10-Q/A 1 d01-35282.txt AMENDMENT TO FORM 10-Q ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q/A |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2001 |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________ TO __________ COMMISSION FILE NUMBER 1-8533 --------------- 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 November 9, 2001, 12,198,610 shares of DRS Technologies, Inc. Common Stock, $.01 par value, were outstanding. ================================================================================ DRS TECHNOLOGIES, INC. AND SUBSIDIARIES ------------------- DRS Technologies, Inc.'s Form 10-Q for the quarter ended September 30, 2001, filed on November 12, 2001, is hereby amended by amending Item 1 "Financial Statements" of Part I and Item 1 "Legal Proceedings" of Part II to read as set forth below. This amendment updates the pro forma financial information presented in Note 2 "Business Combinations" with more current information and clarifies certain legal proceedings disclosures in Note 10 "Contingencies" and in Part II under "Legal Proceedings". INDEX TO QUARTERLY REPORT ON FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2001 PART I - FINANCIAL INFORMATION PAGE NO. ITEM 1. Financial Statements Condensed Consolidated Balance Sheets - September 30, 2001 and March 31, 2001 ......................................... 1 Condensed Consolidated Statements of Earnings - Three and Six Months Ended September 30, 2001 and 2000 ..... 2 Condensed Consolidated Statements of Cash Flows - Six Months Ended September 30, 2001 and 2000 ............... 3 Notes to Condensed Consolidated Financial Statements ....... 4-12 PART II - OTHER INFORMATION ITEM 1. Legal Proceedings .......................................... 13 SIGNATURES ............................................................. 14 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS DRS TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED) SEPTEMBER 30, MARCH 31, 2001 2001 ------------- --------- ASSETS Current assets: Cash and cash equivalents $ 4,162 $ 2,324 Accounts receivable, net 102,069 97,645 Inventories, net of progress payments 110,906 74,327 Prepaid expenses and other current assets 12,426 8,697 --------- --------- Total current assets 229,563 182,993 --------- --------- Property, plant and equipment, less accumulated depreciation and amortization of $43,667 and $39,142 at September 30, 2001 and March 31, 2001, respectively 51,531 37,639 Goodwill, less accumulated amortization of $13,754 at March 31, 2001 76,206 76,390 Acquired intangible assets, less accumulated amortization of $5,911 and $7,551 at September 30, 2001 and March 31, 2001, respectively 21,144 32,912 Purchase price in excess of net tangible assets acquired 30,054 -- Deferred income taxes and other noncurrent assets 10,843 5,006 --------- --------- $ 419,341 $ 334,940 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current installments of long-term debt $ 1,436 $ 7,217 Short-term bank debt 1,312 831 Accounts payable 27,460 40,089 Accrued expenses and other current liabilities 100,631 91,170 --------- --------- Total current liabilities 130,839 139,307 Long-term debt, excluding current installments 159,784 75,076 Other noncurrent liabilities 6,663 8,610 --------- --------- Total liabilities 297,286 222,993 --------- --------- Stockholders' equity: Preferred Stock, no par value. Authorized 2,000,000 shares; no shares issued at September 30, 2001 and March 31, 2001 -- -- Common Stock, $.01 par value per share Authorized 30,000,000 shares; issued 12,189,335 and 12,058,057 shares at September 30, 2001 and March 31, 2001, respectively 122 121 Additional paid-in capital 73,695 72,033 Retained earnings 52,406 44,025 Accumulated other comprehensive losses (3,960) (3,968) Unamortized stock compensation (208) (264) --------- --------- Net stockholders' equity 122,055 111,947 --------- --------- Commitments and contingencies $ 419,341 $ 334,940 ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements 1 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30, -------------------------------- ----------------------------------- 2001 2000 2001 2000 ----------- ----------- ------------ ------------ Revenues $ 116,178 $ 107,227 $ 219,530 $ 201,748 Costs and expenses 105,475 98,724 199,143 186,090 ----------- ----------- ------------ ------------ Operating income 10,703 8,503 20,387 15,658 Other expense (income), net 38 32 (15) (42) Interest and related expenses 1,838 3,537 3,963 6,644 ----------- ----------- ------------ ------------ Earnings before minority interests and income taxes 8,827 4,934 16,439 9,056 Minority interests 368 270 626 595 ----------- ----------- ------------ ------------ Earnings before income taxes 8,459 4,664 15,813 8,461 Income taxes 3,976 2,425 7,432 4,324 ----------- ----------- ------------ ------------ Net earnings $ 4,483 $ 2,239 $ 8,381 $ 4,137 =========== =========== ============ ============ Earnings per share of common stock Basic earnings per share: $ 0.37 $ 0.22 $ 0.69 $ 0.43 Diluted earnings per share: $ 0.34 $ 0.20 $ 0.64 $ 0.38
See accompanying Notes to Condensed Consolidated Financial Statements 2 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)
SIX MONTHS ENDED SEPTEMBER 30, 2001 2000 --------- -------- Cash flows from operating activities: Net earnings $ 8,381 $ 4,137 Adjustments to reconcile net earnings to cash flows from operating activities: Depreciation and amortization 5,962 8,544 Other, net (191) (1,156) Changes in assets and liabilities, net of effects from business combinations: Decrease in accounts receivable 19,163 4,171 Increase in inventories (15,260) (3,896) (Increase) decrease in prepaid expenses and other current assets (3,174) 765 Decrease in accounts payable (12,588) (3,529) (Decrease) increase in accrued costs on acquired contracts (2,962) 11,564 Increase (decrease) in accrued expenses and other current liabilities 3,544 (3,078) Increase (decrease) in customer advances 4,729 (3,187) Other, net (3,751) (893) --------- -------- Net cash provided by operating activities 3,853 13,442 Cash flows from investing activities: Capital expenditures (7,480) (8,412) Payments pursuant to business combinations, net of cash acquired (71,927) (6,979) Proceeds from sale of discontinued operations -- 3,000 Other, net 67 361 --------- -------- Net cash used in investing activities (79,340) (12,030) Cash flows from financing activities: Net borrowings of short-term debt 481 1,478 Retirement of long-term debt (88,455) -- Net payments on long-term debt (42,225) (5,487) Additional borrowings of long-term debt 209,550 7,000 Deferred financing fees (4,664) -- Other, net 1,663 132 --------- -------- Net cash provided by financing activities 76,350 3,123 --------- -------- Effect of exchange rates on cash and cash equivalents 975 253 --------- -------- Net increase in cash and cash equivalents 1,838 4,788 Cash and cash equivalents, beginning of period 2,324 3,778 --------- -------- Cash and cash equivalents, end of period $ 4,162 $ 8,566 ========= ========
See accompanying Notes to Condensed Consolidated Financial Statements. 3 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. BASIS OF PRESENTATION The accompanying unaudited Condensed Consolidated Financial Statements of DRS Technologies, Inc. and Subsidiaries (DRS or the Company) have been prepared in accordance with accounting principles generally accepted in the United States and with the instructions to Form 10-Q and Article 10 of Regulation S-X. The Company has continued to follow the accounting policies set forth in the consolidated financial statements included in its fiscal 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission, except for the April 1, 2001 adoption of the provisions of Statement of Financial Accounting Standards (SFAS) Nos. 133, "Accounting for Derivative Instruments and Hedging Activities" (see Note 7 of Notes to Condensed Consolidated Financial Statements), 141, "Business Combinations", and 142, "Goodwill and Other Intangible Assets" (see Note 4 of Notes to Condensed Consolidated Financial Statements). In the opinion of management, the interim financial information provided herein reflects all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the Company's consolidated financial position as of September 30, 2001, the results of operations for the three- and six-month periods ended September 30, 2001 and 2000, and cash flows for the six-month periods ended September 30, 2001 and 2000. The results of operations for the three- and six-months ended September 30, 2001 are not necessarily indicative of the results to be expected for the full year. For further information, these interim financial statements should be read in conjunction with the Consolidated Financial Statements of the Company for the fiscal year ended March 31, 2001, included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2001. 2. BUSINESS COMBINATIONS On September 28, 2001, DRS acquired certain assets and liabilities of the Sensors and Electronic Systems (SES) business of The Boeing Company (Boeing) (the Acquisition). The Company paid approximately $67.1 million in cash, subject to adjustment, for the Acquisition. In addition to the purchase price, the estimated costs related to the Acquisition, including professional fees, will be approximately $4.0 million. SES, located in Anaheim, California, is a leading provider of advanced electro-optical airborne and naval surveillance and targeting systems, high-performance military infrared cooled sensor systems, and infrared uncooled sensor products for military and commercial applications. This acquisition broadens the Company's product lines and customer base of its Electro-Optical Systems Group, particularly in those areas associated with naval and air-based applications, and provides a strong complement to DRS' existing products in ground-based Forward Looking Infrared technology. SES is now operating as DRS Sensors & Targeting Systems, Inc., a unit of the Company's Electro-Optical Systems Group. The SES assets acquired and liabilities assumed have been included in our consolidated financial statements as of the date of acquisition. The Company is in the process of obtaining a third-party valuation of the assets acquired and the liabilities assumed as well as performing its own internal assessment, thus, the allocation of the purchase price is subject to adjustment. In addition, in connection with the Acquisition the Company may incur costs associated with exiting certain activities, including severance costs. It is management's expectation that a certain amount of the purchase price will be allocated to acquired identifiable intangible assets, with such assets requiring amortization. As the the Company is unable to estimate the amount of acquired identifiable intangibles at this time, the entire excess of purchase price over the tangible net assets acquired has been included as a separate line item on the balance sheet as of September 30, 2001. In addition, since the Acquisition was completed at the end of the second quarter, there is no amortization expense related to the Acquisition in the results of operations. The purchase price allocation will be adjusted during in the second half of fiscal 2002. 4 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following unaudited pro forma financial information shows the results of operations for the three- and six-month periods ended September 30, 2001 and 2000, as though the Acquisition had occurred on April 1, 2000. For purposes of the pro forma financial information shown below, DRS' operating results for the three- and six-month periods ended September 30, have been combined with SES' calendar year operating results for the three- and six-month periods ended June 30. As indicated above, the Company is in the process of obtaining a third-party valuation of the assets acquired and the liabilities assumed as well as performing its own internal assessment. This could result in a different portion of the purchase price being allocated to goodwill, tangible and intangible assets and acquired in process research and development. Any identified in-process research and development would be expensed immediately. Each $1.0 million increase/decrease in the amount allocated to acquired identifiable intangible assets, with an estimated ten year useful life, would result in an increase/decrease in amortization expense of approximately $100,000 per year.
(IN THOUSANDS EXCEPT PER SHARE DATA) THREE MONTHS ENDED SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30, -------------------------------- ------------------------------ 2001 2000 2001 2000 ----------- ----------- ----------- ----------- Revenues $ 142,908 $ 126,846 $ 273,087 $ 240,657 Net earnings (loss) $ 3,233 $ (1,467) $ 5,034 $ (850) ----------- ----------- ----------- ----------- Earnings (loss) per share of common stock Basic earnings (loss) per share: $ 0.27 $ (0.15) $ 0.42 $ (0.09) Diluted earnings (loss) per share: $ 0.25 $ (0.15) $ 0.38 $ (0.09)
The unaudited pro forma financial information shown above is derived from preliminary financial data, is presented for illustrative purposes only and is not necessarily indicative of the operating results that would have been achieved had the Acquisition been completed as of the dates indicated above or of the results that may be obtained in the future. In connection with the SES Acquisition, the Company entered into a $240 million credit agreement with First Union National Bank, 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). 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 beginning on December 31, 2001. Borrowings under the Credit Facility bear interest based on LIBOR (London Interbank Offered Rate), United States Prime Rate or United States Federal Funds Rate. The Credit Facility is secured by substantially all of the assets of the Company. There are certain covenants and restrictions placed on the Company under the Credit Facility, including a maximum total leverage ratio and a minimum fixed charge ratio, a restriction on the payment of dividends on the capital stock of the Company, a limitation on the issuance of additional debt and certain other restrictions. In addition, the Company is required to make an offer to prepay certain portions of the loan from the proceeds of certain events, including an equity offering and sale of certain assets. The interest rates on the Company's outstanding Term Loan and Line of Credit borrowings were approximately 5.9% and 5.7%, respectively, at September 30, 2001. The proceeds of the Credit Facility at the date of the SES Acquisition of $161 million were used to acquire SES and repay the balance of the debt outstanding under DRS's previous credit facility with Mellon Bank, N.A. (the Mellon Facility) in the amount of $88.5 million. At September 30, 2001, the $161 million outstanding under the Credit Facility consisted of a $140 million term loan and a $21 million borrowing under the revolving line of credit. As of September 30, 2001, the Company had approximately $51.0 million available under the revolving line of credit, after satisfaction of its borrowing base requirement and certain restrictions. 5 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On August 22, 2001, we acquired certain assets and liabilities of the Electro-Mechanical Systems (EMS) business of Lockheed Martin for approximately $4.0 million in cash, subject to adjustment. EMS, located in Largo, Florida, produces systems and antenna for radar and other surveillance sensor systems. The acquisition of EMS provides certain product synergies and vertical business integration opportunities for DRS. EMS is now operating as DRS Surveillance Support Systems, Inc. (SSS), a unit of the Company's Electronic Systems Group. The Company is in the process of obtaining a third-party valuation of the assets acquired and the liabilities assumed, thus the allocation of the purchase price is subject to adjustment. The financial position and results of operations of SSS were not significant to those of the Company as of the acquisition date or for the period ended September 30, 2001. 3. INVENTORIES Inventories are summarized as follows:
(IN THOUSANDS) SEPTEMBER 30, 2001 MARCH 31, 2001 ------------------ -------------- Work-in-process $ 127,688 $ 83,058 Raw material and finished goods 14,159 7,992 ------------------ -------------- 141,847 91,050 ------------------ -------------- Less progress payments (30,941) (16,723) ------------------ -------------- Total $ 110,906 $ 74,327 ================== ==============
General and administrative costs included in work-in-process were approximately $17.5 million and $14.5 million at September 30, 2001 and March 31, 2001, respectively. General and administrative expenses included in costs and expenses amounted to approximately $21.5 million and $19.9 million for the three-month periods ended September 30, 2001 and 2000, respectively, and approximately $42.2 million and $36.7 million for the six-month periods then ended. Included in those amounts are expenditures for internal research and development amounting to approximately $2.5 million and $2.0 million for the fiscal quarters ended September 30, 2001 and 2000, respectively and approximately $4.6 million and $4.1 million, respectively, for the six-month periods then ended. 4. GOODWILL AND INTANGIBLE ASSETS In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards Nos. 141 and 142 (SFAS 141 and SFAS 142), "Business Combinations" and "Goodwill and Other Intangible Assets", respectively. SFAS 141 replaces APB 16 and requires the use of the purchase method for all business combinations initiated after June 30, 2001. It also provides guidance on purchase accounting related to the recognition of intangible assets, noting that any purchase price allocated to an assembled workforce may not be accounted for separately, and accounting for negative goodwill. SFAS 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Under SFAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. The Company elected to adopt the provisions of SFAS 141 and 142 as of April 1, 2001. The Company has identified its reporting units to be its operating segments and has determined the carrying value of each reporting unit by assigning assets and liabilities, including the existing goodwill and intangible assets, to those reporting units as of April 1, 2001. Upon adoption of SFAS 142, amortization of goodwill recorded for business combinations consummated prior to July 1, 2001 ceased, and intangible assets acquired prior to July 1, 2001 that did not meet the criteria for recognition apart from goodwill under SFAS 141 were reclassified to goodwill. In connection with the adoption of SFAS 142, the Company was required to perform a transitional goodwill impairment assessment within six months of adoption. The Company completed its transitional goodwill impairment assessment in the second quarter of fiscal 2002 with no adjustment to its April 1, 2001 goodwill. The annual impairment test will be performed in the fourth quarter of each fiscal year, after completion of the Company's annual operating plan. 6 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following disclosure presents certain information on the Company's acquired intangible assets as of September 30, 2001, and March 31, 2001: (All intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual values.)
(IN THOUSANDS) WEIGHTED AVERAGE GROSS AMORTIZATION CARRYING ACCUMULATED ACQUIRED INTANGIBLE ASSETS PERIOD AMOUNT AMORTIZATION NET BALANCE ------------ ------------ ------------ ------------ As of September 30, 2001 Amortized acquired intangible assets: Technology based intangibles 22 years $ 19,425 $ (4,560) $ 14,865 Customer related intangibles 21 years 7,630 (1,351) 6,279 ------------ ------------ ------------ $ 27,055 $ (5,911) $ 21,144 ============ ============ ============ As of March 31, 2001 Amortized acquired intangible assets: Technology based intangibles 22 years $ 18,225 $ (4,032) $ 14,193 Customer related intangibles 21 years 7,630 (1,166) 6,464 Workforce 16 years 7,628 (757) 6,871 Technical infrastructure 20 years 5,280 (638) 4,642 Other 30 years 1,700 (958) 742 ------------ ------------ ------------ $ 40,463 $ (7,551) $ 32,912 ============ ============ ============
The aggregate acquired intangible amortization expense for the three- and six-month periods ended September 30, 2001 was approximately $316,000 and $713,000, respectively. The estimated acquired intangible amortization expense for the fiscal year ending March 31, 2002 and for each of the subsequent four fiscal years ending March 31, 2006, excluding any amortization that may result from the SES or EMS acquisitions, is $1.4 million and $1.3 million, respectively. The table below reconciles the change in the carrying amount of goodwill, by operating segment, for the period from March 31, 2001 to September 30, 2001, excluding the SES and EMS acquisitions. The Company recorded an $11.5 million reduction in goodwill in the second quarter of fiscal 2002 in connection with the reversal of an accrual for future costs on expired options associated with certain acquired contracts.
(IN THOUSANDS) ELECTRO- ELECTRONIC OPTICAL SYSTEMS SYSTEMS FLIGHT SAFETY AND GROUP GROUP COMMUNICATIONS GROUP OTHER TOTAL ------------ ------------- -------------------- --------- ------------- Balance as of March 31, 2001 $ 31,450 $ 20,236 $ 24,661 $ 43 $ 76,390 Effect of adoption of SFAS 141 and 142: Workforce -- 3,807 3,064 -- 6,871 Technical infrastructure -- 4,642 -- -- 4,642 Other -- -- 742 -- 742 Existing technology -- -- (1,155) -- (1,155) Adjustments -- -- -- (43) (43) ------------ ------------- ----------------- --------- ------------- Balance as of April 1, 2001 $ 31,450 $ 28,685 $ 27,312 $ -- $ 87,447 Adjustment on acquired contract -- (11,492) -- -- (11,492) Foreign currency translation adjustment 262 -- (11) -- 251 ------------ ------------- ----------------- --------- ------------- Balance as of September 30, 2001 $ 31,712 $ 17,193 $ 27,301 $ -- $ 76,206 ============ ============= ================= ========= =============
7 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following pro forma information reconciles the net earnings reported for the period ended September 30, 2001 and September 30, 2000 to adjusted net earnings reflecting the adoption of SFAS 142:
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ----------------------- ----------------------- 2001 2000 2001 2000 --------- --------- --------- --------- Reported net earnings $ 4,483 $ 2,239 $ 8,381 $ 4,137 Add back: Goodwill and related intangible amortization, net of tax benefit of $668 and $1,276 -- 754 -- 1,438 --------- --------- --------- --------- Adjusted net earnings $ 4,483 $ 2,993 $ 8,381 $ 5,575 ========= ========= ========= ========= Basic earnings per share: Reported net earnings $ 0.37 $ 0.22 $ 0.69 $ 0.43 Add back: Goodwill and related intangible amortization, net of tax benefit of $.07 and $.13 per share, respectively -- 0.08 -- 0.14 --------- --------- --------- --------- Adjusted net earnings $ 0.37 $ 0.30 $ 0.69 $ 0.57 ========= ========= ========= ========= Diluted earnings per share: Reported net earnings $ 0.34 $ 0.20 $ 0.64 $ 0.38 Add back: Goodwill and related intangible amortization, net of tax benefit of $.05 and $.10 per share, respectively -- 0.06 -- 0.12 --------- --------- --------- --------- Adjusted net earnings $ 0.34 $ 0.26 $ 0.64 $ 0.50 ========= ========= ========= =========
8 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 5. EARNINGS PER SHARE The following table presents a reconciliation of the numerators and denominators of basic and diluted earnings per share (EPS):
(IN THOUSANDS, EXCEPT PER SHARE DATA) THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, 2001 2000 2001 2000 ------- ------- ------- ------- Basic EPS computation: Net earnings $ 4,483 $ 2,239 $ 8,381 $ 4,137 ------- ------- ------- ------- Weighted average common shares outstanding 12,142 10,001 12,118 9,677 ------- ------- ------- ------- Basic earnings per share $ 0.37 $ 0.22 $ 0.69 $ 0.43 ======= ======= ======= ======= Diluted EPS computation: Net earnings 4,483 2,239 $ 8,381 $ 4,137 Interest and expenses related to convertible debentures -- 196 -- 436 ------- ------- ------- ------- Adjusted net earnings 4,483 2,435 8,381 4,573 ------- ------- ------- ------- Diluted common shares outstanding: Weighted average common shares outstanding 12,142 10,001 12,118 9,677 Stock options and warrants 1,039 535 989 493 Convertible debentures -- 1,808 -- 1,984 ------- ------- ------- ------- Diluted common shares outstanding 13,181 12,344 13,107 12,154 ------- ------- ------- ------- Diluted earnings per share $ 0.34 $ 0.20 $ 0.64 $ 0.38 ======= ======= ======= =======
6. COMPREHENSIVE EARNINGS The components of comprehensive earnings for the three- and six-month periods ended September 30, 2001 and 2000 consisted of the following:
(IN THOUSANDS) THREE MONTHS ENDED SIX MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------- ------------------------ 2001 2000 2001 2000 ------- ------- ------- ---------- Net earnings $ 4,483 $ 2,239 $ 8,381 $ 4,137 Other comprehensive earnings (losses): Foreign currency translation adjustments 587 (469) 802 (2,040) Unrealized losses on hedging instruments: Cumulative adjustment at April 1, 2001 -- -- (289) -- Unrealized losses arising during the period (434) -- (505) -- ------- ------- ------- ---------- Comprehensive earnings $ 4,636 $ 1,770 $ 8,389 $ 2,097 ======= ======= ======= ==========
At September 30, 2001, accumulated other comprehensive losses totaled approximately $4.0 million and consisted of $3.2 million and $794,000 for foreign currency translation adjustments and unrealized losses on hedging instruments, respectively. At March 31, 2001, the $4.0 million balance consisted of foreign currency translation adjustments. 9 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. DERIVATIVE FINANCIAL INSTRUMENTS Effective April 1, 2001, the Company adopted SFAS 133. This Statement requires the recognition of all derivative instruments as either assets or liabilities in the consolidated balance sheet, and the periodic adjustment of those instruments to fair value. The classification of gains and losses resulting from changes in the fair values of derivatives is dependent on the intended use of the derivative and its resultant designation. The Company utilizes variable rate debt to maintain its operations and sustain its growth. Such variable rate borrowings expose the Company to interest rate risk and the related impact that changes in interest rates can have on the Company's earnings and on its cash flows. In an effort to limit its interest expense and cash flow exposure the Company entered into interest rate collar agreements with notional amounts covering a limited amount of the aggregate outstanding principal balance of the Company's term loans. The following is a summary of the Company's interest rate collar agreements in place as of September 30, 2001 and March 31, 2001:
(IN THOUSANDS) NOTIONAL AMOUNT EFFECTIVE EXPIRATION ----------------------------------- VARIABLE RATE CEILING FLOOR DATE DATE SEPTEMBER 30, 2001 MARCH 31, 2001 BASE RATE RATE -------------- ------------- ------------------ -------------- ------------- ------- ------ April 22, 1999 January 26, 2002 $20,000 $20,000 3 Month LIBOR 5.75% 4.80% January 26, 2001 January 30, 2003 $10,000 $10,000 3 Month LIBOR 6.50% 5.09% January 29, 2001 January 31, 2003 $10,000 $10,000 3 Month LIBOR 6.50% 5.05%
On April 1, 2001, in accordance with the provisions in SFAS 133, the Company designated its interest rate collars as cash flow hedges and recorded the fair value of the instruments on the balance sheet at that date, with a corresponding adjustment to comprehensive earnings. Due to the nature and characteristics of the Company's designated hedging instruments, all adjustments to the fair values of such instruments will be adjusted via comprehensive earnings. The effect of adopting SFAS 133 at April 1, 2001, and the amounts recorded related to its derivative financial instruments as of and for the three- and six-month periods ended September 30, 2001, were not material to the Company's consolidated financial position and did not impact the Company's consolidated results of operations or cash flows. 8. OPERATING SEGMENTS DRS operates in three principal business segments on the basis of products and services offered: the Electronic Systems Group (ESG), the Electro-Optical Systems Group (EOSG), and the Flight Safety and Communications Group (FSCG). All other operations are grouped in "Other." During the first quarter of fiscal 2002, the Company's operating subsidiary, DRS Photronics, Inc. (DRS Photronics) was combined with DRS' Flight Safety and Communications Group for management purposes, based primarily on operational synergies. DRS Photronics had previously been managed as part of the Electro-Optical Systems Group. Prior-year balances and results of operations disclosed herein have been restated to give effect to this change. 10 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Information about the Company's segments for the fiscal quarters ended September 30, 2001 and 2000 are as follows:
(IN THOUSANDS) ESG EOSG FSCG OTHER TOTAL --------- --------- -------- -------- --------- QUARTER ENDED SEPTEMBER 30, 2001 Total revenues $ 53,120 $ 40,737 $ 22,013 $ 2,248 $ 118,118 Intersegment revenues -- (370) (1,570) -- (1,940) --------- --------- -------- -------- --------- External revenues $ 53,120 $ 40,367 $ 20,443 $ 2,248 $ 116,178 Operating income (loss) $ 4,226 $ 5,340 $ 1,483 $ (346) $ 10,703 Identifiable assets $ 116,554 $ 179,446 $ 99,531 $ 23,810 $ 419,341 Depreciation and amortization $ 435 $ 1,268 $ 908 $ 470 $ 3,081 Capital expenditures $ 424 $ 2,285 $ 389 $ 856 $ 3,954 QUARTER ENDED SEPTEMBER 30, 2000 Total revenues $ 45,688 $ 36,879 $ 22,026 $ 2,636 $ 107,229 Intersegment revenues -- (2) -- -- (2) --------- --------- -------- -------- --------- External revenues $ 45,688 $ 36,877 $ 22,026 $ 2,636 $ 107,227 Operating income (loss) $ 3,762 $ 5,229 $ (796) $ 308 $ 8,503 Identifiable assets $ 104,148 $ 128,709 $ 87,444 $ 16,616 $ 336,917 Depreciation and amortization $ 909 $ 1,755 $ 1,184 $ 554 $ 4,402 Capital expenditures $ 1,019 $ 3,165 $ 834 $ 814 $ 5,832 SIX MONTHS ENDED SEPTEMBER 30, 2001 Total revenues $ 91,216 $ 82,670 $ 44,310 $ 4,484 $ 222,680 Intersegment revenues (17) (464) (2,669) -- (3,150) --------- --------- -------- -------- --------- External revenues $ 91,199 $ 82,206 $ 41,641 $ 4,484 $ 219,530 Operating income (loss) $ 9,034 $ 9,817 $ 2,284 $ (748) $ 20,387 Identifiable assets $ 116,554 $ 179,446 $ 99,531 $ 23,810 $ 419,341 Depreciation and amortization $ 809 $ 2,539 $ 1,672 $ 942 $ 5,962 Capital expenditures $ 1,255 $ 4,049 $ 1,013 $ 1,163 $ 7,480 SIX MONTHS ENDED SEPTEMBER 30, 2000 Total revenues $ 87,225 $ 72,538 $ 37,178 $ 4,818 $ 201,759 Intersegment revenues -- (11) -- -- (11) --------- --------- -------- -------- --------- External revenues $ 87,225 $ 72,527 $ 37,178 $ 4,818 $ 201,748 Operating income (loss) $ 6,262 $ 9,100 $ 108 $ 188 $ 15,658 Identifiable assets $ 104,148 $ 128,709 $ 87,444 $ 16,616 $ 336,917 Depreciation and amortization $ 1,790 $ 3,491 $ 2,161 $ 1,102 $ 8,544 Capital expenditures $ 1,514 $ 3,921 $ 1,964 $ 1,013 $ 8,412
11 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 9. SUPPLEMENTAL CASH FLOW INFORMATION
(IN THOUSANDS) SIX MONTHS ENDED SEPTEMBER 30, ------------------------------ 2001 2000 ------------ ------------ Cash paid for: Income taxes $ 9,573 $ 4,917 Interest $ 4,390 $ 6,686 Noncash Investing and Financing Activities: Deferred acquisition costs for business combinations $ 3,461 $ -- Common stock issued for business combinations $ -- $ 4,000 Note receivable - sale of magnetic tape head business $ -- $ 1,741 Conversion of 9% convertible debentures $ -- $ 8,752
10. CONTINGENCIES The Company is a party to various legal actions and claims arising in the ordinary course of its business. In management's opinion, the Company has adequate legal defenses for each of the actions and claims and believes that their ultimate disposition will not have a material adverse effect on the Company's consolidated financial position or results of operations. In April and May 1998, subpoenas were issued to the Company by the United States Attorney for the Eastern District of New York seeking documents related to a governmental investigation of certain equipment manufactured by DRS Photronics, Inc. (DRS Photronics). These subpoenas were issued in connection with United States v. Tress, a case involving a product substitution allegation against an employee of DRS Photronics. On June 26, 1998, the complaint against the employee was dismissed without prejudice. Although additional subpoenas were issued to the Company on August 12, 1999 and May 10, 2000, to date, no claim has been made against the Company or DRS Photronics. During the Government's investigation, until October 29, 1999, DRS Photronics was unable to ship certain equipment related to the case, resulting in delays in the Company's recognition of revenues. On October 29, 1999, DRS Photronics received authorization to ship its first boresight system since the start of the investigation. The Company is presently involved in a dispute in arbitration with Spar Aerospace Limited (Spar) with respect to the working capital adjustment, if any, provided for in the purchase agreement between the Company and Spar dated as of September 19, 1997, pursuant to which the Company acquired, through certain of its subsidiaries, certain assets of Spar. The Company is also in a dispute with Raytheon Company (Raytheon) with respect to the working capital adjustment (not to exceed $7.0 million), if any, provided for in the purchase agreement between the Company and Raytheon dated as of July 28, 1998, pursuant to which the Company acquired, through certain subsidiaries, certain assets of Raytheon. Management does not believe that resolution of these claims will result in a material adverse effect on our earnings or financial conditions. On October 3, 2001, a lawsuit was filed in the United States District Court of 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 million for each of the claims. The plaintiffs also allege claims for tortious interference with business relationships, tortious interference with contracts and conspiracy to breech fiduciary duty. The plaintiffs seek damages of not less than $47.1 million for each claim. In addition, plaintiffs seek punitive and treble damages, injuctive relief and attorneys' fees. In our answer, we have denied the plaintiffs' allegations and DRS intends to vigorously defend this action. Although this action is in its early stages, management believes it has meritorious defenses and does not believe the action will have a material adverse effect on our earnings or financial condition. 12 DRS TECHNOLOGIES, INC. AND SUBSIDIARIES PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS We are party to various legal actions and claims arising in the ordinary course of our business. In our opinion, we have adequate legal defenses for each of the actions and claims, and we believe that their ultimate disposition will not have a material adverse effect on our consolidated financial position or results of operations. In April and May 1998, subpoenas were issued to us by the United States Attorney for the Eastern District of New York seeking documents related to a governmental investigation of certain equipment manufactured by DRS Photronics, Inc. (DRS Photronics). These subpoenas were issued in connection with United States v. Tress, a case involving a product substitution allegation against an employee of DRS Photronics. On June 26, 1998, the complaint against the employee was dismissed without prejudice. Although additional subpoenas were issued to us on August 12, 1999 and May 10, 2000, to date, no claim has been made against us or DRS Photronics. During the Government's investigation, until October 29, 1999, DRS Photronics was unable to ship certain equipment related to the case, resulting in delays in our recognition of revenues. On October 29, 1999, DRS Photronics received authorization to ship such its first boresight system since the start of the investigation. We are currently involved in a dispute in arbitration with Spar Aerospace Limited (Spar) with respect to the working capital adjustment, if any, provided for in the purchase agreement between us and Spar dated as of September 19, 1997, pursuant to which we acquired, through certain of our subsidiaries, certain assets of Spar. We are also in a dispute with Raytheon Company (Raytheon) with respect to the working capital adjustment (not to exceed $7.0 million), if any, provided for in the purchase agreement between us and Raytheon dated as of July 28, 1998, pursuant to which we acquired, through certain subsidiaries, certain assets of Raytheon. Management does not believe that the resolution of these claims will result in a material adverse effect on our earnings or financial condition. On October 3, 2001, a lawsuit was filed in the United States District Court of 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 million for each of the claims. The plaintiffs also allege claims for tortious interference with business relationships, tortious interference with contracts and conspiracy to breech fiduciary duty. The plaintiffs seek damages of not less than $47.1 million for each 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. Although this action is in its early stages, management believes it has meritorious defenses and does not believe the action will have a material adverse effect on our earnings or financial condition. 13 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: November 21, 2001 /s/ Richard A. Schneider ------------------------------------------------- Richard A. Schneider EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND TREASURER 14