-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J2OfTmITUiiu8aimaZ9ciNcEQf55XL2y22Z8eZbVca3yKNRP9Q7M/u15ol7fZPMC S7stASb0AZiAsNGgDGvUjA== 0000912057-02-031977.txt : 20020814 0000912057-02-031977.hdr.sgml : 20020814 20020814142452 ACCESSION NUMBER: 0000912057-02-031977 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRS TECHNOLOGIES INC CENTRAL INDEX KEY: 0000028630 STANDARD INDUSTRIAL CLASSIFICATION: SEARCH, DETECTION, NAVIGATION, GUIDANCE, AERONAUTICAL SYS [3812] IRS NUMBER: 132632319 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08533 FILM NUMBER: 02734654 BUSINESS ADDRESS: STREET 1: 3RD FLOOR STREET 2: 5 SYLVAN WAY CITY: PARSIPPANY STATE: NJ ZIP: 07054 BUSINESS PHONE: 9738981500 MAIL ADDRESS: STREET 1: 16 THORNTON RD CITY: OAKLAND STATE: NJ ZIP: 07436 FORMER COMPANY: FORMER CONFORMED NAME: DIAGNOSTIC RETRIEVAL SYSTEMS INC DATE OF NAME CHANGE: 19920703 10-Q 1 a2087053z10-q.txt FORM 10-Q ================================================================================ 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, 2002 / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER 1-8533 --------------- DRS TECHNOLOGIES, INC. DELAWARE 13-2632319 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 SYLVAN WAY, PARSIPPANY, NEW JERSEY 07054 (973) 898-1500 --------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES /X/ NO / / As of August 13, 2002, 16,861,162 shares of DRS Technologies, Inc. Common Stock, $.01 par value, were outstanding. ================================================================================ DRS TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------ INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2002
PART I - FINANCIAL INFORMATION PAGE NO. ITEM 1. Financial Statements Consolidated Balance Sheets - June 30, 2002 and March 31, 2002.................. 1 Consolidated Statements of Earnings - Three Months Ended June 30, 2002 and 2001 2 Consolidated Statements of Cash Flows - Three Months Ended June 30, 2002 and 2001............................................................................ 3 Notes to Consolidated Financial Statements...................................... 4 - 9 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................................................... 10 - 18 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 CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED) JUNE 30, MARCH 31, 2002 2002 --------- ---------- ASSETS Current assets: Cash and cash equivalents $ 114,523 $ 117,782 Accounts receivable, net 96,356 110,861 Inventories, net of progress payments 117,545 120,910 Prepaid expenses and other current assets 10,321 9,276 --------- --------- Total current assets 338,745 358,829 --------- --------- Property, plant and equipment, less accumulated depreciation and amortization of $42,613 and $45,389 at June 30, 2002 and March 31, 2002, respectively 52,326 50,481 Acquired intangible assets, less accumulated amortization of $7,584 and $7,028 at June 30, 2002 and March 31, 2002, respectively 33,577 34,133 Goodwill 144,014 142,610 Deferred income taxes and other noncurrent assets 17,647 15,038 --------- --------- TOTAL ASSETS $ 586,309 $ 601,091 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 1,400 $1,435 Short-term bank debt 927 226 Accounts payable 30,399 49,671 Accrued expenses and other current liabilities 137,770 142,260 --------- -------- Total current liabilities 170,496 193,592 Long-term debt, excluding current installments 137,550 138,060 Other noncurrent liabilities 12,492 12,204 --------- -------- TOTAL LIABILITIES 320,538 343,856 --------- -------- Stockholders' equity: Preferred stock, no par value. Authorized 2,000,000 shares; none issued at June 30, 2002 and March 31, 2002 -- -- Common Stock, $.01 par value per share. Authorized 30,000,000 shares; issued 16,859,912 and 16,834,052 shares at June 30, 2002 and March 31, 2002, respectively 169 168 Additional paid-in capital 197,987 197,387 Retained earnings 69,790 64,356 Accumulated other comprehensive losses (2,152) (4,630) Unamortized stock compensation (23) (46) --------- ---------- TOTAL STOCKHOLDERS' EQUITY 265,771 257,235 --------- ---------- Commitments and contingencies TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 586,309 $ 601,091 ========= ==========
See accompanying Notes to Consolidated Financial Statements. 1 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Consolidated Statements of Earnings (in thousands, except per-share data) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, --------------------------- 2002 2001 --------- --------- REVENUES $ 131,238 $ 103,352 Costs and expenses 118,565 93,668 --------- --------- OPERATING INCOME 12,673 9,684 Interest income 478 25 Interest and related expenses 2,283 2,125 Other expense (income), net 521 (28) --------- --------- Earnings before minority interest and income taxes 10,347 7,612 Minority interest 284 258 --------- --------- Earnings before income taxes 10,063 7,354 Income taxes 4,629 3,456 --------- --------- NET EARNINGS $ 5,434 $ 3,898 ========= ========= NET EARNINGS PER SHARE OF COMMON STOCK: BASIC EARNINGS PER SHARE $ 0.32 $ 0.32 DILUTED EARNINGS PER SHARE $ 0.31 $ 0.30
See accompanying Notes to Consolidated Financial Statements. 2 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
THREE MONTHS ENDED JUNE 30, --------------------------- 2002 2001 ------------ ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 5,434 $ 3,898 Adjustments to reconcile net earnings to cash flows from operating activities: Depreciation and amortization 3,161 2,881 Other, net 491 1,269 Changes in assets and liabilities, net of effects from business combinations: Decrease in accounts receivable 13,875 23,937 Decrease (increase) in inventories 2,958 (17,239) Increase in prepaid expenses and other current assets (922) (2,103) Decrease in accounts payable (19,561) (6,470) Decrease in accrued expenses and other current liabilities (9,533) (3,414) Increase in customer advances 4,933 2,258 Other, net 244 (460) --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 1,080 4,557 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (4,161) (3,526) Payments pursuant to business combinations (750) -- Other, net 96 -- --------- --------- NET CASH USED IN INVESTING ACTIVITIES (4,815) (3,526) CASH FLOWS FROM FINANCING ACTIVITIES: Net borrowings of short-term debt 709 184 Borrowings on long-term debt -- 16,600 Repayment of borrowings of long-term debt (545) (19,819) Proceeds from stock option exercises 255 729 --------- --------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 419 (2,306) --------- --------- EFFECT OF EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 57 749 --------- --------- NET DECREASE IN CASH AND CASH EQUIVALENTS (3,259) (526) CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 117,782 2,324 --------- --------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 114,523 $ 1,798 ========= =========
See accompanying Notes to Consolidated Financial Statements. 3 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited Consolidated Financial Statements of DRS Technologies, Inc. and Subsidiaries (DRS or the Company) have been prepared in accordance with accounting principles generally accepted in the United States of America 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 2002 Annual Report on Form 10-K filed with the Securities and Exchange Commission. In the opinion of the Company, 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, 2002, and the results of operations and cash flows for the three-month periods ended June 30, 2002 and 2001. The results of operations for the three-months ended June 30, 2002 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, 2002, included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2002. 2. BUSINESS COMBINATIONS AND DISPOSALS On July 15, 2002, the Company acquired the assets and assumed certain liabilities of the Navy Controls Division of Eaton Corporation for $92.2 million in cash, subject to adjustment. The Company financed the acquisition with existing cash on hand. Renamed DRS Power & Control Technologies, Inc. (DRS PCT), and located in Milwaukee, Wisconsin, and Danbury, Connecticut, the company is a leading supplier of high-performance power conversion and instrumentation and control systems for the U.S. Navy's combatant fleet, including nuclear-powered and conventionally powered ships, as well as to specialized industrial customers. Products include ship electric propulsion equipment, power electronics equipment, high-performance networks, shipboard control equipment and control panels, tactical displays, and specialty reactor instrumentation and control equipment. DRS PCT is being managed as a part of the Electronic Systems Group. The addition of this unit to ESG complements our presence in naval advanced command and control computer display and other ship systems. DRS PCT has over 600 employees. The acquisition will be accounted for using the purchase method of accounting. On May 27, 2002, the Company sold the assets of the DRS Ahead Technology operating unit. DRS Ahead Technology produces magnetic head components used in the manufacturing process of computer disk drives and manufactures magnetic video recording heads used in broadcast television equipment. The operating unit recorded $1.3 million of revenue and $0.4 million of operating loss for the period it was owned by the Company during the first quarter of fiscal 2003 and $2.2 million of revenue and $0.3 million of operating loss for the first quarter of fiscal 2002. The assets of DRS Ahead Technology were sold for their aggregate book value, and DRS received an interest bearing promissory note in the amount of $3.1 million as consideration for the sale. The promissory note bears interest and is payable over an 80-month term. No gain or loss was recorded on the sale. On April 11, 2002, the Company acquired the assets of the U.S.-based Unmanned Aerial Vehicle (UAV) business of Meggitt Defense Systems - Texas, Inc., a unit of Meggitt plc for $0.8 million in cash. The business, located in Mineral Wells, Texas and now operating as DRS Unmanned Technologies, Inc. provides close-range, low-weight, low-noise, medium-duration UAVs supporting military special operations missions. Applications for these products include tactical short-range surveillance, radio relay, and command, control, communications, computers, intelligence, surveillance and reconnaissance. The operations of DRS Unmanned Technologies are not significant to DRS's consolidated operating results. The acquisition was accounted for using the purchase method of accounting. 4 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. INVENTORIES Inventories are summarized as follows:
JUNE 30, MARCH 31, 2002 2002 ------------ ------------ (IN THOUSANDS) Work-in-process $ 143,729 $ 139,748 Raw material and finished goods 8,104 9,127 ------------ ------------ 151,833 148,875 ------------ ------------ Less progress payments (34,288) (27,965) ------------ ------------ Total $ 117,545 $ 120,910 ============ ============
General and administrative costs included in work-in-process were approximately $17.4 million and $16.3 million at June 30, 2002 and March 31, 2002, respectively. General and administrative expenses included in costs and expenses amounted to approximately $28.7 million and $20.7 million for the three-month periods ended June 30, 2002 and 2001, respectively. Included in those amounts are expenditures for internal research and development amounting to approximately $2.9 million and $2.1 million for the fiscal quarters ended June 30, 2002 and 2001, respectively. 4. GOODWILL AND INTANGIBLE ASSETS The following disclosure presents certain information on the Company's acquired intangible assets as of June 30, 2002 and March 31, 2002. All acquired intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual values.
WEIGHTED AVERAGE GROSS CARRYING ACCUMULATED ACQUIRED INTANGIBLE ASSETS AMORTIZATION PERIOD AMOUNT AMORTIZATION NET BALANCE - ------------------------------------- ------------------- -------------- ------------ ----------- (IN THOUSANDS) AS OF JUNE 30, 2002 Amortized acquired intangible assets: Technology-based intangibles 21 years $ 22,931 $ (5,449) $ 17,482 Customer-related intangibles 19 years 18,230 (2,135) 16,095 -------------- ------------ ----------- TOTAL $ 41,161 $ (7,584) $ 33,577 ============== ============ =========== AS OF MARCH 31, 2002 Amortized acquired intangible assets: Technology-based intangibles 21 years $ 22,931 $ (5,155) $ 17,776 Customer-related intangibles 19 years 18,230 (1,873) 16,357 -------------- ------------ ----------- TOTAL $ 41,161 $ (7,028) $ 34,133 ============== ============ ===========
The aggregate acquired intangible asset amortization expense for the three-month periods ended June 30, 2002 and 2001 were $0.6 million and $0.4 million, respectively. The estimated acquired intangible amortization expense for the fiscal year ending March 31, 2003 and for each of the subsequent four fiscal years ending March 31, 2007 is approximately $2.2 million. 5 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The table below reconciles the change in the carrying amount of goodwill by operating segment for the period from March 31, 2002 to June 30, 2002.
FLIGHT SAFETY AND ELECTRONIC ELECTRO-OPTICAL COMMUNICATIONS SYSTEMS GROUP SYSTEMS GROUP GROUP TOTAL -------------------- -------------------- -------------------- ---------- (IN THOUSANDS) Balance as of March 31, 2002 $ 28,127 $ 84,410 $ 30,073 $ 142,610 Foreign currency translation adjustment 513 - 789 1,302 Other adjustments - 102 - 102 -------------------- -------------------- -------------------- ---------- Balance as of June 30, 2002 $ 28,640 $ 84,512 $ 30,862 $ 144,014 ==================== ==================== ==================== ==========
5. EARNINGS PER SHARE The following table presents the computation of basic and diluted earnings per share (EPS):
THREE MONTHS ENDED JUNE 30, ---------------------------- 2002 2001 ------------ ------------- (IN THOUSANDS, EXCEPT PER-SHARE DATA) BASIC EPS COMPUTATION: Net earnings $ 5,434 $ 3,898 ------------ ------------- Weighted average common shares outstanding 16,843 12,095 ------------ ------------- Basic earnings per share $ 0.32 $ 0.32 ============ ============= DILUTED EPS COMPUTATION: Net earnings $ 5,434 $ 3,898 ------------ ------------- Diluted common shares outstanding: Weighted average common shares outstanding 16,843 12,095 Stock options and warrants 801 936 ------------ ------------- Diluted common shares outstanding 17,644 13,031 ------------ ------------- Diluted earnings per share $ 0.31 $ 0.30 ============ =============
6 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. COMPREHENSIVE EARNINGS The components of comprehensive earnings for the three-month periods ended June 30, 2002 and 2001 consisted of the following:
THREE MONTHS ENDED JUNE 30, --------------------------- 2002 2001 ------------ ------------ (IN THOUSANDS) Net earnings $ 5,434 $ 3,898 Other comprehensive earnings (losses): Foreign currency translation adjustments 2,460 215 Unrealized losses on hedging instruments: Cumulative adjustment at April 1, 2001 - (289) Unrealized gains (losses) arising during the period 18 (71) ------------ ------------ Comprehensive earnings $ 7,912 $ 3,753 ============ ============
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." Information about the Company's segments for the fiscal periods ended June 30, 2002 and 2001 is as follows:
ESG EOSG FSCG OTHER TOTAL ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) QUARTER ENDED JUNE 30, 2002 Total revenues $ 34,911 $ 69,178 $ 27,309 $ 1,858 $ 133,256 Intersegment revenues - (184) (1,834) - (2,018) ---------- ---------- ---------- ---------- ---------- External revenues $ 34,911 $ 68,994 $ 25,475 $ 1,858 $ 131,238 ---------- ---------- ---------- ---------- ---------- Operating income (loss) $ 1,343 $ 9,875 $ 2,257 $ (802) $ 12,673 Identifiable assets $ 109,411 $ 246,357 $ 112,971 $ 117,570 $ 586,309 Depreciation and amortization $ 471 $ 1,707 $ 690 $ 293 $ 3,161 Capital expenditures $ 405 $ 3,409 $ 142 $ 205 $ 4,161 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
7 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 8. SUPPLEMENTAL CASH FLOW INFORMATION
THREE MONTHS ENDED JUNE 30, --------------------------- 2002 2001 ------------ ------------ (IN THOUSANDS) Cash paid for: Income taxes $ 1,826 $ 6,353 Interest $ 2,937 $ 1,869 Noncash investing and financing activities: Note receivable - sale of operating unit $ 3,070 $ -
9. CONTINGENCIES The Company is a party to various legal actions and claims arising in the ordinary course of its business. In the Company'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. The Company currently is involved in a dispute with Spar Aerospace Ltd. (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. On January 11, 2002, the Company was notified that an arbitrator awarded Spar $4,616,000 Canadian (or approximately $2,890,000 U.S.) plus interest in respect of such working capital adjustment. As of March 31, 2002, the Company had accrued approximately $3.9 million, including interest associated with the potential award. On February 5, 2002, the Company filed a notice of appeal of such arbitral award with the Ontario Superior Court of Justice. The appeal currently is scheduled to be heard in September 2002. On October 3, 2001, a lawsuit was filed in the United States District Court for the Eastern District of New York by Miltope Corporation, a corporation of the State of Alabama, and IV Phoenix Group, Inc., a corporation of the State of New York, against DRS Technologies, Inc., DRS Electronic Systems, Inc. and a number of individual defendants, several of whom are employed by DRS Electronic Systems, Inc. The plaintiffs allege claims against the Company of infringement of a number of patents, breach of a confidentiality agreement, misappropriation of trade secrets, unjust enrichment and unfair competition. The claims relate generally to the activities of certain former employees of IV Phoenix Group and the hiring of some of those employees by DRS. The plaintiffs seek damages of not less than $5.0 million for each of the claims. The plaintiffs also allege claims for tortious interference with business relationships, tortious interference with contracts and conspiracy to breach fiduciary duty. The plaintiffs seek damages of not less than $47.1 million for each such claim. In addition, plaintiffs seek punitive and treble damages, injunctive relief and attorney's fees. In its answer, the Company has denied the plaintiffs' allegations and intends to vigorously defend this action. In February 2002, plaintiffs filed an amended complaint, which eliminated the patent infringement claims and added claims related to statutory and common law trademark infringement. Although this action is in its early stages, the Company believes it has meritorious defenses and does not believe the action will have a material adverse effect on its earnings or financial condition. 8 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Retirement Obligations" (SFAS 143). SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with early adoption permitted. The Company currently is evaluating the provisions of SFAS 143, but expects that the provisions will not have a material impact on its consolidated financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supersedes SFAS 121, but retains its fundamental provisions for the (a) recognition/measurement of impairment of long-lived assets to be held and used, and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144 also supersedes the accounting/reporting provisions of APB No. 30 for segments of a business to be disposed of, but retains the requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS 144 became effective for DRS on April 1, 2002. The adoption of SFAS 144 did not have an impact on the Company's consolidated financial statements. In April 2002, the FASB issued Statement No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145). SFAS 145 updates, clarifies and simplifies existing accounting pronouncements. SFAS 145 rescinds Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in Accounting Principles Board Opinion No. 30 will now be used to classify those gains and losses. Statement No. 44 was issued to establish accounting requirements for the effects of transition to provisions of the Motor Carrier Act of 1980. Because the transition has been completed, Statement No. 44 is no longer necessary. SFAS 145 amends Statement No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment is consistent with the FASB's goal of requiring similar accounting treatment for transactions that have similar economic effects. SFAS 145 also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. The Company is required to adopt SFAS 145, effective for fiscal 2003. SFAS No. 145 will not have a material effect on the Company's consolidated results of operations, financial position or cash flows. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires Companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" (EITF 94-3). SFAS 146 replaces EITF 94-3. The Statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company is currently evaluating the provisions of the Statement. 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 (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, 2002, and for the three-month periods ended June 30, 2002 and 2001. This discussion should be read in conjunction with the audited consolidated financial statements and related notes contained in our March 31, 2002 Form 10-K. FORWARD-LOOKING STATEMENTS 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. Risks include, without limitation: the effect of our acquisition strategy on future operating results, including our ability to effectively integrate acquired companies into our existing operations; the uncertainty of acceptance of new products and successful bidding for new contracts; the effect of technological changes or obsolescence relating to our products and services; and the effects of government regulation or shifts in government policy, as they may relate to our products and services. OVERVIEW We are a leading supplier of defense electronic products and systems. We provide high-technology products and services to all branches of the U.S. military, major aerospace and defense prime contractors, government intelligence agencies, international military forces and industrial markets. Incorporated in 1968, DRS has served the defense industry for over thirty years. We are a leading provider of thermal imaging devices, combat display workstations, electronic sensor systems, ruggedized computers, mission recorders and deployable flight incident recorders. Our products are deployed on a wide range of high-profile military platforms, such as the DDG-51 Aegis destroyer, the M1A2 Abrams Main Battle Tank, the M2A3 Bradley Fighting Vehicle, the OH-58D Kiowa Warrior helicopter, the AH-64 Apache helicopter and the F/A-18E/F Super Hornet jet fighter, as well as in other military and non-military applications. COMPANY ORGANIZATION AND PRODUCTS We operate in three principal operating segments on the basis of products and services offered. Each operating segment is comprised of separate and distinct businesses: the Electronic Systems Group, the Electro-Optical Systems Group and the Flight Safety and Communications Group. All other operations are grouped in Other. Our Electronic Systems Group (ESG) is a supplier of computer workstations used to process and display integrated combat information. ESG produces rugged computers and peripherals, surveillance, radar and tracking systems, radar support and antennae systems, acoustic signal processing and display equipment, and combat control systems. The Group's 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 U.S. Army and international battlefield digitization programs. Our Electro-Optical Systems Group (EOSG) produces systems and subsystems for infrared night vision and targeting on the U.S. Army's Abrams Main Battle Tanks, Bradley Fighting Vehicles, OH-58D Kiowa Warrior helicopters, Aegis destroyers and cruisers, and High-Mobility Multipurpose Wheeled Vehicle Scouts. EOSG designs, manufactures and markets these and other products that allow operators to detect, identify and target objects based upon their infrared signatures, regardless of the ambient light level. This Group is one of two key suppliers to the U.S. government for advanced focal plane array technology. In addition to military applications, EOSG also manufactures electro-optical modules for commercial devices used in corrective laser eye surgery and provides system integration for retinal scanning and imaging devices. 10 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Our Flight Safety and Communications Group (FSCG) is a manufacturer of airborne deployable recorders and surveillance and communications systems. FSCG's products are used by U.S. and international militaries, as well as commercial customers. FSCG produces integrated naval ship communications systems, information management systems, mission recorders, coastal and border radar surveillance systems, ultra high-speed digital imaging systems for F/A-18 aircraft and industrial purposes, and multiple-platform weapons calibration systems for air platforms, such as the AH-64 Apache attack helicopter and the AC-130U gunship. The Group also provides electronics manufacturing services to the defense and space industries. Other includes the activities of DRS Corporate Headquarters, DRS Unmanned Technologies (see Business Combinations and Disposals Below), DRS Ahead Technology (for the period it was owned by us during the first quarter of fiscal 2003) and certain non-operating subsidiaries of the Company. The assets of DRS Ahead Technology were sold on May 27, 2002 (see business combinations and disposals below). DRS Unmanned Technologies provides close-range, low-weight, low-noise, medium-duration UAVs supporting military special operations missions. DRS Ahead Technology 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. BUSINESS COMBINATIONS AND DISPOSALS On July 15, 2002, we acquired the assets and assumed certain liabilities of the Navy Controls Division of Eaton Corporation for $92.2 million in cash, subject to adjustment. We financed the acquisition with existing cash on hand. Renamed DRS Power & Control Technologies, Inc. (DRS PCT) and located in Milwaukee, Wisconsin, and Danbury, Connecticut, the company is a leading supplier of high-performance power conversion and instrumentation and control systems for the U.S. Navy's combatant fleet, including nuclear-powered and conventionally powered ships, as well as to specialized industrial customers. Products include ship electric propulsion equipment, power electronics equipment, high-performance networks, shipboard control equipment and control panels, tactical displays, and specialty reactor instrumentation and control equipment. DRS PCT is being managed as a part of ESG. DRS PCT's operating results will be included in the Company's consolidated results of operations from the date of acquisition. The addition of this unit to ESG complements our presence in naval advanced command and control computer display and other ship systems. DRS PCT has over 600 employees. The acquisition will be accounted for using the purchase method of accounting. On May 27, 2002, we sold the assets of our DRS Ahead Technology operating unit. DRS Ahead Technology produces magnetic head components used in the manufacturing process of computer disk drives and manufactures magnetic video recording heads used in broadcast television equipment. The operating unit recorded $1.3 million of revenue and $0.4 million of operating losses for the period it was owned by us during the first quarter of fiscal 2003 and $2.2 million of revenue and $0.3 million of operating losses for the first quarter of fiscal 2002. The assets of DRS Ahead Technology were sold for their aggregate book value, and we received an interest bearing promissory note in the amount of $3.1 million as consideration for the sale. The note bears interest and is payable over an 80-month term. No gain or loss was recorded on the sale. On April 11, 2002, we acquired the assets of the U.S.-based Unmanned Aerial Vehicle (UAV) business of Meggitt Defense Systems - Texas, Inc., a unit of Meggitt plc for $0.8 million in cash. The business, located in Mineral Wells, Texas and now operating as DRS Unmanned Technologies, Inc. provides close-range, low-weight, low-noise, medium-duration UAVs supporting military special operations missions. Applications for these products include tactical short-range surveillance, radio relay, and command, control, communications, computers, intelligence, surveillance and reconnaissance. The operations of DRS Unmanned Technologies are not significant to our consolidated operating results. The acquisition was accounted for using the purchase method of accounting. 11 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES CRITICAL ACCOUNTING POLICIES Our consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America. Preparing consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by the application of our accounting policies. Our significant accounting policies are described in Note 1 to the March 31, 2002 consolidated financial statements included in our Form 10-K. Critical accounting policies are those that require application of management's most difficult, subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Critical accounting policies for us include revenue recognition on contracts and contract estimates, goodwill and intangible assets, long-lived assets and acquired intangible assets, valuation of deferred tax assets and liabilities, and management estimates. For additional discussion of our critical accounting policies, see our MD&A in our March 31, 2002 Form 10-K. 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 THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001 Revenues and operating income for the three months ended June 30, 2002 were $131.2 million and $12.7 million, respectively, increasing $27.9 million and $3.0 million, respectively, as compared with the corresponding prior-year period. The Electro-Optical Systems Group and Flight Safety and Communications Group revenues increased $27.2 million and $4.3 million, respectively, and the Electronic Systems Group revenues decreased $3.2 million. Fiscal 2002 second quarter acquisitions of the Sensors and Electronics Systems (SES) business of The Boeing Company (operating as part of EOSG) and the Electro Mechanical Systems unit of Lockheed Martin (operating as part of ESG) contributed $19.0 million and $3.4 million of revenues, respectively, to fiscal 2003 first quarter revenues. The 31% increase in operating income was due primarily to the overall increase in revenues, partially offset by the impact of certain charges at our operating segments (see discussion of operating segments below for additional information). Interest income increased approximately $0.5 million for the quarter ended June 30, 2002, as compared with the prior-year period. The increase in interest income reflects a higher average cash and cash equivalents balance during the quarter, resulting from our common stock offering in the third quarter of fiscal 2002. Interest and related expenses increased $0.2 million for the quarter ended June 30, 2002, as compared with the corresponding prior-year period. The increase in interest expense was attributable to an overall increase in term loan borrowings outstanding during the quarter. The increase in our term loan borrowings was a result of our fiscal 2002 third quarter acquisition of the SES business of The Boeing Company. Partially offsetting the increase in interest expense was the favorable impact of an overall decrease in weighted average interest rates on our outstanding borrowings during the first quarter of fiscal 2003, as compared with the prior-year period. Our revolving line of credit borrowings were repaid in the third quarter of the prior fiscal year with proceeds from our fiscal 2002 common stock offering. As of June 30, 2002, we had no borrowings outstanding under our revolving credit facility. Minority interest was $0.3 million for the three months ended June 30, 2002 and 2001. Minority interest is generated by ESG's DRS Laurel Technologies unit in which we have an 80% interest. 12 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES The provision for income taxes for the three months ended June 30, 2002 reflects an annual estimated effective income tax rate of approximately 46%, as compared with 47% in the prior-year period. There are two primary factors that negatively impact our effective income tax rate; losses in ESG's U.K. operation for which the full tax benefit has not been recognized, and the effect of non-deductible lobbying expenses. It is anticipated that our effective tax rate will continue to decline moderately in future years, as we continue to grow. Earnings before net interest and related expenses (primarily amortization of debt issuance costs), income taxes, depreciation and amortization (EBITDA) for the three months ended June 30, 2002 was $15.0 million, an increase of 22% over the prior-year period. EBITDA is not a substitute for operating income, net earnings or cash flows from operating activities, as determined in accordance with accounting principles generally accepted in the United States of America, or as measures of our profitability or liquidity. We present EBITDA as additional information because we believe it to be a useful indicator of our ability to meet debt service and capital expenditure requirements. EBITDA, as we define it, may differ from similarly named measures used by other entities. OPERATING SEGMENTS 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-year period:
THREE MONTHS ENDED JUNE 30, PERCENT CHANGES ----------------------- --------------- 2002 2001 2002 VS. 2001 ---------- ---------- --------------- (IN THOUSANDS, EXCEPT FOR PERCENTAGES) ESG External revenues $ 34,911 $ 38,079 (8.3%) Operating income $ 1,343 $ 4,808 (72.1%) Operating margin 3.8% 12.6% (69.8%) EOSG External revenues $ 68,994 $ 41,839 64.9% Operating income $ 9,875 $ 4,477 120.6% Operating margin 14.3% 10.7% 33.6% FSCG External revenues $ 25,475 $ 21,198 20.2% Operating income $ 2,257 $ 801 181.8% Operating margin 8.9% 3.8% 134.2% OTHER External revenues $ 1,858 $ 2,236 (16.9%) Operating loss $ (802) $ (402) (99.5%) Operating margin (43.2%) (18.0%) (140.0%)
13 THREE MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE MONTHS ENDED JUNE 30, 2001 ELECTRONIC SYSTEMS GROUP DRS TECHNOLOGIES, INC. AND SUBSIDIARIES Revenues decreased $3.2 million, or 8%, to $34.9 million in the three months ended June 30, 2002, as compared with the corresponding prior-year period. Operating income decreased $3.5 million, or 72%, to $1.3 million. The decrease in revenues was principally attributed to a decrease in sales of our rugged computers and peripherals and timing of shipments of combat display workstations and components. Partially offsetting the decrease in revenues was $4.3 million of revenue contributed by our fiscal 2002 second quarter acquisition of the Electro Mechanical Systems unit of Lockheed Martin (operating as DRS Surveillance Support Systems). The decrease in operating income was driven by the overall decrease in revenues, as well as first quarter charges totaling $0.7 million. The charges were associated with restructuring efforts at ESG's U.K operating unit, which included provisions for inventory and employee severance. We anticipate improvement in ESG's operating results throughout the remainder of fiscal 2003, as the scheduled volume of shipments on certain key programs increases. Additionally, the operating results of the recently completed acquisition of the Navy Controls Division of Eaton Corporation (operating as DRS Power & Control Technologies) will favorably impact future operating results. ELECTRO-OPTICAL SYSTEMS GROUP Revenues increased $27.2 million, or 65%, to $69.0 million in the three months ended June 30, 2002, as compared with the corresponding prior-year period. Operating income increased $5.4 million to $9.9 million. The increase in revenues was driven by our fiscal 2002 second quarter acquisition of the SES business of The Boeing Company (the SES acquisition) and internal growth from our infrared targeting and imaging systems. The programs we acquired with the SES acquisition generated $19.0 million of revenues in the first quarter of fiscal 2003. Operating income was favorably impacted by the internal growth in revenues, as well as $1.5 million of operating income associated with the SES revenues. Fiscal 2003 first quarter operating income reflected a charge of $0.3 million primarily for legal costs. FLIGHT SAFETY AND COMMUNICATIONS GROUP Revenues increased $4.3 million, or 20%, to $25.5 million in the three months ended June 30, 2002, as compared with the corresponding prior-year period. Operating income increased $1.5 million to $2.3 million. The revenue growth was a result of greater volume of contract manufacturing services and increased shipments of mission data recording systems and components. Partially offsetting the revenue increase were decreases in sales of data terminal sets and data modems for tactical network interconnections. The increase in operating income reflects the overall increase in revenues and favorable operating margins due to improved cost absorption at the group's U.K operating unit, as well as to a change in revenue mix to higher margin programs. Fiscal 2003 first quarter operating income reflects a charge of $0.5 million for potential losses associated with a certain mission data recording system. Fiscal 2002 first quarter operating income included charges of $0.8 million in connection with the closing of FSCG's Santa Clara production facility. OTHER Revenues decreased $0.4 million to $1.9 million in the three months ended June 30, 2002. Operating loss increased $0.4 million to $0.8 million. The decrease in revenues was attributable to our sale of substantially all of the assets and liabilities of DRS Ahead Technology on May 27, 2002, partially offset by revenues generated by our April 11, 2002 acquisition of the U.S.-based Unmanned Aerial Vehicle (UAV) business of Meggitt Defense Systems - Texas, Inc. (now operating as DRS Unmanned Technologies). The increase in the operating loss was due to unfavorable operating results at DRS Ahead Technology, as well as research and development costs at DRS Unmanned Technologies. LIQUIDITY AND CAPITAL RESOURCES The following table provides our cash flow data for the three months ended June 30, 2002 and 2001. 14 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
THREE MONTHS ENDED JUNE 30, ------------------- 2002 2001 -------- -------- (IN THOUSANDS) Net cash provided by operating activities $ 1,080 $ 4,557 Net cash used in investing activities $ (4,815) $ (3,526) Net cash provided by (used in) financing activities $ 419 $ (2,306)
OPERATING ACTIVITIES For the fiscal quarter ended June 30, 2002, we generated $1.1 million of operating cash flow, $3.5 million less than the $4.6 million reported in the prior-year period. During the quarter, we paid $2.5 million completing a global settlement with the government resolving all potential allegations related to their investigation of DRS Photronics (see Part I, Item 3 of our March 31, 2002 10-K). Cash provided by earnings, net of adjustments for non-cash items, increased $1.0 million to $9.1 million. Increases in our net operating assets and liabilities used approximately $8.0 million of cash during the quarter, $4.5 million more than the $3.5 million of cash used in the prior-year period. During the current quarter, we used cash to reduce our accounts payable and other current liabilities. These uses of cash were offset, in part, by customer collections and increases in advance payments. INVESTING ACTIVITIES We paid $4.2 million for capital improvements to our manufacturing facilities and equipment for the fiscal quarter ended June 2002, as compared with $3.5 million for the corresponding prior-year quarter. Of the $4.2 million, $2.7 million related to the transfer and integration of certain electro-optical system production programs acquired from the SES acquisition to our manufacturing centers in Melbourne, Florida and Dallas, Texas. We expect that capital expenditures for fiscal 2003 will be between $22.0 million and $27.0 million, as we continue to upgrade our facilities and integrate the SES business and Navy Controls Division of Eaton Corporation into our existing businesses (see below). On May 27, 2002, we sold the assets of our DRS Ahead Technology unit for $3.1 million and received a $3.1 million interest bearing promissory note as consideration. The promissory note bears interest and is payable over an 80-month term. On July 16, 2002, we completed the acquisition of the assets and certain liabilities of the Navy Controls Division of Eaton Corporation for $92.2 million in cash. Our long-term growth strategy includes a disciplined program of acquiring companies that are expected to be accretive to our earnings. Continuation of our acquisition program will depend, in part, on the availability of financial resources at interest rates and costs of capital that are acceptable to us. We would expect to utilize cash generated by operations, as well as cash available under our credit facility, which also may include the renegotiation of our credit limit to finance such acquisitions. Other sources of capital could include proceeds from a sale of our common stock and the placement of convertible or high-yield debt. We believe that sufficient capital resources will be available to us from one or several of these sources to finance future acquisitions that we believe to be strategic and accretive to our net earnings. However, no assurances can be provided that such financing will be available and at a cost that is acceptable to us. 15 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES FINANCING ACTIVITIES For the fiscal quarter ended June 2002, financing activities provided $0.4 million. Proceeds from short-term borrowings at one of our foreign operating subsidiaries and stock option exercises were offset, in part, by a payment made on our Term Loan and the early retirement of a property mortgage. We currently have a $240 million credit agreement with a syndicate of lenders, with Wachovia Bank, N.A. as the lead lender, consisting of a term loan in the aggregate principal amount of $140 million (Term Loan) and a $100 million revolving line of credit (Line of Credit) (collectively referred to as the Credit Facility). The maturity dates of the Term Loan and the Line of Credit are September 30, 2008 and September 30, 2006, respectively. The Term Loan requires quarterly principal payments of $350,000, which began on December 31, 2001. Borrowings under the Credit Facility bear interest, at our option, at either: a "base rate" (as defined in the Credit Agreement) equal to the higher of 0.50% per annum above the latest Prime Rate and Federal Funds Rate plus a spread ranging from 1.25% to 2.25% per annum, depending on our Total Leverage Ratio (TLR) at the time of determination; or a LIBOR rate (as defined in the Credit Agreement) plus a spread ranging from 2.25% to 3.25% per annum depending on our TLR. The TLR is defined as total debt minus performance-based letters of credit, as compared with EBITDA (as defined in the Credit Agreement). The Credit Facility is secured by substantially all of our assets. There were no borrowings under our revolving line of credit as of June 30, 2002. The interest rate on our outstanding Term Loan was approximately 5.3% at June 30, 2002. There are certain covenants and restrictions placed on us under our Credit Facility, including a maximum TLR and a minimum fixed-charge ratio, a restriction on the payment of dividends on our capital stock, a limitation on the issuance of additional debt, a requirement that we offer to make prepayments on our term loans outstanding with 50% of the aggregate net cash proceeds from any equity offering. Our ability to continue to borrow under the Credit Facility will depend upon on our remaining in compliance with the limitations imposed by our lenders. We were in compliance with all covenants under the Credit Agreement at June 30, 2002. As of June 30, 2002, we had approximately $81.4 million of additional available credit, after satisfaction of the borrowing base requirement. We use "free cash flow" as a measure to evaluate our performance. The calculation of free cash flow is net cash provided by operating activities less capital expenditures. Free cash flow was a negative $3.1 million for the fiscal quarter ended June 30, 2002 and $1.0 million for the corresponding quarter in the prior year. CONTRACTUAL OBLIGATIONS Our contractual obligations and commitments principally include obligations associated with our outstanding indebtedness and future minimum operating lease obligations as set forth in the table below:
AS OF JUNE 30,2002 -------------------------------------------------------------- PAYMENTS DUE BY PERIOD -------------------------------------------------------------- (in thousands) WITHIN 1 AFTER 5 TOTAL YEAR 1-3 YEARS 4-5 YEARS YEARS ---------- ----------- ---------- ---------- ---------- (in thousands) Long-term debt obligations $ 138,950 $ 1,400 $ 2,800 $ 2,800 $ 131,950 Operating lease commitments 81,557 16,164 23,449 19,569 22,375 ---------- ---------- ---------- ---------- ---------- Total contractual obligations $ 220,507 $ 17,564 $ 26,249 $ 22,369 $ 154,325 ========== ========== ========== ========== ==========
16 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES We enter into standby letter of credit agreements with financial institutions and customers primarily relating to the guarantee of future performance on certain contracts to provide products and services and to secure advance payments we have received from customers. At June 30, 2002, we had contingent liabilities on outstanding letters of credit as follows:
AS OF JUNE 30, 2002 ----------------------------------------- CONTINGENT PAYMENTS DUE BY PERIOD ----------------------------------------- (in thousands) WITHIN 1 1-3 AFTER 3 TOTAL YEAR YEARS YEARS -------- -------- -------- -------- Standby letters of credit $ 18,593 $ 5,482 $ 12,911 $ 200
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. Consistent with our desire to generate cash to invest in our core businesses and reduce debt, we anticipate that, subject to prevailing financial, market and economic conditions, we may divest certain non-core businesses. There can be no assurance, however, that our business will continue to generate cash flow at current levels, or that anticipated operational improvements will be achieved. If we are unable to generate sufficient cash flow from operations to service our debt, we may be required to sell assets, reduce capital expenditures, refinance all or a portion of our existing debt or obtain additional financing. Our ability to make scheduled principal payments or pay interest on or refinance our indebtedness depends on our future performance and financial results, which, to a certain extent, are subject to general conditions in or affecting the defense industry and to general economic, political, financial, competitive, legislative and regulatory factors beyond our control. BACKLOG Backlog represents products or services that our customers have committed by contract to purchase from us. Our backlog at June 30, 2002 was $610.4 million. The backlog at March 31, 2002 was $595.3 million. We booked approximately $139.2 million in new orders in the first three months of fiscal 2003. Our backlog is subject to fluctuations and is not necessarily indicative of future sales. Moreover, cancellations of purchase orders or reductions of product quantities in existing contracts could substantially and materially reduce our backlog and, consequently, future revenues. Our failure to replace canceled or reduced backlog could result in lower revenues. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In June 2001, the FASB issued SFAS No. 143, "Accounting for Retirement Obligations" (SFAS 143). SFAS 143 establishes accounting standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. It also provides accounting guidance for legal obligations associated with the retirement of tangible long-lived assets. SFAS 143 is effective for fiscal years beginning after June 15, 2002, with early adoption permitted. We currently are evaluating the statement, and we do not expect that the provisions of SFAS 143 will have a material impact on our consolidated financial statements. 17 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144). SFAS 144 supersedes SFAS 121, but retains its fundamental provisions for the (a) recognition/measurement of impairment of long-lived assets to be held and used, and (b) measurement of long-lived assets to be disposed of by sale. SFAS 144 also supersedes the accounting/reporting provisions of Accounting Principles Board Opinion (APB) No. 30 for segments of a business to be disposed of, but retains the requirement to report discontinued operations separately from continuing operations and extends that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS 144 became effective for us on April 1, 2002. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections" (SFAS 145). SFAS 145 updates, clarifies and simplifies existing accounting pronouncements. SFAS 145 rescinds Statement No. 4, which required all gains and losses from extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. As a result, the criteria in APB No. 30 will now be used to classify those gains and losses because Statement No. 4 has been rescinded. Statement No. 44 was issued to establish accounting requirements for the effects of transition to provisions of the Motor Carrier Act of 1980. Because the transition has been completed, Statement No. 44 is no longer necessary. SFAS 145 amends Statement No.13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same manner as sale-leaseback transactions. This amendment is consistent with the FASB's goal of requiring similar accounting treatment for transactions that have similar economic effects. SFAS 145 also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. We are required to adopt SFAS 145, effective for fiscal 2003. SFAS No. 145 will not have a material effect on our consolidated results of operations, financial position or cash flows. In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" (SFAS 146). SFAS 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Previous accounting guidance was provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" (EITF 94-3). SFAS 146 replaces EITF 94-3. The Statement is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. We are currently evaluating the provisions of the Statement. 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, 2002 for a discussion of our exposure to market risks. There was no significant change in those risks during the three months ended June 30, 2002, except for interest rate risk. We currently have a $240 million credit agreement with Wachovia Bank, N.A. as the lead bank, consisting of a term loan in the aggregate principal amount of $140 million (Term Loan) and a $100 million revolving line of credit (Line of Credit) (collectively referred to as the Credit Facility). Borrowings under the Credit Facility bear interest based on LIBOR (London Interbank Offered Rate), United States Prime Rate or United States Federal Funds Rate. Therefore, we are exposed to interest rate risk on our variable rate borrowings. Although there were no borrowings outstanding under our Line of Credit as of June 30, 2002, we had $139 million outstanding under our Term Loan. Excluding the notional amounts covered under our interest rate collar agreements, a 12.5 basis point increase/decrease in interest rates would have resulted in an increase/decrease in interest expense of $37,000 for the three-month period ended June 30, 2002. 18 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. We currently are involved in a dispute with Spar Aerospace Ltd. (Spar) with respect to the working capital adjustment, if any, provided for in the purchase agreement between us and Spar dated as of September 19, 1997, pursuant to which we acquired, through certain of our subsidiaries, certain assets of Spar. On January 11, 2002, we were notified that an arbitrator awarded Spar $4,616,000 Canadian (or approximately $2,890,000 U.S.) plus interest in respect of such working capital adjustment. As of March 31, 2002, we had accrued approximately $3.9 million, including interest, associated with the potential award. On February 5, 2002, we filed a notice of appeal of such arbitral award with the Ontario Superior Court of Justice. The appeal currently is scheduled to be heard in September 2002. On October 3, 2001, a lawsuit was filed in the United States District Court for the Eastern District of New York by Miltope Corporation, a corporation of the State of Alabama, and IV Phoenix Group, Inc., a corporation of the State of New York, against DRS Technologies, Inc., DRS Electronic Systems, Inc. and a number of individual defendants, several of whom are employed by DRS Electronic Systems. The plaintiffs allege claims against us of infringement of a number of patents, breach of a confidentiality agreement, misappropriation of trade secrets, unjust enrichment and unfair competition. The claims relate generally to the activities of certain former employees of IV Phoenix Group and the hiring of some of those employees by us. The plaintiffs seek damages of not less than $5.0 million for each of the claims. The plaintiffs also allege claims for tortious interference with business relationships, tortious interference with contracts and conspiracy to breach fiduciary duty. The plaintiffs seek damages of not less than $47.1 million for each such claim. In addition, plaintiffs seek punitive and treble damages, injunctive relief and attorneys' fees. In our answer, we have denied the plaintiffs' allegations, and we intend to vigorously defend this action. In February 2002, plaintiffs filed an amended complaint, which eliminated the patent infringement claims and added claims related to statutory and common law trademark infringement. Although this action is in its early stages, we believe we have meritorious defenses and do not believe the action will have a material adverse effect on our earnings or financial condition. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit No. Description ----------- ----------- 99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 19 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES (b) Reports on Form 8-K The following report on form 8-K was filed during the quarter ending September 30, 2002: 1. Form 8-K filed on July 30, 2002, in connection with DRS Technologies, Inc.'s acquisition of the assets and certain liabilities of the Navy Controls Division of Eaton Corporation. 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 14, 2002 /s/ Richard A. Schneider ----------------------------------------- Richard A. Schneider EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER 20 EX-99.1 3 a2087053zex-99_1.txt EXHIBIT 99.1 EXHIBIT NO. 99.1 CERTIFICATION OF CEO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Mark S. Newman, Chief Executive Officer of DRS Technologies, Inc., have reviewed the Quarterly Report on Form 10Q accompanying this certificate, and based on the inquiries I have made or caused to be made in the fulfillment of my responsibilities as the Chief Executive Officer of DRS Technologies, Inc., I hereby certify that: (i) the Quarterly Report on Form 10Q, containing the Financial Statements of DRS Technologies, Inc., fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (ii) the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of DRS Technologies, Inc. This certificate is being made for the exclusive purpose of compliance by the Chief Executive Officer of DRS Technologies, Inc. with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be used for any other purpose. /s/ Mark S. Newman - ------------------------------ Mark S. Newman Chief Executive Officer August 14, 2002 This certification accompanies this Quarterly Report on Form 10Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. EX-99.2 4 a2087053zex-99_2.txt EXHIBIT 99.2 EXHIBIT NO. 99.2 CERTIFICATION OF CFO PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Richard A. Schneider, Chief Financial Officer of DRS Technologies, Inc., have reviewed the Quarterly Report on Form 10Q accompanying this certificate, and based on the inquiries I have made or caused to be made in the fulfillment of my responsibilities as the Chief Financial Officer of DRS Technologies, Inc., I hereby certify that: (i) the Quarterly Report on Form 10Q, containing the Financial Statements of DRS Technologies, Inc., fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (ii) the information contained in such report fairly presents, in all material respects, the financial condition and results of operations of DRS Technologies, Inc. This certificate is being made for the exclusive purpose of compliance by the Chief Financial Officer of DRS Technologies, Inc. with the requirements of Section 906 of the Sarbanes-Oxley Act of 2002, and may not be used for any other purpose. /s/ Richard A. Schneider - ------------------------------ Richard A. Schneider Chief Financial Officer August 14, 2002 This certification accompanies this Quarterly Report on Form 10Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended. -----END PRIVACY-ENHANCED MESSAGE-----