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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 2003 OR
[ ] 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 001-31235
Integrated Defense Technologies, Inc.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-4027646
--------------------- ------------------------------------
(State or other (I.R.S. Employer Identification No.)
jurisdiction of
incorporation or
organization)
110 Wynn Drive, Huntsville, Alabama 35805
---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(256) 895-2000
------------------------------
(Telephone Number)
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 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 ___
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). YES ___ NO X
Common stock, par value $.01 per share: 21,327,931 shares
outstanding as of May 12, 2003
================================================================================
INTEGRATED DEFENSE TECHNOLOGIES, INC.
FORM 10-Q
March 28, 2003
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Balance Sheets as of March 28, 2003
and December 31, 2002 (unaudited) 2
Consolidated Statements of Operations for the
quarters ended March 28, 2003 and March 31, 2002 (unaudited) 3
Consolidated Statements of Cash Flows for the quarters ended
March 28, 2003 and March 31, 2002 (unaudited) 4
Notes to Consolidated Financial Statements 5 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 23
Item 3. Quantitative and Qualitative Disclosures About Market
Risk 24
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
CERTIFICATIONS 27 - 29
PART I. FINANCIAL INFORMATION
ITEM 1.
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
March 28, December 31,
2003 2002
- --------------------------------------------------------------------------------
(In thousands except share and per share amounts)
ASSETS
Current assets:
Cash $12,372 $ 8,969
Restricted cash 468 1,140
Accounts receivable, net 137,286 134,304
Inventories, net 21,538 20,242
Prepaid expenses and other current assets 4,115 3,047
Deferred income taxes 6,526 6,456
- --------------------------------------------------------------------------------
Total current assets 182,305 174,158
Property and equipment, net 61,018 62,002
Goodwill, net 142,124 143,809
Other intangible assets, net (Note 5) 55,363 55,963
Deferred income taxes 1,311 2,987
Other assets 8,393 8,781
- --------------------------------------------------------------------------------
Total Assets $450,514 $447,700
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit loan $2,500 $ 2,500
Current portion of long-term debt 7,350 7,348
Accounts payable 17,094 20,737
Accrued compensation 13,575 13,162
Other accrued expenses 15,735 13,230
Derivative liabilities 520 458
Billings in excess of costs and earnings 6,612 6,055
- --------------------------------------------------------------------------------
Total current liabilities 63,386 63,490
Long-term debt 208,826 208,860
Pension and other postemployment benefits 11,916 11,941
- --------------------------------------------------------------------------------
Total liabilities 284,128 284,291
- --------------------------------------------------------------------------------
Commitments and contingencies (Note 12)
- --------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value per share,
20,000,000 shares authorized, none issued
Common stock, $.01 par value per share,
200,000,000 shares authorized, 21,327,931 issued 213 213
Additional paid-in capital 170,955 170,955
Accumulated other comprehensive loss (6,017) (5,965)
Retained earnings (deficit) 1,235 (1,794)
- --------------------------------------------------------------------------------
Total stockholders' equity 166,386 163,409
- --------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $450,514 $447,700
================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
- --------------------------------------------------------------------------------
Quarter ended March 28, March 31,
2003 2002
- --------------------------------------------------------------------------------
(In thousands except per share amounts)
Revenue $80,899 $ 68,393
Cost of revenue 55,110 48,843
- --------------------------------------------------------------------------------
Gross profit 25,789 19,550
Sales and marketing expense 3,704 3,883
General and administrative expense 8,125 5,520
Research and development and bid and
proposal expenses 5,569 3,575
Amortization expense 780 217
- --------------------------------------------------------------------------------
Income from operations 7,611 6,355
Interest expense (3,086) ( 3,831)
Refinancing costs --- (20,696)
Other income (expense), net 245 21
- --------------------------------------------------------------------------------
Income (loss) before income taxes 4,770 (18,151)
Income tax benefit (expense) (1,741) 7,079
- --------------------------------------------------------------------------------
Net income (loss) $ 3,029 $(11,072)
================================================================================
Earnings (loss) per share - basic and diluted $.14 $(.70)
================================================================================
Weighted-average shares outstanding
- basic and diluted 21,328 15,762
================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Quarter ended March 28, March 31,
2003 2002
- --------------------------------------------------------------------------------
(In thousands)
OPERATING ACTIVITIES:
Net income (loss): $ 3,029 $( 11,072)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation expense 3,373 2,666
Amortization expense 1,078 263
Refinancing costs --- 20,696
Deferred income taxes 1,629 ( 6,431)
Changes in current assets and liabilities:
Restricted cash 671 293
Accounts receivable, net (2,981) ( 2,564)
Inventories, net (1,235) ( 233)
Other current assets ( 937) ( 2,186)
Accounts payable (3,643) ( 1,804)
Billings in excess of costs and earnings 557 ( 1,248)
Other current liabilities 2,576 ( 1,276)
- --------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 4,117 ( 2,896)
- --------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment (2,390) ( 1,425)
Capitalization of internally developed software ( 122) ---
Signia purchase price adjustments 1,830 ---
- --------------------------------------------------------------------------------
Net cash used in investing activities ( 682) ( 1,425)
- --------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Issuance of common stock, net of issuance costs --- 117,337
Issuance of long-term debt --- 85,000
Repayment of long-term debt ( 32) (168,586)
Payment of refinancing costs --- ( 14,506)
Net repayments under revolving credit loans --- ( 8,500)
- --------------------------------------------------------------------------------
Net cash provided by (used in) financing
activities ( 32) 10,745
- --------------------------------------------------------------------------------
Net increase in cash 3,403 6,424
Cash at beginning of period 8,969 3,893
- --------------------------------------------------------------------------------
Cash at end of period $12,372 $ 10,317
================================================================================
Supplemental disclosure of noncash financing
activities:
Unrealized losses on derivative financial
instruments $ ( 181) $( 1,075)
Accrued expenses associated with issuance of
common stock $ --- $( 606)
Accrued refinancing costs $ --- $( 187)
The accompanying notes are an integral part of these consolidated
financial statements.
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated
financial statements of Integrated Defense Technologies,
Inc. and subsidiaries (the "Company") have been prepared
on the same basis as the Company's annual consolidated
financial statements and should be read in conjunction
with its Annual Report on Form 10-K for the year ended
December 31, 2002 filed with the Securities and Exchange
Commission on March 28, 2003. In the opinion of
management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments
(consisting of normal recurring items) necessary for a
fair presentation of results for the interim periods
presented. The consolidated results for interim periods
are not necessarily indicative of the results that may be
expected for the full year. Certain prior period amounts
have been reclassified to provide comparability with the
current presentation.
NOTE 2: REFINANCING
On February 27, 2002, the Company completed an initial
public offering of 8,000,000 shares of common stock at $22
per share. In the offering, the Company sold 6,000,000
primary shares, generating net cash proceeds of
$116,688,000, consisting of a $117,337,000 net cash inflow
in first quarter 2002 and a $649,000 cash outflow in
second quarter 2002 for offering expenses not paid in the
first quarter. The majority of the proceeds from the
offering were used for debt retirement and refinancing.
Concurrent with the closing of the offering, the Company
repaid the outstanding balances on its revolving credit
and term loan agreement and its senior subordinated notes
($125,836,000 and $51,250,000, respectively) and replaced
the previous revolving credit and term loan facility with
a new facility provided by a syndicate of financial
institutions.
The Company's new six-year revolving credit and term loan
facility, as amended on November 1, 2002 (see Note 3),
provides for a total credit facility of up to
$265,000,000, consisting of a $45,000,000 five-year
revolving credit facility, a $40,000,000 five-year term
loan ("Term Loan A") and a $180,000,000 six-year term loan
("Term Loan B"). Borrowings under the facility are
secured by a pledge of substantially all of the Company's
assets and bear interest at the base rate or LIBOR plus an
applicable margin ranging from 1.00% to 4.00% based upon
the Company's leverage ratio. Available borrowings under
the revolving credit facility are based upon a borrowing
base, which is calculated based upon eligible accounts
receivable and inventories as defined in the agreement.
At March 28, 2003 and December 31, 2002, the Company had
outstanding borrowings of $218,450,000 under the facility,
consisting of $36,625,000 under Term Loan A, $179,325,000
under Term Loan B, and $2,500,000 under the revolving
credit facility. In addition, at March 28, 2003,
$18,331,000 of the credit line was allocated to support
the Company's letters of credit, leaving available
borrowings under the facility of $24,169,000 as of that
date.
On March 31, 2003, the Company repaid the entire amount
outstanding under the revolving credit facility and made
its scheduled payments on Term Loans A and B of $1,125,000
and $450,000, respectively. Current interest rates on the
outstanding term loan balances are 4.29% and 5.29%,
respectively.
At March 28, 2003 and December 31, 2002, the fair values
of the Company's borrowings under its revolving credit
and term loan facility approximated their carrying
values based upon the variable nature of the interest
rates. For further information regarding the Company's
revolving credit and term loan facility, including
information regarding financial covenants and business
restrictions associated with the facility, see
"Liquidity and Capital Resources" contained in
"Management's Discussion and Analysis of Financial
Condition and Results of Operations" in this quarterly
report on Form 10-Q.
In connection with the early retirement and refinancing of
its prior credit facility in first quarter 2002, the
Company incurred charges totaling $20,696,000, including
prepayment penalties of $2,565,000, a $4,833,000 write-off
of capitalized debt issuance costs associated with the
previous debt, a $5,727,000 write-off of unamortized
discount on its senior subordinated notes, and a
$7,571,000 payment to terminate interest rate swap
agreements associated with the retired debt. These
charges are reflected as "Refinancing costs" in the
Company's consolidated statement of operations for the
quarter ended March 31, 2002.
NOTE 3: BUSINESS ACQUISITION
On November 1, 2002, the Company acquired substantially
all of the assets and assumed certain of the liabilities
of the BAE SYSTEMS Advanced Systems Gaithersburg, Maryland
operation (now known as "Signia"). Signia designs and
manufactures high performance radio frequency surveillance
equipment used in communications intelligence and signals
intelligence applications. The Signia operation
complements the Company's Communications & Surveillance
Systems segment, particularly its Zeta division, which was
combined with Signia during the fourth quarter of 2002.
In addition to reducing overhead expenses associated with
the Zeta division, the integration of Signia into the
Communications & Surveillance Systems segment is expected
to broaden its capabilities and technological expertise in
surveillance and intelligence, while adding valuable new
customer relationships.
The aggregate purchase price paid in fourth quarter 2002
was $149,085,000, including direct acquisition costs, and
was financed primarily through an add-on to the Company's
revolving credit and term loan facility. (See Note 2 for
details of the Company's credit facility.) In March
2003, the Company received a final closing purchase price
adjustment of $1,899,000 in cash from the seller. In
addition, during first quarter 2003, the Company incurred
additional expenses related to the acquisition totaling
$214,000. These additional expenses, $69,000 of which
were paid in first quarter 2003, also resulted in an
adjustment to the purchase price and goodwill associated
with the acquisition. (See Note 5 following.) The net
cash inflow during the quarter related to the various
Signia purchase price adjustments of $1,830,000 is
reflected as "Signia purchase price adjustments" in the
Company's consolidated statement of cash flows for the
quarter ended March 28, 2003.
See Note 4 of Notes to Consolidated Financial Statements
contained in the Company's 2002 Annual Report to
Stockholders for complete details of the Signia
acquisition, including the fair values of the assets
acquired and liabilities assumed at the date of
acquisition. For information regarding the intangible
assets acquired, see Note 5 following.
NOTE 4: INVENTORIES
Inventories consist of the following:
---------------------------------------------------------------------
March 28, December 31,
2003 2002
---------------------------------------------------------------------
(In thousands)
Stock materials $15,260 $14,983
Work-in-process 13,031 10,525
Finished goods 1,682 3,363
---------------------------------------------------------------------
29,973 28,871
Less reserve for excess and obsolescence 8,435 8,629
---------------------------------------------------------------------
Inventories, net $21,538 $20,242
=====================================================================
Inventories are stated at the lower of first-in, first-out
("FIFO") cost or market or valued using other costing
methods which approximate the lower of FIFO cost or
market. For the purpose of this valuation, market values
are estimated based upon assumptions about future demand
and market conditions.
Work-in-process and finished goods inventories consist
primarily of electronic components for use in fulfilling
current and future contracts.
NOTE 5: GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the
provisions of Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("SFAS 142"), under
which the Company's goodwill is no longer amortized and
is instead subject to annual impairment tests using a
fair value based approach. The Company's other recorded
intangible assets, substantially all of which were acquired
in the Company's November 1, 2002 acquisition of Signia,
are being amortized over their remaining estimated useful lives.
Goodwill
The Company completed transitional impairment testing and
reallocation of goodwill to its business units in the
second quarter of 2002. For impairment testing purposes,
the Company determined the value of its individual
business units using a discounted cash flow model, a
guideline company model, and a transaction model, and by
observation of demonstrable fair values of comparable
entities. The Company determined that there was no
impairment of its goodwill as of the January 1, 2002
implementation date of SFAS 142.
In fourth quarter 2002, in connection with the combination
of its Zeta division into Signia, the Company determined
the value of the Zeta division using a discounted cash
flow model and wrote off the remaining unamortized
goodwill balance associated with the division.
The Company completed its first annual impairment testing
of goodwill as of December 31, 2002 using a discounted
cash flow model and a transaction model and determined
that there was no further impairment of its goodwill.
Changes in the carrying amount of the Company's goodwill
during the first quarter of 2003 were as follows:
-----------------------------------------------------------------------------------
Electronic Diagnostics Communications
Combat & Power & Surveillance
Systems Systems Systems Total
-----------------------------------------------------------------------------------
(In thousands)
Balance as of January 1, 2003 $53,221 $20,075 $70,513 $143,809
Signia purchase price adjustments
(see Note 3) --- --- (1,685) (1,685)
-----------------------------------------------------------------------------------
Balance as of March 28, 2003 $53,221 $20,075 $68,828 $142,124
===================================================================================
Other Intangible Assets
-----------------------------------------------------------------------------------
As of March 28, 2003
--------------------
Gross Carrying Accumulated Net Carrying
Amount Amortization Amount
-----------------------------------------------------------------------------------
(In thousands)
Trade names and trademarks $ 1,581 $ 66 $ 1,515
Patents and proprietary technology 13,870 384 13,486
Customer relationships 40,912 550 40,362
-----------------------------------------------------------------------------------
Total $56,363 $1,000 $55,363
===================================================================================
Annual amortization expense for each of the next five years should
approximate $2,400,000.
NOTE 6: PROPERTY AND EQUIPMENT
Property and equipment - net includes allowances for
depreciation of $74,309,000 and $71,043,000 at March 28,
2003 and December 31, 2002, respectively.
NOTE 7: INTEREST RATE SWAP AGREEMENTS
The Company at times uses interest rate swap agreements to
manage the risk associated with interest rate fluctuations
on its variable rate debt. In October 2000, the Company
entered into three such agreements with notional amounts
of $25,000,000, $10,000,000, and $60,000,000, under which
the Company paid fixed interest rates ranging from 6.39%
to 6.75% and received a variable LIBOR-based rate of
interest from the holders of the agreements. On March 4,
2002, in connection with its debt retirement and
refinancing (see Note 2), the Company paid $7,571,000 to
terminate these interest rate swap agreements. This
expense is reflected as a component of "Refinancing costs"
in the Company's consolidated statement of operations for
the quarter ended March 31, 2002.
On December 31, 2002, the Company entered into an interest
rate swap agreement with a notional amount of
$115,000,000, under which the Company pays a fixed
interest rate of 1.815% and receives a variable LIBOR-
based rate of interest from the holder of the agreement.
LIBOR approximated 1.4% at December 31, 2002 and 1.3% at
March 28, 2003. As such, the swap agreement had a
negative fair value of $458,000 ($291,000 net of tax
benefit) at December 31, 2002 and $520,000 ($330,000 net of
tax benefit) at March 28, 2003. These fair values,
representing the approximate cost of terminating the swap
on those dates, are reflected as "Derivative liabilities"
and as a component of "Accumulated other comprehensive
loss" in the Company's consolidated balance sheets. The
interest rate swap agreement is scheduled to terminate in
December 2003, and as such, the accumulated other
comprehensive loss associated with the agreement can be
expected to be reclassified into earnings during 2003.
The difference between the pay and receive rates of
interest on the Company's interest rate swap agreements is
charged or credited to interest expense as incurred and
reflected as a reclassification adjustment out of other
comprehensive income (loss). In the first quarters of
2002 and 2003, the Company's swap agreements increased its
interest expense by $830,000 and $119,000, respectively.
There was no impact to earnings due to hedge
ineffectiveness during the first quarters of 2002 and
2003. The Company does not use derivative financial
instruments for speculative or trading purposes.
NOTE 8: EARNINGS (LOSS) PER SHARE ("EPS")
The Company reports both basic and diluted EPS figures.
Basic EPS is computed using the weighted average number of
common shares outstanding. Diluted EPS is computed using
the weighted average number of common and equivalent
common shares outstanding. Historically, common stock
warrants have been the Company's only common stock
equivalent and have been included in the Company's EPS
calculations only if dilutive.
On February 5, 2002, the Company's Board of Directors
approved a 198.6359 to 1 common stock split. All share
and per share amounts for the quarter ended March 31, 2002
reflect this stock split.
On February 27, 2002, in connection with its initial
public stock offering, the Company issued 6,000,000
additional shares of common stock, and warrant holders
converted outstanding warrants into 235,749 shares of the
Company's common stock. On September 6, 2002, warrant
holders converted the remaining outstanding warrants into
1,526,939 shares of restricted common stock. The Company
no longer has any common stock warrants outstanding.
Common stock warrants outstanding during the quarter ended
March 31, 2002 equated to 1,679,647 anti-dilutive weighted-
average equivalent shares for the period. The Company had
no common stock warrants outstanding during the quarter
ended March 28, 2003.
NOTE 9: COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) as
well as all other nonowner changes in equity. The
components of the Company's comprehensive income (losses)
for the quarters ended March 28, 2003 and March 31, 2002 are
presented below, net of related income tax effects. See
Note 7 for further information regarding the interest rate
swap agreements used by the Company and the impact of
those agreements on its consolidated financial position
and results of operations.
---------------------------------------------------------------------------------------
Quarter Ended March 28, 2003 March 31, 2002
---------------------------------------------------------------------------------------
(In thousands)
Net income (loss) $3,029 $(11,072)
Other comprehensive income (loss):
Unrealized losses on interest rate swap agreements (115) ( 656)
Realized losses on interest rate swap agreements
charged to net income (loss) 76 5,198
Minimum pension liability adjustment ( 13) 21
---------------------------------------------------------------------------------------
Comprehensive income (loss) $2,977 $( 6,509)
=======================================================================================
NOTE 10:SEGMENT INFORMATION
The Company's business presently consists of three
operating segments: Electronic Combat Systems, Diagnostics
& Power Systems, and Communications & Surveillance
Systems. These reportable segments are defined primarily
by their economic characteristics, the nature of their
products and services, and by their class of customer.
The Electronic Combat Systems segment designs, integrates,
manufactures, and sells electronics and avionics equipment
primarily to the U.S. Government for military, civil and
governmental uses, and designs, manufactures and supports
advanced test and evaluation systems, rangeless air combat
training systems, threat simulation equipment, high power
transmitters, and control subsystems for both guided bombs
and missile launching systems for the U.S. Department of
Defense, major defense prime contractors and foreign
government defense agencies.
The Diagnostics & Power Systems segment is a contractor
primarily to the U.S. government and foreign governments,
and designs, manufactures and supports test equipment,
vehicle electronics systems and energy management systems
primarily for military combat vehicle applications.
The Communications & Surveillance Systems segment designs
and manufactures meteorological surveillance and analysis
systems, more commonly known as Doppler weather radar
systems, and designs and produces advanced electronics
systems, subsystems, components, and radio frequency
surveillance equipment for the defense, aerospace and
communications industries for U.S. and foreign government
agencies and commercial customers.
The Company evaluates performance of the operating
segments based upon revenue and earnings before interest,
taxes, depreciation, and amortization ("EBITDA") (1),
calculated as income from operations plus depreciation and
amortization expense. The accounting policies of the
operating segments are consistent across segments and are
the same as those used in preparation of the consolidated
financial statements of the Company. (See Note 2 of Notes
to Consolidated Financial Statements included in the
Company's 2002 Annual Report to Stockholders.) Sales
among the operating segments are insignificant. The
Company's corporate expenses are allocated in full to the
segments on the basis of relative employment, revenue, and
selected assets. Corporate assets are included in "All
other" in the following table.
Set forth below are revenue and EBITDA by operating
segment for the first quarters of 2003 and 2002.
------------------------------------------------------------------------
First Quarter 2003 2002
------------------------------------------------------------------------
(In thousands)
Revenues from Unaffiliated Customers:
Electronic Combat Systems $31,643 $32,221
Diagnostics & Power Systems 18,274 21,685
Communications & Surveillance Systems 30,982 14,232
All other --- 255
------------------------------------------------------------------------
Total $80,899 $68,393
========================================================================
Other Financial Information:
------------------------------------------------------------------------
EBITDA:
Electronic Combat Systems $4,920 $5,223
Diagnostics & Power Systems 2,102 2,177
Communications & Surveillance Systems 4,987 2,069
All other 53 (185)
------------------------------------------------------------------------
Total $12,062 $9,284
========================================================================
The increase in Communications & Surveillance Systems'
revenue and EBITDA is due primarily to the acquisition
of Signia in fourth quarter 2002. Signia's revenue and
EBITDA for first quarter 2003 totaled $17,463,000 and
$3,828,000, respectively.
(1) EBITDA is not a presentation made in accordance with
accounting principles generally accepted in the United
States ("U.S. GAAP"), and as such, it should not be
considered in isolation or as a substitute for net
income (loss), cash flows from operating activities, or
other income or cash flow statement data prepared in
accordance with U.S. GAAP, or as a measure of
profitability or liquidity. The Company monitors EBITDA
by segment to determine each segment's ability to
satisfy its debt service, capital expenditures, and
working capital requirements and because certain
covenants in the Company's revolving credit and term
loan facility are based upon similar measures. EBITDA
does not fully consider the impact of investing or
financing transactions as it specifically excludes
depreciation and amortization charges, which should be
considered in the overall evaluation of results.
Additionally, the Company's EBITDA is not necessarily
comparable to other similarly titled captions used by
other companies. A reconciliation of the Company's
EBITDA to income (loss) before income taxes is presented
in the following table.
Reconciliation of EBITDA to income (loss) before income taxes:
------------------------------------------------------------------------
First Quarter 2003 2002
------------------------------------------------------------------------
(In thousands)
EBITDA $12,062 $9,284
Less:Depreciation and amortization expense 4,451 2,929
Interest expense 3,086 3,831
Refinancing costs --- 20,696
Add back other income 245 21
------------------------------------------------------------------------
Income (loss) before income taxes $4,770 $(18,151)
========================================================================
The following table presents total assets for each of
the Company's operating segments as of March 28, 2003
and December 31, 2002.
------------------------------------------------------------------------
March 28, December 31,
2003 2002
------------------------------------------------------------------------
(In thousands)
Total assets:
Electronic Combat Systems $160,864 $163,615
Diagnostics & Power Systems 56,778 57,216
Communications & Surveillance Systems 205,043 202,004
All other 27,829 24,865
------------------------------------------------------------------------
Total $450,514 $447,700
========================================================================
NOTE 11:RECENT ACCOUNTING PRONOUNCEMENTS
In fourth quarter 2002, the Company early adopted the
provisions of FASB Statement of Financial Accounting
Standards No. 145 ("SFAS 145"), which rescinded FASB
Statement of Financial Accounting Standards No. 4,
Reporting Gains and Losses from Extinguishment of Debt
("SFAS 4"), and made other technical corrections to
existing authoritative pronouncements. SFAS 4 required
companies to classify all gains and losses from
extinguishment of debt as extraordinary items, net of the
related tax effects, in their statements of operations.
SFAS 145 requires gains and losses from extinguishment of
debt to be classified as income or loss from continuing
operations unless they meet the criteria for
classification as extraordinary items contained in
Accounting Principles Board Opinion No. 30. In accordance
with the provisions of SFAS 145, the Company has
reclassified its first quarter 2002 early debt
extinguishment loss of $13,125,000, which was previously
classified as an extraordinary item, net of tax, into its
loss from continuing operations. This loss is included in
"Refinancing costs" in the Company's consolidated
statement of operations for the quarter ended March 31,
2002. See Note 2 for further discussion of the Company's
refinancing costs.
NOTE 12:COMMITMENTS AND CONTINGENCIES
Retention Agreements - In March 2003, the Company's Board
of Directors, in connection with its decision to explore
strategic alternatives for the Company and thereby
maximize stockholder value, adopted a retention incentive
program for certain key employees to ensure their
continuous full-time employment with the Company. The
employees covered under this program are eligible to
receive special retention bonuses in varying fixed amounts
in the event of a sale, merger, consolidation, or other
business combination resulting in a change of control of
the Company. The aggregate amount of the Company's
contingent liability with respect to the retention
agreements under this program is $3,200,000, but such
amount is not payable absent a change of control event.
Additionally, all agreements under this program will
terminate if such an event has not occurred prior to
December 31, 2003.
Product Warranties - Due to the nature and variability of
its products and customers, the Company has no standard
warranty policy applicable to all of its products and
business segments. When applicable, warranties are
limited to defects in material and workmanship, with
specific terms and duration based upon contractual
agreements with individual customers.
For products sold with warranties, a provision for future
warranty costs is estimated based upon historical
experience and recorded when the product is shipped. The
adequacy of the recorded warranty liability is assessed
each quarter and adjusted as necessary.
The Company's liability for estimated warranty obligations
is included as a component of "Other accrued expenses" in
its consolidated balance sheets. Changes in the Company's
warranty liability during the quarter ended March 28, 2003
were as follows:
(In thousands)
--------------
Balance at December 31, 2002 $ 2,522
Product warranty accrual 118
Warranty costs incurred (95)
--------
Balance at March 28, 2003 $ 2,545
========
Letters of Credit - At March 28, 2003, the Company had
outstanding letters of credit of approximately
$18,331,000. These letters of credit, substantially all
of which expire within a year, relate primarily to the
Company's contracts with foreign governments.
Claims and Legal Proceedings - As further described in the
Company's 2002 Annual Report to Stockholders, the Company
is involved in various legal actions arising in the normal
course of its business, including a National Park Service
investigation regarding the presence of residual
radioactive materials and contamination at a uranium mine
previously owned by a predecessor of one of the Company's
subsidiaries. Although the ultimate cost of these matters
cannot be predicted with certainty, the outcomes of such
legal actions are not expected, either individually or in
the aggregate, to result in a material adverse effect on
the Company's business, results of operations, or
financial condition. There were no material developments
with respect to these matters during first quarter 2003.
ITEM 2.
INTEGRATED DEFENSE TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
Integrated Defense Technologies, Inc. (the "Company") is a
designer and developer of advanced electronics and technology
products for the defense and intelligence industries. The
Company's products are installed on or used in support of a broad
array of military platforms in order to enhance their operational
performance or extend their useful lives. The Company's
customers include all branches of the military services, major
domestic prime defense contractors such as The Boeing Company,
General Dynamics Corporation, Lockheed Martin Corporation,
Northrop Grumman Corporation, Raytheon Company and United Defense
Industries, Inc., foreign defense contractors, foreign
governments and U.S. Government agencies.
The Company's contracts typically fall into two categories:
cost-plus and fixed-price contracts. Contracts for research,
engineering, prototypes, repair and maintenance and similar are
typically cost-plus arrangements. Customer-funded research and
development costs are typically included in the Company's
contracts and booked as revenue and cost of revenue.
In a fixed-price contract, the price is not subject to
adjustment based upon cost incurred to perform the required work
under the contract. In a cost-plus contract, the Company is
reimbursed for allowable incurred costs plus a fee, which may be
fixed or variable. The price on a cost-plus contract is based
upon allowable cost incurred, but generally is subject to
contract funding limitations. Under fixed-price contracts, the
Company agrees to perform for a predetermined contract price.
Although fixed-price contracts generally permit the Company to
keep profits if costs are less than projected, the Company bears
the risk that increased or unexpected costs may reduce profit or
cause the Company to sustain losses on the contracts. Generally,
fixed-price contracts offer higher margins than cost-plus type
contracts.
All of the Company's domestic U.S. Government contracts and
subcontracts are subject to audit and various cost controls and
include standard provisions for termination at the convenience of
the U.S. Government or for default. The Department of Defense
generally has the right to object to the costs as not allowable
or as unreasonable, which can increase the level of costs the
Company bears. Multi-year U.S. Government contracts and related
orders are subject to cancellation if funds for contract
performance for any subsequent year are not available. Foreign
government contracts generally include comparable provisions
relating to termination at the convenience of the foreign
government or for default.
Prior to its November 1, 2002 acquisition of Signia (see the
Company's Annual Report on Form 10-K for the year ended December
31, 2002 for further discussion), the Company accounted for
substantially all of its contracts using the percentage-of-
completion method of accounting. As revenues of the newly-
acquired Signia business are generated primarily from shorter-
term production jobs which are recognized at delivery, the
Company's mix of percentage-of-completion revenues to total
revenues has declined to approximately 80%. Under the percentage-
of-completion method of accounting, revenue is matched with the
cost incurred on each unit produced at the time the Company
recognizes its sale based upon the estimate of the gross profit
margin the Company expects to receive over the life of the
contract. The Company currently evaluates its estimates of gross
margin on a monthly basis. In addition, the Company uses the
cumulative catch-up method to recognize its changes in estimates
of sales and gross margins during the period in which those
changes are determined. The Company charges any anticipated
losses on a contract to operations as soon as those losses are
determined. The principal components of the Company's cost of
revenue are materials, subcontractor costs, labor, and overhead.
The Company charges all of these costs to the respective
contracts as incurred.
The Company expenses operating costs such as sales and
marketing, general and administrative, independent research and
development costs, and bid and proposal costs in the period
incurred. The major components of these costs are compensation
and overhead. Capitalized debt issuance costs, qualifying
software development costs, and intangible assets are amortized
over their useful lives, with the amortization of capitalized
software development costs included as a component of the
Company's cost of revenue. Since January 1, 2002, the Company has
been subject to a new accounting standard under which it no
longer amortizes goodwill, although it must test its goodwill
periodically for impairment.
The Company's results of operations, particularly its
revenue and its cash flows, may vary significantly from period to
period depending upon the timing of delivery of finished
products, the terms of contracts, and the level of export sales.
As a result, period-to-period comparisons may show substantial
changes disproportionate to the Company's underlying business
activity. Accordingly, the Company does not believe that its
quarterly results of operations are necessarily indicative of
results for future periods.
Forward Looking Statements
The information contained in this report includes forward-
looking statements, including in particular statements about
plans, strategies and prospects under the heading "Management's
Discussion and Analysis of Financial Condition and Results of
Operations." Words such as "may," "will," "expect," "anticipate,"
"believe," "estimate," "plan," "intend" and similar expressions
in this report identify forward-looking statements. These forward-
looking statements are based upon current views with respect to
future events and financial performance of the Company based upon
assumptions made by management. Actual results could differ
materially from those projected in the forward-looking
statements.
The Company's forward-looking statements are subject to
risks and uncertainties, including:
o the Company's dependence on the defense industry and the
business risks peculiar to that industry, including changing
priorities due to geopolitical conditions or otherwise, or
reductions in the U.S. Government defense budget;
o the Company's ability to obtain future government contracts
on a timely basis;
o the availability of government funding and customer
requirements;
o the potential development of new and competing technologies
and the Company's ability to compete technologically;
o difficulties encountered in the integration of acquired
businesses;
o general economic conditions, the competitive environment of
the defense industry, international business and political
conditions, and timing of awards and contracts; and
o other factors described under "Factors Which May Affect
Financial Condition and Future Results" in the Company's Annual
Report on Form 10-K for the year ended December 31, 2002.
As for the forward-looking statements that relate to future
financial results and other projections, actual results could be
different due to the inherent uncertainty of estimates,
forecasts, and projections, and may be better or worse than
anticipated. Given these uncertainties, no reliance should be
placed upon forward-looking statements. Forward-looking
statements represent the Company's estimates and assumptions only
as of the date they were made. The Company expressly disclaims
any duty to provide updates to forward-looking statements and the
estimates and assumptions associated with them after the date of
this report in order to reflect changes in circumstances or
expectations or occurrence of unanticipated events, except to the
extent required by applicable securities laws.
Results of Operations
The following tables summarize the Company's operating
information as a percentage of revenue and its segment data for
the first quarters of 2003 and 2002:
- --------------------------------------------------------------------------------
First Quarter
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
Statement of operations and other financial information:
Revenue 100.0% 100.0%
Cost of revenue 68.1 71.4
- --------------------------------------------------------------------------------
Gross Profit 31.9 28.6
Sales and marketing expense 4.6 5.7
General and administrative expense 10.0 8.1
Research and development and bid and proposal expenses 6.9 5.2
Amortization expense 1.0 .3
- --------------------------------------------------------------------------------
Income from operations 9.4% 9.3%
================================================================================
EBITDA (1) 14.9% 13.6%
================================================================================
Operations information by segment and other financial information:
(In millions)
Revenue:
Electronic Combat Systems $31.6 $32.2
Diagnostics & Power Systems 18.3 21.7
Communications & Surveillance Systems 31.0 14.2
Other --- .3
- --------------------------------------------------------------------------------
Total revenue $80.9 $68.4
================================================================================
Gross profit:
Electronic Combat Systems $ 8.8 $ 9.7
Diagnostics & Power Systems 4.7 4.4
Communications & Surveillance Systems 12.2 5.3
Other .1 .2
- --------------------------------------------------------------------------------
Total gross profit $25.8 $19.6
================================================================================
EBITDA (1) :
Electronic Combat Systems $4.9 $5.2
Diagnostics & Power Systems 2.1 2.2
Communications & Surveillance Systems 5.0 2.1
Other .1 (.2)
- --------------------------------------------------------------------------------
Total EBITDA $12.1 $9.3
================================================================================
(1) The Company's EBITDA (earnings before interest, taxes,
depreciation, and amortization) represents income (loss) from
operations plus depreciation and amortization expense. EBITDA is
not a presentation made in accordance with accounting principles
generally accepted in the United States ("U.S. GAAP"), and as
such, it should not be considered in isolation or as a substitute
for net income (loss), cash flows from operating activities, or
other income or cash flow statement data prepared in accordance
with U.S. GAAP or as a measure of profitability or liquidity.
EBITDA is the measure of segment profit or loss which is reviewed
by the Company's Chief Executive Officer and Board of Directors,
and as such, in accordance with the provisions of Financial
Accounting Standards Board ("FASB") Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an
Enterprise and Related Information, it is the measure used for
the Company's segment disclosures. The Company monitors EBITDA
by segment to determine each segment's ability to satisfy its
debt service, capital expenditure, and working capital requirements
and because certain covenants in the Company's revolving credit
and term loan facility are based upon similar measures. EBITDA does
not fully consider the impact of investing or financing transactions
as it specifically excludes depreciation and amortization charges,
which should be considered in the overall evaluation of results.
Additionally, the Company's EBITDA is not necessarily comparable
to other similarly titled captions used by other companies. For a
reconciliation of the Company's EBITDA to income (loss) before
income taxes, see Note 10 of Notes to Consolidated Financial
Statements contained in this quarterly report on Form 10-Q.
COMPARISON OF FIRST QUARTER 2003 TO FIRST QUARTER 2002
Results of Operations. In first quarter 2003, the Company
earned net income of $3.0 million, or $0.14 per share, compared
to a first quarter 2002 net loss of $11.1 million, or ($0.70) per
share. The Company's first quarter 2002 results included charges
totaling $20.7 million ($12.6 million after tax, or $0.80 per
share) for debt retirement and refinancing concurrent with the
Company's February 27, 2002 initial public offering. These
charges, which included prepayment penalties, payments to
terminate interest rate swaps, and write-offs of capitalized debt
issuance costs and unamortized discounts associated with the
extinguished debt, are reflected as "Refinancing costs" in the
Company's consolidated statement of operations for first quarter
2002. See Note 2 of Notes to Consolidated Financial Statements
contained in this quarterly report on Form 10-Q for further
details regarding these charges.
Revenue. Revenue for first quarter 2003 was
$80.9 million, up $12.5 million, or 18%, compared to revenue of
$68.4 million for first quarter 2002. This increase was directly
attributable to the acquisition of Signia in fourth quarter 2002.
Signia's revenues, which are included in the results of the
Company's Communications & Surveillance Systems segment, totaled
$17.5 million for the quarter. Excluding the impact of Signia,
Communications & Surveillance Systems' revenues declined by $.7
million, or 5%, from the prior year period. The Company's
Diagnostics & Power Systems and Electronic Combat Systems
segments also experienced revenue declines of $3.4 million, or
16%, and $.6 million, or 2%, respectively. The Diagnostics &
Power Systems segment had a very strong first quarter 2002 due to
fourth quarter 2001 orders for embedded diagnostics, additions to
the scope of the Abrams Systems Technical Support program, and
earlier than expected booking of the Common Support Function
Module program. Booking and program delays in the
Communications & Surveillance Systems segment served to offset
strong first quarter 2003 domestic television orders for the
segment's Doppler weather radar systems. Electronic Combat
Systems' revenues were negatively impacted by a temporary delay
in a large U.S. Air Force program. This program is now in
progress and should benefit the segment's revenues in second
quarter 2003. The program delays experienced in the
Communications & Surveillance Systems and Electronic Combat
Systems segments related primarily to timing issues and as such,
they are not anticipated to have a negative impact on the
Company's full year 2003 revenue.
Gross Profit. The Company's gross profit for first
quarter 2003 was $25.8 million, up $6.2 million, or 32%, compared
to gross profit of $19.6 million for first quarter 2002. As a
percentage of revenue, gross profit increased from 28.6% in first
quarter 2002 to 31.9% in first quarter 2003. Both the dollar and
percentage increases in gross profit were due primarily to the
higher margins earned by the newly acquired Signia business.
Including Signia, Communications & Surveillance Systems earned a
gross profit of $12.2 million, or 39.5%, compared to $5.3
million, or 37.2%, in first quarter 2002. Losses incurred by the
Company's Zeta division in first quarter 2003 served to partially
offset the positive impact of Signia on this segment's gross
profit. The Company's first quarter 2003 gross profit was also
positively impacted by a decline in the mix of Diagnostics &
Power Systems' revenues to total revenue. As this segment has a
higher proportion of cost-plus business than the other segments,
its margins will generally be lower, improving the consolidated
margin percentage in periods of decreased Diagnostics revenue
relative to total revenue. These positive factors were partially
offset by a decline in Electronic Combat Systems' gross profit
due to the program delays discussed previously and resulting
inefficiencies.
Sales and Marketing Expense. The Company's sales and
marketing expense for first quarter 2003 was $3.7 million, down
$.2 million, or 5%, compared to $3.9 million for first quarter
2002. As a percentage of revenue, sales and marketing expense
was down from 5.7% in first quarter 2002 to 4.6% in first quarter
2003. Signia's sales and marketing expense for first quarter
2003 approximated $1.0 million. Excluding the impact of Signia,
Communications & Surveillance Systems' and Electronic Combat
Systems' expenses declined by $.5 million and $.6 million,
respectively, due to declines in commission expenses resulting
from a lower mix of international revenues in the quarter.
Diagnostics & Power Systems' expenses were relatively flat with
the first quarter 2002 level.
General and Administrative Expense. The Company's general
and administrative expense for first quarter 2003 was
$8.1 million, up $2.6 million, or 47%, compared to $5.5 million
for first quarter 2002. As a percentage of revenue, general and
administrative expense was up from 8.1% in first quarter 2002 to
10.0% in first quarter 2003. Signia accounted for approximately
$1.0 million of the increase from the prior year period. The
remainder of the increase was due to bad debt expenses incurred
by the Company's Diagnostics & Power Systems segment, additional
spending associated with the combination of Zeta and Signia, and
incremental expenses associated with public company status for a
full quarter in 2003. Electronic Combat Systems', Diagnostics &
Power Systems' and Communications & Surveillance Systems' general
and administrative expenses increased by $.6 million, $.4
million, and $1.9 million, respectively.
Research and Development and Bid and Proposal
Expenses. The Company's research and development and bid and
proposal expenses were $5.6 million for first quarter 2003, up
$2.0 million, or 56%, compared to $3.6 million for first quarter
2002. As a percentage of revenue, research and development and
bid and proposal expenses increased from 5.2% in first quarter
2002 to 6.9% in first quarter 2003. Signia's research and
development and bid and proposal expenses for first quarter 2003
approximated $2.3 million. This increase in the Company's
expenses was partially offset by a $.4 million decline in
expenses of the Electronic Combat Systems segment. Other than
the expenses incurred by Signia, most of the Company's first
quarter research and development expenses related to projects
which were carried over from 2002. The Company expects its
research and development expenses to increase over the remainder
of 2003 as new projects are now under way.
Amortization Expense. The Company's amortization expense,
excluding amounts included in cost of revenue for amortization of
its internally developed software, was $.8 million for first
quarter 2003, up $.6 million compared to amortization expense of
$.2 million in first quarter 2002. The increase is the direct
result of the Signia acquisition in fourth quarter 2002. See
Note 5 of Notes to Consolidated Financial Statements contained in
this quarterly report on Form 10-Q for details of the Company's
intangible assets, substantially all of which were acquired in
the Signia acquisition.
Income from Operations. The Company's income from
operations was $7.6 million, or 9.4% of revenue, for first
quarter 2003, up $1.2 million compared to $6.4 million, or 9.3%
of revenue, for first quarter 2002. Communications & Surveillance
Systems' operating income increased by $1.6 million to a total of
$3.2 million. Signia contributed $2.7 million to the segment's
operating income; however, this increase was offset by losses
incurred by the Company's Zeta division and additional expenses
associated with the combination of Zeta and Signia. Electronic
Combat Systems' operating income declined by $.6 million to a
total of $2.9 million due to the reduction in the segment's
revenue and gross margin resulting from the previously discussed
program delay. Diagnostics & Power Systems' operating income was
relatively flat with the first quarter 2002 level at $1.7
million.
Interest Expense. The Company's interest expense for
first quarter 2003 was $3.1 million, compared to $3.8 million in
first quarter 2002. The interest expense decline from the prior
year period was due primarily to a decline in expense associated
with the Company's interest rate swap agreements. Average LIBOR
rates declined from approximately 1.9% in first quarter 2002 to
1.3% in first quarter 2003. However, the positive impact of the
interest rate decline on the Company's floating rate debt was
offset by the adverse effect of its LIBOR-based interest rate
swap agreements.
Income Tax Expense. Income tax expense for first quarter
2003 was $1.7 million or 36.5% of pretax income, compared to an
income tax benefit of $7.1 million or 39% of pretax loss in first
quarter 2002. The effective income tax rate in both periods
exceeded the U.S. federal statutory rate in those periods due
primarily to state income taxes and to non-deductible expenses
such as meals and entertainment.
EBITDA. The Company's EBITDA was $12.1 million, or 14.9%
of revenue, in first quarter 2003, versus $9.3 million, or 13.6%
of revenue, in first quarter 2002. Communications & Surveillance
Systems' EBITDA increased by $2.9 million to a total of $5.0
million due primarily to the acquisition of Signia in fourth
quarter 2002, though losses incurred by the segment's Zeta
division served to partially offset this positive impact.
Electronic Combat Systems' EBITDA declined by $.3 million to a
total of $4.9 million, primarily due to the Air Force program
delay. Diagnostics & Power Systems' EBITDA was relatively flat
with the first quarter 2003 level at $2.1 million.
Liquidity and Capital Resources
In first quarter 2003, the Company generated net cash of
$3.4 million, primarily from its operations, compared to a net
cash generation of $6.4 million in first quarter 2002, primarily
from the net proceeds of its initial public offering and debt
refinancing.
Cash generated from operations in first quarter 2003 totaled
$4.1 million, compared to a net operating cash usage of $2.9
million in first quarter 2002. The improvement from the prior
year period reflects improvements in the Company's operating
earnings and working capital management.
Capital expenditures in first quarter 2003 were
$2.4 million, up from $1.4 million in first quarter 2002. The
Company's capital expenditures consist primarily of purchases of
engineering equipment, office equipment, and building and
leasehold improvements. Due to the nature of the Company's
business, capital expenditures historically have not been
substantial. The increase in first quarter 2003 was due
primarily to an additional investment by Electronic Combat
Systems in airborne instrumentation pods which are leased to the
U.S. Air Force in Europe. The Company expects that its total
capital expenditures for 2003 will be within the range of $8 to
$10 million.
In first quarter 2002, the Company completed an initial
public offering of 8 million shares of common stock at $22 per
share. In the offering, the Company sold 6 million primary
shares, generating net cash proceeds of approximately $116.7
million, consisting of a $117.3 million net cash inflow in first
quarter 2002 and a $.6 million cash outflow in second quarter
2002 for offering expenses which were not paid in the first
quarter. Concurrent with the closing of the offering, the
Company repaid the outstanding balances of its revolving credit
and term loan agreement and its senior subordinated notes ($125.8
million and $51.3 million, respectively) and replaced the
previous revolving credit and term loan facility with a new
facility provided by a syndicate of financial institutions.
Refinancing costs paid in connection with this early retirement
and refinancing of the credit facility totaled $14.8 million
($14.5 million of which were paid in first quarter 2002),
including prepayment penalties of $2.6 million, new debt issuance
costs of $4.6 million, and a $7.6 million payment to terminate
interest rate swap agreements associated with the extinguished
debt. The new credit facility provided financing of up to $125
million, consisting of a $40 million five-year revolving credit
facility, a $40 million five-year term loan, and a $45 million
six-year term loan.
On November 1, 2002, in connection with the Signia
acquisition, the Company amended and restated its revolving
credit and term loan facility. The amendment increased the six-
year term loan by $135 million, increased availability under the
revolving credit facility by $5 million, and updated the
financial covenants in the agreement to reflect the integration
of Signia into the Company's Communications & Surveillance
Systems segment. At March 28, 2003, the Company had outstanding
borrowings of $218.5 million under the facility, consisting of
$36.6 million under the five-year term loan, $179.3 million under
the six-year term loan, and $2.5 million under the revolving
credit facility. In addition, $18.3 million of the credit line
was allocated to support the Company's letters of credit at March
28, 2003, leaving available borrowings under the facility of
$24.2 million as of that date.
On March 31, 2003, the Company repaid the entire amount
outstanding under the revolving credit facility and made its
scheduled payments on the five- and six-year term loans of
$1,125,000 and $450,000, respectively. Current interest rates on
the outstanding term loan balances are 4.29% and 5.29%,
respectively.
Borrowings under the amended facility are secured by a
pledge of substantially all of the Company's assets and bear
interest at a base rate or LIBOR plus an applicable margin
ranging from 1% to 4%. Available borrowings under the revolving
credit facility are determined by the Company's borrowing base,
which is calculated based upon eligible accounts receivable and
inventories as defined in the agreement.
The amended revolving credit and term loan agreement
contains certain financial covenants of the Company, including
minimum net worth, minimum EBITDA, and maximum total leverage
ratio, and places limitations or restrictions on various business
transactions, including capital expenditures, investments,
purchases of the Company's stock, dividend payments, and asset
sales. The Company was in compliance with these covenants on
March 28, 2003.
Historically, the Company's primary sources of liquidity
have been cash provided by operations and its revolving credit
agreement. The Company's liquidity position is dependent upon a
number of factors, including the timing of production and
delivery on sales contracts and the timing of billing and
collection activity. Purchases of materials for production and
payments for labor and overhead expenses can represent
significant advance expenditures, and billings to and collection
from customers can lag these expenditures significantly on some
longer-term customer contracts. The Company's billing
arrangements include (a) monthly progress payments (typically on
fixed-price contracts) in which customers are billed 80% of
incurred cost plus general and administrative expenses but
without profit, (b) monthly billing in full at cost incurred plus
profit (typically on cost-plus contracts), (c) periodic milestone
achievement-based billing at cost incurred plus profit, and (d)
billing at final delivery at cost incurred plus profit. Fixed-
price contracts, some milestone-based billing contracts, and bill-
at-delivery contracts represent a significant required use of
working capital for the Company that must be funded by operations
or through external sources.
The Company has three defined benefit pension plans covering
certain of its employees. See Note 13 of Notes to Consolidated
Financial Statements contained in the Company's Annual Report to
Stockholders for a complete description of these plans, including
details regarding fluctuations in the fair values of plan assets
and the projected benefit obligations associated with these plans
for the three years ended December 31, 2002. While the cash
requirements and expenses associated with these plans were
minimal during this three year period, the Company anticipates
that, absent a recovery in the equity market, it may be required
to make cash contributions to the plans in 2003 in order to meet
minimum plan funding requirements.
The Company's liquidity and ability to generate cash has
improved significantly throughout the past year, and the Company
anticipates further improvement throughout 2003 as the result of
its improved profitability and continuing focus on working
capital management. Based upon its current level of operations and
anticipated growth, the Company believes that cash from
operations and other available sources of liquidity, including
borrowings under the amended revolving credit facility, will be
sufficient to fund its operations for at least the next two
years. The Company does not anticipate any significant
nonoperating events that will require the use of cash.
The Company has contractual obligations to make future
payments under its amended term loan agreement and under long-
term noncancelable lease agreements. The following table sets
forth these contractual obligations as of March 28, 2003.
- --------------------------------------------------------------------------------
Payments due by period
- --------------------------------------------------------------------------------
Contractual Obligation 2003 2004-2007 2008 and beyond Total
- --------------------------------------------------------------------------------
(In millions)
Term loans $7.2 $38.4 $170.3 $215.9
Capital leases .1 .2 --- .3
Operating leases 3.9 14.5 2.3 20.7
- --------------------------------------------------------------------------------
Total $11.2 $53.1 $172.6 $236.9
================================================================================
The Company's term loan obligations for 2008 and beyond
relate primarily to its six-year term loan, which must be paid in
full by March 4, 2008. The Company may prepay any obligations
under its revolving credit and term loan facility without
penalty. In addition, the lenders under the facility may require
prepayments from the proceeds of certain transactions, including
sales of net assets, issuance of equity securities,
insurance/condemnation settlements, and the reversion of surplus
assets from pension plans, as well as from any excess cash flows,
as defined in the agreement, generated by the Company during a
fiscal year.
The Company's noncancelable operating leases are primarily
for office space and manufacturing equipment. Certain of these
agreements are subject to periodic escalation provisions for
increases in real estate taxes and other charges.
At March 28, 2003, the Company had outstanding letters of
credit of approximately $18.3 million. These letters of credit,
substantially all of which expire within a year, relate primarily
to the Company's contracts with foreign governments.
Backlog
The Company defines backlog as the value of contract awards
received from customers which have not been recognized as sales.
Funded backlog refers to contract awards for which the Company
has received orders and the customer has obligated funds.
Unfunded backlog consists of potential product orders relating to
existing customer contracts that are the subject of customer
options for additional products or potential orders under
existing contracts that receive annual or incremental funding. A
significant portion of the Company's sales are to prime
contractors, the Department of Defense and foreign governments
pursuant to long-term contracts. Accordingly, the Company's
backlog consists in large part of orders under these contracts.
As of March 28, 2003 the funded backlog was $288.4 million, and
the total backlog was $409.7 million. At any given point in
time, the Company can generally expect to ship approximately 60%
of its funded backlog contracts within the next twelve months.
The following depicts the Company's backlog of orders by
business segment at March 28, 2003 and December 31, 2002:
- --------------------------------------------------------------------------------------------
Funded Unfunded
------ --------
March 28, December 31, March 28, December 31,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------
(In millions)
Electronic Combat Systems $139.6 $140.2 $102.9 $ 98.3
Diagnostics & Power Systems 63.5 59.4 16.0 17.9
Communications & Surveillance Systems 85.3 86.2 2.4 .9
- --------------------------------------------------------------------------------------------
Total Backlog $288.4 $285.8 $121.3 $117.1
============================================================================================
While it is expected that a substantial portion of funded
backlog will be converted to revenue during 2003, the Company
cannot provide assurance that the backlog, both funded and
unfunded, will become revenue in any particular period, if at
all. Uncertain timing of bookings and revenue recognition is
typical in the industry in which the Company conducts business.
Seasonality
The Company's business is seasonal, with a concentration of
revenue in the fourth quarter of the year, as many of the
Company's sales contracts expire on December 31 of each year. As
a result, product sales efforts at year end are expedited to
fulfill funding terms prior to expiration of the contracts.
Related Party Transactions
The Company pays Veritas Capital Management, L.L.C.
("Veritas") an annual management fee. Veritas controls the
Company's principal stockholder, IDT Holding, L.L.C. The Company
paid $225,000 in management fees to Veritas in both first quarter
2003 and 2002. In addition, in connection with the Company's
initial public offering on February 27, 2002, the Company paid a
$1.5 million transaction advisory fee to The Veritas Capital
Fund, L.P. The Company was not indebted to its principal
stockholder or to Veritas at March 28, 2003 or December 31, 2002.
Robert B. McKeon and Thomas J. Campbell, the Chairman and
Secretary of the Company, respectively, and members of its Board
of Directors, are managing members of Veritas.
William G. Tobin, a member of the Company's Board of
Directors and audit committee, is a Managing Director and
Chairman of the Defense and Aerospace practice of Korn/Ferry
International, an executive search firm. The Company contracted
with Korn/Ferry in 2002 to conduct its search for a Chief
Operating Officer. During 2002, the Company made payments to
Korn/Ferry totaling $179,000 in connection with this search,
including $94,000 paid in first quarter 2002. The search was
concluded in 2002, and no further payments to Korn/Ferry in
connection with the search have been made.
Edward N. Ney, a member of the Company's Board of Directors
and audit committee, is Chairman Emeritus of Young & Rubicam, an
advertising firm for which he previously served as President and
Chief Executive Officer. The Company has contracted with Burson-
Marsteller, an affiliate company of Young & Rubicam, to manage
its investor relations functions. The Company made payments to
Burson-Marsteller totaling approximately $42,000 and $82,000 in
the first quarters of 2003 and 2002, respectively.
Critical Accounting Policies and Estimates
Management's Discussion and Analysis of Financial Condition
and Results of Operations is based upon the Company's
consolidated financial statements, which have been prepared in
accordance with U.S. GAAP. The preparation of these financial
statements requires management to make estimates and assumptions
which affect the amounts reported in the financial statements and
determine whether contingent assets and liabilities, if any, are
disclosed in the financial statements. On an ongoing basis, the
Company evaluates its estimates and assumptions, including those
related to long-term contracts, product returns and warranty
obligations, bad debts, inventories, the recoverability of
goodwill and other intangible assets, fixed asset lives, income
taxes, self-insurance reserves, pensions and other post-
retirement benefits, environmental matters, litigation, and other
contingencies. The Company bases its estimates and assumptions
on historical experience and on various other factors which are
believed to be reasonable under the circumstances, including
current and expected economic conditions, the results of which
form the basis for making judgments about the carrying values of
assets and liabilities which are not readily apparent from other
sources. Actual results could differ materially from the
Company's estimates under different assumptions or conditions.
The Company believes the following critical accounting
policies affect its more significant estimates and assumptions
used in the preparation of its consolidated financial statements:
Revenue Recognition. The Company recognizes revenue and
profit on approximately 80% of its contracts using the percentage-
of-completion method of accounting, which relies on estimates of
total expected contract revenues and costs. The Company follows
this method since reasonably dependable estimates of the revenues
and costs applicable to various stages of the contracts can be
made. Recognized revenues and profit are subject to revisions as
the projects progress to completion. Revisions to the Company's
profit estimates are charged to income in the period in which the
facts that give rise to the revisions become known. Although the
Company makes provisions for losses on its contracts in its
financial statements, it cannot provide assurance that such
contract loss provisions, which are based upon estimates, will be
adequate to cover all future losses or that it will not be
required to restate prior period quarterly or annual financial
statements as the result of errors in its estimates.
Goodwill. The Company's March 28, 2003 consolidated balance
sheet contains a goodwill asset in the amount of $142.1 million.
In accordance with the provisions of FASB Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible
Assets ("SFAS 142"), the Company performs periodic impairment
tests of its goodwill. The process of evaluating goodwill for
impairment involves the determination of the fair value of the
Company's business units. Inherent in such fair value
determinations are certain judgments and estimates, including the
interpretation of current economic indicators and market
valuations, and assumptions about the Company's strategic plans
with regard to its operations. To the extent additional
information arises or the Company's strategies change, it is
possible that the Company's conclusions regarding goodwill
impairment could change and result in a material effect on its
consolidated financial position or results of operations.
Other Intangible Assets. The Company's March 28, 2003
consolidated balance sheet contains other intangible assets totaling
$55.4 million, substantially all of which were acquired in the
Signia acquisition. These intangible assets consist of trade
names and trademarks, patents and proprietary technology, and
customer relationships. In accordance with the provisions of
FASB Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets
("SFAS 144"), the Company performs periodic impairment tests of
its intangible assets when events and circumstances warrant such
a review. The process of evaluating intangible assets for
impairment involves the estimation of their remaining useful
lives and the projection of future cash flows related to the
assets. Factors that may impact these estimates and projections
include, among other things, the level of brand support, customer
demand, governmental regulation, the ability to raise prices,
maintenance of historical market share and margins, and other
factors. Changes in the Company's estimates and assumptions
regarding these factors could affect the Company's conclusions
regarding the value of its intangible assets and result in a
material effect on its financial position or results of
operations.
Inventories. The Company reduces the value of its
inventories for estimated obsolescence or unmarketable items in
an amount equal to the difference between the cost of inventories
and their estimated market values based upon assumptions about
future demand and market conditions. If actual future demand or
market conditions are less favorable than those projected by
management, inventory write-downs may be required.
Contingencies. As discussed in its Annual Report on Form 10-
K for the year ended December 31, 2002, the Company is involved
in various legal actions arising in the normal course of its
business, including a National Park Service investigation
regarding the presence of residual radioactive materials and
contamination at a uranium mine previously owned by a predecessor
of one of the Company's subsidiaries. The outcomes of such legal
actions are not expected, either individually or in the
aggregate, to result in a material adverse effect on the
Company's business, results of operations, or financial
condition. It is possible, however, that future results of
operations for any particular quarterly or annual period could be
materially affected by changes in the Company's assumptions
related to these proceedings. The Company accrues its best
estimate of the probable cost for the resolution of legal claims.
Such estimates are developed in consultation with outside counsel
handling these matters and are based upon a combination of
litigation and settlement strategies. To the extent additional
information arises or the Company's strategies change, it is
possible that the Company's best estimate of its liability in
these matters, if any, may change.
Pension and Other Postretirement Benefits. The Company
follows the guidance of FASB Statement of Financial Accounting
Standards No. 87, Employers' Accounting for Pensions ("SFAS 87"),
and FASB Statement of Financial Accounting Standards No. 106,
Employers' Accounting for Postretirement Benefits Other Than
Pensions ("SFAS 106"), when accounting for pension and
postretirement benefits. Under these accounting standards,
assumptions are made regarding the valuation of benefit
obligations and the performance of plan assets. Delayed
recognition of differences between actual results and expected or
estimated results is a guiding principle of these standards.
This delayed recognition of actual results allows for a smoothed
recognition of changes in benefit obligations and plan
performance over the working lives of the employees who benefit
under the plans. The primary assumptions are as follows:
o Discount rate - The discount rate is used in calculating the
present value of benefits, which is based upon projections of
benefit payments to be made in the future.
o Expected return on plan assets - Management projects the
future return on plan assets based principally upon prior
performance. These projected returns reduce the net benefit
costs the Company will record currently.
During 2002, the Company made changes to its assumptions
related to the discount rate and the expected return on plan
assets. Management consults with its actuaries when selecting
each of these assumptions.
In selecting the discount rate, the Company considers fixed-
income security yields, specifically AA-rated corporate bonds.
At December 31, 2002, the Company decreased the discount rates
used for all of its plans to 6.5% from the range of 7.0% to 7.25%
used in the prior year as a result of decreased yields for long-
term AA-rated corporate bonds.
In estimating the expected return on plan assets, the
Company considers past performance and future expectations for
the types of investments held by the plans as well as the
expected long-term allocations of plan assets to these
investments. At December 31, 2002, the Company decreased the
expected return on plan assets for all of its plans to 8.5% from
the range of 8.5% to 9% used in the prior year.
A variance in the assumptions described above would have an
impact on the projected benefit obligations, the accrued other
postretirement benefit liabilities, the annual net periodic
pension and other postretirement benefit cost, and the Company's
other comprehensive loss associated with its minimum pension
liability adjustment.
The fair value of the Company's pension plan assets declined
from $27.3 million at December 31, 2001 to $23.7 million at
December 31, 2002 due to the payment of benefits and the decline
in the equity markets. This decline will serve to increase
pension expense for 2003 through the calculation of "market-
related value", which recognizes changes in fair value averaged
on a systematic basis over five years, but the amount of these
contributions has not yet been determined.
For additional information regarding the Company's pension
and postretirement plans, see Note 13 of Notes to Consolidated
Financial Statements contained in the Company's 2002 Annual
Report to Stockholders.
The above listing is not intended to be a comprehensive list
of all of the Company's accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically
dictated by U.S. GAAP, with no need for management's judgement of
their application. There are also areas in which management's
judgment in selecting an available alternative would not produce
a materially different result. See the Company's audited
financial statements and notes thereto contained in its 2002
Annual Report to Stockholders for a discussion of the Company's
accounting policies and other disclosures required by U.S. GAAP.
Recent Accounting Pronouncements
In fourth quarter 2002, the Company early adopted the
provisions of FASB Statement of Financial Accounting Standards
No. 145 ("SFAS 145"), which rescinded FASB Statement of Financial
Accounting Standards No. 4, Reporting Gains and Losses from
Extinguishment of Debt ("SFAS 4"), and made other technical
corrections to existing authoritative pronouncements. SFAS 4
required companies to classify all gains and losses from
extinguishment of debt as extraordinary items, net of the related
tax effects, in their statements of operations. SFAS 145
requires gains and losses from extinguishment of debt to be
classified as income or loss from continuing operations unless
they meet the criteria for classification as extraordinary items
contained in Accounting Principles Board Opinion No. 30. In
accordance with the provisions of SFAS 145, the Company has
reclassified its first quarter 2002 early debt extinguishment
loss of $13.1 million, which was previously classified as an
extraordinary item, net of tax, into its loss from continuing
operations. This loss is included in "Refinancing costs" in the
Company's consolidated statement of operations for the quarter
ended March 31, 2002. See Note 2 of Notes to Consolidated
Financial Statements contained in this quarterly report on Form
10-Q for further discussion of the Company's refinancing costs.
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company has experienced no material changes in its
market risk exposures which would affect the quantitative and
qualitative disclosures provided in its Annual Report on Form 10-
K for the year ended December 31, 2002.
Item 4: Controls and Procedures
Under the supervision and with the participation of the
Company's management, including its Chief Executive Officer and
Chief Financial Officer, the Company has evaluated the
effectiveness of the design and operation of its disclosure
controls and procedures within 90 days of the filing date of this
Quarterly Report on Form 10-Q. Based upon this evaluation, the
Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures
are adequate and effective to ensure that material information
relating to the Company and its consolidated subsidiaries is made
known to them by others within those entities, particularly
during the period in which this Quarterly Report on Form 10-Q was
prepared. There were no significant changes in the Company's
internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
INTEGRATED DEFENSE TECHNOLOGIES, INC.
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1 Certifications Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
On April 30, 2003, the Company filed a report on Form 8-K to
furnish the April 30, 2003 announcement of its earnings
results for the quarter ended March 28, 2003 pursuant to Item
12. Disclosure of Results of Operations and Financial
Condition.
INTEGRATED DEFENSE TECHNOLOGIES, INC.
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.
INTEGRATED DEFENSE TECHNOLOGIES, INC.
---------------------------------------
(Registrant)
By: /s/ Thomas J. Keenan By: /s/ John W. Wilhoite
----------------------------- -----------------------------
Thomas J. Keenan John W. Wilhoite
Chief Executive Officer Vice President of Finance and
(Principal Executive Officer) Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 12, 2003 Date: May 12, 2003
CERTIFICATIONS
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Thomas J. Keenan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Integrated Defense Technologies, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 /s/ Thomas J. Keenan
------------------------------------
Thomas J. Keenan
Chief Executive Officer
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, John W. Wilhoite, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Integrated Defense Technologies, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state
a material fact necessary to make the statements made, in light
of the circumstances under which such statements were made, not
misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results
of operations and cash flows of the registrant as of, and for,
the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-
14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant, including
its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which
this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have
indicated in this quarterly report whether or not there were
significant changes in internal controls or in other factors that
could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material
weaknesses.
Date: May 12, 2003 /s/ John W. Wilhoite
-------------------------------------
John W. Wilhoite
Vice President of Finance and
Chief Financial Officer