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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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
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DRS TECHNOLOGIES, INC.
DELAWARE 13-2632319
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 SYLVAN WAY, PARSIPPANY, NEW JERSEY 07054
(973) 898-1500
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT
OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
YES /X/ NO / /
As of August 13, 2002, 16,861,162 shares of DRS Technologies, Inc. Common Stock,
$.01 par value, were outstanding.
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DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
------------------
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 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.
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Registrant
Date: August 14, 2002 /s/ Richard A. Schneider
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Richard A. Schneider
EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND TREASURER
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