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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, 2001
[ ] 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
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DRS Technologies, Inc.
Delaware 13-2632319
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Sylvan Way, Parsippany, New Jersey 07054
(973) 898-1500
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of August 9, 2001, 12,117,520 shares of DRS Technologies, Inc. Common
Stock, $.01 par value, were outstanding.
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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
-------------------
Index to Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2001
PART I - FINANCIAL INFORMATION PAGE NO.
--------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 2001 and
March 31, 2001............................................................................ 1
Condensed Consolidated Statements of Earnings - Three Months Ended June 30,
2001 and 2000............................................................................. 2
Condensed Consolidated Statements of Cash Flows - Three Months Ended June 30,
2001 and 2000............................................................................. 3
Notes to Condensed Consolidated Financial Statements...................................... 4-10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations ............................................................................... 11-16
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
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share data)
(Unaudited)
June 30, March 31,
2001 2001
---------- ---------
Assets
Current assets:
Cash and cash equivalents $ 1,798 $ 2,324
Accounts receivable, net 73,555 97,645
Inventories, net of progress payments 90,373 74,327
Prepaid expenses and other current assets 10,832 8,697
--------- ---------
Total current assets 176,558 182,993
--------- ---------
Property, plant and equipment, less accumulated
depreciation and amortization of $41,389, and
$39,142 at June 30, 2001 and March 31, 2001,
respectively 39,060 37,639
Goodwill, less accumulated amortization of
$13,754 at March 31, 2001 87,914 76,390
Acquired intangible assets, less accumulated amortization of
$5,596 and $7,551 at June 30, 2001 and March 31, 2001,
respectively 21,459 32,912
Deferred income taxes and other noncurrent assets 4,762 5,006
--------- ---------
$ 329,753 $ 334,940
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current installments of long-term debt $ 7,784 $ 7,217
Short-term bank debt 1,009 831
Accounts payable 33,540 40,089
Accrued expenses and other current liabilities 90,573 91,170
--------- ---------
Total current liabilities 132,906 139,307
Long-term debt, excluding current installments 71,843 75,076
Other noncurrent liabilities 8,547 8,610
--------- ---------
Total liabilities 213,296 222,993
--------- ---------
Stockholders' equity:
Preferred Stock, no par value. Authorized 2,000,000 shares;
no shares issued at June 30, 2001 and March 31, 2001 -- --
Common Stock, $.01 par value per share
Authorized 20,000,000 shares; issued 12,116,670
and 12,058,057 shares at June 30, 2001 and
March 31, 2001, respectively 121 121
Additional paid-in capital 72,762 72,033
Retained earnings 47,923 44,025
Accumulated other comprehensive losses (4,113) (3,968)
Unamortized stock compensation (236) (264)
--------- ---------
Net stockholders' equity 116,457 111,947
--------- ---------
Commitments and contingencies
$ 329,753 $ 334,940
========= =========
See accompanying Notes to Condensed Consolidated Financial Statements.
1
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings
(in thousands, except per share data)
(Unaudited)
Three Months Ended June 30,
---------------------------
2001 2000
--------- --------
Revenues $ 103,352 $ 94,521
Costs and expenses 93,668 87,366
--------- --------
Operating income 9,684 7,155
Other income, net (53) (74)
Interest and related expenses 2,125 3,107
--------- --------
Earnings before minority interests
and income taxes 7,612 4,122
Minority interests 258 325
--------- --------
Earnings before income taxes 7,354 3,797
Income taxes 3,456 1,899
--------- --------
Net Earnings $ 3,898 $ 1,898
========= ========
Earnings per share of common stock
Basic earnings per share: $ 0.32 $ 0.20
Diluted earnings per share: $ 0.30 $ 0.18
See accompanying Notes to Condensed Consolidated Financial Statements.
2
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended June 30,
---------------------------
2001 2000
-------- --------
Cash flows from operating activities
Net earnings $ 3,898 $ 1,898
Adjustments to reconcile net earnings to cash
flows from operating activities:
Depreciation and amortization 2,881 4,142
Other, net 1,269 (1,542)
Changes in assets and liabilities, net of effects from
business combinations:
Decrease in accounts receivable 23,937 3,041
Increase in inventories (17,239) (2,986)
(Increase) decrease in prepaid expenses and
other current assets (2,103) 479
Decrease in accounts payable (6,470) (3,266)
Decrease in accrued expenses and other current liabilities (3,360) (327)
Increase (decrease) in customer advances 2,258 (3,136)
Other, net (514) 803
-------- --------
Net cash provided by (used in) operating activities 4,557 (894)
Cash flows from investing activities
Capital expenditures (3,526) (2,580)
Payments pursuant to business combinations, net of cash acquired -- (6,757)
Other, net -- 40
-------- --------
Net cash used in investing activities (3,526) (9,297)
Cash flows from financing activities
Net borrowings of short-term debt 184 7,056
Net payments on long-term debt (19,819) (1,902)
Additional borrowings of long-term debt 16,600 --
Net proceeds from acquisition-related debt -- 7,000
Other, net 729 7
-------- --------
Net cash (used in) provided by financing activities (2,306) 12,161
-------- --------
Effect of exchange rates on cash and cash equivalents 749 643
-------- --------
Net (decrease) increase in cash and cash equivalents (526) 2,613
Cash and cash equivalents, beginning of period 2,324 3,778
-------- --------
Cash and cash equivalents, end of period $ 1,798 $ 6,391
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
3
DRS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements of
DRS Technologies, Inc. and Subsidiaries (the Company) have been prepared in
accordance with accounting principles generally accepted in the United
States and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. The Company has continued to follow the accounting policies set forth
in the consolidated financial statements included in its fiscal 2001 Annual
Report on Form 10-K filed with the Securities and Exchange Commission,
except for the April 1, 2001 adoption of the provisions of Statement of
Financial Accounting Standards (SFAS) Nos. 133, "Accounting for Derivative
Instruments and Hedging Activities" (see Note 6 of Notes to Condensed
Consolidated Financial Statements), 141, "Business Combinations", and 142,
"Goodwill and Other Intangible Assets" (see Note 3 of Notes to Condensed
Consolidated Financial Statements). In the opinion of management, the
interim financial information provided herein reflects all adjustments
(consisting of normal and recurring adjustments) necessary for a fair
presentation of the Company's consolidated financial position as of June
30, 2001, and the results of operations and cash flows for the three-month
periods ended June 30, 2001 and 2000. The results of operations for the
three months ended June 30, 2001 are not necessarily indicative of the
results to be expected for the full year.
For further information, these interim financial statements should be read
in conjunction with the Consolidated Financial Statements of the Company
for the fiscal year ended March 31, 2001, included in the Company's Annual
Report on Form 10-K for the fiscal year ended March 31, 2001.
2. Inventories
Inventories are summarized as follows:
(in thousands)
June 30, 2001 March 31, 2001
------------- --------------
Work-in-process $ 99,783 $ 83,058
Raw material and finished
goods 9,080 7,992
--------- --------
108,863 91,050
--------- --------
Less progress payments (18,490) (16,723)
--------- --------
Total $ 90,373 $ 74,327
========= ========
General and administrative costs included in work-in-process were
approximately $16.9 million and $14.5 million at June 30, 2001 and March
31, 2001, respectively. General and administrative expenses included in
costs and expenses amounted to approximately $ 20.7 million and $18.7
million for the three-month periods ended June 30, 2001 and 2000,
respectively. Included in those amounts are expenditures for internal
research and development amounting to approximately $2.1 million and $2.2
million for the fiscal quarters ended June 30, 2001 and 2000, respectively.
4
DRS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
3. Goodwill and Intangible Assets
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 141 and 142 (SFAS 141 and SFAS 142),
"Business Combinations" and "Goodwill and Other Intangible Assets,"
respectively. SFAS 141 replaces APB 16 and requires the use of the purchase
method for all business combinations initiated after June 30, 2001. It also
provides guidance on purchase accounting related to the recognition of
intangible assets, noting that any purchase price allocated to an assembled
workforce may not be accounted for separately, and accounting for negative
goodwill. SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Under SFAS 142, goodwill will be
tested annually and whenever events or circumstances occur indicating that
goodwill might be impaired.
The Company elected to adopt the provisions of SFAS 141 and 142 as of April
1, 2001. The Company has identified its reporting units to be its operating
segments and has determined the carrying value of each reporting unit by
assigning assets and liabilities, including the existing goodwill and
intangible assets, to those reporting units as of April 1, 2001. Upon
adoption of SFAS 142, amortization of goodwill recorded for business
combinations consummated prior to July 1, 2001 ceased, and intangible
assets acquired prior to July 1, 2001 that did not meet the criteria for
recognition apart from goodwill under SFAS 141 were reclassified to
goodwill. In connection with the adoption of SFAS 142, the Company will be
required to perform a transitional goodwill impairment assessment within
six months of adoption, as well as an annual impairment test. The annual
impairment test will be performed in the fourth quarter of each fiscal
year, after completion of the Company's Annual Operating Plan.
The following disclosure presents certain information on the Company's
acquired intangible assets as of June 30, 2001, and March 31, 2001: (All
intangible assets are being amortized over their estimated useful lives, as
indicated below, with no estimated residual values.)
(in thousands)
Weighted
Average Gross
Amortization Carrying Accumulated
Acquired Intangible Assets Period Amount Amortization Net Balance
------------ -------- ------------ -----------
As of June 30, 2001
Amortized acquired intangible assets:
Technology based intangibles 22 years $ 19,425 $ (4,315) $15,110
Customer related intangibles 21 years 7,630 (1,281) 6,349
-------- -------- -------
$ 27,055 $ (5,596) $21,459
======== ======== =======
As of March 31, 2001
Amortized acquired intangible assets:
Technology based intangibles 22 years $ 18,225 $ (4,032) $14,193
Customer related intangibles 21 years 7,630 (1,166) 6,464
Workforce 16 years 7,628 (757) 6,871
Technical infrastructure 20 years 5,280 (638) 4,642
Other 30 years 1,700 (958) 742
-------- -------- -------
$ 40,463 $ (7,551) $32,912
======== ======== =======
5
DRS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The aggregate acquired intangible amortization expense for the period ended
June 30, 2001 was approximately $398,000. The estimated acquired intangible
amortization expense for the fiscal year ending March 31, 2002 is $1.5
million. Estimated acquired intangible amortization expense for each of the
subsequent four fiscal years ending March 31, 2006 is $1.4
million.
The changes in the carrying amount of goodwill, by operating segment, for
the period ended June 30, 2001, are as follows (see Note 7 Operating
Segments for additional details on the Company's operating segments):
(in thousands)
Flight Safety and
Electronic Electro-Optical Communications
Systems Group Systems Group Group Other Total
------------- --------------- ----------------- ------- ---------
Balance as of March 31, 2001 $31,450 $ 20,236 $ 24,661 $ 43 $ 76,390
Effect of adoption of SFAS 141 and 142:
Workforce - 3,807 3,064 -- 6,871
Technical infrastructure - 4,642 -- -- 4,642
Other -- -- 742 -- 742
Existing technology -- -- (1,155) -- (1,155)
Adjustments -- -- -- (43) (43)
------- -------- -------- ---- --------
Balance as of April 1, 2001 $31,450 $ 28,685 $ 27,312 $ -- $ 87,447
Foreign currency translation adjustment (52) -- 519 -- 467
------- -------- -------- ---- --------
Balance as of June 30, 2001 $31,398 $ 28,685 $ 27,831 $ -- $ 87,914
======= ======== ======== ==== ========
The following pro forma information reconciles the net earnings reported
for the period ended June 30, 2000 to adjusted net earnings reflecting the
adoption of SFAS 142:
(in thousands, except per share data)
Three Months Ended June 30,
----------------------------------
2001 2000
--------- ---------
Reported net earnings $ 3,898 $ 1,898
Add back:
Goodwill and related intangible amortization,
net of tax benefit of $601 -- 678
--------- ---------
Adjusted net earnings $ 3,898 $ 2,576
========= =========
Basic earnings per share:
Reported net earnings $ 0.32 $ 0.20
Add back:
Goodwill and related intangible amortization,
net of tax benefit of $.06 per share -- 0.07
--------- ---------
Adjusted net earnings $ 0.32 $ 0.27
========= =========
Diluted earnings per share:
Reported net earnings $ 0.30 $ 0.18
Add back:
Goodwill and related intangible amortization,
net of tax benefit of $.05 per share -- 0.06
--------- ---------
Adjusted net earnings $ 0.30 $ 0.24
========= =========
6
DRS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
4. Earnings Per Share
The following table presents a reconciliation of the numerators and
denominators of basic and diluted earnings per share (EPS):
(in thousands, except per share data)
Three Months Ended June 30,
---------------------------
2001 2000
------- -------
Basic EPS computation:
Net earnings $ 3,898 $ 1,898
------- -------
Weighted average common shares
outstanding 12,095 9,349
------- -------
Basic earnings per share $ 0.32 $ 0.20
======= =======
Diluted EPS computation:
Net earnings $ 3,898 $ 1,898
Interest and expenses related to convertible
debentures -- 240
------- -------
Adjusted net earnings 3,898 2,138
------- -------
Diluted common shares outstanding:
Weighted average common shares
outstanding 12,095 9,349
Stock options and warrants 936 452
Convertible debentures -- 2,162
------- -------
Diluted common shares outstanding 13,031 11,963
------- -------
Diluted earnings per share $ 0.30 $ 0.18
======= =======
5. Comprehensive Earnings
The components of comprehensive earnings for the three-month periods ended
June 30, 2001 and 2000 consisted of the following:
(in thousands)
Three Months Ended June 30,
---------------------------
2001 2000
------- -------
Net earnings $ 3,898 $ 1,898
Other comprehensive earnings (losses):
Foreign currency translation adjustments 215 (1,571)
Unrealized losses on hedging instruments:
Cumulative adjustment at April 1, 2001 (289) --
Unrealized losses arising during the period (71) --
------- -------
Comprehensive earnings $ 3,753 $ 327
======= =======
At June 30, 2001, accumulated other comprehensive losses totaled approximately
$4.1 million and consisted of $3.7 million and $360,000 for foreign currency
translation adjustments and unrealized losses on hedging instruments,
respectively. At March 31, 2001, the $4.0 million balance consisted of foreign
currency translation adjustments.
7
DRS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
6. Derivative Financial Instruments
Effective April 1, 2001, the Company adopted SFAS 133. This Statement
requires the recognition of all derivative instruments as either assets or
liabilities in the consolidated balance sheet, and the periodic adjustment
of those instruments to fair value. The classification of gains and losses
resulting from changes in the fair values of derivatives is dependent on
the intended use of the derivative and its resultant designation.
The Company utilizes variable rate debt to maintain its operations and
sustain its growth. Such variable rate borrowings expose the Company to
interest rate risk and the related impact that changes in interest rates
can have on the Company's earnings and on its cash flows. In an effort to
limit its interest expense and cash flow exposure, and in accordance with
certain covenants in DRS' credit facility, the Company entered into
interest rate collar agreements with notional amounts covering a limited
amount of the aggregate outstanding principal balance of the Company's term
loans. The following is a summary of the Company's interest rate collar
agreements in place as of June 30, 2001 and March 31, 2001:
(in thousands)
Notional Amount
Effective Expiration -------------------------------- Variable Rate Ceiling Floor
Date Date June 30, 2001 March 31, 2001 Base Rate Rate
---------------- ---------------- -------------------------------- -------------- -------- --------
April 22, 1999 January 26, 2002 $ 20,000 $ 20,000 3 Month LIBOR* 5.75% 4.80%
January 26, 2001 January 30, 2003 10,000 10,000 3 Month LIBOR* 6.50% 5.09%
January 29, 2001 January 31, 2003 $ 10,000 $ 10,000 3 Month LIBOR* 6.50% 5.05%
* - London Interbank Offered Rate
On April 1, 2001, in accordance with the provisions in SFAS 133, the
Company designated its interest rate collars as cash flow hedges and
recorded the fair value of the instruments on the balance sheet at that
date, with a corresponding adjustment to comprehensive earnings. Due to the
nature and characteristics of the Company's designated hedging instruments,
all adjustments to the fair values of such instruments will be adjusted via
comprehensive earnings. The effect of adopting SFAS 133 at April 1, 2001,
and the amounts recorded related to its derivative financial instruments as
of and for the three month period ended June 30, 2001, were not material to
the Company's consolidated financial position and did not impact the
Company's consolidated results of operations or cash flows.
8
DRS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
7. Operating Segments
DRS operates in three principal business segments on the basis of products
and services offered: 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."
During the first quarter of fiscal 2002, the Company's operating
subsidiary, DRS Photronics, Inc. (DRS Photronics) was combined with DRS'
Flight Safety and Communications Group for management purposes, based
primarily on operational synergies. DRS Photronics had previously been
managed as part of the Electro-Optical Systems Group. Prior-year balances
and results of operations disclosed herein have been restated to give
effect to this change.
Information about the Company's segments for the fiscal quarters ended June
30, 2001 and 2000 are as follows:
(in thousands)
ESG EOSG FSCG Other Total
--------- --------- -------- -------- ---------
Quarter Ended June 30, 2001
Total revenues $ 38,096 $ 41,933 $ 22,297 $ 2,236 $ 104,562
Intersegment revenues (17) (94) (1,099) -- (1,210)
--------- --------- -------- -------- ---------
External revenues $ 38,079 $ 41,839 $ 21,198 $ 2,236 $ 103,352
Operating income (loss) $ 4,808 $ 4,477 $ 801 $ (402) $ 9,684
Identifiable assets $ 109,129 $ 112,763 $ 94,136 $ 13,725 $ 329,753
Depreciation and amortization $ 374 $ 1,271 $ 764 $ 472 $ 2,881
Capital expenditures $ 831 $ 1,764 $ 624 $ 307 $ 3,526
Quarter Ended June 30, 2000
Total revenues $ 41,537 $ 35,659 $ 15,152 $ 2,182 $ 94,530
Intersegment revenues -- (9) -- -- (9)
--------- --------- -------- -------- ---------
External revenues $ 41,537 $ 35,650 $ 15,152 $ 2,182 $ 94,521
Operating income (loss) $ 2,500 $ 3,871 $ 904 $ (120) $ 7,155
Identifiable assets $ 92,942 $ 135,027 $ 85,411 $ 15,832 $ 329,212
Depreciation and amortization $ 881 $ 1,736 $ 977 $ 548 $ 4,142
Capital expenditures $ 495 $ 756 $ 1,130 $ 199 $ 2,580
8. Supplemental Cash Flow Information
(in thousands)
Three Months Ended June 30,
---------------------------
2001 2000
------ ------
Cash paid for:
Income taxes $6,353 $2,054
Interest $1,869 $3,223
9
DRS Technologies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Unaudited)
9. Contingencies
The Company is a 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 believes
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. (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 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
DRS Photronics. During the Government's investigation, until October 29,
1999, 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 the investigation.
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.
10. Subsequent Event
At the annual meeting of stockholders held on August 8, 2001, the
shareholders approved an amendment to the Amended and Restated Certificate
of Incorporation to increase the number of shares of common stock to
30,000,000, from 20,000,000.
10
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 (MD&A) of the consolidated
financial condition and results of operations of DRS Technologies, Inc. and
Subsidiaries (hereinafter, we, us, our, the Company or DRS) as of June 30, 2001
and for the three-month periods ended June 30, 2001 and 2000. 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, our actual results could differ materially from those
suggested by such forward-looking statements.
Recently Issued Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 141 and 142 (SFAS 141 and SFAS 142),
"Business Combinations" and "Goodwill and Other Intangible Assets,"
respectively. SFAS 141 replaces APB 16 and requires the use of the purchase
method for all business combinations initiated after June 30, 2001. It also
provides guidance on purchase accounting related to the recognition of
intangible assets, noting that any purchase price allocated to an assembled
workforce may not be accounted for separately, and accounting for negative
goodwill. SFAS 142 changes the accounting for goodwill from an amortization
method to an impairment-only approach. Under SFAS 142, goodwill will be tested
annually and whenever events or circumstances occur indicating that goodwill
might be impaired.
We elected to adopt the provisions of SFAS 141 and 142 as of April 1, 2001. We
have identified our reporting units to be our operating segments and we have
determined the carrying value of each reporting unit by assigning assets and
liabilities, including the existing goodwill and intangible assets, to those
reporting units as of April 1, 2001. Upon adoption of SFAS 142, amortization of
goodwill recorded for business combinations consummated prior to July 1, 2001
ceased, and intangible assets acquired prior to July 1, 2001 that did not meet
the criteria for recognition apart from goodwill under SFAS 141 were
reclassified to goodwill. In connection with the adoption of SFAS 142, we will
be required to perform a transitional goodwill impairment assessment within six
months of adoption, as well as an annual impairment test. Our annual impairment
test will be performed in the fourth quarter of each fiscal year, after the
completion of our Annual Operating Plan.
Results of Operations
Our 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, 2001 increased
$8.8 million, as compared with the corresponding prior-year period. The increase
in revenues was primarily due to the inclusion of the operating results of our
fiscal 2001 acquisition of DRS Communications Company as well as increased
shipments of rugged computers and second generation electro-optical night vision
and targeting systems. These increases were partially offset by decreased
shipments of our military display workstations and certain search and navigation
radar systems. Operating income increased 35% to $9.7 million from $7.2 million
for the same three-month period in fiscal 2001. The increase in operating income
was driven by the overall increase in revenues and the positive impact of our
fiscal 2002 first quarter adoption of SFAS 141 and SFAS 142 (see Note 3 of Notes
to Condensed Consolidated Financial Statements). In accordance with the
provisions of these standards, we ceased amortizing goodwill effective April 1,
2001.
11
DRS Technologies, Inc. and Subsidiaries
The adoption of SFAS 141 and 142 contributed approximately $1.3 million to the
Company's fiscal 2002 first quarter operating income. Had these standards been
effective in the prior year, our operating income, for the three-month period
ended June 30, 2000, would have been $1.3 million higher. Partially offsetting
the increase in operating income were the impact of certain charges at our
operating segments. See discussion of operating segments below for additional
information.
Interest and related expenses decreased approximately $1.0 million for the
three-month period ended June 30, 2001 as compared with the corresponding
prior-year period. This decrease was primarily the result of a 67% decrease in
average working capital borrowings outstanding during the three-month period
ended June 30, 2001, as compared with the prior-year period, and the favorable
impact of the conversion of all of our 9% Senior Subordinated Convertible
Debentures during the second half of fiscal 2001.
The provision for income taxes for the quarter-to-date period ended June 30,
2001 reflects an annual estimated effective income tax rate of approximately
47%, as compared with 50% in the first quarter of fiscal 2001. The decrease in
our effective tax rate is primarily due to the adoption of SFAS 142. It
is anticipated that the Company's effective tax rate may also decline moderately
in future years as the Company continues to grow.
Earnings before interest, income taxes, depreciation and amortization (EBITDA)
for the three-month period ended June 30, 2001 was $12.4 million, an increase of
approximately 12% over the three-month period ended June 30, 2000.
Operating Segments
We operate in three principal business segments on the basis of products and
services offered: 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."
During the first quarter of fiscal 2002, one of our operating subsidiaries, DRS
Photronics, was combined with DRS' Flight Safety and Communications Group for
management purposes based primarily on operational synergies. DRS Photronics had
previously been managed as part of the Electro-Optical Systems Group. Prior-year
balances and results of operations disclosed in this MD&A have been restated to
give effect to this change.
Electronic Systems Group
Our Electronic Systems Group is a leader in the development, production and
support of high-performance combat display workstations used by the U.S. Navy.
In addition, we supply the military and intelligence communities with signal
processing systems and computer systems adapted, or "ruggedized," for harsh
environments. We incorporate advanced commercial computing technology to provide
rapidly fielded and cost-effective system solutions for enhancing the military's
ability to attain information dominance in land, sea and air applications. These
systems are deployed on front-line platforms, including Aegis destroyers and
cruisers, aircraft carriers, submarines and surveillance aircraft. Our family of
rugged computer products is also used in the U.S. Army's ongoing battlefield
digitization program.
Electro-Optical Systems Group
Our Electro-Optical Systems Group is a leading provider of sophisticated thermal
imaging and targeting systems. We have one of the few high-performance focal
plane array foundries that allows us to design and develop these electro-optical
systems for our customers. We design, manufacture and market thermal imaging
systems that allow operators to detect, identify and target objects based upon
their infrared signatures under adverse conditions, such as darkness, fog, smoke
and dust. These systems are used in the U.S. Army's most important battlefield
platforms, including the Abrams Battle Tank, the Bradley Infantry Fighting
Vehicle, the High-Mobility Multi-Purpose Wheeled Vehicle Scout and the Javelin
missile program. We also design and manufacture eye-safe laser range finders.
12
DRS Technologies, Inc. and Subsidiaries
In addition to military applications, we are leveraging our advanced
electro-optical production capability by expanding into related non-defense
markets. For example, we manufacture electro-optical modules for commercial
devices used in corrective laser eye surgery and integrate systems for retinal
scanning.
Flight Safety and Communications Group
Our Flight Safety and Communications Group supplies airborne deployable
recorders, surveillance and communications systems and electronic manufacturing
services. We are the leading manufacturer of deployable flight voice and data
recording equipment, or "black box" recorders, for U.S. and foreign customers.
Mounted to the airframe, these recorders eject automatically from the aircraft
prior to impact, so that they more easily can be located by search and rescue
teams. We have provided over 4,000 of these deployable recorders for military
and search and rescue aircraft. We also supply integrated naval ship
communications, information management systems, coastal surveillance systems and
ultra high-speed digital imaging systems. In addition, we provide electronic
manufacturing services, often with value-added engineering content, to the
defense and space industries. We also design and manufacture multiple-platform
weapons calibration systems for such diverse air platforms as the Apache attack
helicopter and the AC-130U gunship.
Other
"Other" includes the activities of DRS Corporate Headquarters and DRS Ahead
Technology. DRS Ahead Technology is a commercial operation that produces
magnetic head components used in the manufacturing process of computer disk
drives, which burnish and verify the quality of disk surfaces. DRS Ahead
Technology also services and manufactures magnetic video recording heads used in
broadcast television equipment.
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)
Three Months Ended
June 30, Percent Changes
--------------------- ---------------
2001 2000 2001 vs. 2000
-------- -------- ---------------
ESG
External revenues $ 38,079 $ 41,537 (8.3%)
Operating income $ 4,808 $ 2,500 92.3%
Operating margin 12.6% 6.0% 110.0%
EOSG
External revenues $ 41,839 $ 35,650 17.4%
Operating income $ 4,477 $ 3,871 15.7%
Operating margin 10.7% 10.9% (1.8%)
FSCG
External revenues $ 21,198 $ 15,152 39.9%
Operating income $ 801 $ 904 (11.4%)
Operating margin 3.8% 6.0% (36.7%)
Other
External revenues $ 2,236 $ 2,182 2.5%
Operating loss $ (402) $ (120) (235.0%)
Operating margin (18.0%) (5.5%) (227.3%)
13
DRS Technologies, Inc. and Subsidiaries
Electronic Systems Group: Our Electronic Systems Group's revenues decreased $3.5
million, or approximately 8%, for the three-month period ended June 30, 2001, as
compared with the corresponding prior year period. The decrease in revenues was
due primarily to the timing of shipments of combat display workstations and a
decrease in shipments of certain search and navigation radar systems. These
decreases were partially offset by increases in revenues from rugged computers
and peripherals. Operating income increased $2.3 million in the first quarter of
fiscal 2002, as compared with the respective fiscal 2001 period. The increase in
operating income was driven by a change in product mix and lower overhead costs
in the first quarter of fiscal 2002, as compared with the corresponding prior
year period, as well as the favorable impact of the elimination of goodwill
amortization in accordance with SFAS 142. The elimination of goodwill
amortization contributed approximately $448,000 in operating income to the ESG
operating segment in the three-month period ended June 30, 2001. Had this
standard been effective in the prior year, operating income would have been
$487,000 higher for the three-month period ended June 30, 2000.
Electro-Optical Systems Group: Our Electro-Optical Systems Group's revenues
increased $6.2 million, or approximately 17%, for the three-month period ended
June 30, 2001, as compared with the corresponding prior year period. The
increase in revenues was driven by increased shipments of second generation
electro-optical night vision and targeting systems and infrared detectors.
Partially offsetting these increases were decreased shipments of certain
commercial electro-optical products. Operating income for the first quarter of
fiscal 2002 increased $606,000, or approximately 16%, as compared with the prior
year period. The increase in operating income was primarily attributable to the
overall increase in revenues as well as the favorable impact of the elimination
of goodwill amortization in accordance with SFAS 142. The elimination of
goodwill amortization contributed approximately $454,000 in operating income to
the EOSG operating segment in the three-month period ended June 30, 2001. Had
this standard been effective in the prior year, operating income would have been
$528,000 higher for the three-month period ended June 30, 2000. Partially
offsetting these increases were charges recorded in connection with a certain
commercial product line.
Flight Safety and Communications Group: Our Flight Safety and Communications
Group's revenues increased $6.0 million, or approximately 40%, for the
three-month period ended June 30, 2001, as compared with the corresponding prior
year period. The increase in revenues was primarily driven by our acquisition of
DRS Communications Company in the latter part of the first quarter of fiscal
2001. Also contributing to the overall increase in revenues were increased
shipments of certain mission data recorders. The increase in revenues was
partially offset by decreased shipments of the Group's high-speed cameras and
shipments of airborne separation video systems. Operating income decreased
approximately $103,000 in the three-month period ended June 30, 2001, as
compared with the respective prior year period. The elimination of goodwill
amortization contributed approximately $351,000 in operating income to the FSCG
operating segment in the three-month period ended June 30, 2001. Had this
standard been effective in the prior year, operating income would have been
$264,000 higher for the three-month period ended June 30, 2000. In addition, DRS
Communications Company contributed approximately $782,000 to operating income in
the three month period ended June 30, 2001. Exclusive of the contributions of
DRS Communications Company, the Group's operating income decreased by
approximately $885,000. The decrease in operating income was primarily
attributable to charges of approximately $765,000 for costs associated with
shutting down FSCG's Santa Clara, California production and engineering
facility as well as decreases in revenues from high-speed cameras and airborne
separation video systems. We announced in the first quarter of fiscal 2002 that
we would be closing our Santa Clara facility and relocating production and
engineering previously performed at this location to other DRS facilities. It is
anticipated that the cost savings associated with this effort will offset the
cost to implement the plan and that any impact to FSCG's full year fiscal 2002
earnings will be immaterial.
Other: Revenues for the three-month period ended June 30, 2001 increased 3% as
compared to the corresponding prior year period. Operating loss increased by
approximately $282,000 in the three-months ended June 30, 2001, as compared with
the prior year period. The increase in the operating loss was primarily due to
price pressures on certain video products and continued soft demand in the disk
drive marketplace.
14
DRS Technologies, Inc. and Subsidiaries
FINANCIAL CONDITION AND LIQUIDITY
Cash and Cash Flow
The following table provides cash flow data for the Company for the three-month
periods ended June 30, 2001 and June 30, 2000:
(in thousands)
Three Months Ended June 30,
---------------------------
2001 2000
-------- --------
Net cash provided by (used in) operating activities $ 4,557 $ (894)
Net cash used in investing activities $(3,526) $ (9,297)
Net cash (used in) provided by financing activities $(2,306) $ 12,161
Operating cash flow for the three-month period ended June 30, 2001 improved by
approximately $5.5 million as compared with the corresponding prior-year period.
This improvement primarily resulted from increased earnings (net of adjustments
for non-cash items), a decrease in accounts receivable and increased advanced
payments from customers, partially offset by an increase in inventories and
other current assets.
Cash used in investing activities for the three-month period ended June 30, 2001
consisted of $3.5 million for capital expenditures.
We have a $160 million secured credit facility consisting of two term loans
totaling $80 million and a revolving line of credit of $80 million, subject to a
borrowing base calculation. During the three-months ended June 30, 2001, we paid
approximately $1.8 million in principal payments against our two term loans,
borrowed approximately $16.6 million under the revolving line of credit and
repaid approximately $18.0 million. The borrowings under our revolving line of
credit were used to meet temporary working capital requirements. Other than cash
flows from operations, the revolving line of credit is our primary source of
liquidity. As of June 30, 2001, we had approximately $39.0 million available
under the revolving line of credit, after satisfaction of its borrowing base
requirement.
We actively seek to finance our business in a manner that preserves financial
flexibility, while minimizing borrowing costs to the extent practicable. We
continually review the changing financial, market and economic conditions to
manage the types, amounts and maturities of our indebtedness. Cash and cash
equivalents, internally generated cash flow from operations and other available
financing resources are expected to be sufficient to meet anticipated operating,
capital expenditure and debt service requirements during the next twelve months
and the foreseeable future.
Our total debt to trailing twelve-month EBITDA improved to 1.5x at June 30,
2001, from 3.0x at June 30, 2000. The improvement in fiscal 2002 was driven by
increased earnings as well as a $52.6 million reduction in total debt over the
last twelve months.
15
DRS Technologies, Inc. and Subsidiaries
Backlog
Backlog at June 30, 2001 was approximately $494.2 million as compared with
$456.5 million at March 31, 2001. We booked approximately $139.7 million in new
orders in the first three months of fiscal 2002.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
See Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market
Risk", of our Annual Report on Form 10-K for the fiscal year ended March 31,
2001 for a discussion of our exposure to market risks. There was no significant
change in those risks during the three months ended June 30, 2001.
16
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are 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. (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 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 DRS Photronics. During the
Government's investigation, until October 29, 1999, 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 such equipment.
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 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
Exhibit No. Description
----------- -----------
3.9 Certificate of Amendment to the Amended and
Restated Certificate of Incorporation of the
Company, as filed August 8, 2001.
(b) Reports on Form 8-K
None
17
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DRS TECHNOLOGIES, INC.
Registrant
Date: August 13, 2001 /s/ Richard A. Schneider
---------------------------------------
Richard A. Schneider
Executive Vice President, Chief
Financial Officer and Treasurer
18