-----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, AC08UV4VaTeP57ZffFzumyesvDuyF14VipifBRczT17R1NTJaatrRd8d9XAWtcEU YGl9VVKL1HkWo9VWzvjjfQ== 0000950110-00-000123.txt : 20000216 0000950110-00-000123.hdr.sgml : 20000216 ACCESSION NUMBER: 0000950110-00-000123 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000215 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: SEC FILE NUMBER: 001-08533 FILM NUMBER: 546144 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 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 DECEMBER 31, 1999 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ --------------- COMMISSION FILE NUMBER 1-8533 DRS TECHNOLOGIES, INC. DELAWARE 13-2632319 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 5 SYLVAN WAY, PARSIPPANY, NEW JERSEY 07054 (973) 898-1500 --------------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES |X| NO |_| AS OF FEBRUARY 10, 2000, 9,716,833 SHARES OF REGISTRANT'S COMMON STOCK, $.01 PAR VALUE, WERE OUTSTANDING (EXCLUSIVE OF 440,939 SHARES HELD IN TREASURY). ================================================================================ DRS TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------- INDEX TO QUARTERLY REPORT ON FORM 10-Q PART I. FINANCIAL INFORMATION PAGE NO. ITEM 1. Financial Statements Condensed Consolidated Balance Sheets - December 31, 1999 and March 31, 1999................................ 1 Condensed Consolidated Statements of Operations - Three and Nine Months Ended December 31, 1999 and 1998 .............................................. 2 Condensed Consolidated Statements of Cash Flows - Nine Months Ended December 31, 1999 and 1998......... 3 Notes to Condensed Consolidated Financial Statements... 4-8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 9-14 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk................................................... 14 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings...................................... 15 ITEM 6. Exhibits and Reports on Form 8-K....................... 15 SIGNATURES ....................................................... 16 PART I. FINANCIAL INFORMATION ITEM 1. Financial Statements DRS TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
DECEMBER 31, 1999 MARCH 31, 1999 ----------------- -------------- ASSETS Current assets: Cash and cash equivalents $ 2,920,000 $ 10,154,000 Accounts receivable, net 70,290,000 76,135,000 Inventories, net of progress payments 70,773,000 72,907,000 Prepaid expenses and other current assets 3,687,000 4,316,000 ------------- ------------- Total current assets 147,670,000 163,512,000 ------------- ------------- Property, plant and equipment, less accumulated depreciation and amortization of $46,036,000 and $38,730,000 at December 31, 1999 and March 31, 1999, respectively 30,846,000 34,163,000 ------------- ------------- Goodwill and related intangible assets, less accumulated amortization of $14,261,000 and $9,163,000 at December 31, 1999 and March 31, 1999, respectively 128,029,000 122,335,000 ------------- ------------- Deferred income taxes and other noncurrent assets 8,953,000 10,334,000 ------------- ------------- $ 315,498,000 $ 330,344,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 5,302,000 $ 5,844,000 Short-term bank debt 24,556,000 9,169,000 Accounts payable 26,996,000 42,470,000 Accrued expenses and other current liabilities 27,663,000 33,344,000 Customer advances 6,392,000 15,973,000 Unearned income and accrual for future costs related to acquired contracts 35,323,000 43,221,000 ------------- ------------- Total current liabilities 126,232,000 150,021,000 Long-term debt, excluding current installments 104,600,000 102,091,000 Other noncurrent liabilities 5,984,000 4,790,000 ------------- ------------- Total liabilities 236,816,000 256,902,000 Stockholders' equity: Preferred Stock, no par value. Authorized 2,000,000 shares; no shares issued at December 31, 1999 and March 31, 1999 $ -- $ -- Common Stock, $.01 par value per share Authorized 20,000,000 shares; issued 9,716,833 and 9,615,933 shares at December 31, 1999 and March 31, 1999, respectively 97,000 96,000 Additional paid-in capital 48,484,000 48,038,000 Retained earnings 31,538,000 27,737,000 Accumulated other comprehensive earnings (losses) 1,086,000 (139,000) Treasury stock, at cost: 440,939 and 385,164 shares of Common Stock at December 31, 1999 and March 31, 1999, respectively (1,988,000) (1,493,000) Unamortized restricted stock compensation (535,000) (797,000) ------------- ------------- Net stockholders' equity 78,682,000 73,442,000 ------------- ------------- Commitments and contingencies -- -- $ 315,498,000 $ 330,344,000 ============= =============
See accompanying Notes to Condensed Consolidated Financial Statements. 1 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED DECEMBER 31, NINE MONTHS ENDED DECEMBER 31, ------------------------------- ------------------------------ 1999 1998 1999 1998 ---- ---- ---- ---- Revenues $ 105,664,000 $ 76,991,000 $ 284,772,000 $ 169,105,000 Costs and expenses 98,318,000 72,985,000 267,577,000 161,284,000 Restructuring charges 693,000 -- 693,000 -- ------------- ------------- ------------- ------------- Operating income 6,653,000 4,006,000 16,502,000 7,821,000 Interest and other income, net 215,000 271,000 513,000 599,000 Interest and related expenses (3,426,000) (2,988,000) (9,507,000) (6,101,000) Minority interests (385,000) (235,000) (955,000) (660,000) ------------- ------------- ------------- ------------- Earnings before income taxes and extraordinary item 3,057,000 1,054,000 6,553,000 1,659,000 Income taxes 1,284,000 390,000 2,752,000 614,000 ------------- ------------- ------------- ------------- Net earnings before extraordinary item 1,773,000 664,000 3,801,000 1,045,000 Extraordinary item, net of tax -- (2,306,000) -- (2,306,000) ------------- ------------- ------------- ------------- Net earnings (losses) $ 1,773,000 $ (1,642,000) $ 3,801,000 $ (1,261,000) ============= ============= ============= ============= Basic earnings per share: Net earnings before extraordinary item $ 0.19 $ 0.10 $ 0.41 $ 0.17 Extraordinary item, net of tax $ -- $ (0.36) $ -- $ (0.37) Net earnings (losses) $ 0.19 $ (0.26) $ 0.41 $ (0.20) Diluted earnings per share: Net earnings before extraordinary item $ 0.18 $ 0.10 $ 0.40 $ 0.16 Extraordinary item, net of tax $ -- $ (0.35) $ -- $ (0.35) Net earnings (losses) $ 0.18 $ (0.25) $ 0.40 $ (0.19)
See accompanying Notes to Condensed Consolidated Financial Statements. 2 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED DECEMBER 31, ------------------------------- 1999 1998 ------------ ------------ Cash flows from operating activities Net earnings $ 3,801,000 $ (1,261,000) Adjustments to reconcile net earnings to cash flows from operating activities: Extraordinary item, net of tax -- 2,306,000 Depreciation and amortization 13,340,000 7,926,000 Inventory reserves and provision for doubtful accounts 2,388,000 1,023,000 Minority interest 240,000 443,000 Other, net 1,107,000 558,000 Changes in assets and liabilities, net of effects from business combinations: Decrease (increase) in accounts receivable 8,122,000 (3,314,000) Decrease (increase) in inventories 1,744,000 (13,905,000) Decrease in prepaid expenses and other current assets 2,100,000 29,000 (Decrease) increase in accounts payable (16,955,000) 4,933,000 Decrease in accrued expenses and other current liabilities (9,809,000) (2,213,000) (Decrease) increase in customer advances (9,857,000) 15,254,000 Decrease in unearned income and accrual for future costs related to acquired contracts (7,898,000) -- Other, net 1,912,000 892,000 ------------ ------------ Net cash (used in) provided by operating activities (9,765,000) 12,671,000 ------------ ------------ Cash flows from investing activities Capital expenditures (3,505,000) (4,059,000) Payments pursuant to business combinations, net of cash acquired (8,656,000) (45,782,000) Other, net -- 55,000 ------------ ------------ Net cash used in investing activities (12,161,000) (49,786,000) ------------ ------------ Cash flows from financing activities Net borrowings of short-term debt 11,542,000 13,140,000 Other long-term borrowings 8,000,000 42,075,000 Payments on long-term debt (3,715,000) (1,242,000) Retirement of convertible debt (690,000) (4,992,000) Other, net 8,000 191,000 ------------ ------------ Net cash provided by financing activities 15,145,000 49,172,000 ------------ ------------ Effect of exchange rates on cash and cash equivalents (453,000) (220,000) ------------ ------------ Net (decrease) increase in cash and cash equivalents (7,234,000) 11,837,000 Cash and cash equivalents, beginning of period 10,154,000 9,673,000 ------------ ------------ Cash and cash equivalents, end of period $ 2,920,000 $ 21,510,000 ============ ============
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, 1999, and the results of operations and cash flows for the three- and nine-month periods ended December 31, 1999 and 1998. All significant intercompany balances and transactions have been eliminated. Certain items in the March 31, 1999 and December 31, 1998 condensed consolidated financial statements and accompanying notes have been reclassified to conform to the fiscal 2000 presentation. The results of operations for the nine months ended December 31, 1999 are not necessarily indicative of the results to be expected for the full year. 2. BUSINESS COMBINATIONS In July 1999, a subsidiary of the Company, DRS Rugged Systems (Europe) Ltd., acquired Global Data Systems Ltd. and its wholly owned subsidiary, European Data Systems Ltd., for approximately $7.8 million in cash and potential future consideration, not to exceed a total of $10.2 million. Located in Chippenham, Wiltshire, the United Kingdom, and now operating as DRS Rugged Systems (Europe) Products Ltd. (RSEP), the company is a leading provider in the design and development of rugged computers and peripherals primarily for military applications. The acquisition has been accounted for using the purchase method of accounting. The excess of cost over the estimated fair value of net assets acquired was approximately $9.4 million and is being amortized on a straight-line basis over twenty years. Purchase price allocation has not yet been finalized, and actual purchase price allocation may differ from that used in these Condensed Consolidated Financial Statements. The financial position and results of operations of RSEP were not significant to those of the Company as of the acquisition date. 3. INVENTORIES Inventories are summarized as follows: December 31, 1999 March 31, 1999 ----------------- -------------- Work-in-process $ 92,429,000 $ 95,392,000 Raw material and finished goods 14,972,000 14,309,000 ------------- ------------- 107,401,000 109,701,000 Less progress payments (36,628,000) (36,794,000) ------------- ------------- Total $ 70,773,000 $ 72,907,000 ============= ============= General and administrative costs included in work-in-process were approximately $10.2 million and $13.0 million at December 31, 1999 and March 31, 1999, respectively. General and administrative expenses included in costs and expenses amounted to approximately $19.3 million and $13.4 million for the three-month periods ended December 31, 1999 and 1998, respectively, and approximately $52.0 million and $30.8 million for the nine-month periods then ended. Included in those amounts are expenditures for internal research and development amounting to approximately $3.1 million and $1.7 million for the fiscal quarters ended December 31, 1999 and 1998, respectively, and approximately $6.9 million and $3.1 million, respectively, for the nine-month periods then ended. 4 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 4. RESTRUCTURING During the third quarter of fiscal 2000, the Company recorded restructuring charges totaling $693,000. The Electro-Optical Systems Group (EOSG) recorded a restructuring charge of approximately $401,000 for severance payments to certain management employees of the Group's DRS Hadland operating unit. Day-to-day management of DRS Hadland's operations has been transferred to the Company's Flight Safety and Communications Group (FSCG). The effect of the restructuring will be to reduce future general and administrative expenses. Effective January 1, 2000, DRS Hadland's operating results will be reported within FSCG. As continuation of its efforts to streamline operations, the Company's Data Systems Group (DSG) recorded a restructuring charge of $292,000 relating to the closure of its Plymouth, Minnesota location. Effective January 1, 2000, operations at the Plymouth location ceased; productive assets and inventory were transferred to the Group's St. Croix Falls, Wisconsin and Razlog, Bulgaria plants. The Company's Midwest Division now consists of a single plant location. In connection with this plant closure, the Group effected a forty-five percent reduction in its Midwest workforce (forty-two employees). This restructuring charge consists of provisions for severance payments and idle plant costs. Costs associated with the relocation of equipment and inventory have been or will be charged to operations or capitalized, as appropriate, when incurred. The following table reconciles the restructuring charge to the related reserve account balance as of December 31, 1999.
DSG EOSG Total --------- --------- --------- Fiscal 2000 Restructuring Charge $ 292,000 $ 401,000 $ 693,000 Charge for asset write-offs (42,000) -- (42,000) Cash outflow for idle plant costs -- -- -- Cash outflow for severance payments (49,000) (401,000) (450,000) --------- --------- --------- Balance at December 31, 1999 $ 201,000 $ -- $ 201,000 ========= ========= =========
The reserve is classified as a component of Accrued Expenses and Other Current Liabilities in the accompanying consolidated balance sheet for December 31, 1999. 5 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 5. EARNINGS PER SHARE The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share (EPS):
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, -------------------- -------------------- 1999 1998 1999 1998 ------- ------- ------- ------- (in thousands, except per share data) BASIC EPS COMPUTATION Net earnings before extraordinary item $ 1,773 $ 664 $ 3,801 $ 1,045 Extraordinary item, net of tax -- (2,306) -- (2,306) ------- ------- ------- ------- Net earnings (losses) $ 1,773 $(1,642) $ 3,801 $(1,261) ------- ------- ------- ------- Weighted average common shares outstanding 9,276 6,350 9,266 6,266 Basic Earnings (Losses) Per Share: Net earnings before extraordinary item $ 0.19 $ 0.10 $ 0.41 $ 0.17 Extraordinary item, net of tax -- (0.36) -- (0.37) ------- ------- ------- ------- Net earnings (losses) $ 0.19 $ (0.26) $ 0.41 $ (0.20) ======= ======= ======= ======= DILUTED EPS COMPUTATION Net earnings before extraordinary item $ 1,773 $ 664 $ 3,801 $ 1,045 Interest and expenses related to convertible debentures 284 -- 849 -- ------- ------- ------- ------- Adjusted net earnings before extraordinary item 2,057 664 4,650 1,045 Extraordinary item, net of tax -- (2,306) -- (2,306) ------- ------- ------- ------- Adjusted net earnings (losses) 2,057 (1,642) 4,650 (1,261) ------- ------- ------- ------- Diluted Common Shares Outstanding: Weighted average common shares outstanding 9,276 6,350 9,266 6,266 Stock options and other 146 165 151 215 Convertible debt 2,162 -- 2,162 -- ------- ------- ------- ------- Diluted common shares outstanding 11,584 6,515 11,579 6,481 ------- ------- ------- ------- Diluted Earnings Per Share: Net earnings before extraordinary item $ 0.18 $ 0.10 $ 0.40 $ 0.16 Extraordinary item, net of tax -- (0.35) -- (0.35) ------- ------- ------- ------- Net earnings (losses) $ 0.18 $ (0.25) $ 0.40 $ (0.19) ======= ======= ======= =======
For the three-and nine-month periods ended December 31, 1998 the assumed conversions of the Company's 9% and 8 1/2% Debentures were excluded because their inclusion would have been antidilutive. The 8 1/2% Debentures were redeemed at maturity on August 1, 1998. 6 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 6. COMPREHENSIVE INCOME
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, --------------------------- --------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- Net earnings (losses) $ 1,773,000 $(1,642,000) $ 3,801,000 $(1,261,000) Other comprehensive earnings (losses): Foreign currency translation adjustment 106,000 (196,000) 1,225,000 (352,000) ----------- ----------- ----------- ----------- Comprehensive earnings (losses) $ 1,879,000 $(1,838,000) $ 5,026,000 $(1,613,000) =========== =========== =========== ===========
7. OPERATING SEGMENTS DRS is organized into operating segments on the basis of products and services offered: the Electronic Systems Group (ESG); EOSG; FSCG; DSG and Corporate operations. Each operating unit is comprised of separate and distinct businesses. Information about the Company's operations in these segments for the three- and nine-month periods ended December 31, 1999 and 1998 is as follows:
ESG EOSG FSCG DSG CORPORATE TOTAL -------- -------- -------- -------- --------- -------- (IN THOUSANDS) QUARTER ENDED DECEMBER 31, 1999 Revenues $ 54,141 $ 36,520 $ 10,752 $ 4,251 $ -- $105,664 Operating income (loss) $ 4,617 $ 2,456 $ 167 $ (490) $ (97) $ 6,653 Identifiable assets $ 98,641 $143,562 $ 47,368 $ 13,245 $ 12,682 $315,498 Depreciation and amortization $ 923 $ 2,189 $ 416 $ 532 $ 198 $ 4,258 Capital expenditures $ 348 $ 528 $ 54 $ 57 $ 260 $ 1,247 QUARTER ENDED DECEMBER 31, 1998 Revenues $ 30,804 $ 26,038 $ 15,563 $ 4,586 $ -- $ 76,991 Operating income (loss) $ 2,068 $ 1,441 $ 1,390 $ (798) $ (95) $ 4,006 Identifiable assets $ 29,802 $124,619 $ 53,210 $ 14,671 $ 27,529 $249,831 Depreciation and amortization $ 289 $ 1,902 $ 642 $ 507 $ 181 $ 3,521 Capital expenditures $ 323 $ 443 $ 873 $ 89 $ 30 $ 1,758 ESG EOSG FSCG DSG CORPORATE TOTAL -------- -------- -------- -------- --------- -------- (IN THOUSANDS) NINE MONTHS ENDED DECEMBER 31, 1999 Revenues $139,376 $102,058 $ 29,703 $ 13,635 $ -- $284,772 Operating income (loss) $ 10,676 $ 5,901 $ 1,958 $ (1,638) $ (395) $ 16,502 Identifiable assets $ 98,641 $143,562 $ 47,368 $ 13,245 $ 12,682 $315,498 Depreciation and amortization $ 2,630 $ 6,541 $ 1,744 $ 1,844 $ 581 $ 13,340 Capital expenditures $ 1,125 $ 1,093 $ 375 $ 308 $ 604 $ 3,505 NINE MONTHS ENDED DECEMBER 31, 1998 Revenues $ 79,534 $ 38,475 $ 35,856 $ 15,240 $ -- $169,105 Operating income (loss) $ 5,757 $ 1,186 $ 2,688 $ (1,488) $ (322) $ 7,821 Identifiable assets $ 29,802 $124,619 $ 53,210 $ 14,671 $ 27,529 $249,831 Depreciation and amortization $ 827 $ 3,024 $ 1,953 $ 1,599 $ 523 $ 7,926 Capital expenditures $ 1,216 $ 836 $ 1,338 $ 336 $ 333 $ 4,059
7 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) 8. SUBSEQUENT EVENT Effective February 4, 2000, the terms of the Company's Secured Credit Facility were modified, increasing the revolving credit line limit from $70 million to $80 million. The borrowing base calculation was also modified, which should allow greater access to the unused portion of the credit line. 8 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is management's discussion and analysis of the consolidated financial condition and results of operations of DRS Technologies, Inc. and Subsidiaries (hereinafter, the Company or DRS) as of December 31, 1999 and for the three-and nine-month periods ended December 31, 1999 and 1998. This discussion should be read in conjunction with the consolidated financial statements and related notes and other financial information included in this quarterly report on Form 10-Q and in the Company's Annual Report on Form 10-K for the year ended March 31, 1999. The following discussion and analysis contains certain forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Persons reading this report are cautioned that risks and uncertainties are inherent to forward-looking statements. Accordingly, the Company's actual results could differ materially from those suggested by such forward-looking statements. ACQUISITIONS AND RELATED ACTIVITIES In July 1999, a subsidiary of the Company, DRS Rugged Systems (Europe) Ltd., acquired Global Data Systems Ltd. and its wholly owned subsidiary, European Data Systems Ltd., for approximately $7.8 million in cash and potential future consideration, not to exceed a total of $10.2 million. Located in Chippenham, Wiltshire, the United Kingdom, and now operating as DRS Rugged Systems (Europe) Products Ltd. (RSEP), the company is a leading provider in the design and development of rugged computers and peripherals primarily for military applications. The acquisition has been accounted for using the purchase method of accounting. The excess of cost over the estimated fair value of net assets acquired was approximately $9.4 million and is being amortized on a straight-line basis over twenty years. Purchase price allocation has not yet been finalized, and actual purchase price allocation may differ from that used in these Condensed Consolidated Financial Statements. The financial position and results of operations of RSEP were not significant to those of the Company as of the acquisition date. RESTRUCTURING During the third quarter of fiscal 2000, the Company recorded restructuring charges totaling $0.7 million. The Electro-Optical Systems Group (EOSG) recorded a restructuring charge of approximately $0.4 million for severance payments to certain management employees of the Group's DRS Hadland operating unit. Day to day management of DRS Hadland's operations has been transferred to the Company's Flight Safety and Communications Group (FSCG). The impact of the restructuring will be reduced future general and administrative expenses. Effective January 1, 2000, DRS Hadland's operating results will be reported within the FSCG segment in subsequent financial statements. As a continuation of its efforts to streamline operations, the Company's Data Systems Group (DSG) recorded a restructuring charge of $0.3 million relating to the closure of its Plymouth, Minnesota location. Effective January 1, 2000, operations at the Plymouth location ceased; productive assets and inventory were transferred to the Group's St. Croix Falls, Wisconsin and Razlog, Bulgaria plants. The Company's Midwest Division now consists of a single plant location. In connection with this plant closure, the Group implemented a forty-five percent reduction in its Midwest workforce (forty-two employees). The restructuring charge is comprised of provisions for severance payments and idle plant costs. Costs associated with the relocation of equipment and inventory have been or will be charged to operations or capitalized, as appropriate, when incurred. The Company believes that the overall reduction in direct and indirect operating expenses resulting from these management actions will have a positive effect on the Company's future operating results. Management is currently considering plans for additional restructuring initiatives and believes that some or all of these plans will be approved and implemented in the fourth quarter or fiscal 2000. Although the potential magnitude of related restructuring charges is still being assessed, management does not believe that such charges, if any, will have a material adverse effect on the Company's results of operations or financial position. 9 RESULTS OF OPERATIONS The Company's operating cycle is long-term and involves various types of production contracts and varying production delivery schedules. Accordingly, operating results of a particular quarter, or quarter-to-quarter comparisons of recorded revenues and earnings, may not be indicative of future operating results. The following comparative analysis should be viewed in this context. This table sets forth items in the Condensed Consolidated Statements of Earnings as a percent of revenues and presents the percentage dollar increase or decrease of those items as compared to the prior period:
PERCENT OF REVENUES PERCENT OF REVENUES ------------------------- ---------------------------- THREE MONTHS ENDED PERCENT NINE MONTHS ENDED PERCENT DECEMBER 31, CHANGES DECEMBER 31, CHANGES ------------------------- --------------- --------------------------- ----------------- 1999 1998 1999 vs. 1998 1999 1998 1999 vs. 1998 Revenues 100.0% 100.0% 37.2% 100.0% 100.0% 68.4% Costs and expenses 93.0 94.8 34.7% 94.0 95.4 65.9% Restructuring charges 0.7 0.0 100.0% 0.2 0.0 100.0% ----- ----- ----- ----- Operating income 6.3 5.2 66.1% 5.8 4.6 111.0% Interest and other income, net 0.2 0.4 -20.7% 0.2 0.4 -14.4% Interest and related expenses (3.2) (3.9) 14.7% (3.4) (3.6) 55.8% Minority interest (0.4) (0.3) 63.8% (0.3) (0.4) 44.7% ----- ---- ----- ----- Earnings before income taxes and extraordinary item 2.9 1.4 190.0% 2.3 1.0 295.0% Income taxes 1.2 0.5 229.2% 1.0 0.4 348.2% ---- ---- ----- ----- Net earnings before extraordinary item 1.7% 0.9% 167.0% 1.3% 0.6% 263.7% ==== ==== ===== =====
Consolidated revenues for the three-and nine-month periods ended December 31, 1999 increased $28.7 million and $115.7 million, respectively, as compared with three-and nine-month periods ended December 31, 1998. Consolidated operating income for the three-and nine-month periods ended December 31, 1999 increased $2.6 million and $8.6 million, respectively, as compared with the three- and nine-month periods ended December 31, 1998. These increases are primarily attributable to the inclusion of the operations of the Company's fiscal 1999 third and fourth quarter acquisitions (see discussion of operating segments below for additional information). Interest and related expenses were approximately $3.4 million and $3.0 million for the three-month periods ended December 31, 1999 and 1998, respectively, and $9.5 million and $6.1 million for the nine-month periods then ended. This increase was primarily attributable to debt associated with the Company's October 1998 acquisition of certain assets of the Second Generation Ground-Based Electro-Optical and Focal Plane Array businesses of the Raytheon Company and certain of its subsidiaries (the EOS Business) and the July 1999 acquisition of RSEP. Interest also has increased as a result of higher average working capital borrowings in fiscal 2000, as compared with fiscal 1999. The provision for income taxes for the first nine months of fiscal 2000 reflects an annual estimated effective income tax rate of 42%, versus 37% for fiscal 1999. The effective rate for fiscal 2000 assumes continued growth in domestic earnings, which are taxed at higher overall rates in comparison to the Company's foreign tax jurisdictions. The effective rate has also increased, due to the effect of non-deductible goodwill associated with the acquisition of NAI Technologies, Inc. (NAI) in February 1999 and RSEP in July 1999. 10 OPERATING SEGMENTS DRS is organized into four principal operating segments, the first three of which compete in the defense industry: the Electronic Systems Group (ESG); EOSG; FSCG; and DSG. Each group is comprised of separate and distinct businesses. The following tables set forth, by operating segment, revenues, operating income, and operating margin and the percentage increase or decrease of those items as compared with the prior period:
Three Months Three Months Ended Nine Months Nine Months Ended Ended December 31, Percent Changes Ended December 31, Percent Changes ------------------- ------------------------ ----------------------- ------------------- 1999 1998 1999 vs. 1998 1999 1998 1999 vs. 1998 ---------- ------- ------------------------ --------- ------------ ------------------- (in thousands, except for percentages) ESG Revenues $54,141 $30,804 75.8% $139,376 $79,534 75.2% Operating income $ 4,617 $ 2,068 123.3% $ 10,676 $ 5,757 85.4% Operating margin 8.5% 6.7% 27.0% 7.7% 7.2% 5.8% EOSG Revenues $36,520 $26,038 40.3% $102,058 $38,475 165.3% Operating loss $ 2,456 $ 1,441 70.4% $ 5,901 $ 1,186 397.6% Operating margin 6.7% 5.5% 21.5% 5.8% 3.1% 87.6% FSCG Revenues $10,752 $15,563 (30.9%) $ 29,703 $35,856 (17.2%) Operating income $ 167 $ 1,390 (88.0%) $ 1,958 $ 2,688 (27.2%) Operating margin 1.6% 8.9% (82.6%) 6.6% 7.5% (12.1%) DSG Revenues $ 4,251 $ 4,586 (7.3%) $ 13,635 $15,240 (10.5%) Operating loss $ (490) $ (798) 38.6% $ (1,638) $(1,488) (10.1%) Operating margin (11.5%) (17.4%) 33.8% (12.0%) (9.8%) (23.0%)
ESG: ESG's increase in revenue and operating income for the three-and nine-month periods ended December 31, 1999, as compared with the prior corresponding periods, was due primarily to the inclusion of the operating results of the Company's fiscal 1999 fourth quarter acquisition of NAI. The NAI acquisition's contribution to the ESG segment's operating results was approximately $14.9 million and $42.1 million in additional revenues, and approximately $1.5 million and $3.3 million of operating income for the three-and nine-month periods ended December 31, 1999, respectively. Following its acquisition in July 1999, RSEP contributed approximately $1.9 million and $2.4 million in additional revenues for the three- and nine-month periods ended December 31, 1999. The overall increases in revenues and operating income were also attributable to continued growth of the Company's military display workstation programs, primarily the AN/UYQ-70 Advanced Display System (Q-70). EOSG: The increase in revenues and operating income for the three-and nine-month periods ended December 31, 1999 was primarily attributable to the October 1998 acquisition of certain assets of the Second Generation Ground-Based Electro-Optical and Focal Plane Array businesses of the Raytheon Company and certain of its subsidiaries (the EOS Business). This acquisition contributed approximately $28.9 million and $82.0 million in revenues for the three-and nine-month periods ended December 31, 1999, respectively, and $5.7 million and $10.3 million of 11 operating income for the three- and nine-month periods ended December 31, 1999, respectively. Operating income for the three- and nine-month periods ended December 31, 1999 include a $2.9 million cumulative profit adjustment relating to a certain long-term production program. Estimates to complete this program were revised this quarter to reflect the benefit of management's efforts to reduce overall production costs, primarily by identifying and procuring certain materials and subassemblies from alternate suppliers. Shipments under the current production contract commenced early in the third quarter of fiscal 2000, and the benefits of management's cost reduction initiatives are now being realized. Revenues and operating income for the three-months ended December 31, 1999 attributable to the EOS Business increased by $11.1 million and $4.2 million, respectively, as compared with the corresponding prior period. Exclusive of the contributions of the EOS Business, EOSG's operating income decreased by $3.1 million and $4.0 million for the three- and nine-month periods ended December 31, 1999, respectively. The decrease in operating income was primarily attributable to several factors at its DRS Hadland operating unit, including the $0.4 million restructuring charge recorded in the third quarter of fiscal 2000 (see Management's Discussion & Analysis -- Restructuring), higher overall general and administrative cost (treated as period costs) and lower overall profit margins. Management is currently evaluating additional alternatives aimed at reducing DRS Hadland's overall operating expenses. In connection with this restructuring effort, $0.5 million was provided this fiscal quarter for estimated excess inventory and obsolescence, based on incoming management's assessment of overall inventory levels and stock on hand. EOSG's operating income for the three- and nine-month periods ended December 31, 1999 also included charges totaling $0.4 million and $0.8 million, respectively, for anticipated costs to be incurred in connection with certain product warranty issues associated with a specific product line and a charge of approximately $0.5 million relating to additional development costs associated with one of the Group's commercial product lines. FSCG: Revenues and operating income for the three-month period ended December 31, 1999 decreased by $4.8 million and $0.3 million, respectively. For the nine-months ended December 31, 1999 revenues decreased by approximately $6.1 million, as compared with prior year results for the same period, while operating income improved by 7% to $2.9 million. The decrease in revenues in both periods was primarily attributable to a decline in shipments of mission data recording systems. The Group currently is developing new mission data recording systems under contract with the U.S. Navy and anticipates an award for initial production units in the fourth quarter of fiscal 2000. Operating income decreased by $1.2 million and $0.7 million for the three- and nine-month periods ended December 31, 1999, respectively, primarily due to the decline in revenues. In addition, FSCG management provided $1.1 million for estimated excess inventories at its DRS Precision Echo unit, relating primarily to spares inventory and inventory relating to a certain commercial product line. The effects of these charges were partially offset by margin improvement attributable to cost savings achieved on certain contract manufacturing services provided by the Group's Canadian operations. DSG: DSG's revenues for the three- and nine-month periods ended December 31, 1999 decreased by $0.3 million and $1.6 million, respectively, resulting from the continuing effects of the sluggish global computer disk drive marketplace and competitive pricing pressure on certain other magnetic tape head products. Operating losses for the fiscal quarter ended December 31, 1999 were approximately $0.3 million better than those posted in the comparable prior year period, despite the $0.3 million restructuring charge recorded in the fiscal quarter (see Management's Discussion & Analysis -- Restructuring). The $0.2 million increase in DSG's year-to-date operating losses and the corresponding decline in operating margin were the result of lower revenues and margins attributable to adverse market conditions and less favorable absorption of fixed operating expenses associated with lower production volumes. The adverse impact of these factors were partially offset by the cumulative effect of DSG's previously implemented cost reduction initiatives. The operating loss for the nine-month period ended December 31, 1998 included charges of approximately $0.5 million for costs relating to the closing of its Dassel, Minnesota facility and reserves for certain receivables and inventory, necessitated by the bankruptcy filing of a significant customer. Exclusive of the restructuring charge taken this fiscal quarter and last year's charge for nonrecurring expenses, operating losses decreased by approximately $0.6 million for the three-month period ended December 31, 1999, while operating losses increased by $0.4 million for the nine-month period then ended. DSG will continue to identify and implement cost reduction measures, and is currently focused on improving operational efficiencies and capacity utilization, particularly at its Bulgarian manufacturing plant. 12 FINANCIAL CONDITION AND LIQUIDITY Cash and Cash Flow The following table provides summary cash flow data for the Company for the nine-month periods ended December 31, 1999 and 1998:
Nine Months Ended December 31, ------------------------------- 1999 1998 ------------- --------------- Net cash (used in) provided by operating activities $ (9,765,000) $ 12,671,000 Net cash used in investing activities $(12,161,000) $(49,786,000) Net cash provided by financing activities $ 15,145,000 $ 49,172,000
The $22.4 million reduction in net cash (used in) provided by operating activities in the first nine months of fiscal 2000, as compared with the first nine months of fiscal 1999, was primarily attributable to the net change in customer advances relating to the Q-70 program. Last year, approximately $15.0 million in advances were received in late December and were included in the cash balance as of December 31, 1999. For the nine months ended December 31, 1999, net advances decreased by approximately $9.9 million. Advances are liquidated against progress billings based on terms negotiated at the time such advances are made. Net cash used in investing activities in the nine-month period ended December 31, 1999 consisted of capital expenditures and the cost of fiscal 2000 acquisitions (primarily the cost of the RSEP acquisition). The Company expects that its capital expenditures for fiscal 2000 will be approximately $9.0 million. The net cash provided by financing activities decreased by $34.0 million, due primarily to higher borrowings in fiscal 1999 associated with the acquisition of the EOS Business. The Company maintains a $70 million (subject to borrowing base calculation) revolving line of credit with Mellon Bank, N.A. as agent, maturing on October 20, 2003 (Line of Credit), and uses the Line of Credit primarily to finance its working capital needs and to finance acquisitions. During the nine months ended December 31, 1999, borrowings under the Line of Credit increased by approximately $19.5 million, $8.0 million of which related to the RSEP acquisition. Other than cash flows from operations, the Line of Credit is the Company's primary source of liquidity. As of December 31, 1999, the Company had approximately $20.9 million available under the Line of Credit, after satisfaction of its borrowing base requirement. The increase in borrowings was partially offset by the Company's payments on long-term debt of $3.7 million and the $0.7 million liquidation of the remaining balance of the Company's 12% Convertible Subordinated Promissory Notes assumed in connection with the NAI Acquisition. The Company recently revised the terms of its Line of Credit. Effective February 4,2000, the Line of Credit agreement was amended, increasing the revolving line of credit limit from $70 million to $80 million. The borrowing base calculation was also modified and should provide the Company with access to the entire unused portion of the revolving credit line. Although the Company believes that the Line of Credit, as amended, is sufficient to support its near-term objectives, management will continue to monitor the Company's overall working capital position and available sources of financing to ensure that the amounts available are sufficient to support its operational needs and strategic business objectives. Backlog Backlog at December 31, 1999 was approximately $349.9 million (including $11.2 million in backlog added as a result of recent acquisitions), as compared with $365.8 million at March 31, 1999. The Company booked approximately $256.6 million in new orders in the first nine months of fiscal 2000. 13 YEAR 2000 The Company's Year 2000 readiness plan focused on identification and remediation of processes which may not have functioned correctly at the beginning of the Year 2000. The overall Year 2000 effort was directed towards: (1) IT Systems (which examined internal operating systems and business application software); (2) External Agents (which examined third-party suppliers and customers); and (3) Product Issues (which examined Year 2000 issues inherent in products sold by DRS). As a result of the Company's efforts, no significant problems were encountered resulting from Year 2000 related issues. The Company has successfully completed its efforts to replace or reprogram critical systems for Year 2000 readiness. To date, the Company is not aware of any Year 2000 related product failures, nor has it experienced any supply or demand disruptions with critical suppliers or customers. DRS will continue to monitor its internal systems, products and critical suppliers and customers to avert any potential Year 2000 related deficiencies or business disruptions. Although the Company does not expect to encounter Year 2000 related problems, there can be no assurances that such problems may not arise in the future. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK In the normal course of business, the Company is exposed to market risks relating to fluctuations in interest rates and foreign currency exchange risk. The Company does not enter into derivatives or other financial instruments for trading or speculative purposes. Interest Rate Risk As the Company seeks debt financing to maintain its ongoing operations and sustain its growth, it is exposed to interest rate risk. Borrowings under the Company's $150 million secured credit facility with Mellon Bank, N.A. are sensitive to changes in interest rates as such borrowings bear interest at variable rates. In April 1998 and 1999, the Company entered into three interest rate collar agreements to limit the impact of interest rate fluctuations on cash flow and interest expense. A summary of the interest rate collar agreements in place as of December 31, 1999 follows:
WEIGHTED AVERAGE TERMINATION NOTIONAL VARIABLE CEILING FLOOR INTEREST EFFECTIVE DATE DATE AMOUNT RATE BASE RATE RATE RATE --------------- ---------------- ----------- ----------- -------- ------ --------- Collar No. 1 April 8, 1998 January 8, 2001 $6,200,000 CAD-BA* 6.35% 4.84% 5.21% Collar No. 2 April 26, 1999 January 26, 2002 $20,000,000 LIBOR** 5.75% 4.80% 6.28% Collar No. 3 April 26, 1999 January 26, 2000 $20,000,000 LIBOR** 5.75% 4.77% 6.28%
* - CANADIAN BANKERS ACCEPTANCE RATE ** - LONDON INTERBANK OFFERED RATE Foreign Currency Exchange Risk DRS operates and conducts business in foreign countries and as a result is exposed to movements in foreign currency exchange rates. More specifically, our net equity is impacted by the conversion of the net assets of foreign subsidiaries for which the functional currency is not the U.S. Dollar for U.S. reporting purposes. The Company's exposure to foreign currency exchange risk related to its foreign operations is not material to the Company's results of operations, cash flows or financial position. The Company, at present, does not hedge this risk, but continues to evaluate such foreign currency translation risk exposure. 14 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to various legal actions and claims in the ordinary course of business. The Company believes that it has adequate legal defenses for each of the actions and claims and that their ultimate disposition will not have a material adverse affect on its consolidated financial position or results of operations. In April and May 1998, subpoenas were issued to the Company by the United States Attorney for the Eastern District of New York seeking documents related to a governmental investigation of certain equipment manufactured by DRS Photronics, Inc. (DRS Photronics). These subpoenas were issued in connection with United States v. Tress, a case involving a product substitution allegation against an employee of DRS Photronics. On June 26, 1998, the complaint against the employee was dismissed without prejudice. Although an additional subpoena was issued to the Company on August 12, 1999, to date, no claim has been made against the Company or DRS Photronics. During the pendancy of the Government's investigation, DRS Photronics was unable to ship certain equipment related to the case, resulting in delays in the Company's recognition of revenues. On October 29, 1999, DRS Photronics received authorization to ship its first boresight system since the start of investigation. At this time, however, the Company is unable to quantify the effect of the delayed shipments on its future operations or financial position, or to predict when regular shipments ultimately will resume, although the delays are expected to continue to impact the Company's fiscal year 2000 results. We are presently in an arbitration proceeding with Spar Aerospace Limited (SPAR) with respect to the working capital adjustment, if any, required under the purchase agreement between the Company and Spar dated as of September 19, 1997, pursuant to which we acquired, through certain of our subsidiaries, certain assets of Spar. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 27. Financial Data Schedule (b) Reports on Form 8-K None 15 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DRS TECHNOLOGIES, INC. Registrant Date: February 15, 2000 /s/ RICHARD A. SCHNEIDER ---------------------------------------- Richard A. Schneider Executive Vice President, Chief Financial Officer and Treasurer 16 EX-27 2 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DRS TECHNOLOGIES, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS MAR-31-2000 OCT-01-1999 DEC-31-1999 2,920,000 0 71,525,000 1,235,000 70,773,000 147,670,000 76,882,000 46,036,000 315,498,000 126,232,000 104,600,000 0 0 97,000 77,499,000 315,498,000 105,664,000 105,664,000 98,318,000 98,318,000 0 0 3,426,000 3,057,000 1,284,000 1,773,000 0 0 0 1,773,000 0.19 0.18
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