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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 December 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
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Commission file number 1-8533
DRS Technologies, Inc.
Delaware 13-2632319
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Sylvan Way, Parsippany, New Jersey 07054
(973) 898-1500
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
As of February 9, 2001, 11,940,046 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
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets--December 31, 2000 and
March 31, 2000.................................................................. 1
Condensed Consolidated Statements of Earnings--Three and Nine Months Ended
December 31, 2000 and 1999...................................................... 2
Condensed Consolidated Statements of Cash Flows--Nine Months Ended December 31,
2000 and 1999................................................................... 3
Notes to Condensed Consolidated Financial Statements............................ 4-9
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations...................................................................... 10-17
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk...................... 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................................... 19
ITEM 6. Exhibits and Reports on Form 8-K................................................ 19
SIGNATURES ................................................................................ 20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
DECEMBER 31, 2000 MARCH 31, 2000
----------------- --------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 8,570 $ 3,778
Accounts receivable, net ................................... 79,390 80,894
Inventories, net of progress payments ...................... 76,857 62,326
Prepaid expenses and other current assets .................. 7,423 6,326
Net current assets of discontinued operations .............. - 5,309
-------- --------
Total current assets ........................... 172,240 158,633
-------- --------
Property, plant and equipment, less accumulated
depreciation and amortization of $37,091 and
$28,033 at December 31, 2000 and March 31,
2000, respectively .......................................... 34,070 29,006
-------- --------
Goodwill and related intangible assets, less
accumulated amortization of $19,803 and
$14,821 at December 31, 2000 and March 31,
2000, respectively .......................................... 119,651 125,321
-------- --------
Deferred income taxes and other noncurrent assets ............... 5,164 7,138
-------- --------
$331,125 $320,098
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term debt ..................... $ 12,982 $ 5,699
Short-term bank debt ....................................... - 17,781
Accounts payable ........................................... 24,544 28,295
Accrued expenses and other current liabilities ............. 94,867 85,474
-------- --------
Total current liabilities .................... 132,393 137,249
Long-term debt, excluding current installments .................. 87,704 97,695
Other noncurrent liabilities .................................... 9,653 6,970
-------- --------
Total liabilities ............................ 229,750 241,914
-------- --------
Stockholders' equity:
Preferred Stock, no par value. Authorized
2,000,000 shares; no shares issued at
December 31, 2000 and March 31, 2000 ........................ - -
Common Stock, $.01 par value per share
Authorized 20,000,000 shares; issued
11,624,755 and 9,717,020 shares at
December 31, 2000 and March 31, 2000, respectively ......... 116 97
Additional paid-in capital ...................................... 65,778 48,584
Retained earnings ............................................... 39,663 32,047
Accumulated other comprehensive losses .......................... (1,881) (86)
Treasury stock, at cost:
440,939 shares of Common Stock at December 31, 2000
and March 31, 2000 ......................................... (1,988) (1,988)
Unamortized restricted stock compensation ....................... (313) (470)
-------- --------
Net stockholders' equity ................................... 101,375 78,184
-------- --------
Commitments and contingencies ................................... $331,125 $320,098
======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
1
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31,
------------------------------- ------------------------------
2000 1999 2000 1999
---- ---- ---- ----
Revenues $ 95,935 $103,570 $297,683 $ 277,469
Costs and expenses .................................. (85,844) (96,450) (271,934) (259,956)
-------- -------- -------- ---------
Operating income ................................. 10,091 7,120 25,749 17,513
Other income, net ................................... (149) (242) (191) (536)
Interest and related expenses ....................... 2,618 3,424 9,262 9,503
-------- -------- -------- ---------
Earnings from continuing operations before
minority interests and income taxes ........... 7,622 3,938 16,678 8,546
Minority interests .................................. 375 385 970 955
-------- -------- -------- ---------
Earnings from continuing operations before
income taxes .................................. 7,247 3,553 15,708 7,591
Income taxes ........................................ 3,768 1,433 8,092 3,063
-------- -------- -------- ---------
Earnings from continuing operations .............. 3,479 2,120 7,616 4,528
Loss from discontinued operations, net of tax
benefit of $149 and $312 ......................... - (347) - (727)
-------- -------- -------- ---------
Net earnings ..................................... $ 3,479 $ 1,773 $ 7,616 $ 3,801
======== ======== ======== =========
Earnings per share of common stock
Basic earnings per share:
Earnings from continuing operations ............ $ 0.32 $ 0.23 $ 0.76 $ 0.49
Loss from discontinued operations, net of tax .. - (0.04) - (0.08)
Net earnings ................................... $ 0.32 $ 0.19 $ 0.76 $ 0.41
Diluted earnings per share:
Earnings from continuing operations ............ $ 0.28 $ 0.21 $ 0.66 $ 0.46
Loss from discontinued operations, net of tax .. - (0.03) - (0.06)
Net earnings ................................... $ 0.28 $ 0.18 $ 0.66 $ 0.40
See accompanying Notes to Condensed Consolidated Financial Statements.
2
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
NINE MONTHS ENDED DECEMBER 31,
---------------------------------------
2000 1999
---------------- ----------------
Cash flows from operating activities
Net earnings ................................................ $ 7,616 $ 3,801
Adjustments to reconcile net earnings to cash
flows from operating activities:
Net loss from discontinued operations ....................... - 727
Depreciation and amortization ............................... 12,456 12,765
Other, net .................................................. 1,311 3,357
Changes in assets and liabilities, net of effects from
business combinations:
Decrease in accounts receivable ............................. 4,613 8,049
(Increase) decrease in inventories .......................... (11,406) 2,435
(Increase) decrease in prepaid expenses and other
current assets ........................................... (356) 2,112
Decrease in accounts payable (4,739) (16,767)
Increase (decrease) in accrued expenses and other
current liabilities ...................................... 10,485 (16,626)
Increase (decrease) in customer advances .................... 1,813 (9,857)
Other, net .................................................. 1,007 638
-------- --------
Net cash provided by (used in) operating activities of
continuing operations .................................... 22,800 (9,366)
Net cash used in operating activities of discontinued
operations ............................................... - (407)
-------- --------
Net cash provided by (used in) operating activities ......... 22,800 (9,773)
-------- --------
Cash flows from investing activities
Capital expenditures ........................................ (10,339) (3,249)
Payments pursuant to business combinations, net of
cash acquired ............................................ (6,979) (8,656)
Proceeds from sale of discontinued operations ............... 3,525 -
Other, net .................................................. 770 (104)
-------- --------
Net cash used in investing activities of continuing
operations ................................................. (13,023) (12,009)
Net cash used in investing activities of discontinued
operations ................................................. - (152)
-------- --------
Net cash used in investing activities ....................... (13,023) (12,161)
-------- --------
Cash flows from financing activities
Net borrowings of short-term debt ........................... - 11,542
Net payments on long-term debt .............................. (14,233) (3,715)
Net proceeds from acquisition-related debt .................. 7,000 8,000
Other, net .................................................. 654 (682)
-------- --------
Net cash (used in) provided by financing activities ......... (6,579) 15,145
-------- --------
Effect of exchange rates on cash and cash equivalents ............ 1,594 (453)
-------- --------
Net increase (decrease) in cash and cash equivalents ............. 4,792 (7,242)
Cash and cash equivalents, beginning of period ................... 3,778 10,031
-------- --------
Cash and cash equivalents, end of period ......................... $ 8,570 $ 2,789
======== ========
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
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, 2000, and the results of
operations for the three- and nine-month periods and cash flows for the
nine-month periods ended December 31, 2000 and 1999. All significant
intercompany balances and transactions have been eliminated. The results of
operations for the three- and nine-month periods ended December 31, 2000 are
not necessarily indicative of the results to be expected for the full year.
On August 31, 2000, the Company completed the sale of its magnetic tape head
business units located in St. Croix Falls, Wisconsin and Razlog, Bulgaria
(see Note 2. Discontinued Operations). Accordingly, the Company has restated
its financial statements for the periods ended December 31, 1999 to present
the operating results of these business units as discontinued operations.
The Company has reclassified its working capital obligations from short-term
debt to long-term debt, excluding current installments, on the December 31,
2000 Condensed Consolidated Balance Sheets to reflect the intent of the
borrowings and their maturity date of October 1, 2003. Certain other items in
the accompanying notes to the December 31, 1999 Condensed Consolidated
Financial Statements have been reclassified to conform to the fiscal 2001
presentation.
Most of the Company's contracts are long-term in nature, spanning multiple
years. The Company reviews cost performance and estimates to complete on
these contracts at least quarterly and in many cases more frequently.
Revisions in profit estimates are reflected in the period in which the facts,
which require the revisions, become known. If the estimated cost to complete
a contract changes from the previous estimate, the Company will record a
cumulative profit adjustment. In the three- and nine-month periods ended
December 31, 2000, the Company recorded cumulative profit adjustments of $5.2
million and $6.3 million, respectively, on certain long-term contracts. The
three- and nine-month periods ended December 31, 1999 include a cumulative
profit adjustment of $2.9 million.
2. DISCONTINUED OPERATIONS
On May 18, 2000, the Company's Board of Directors approved an agreement to
sell the Company's magnetic tape head business units located in St. Croix
Falls, Wisconsin, and Razlog, Bulgaria, and on August 31, 2000, the Company
completed the sale. In fiscal 2000, in anticipation of the sale of the
magnetic tape head business units, the Company recorded a $2.1 million
charge, net of tax, on the disposal of these operations. Actual income from
discontinued operations for the five months ended August 31, 2000 was
$135,000 greater than estimated at March 31, 2000. Other costs associated
with the disposal substantially offset the improvement in operating results
and, as such, no adjustment to the loss on disposal of discontinued
operations recorded at March 31, 2000 was required.
3. BUSINESS COMBINATIONS
On June 14, 2000, a newly formed subsidiary of the Company acquired the
assets of General Atronics Corporation for $7.5 million in cash and $4.0
million in stock (approximately 355,000 shares of DRS Common Stock). The
Company funded the cash portion of this acquisition through borrowings under
its revolving line of credit. Located in Wyndmoor, Pennsylvania, and now
operating as DRS Communications Company, LLC (DRS Communications Company),
the company designs, develops and manufactures military data link components
and systems, high-frequency communication modems, tactical and secure digital
telephone components, and radar surveillance systems for U.S. and
international militaries. DRS Communications Company is being managed as part
of the DRS Flight Safety and Communications Group. The acquisition has been
accounted for
4
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
using the purchase method of accounting. The excess of costs over the
estimated fair value of identifiable net assets acquired and the appraised
value of certain identified intangible assets were approximately $2.6 million
and $3.3 million, respectively, and are being amortized on a straight-line
basis over twenty years and ten years, respectively. In connection with the
acquisition, the Company incurred approximately $369,000 in transaction
costs. 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 results of the acquired business have
been included in the Consolidated Financial Statements of the Company since
the acquisition date.
In the fourth quarter of fiscal 2000 the Company closed its Longmont,
Colorado facility, which was acquired as part of the Company's acquisition of
NAI Technologies, Inc. in the fourth quarter of fiscal 1999. Engineering and
production performed at this facility were transferred to other DRS
locations. Approximately $1.5 million was recorded in fiscal 2000, as an
adjustment to acquisition cost, for costs incurred in connection with closing
the facility. The following table reconciles the related liability at March
31, 2000 to the liability as of December 31, 2000:
(IN THOUSANDS)
LIABILITY AT UTILIZED LIABILITY AT
MARCH 31, 2000 FISCAL 2001 DECEMBER 31, 2000
-------------- ----------- -----------------
Severance/Employee costs ....................... $1,195 $1,195 $ -
Estimated lease commitments and
related facility costs ...................... 215 215 -
------ ------ ----
Total .......................................... $1,410 $1,410 $ -
====== ====== ====
4. INVENTORIES
Inventories are summarized as follows:
(IN THOUSANDS)
DECEMBER 31, 2000 MARCH 31, 2000
----------------- --------------
Work-in-process ....................................... $ 96,303 $79,058
Raw material and finished
goods .............................................. 6,804 10,917
-------- -------
103,107 89,975
-------- -------
Less progress payments ................................ (26,250) (27,649)
-------- -------
Total ................................................. $ 76,857 $62,326
======== =======
General and administrative costs included in work-in-process were
approximately $18.6 million and $12.7 million at December 31, 2000 and March
31, 2000, respectively. General and administrative expenses included in costs
and expenses amounted to approximately $14.0 million and $18.4 million for
the three-month periods ended December 31, 2000 and 1999, respectively, and
approximately $50.7 million and $49.2 million for the nine-month periods then
ended. Included in those amounts are expenditures for internal research and
development amounting to approximately $2.0 million and $3.1 million for the
fiscal quarters ended December 31, 2000 and 1999, respectively, and
approximately $6.1 million and $6.9 million, respectively, for the nine-month
periods then ended.
5
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
5. 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Basic EPS Computation
Net earnings from continuing operations ....... $ 3,479 $ 2,120 $ 7,616 $ 4,528
Net loss from discontinued operations, net of
tax ........................................ - (347) - (727)
------- ------- ------- -------
Net earnings .................................. $ 3,479 $ 1,773 $ 7,616 $ 3,801
------- ------- ------- -------
Weighted average common shares outstanding ....... 10,734 9,276 10,030 9,266
------- ------- ------- -------
Basic earnings (losses) per share:
Net earnings from continuing operations ....... 0.32 $ 0.23 $ 0.76 $ 0.49
Net loss from discontinued operations, net of
tax ........................................ - (0.04) - (0.08)
------- ------- ------- -------
Net earnings .................................. $ 0.32 $ 0.19 $ 0.76 $ 0.41
======= ======= ======= =======
Diluted EPS Computation
Net earnings from continuing operations ....... $ 3,479 $ 2,120 $ 7,616 $ 4,528
Interest and expenses related to convertible
debentures ................................. 124 284 560 849
------- ------- ------- -------
Adjusted net earnings from continuing
operations ................................. 3,603 2,404 8,176 5,377
Net loss from discontinued operations, net of
tax ........................................ - (347) - (727)
------- ------- ------- -------
Adjusted net earnings ......................... $ 3,603 $ 2,057 $ 8,176 $ 4,650
------- ------- ------- -------
Diluted common shares outstanding:
Weighted average common shares outstanding .... 10,734 9,276 10,030 9,266
Stock options and warrants..................... 825 146 604 151
Convertible debentures ........................ 1,140 2,162 1,702 2,162
------- ------- ------- -------
Diluted common shares outstanding ................ 12,699 11,584 12,336 11,579
------- ------- ------- -------
Diluted earnings (losses) per share:
Net earnings from continuing operations ....... $ 0.28 $ 0.21 $ 0.66 $ 0.46
Net loss from discontinued operations, net of
tax ........................................ - (0.03) - (0.06)
------- ------- ------- -------
Net earnings .................................. $ 0.28 $ 0.18 $ 0.66 $ 0.40
======= ======= ======= =======
The Company's 12% Convertible Subordinated Promissory Notes (which were
fully liquidated in the second quarter of fiscal 2000) were excluded from
the computation of earnings per share for the year to date period ended
December 31, 1999 as their inclusion would have been antidilutive.
6
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. COMPREHENSIVE EARNINGS
(IN THOUSANDS)
THREE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
--------------------------- ---------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
Comprehensive earnings
Net earnings .................................. $3,479 $1,773 $7,616 $3,801
Other comprehensive (losses) earnings:
Foreign currency translation adjustment ..... 245 106 (1,795) 1,225
------ ------ ------ ------
Comprehensive earnings ........................ $3,724 $1,879 $5,821 $5,026
====== ====== ====== ======
7. RESTRUCTURING CHARGE
During fiscal 2000, the Company recorded restructuring charges totaling
approximately $2.2 million. The Company's restructuring initiatives impacted
the Electro-Optical Systems Group (EOSG) and Flight Safety and Communications
Group (FSCG) operating segments and DRS Corporate Headquarters. EOSG recorded
a restructuring charge of approximately $831,000 for costs relating primarily
to consolidating two facilities into one in Oakland, New Jersey, as of March
31, 2000. FSCG recorded a restructuring charge of approximately $669,000 and
$143,000 at its DRS Hadland Ltd. ("DRS Hadland") and DRS Precision Echo, Inc.
operating units, respectively, for severance and other employee-related
costs. The DRS Hadland restructuring charge was recorded in connection with
the transition of the day-to-day management of DRS Hadland's operations from
EOSG to FSCG in the second half of fiscal 2000. In addition, DRS Corporate
Headquarters recorded a restructuring charge of approximately $560,000 for
severance and other employee-related costs. Severance and other employee
costs were recorded in connection with the termination of 13 employees. As of
March 31, 2000, all terminations had occurred. In the third quarter of fiscal
2001 the Company revised its estimate relating to its facility consolidation
efforts in Oakland, New Jersey and recorded a charge of $525,000. At December
31, 2000, the majority of the Severance/Employee costs liability shown below
represents termination benefits to be paid in accordance with contractual
terms over the next sixteen months. The following table reconciles the
restructuring liability at March 31, 2000 to the restructuring liability as
of December 31, 2000:
(IN THOUSANDS)
LIABILITY AT FISCAL 2001 UTILIZED LIABILITY AT
MARCH 31, 2000 CHARGES FISCAL 2001 DECEMBER 31, 2000
-------------- ------------- ----------- -----------------
Estimated lease commitments
and related facility costs ........ $ 328 $525 $289 $564
Severance/Employee costs ............. 690 -- 332 358
------ ---- ---- ----
Total ................................ $1,018 $525 $621 $922
====== ==== ==== ====
7
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
8. OPERATING SEGMENTS
DRS operates in three principal business segments on the basis of products
and services offered. Each operating segment is comprised of separate and
distinct businesses: the Electronic Systems Group (ESG), the Electro-Optical
Systems Group (EOSG), and the Flight Safety and Communications Group (FSCG).
All other operations are grouped in "Other." Information about the Company's
operations in these segments for the fiscal quarters and nine-month periods
ended December 31, 2000 and 1999 are as follows:
(IN THOUSANDS)
ESG EOSG FSCG Other Total
--------- --------- ---------- --------- ----------
Quarter Ended December 31, 2000
Total Revenues .......................... $ 41,912 $ 36,974 $ 16,778 $ 2,320 $ 97,984
Intersegment Revenues ................. $ (257) $ (19) $ (1,773) $ -- $ (2,049)
External Revenues ....................... $ 41,655 $ 36,955 $ 15,005 $ 2,320 $ 95,935
Operating income (loss) ................. $ 3,869 $ 7,965 $ (987) $ (756) $ 10,091
Identifiable assets ..................... $ 93,663 $ 134,076 $ 81,503 $ 21,883 $ 331,125
Depreciation and amortization ........... $ 911 $ 1,968 $ 684 $ 349 $ 3,912
Capital expenditures .................... $ 217 $ 2,657 $ 81 $ 130 $ 3,085
Quarter Ended December 31, 1999
Total Revenues .......................... $ 54,240 $ 34,403 $ 13,326 $ 2,157 $ 104,126
Intersegment Revenues ................. $ (99) $ (457) $ -- $ -- $ (556)
External Revenues ...................... $ 54,141 $ 33,946 $ 13,326 $ 2,157 $ 103,570
Operating income (loss) ................. $ 4,617 $ 3,707 $ (1,084) $ (120) $ 7,120
Identifiable assets ..................... $ 98,641 $ 134,102 $ 57,070 $ 17,256 $ 307,069
Depreciation and amortization ........... $ 923 $ 1,777 $ 828 $ 674 $ 4,202
Capital expenditures .................... $ 348 $ 516 $ 66 $ 268 $ 1,198
(IN THOUSANDS)
ESG EOSG FSCG Other Total
--------- --------- ---------- --------- ----------
Nine Months Ended December 31, 2000
Revenues ................................ $ 129,137 $ 116,321 $ 47,196 $ 7,138 $ 299,792
Intersegment Revenues ................. $ (257) $ (79) $ (1,773) $ -- $ (2,109)
External Revenues ....................... $ 128,880 $ 116,242 $ 45,423 $ 7,138 $ 297,683
Operating income ........................ $ 10,131 $ 16,917 $ (731) $ (568) $ 25,749
Identifiable assets ..................... $ 93,663 $ 134,076 $ 81,503 $ 21,883 $ 331,125
Depreciation and amortization ........... $ 2,701 $ 5,822 $ 2,482 $ 1,451 $ 12,456
Capital expenditures .................... $ 1,731 $ 6,694 $ 771 $ 1,143 $ 10,339
Nine Months Ended December 31, 1999
Revenues ................................ $ 139,568 $ 96,349 $ 36,415 $ 6,332 $ 278,664
Intersegment Revenues ................. $ (192) $ (955) $ (48) $ -- $ (1,195)
External Revenues ...................... $ 139,376 $ 95,394 $ 36,367 $ 6,332 $ 277,469
Operating income (loss) ................. $ 10,676 $ 7,509 $ 350 $ (1,022) $ 17,513
Identifiable assets ..................... $ 98,641 $ 134,102 $ 57,070 $ 17,256 $ 307,069
Depreciation and amortization ........... $ 2,630 $ 5,966 $ 2,319 $ 1,850 $ 12,765
Capital expenditures .................... $ 1,125 $ 1,024 $ 444 $ 656 $ 3,249
8
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. CASH FLOW INFORMATION
(IN THOUSANDS)
NINE MONTHS ENDED DECEMBER 31,
------------------------------
2000 1999
-------- -------
Cash paid for:
Income taxes ................. $6,472 $ 6,474
Interest ..................... $9,648 $10,197
During the nine-months ended December 31, 2000, holders of approximately
$13.0 million of the Company's 9% Senior Subordinated Convertible
Debentures converted their Debentures into approximately 1.5 million shares
of the Company's Common Stock. The Company recorded a non-cash charge of
approximately $305,000 to interest expense in the second quarter of fiscal
2001 in connection with certain conversions. On December 20, 2000, the
Company called for redemption all of its 9% Senior Subordinated Convertible
Debentures, due October 1, 2003. As of December 31, 2000, approximately
$6.2 million of the Debentures were outstanding and classified as Current
installments of long-term debt on the condensed consolidated balance sheet.
The outstanding Debentures at December 31, 2000 were converted into
approximately 696,000 shares of the Company's common stock in January 2001.
In connection with the sale of the magnetic tape head business units, the
Company received a $1.7 million promissory note from the buyer.
10. CONTINGENCIES
The Company is party to various legal actions and claims arising in the
ordinary course of its business. In Management's opinion, the Company has
adequate legal defenses for each of the actions and claims and 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. (Photronics). These subpoenas were issued in
connection with United States v. Tress, a case involving a product
substitution allegation against an employee of Photronics. On June 26,
1998, the complaint against the employee was dismissed without prejudice.
Although additional subpoenas were issued to the Company on August 12, 1999
and May 10, 2000, to date, no claim has been made against the Company or
Photronics. During the Government's investigation, until October 29, 1999,
Photronics was unable to ship certain equipment related to the case,
resulting in delays in the Company's recognition of revenues. On October
29, 1999, Photronics received authorization to ship its first boresight
system since the start of the investigation.
The Company is currently involved in a dispute in arbitration with Spar
Aerospace Limited (Spar) with respect to the working capital adjustment, if
any, provided for in the purchase agreement between the Company and Spar
dated as of September 19, 1997, pursuant to which the Company acquired,
through certain of its subsidiaries, certain assets of Spar. The Company is
also in a dispute with Raytheon Company (Raytheon) with respect to the
working capital adjustment (not to exceed $7.0 million), if any, provided
for in the purchase agreement between the Company and Raytheon dated as of
July 28, 1998, pursuant to which the Company acquired, through certain
subsidiaries, certain assets of Raytheon.
9
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
----------------------------------------------------------------------
The following is Management's Discussion and Analysis of the Consolidated
Financial Condition and Results of Continuing operations of DRS Technologies,
Inc. and Subsidiaries (hereinafter, the Company or DRS) as of December 31, 2000
and for the three- and nine-month periods ended December 31, 2000 and 1999. This
discussion should be read in conjunction with the audited Consolidated Financial
Statements and related notes.
The following discussion and analysis contains certain forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements in this report are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Persons reading this report
are cautioned that risks and uncertainties are inherent to forward-looking
statements. Accordingly, the Company's actual results could differ materially
from those suggested by such forward-looking statements.
DISCONTINUED OPERATIONS
On May 18, 2000, the Company's Board of Directors approved an agreement to sell
the Company's magnetic tape head business units located in St. Croix Falls,
Wisconsin, and Razlog, Bulgaria, and on August 31, 2000, the Company completed
the sale. The sale of the magnetic tape head business represents a strategic
decision by the Company to focus its resources on its core businesses. The
Company has restated its financial statements for the three- and nine-month
periods ended December 31, 1999 to reflect these business units as discontinued
operations.
BUSINESS COMBINATIONS
On June 14, 2000, a newly formed subsidiary of the Company acquired the assets
of General Atronics Corporation for $7.5 million in cash and $4.0 million in
stock (approximately 355,000 shares of DRS Common Stock). The Company funded the
cash portion of this acquisition through borrowings under its revolving credit
facility. Located in Wyndmoor, Pennsylvania, and now operating as DRS
Communications Company, LLC (DRS Communications Company), the company designs,
develops and manufactures military data link components and systems,
high-frequency communication modems, tactical and secure digital telephone
components, and radar surveillance systems for U.S. and international
militaries. DRS Communications Company is being managed as part of the DRS
Flight Safety and Communications Group. The acquisition of DRS Communications
Company added approximately $25.9 million to the Company's backlog as of the
acquisition date. The acquisition has been accounted for using the purchase
method of accounting. The excess of costs over the estimated fair value of
identifiable net assets acquired, and the appraised value of certain identified
intangible assets were approximately $2.6 million and $3.3 million,
respectively, and are being amortized on a straight-line basis over twenty years
and ten years, respectively. In connection with the acquisition, the Company
incurred approximately $369,000 in transaction costs. 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 results of
the acquired business have been included in the Consolidated Financial
Statements since the acquisition date.
10
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
RESTRUCTURING CHARGE
During fiscal 2000, the Company recorded restructuring charges totaling
approximately $2.2 million. The Company's restructuring initiatives impacted the
Electro-Optical Systems Group (EOSG) and Flight Safety and Communications Group
(FSCG) operating segments and DRS Corporate Headquarters. EOSG recorded a
restructuring charge of approximately $831,000 for costs relating primarily to
consolidating two facilities into one in Oakland, New Jersey, as of March 31,
2000. FSCG recorded a restructuring charge of approximately $669,000 and
$143,000 at its DRS Hadland Ltd. ("DRS Hadland") and DRS Precision Echo, Inc.
operating units, respectively, for severance and other employee-related costs.
The DRS Hadland restructuring charge was recorded in connection with the
transition of the day-to-day management of DRS Hadland's operations from EOSG to
FSCG in the second half of fiscal 2000. In addition, DRS Corporate Headquarters
recorded a restructuring charge of approximately $560,000 for severance and
other employee-related costs. Severance and other employee costs were recorded
in connection with the termination of 13 employees. As of March 31, 2000, all
terminations had occurred. In the third quarter of fiscal 2001 the Company
revised its estimate relating to its facility consolidation efforts in Oakland,
New Jersey and recorded a charge of $525,000. At December 31, 2000, the majority
of the Severance/Employee costs liability represents approximately 16 months
of termination benefits to be paid in accordance with contractual obligations.
The following table reconciles the restructuring liability at March 31, 2000 to
the restructuring liability as of December 31, 2000:
(IN THOUSANDS)
LIABILITY AT FISCAL 2001 UTILIZED LIABILITY AT
MARCH 31, 2000 CHARGES FISCAL 2001 DECEMBER 31, 2000
---------------- ----------- ----------- -----------------
Estimated lease commitments
and related facility costs ........... $ 328 $525 $289 $564
Severance/Employee costs .............. 690 -- 332 358
------- ---- ---- ----
Total ................................. $ 1,018 $525 $621 $922
======= ==== ==== ====
RESULTS OF OPERATIONS
The Company's operating cycle is long-term and involves various types of
production contracts and varying production delivery schedules.
Accordingly, results of a particular quarter, or quarter-to-quarter
comparisons of recorded revenues and earnings, may not be indicative of
future operating results. The following comparative analysis should be
viewed in this context.
CONSOLIDATED SUMMARY
Consolidated revenues for the three- and nine-month periods ended December
31, 2000 decreased $7.6 million and increased $20.2 million, respectively,
as compared with the corresponding prior-year periods. The decrease in
revenues in third quarter of fiscal 2001 was due primarily to the timing
of shipments of the Company's military display workstation products, a
decrease in shipments of certain rugged computers and peripherals in
Europe, decreased orders for high-speed cameras and temporarily delayed
orders for certain mission data recording systems. The revenue growth in
the year-to-date period ended December 31, 2000 was primarily attributable
to increased shipments of the Company's second generation ground
electro-optical sighting systems and infrared detectors, as well as
increases in electro-optical contract manufacturing and engineering
services for military display workstations. Operating income increased
approximately 42% and 47% for the three- and nine-month periods ended
December 31, 2000, respectively, as compared with the same periods in
fiscal 2000. The increase in operating income in the third quarter was due
to the impact of cumulative profit adjustments on several long-term
contracts at the Company's Electro-Optical Systems Group, partially offset
by certain charges at other operating segments. Most of the Company's
contracts are long-term in nature, spanning multiple years. The Company
reviews cost performance and estimates to complete on these contracts at
least quarterly and in many cases more frequently. Revisions in profit
estimates are reflected in the period in which the facts, which require
the revisions, become known. If the estimated cost to complete a contract
changes from the previous estimate, the Company will record a cumulative
profit adjustment.
11
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
The increase in operating income in the year-to-date period ended December
31, 2000, was substantially attributable to the overall increase in
revenues, the net impact of the cumulative profit adjustment and charges,
and lower operating expenses at certain operating units. Also favorably
impacting revenue and operating income in fiscal 2001 was the inclusion of
the operating results of the Company's fiscal 2001 acquisition of DRS
Communications Company. See discussion of operating segments below for
additional information.
Interest and related expenses decreased approximately $806,000 and
$241,000 for the three- and nine-month periods ended December 31, 2000,
respectively, as compared with the corresponding prior-year periods. These
decreases were primarily the result of the following: 33% and 13%
decreases in average working capital borrowings outstanding during the
three- and nine-month periods ended December 31, 2000, as compared with
the corresponding prior-year periods; the favorable impact of the
conversion of approximately $13.0 million of the Company's 9% Senior
Subordinated Convertible Debentures (the Debentures) into approximately
1.5 million shares of the Company's common stock. Partially offsetting the
year-to-date decrease in interest expense is a non-cash charge of
approximately $305,000 relating to the conversion of $8.7 million of the
Debentures during the second quarter of fiscal 2001.
On December 20, 2000, the Company announced its intention to redeem all of
its 9% Senior Subordinated Convertible Debentures, due October 1, 2003. As
of December 31, 2000, approximately $6.2 million of the Debentures were
outstanding, all of which were converted into approximately 696,000 shares
of the Company's common stock in January 2001.
The provision for income taxes for the year-to-date period ended December
31, 2000 reflected an annual estimated effective income tax rate of
approximately 52%, versus 40% for fiscal 2000. The increase in the
effective tax rate for fiscal 2001 was primarily due to the following: the
continued improvement in domestic earnings, which are taxed at higher
overall rates in comparison to the Company's foreign tax jurisdictions;
losses in the Company's U.K. operations for which the benefit has not been
recognized; the effect of non-deductible goodwill and the Company's
expectation that certain domestic and foreign tax benefits recognized in
fiscal 2000 will not be recurring in fiscal 2001. It is anticipated that
the Company's effective tax rate will decline moderately in future years
as the Company continues to grow and its U.K. operations return to
profitability. Earnings before interest, income taxes, depreciation and
amortization (EBITDA) for the three- and nine-month periods ended December
31, 2000 were $13.8 million and $37.3 million, respectively, an increase
of approximately 25% and 26% over the three- and nine-month periods ended
December 31, 1999, respectively.
OPERATING SEGMENTS
DRS operates in three principal business segments on the basis of products
and services offered. Each operating segment is comprised of separate and
distinct businesses: the Electronic Systems Group (ESG), the
Electro-Optical Systems Group (EOSG), and the Flight Safety and
Communications Group (FSCG). All other operations are grouped in "Other."
o ESG is a leading provider of naval computer workstations used to
process and display integrated combat information. ESG produces
rugged computers and peripherals, surveillance, radar and tracking
systems, acoustic signal processing and display equipment, and combat
control systems for U.S. and international military organizations.
ESG performs field service and depot level repairs for its products,
as well as other manufacturers' systems, and also provides systems
and software engineering support to the U.S. Navy for the testing of
shipboard combat systems. ESG products are used on front-line
platforms, including Aegis destroyers and cruisers, aircraft
carriers, submarines and surveillance aircraft. ESG's products also
are used in the U.S. Army's ongoing battlefield digitization
programs. ESG markets directly to various U.S. Government agencies,
including the intelligence community, and has teamed with leading
corporations, such as General Dynamics and Lockheed Martin.
o EOSG produces systems and subsystems for infrared night vision and
targeting products used in some of the U.S. Army's most important
battlefield platforms, including the Abrams Main Battle Tank, Bradley
Infantry Fighting Vehicle and the HMMWV scout vehicle. EOSG designs,
manufactures and
12
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
markets products that allow operators to detect, identify and target
objects based upon their infrared signatures, regardless of the
ambient light level. This Group is also a leading designer and
manufacturer of eye-safe laser range finders and multiple-platform
weapons calibration systems for such diverse air platforms as the
Apache attack helicopter and AC-130U gunship. EOSG is leveraging its
technology base by expanding into related non-defense markets and
manufactures electro-optical modules for a commercial device used in
corrective laser eye surgery, as well as a digital retinal scanner
system.
o FSCG is a leading manufacturer of deployable flight emergency or
"black box" recording equipment. These complete emergency avionics
systems combine the functionality of a crash locator beacon with a
flight incident recorder for search, recovery and crash analysis.
This Group uses advanced commercial technology in the design and
manufacture of multi-sensor digital, analog and video data capture
and recording products, as well as high-capacity data storage devices
for harsh aerospace and defense environments. FSCG also manufactures
shipboard communications and infrared laser warning and range finder
displays for Canadian and other foreign navies and is a leading
manufacturer of ultra high-speed digital imaging systems. FSCG is
also the leading supplier of Link 11 Data Terminal Systems for NATO
and allied international navies and manufactures and markets ship and
ground surveillance radar and infrared imaging systems.
o Other includes the activities of the parent company, DRS Corporate
Headquarters, DRS Ahead Technology, Inc. (DRS Ahead) and certain
non-operating subsidiaries of the Company. DRS Ahead produces
magnetic head components used in the manufacturing process of
computer disk drives, which burnish and verify the quality of disk
surfaces. DRS Ahead also services and manufactures video heads used
in broadcast television equipment.
13
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
The following tables set forth, by operating segment, revenues, operating
income, and operating margin and the percentage increase or decrease of those
items as compared with the prior period:
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
THREE MONTHS ENDED THREE MONTHS ENDED NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, PERCENT CHANGES DECEMBER 31, PERCENT CHANGES
------------------ ------------------ ------------------- -----------------
2000 1999 2000 vs. 1999 2000 1999 2000 vs. 1999
---- ----- ------------------ ------ ------ -----------------
ESG
External revenues ................. $41,655 $54,141 (23.1%) $128,880 $139,376 (7.5%)
Operating income .................. $ 3,869 $ 4,617 (16.2%) $ 10,131 $ 10,676 (5.1%)
Operating margin .................. 9.3% 8.5% 8.9% 7.9% 7.7% 2.6%
EOSG
External revenues ................. $36,955 $33,946 8.9% $116,242 $ 95,394 21.9%
Operating income .................. $ 7,965 $ 3,707 114.9% $ 16,917 $ 7,509 125.3%
Operating margin .................. 21.6% 10.9% 97.4% 14.6% 7.9% 84.9%
FSCG
External revenues ................. $15,005 $13,326 12.6% $ 45,423 $ 36,367 24.9%
Operating (loss) income ........... $ (987) $(1,084) 8.9% $ (731) $ 350 (308.9%)
Operating margin .................. (6.6%) (8.1%) 19.1% (1.6%) 1.0% (267.2%)
OTHER
External revenues ................. $ 2,320 $ 2,157 7.6% $ 7,138 $ 6,332 12.7%
Operating loss .................... $ (756) $ (120) (530.0%) $ (568) $ (1,022) 44.4%
Operating margin .................. (32.6%) (5.6%) (485.7%) (8.0%) (16.1%) 50.7%
ESG: ESG's decrease in revenues for the three- and nine-month periods ended
December 31, 2000, as compared with the three- and nine-month periods ended
December 31, 1999, was due primarily to the timing of shipments of military
display workstation products and a decrease in shipments of certain rugged
computers and peripherals in the U.K. These decreases were partially offset by
increases in revenues from search and navigation radar systems and engineering
services for military display workstations. The decreases in operating income
and change in operating margin in the quarter and year-to-date periods ended
December 31, 2000, as compared to the corresponding prior periods, was driven by
the decrease in revenues and change in product mix.
EOSG: For the three- and nine-month periods ended December 31, 2000, revenues
increased by approximately $3.0 million and $20.8 million, respectively, as
compared with the three- and nine-month periods ended December 31, 1999. The
increases in revenues were driven by increased shipments of the Group's second
generation ground electro-optical sighting systems, infrared detectors and
boresighting systems, as well as increases in electro-optical contract
manufacturing. Operating income for the three- and nine-month periods ended
December 31, 2000 increased $4.3 million and $9.4 million, respectively, as
compared with the corresponding prior-year periods. These increases reflected
the favorable impact of $5.2 million and $6.3 million cumulative profit
adjustments for the three- and nine-month periods ended December 31, 2000,
respectively. Partially offsetting these net increases in operating income were
fiscal 2001 second- and third-quarter charges of approximately $880,000 for
revisions to "Estimates to Complete" on other long-term production programs and
$525,000 for additional expenses expected to be incurred in connection with a
facility that vacated during fiscal 2000, respectively. Operating income for the
three- and nine-month periods ended December 31, 1999 also included a cumulative
profit adjustment of $2.9 million. Operating income also was impacted favorably
in fiscal 2001 by increases in revenues, as discussed above, as well as the fact
that fiscal 2000 operating income for the three- and nine-month periods
14
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
ended December 31, 1999 reflects charges of $830,000 and $1.3 million,
respectively, for certain product warranty reserves and additional development
costs for a commercial product line.
FSCG: Revenues increased $1.7 million and $9.1 million for the three- and
nine-month periods ended December 31, 2000, respectively, as compared with the
corresponding prior-year periods. The increases in revenues were primarily
attributed to the acquisition of General Atronics Corporation (now operating as
DRS Communications Company) in the latter part of the first quarter of fiscal
2001, as well as continued growth in the Group's contract manufacturing and
shipboard communications businesses. These increases were partially offset by
decreased orders for the Group's high-speed cameras and temporarily delayed
orders for certain mission data recording systems. In the three- and nine-month
periods ended December 31, 2000, DRS Communications Company contributed to the
FSCG operating segment approximately $5.1 million and $13.4 million in revenues,
respectively. Operating income increased approximately $97,000 and decreased
$1.1 million in the three- and nine-month periods ended December 31, 2000,
respectively. DRS Communications Company contributed approximately $322,000 and
$1.0 million of operating income to the Group in the three- and nine-month
periods ended December 31, 2000, respectively. Exclusive of the contributions of
DRS Communications Company, the Group's operating income decreased by $225,000
and $2.1 million for the three- and nine-month periods ended December 31, 2000,
respectively. The decreases in operating income were primarily attributable to
several factors; a third quarter charge of $500,000 for additional costs
expected to be incurred in connection with the completion of the development of
a new mission data recording system for the U.S. Navy, less favorable absorption
of fixed operating expenses associated with lower production volumes for certain
mission data recording systems and high-speed cameras, and lower overall profit
margins in the Group's contract manufacturing business. Management is currently
evaluating alternatives aimed at reducing the Group's overall operating
expenses. The Group also recorded a $1.1 million charge in the third quarter of
fiscal 2001 for estimated excess inventories associated with a specific product
line which the anticipated future sales are less than previously estimated.
Other: The increase in revenues for the three- and nine-month periods ended
December 31, 2000, as compared with the corresponding prior periods, was
primarily due to increased shipments of components used to manufacture disk
drive media. This revenue growth resulted from the improvement in the computer
disk drive marketplace and improved marketing of DRS Ahead's products and
services. The increase in the operating loss for the three-months ended December
31, 2000, as compared with the corresponding prior-year period, was mainly the
result of a $500,000 charge recorded in the third quarter of fiscal 2001 for a
potential loss associated with a note receivable. The improvement in the
operating loss for the year-to-date period ended December 31, 2000, as compared
with the prior-year period, is primarily attributable to the increase in
revenues and the allocation of certain costs to the operating units, which had
previously been recorded at DRS Corporate. These favorable impacts to operating
income were partially offset by the fiscal 2001 third quarter charge discussed
above.
15
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 nine-month
periods ended December 31, 2000 and December 31, 1999:
(IN THOUSANDS)
NINE MONTHS ENDED DECEMBER 31,
------------------------------
2000 1999
----------- ------------
Net cash provided by (used in) operating activities ... $ 22,800 $ (9,773)
Net cash used in investing activities ................. $(13,023) $(12,161)
Net cash (used in) provided by financing activities ... $ (6,579) $ 15,145
Operating cash flow for the nine-months ended December 31, 2000 improved by
approximately $32.6 million as compared with the corresponding prior-year
period. This improvement primarily results from increased earnings (net of
adjustments for non-cash items), increases in certain liabilities and increased
advanced payments from customers.
Net cash used in investing activities for the nine-month period ended December
31, 2000 included approximately $7.0 million relating to the acquisition of
General Atronics Corporation and $10.3 million for capital expenditures. A $3.5
million payment received in connection with the sale of the Company's magnetic
tape head business units reduced the net cash outflows from investing
activities.
During the nine-months ended December 31, 2000, the Company paid $6.5 million in
principal payments against its two term loans with Mellon Bank. The Company also
has an $80 million (subject to a borrowing base calculation) revolving line of
credit with Mellon Bank, N.A., as agent (Mellon Bank), maturing on October 20,
2003 (Line of Credit). During the nine-month period ended December 31, 2000, the
Company borrowed approximately $40.6 million under the Line of Credit and repaid
approximately $39.8 million. Of the total $40.6 million borrowed, approximately
$7.0 million was used to acquire the net assets of General Atronics Corporation
in the latter part of the first quarter of fiscal 2001, with the balance used to
meet temporary working capital requirements. As of December 31, 2000, the
Company re-classified its entire Line of Credit borrowings as Long-term debt,
excluding current installments to reflect the intent of the borrowings and their
maturity date of October 1, 2003. Other than cash flows from operations, the
Line of Credit is the Company's primary source of liquidity. As of December 31,
2000, the Company had approximately $42.8 million available under the Line of
Credit, after satisfaction of its borrowing base requirement.
During the nine-months ended December 31, 2000, holders of approximately $13.0
million of the Company's 9% Senior Subordinated Convertible Debentures elected
to convert their Debentures into approximately 1.5 million shares of the
Company's Common Stock. As of December 31, 2000, approximately $6.2 million of
the Debentures were outstanding, all of which were converted into approximately
696,000 shares of the Company's common stock in January 2001.
The Company actively seeks to finance its business in a manner that preserves
financial flexibility, while minimizing borrowing costs to the extent
practicable. Management continually reviews the changing financial, market and
economic conditions to manage the types, amounts and maturities of the
Corporation's indebtedness. 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.
16
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
The Company's total debt to trailing twelve-month EBITDA improved to 2.0x at
December 31, 2000, from 3.3x at December 31, 1999. The improvement in fiscal
2001 was driven by increased earnings as well as a $33.8 million reduction in
total debt over the last twelve months.
BACKLOG
Backlog at December 31, 2000 was approximately $458.7 million as compared with
$388.1 million at March 31, 2000. The Company booked approximately $348.0
million in new orders in the first nine months of fiscal 2001.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133), which establishes accounting and reporting
standards for derivative instruments including certain derivative instruments
embedded in other contracts and for hedging activities. SFAS 133 requires that
an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
SFAS 133 is effective for the Company for its fiscal year beginning April 1,
2001. The Company is in the process of evaluating the potential impact of
adopting SFAS 133. Based on the Company's current use of derivatives, management
does not expect the adoption to have a material impact on the Company's results
of operations or financial position.
In December 1999, the Securities and Exchange Commission staff released Staff
Accounting Bulletin No.101, "Revenue Recognition in Financial Statements" (SAB
101) which provides guidance on the recognition, presentation and disclosure of
revenue in financial statements. DRS is required to adopt SAB 101 in the fourth
quarter of fiscal 2001. The Company does not believe that adoption of this SAB
will have a material impact on its results of operations or financial position.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the Company is exposed to market risks
relating to fluctuations in interest rates and foreign currency exchange risk.
The Company does not enter into derivatives or other financial instruments for
trading or speculative purposes.
INTEREST RATE RISK
As the Company seeks debt financing to maintain its ongoing operations and
sustain its growth, it is exposed to interest rate risk. Borrowings under the
Company's $160 million secured credit facility with Mellon Bank, N.A., as agent,
are sensitive to changes in interest rates, as such borrowings bear interest at
variable rates. In January 1998 and January 1999, the Company entered into
interest rate collar agreements (the 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, 2000 and March 31,
2000 follows:
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
(IN THOUSANDS)
NOTIONAL AMOUNT
EFFECTIVE EXPIRATION ---------------------------------- VARIABLE RATE CEILING FLOOR
DATE DATE DECEMBER 31, 2000 MARCH 31, 2000 BASE RATE RATE
--------- ---------- ----------------- -------------- ------------- ------- ------
April 8, 1998 ......... January 8, 2001 $ 6,200 $ 6,200 CAD-BA* 6.35% 4.84%
April 26, 1999 ........ January 26, 2002 $20,000 $20,000 LIBOR** 5.75% 4.80%
* - Canadian Bankers Acceptance Rate
** - London Interbank Offered Rate
The variable interest rates established under the Collar Agreements for the
Company's LIBOR and Canadian Bankers Acceptance Rate-based collars as of
December 31, 2000 were 6.76% and 5.84%, respectively.
In January 2001 the Company entered into new interest rate collar agreements
with a total notional value of $20.0 million.
FOREIGN CURRENCY EXCHANGE RISK
DRS operates and conducts business in foreign countries and as a result is
exposed to fluctuations in foreign currency exchange rates. More specifically,
our net equity is impacted by the conversion of the net assets of foreign
subsidiaries for which the functional currency is not the U.S. Dollar for U.S.
reporting purposes. The Company believes that its exposure to foreign currency
exchange risk related to its foreign operations is not material to the Company's
results of operations, cash flows or financial position. The Company, at
present, does not hedge this risk, but continues to evaluate such foreign
currency translation risk exposure.
18
DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to various legal actions and claims arising in the ordinary
course of its business. In Management's opinion, the Company has adequate legal
defenses for each of the actions and claims and 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. (Photronics). These subpoenas were issued in connection with United States
v. Tress, a case involving a product substitution allegation against an employee
of Photronics. On June 26, 1998, the complaint against the employee was
dismissed without prejudice. Although additional subpoenas were issued to the
Company on August 12, 1999 and May 10, 2000, to date, no claim has been made
against the Company or Photronics. During the Government's investigation, until
October 29, 1999, Photronics was unable to ship certain equipment related to the
case, resulting in delays in the Company's recognition of revenues. On October
29, 1999, Photronics received authorization to ship its first boresight system
since the start of the investigation
The Company is currently 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27. Financial Data Schedule
(b) Reports on Form 8-K
None
19
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 13, 2001 /s/ RICHARD A. SCHNEIDER
-----------------------------------------
Richard A. Schneider
Executive Vice President, Chief Financial
Officer and Treasurer
20