FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1996
Commission file Number 0-20227
Tracor, Inc.
(Exact name of registrant as specified in its charter.)
Austin, Texas 74-2618088
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6500 Tracor Lane 78725-2000
(Address of principal executive offices (Zip Code)
Registrant's telephone number, including area code: (512)926-2800
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 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 [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d)
of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by the court.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest practical date:
Common Stock, $.01 Par Value - 13,216,845 shares as of May 3, 1996.
Class A Common Stock, $.01 Par Value - 978,458 shares as of May 3, 1996.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
-----------------------------
<TABLE>
<CAPTION>
TRACOR
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
1996 1995
--------- -----------
(Unaudited) (Audited)
ASSETS (in thousands, except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 44,192 $59,478
Accounts receivable 182,213 141,657
Inventories 10,812 4,695
Assets held for sale 18,535 -
Prepaid expenses and other 11,990 7,988
Deferred income taxes 24,669 15,916
-------- --------
Total current assets 292,411 229,734
Property, plant, and equipment, net 112,319 85,760
Goodwill, net 158,638 99,813
Other intangibles, net 16,975 18,385
Prepaid pension costs 20,869 23,107
Deferred charges and other assets 15,158 10,657
-------- --------
Total assets $616,370 $467,456
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $116,514 $ 89,870
Current portion of long-term debt 22,921 10,735
-------- --------
Total current liabilities 139,435 100,605
Long-term debt, less current portion 283,778 180,440
Deferred revenue 21,514 23,752
Other long-term liabilities 26,972 25,694
Shareholders' equity:
Preferred stock, par value $.01 per share:
1,000,000 shares authorized;
no shares issued or outstanding - -
Common stock, par value $.01 per share:
53,000,000 shares authorized;
issued and outstanding: 13,192,188 in 1996
and 13,172,754 in 1995, net of 1,553 shares
in treasury in 1996 132 132
Class A common stock, par value $.01 per share:
1,000,000 shares authorized; 978,458 shares
issued and outstanding 10 10
Additional capital paid in 76,651 76,606
Retained earnings 67,878 60,217
-------- --------
Total shareholders' equity 144,671 136,965
-------- --------
Total liabilities and shareholders' equity $616,370 $467,456
======== ========
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
TRACOR
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended
March 31,
------------------
1996 1995
(in thousands, except
per share amounts)
<S> <C> <C>
Net sales $229,047 $211,241
Cost of sales 181,993 168,627
-------- --------
Gross profit 47,054 42,614
Selling, administrative, and general expenses 27,607 26,239
-------- --------
Earnings before interest and income taxes 19,447 16,375
Interest expense 5,683 5,398
-------- --------
Income before income taxes 13,764 10,977
Income taxes 6,103 4,727
-------- --------
Net income $ 7,661 $ 6,250
======== ========
Net income per common and common equivalent share $.32 $.30
==== ====
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
TRACOR
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended
March 31,
------------------
1996 1995
(in thousands)
<S> <C> <C>
Operating activities:
Net income $ 7,661 $ 6,250
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation of property, plant, and equipment 3,807 3,390
Amortization of goodwill 1,122 843
Amortization of other intangibles 1,410 1,410
Decrease in prepaid pension costs 2,238 2,785
Decrease in debt issuance costs 629 511
Decrease in deferred revenue (2,238) (2,785)
Changes in operating assets and liabilities:
Decrease in accounts receivable 137 12,266
Increase in inventories and prepaid expenses (6,398) (1,562)
Decrease in recoverable income taxes 68 2,067
Decrease in accounts payable and accrued expenses (8,312) (3,776)
Increase in other, net (270) (1,385)
-------- --------
Net cash provided by (used in) operating activities (146) 20,014
Investing activities:
Purchases of property, plant, and equipment (2,754) (1,721)
Acquisition of business, net of cash acquired (103,058) (12,102)
-------- -------
Net cash used in investing activities (105,812) (13,823)
Financing activities:
Payments of long-term debt (84,287) (2,631)
Proceeds from issuance of long-term debt 180,000 -
Payment of debt issuance costs (5,041) -
-------- -------
Net cash provided by (used in) financing
activities 90,672 (2,631)
Increase (decrease) in cash and cash equivalents (15,286) 3,560
Cash and cash equivalents at beginning of period 59,478 24,152
-------- -------
Cash and cash equivalents at end of period $ 44,192 $27,712
======== =======
</TABLE>
See notes to unaudited condensed consolidated financial statements.
<PAGE>
TRACOR
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996
Note A -- Basis of Presentation
- -------------------------------
The accompanying unaudited condensed consolidated financial
statements of Tracor, Inc. (Tracor or the Company) have been
prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all
adjustments, consisting of normal recurring items, considered
necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 1996, are not
necessarily indicative of the results that may be expected for the
year ending December 31, 1996. For further information, refer to
the Company's consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K as of December
31, 1995.
Note B -- Income Taxes
- ----------------------
The effective income tax rate for the three months ended March 31,
1996, is based on the expected annual rate for federal, state, and
foreign income taxes.
Note C -- Net Income Per Common and Common Equivalent Share
- -----------------------------------------------------------
Primary and fully diluted net income per share amounts are computed
in accordance with the modified treasury stock method using the
weighted average common shares outstanding and equivalents assuming
the exercise of all outstanding warrants and options for common
shares. The weighted average common and common equivalent shares
used in this calculation were 24,878,000 and 23,138,000 for the
three months ended March 31, 1996 and 1995, respectively. For
purposes of net income per share computations, net income is
adjusted for the pro forma reduction of interest expense, net of
income taxes, resulting from the assumed use of warrants and
options exercise proceeds to reduce outstanding debt. For the
first quarter of 1996 and 1995, the primary and fully diluted net
income per share calculations yielded the same amount.
Note D -- Acquisitions
- ----------------------
AEL Acquisition
---------------
On February 22, 1996, Tracor purchased all of the approximately 4.1
million common shares of AEL Industries, Inc. (AEL). AEL designs
and manufactures sophisticated countermeasures, simulation, and
radar-warning receiver systems; installs and integrates electronic
avionics equipment in military and commercial aircraft; and
provides state-of-the-art antenna, microwave, and integrated
circuit components.
The purchase price, including acquisition expenses, was
approximately $103 million. AEL's long-term indebtedness prior to
the acquisition totaled approximately $20 million, of which
approximately $10 million was retired and approximately $10 million
was assumed by Tracor. The financing for the transaction and
related expenses was obtained through an increase of the Company's
existing bank term credit facility and from cash on hand.
The acquisition has been accounted for using the purchase method,
and, accordingly, the purchase price ($103 million) and the
liabilities assumed ($59 million) have been allocated to the assets
acquired ($102 million) based on a preliminary estimate of their
respective fair values at the date of acquisition. This
preliminary estimate is subject to change based on finalization of
certain fair value determinations. Such fair value determinations
are not expected to have a material effect on the consolidated
financial position or results of operations of Tracor. The
resulting excess of the purchase price over the preliminary
estimate of the fair value of the net assets acquired ($60 million)
is being amortized over 30 years.
AEL's results of operations have been included in the Company's
consolidated statements of income from February 22, 1996, the date
of acquisition, through March 31, 1996. The following net sales,
net income, and net income per share are presented on a pro forma
basis, assuming the acquisition had occurred on January 1, 1995 (in
thousands, except per share data):
<TABLE>
<CAPTION>
Three-Month
Period Ended
March 31
1996 1995
---------------------
<S> <C> <C>
Net sales $245,900 $243,045
Net income 1,591 6,366
Net income per share fully diluted .08 .30
</TABLE>
The pro forma results are not necessarily indicative of the actual
results of operations that would have occurred had the acquisition
of AEL occurred on January 1, 1995, nor of future results.
Westmark Acquisition
--------------------
On March 12, 1996, Tracor reached agreement with Westmark Systems,
Inc. (Westmark) to acquire substantially all of Westmark's assets,
which primarily consist of Tracor stock and warrants, as well as
certain real estate holdings. Westmark, the former parent company
of Tracor, holds all of Tracor's Class A stock (978,458 shares), a
Series B warrant to purchase 5,249,428 shares of Tracor common
stock with an exercise price of $4.42 per share, and a Series C
warrant to purchase 5,455,000 shares of Tracor common stock with an
exercise price of $7.36 per share. Under the agreement, which is
subject to shareholder approval by both companies, Tracor would
exchange approximately 8 million shares of common stock for the
assets. The number of shares is subject to certain adjustments
based on Tracor's average stock price during a 20-day period ending
three days before the earliest shareholder meeting held. Westmark
will liquidate concurrently with the closing by distributing the
Tracor shares to its shareholders. The agreement provides for a
distribution of the Tracor shares through underwritten secondary
offerings of a maximum of one-half of the shares during the first
two years after the closing.
Note E -- Long-term Debt
- ------------------------
Concurrent with the AEL acquisition, Tracor amended and restated
its existing credit agreement (Amended Credit Agreement) increasing
the total credit available thereunder from $135 million to $270
million. The Amended Credit Agreement consists of a $180 million
term loan facility, a $40 million revolving loan facility, and a
$50 million letters of credit facility. Substantially all assets
of Tracor and certain domestic, wholly owned subsidiaries are
pledged or mortgaged under the Amended Credit Agreement, and all
borrowings are guaranteed by such subsidiaries.
The term loans are comprised of an $80 million A Term Loan, a $50
million B Term Loan, and a $50 million C Term Loan. The A Term Loan
facility is evidenced by promissory notes maturing October 31,
1999, and requiring quarterly principle payments of approximately
$5.3 million. The B Term Loan facility is evidenced by promissory
notes maturing October 31, 2000, requiring quarterly payments of
$133,333 through and including October 31, 1999, and quarterly
payments of $12 million from January 31, 2000, through October 31,
2000. The C Term Loan facility is evidenced by promissory notes
maturing April 30, 2001, requiring quarterly payments of $131,578
through October 31, 2000, and two payments of $23,750,000 on
January 31 and April 30, 2001. The revolving loans facility is
evidenced by promissory notes maturing December 31, 2000. The
letters of credit facility provides for the issuance of letters of
credit with expiration dates generally 18 months or less from the
date of issuance (automatically renewable unless a default exists
at the expiration date) but in any event not later than December
31, 2000.
Certain mandatory prepayments are also required, including the
prepayment of amounts equal to 100% of the net proceeds from any
asset sales, subject to certain exceptions, and 50% of annual
excess cash flow. Such mandatory repayments are to be applied to
equally and ratably prepay the A, B, and C Term Loans based on the
relative principal amounts outstanding.
Term loans under the A Term Loan facility and the revolving loans
bear interest at Tracor's option at either the lender's base rate
plus 1 1/2% or the eurodollar rate plus 2 1/2%. Loans under the B
Term Loan facility bear interest at Tracor's option at either the
lender's base rate plus 2% or the eurodollar rate plus 3%. Loans
under the C Term Loan facility bear interest at Tracor's option at
either the lender's base rate plus 2 1/4% or the eurodollar rate
plus 3 1/4%. Interest on base rate loans is payable quarterly, and
interest on eurodollar loans is payable at the end of the
applicable interest period or every three months in the case of
interest periods in excess of three months. A commitment fee of
.5% per annum is charged on the unused revolving loans and letters
of credit facility and is payable quarterly in arrears. Each
letter of credit bears a total fee of 2 3/8% per annum plus
customary administrative charges. At March 31, 1996, the Company
had outstanding letters of credit totaling $38.2 million relating
to commitments for performance on certain contracts with foreign
customers and as collateral on certain insurance policies.
The Amended Credit Agreement contains covenants which, among other
things, impose limitations and restrictions on the incurrence of
additional indebtedness, capital expenditures, future mergers and
acquisitions, sales of assets, payment of dividends (limited to 30%
of net income for the prior year), and changes in control, as
defined. In addition, Tracor is required to satisfy certain
financial covenants and tests relating to, among other matters,
interest coverage, working capital, leverage, and net worth.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
- ----------------------------------------------------------
Business Environment
- --------------------
Approximately 88% of the products, systems, and services of Tracor,
Inc. and its subsidiaries (Tracor or the Company) are sold to the
U.S. government through direct contracts, primarily with agencies
of the U.S. Department of Defense (DOD), or through subcontracts
with other U.S. government contractors. Beginning in the
mid-1980s, the defense industry in general was negatively impacted
by the perceived reduction of threats from the former Soviet Union
and eastern European countries and, more recently, by competing
demands upon the federal budget. While this has resulted in a U.S.
defense budget that has decreased in real dollars, adjusted for
inflation, over the last decade, it recently began to stabilize.
For the first time in many years, the total U.S. defense budget
increased in 1996, excluding inflation. Approximately 70% of the
Company's DOD sales are funded by the operations and maintenance
segment of the defense budget in areas which are among today's top
DOD priorities. This segment has declined less than other segments
of the budget as readiness priorities have emerged. It is now the
largest segment of the defense budget and is projected to comprise
about one-third of the defense budget over the next decade. The
procurement portion of the budget is expected to experience a
modest increase over this same time frame, and Tracor is also well
positioned to benefit from this upturn.
The contraction of the defense budget in recent years and the
attendant excess capacity and increase in competition for contracts
among defense companies have resulted in a significant
consolidation in the industry. Principally through several
acquisitions, the Company has substantially increased its revenue
base and reduced combined overhead costs through staff reductions,
facilities consolidations, process improvements, and the
elimination of certain other duplicative costs. These efficiencies
and increased revenue base have enhanced Tracor's cost
competitiveness in bidding on new contracts and recompetes of
existing contracts. Management is continuing to pursue its
acquisition strategy and believes the continuing consolidation
within the defense industry will result in opportunities to pursue
additional selected acquisitions, both large and small, which
should allow the Company to continue to expand its revenue base and
further improve its cost-competitive position.
While the long-term impact of changes in the defense budget and the
industry consolidation cannot be predicted with certainty,
management believes the Company is well positioned to continue to
leverage its strengths and successes in the U.S. defense and
intelligence marketplaces and increase its ongoing diversification
efforts into foreign defense markets, nondefense U.S. government
markets, and selected commercial markets.
Financial Condition
- -------------------
Working capital increased to $153.2 million at March 31, 1996,
compared to $129.1 million at December 31, 1995, due primarily to
the acquisition of AEL. The ratio of current assets to current
liabilities was 2.1 at March 31, 1996, compared to 2.3 at December
31, 1995. Cash provided by operating activities decreased in the
first quarter of 1996 compared to the first quarter of 1995
primarily due to the timing of changes in accounts receivable,
inventories, and accounts payable. Accounts receivable decreased
in the prior period due to the accelerated collection of billings
related to contract deliveries. Inventories increased in the first
quarter of 1996 in support of various programs and spare parts
inventories. Accounts payable decreased during the current quarter
due to the timing of subcontractor progress payments and the
funding of insurance programs. In addition to these working
capital changes, cash increased in the first quarter of 1995 due to
the receipt of an income tax refund related to the preacquisition
period of an acquired company. Normal capital expenditures of $2.8
million and scheduled long-term debt payments of $2.6 million were
incurred in the quarter. The proceeds from the Amended Credit
Agreement and cash on hand were used to finance the acquisition of
AEL, to retire approximately $10 million of debt assumed in the
acquisition, and to pay approximately $5 million of financing
costs.
No borrowings were made from the Company's $40 million revolving
loans facility during the quarter. At March 31, 1996, the Company
had outstanding letters of credit of approximately $38.2 million,
leaving $11.8 million available under its $50 million letters of
credit facility. If the $50 million letters of credit facility
should become fully utilized, $20 million of the revolving loans
facility, to the extent then available, can be used for issuance of
additional letters of credit. Existing letters of credit secure
performance commitments on certain contracts with foreign customers
and serve as collateral for certain insurance policies.
At March 31, 1996, the Company had firm backlog, which includes
funded and unfunded contractual commitments, of $996 million, as
compared to $924 million at December 31, 1995. Included in firm
backlog at March 31, 1996, is $76.7 million of backlog attributable
to AEL. Approximately 79% of firm backlog represents contracts
with agencies of the U.S. government or its prime contractors, and
about 78% is expected to be earned within one year. In addition,
the Company's backlog of unexercised contract options on U.S.
government contracts was $1.1 billion at March 31, 1996, compared
to $948.9 million at December 31, 1995.
The Company's operations typically do not require large capital
expenditures, and there were no material capital commitments at
March 31, 1996.
Except for available amounts under the Amended Credit Agreement's
revolving loans and letters of credit facilities, the Company's
present debt position limits its ability to obtain substantial
additional debt for operational purposes in the near future.
However, management believes existing cash, funds generated by
continuing operations, and the Amended Credit Agreement will
provide sufficient resources to allow the Company to meet its
obligations, fund capital requirements, and continue to pursue its
business strategy. Management also believes it can obtain the
necessary resources to pursue further acquisitions in the ongoing
U.S. defense industry consolidation.
Results of Operations
- ---------------------
Three Months Ended March 31, 1996, Versus Three Months Ended March
31, 1995
The results of operations for the three months ended March 31,
1996, include the operating results of AEL since the date of
acquisition, February 22, 1996. AEL's results are not included in
the comparative prior period of 1995.
Sales and operating profits increased approximately 8% and 19%,
respectively, due to improved operating results throughout the
Company and the acquisition of AEL. Sales increased approximately
4% as a result of the acquisition of AEL. Other sales increases
were due primarily to deliveries of mission planning workstations
and increased revenues from QF-4 drone production and MQM-107E
sub-scale drone development contracts. Operating profits increased
approximately 3% from the acquisition of AEL. Other operating
profit increases were the result of increased sales and slightly
higher profit margins on those sales.
Interest expense increased 5% compared to the first quarter of 1995
due primarily to the additional term debt borrowed in conjunction
with the AEL acquisition. This increase was reduced by lower
interest expense on Series A Notes due to a payment of $3.8 million
in March 1995 and by increased investment interest income.
The effective tax rate increased from 43% to 44% due to an increase
in combined federal and state income tax rates.
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 10-Q
A. Exhibits
11. Statement regarding computation of income per common
and common equivalent share.
27. Financial Data Schedule for three month period ending
March 31, 1996.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
TRACOR, INC.
Date: May 14, 1996 By: /s/ Robert K. Floyd
----------------------
Robert K. Floyd
Vice President and
Chief Financial
Officer
<PAGE>
<TABLE>
<CAPTION>
TRACOR
COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
(in thousands, except per share amounts)
Three Months Ended
March 31,
1996 1995
------------------
<S> <C> <C>
Primary:
Net income $ 7,661 $ 6,250
Adjustments, net of income taxes under
modified treasury stock method:
Interest expense 424 605
Investment income - -
------- -------
Adjusted net income $ 8,085 $ 6,855
======= =======
Weighted average common shares outstanding 14,165 11,675
Weighted average common share equivalents:
Assumed exercise of warrants 12,049 12,883
Assumed exercise of options 1,497 916
Assumed 20% purchase of common shares for treasury (2,833) (2,336)
------- -------
Net weighted average additional shares issuable 10,713 11,463
------- -------
Common and common equivalent shares 24,878 23,138
======= =======
Income per common and common equivalent share $.32 $.30
==== ====
Fully diluted:
Net income $ 7,661 $ 6,250
Adjustments, net of income taxes under
modified treasury stock method:
Interest expense 360 605
Investment income - -
------- -------
Adjusted net income $ 8,021 $ 6,855
======= ========
Weighted average common shares outstanding 14,165 11,675
Weighted average common share equivalents:
Assumed exercise of warrants 12,049 12,883
Assumed exercise of options 1,497 916
Assumed 20% purchase of common shares for treasury (2,833) (2,336)
------- -------
Net weighted average additional shares issuable 10,713 11,463
------- -------
Common and common equivalent shares 24,878 23,138
======= =======
Income per common and common equivalent share $.32 $.30
==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> MAR-31-1996
<CASH> 44192
<SECURITIES> 0
<RECEIVABLES> 182213
<ALLOWANCES> 0
<INVENTORY> 10812
<CURRENT-ASSETS> 292598
<PP&E> 150650
<DEPRECIATION> 38331
<TOTAL-ASSETS> 616370
<CURRENT-LIABILITIES> 139435
<BONDS> 283778
0
0
<COMMON> 142
<OTHER-SE> 144529
<TOTAL-LIABILITY-AND-EQUITY> 616370
<SALES> 229047
<TOTAL-REVENUES> 229047
<CGS> 181993
<TOTAL-COSTS> 181993
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5683
<INCOME-PRETAX> 13764
<INCOME-TAX> 6103
<INCOME-CONTINUING> 7661
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7661
<EPS-PRIMARY> 0.32
<EPS-DILUTED> 0.32
</TABLE>
