================================================================================
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 DECEMBER 31, 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 FEBRUARY 10, 2000, 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 - December 31,
1999 and March 31, 1999................................ 1
Condensed Consolidated Statements of Operations -
Three and Nine Months Ended December 31, 1999
and 1998 .............................................. 2
Condensed Consolidated Statements of Cash Flows
- Nine Months Ended December 31, 1999 and 1998......... 3
Notes to Condensed Consolidated Financial Statements... 4-8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 9-14
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk................................................... 14
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings...................................... 15
ITEM 6. Exhibits and Reports on Form 8-K....................... 15
SIGNATURES ....................................................... 16
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
<TABLE>
<CAPTION>
DECEMBER 31, 1999 MARCH 31, 1999
----------------- --------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,920,000 $ 10,154,000
Accounts receivable, net 70,290,000 76,135,000
Inventories, net of progress payments 70,773,000 72,907,000
Prepaid expenses and other current assets 3,687,000 4,316,000
------------- -------------
Total current assets 147,670,000 163,512,000
------------- -------------
Property, plant and equipment, less accumulated
depreciation and amortization of $46,036,000 and
$38,730,000 at December 31, 1999 and March 31, 1999,
respectively 30,846,000 34,163,000
------------- -------------
Goodwill and related intangible assets, less accumulated
amortization of $14,261,000 and $9,163,000 at
December 31, 1999 and March 31, 1999, respectively 128,029,000 122,335,000
------------- -------------
Deferred income taxes and other noncurrent assets 8,953,000 10,334,000
------------- -------------
$ 315,498,000 $ 330,344,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt $ 5,302,000 $ 5,844,000
Short-term bank debt 24,556,000 9,169,000
Accounts payable 26,996,000 42,470,000
Accrued expenses and other current liabilities 27,663,000 33,344,000
Customer advances 6,392,000 15,973,000
Unearned income and accrual for future costs
related to acquired contracts 35,323,000 43,221,000
------------- -------------
Total current liabilities 126,232,000 150,021,000
Long-term debt, excluding current installments 104,600,000 102,091,000
Other noncurrent liabilities 5,984,000 4,790,000
------------- -------------
Total liabilities 236,816,000 256,902,000
Stockholders' equity:
Preferred Stock, no par value. Authorized 2,000,000 shares;
no shares issued at December 31, 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 December 31, 1999 and
March 31, 1999, respectively 97,000 96,000
Additional paid-in capital 48,484,000 48,038,000
Retained earnings 31,538,000 27,737,000
Accumulated other comprehensive earnings (losses) 1,086,000 (139,000)
Treasury stock, at cost:
440,939 and 385,164 shares of Common Stock at
December 31, 1999 and March 31, 1999, respectively (1,988,000) (1,493,000)
Unamortized restricted stock compensation (535,000) (797,000)
------------- -------------
Net stockholders' equity 78,682,000 73,442,000
------------- -------------
Commitments and contingencies -- --
$ 315,498,000 $ 330,344,000
============= =============
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
1
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 105,664,000 $ 76,991,000 $ 284,772,000 $ 169,105,000
Costs and expenses 98,318,000 72,985,000 267,577,000 161,284,000
Restructuring charges 693,000 -- 693,000 --
------------- ------------- ------------- -------------
Operating income 6,653,000 4,006,000 16,502,000 7,821,000
Interest and other income, net 215,000 271,000 513,000 599,000
Interest and related expenses (3,426,000) (2,988,000) (9,507,000) (6,101,000)
Minority interests (385,000) (235,000) (955,000) (660,000)
------------- ------------- ------------- -------------
Earnings before income taxes and
extraordinary item 3,057,000 1,054,000 6,553,000 1,659,000
Income taxes 1,284,000 390,000 2,752,000 614,000
------------- ------------- ------------- -------------
Net earnings before extraordinary item 1,773,000 664,000 3,801,000 1,045,000
Extraordinary item, net of tax -- (2,306,000) -- (2,306,000)
------------- ------------- ------------- -------------
Net earnings (losses) $ 1,773,000 $ (1,642,000) $ 3,801,000 $ (1,261,000)
============= ============= ============= =============
Basic earnings per share:
Net earnings before extraordinary item $ 0.19 $ 0.10 $ 0.41 $ 0.17
Extraordinary item, net of tax $ -- $ (0.36) $ -- $ (0.37)
Net earnings (losses) $ 0.19 $ (0.26) $ 0.41 $ (0.20)
Diluted earnings per share:
Net earnings before extraordinary item $ 0.18 $ 0.10 $ 0.40 $ 0.16
Extraordinary item, net of tax $ -- $ (0.35) $ -- $ (0.35)
Net earnings (losses) $ 0.18 $ (0.25) $ 0.40 $ (0.19)
</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>
NINE MONTHS ENDED DECEMBER 31,
-------------------------------
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities
Net earnings $ 3,801,000 $ (1,261,000)
Adjustments to reconcile net earnings to cash
flows from operating activities:
Extraordinary item, net of tax -- 2,306,000
Depreciation and amortization 13,340,000 7,926,000
Inventory reserves and provision for doubtful accounts 2,388,000 1,023,000
Minority interest 240,000 443,000
Other, net 1,107,000 558,000
Changes in assets and liabilities, net of effects
from business combinations:
Decrease (increase) in accounts receivable 8,122,000 (3,314,000)
Decrease (increase) in inventories 1,744,000 (13,905,000)
Decrease in prepaid expenses and
other current assets 2,100,000 29,000
(Decrease) increase in accounts payable (16,955,000) 4,933,000
Decrease in accrued expenses and
other current liabilities (9,809,000) (2,213,000)
(Decrease) increase in customer advances (9,857,000) 15,254,000
Decrease in unearned income and accrual for
future costs related to acquired contracts (7,898,000) --
Other, net 1,912,000 892,000
------------ ------------
Net cash (used in) provided by operating activities (9,765,000) 12,671,000
------------ ------------
Cash flows from investing activities
Capital expenditures (3,505,000) (4,059,000)
Payments pursuant to business combinations,
net of cash acquired (8,656,000) (45,782,000)
Other, net -- 55,000
------------ ------------
Net cash used in investing activities (12,161,000) (49,786,000)
------------ ------------
Cash flows from financing activities
Net borrowings of short-term debt 11,542,000 13,140,000
Other long-term borrowings 8,000,000 42,075,000
Payments on long-term debt (3,715,000) (1,242,000)
Retirement of convertible debt (690,000) (4,992,000)
Other, net 8,000 191,000
------------ ------------
Net cash provided by financing activities 15,145,000 49,172,000
------------ ------------
Effect of exchange rates on cash and cash equivalents (453,000) (220,000)
------------ ------------
Net (decrease) increase in cash and cash equivalents (7,234,000) 11,837,000
Cash and cash equivalents, beginning of period 10,154,000 9,673,000
------------ ------------
Cash and cash equivalents, end of period $ 2,920,000 $ 21,510,000
============ ============
</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 December 31, 1999, and
the results of operations and cash flows for the three- and nine-month
periods ended December 31, 1999 and 1998. All significant intercompany
balances and transactions have been eliminated. Certain items in the March
31, 1999 and December 31, 1998 condensed consolidated financial statements
and accompanying notes have been reclassified to conform to the fiscal
2000 presentation. The results of operations for the nine months ended
December 31, 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., for approximately $7.8 million in cash and
potential future consideration, not to exceed a total of $10.2 million.
Located in Chippenham, Wiltshire, the United Kingdom, and now operating as
DRS Rugged Systems (Europe) Products Ltd. (RSEP), the company 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
RSEP were not significant to those of the Company as of the acquisition
date.
3. INVENTORIES
Inventories are summarized as follows:
December 31, 1999 March 31, 1999
----------------- --------------
Work-in-process $ 92,429,000 $ 95,392,000
Raw material and finished
goods 14,972,000 14,309,000
------------- -------------
107,401,000 109,701,000
Less progress payments (36,628,000) (36,794,000)
------------- -------------
Total $ 70,773,000 $ 72,907,000
============= =============
General and administrative costs included in work-in-process were
approximately $10.2 million and $13.0 million at December 31, 1999 and
March 31, 1999, respectively. General and administrative expenses included
in costs and expenses amounted to approximately $19.3 million and $13.4
million for the three-month periods ended December 31, 1999 and 1998,
respectively, and approximately $52.0 million and $30.8 million for the
nine-month periods then ended. Included in those amounts are expenditures
for internal research and development amounting to approximately $3.1
million and $1.7 million for the fiscal quarters ended December 31, 1999
and 1998, respectively, and approximately $6.9 million and $3.1 million,
respectively, for the nine-month periods then ended.
4
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
4. RESTRUCTURING
During the third quarter of fiscal 2000, the Company recorded
restructuring charges totaling $693,000. The Electro-Optical Systems Group
(EOSG) recorded a restructuring charge of approximately $401,000 for
severance payments to certain management employees of the Group's DRS
Hadland operating unit. Day-to-day management of DRS Hadland's operations
has been transferred to the Company's Flight Safety and Communications
Group (FSCG). The effect of the restructuring will be to reduce future
general and administrative expenses. Effective January 1, 2000, DRS
Hadland's operating results will be reported within FSCG.
As continuation of its efforts to streamline operations, the Company's
Data Systems Group (DSG) recorded a restructuring charge of $292,000
relating to the closure of its Plymouth, Minnesota location. Effective
January 1, 2000, operations at the Plymouth location ceased; productive
assets and inventory were transferred to the Group's St. Croix Falls,
Wisconsin and Razlog, Bulgaria plants. The Company's Midwest Division now
consists of a single plant location. In connection with this plant
closure, the Group effected a forty-five percent reduction in its Midwest
workforce (forty-two employees). This restructuring charge consists of
provisions for severance payments and idle plant costs. Costs associated
with the relocation of equipment and inventory have been or will be
charged to operations or capitalized, as appropriate, when incurred.
The following table reconciles the restructuring charge to the related
reserve account balance as of December 31, 1999.
<TABLE>
<CAPTION>
DSG EOSG Total
--------- --------- ---------
<S> <C> <C> <C>
Fiscal 2000 Restructuring Charge $ 292,000 $ 401,000 $ 693,000
Charge for asset write-offs (42,000) -- (42,000)
Cash outflow for idle plant costs -- -- --
Cash outflow for severance payments (49,000) (401,000) (450,000)
--------- --------- ---------
Balance at December 31, 1999 $ 201,000 $ -- $ 201,000
========= ========= =========
</TABLE>
The reserve is classified as a component of Accrued Expenses and Other
Current Liabilities in the accompanying consolidated balance sheet for
December 31, 1999.
5
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
5. 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
BASIC EPS COMPUTATION
Net earnings before extraordinary item $ 1,773 $ 664 $ 3,801 $ 1,045
Extraordinary item, net of tax -- (2,306) -- (2,306)
------- ------- ------- -------
Net earnings (losses) $ 1,773 $(1,642) $ 3,801 $(1,261)
------- ------- ------- -------
Weighted average common shares outstanding 9,276 6,350 9,266 6,266
Basic Earnings (Losses) Per Share:
Net earnings before extraordinary item $ 0.19 $ 0.10 $ 0.41 $ 0.17
Extraordinary item, net of tax -- (0.36) -- (0.37)
------- ------- ------- -------
Net earnings (losses) $ 0.19 $ (0.26) $ 0.41 $ (0.20)
======= ======= ======= =======
DILUTED EPS COMPUTATION
Net earnings before extraordinary item $ 1,773 $ 664 $ 3,801 $ 1,045
Interest and expenses related to convertible debentures 284 -- 849 --
------- ------- ------- -------
Adjusted net earnings before extraordinary item 2,057 664 4,650 1,045
Extraordinary item, net of tax -- (2,306) -- (2,306)
------- ------- ------- -------
Adjusted net earnings (losses) 2,057 (1,642) 4,650 (1,261)
------- ------- ------- -------
Diluted Common Shares Outstanding:
Weighted average common shares outstanding 9,276 6,350 9,266 6,266
Stock options and other 146 165 151 215
Convertible debt 2,162 -- 2,162 --
------- ------- ------- -------
Diluted common shares outstanding 11,584 6,515 11,579 6,481
------- ------- ------- -------
Diluted Earnings Per Share:
Net earnings before extraordinary item $ 0.18 $ 0.10 $ 0.40 $ 0.16
Extraordinary item, net of tax -- (0.35) -- (0.35)
------- ------- ------- -------
Net earnings (losses) $ 0.18 $ (0.25) $ 0.40 $ (0.19)
======= ======= ======= =======
</TABLE>
For the three-and nine-month periods ended December 31, 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.
6
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
6. COMPREHENSIVE INCOME
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net earnings (losses) $ 1,773,000 $(1,642,000) $ 3,801,000 $(1,261,000)
Other comprehensive earnings (losses):
Foreign currency translation adjustment 106,000 (196,000) 1,225,000 (352,000)
----------- ----------- ----------- -----------
Comprehensive earnings (losses) $ 1,879,000 $(1,838,000) $ 5,026,000 $(1,613,000)
=========== =========== =========== ===========
</TABLE>
7. OPERATING SEGMENTS
DRS is organized into operating segments on the basis of products and
services offered: the Electronic Systems Group (ESG); EOSG; FSCG; 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 three- and nine-month periods ended December 31, 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 DECEMBER 31, 1999
Revenues $ 54,141 $ 36,520 $ 10,752 $ 4,251 $ -- $105,664
Operating income (loss) $ 4,617 $ 2,456 $ 167 $ (490) $ (97) $ 6,653
Identifiable assets $ 98,641 $143,562 $ 47,368 $ 13,245 $ 12,682 $315,498
Depreciation and amortization $ 923 $ 2,189 $ 416 $ 532 $ 198 $ 4,258
Capital expenditures $ 348 $ 528 $ 54 $ 57 $ 260 $ 1,247
QUARTER ENDED DECEMBER 31, 1998
Revenues $ 30,804 $ 26,038 $ 15,563 $ 4,586 $ -- $ 76,991
Operating income (loss) $ 2,068 $ 1,441 $ 1,390 $ (798) $ (95) $ 4,006
Identifiable assets $ 29,802 $124,619 $ 53,210 $ 14,671 $ 27,529 $249,831
Depreciation and amortization $ 289 $ 1,902 $ 642 $ 507 $ 181 $ 3,521
Capital expenditures $ 323 $ 443 $ 873 $ 89 $ 30 $ 1,758
<CAPTION>
ESG EOSG FSCG DSG CORPORATE TOTAL
-------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
NINE MONTHS ENDED DECEMBER 31, 1999
Revenues $139,376 $102,058 $ 29,703 $ 13,635 $ -- $284,772
Operating income (loss) $ 10,676 $ 5,901 $ 1,958 $ (1,638) $ (395) $ 16,502
Identifiable assets $ 98,641 $143,562 $ 47,368 $ 13,245 $ 12,682 $315,498
Depreciation and amortization $ 2,630 $ 6,541 $ 1,744 $ 1,844 $ 581 $ 13,340
Capital expenditures $ 1,125 $ 1,093 $ 375 $ 308 $ 604 $ 3,505
NINE MONTHS ENDED DECEMBER 31, 1998
Revenues $ 79,534 $ 38,475 $ 35,856 $ 15,240 $ -- $169,105
Operating income (loss) $ 5,757 $ 1,186 $ 2,688 $ (1,488) $ (322) $ 7,821
Identifiable assets $ 29,802 $124,619 $ 53,210 $ 14,671 $ 27,529 $249,831
Depreciation and amortization $ 827 $ 3,024 $ 1,953 $ 1,599 $ 523 $ 7,926
Capital expenditures $ 1,216 $ 836 $ 1,338 $ 336 $ 333 $ 4,059
</TABLE>
7
<PAGE>
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(UNAUDITED)
8. SUBSEQUENT EVENT
Effective February 4, 2000, the terms of the Company's Secured Credit
Facility were modified, increasing the revolving credit line limit from
$70 million to $80 million. The borrowing base calculation was also
modified, which should allow greater access to the unused portion of the
credit line.
8
<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 December 31, 1999 and for
the three-and nine-month periods ended December 31, 1999 and 1998. This
discussion should be read in conjunction with the 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., for approximately $7.8 million in cash and potential future
consideration, not to exceed a total of $10.2 million. Located in Chippenham,
Wiltshire, the United Kingdom, and now operating as DRS Rugged Systems (Europe)
Products Ltd. (RSEP), the company 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 RSEP were not significant to those of the Company as of
the acquisition date.
RESTRUCTURING
During the third quarter of fiscal 2000, the Company recorded restructuring
charges totaling $0.7 million. The Electro-Optical Systems Group (EOSG) recorded
a restructuring charge of approximately $0.4 million for severance payments to
certain management employees of the Group's DRS Hadland operating unit. Day to
day management of DRS Hadland's operations has been transferred to the Company's
Flight Safety and Communications Group (FSCG). The impact of the restructuring
will be reduced future general and administrative expenses. Effective January 1,
2000, DRS Hadland's operating results will be reported within the FSCG segment
in subsequent financial statements.
As a continuation of its efforts to streamline operations, the Company's Data
Systems Group (DSG) recorded a restructuring charge of $0.3 million relating to
the closure of its Plymouth, Minnesota location. Effective January 1, 2000,
operations at the Plymouth location ceased; productive assets and inventory were
transferred to the Group's St. Croix Falls, Wisconsin and Razlog, Bulgaria
plants. The Company's Midwest Division now consists of a single plant location.
In connection with this plant closure, the Group implemented a forty-five
percent reduction in its Midwest workforce (forty-two employees). The
restructuring charge is comprised of provisions for severance payments and idle
plant costs. Costs associated with the relocation of equipment and inventory
have been or will be charged to operations or capitalized, as appropriate, when
incurred.
The Company believes that the overall reduction in direct and indirect operating
expenses resulting from these management actions will have a positive effect on
the Company's future operating results.
Management is currently considering plans for additional restructuring
initiatives and believes that some or all of these plans will be approved and
implemented in the fourth quarter or fiscal 2000. Although the potential
magnitude of related restructuring charges is still being assessed, management
does not believe that such charges, if any, will have a material adverse effect
on the Company's results of operations or financial position.
9
<PAGE>
RESULTS OF OPERATIONS
The Company's operating cycle is long-term and involves various types of
production contracts and varying production delivery schedules. Accordingly,
operating 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 NINE MONTHS ENDED PERCENT
DECEMBER 31, CHANGES DECEMBER 31, CHANGES
------------------------- --------------- --------------------------- -----------------
1999 1998 1999 vs. 1998 1999 1998 1999 vs. 1998
<S> <C> <C> <C> <C> <C> <C>
Revenues 100.0% 100.0% 37.2% 100.0% 100.0% 68.4%
Costs and expenses 93.0 94.8 34.7% 94.0 95.4 65.9%
Restructuring charges 0.7 0.0 100.0% 0.2 0.0 100.0%
----- ----- ----- -----
Operating income 6.3 5.2 66.1% 5.8 4.6 111.0%
Interest and other income, net 0.2 0.4 -20.7% 0.2 0.4 -14.4%
Interest and related expenses (3.2) (3.9) 14.7% (3.4) (3.6) 55.8%
Minority interest (0.4) (0.3) 63.8% (0.3) (0.4) 44.7%
----- ---- ----- -----
Earnings before income taxes and
extraordinary item 2.9 1.4 190.0% 2.3 1.0 295.0%
Income taxes 1.2 0.5 229.2% 1.0 0.4 348.2%
---- ---- ----- -----
Net earnings before extraordinary item 1.7% 0.9% 167.0% 1.3% 0.6% 263.7%
==== ==== ===== =====
</TABLE>
Consolidated revenues for the three-and nine-month periods ended December 31,
1999 increased $28.7 million and $115.7 million, respectively, as compared with
three-and nine-month periods ended December 31, 1998. Consolidated operating
income for the three-and nine-month periods ended December 31, 1999 increased
$2.6 million and $8.6 million, respectively, as compared with the three- and
nine-month periods ended December 31, 1998. These increases are primarily
attributable to the inclusion of the operations of the Company's fiscal 1999
third and fourth quarter acquisitions (see discussion of operating segments
below for additional information).
Interest and related expenses were approximately $3.4 million and $3.0 million
for the three-month periods ended December 31, 1999 and 1998, respectively, and
$9.5 million and $6.1 million for the nine-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
RSEP. Interest also has increased as a result of higher average working capital
borrowings in fiscal 2000, as compared with fiscal 1999.
The provision for income taxes for the first nine months 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 RSEP in July 1999.
10
<PAGE>
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); EOSG;
FSCG; and 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 Nine Months Nine Months Ended
Ended December 31, Percent Changes Ended December 31, 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 $54,141 $30,804 75.8% $139,376 $79,534 75.2%
Operating income $ 4,617 $ 2,068 123.3% $ 10,676 $ 5,757 85.4%
Operating margin 8.5% 6.7% 27.0% 7.7% 7.2% 5.8%
EOSG
Revenues $36,520 $26,038 40.3% $102,058 $38,475 165.3%
Operating loss $ 2,456 $ 1,441 70.4% $ 5,901 $ 1,186 397.6%
Operating margin 6.7% 5.5% 21.5% 5.8% 3.1% 87.6%
FSCG
Revenues $10,752 $15,563 (30.9%) $ 29,703 $35,856 (17.2%)
Operating income $ 167 $ 1,390 (88.0%) $ 1,958 $ 2,688 (27.2%)
Operating margin 1.6% 8.9% (82.6%) 6.6% 7.5% (12.1%)
DSG
Revenues $ 4,251 $ 4,586 (7.3%) $ 13,635 $15,240 (10.5%)
Operating loss $ (490) $ (798) 38.6% $ (1,638) $(1,488) (10.1%)
Operating margin (11.5%) (17.4%) 33.8% (12.0%) (9.8%) (23.0%)
</TABLE>
ESG: ESG's increase in revenue and operating income for the three-and nine-month
periods ended December 31, 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's
contribution to the ESG segment's operating results was approximately $14.9
million and $42.1 million in additional revenues, and approximately $1.5 million
and $3.3 million of operating income for the three-and nine-month periods ended
December 31, 1999, respectively. Following its acquisition in July 1999, RSEP
contributed approximately $1.9 million and $2.4 million in additional revenues
for the three- and nine-month periods ended December 31, 1999. 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 nine-month
periods ended December 31, 1999 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 $28.9 million and $82.0 million in revenues for the three-and
nine-month periods ended December 31, 1999, respectively, and $5.7 million and
$10.3 million of
11
<PAGE>
operating income for the three- and nine-month periods ended December 31, 1999,
respectively. Operating income for the three- and nine-month periods ended
December 31, 1999 include a $2.9 million cumulative profit adjustment relating
to a certain long-term production program. Estimates to complete this program
were revised this quarter to reflect the benefit of management's efforts to
reduce overall production costs, primarily by identifying and procuring certain
materials and subassemblies from alternate suppliers. Shipments under the
current production contract commenced early in the third quarter of fiscal 2000,
and the benefits of management's cost reduction initiatives are now being
realized. Revenues and operating income for the three-months ended December 31,
1999 attributable to the EOS Business increased by $11.1 million and $4.2
million, respectively, as compared with the corresponding prior period.
Exclusive of the contributions of the EOS Business, EOSG's operating income
decreased by $3.1 million and $4.0 million for the three- and nine-month periods
ended December 31, 1999, respectively. The decrease in operating income was
primarily attributable to several factors at its DRS Hadland operating unit,
including the $0.4 million restructuring charge recorded in the third quarter of
fiscal 2000 (see Management's Discussion & Analysis -- Restructuring), higher
overall general and administrative cost (treated as period costs) and lower
overall profit margins. Management is currently evaluating additional
alternatives aimed at reducing DRS Hadland's overall operating expenses. In
connection with this restructuring effort, $0.5 million was provided this fiscal
quarter for estimated excess inventory and obsolescence, based on incoming
management's assessment of overall inventory levels and stock on hand. EOSG's
operating income for the three- and nine-month periods ended December 31, 1999
also included charges totaling $0.4 million and $0.8 million, respectively, for
anticipated costs to be incurred in connection with certain product warranty
issues associated with a specific product line and a charge of approximately
$0.5 million relating to additional development costs associated with one of the
Group's commercial product lines.
FSCG: Revenues and operating income for the three-month period ended December
31, 1999 decreased by $4.8 million and $0.3 million, respectively. For the
nine-months ended December 31, 1999 revenues decreased by approximately $6.1
million, as compared with prior year results for the same period, while
operating income improved by 7% to $2.9 million. The decrease in revenues in
both periods was primarily attributable to 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 fourth quarter of fiscal 2000. Operating income
decreased by $1.2 million and $0.7 million for the three- and nine-month periods
ended December 31, 1999, respectively, primarily due to the decline in revenues.
In addition, FSCG management provided $1.1 million for estimated excess
inventories at its DRS Precision Echo unit, relating primarily to spares
inventory and inventory relating to a certain commercial product line. The
effects of these charges were partially offset by margin improvement
attributable to cost savings achieved on certain contract manufacturing services
provided by the Group's Canadian operations.
DSG: DSG's revenues for the three- and nine-month periods ended December 31,
1999 decreased by $0.3 million and $1.6 million, respectively, resulting from
the continuing effects of the sluggish global computer disk drive marketplace
and competitive pricing pressure on certain other magnetic tape head products.
Operating losses for the fiscal quarter ended December 31, 1999 were
approximately $0.3 million better than those posted in the comparable prior year
period, despite the $0.3 million restructuring charge recorded in the fiscal
quarter (see Management's Discussion & Analysis -- Restructuring). The $0.2
million 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 adverse market conditions and less favorable absorption of fixed
operating expenses associated with lower production volumes. The adverse impact
of these factors were partially offset by the cumulative effect of DSG's
previously implemented cost reduction initiatives. The operating loss for the
nine-month period ended December 31, 1998 included charges of approximately $0.5
million for costs relating to the closing of its Dassel, Minnesota facility and
reserves for certain receivables and inventory, necessitated by the bankruptcy
filing of a significant customer. Exclusive of the restructuring charge taken
this fiscal quarter and last year's charge for nonrecurring expenses, operating
losses decreased by approximately $0.6 million for the three-month period ended
December 31, 1999, while operating losses increased by $0.4 million for the
nine-month period then ended. DSG will continue to identify and implement cost
reduction measures, and is currently focused on improving operational
efficiencies and capacity utilization, particularly at its Bulgarian
manufacturing plant.
12
<PAGE>
FINANCIAL CONDITION AND LIQUIDITY
Cash and Cash Flow
The following table provides summary cash flow data for the Company for the
nine-month periods ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Nine Months Ended December 31,
-------------------------------
1999 1998
------------- ---------------
<S> <C> <C>
Net cash (used in) provided by operating activities $ (9,765,000) $ 12,671,000
Net cash used in investing activities $(12,161,000) $(49,786,000)
Net cash provided by financing activities $ 15,145,000 $ 49,172,000
</TABLE>
The $22.4 million reduction in net cash (used in) provided by operating
activities in the first nine months of fiscal 2000, as compared with the first
nine months of fiscal 1999, was primarily attributable to the net change in
customer advances relating to the Q-70 program. Last year, approximately $15.0
million in advances were received in late December and were included in the cash
balance as of December 31, 1999. For the nine months ended December 31, 1999,
net advances decreased by approximately $9.9 million. Advances are liquidated
against progress billings based on terms negotiated at the time such advances
are made.
Net cash used in investing activities in the nine-month period ended December
31, 1999 consisted of capital expenditures and the cost of fiscal 2000
acquisitions (primarily the cost of the RSEP acquisition). The Company expects
that its capital expenditures for fiscal 2000 will be approximately $9.0
million.
The net cash provided by financing activities decreased by $34.0 million, due
primarily to higher borrowings in fiscal 1999 associated with the acquisition of
the EOS Business. The Company maintains a $70 million (subject to borrowing
base calculation) revolving line of credit with Mellon Bank, N.A. as agent,
maturing on October 20, 2003 (Line of Credit), and uses the Line of Credit
primarily to finance its working capital needs and to finance acquisitions.
During the nine months ended December 31, 1999, borrowings under the Line of
Credit increased by approximately $19.5 million, $8.0 million of which related
to the RSEP acquisition. Other than cash flows from operations, the Line of
Credit is the Company's primary source of liquidity. As of December 31, 1999,
the Company had approximately $20.9 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 $3.7 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 recently revised the terms of its Line of Credit. Effective February
4,2000, the Line of Credit agreement was amended, increasing the revolving line
of credit limit from $70 million to $80 million. The borrowing base calculation
was also modified and should provide the Company with access to the entire
unused portion of the revolving credit line. Although the Company believes that
the Line of Credit, as amended, is sufficient to support its near-term
objectives, management will continue to monitor the Company's overall working
capital position and available sources of financing to ensure that the amounts
available are sufficient to support its operational needs and strategic business
objectives.
Backlog
Backlog at December 31, 1999 was approximately $349.9 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 $256.6
million in new orders in the first nine months of fiscal 2000.
13
<PAGE>
YEAR 2000
The Company's Year 2000 readiness plan focused on identification and remediation
of processes which may not have functioned correctly at the beginning of the
Year 2000. The overall Year 2000 effort was directed towards: (1) IT Systems
(which examined internal operating systems and business application software);
(2) External Agents (which examined third-party suppliers and customers); and
(3) Product Issues (which examined Year 2000 issues inherent in products sold by
DRS).
As a result of the Company's efforts, no significant problems were encountered
resulting from Year 2000 related issues. The Company has successfully completed
its efforts to replace or reprogram critical systems for Year 2000 readiness. To
date, the Company is not aware of any Year 2000 related product failures, nor
has it experienced any supply or demand disruptions with critical suppliers or
customers. DRS will continue to monitor its internal systems, products and
critical suppliers and customers to avert any potential Year 2000 related
deficiencies or business disruptions. Although the Company does not expect to
encounter Year 2000 related problems, there can be no assurances that such
problems may not arise in the future.
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 December 31, 1999 follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
TERMINATION NOTIONAL VARIABLE CEILING FLOOR INTEREST
EFFECTIVE 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% 5.21%
Collar No. 2 April 26, 1999 January 26, 2002 $20,000,000 LIBOR** 5.75% 4.80% 6.28%
Collar No. 3 April 26, 1999 January 26, 2000 $20,000,000 LIBOR** 5.75% 4.77% 6.28%
</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.
14
<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 in an arbitration proceeding with Spar Aerospace
Limited (SPAR) with respect to the working capital adjustment, if
any, required under 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
15
<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: February 15, 2000 /s/ RICHARD A. SCHNEIDER
----------------------------------------
Richard A. Schneider
Executive Vice President,
Chief Financial Officer and Treasurer
16
<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 DECEMBER 31, 1999
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,920,000
<SECURITIES> 0
<RECEIVABLES> 71,525,000
<ALLOWANCES> 1,235,000
<INVENTORY> 70,773,000
<CURRENT-ASSETS> 147,670,000
<PP&E> 76,882,000
<DEPRECIATION> 46,036,000
<TOTAL-ASSETS> 315,498,000
<CURRENT-LIABILITIES> 126,232,000
<BONDS> 104,600,000
0
0
<COMMON> 97,000
<OTHER-SE> 77,499,000
<TOTAL-LIABILITY-AND-EQUITY> 315,498,000
<SALES> 105,664,000
<TOTAL-REVENUES> 105,664,000
<CGS> 98,318,000
<TOTAL-COSTS> 98,318,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,426,000
<INCOME-PRETAX> 3,057,000
<INCOME-TAX> 1,284,000
<INCOME-CONTINUING> 1,773,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,773,000
<EPS-BASIC> 0.19
<EPS-DILUTED> 0.18
</TABLE>
