Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

For the transition period from                               to                              

Commission file number 1-8533

DRS Technologies, Inc.
(Exact name of registrant as specified in its charter)

5 Sylvan Way, Parsippany, New Jersey 07054
(Address of principal executive offices)

(973) 898-1500
(Registrant's telephone number, including area code)

        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 ý        No o

        Indicate by check mark whether the Registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).  Yes ý        No o

        As of August 5, 2004, 27,195,823 shares of DRS Technologies, Inc. $0.01 par value common stock were outstanding.

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES

Index to Quarterly Report on Form 10-Q
For the Quarter Ended June 30, 2004

PART I—FINANCIAL INFORMATION

Item 1.    Financial Statements

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share data)
(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

1

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Earnings
(in thousands, except per-share data)
(Unaudited)

See accompanying Notes to Consolidated Financial Statements.

2

DRS TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)

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., its wholly-owned subsidiaries and a partnership of which DRS owns an 80% controlling interest, (hereinafter, 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. In the opinion of the Company, the interim consolidated 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, 2004, the results of operations for the three-month periods ended June 30, 2004 and 2003, and cash flows for the three-month periods ended June 30, 2004 and 2003. The results of operations for the three-month period ended June 30, 2004 are not necessarily indicative of the results to be expected for the full year. Certain fiscal 2004 amounts have been reclassified to conform to the fiscal 2005 presentation. These interim consolidated financial statements should be read in conjunction with the Consolidated Financial Statements of the Company for the fiscal year ended March 31, 2004, included in the Company's filing on Form 10-K, as amended, for the year ended March 31, 2004.

        On November 4, 2003, a wholly-owned subsidiary of the Company merged with and into Integrated Defense Technologies, Inc. (IDT) in a purchase business combination with IDT being the surviving corporation and continuing as a wholly-owned subsidiary of DRS (the Merger). The total consideration for the Merger consisted of $261.3 million in cash (excluding cash acquired of $27.5 million) and 4,323,172 shares of DRS common stock, or an aggregate value of approximately $367.4 million, and the assumption of $201.0 million in debt, including $0.2 million of IDT's capital leases. The Company financed the Merger with borrowings under its credit facility, the issuance of $350.0 million of senior subordinated notes and with existing cash on hand. The results of IDT's operations have been included in the Company's consolidated financial statements since the date of the Merger.

        During the fourth quarter of fiscal 2004, the Company implemented a new organizational operating structure that realigned its four legacy operating segments (i.e., the Electronic Systems Group, Electro-Optical Systems Group, Flight Safety and Communications Group and the Intelligence, Training and Test Group) into two operating segments. The two new operating segments are the Command, Control, Communications, Computers and Intelligence Group (C4I Group) and the Surveillance and Reconnaissance Group (SR Group). See Note 10 for a description of the operations of the C4I Group and SR Group. All prior-year amounts presented by operating segment have been restated to reflect the new operating segment structure.

2.    Stock-Based Compensation

        The Company has one stock-based compensation plan, the 1996 Omnibus Plan (Omnibus Plan). Under the terms of the Omnibus Plan, stock options and restricted stock may be granted to key employees, directors and consultants of the Company. The Company accounts for stock options granted to employees and directors under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations. Compensation expense for stock options granted to an employee or director is recognized in earnings based on the excess, if any, of the quoted market price of DRS common stock at the date of the grant, or other measurement date, over the amount an employee or director must pay to acquire the common stock. When the exercise price of the option granted to an employee or director equals or exceeds the

4

quoted market price of DRS common stock at the date of grant, the Company does not recognize compensation expense. Compensation cost for restricted stock is recorded based on the quoted market price of DRS common stock on the date of grant.

        The Company elected not to adopt the fair-value-based method of accounting for stock-based employee compensation, as permitted by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" (SFAS 123), as amended by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure—an amendment of SFAS No. 123." Had the Company adopted the fair-value-based method of SFAS 123, it would have recorded a non-cash expense for the estimated fair value of the stock options on the date of grant that the Company has granted to its employees and directors.

        The table below compares the "as reported" net earnings and earnings per share to the "pro forma" net earnings and earnings per share that the Company would have reported if it had elected to recognize compensation expense in accordance with the fair value-based method of accounting of SFAS 123. For purposes of determining the pro forma effects of SFAS 123, the estimated fair value of options granted was calculated using the Black-Scholes option pricing valuation model.

5

3.    Inventories

        Inventories are summarized as follows:

        Inventoried contract costs for the Company's businesses that are primarily government contractors include certain general and administrative (G&A) costs, including internal research and development costs (IRAD) and bid and proposal costs (B&P). G&A, IRAD and B&P costs are allowable, indirect contract costs under U.S. Government regulations. The Company allocates these costs to certain contracts, and accounts for them as product costs, not as period expenses.

        The table below presents a summary of G&A, IRAD and B&P costs included in inventoried contract costs and changes to them, including amounts charged to costs and expenses for the three-month periods ended June 30, 2004 and 2003. The cost data in the tables below do not include the G&A, IRAD and B&P costs for the Company's businesses that are not primarily U.S. Government contractors, as these costs are expensed as incurred:

        The Company expensed costs for internal research and development amounting to $8.8 million and $3.7 million for the three-month periods ended June 30, 2004 and 2003, respectively.

6

4.    Goodwill and Intangible Assets

        The following presents certain information about the Company's acquired intangible assets as of June 30, 2004 and March 31, 2004. All acquired intangible assets are being amortized over their estimated useful lives, as indicated below, with no estimated residual values.

        The aggregate acquired intangible asset amortization expense for the three-month periods ended June 30, 2004 and 2003 was $1.8 million and $1.0 million, respectively. The estimated acquired intangible amortization expense, based on gross carrying amounts at June 30, 2004, is estimated to be $7.1 million per year for fiscal 2005 through 2008, $7.0 million for fiscal 2009 and $6.9 million for fiscal 2010.

7

        The table below reconciles the change in the carrying amount of goodwill, by operating segment, for the period from March 31, 2004 to June 30, 2004.

(a)

During the third quarter of fiscal 2004, the Company acquired Integrated Defense Technologies, Inc. (IDT). The following table summarizes the IDT purchase price allocation adjustments recorded during the three months ended June 30, 2004.

        The $3.2 million increase to goodwill is associated with an IDT merger-related facility consolidation. The Company anticipates terminating approximately sixty individuals and exiting a leased facility, with the severance and lease payments being completed by the first quarter of fiscal 2006 and fiscal 2007, respectively. The Company is in the process of finalizing its estimates to complete certain contracts and certain other acquisition-related liabilities; thus the allocation of purchase price may change, however, such changes are not expected to be material. The Company anticipates completing its purchase price allocation in the second quarter of fiscal 2005.

5.    Product Warranties

        Product warranty costs are accrued when the covered products are delivered to the customer. Product warranty expense is recognized based on the terms of the product warranty and the related estimated costs, considering historical claims expense. Accrued warranty costs are reduced as these costs are incurred and as the warranty period expires and may be otherwise modified as specific product performance issues are identified and resolved. The table below presents the changes in the

8

Company's accrual for product warranties for the three months ended June 30, 2004 and 2003, which is included in accrued expenses and other current liabilities.

6.    Debt

        A summary of debt is as follows:

        On October 30, 2003, the Company issued $350.0 million of 6⁷/8% Senior Subordinated Notes, due November 1, 2013 (the Notes). The Notes were issued under an indenture with The Bank of New York. Subject to a number of exceptions, the indenture restricts the Company's ability and the ability of its subsidiaries to incur more debt, pay dividends and make distributions, make certain investments, repurchase stock, create liens, enter into transactions with affiliates, enter into sale lease-back transactions, merge or consolidate, and transfer or sell assets. The Notes are unconditionally guaranteed, jointly and severally, by certain of DRS's current and future wholly-owned domestic subsidiaries. The foreign subsidiaries and certain domestic subsidiaries of DRS do not guarantee the Notes. The market value of the Notes at June 30, 2004 was approximately $341.3 million. See Note 13, "Guarantor and Non-guarantor Financial Statements," for additional disclosure.

        The Company has a $411.0 million credit facility (the Credit Facility) consisting of a $175.0 million senior secured revolving line of credit and a $236.0 million senior secured term loan, and has the ability to borrow up to two additional term loans totaling $100.0 million at any time prior to maturity. As of June 30, 2004 and March 31, 2004, the Company had $204.2 million and $214.8 million of term loans outstanding against the Credit Facility. The Credit Facility is guaranteed by substantially all of DRS's domestic subsidiaries. In addition, it is collateralized by liens on substantially all of the assets of the Company's subsidiary guarantors' and certain of DRS's other subsidiaries assets and by a pledge of certain of the Company's non-guarantor subsidiaries' capital stock. The term loan and the revolving

9

credit facility will mature in November 2008 and November 2010, respectively. The interest rate on the Company's term loans was 3.2% as of June 30, 2004 (3.0% as of March 31, 2004) excluding the impact of the Company's interest rate swap agreements and the amortization of debt issuance costs. As of June 30, 2004, the Company had $137.6 million available under its revolving line of credit. There were no borrowings under the Company's revolving line of credit as of June 30, 2004 and March 31, 2004.

        During the three months ended June 30, 2004, the Company repaid an additional $10.0 million of its term loan, at its discretion, and recorded a $0.3 million charge to interest and related expenses for the related write-off of a portion of debt issuance costs. On July 1, 2004, the Company repaid an additional $5.0 million of its term loan at its discretion and recorded a $0.1 million charge to interest and related expenses for the write-off of debt issuance costs.

        From time to time, the Company enters into standby letter-of-credit agreements with financial institutions and customers, primarily relating to the guarantee of its future performance on certain contracts to provide products and services and to secure advanced payments it has received from its customers. As of June 30, 2004, $44.0 million was contingently payable under letters of credit (approximately $1.5 million and $5.1 million of the letters of credit outstanding as of June 30, 2004 were issued under the Company's previous credit agreement and IDT's previous credit agreement, respectively, and are not considered when determining the availability under the Company's revolving line of credit).

        The Company has a mortgage note payable that is secured by a lien on its facility located in Palm Bay, Florida, and bears interest at a rate equal to the one-month LIBOR plus 1.65%. The balance of the mortgage at both June 30, 2004 and March 31, 2004 was $3.1 million. The Company has an interest rate swap that hedges the mortgage pursuant to which the Company receives interest at a variable rate equal to the one-month LIBOR plus 1.65% and pays interest at a fixed rate of 7.85%. This swap agreement is accounted for as a cash flow hedge, and as such, changes in the fair value of the swap agreement are recorded as adjustments to accumulated other comprehensive earnings. At June 30, 2004, the Company also had $3.0 million outstanding on a promissory note bearing interest at 6% per annum, relating to DRS's October 15, 2002, acquisition of DKD, Inc. The remaining principal and related accrued interest are due on October 15, 2004.

        The Company has two interest rate swap agreements, each in the amount of $25.0 million expiring on June 30, 2008, with Wachovia Bank, N.A. and Fleet National Bank (the Banks), respectively. These swap agreements effectively convert the variable interest rate on a total of $50.0 million of the Company's term loan to a fixed interest rate. Under the terms of these swap agreements, the Company will pay or receive the difference between the variable interest rate payable by the Banks and the fixed 2.59% interest rate payable by the Company. These swap agreements are accounted for as cash flow hedges, and as such, changes in the fair values of the swap agreements are recorded as adjustments to accumulated other comprehensive earnings.

7.    Earnings Per Share

        Basic earnings per share (EPS) is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during each period. The computation of diluted earnings per share includes the effect of shares from the assumed exercise of dilutive stock options,

10

restricted stock and restricted stock units. The following table presents the components of basic and diluted earnings per share: