, New Jersey, as of March 31,
2000. FSCG recorded a restructuring charge of approximately $669,000 and
$143,000 at its DRS Hadland Ltd. ("DRS Hadland") and DRS Precision Echo, Inc.
operating units, respectively, for severance and other employee related costs.
10
<PAGE>
The DRS Hadland restructuring charge was recorded in connection with the
transition of the day-to-day management of DRS Hadland's operations from EOSG to
FSCG in the second half of fiscal 2000. In addition, DRS Corporate Headquarters
recorded a restructuring charge of approximately $560,000 for severance and
other employee related costs. Severance and other employee costs were recorded
in connection with the termination of 13 employees. As of March 31, 2000, all
terminations had occurred. A portion of the termination benefits will be paid in
accordance with contractual terms over the next two years. The following table
reconciles the restructuring liability at March 31, 2000 to the restructuring
liability as of June 30, 2000:
(in thousands)
Liability at Utilized Liability at
March 31, 2000 Fiscal 2001 June 30, 2000
-------------- ----------- -------------
Estimated lease commitments
and related facility
costs ..................... $ 328 $ 97 $231
Severance/Employee costs ... 690 101 589
------ ---- ----
Total ...................... $1,018 $198 $820
====== ==== ====
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
CONSOLIDATED SUMMARY
Consolidated revenues for the three-month period ended June 30, 2000 increased
approximately 10% to $94.5 million from $85.6 for the same three-month period in
fiscal 2000. The revenue growth in the first quarter of fiscal 2001 was
primarily attributable to increased shipments of the Company's second generation
ground electro-optical sighting systems and infrared detectors, as well as
increases in electro-optical contract manufacturing. Operating income increased
approximately 36% to $7.2 million from $5.3 for the same three-month period in
fiscal 2000. The increase in operating income was due to the overall increase in
revenues and lower operating expenses at certain operating units. See discussion
of operating segments below for additional information.
Interest and related expenses were approximately $3.1 million for the
three-month periods ended June 30, 2000 and June 30, 1999.
The provision for income taxes for the first quarter of fiscal 2001 reflects an
annual estimated effective income tax rate of 50%, versus 40% for fiscal 2000.
The increase in the effective tax rate for fiscal 2001 is primarily due to the
following: the continued improvement in domestic earnings, which are taxed at
higher overall rates in comparison to the Company's foreign tax jurisdictions;
the effect of non-deductible goodwill and the Company's expectation that certain
domestic and foreign tax benefits, recognized in fiscal 2000, will not be
recurring in fiscal 2001.
Earnings before interest, income taxes, depreciation and amortization (EBITDA)
for the three-months ended June 30, 2000 was $11.0 million, an increase of $1.6
million or 17.1% as compared with the three-months ended June 30, 1999.
11
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
OPERATING SEGMENTS
DRS operates in three principal business segments on the basis of products and
services offered. Each operating unit is comprised of separate and distinct
businesses: the Electronic Systems Group (ESG); the Electro-Optical Systems
Group (EOSG), and the Flight Safety and Communications Group (FSCG). All other
operations are grouped in "Other."
o ESG is a leading provider of naval computer workstations used to process
and display integrated combat information. ESG produces rugged computers
and peripherals, surveillance, radar and tracking systems, acoustic signal
processing and display equipment, and combat control systems for U.S. and
international military organizations. ESG performs field service and depot
level repairs for its products, as well as other manufacturers' systems,
and also provides systems and software engineering support to the U.S. Navy
for the testing of shipboard combat systems. ESG products are used on
front-line platforms, including Aegis destroyers and cruisers, aircraft
carriers, submarines and surveillance aircraft. ESG's products also are
used in the U.S. Army's ongoing battlefield digitization programs. ESG
markets directly to various U.S. Government agencies, primarily in the
intelligence community, and has teamed with leading corporations, such as
General Dynamics and Booz-Allen.
o EOSG produces systems and subsystems for infrared night vision and
targeting products used in some of the U.S. Army's most important
battlefield platforms, including the Abrams Main Battle Tank, Bradley
Infantry Fighting Vehicle and the HMMWV scout vehicle. EOSG designs,
manufactures and markets products that allow operators to detect, identify
and target objects based upon their infrared signatures regardless of the
ambient light level. This Group is also a leading designer and manufacturer
of eye-safe laser range finders and multiple-platform weapons calibration
systems for such diverse air platforms as the Apache attack helicopter and
AC-130U gunship. EOSG is leveraging its technology base by expanding into
related non-defense markets and manufactures electro-optical modules for a
commercial device used in corrective laser eye surgery.
o FSCG is a leading manufacturer of deployable flight emergency or "black
box" recording equipment. These complete emergency avionics systems combine
the functionality of a crash locator beacon with a flight incident recorder
for search, recovery and crash analysis. This Group uses advanced
commercial technology in the design and manufacture of multi-sensor
digital, analog and video data capture and recording products, as well as
high-capacity data storage devices for harsh aerospace and defense
environments. FSCG also manufactures shipboard communications and infrared
laser warning and range finder displays for Canadian and other foreign
navies. FSCG is also a leading manufacturer of ultra high-speed digital
imaging systems.
o Other includes the activities of the parent company, DRS Corporate
Headquarters, DRS Ahead Technology, Inc. (DRS Ahead) and certain
non-operating subsidiaries of the Company. DRS Ahead produces magnetic head
components used in the manufacturing process of computer disk drives, which
burnish and verify the quality of disk surfaces. DRS Ahead also services
and manufactures video heads used in broadcast television equipment.
12
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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
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:
(in thousands, except for percentages)
QUARTERS ENDED JUNE 30, PERCENT CHANGES
----------------------- ---------------
ESG 2000 1999 2000 vs. 1999
----------- ---------- ---------------
Revenues $41,537 $43,551 (4.6%)
Operating income $ 2,500 $ 3,187 (21.6%)
Operating margin 6.0% 7.3% (17.8%)
QUARTERS ENDED JUNE 30, PERCENT CHANGES
----------------------- ---------------
EOSG 2000 1999 2000 vs. 1999
----------- ---------- ---------------
Revenues $39,511 $29,029 36.1%
Operating income $ 3,830 $ 2,059 86.0%
Operating margin 9.7% 7.1% 36.7%
QUARTERS ENDED JUNE 30, PERCENT CHANGES
----------------------- ---------------
FSCG 2000 1999 2000 vs. 1999
----------- ---------- ---------------
Revenues $ 11,291 $11,184 1.0%
Operating income $ 945 $ 912 3.6%
Operating margin 8.4% 8.2% 2.6%
QUARTERS ENDED JUNE 30, PERCENT CHANGES
----------------------- ---------------
OTHER 2000 1999 2000 vs. 1999
----------- ---------- ---------------
Revenues $ 2,182 $ 1,882 15.9%
Operating loss $ (120) $ (884) 86.4%
Operating margin (5.5%) (47.0%) 88.3%
ESG: ESG's decrease in revenue and operating income for the three-month period
ended June 30, 2000, as compared with the period ended June 30, 1999, was due
primarily to a decline in shipments of certain rugged computer and peripheral
products in the U.K. and less favorable absorption of fixed operating expenses
associated with lower production volumes. The overall decrease in revenue and
operating income in the first quarter of fiscal 2001 was offset, in part, by the
continued growth of the Company's military display workstation programs.
Operating income was also impacted favorably in the first quarter of fiscal 2001
by the cost savings associated with the Company shutting down its Longmont,
Colorado facility at the end of fiscal 2000 and consolidating production into
the Company's newest production facility in Johnstown, Pennsylvania.
EOSG: For the three-months ended June 30, 2000 revenues increased by
approximately $10.5 million, as compared with the three-months ended June 30,
1999, while operating income improved by 86% to $3.8 million. The increase in
revenues is driven by increased shipments of the Group's second generation
ground electro-optical sighting systems, infrared detectors, and boresighting
systems, as well as increases in electro-optical contract manufacturing. The
increase in operating income was primarily driven by the 36% increase in
revenues and changes in product mix to higher margin products. In addition to a
change in product mix, the 37% improvement in operating margin in the first
quarter of fiscal 2001 was also due to the realization of management's fiscal
2000 efforts to reduce overall production costs on a certain long-term
production program. Shipments under the current production contract for such
program commenced
13
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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
in the third quarter of fiscal 2000, and as such the benefits of management's
cost reduction initiatives are not reflected in the fiscal 2000 first quarter
operating results. Also driving the increases in fiscal 2001 operating income
and operating margins was the fact that EOSG's operating income for the
three-month period ended June 30, 1999 included a charge of $450,000 for certain
product warranty reserve issues.
FSCG: FSCG's revenues increased 1.0% to $11.3 million, as compared with prior
year results, while operating income improved by 3.6% to approximately $1.0
million. Increases in revenue and operating income for the Group's contract
manufacturing services were offset by decreases in revenues and operating income
for the Group's high-speed cameras and mission data recording systems. Operating
margin increased to 8.4% for the three-months ended June 30, 2000, as compared
with 8.2% for the three-months ended June 30, 1999. This margin increase was
driven by a change in product mix and the impact of certain cost reduction
efforts implemented in the second half of fiscal 2000.
Other: The increase in revenues resulted from the improvement in the computer
disk drive marketplace and improved marketing of DRS Ahead's products and
services. The improvement in operating income and operating margin was the
result of increased revenues and the impact of previously implemented cost
reduction initiatives at DRS Ahead and the timing of certain costs recorded at
DRS Corporate Headquarters.
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, 2000 and June 30 1999:
(in thousands)
THREE MONTHS ENDED JUNE 30,
---------------------------
2000 1999
------- -------
Net cash used in operating activities $ (894) $(9,996)
Net cash used in investing activities $(9,297) $(1,308)
Net cash provided by financing activities $12,161 $ 9,052
The $.9 million net cash used in operating activities for the three months ended
June 30, 2000, is related to a $7.0 million decrease in advance payments under
the Q-70 program offset by a $3.5 million increase under the IBAS program, a
$5.0 million increase in accrued costs on acquired contracts under the HTI
program, a $.9 million decrease in unearned income under the Detector program
and a reduction in accrued expenses of $1.4 million relating to the shutting
down of the Longmont, Colorado facility.
Net cash used in investing activities for three-month period ended June 30, 2000
includes $6.8 million relating to the acquisition of DRS Communications Company
and $2.6 million for capital expenditures. Net cash used in investing
activities in the three-month period ended June 30, 1999 of $1.3 million,
consisted solely of capital expenditures. The Company expects that its capital
expenditures rate for the quarter will remain unchanged for the balance of the
year.
The $12.2 million of net cash provided by financing activities is primarily 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 used to finance the acquisition of DRS Communications
Company and for 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, 2000, the Company had approximately $35.6 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 $1.9 million.
14
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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
The Company actively seeks to finance its business in a manner that preserves
financial flexibility, while minimizing borrowing costs to the extent
practicable. Management continually reviews the changing financial, market and
economic conditions to manage the types, amounts and maturities of the
Corporation's indebtedness.
BACKLOG
Backlog at June 30, 2000 was approximately $408.5 million (including $25.5
million in backlog added as a result of the acquisition of DRS Communications
Company), as compared with $388.1 million at March 31, 2000. The Company
booked approximately $92.6 million in new orders in the first quarter of fiscal
2001.
15
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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
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 $160 million secured credit facility with Mellon Bank, N.A., as Agent,
are sensitive to changes in interest rates as such borrowings bear interest at
variable rates. In January 1998, and January 1999 the Company entered into
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, 2000 and March 31, 2000 follows:
<TABLE>
<CAPTION>
(in thousands)
NOTIONAL AMOUNT
EFFECTIVE EXPIRATION --------------------------------- VARIABLE RATE CEILING FLOOR
DATE DATE JUNE 30, 2000 MARCH 31, 2000 BASE RATE RATE
-------------- --------------- --------------- -------------- ------------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
April 8, 1998 January 8, 2001 $ 6,200 $ 6,200 CAD-BA* 6.35% 4.84%
April 26, 1999 January 26, 2002 $ 20,000 $ 20,000 LIBOR** 5.75% 4.80%
</TABLE>
----------
* - Canadian Bankers Acceptance Rate
** - London Interbank Offered Rate
The weighted average interest rate the Company's LIBOR and Canadian Bankers
Acceptance Rate-based borrowings outstanding during the three-months ended June
30, 2000 were 6.86% and 5.25%, respectively.
FOREIGN CURRENCY EXCHANGE RISK
DRS operates and conducts business in foreign countries and as a result is
exposed to fluctuations 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 believes that its 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.
16
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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are a party to various legal actions and claims arising 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 effect on our
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. (Photronics). 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. Although additional subpoenas were issued to the Company on
August 12, 1999 and May 10, 2000, to date, no claim has been made
against the Company or Photronics. During the Government's
investigation, until October 29, 1999, 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, Photronics
received authorization to ship its first boresight system since the
start of the 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 impact the
Company's fiscal year 2001 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. We are also
in a dispute with Raytheon Company (Raytheon) with respect to the
working capital adjustment, if any, provided for in the purchase
agreement between the Company and Raytheon dated as of July 28, 1998,
pursuant to which we acquired, through certain subsidiaries, certain
assets of Raytheon.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
17
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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 11, 2000 /s/ Richard A. Schneider
-------------------------------------
Richard A. Schneider
Executive Vice President,
Chief Financial Officer and Treasurer
18
