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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended March 31, 2001
Commission File Number 1-8533
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DRS Technologies, Inc.
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Delaware 13-2632319
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5 Sylvan Way, Parsippany, New Jersey 07054
(973) 898-1500
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on which Registered
------------------- -------------------
Common Stock, $.01 par value American Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The market value of shares of common stock held by non-affiliates, based on
the closing prices for such stock on the American Stock Exchange on June 8,
2001, was approximately $260,508,000. The number of shares of common stock
outstanding as of June 22, 2001 was 12,116,670.
DOCUMENTS INCORPORATED BY REFERENCE
1. Definitive Proxy Statement, dated June 27, 2001, for the Annual Meeting of
Stockholders, incorporated in Part III of this Form 10-K.
DRS Technologies, Inc.
Form 10-K
For the Fiscal Year Ended March 31, 2001
Table of Contents
PART I
Page
Item 1. Business.......................................................... 3
Item 2. Properties........................................................ 17
Item 3. Legal Proceedings................................................. 19
Item 4. Submission of Matters to a Vote of Security Holders............... 19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters........................................................... 20
Item 6. Selected Financial Data........................................... 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................. 22
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........ 35
Item 8. Financial Statements and Supplementary Data....................... 37
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.............................................. 65
PART III
Item 10. Directors and Executive Officers of the Registrant................ 66
Item 11. Executive Compensation............................................ 66
Item 12. Security Ownership of Certain Beneficial Owners and Management.... 66
Item 13. Certain Relationships and Related Transactions.................... 66
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K... 67
Signatures ................................................................ 68
Exhibit Index................................................................ 69
PART I
The following discussion and analysis contains certain forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements in this report are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Persons reading this report
are cautioned that risks and uncertainties are inherent to forward-looking
statements. Accordingly, the Company's actual results could differ materially
from those suggested by such forward-looking statements. Risks include, without
limitation: the effect of the Company's acquisition strategy on future operating
results; the uncertainty of acceptance of new products and successful bidding
for new contracts; the effect of technological changes or obsolescence relating
to the Company's products and services; the effects of government regulation or
shifts in government policy, as they may relate to the Company's products and
services; competition; and other matters referred to in this report.
Item 1. Business
General
DRS Technologies, Inc. ("DRS", the "Company", "we", "us", "our") is a
leading supplier of defense electronics products and systems. We provide
high-technology products and services to all branches of the U.S. military,
major aerospace and defense prime contractors, government intelligence agencies,
international military forces and consumer markets. Incorporated in 1968, DRS
has served the defense industry for over thirty years. We are a leading provider
of thermal imaging devices, combat display workstations, electronic sensor
systems, mission recorders and deployable flight incident recorders. Our
products are deployed on Navy surface ships, submarines and surveillance
aircraft, U.S. Army battle tanks and other vehicles, as well as in other
military and non-military applications.
We have increased our annual revenues and operating income at a compound
annual growth rate of approximately 33% and 34%, respectively, over the last
five years. In addition, from fiscal 2000 to fiscal 2001, operating income
increased over 43% and net earnings increased over 177%. For the year ended
March 31, 2001, we generated sales of $427.6 million and operating income of
$37.5 million.
Company Organization
We design and manufacture electronic systems for several of the U.S.
military's well-funded programs and high-profile platforms. We operate in three
principal business segments on the basis of products and services offered. Each
operating unit is comprised of separate and distinct businesses: the Electronic
Systems Group (ESG), the Electro-Optical Systems Group (EOSG) and the Flight
Safety and Communications Group (FSCG). All other operations are grouped in
"Other."
Financial information on our reportable business segments is presented in
Note 15 to our Consolidated Financial Statements, which are included in this
Form 10-K (see Item 8 - Financial Statements and Supplementary Data). Additional
financial data and commentary on the results of operations for the reportable
segments are included in Management's Discussion and Analysis of Financial
Condition and Results of Operations, which is also included in this Form 10-K
(see Item 7 - Management's Discussion and Analysis of Financial Condition and
Results of Operations). These data and comments should be referred to in
conjunction with the summary description of our business segments which follows.
Electronic Systems Group
ESG is a leading provider of naval computer workstations used to process and
display integrated combat information. ESG produces rugged computers and
peripherals, surveillance radar and tracking systems, acoustic signal
processing and display equipment, and combat control systems for U.S. and
international military organizations. ESG performs field service and depot level
repairs for its products, as well as other manufacturers' systems, and also
provides systems and software engineering support to the U.S. Navy for the
testing of shipboard combat systems. ESG products are used on front-line
platforms, including Aegis destroyers and cruisers, aircraft carriers,
submarines and surveillance aircraft. ESG's products also are used in the U.S.
Army's ongoing battlefield digitization programs. ESG markets directly to
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various U.S. Government agencies, primarily in the intelligence community, and
has teamed with leading corporations, such as Lockheed Martin and General
Dynamics.
ESG's major products and services include:
o AN/UYQ-70. AN/UYQ-70 Advanced Display Systems are advanced,
open-architecture display systems designed for widespread application through
software and hardware modification for deployment on Navy platforms such as
Aegis and other surface ships, submarines and airborne platforms. These systems
are self-contained, microprocessor-based units complete with interface software
and offer advanced computing and graphic capabilities. These units replace
previous generation units that are dependent upon a shipboard computer for
approximately 25% of the cost of the legacy systems. These systems were
developed for the U.S. Navy under a subcontract with Lockheed Martin Tactical
Defense Systems. Revenues from the AN/UYQ-70 program accounted for approximately
22% of total consolidated revenues for the year ended March 31, 2001.
o Rugged Computer Products. The Explorer (often referred to as the CCU,
Compact Computer Unit) provides the full capabilities for the Common
Hardware/Software (CH/S-2) program in a portable, self-contained unit with its
own power source and an integrated flat panel display. The unit uses
exchangeable media (hard disks and tape units) and provides compatibility of
information and system security. The unit shares its design with the Explorer 2
and is being complemented with an upgraded version with a larger display and
greater capabilities. The Genesis 300, a variant of the Genesis SR (short rack),
features an integrated 12-inch screen and keyboard. Since its launch in 1997,
the Genesis SR, which supports applications such as mission planning, tactical
communications, combat support and logistics support, has been sold into
military programs in Europe and Southeast Asia.
o AN/SPS-67. AN/SPS-67 Radar Systems are being deployed on the U.S. Navy's
new DDG-51 Aegis class ships, Spanish Navy's F-100 class ships and other
international naval forces. They provide ocean surveillance and navigation data,
including detection and tracking of low flying aircraft and surface targets. An
integral part of the ships' command and control combat system, the AN/SPS-67 has
a potential market application on other surface ships in the Navy's fleet, as
well as on aircraft carriers and amphibious operation assault ship platforms.
o AN/SQR-17A(V)3. The AN/SQR-17A(V)3 Mobile In-shore Undersea Warfare
(MIUW) system is a multi-sensor processing system that is deployed in land-based
vans, utilizing sonobuoys and sensor string array passive detectors for harbor
defense, coastal defense and amphibious operations surveillance, as well as for
the enhancement of drug interdiction efforts. These systems currently are being
procured for use in 22 field installations. We provide the underwater subsystem,
including sensor string arrays for MIUW.
o Technical Support Services. Technical Support Services perform field
service and depot level repairs for ESG products, as well as other
manufacturers' systems, and also provide systems and software engineering
support to the U.S. Navy for the testing of shipboard combat systems. The
facilities are located in close proximity to U.S. Naval bases in Norfolk,
Virginia and San Diego, California. Services, including equipment and field
change installation, configuration audit, repair, testing and maintenance, are
performed for the U.S. Navy and, to a lesser extent, commercial customers. DRS
Technical Services also has performed work for foreign navies, including those
of Australia, Egypt, Greece, the Republic of China and Turkey.
o Electronic Manufacturing and Systems Integration Services. ESG operates
an ISO 9001 certified electronic manufacturing and integration facility in
Johnstown, PA. This facility produces ESG products and provides contract
manufacturing services for many aerospace and military prime contractors and
programs.
4
The products, their applications and platforms or end users of our
Electronic Systems Group are summarized in the table below:
Product Description Platforms/Customers
- --------------------------- ---------------------------------------------- --------------------------------------
Tactical/Sensor Combat AN/UYQ-70 Advanced Display Systems family of o U.S. Navy Aegis cruisers/destroyers
Display Systems products comprised of COTS-based systems o Aircraft carriers
integrating the latest information o NSSN, Trident and other attack
processing and display technology for submarines
combat, command and control, and o E-2C Hawkeye surveillance aircraft
mission-essential applications. Open-system o LHA Amphibious assault operations
architecture, ease of technology insertion, platforms
adaptability across platforms, and seamless o U.S. Navy/Marine Corps Cooperative
integration capabilities provide ease of Engagement (CEC) Capability platforms
upgrading and costs savings throughout life
cycle. Represents the next generation in
the evolution of force readiness and
information sharing in network-centric
environment.
- --------------------------- ---------------------------------------------- --------------------------------------
Rugged Computer Systems COTS-based computers, servers and other o U.S. Army
and Peripherals peripheral equipment in battlefield-ready o U.S. Navy
hardware that meets reliability and o Range of international military
durability standards of harsh environments. ground mobile, airborne, surface,
Explorer(TM)used in the U.S. Army's CH/S-2 subsurface platforms
program supplied throughout Army for o Government intelligence, Tempest
communications, tactical information applications
processing, and coordination. Genesis(TM)for
mission planning, combat support, tactical
communications, logistics. Tempest systems
provide secure communications and data
processing for variety of intelligence
agency applications.
- --------------------------- ---------------------------------------------- --------------------------------------
Radar Systems AN/SPS-67(V)3 Radar System provides o U.S. Navy Aegis cruisers/destroyers
automatic target detection, clutter lock o Spanish F-100, Royal Norwegian
digital moving target indications, Coast Guard, other international
track-while-scan capability and surface ships, aircraft carriers,
command/weapon interface for surface and low international surface ships,
flying object detection. amphibious operations platforms
- --------------------------- ---------------------------------------------- --------------------------------------
Littoral Surveillance State-of-the-art string array sonar sensors o U.S. Navy MIUW shore surveillance
Systems and multi-sensor processing systems for vans
mobile in-shore warfare, amphibious operations o Harbor and coastal defense
and harbor defense. AN/SQR-17A(V)3 Sonar Signal o Amphibious operation surveillance
Processing Systems installed in electronically o Drug interdiction efforts
equipped vans for Mobile In-Shore Underwater
Warfare Systems Upgrade (MIUW-SU) program.
- --------------------------- ---------------------------------------------- --------------------------------------
Technical Support Services East and West coast naval support, including o U.S. and international naval bases
Integrated Logistics Support (ILS), o Worldwide field support
technical manuals, repair, system
installation, drawing packages, training,
maintenance planning, configuration
management, on line and phone support, R&D
capabilities.
- --------------------------- ---------------------------------------------- --------------------------------------
5
Product Description Platforms/Customers
- --------------------------- ---------------------------------------------- --------------------------------------
Electronic Manufacturing, Value-added electronic manufacture of our o General Dynamics CH/S-2 rugged
Integration and Testing products. Advanced, state-of-the-art ISO computer systems for U.S. Army
Services 9001 and AS-9000 Quality System Standards o United Defense M2A3 Bradley
certified manufacturing, test, system Fighting Vehicles for U.S. Army
integration facilities for military and o U.S. Navy AN/UYQ-70 Display
commercial customers. Specializes in Systems for Lockheed Martin
production of UYQ-70 workstations, CH/S-2 o Northrop Grumman E-8C Joint STARS
rugged computers, cable and wire harness aircraft for U.S. Air Force
assembly for tanks and aircraft, printed o Condor surveillance system
circuit cards, full system integration and
test services.
- --------------------------- ---------------------------------------------- --------------------------------------
Electro-Optical Systems Group
EOSG produces systems and subsystems for thermal imaging and targeting
products used in some of the U.S. Army's most important battlefield
platforms, including the Abrams Main Battle Tank, Bradley Infantry Fighting
Vehicle and the HMMWV scout vehicle. EOSG designs, manufactures and markets
products that allow operators to detect, identify and target objects based
upon their infrared signatures regardless of the ambient light level. EOSG is
also a designer and manufacturer of eye-safe laser range finders and
multiple-platform weapons calibration systems for such diverse air platforms
as the Apache attack helicopter and AC-130U gunship. EOSG is leveraging its
technology base by expanding into related non-defense markets and
manufactures electro-optical modules for a commercial device used in
corrective laser eye surgery.
EOSG's major products and contracts include:
o Horizontal Technology Integration Second Generation Forward Looking
Infrared (FLIR), thermal imaging systems (HTI SGF Thermal Imaging Systems). HTI
SGF Thermal Imaging Systems are installed on the U.S. Army's Abrams Battle
Tanks, Bradley Infantry Fighting Vehicles and HMMWV scouts. Revenues from the
HTI SGF Thermal Imaging Systems program accounted for approximately 11% of total
consolidated revenues for the year ended March 31, 2001.
o Improved Bradley Acquisition System (IBAS). IBAS provides the thermal
imaging and fire control system installed on Bradley Infantry Fighting Vehicles.
o Long Range Advanced Scout Surveillance System (LRAS3). LRAS3 is the
thermal imaging sighting systems on the HMMWV scouts.
o Standard Advanced Dewar Assembly II Detector (SADA II). SADA II is the
specified detector dewar cooler module procured by the U.S. Army for its
Horizontal Technology Integration (HTI) program for use in the Second Generation
night vision equipment upgrades on the MIA2 Abrams Battle Tank and the Bradley
Infantry Fighting Vehicle. The HTI upgrade greatly increases the range
performance of these systems for our soldiers.
o Infrared Scanning Focal Plane Arrays (scanning FPAs), staring FPAs and
linear coolers. Scanning FPAs, staring FPAs and linear coolers are used to
provide cooled detector assemblies for military thermal imaging devices. An FPA
is a two-dimensional assembly of electro-optical detecting pixels used to
generate thermal imaging capability. FPAs are also used in heat-seeking missile
guidance systems and missile warning systems, applications for which no
pictorial image is required.
6
o Day/Night Vision Binoculars. EOSG is currently under contract to develop
and manufacture these units for U.S. and foreign militaries. The Nightstar(R)
night vision binocular is a hand-held viewing binocular that incorporates an
image intensifier tube, laser range finder and digital compass in a compact
lightweight system suited for infantry units, special forces and night
operations involving forward observers and reconnaissance patrols. Nightstar(R)
displays range and azimuth data in the soldier's eyepiece, allowing
identification of targets and providing essential fire support data for
nighttime engagement. These units have a range of 20 to 2,000 meters.
o Tube-launched Optically-tracked Wire-guided (TOW) Optical Sight. EOSG is
currently the only U.S. qualified producer of two of the three critical
assemblies in the TOW anti-tank missile launcher. The complex electro-optical
system produced by EOSG is the main component of this premier ground antitank
weapons system for the U.S. Army and Marine Corps.
o Multiple Platform Boresighting Equipment (MPBE). MPBE currently is used
on the U.S. Army's Apache helicopters and Apache Longbow helicopters, the Marine
Corps' Cobra helicopters, and the Air Force's AC-130 Spectre gunship radar as
well as aircraft of international military forces. Boresighting equipment is
used to align and harmonize the navigation, targeting and weapons systems on
rotary- and fixed-wing aircraft. This technology is proprietary to us.
o LADARVision. LADARVision combines a laser radar eye tracker with a
narrow-beam shaping technology for the correction of near-sightedness,
far-sightedness and astigmatism. LADARVision is the first FDA -approved laser
system to incorporate an eye tracker during surgery.
The products, their applications and platforms or end users of our
Electro-Optical Systems Group are summarized in the table below:
Product Description Platforms/Customers
- --------------------------- ----------------------------------------------- --------------------------------------
Sighting and Day/Night Second Generation Forward Looking Infrared o U.S. Army M1 Abrams Battle Tanks
Vision Systems (Gen II FLIR) thermal imaging, sighting and o U.S. Army M2 Bradley Fighting
weapons systems providing common night vision Vehicles
technology across land/air platforms. o M1025 and M1114 Long Range Scouts
Improved Bradley Acquisition System (IBAS), o AH-64 Apache Longbow helicopter
Long Range Scout Surveillance System (LRAS3), o RAH-66A Comanche helicopter
Nightstar(R) binoculars. Higher detail at o Ground personnel forces
greater ranges, regardless of dust, smoke,
fog, low light level and other battlefield
obscurants.
- --------------------------- ----------------------------------------------- --------------------------------------
Missile Guidance and Advanced Infrared Focal Plane Arrays (IRFPA), o U.S. Army Javelin Anti-Tank
Infrared Components/ Standard Advanced Dewar Assemblies (SADA I, Commander's Launch Unit (CLU)
Assemblies, Precision II, III), cooler assemblies for target o Sighting systems for U.S. Army
Optics tracking, imaging used in our sighting and o AH-64 Apache Longbow helicopter
night vision systems. Mirror assemblies that o RAH-66A Comanche helicopter
focus infrared energy onto missile guidance o U.S. Army Stinger and other
device. Diamond-turned components, optics missiles
prisms/lenses for fire control devices. o Satellite systems used in theater
missile defense
- --------------------------- ----------------------------------------------- --------------------------------------
Eye-Safe Laser Range Incorporated in Nightstar(R) Day/Night o U.S. Army Attack helicopter and
Finders Binocular Systems. Transmit target range, and ground vehicle combat training
azimuth and elevation data directly to combat o Binoculars for ground troops and
computers, which pass coordinates on to fire special operations units
and special operations units control units.
Accurate within five meters at maximum range.
Protect eyes against blindness caused by laser
beams.
- --------------------------- ----------------------------------------------- --------------------------------------
7
Product Description Platforms/Customers
- --------------------------- ----------------------------------------------- --------------------------------------
Weapons Fire Control Sighting and targeting systems, eye-safe U.S. Army Abrams Main Battle Tanks,
Systems laser range finders with Global Positioning Bradley Acquisition Systems, TOW
Systems (GPS). Acquisition Systems, missile launch
systems
- --------------------------- ----------------------------------------------- --------------------------------------
Multiple-Platform Portable ground-support device that aligns o U.S. Army AH-64 Apache helicopters
Boresight Equipment aircraft's navigation, targeting and weapon o U.S. Marine Corps AH-1F Cobra
systems with the pilot's sighting gear to helicopters
ensure synchronization and target accuracy o U.S. National Guard Cobras
when weapons are released. Generic for o International Apache and Cobra
multiple platforms. Provide significant cost helicopters
reduction by reducing platform down time. o U.S. Air Force F-16 strike fighter
and for AC-130U gun ship radar system
- --------------------------- ----------------------------------------------- --------------------------------------
Electro-Optical System Value-added electronic manufacture of our o Sighting and targeting systems
Manufacturing, products. Advanced, state-of-the-art ISO o Focal plane arrays
Integration and Testing 9000 Quality System Standard certified o Cryogenics and cooler assemblies
Services manufacturing, test, system integration o Laser products
facilities for military and commercial o Diamond-tuned components
customers. Specializes in advanced infrared o Optical coatings and lenses/mirrors
and electro-optical systems production. for military applications
o LADARVision(R)modules for laser eye
surgery device
- --------------------------- ----------------------------------------------- --------------------------------------
High-Speed Digital Airborne Separation Video System, a fully o U.S. Navy F/A-18 Hornet strike
Imaging Systems integrated digital imaging system recording aircraft
weapons separation on test flights. Captures
multiple images of projectiles and records
hypervelocity impacts. Provides cost/time
efficiencies gained with digital processing.
- --------------------------- ----------------------------------------------- --------------------------------------
Flight Safety and Communications Group
FSCG is a leading manufacturer of deployable flight emergency or "black
box" recording equipment. These complete emergency avionics systems combine
the functionality of a crash locator beacon with a flight incident recorder
for search, recovery and crash analysis. FSCG uses advanced commercial
technology in the design and manufacture of multi-sensor digital, analog and
video data capture and recording products, as well as high-capacity data
storage devices for harsh aerospace and defense environments. FSCG also
manufactures shipboard communications and infrared laser warning and range
finder displays for Canadian and other foreign navies. FSCG is also a leading
manufacturer of ultra high-speed digital imaging systems.
FSCG's major products and services include:
o Emergency Avionics System 3000 (EAS3000): The EAS3000 is an integrated
in-flight data recorder, cockpit voice recorder and emergency locator beacon
system constructed in a modular, deployable and crash-survivable package,
designed to withstand intensive destructive forces. Mounted on the outside of a
helicopter, the EAS3000 provides rapid location of an accident site, allowing
early rescue of survivors and recovery of vital flight and cockpit voice data.
FSCG provides the EAS3000 for use on British EH-101 helicopters and its
variants, as well as on the Italian MMI, Canadian Cormorant, Tokyo Metropolitan
Police and other military and search and rescue helicopters. FSCG also developed
a version of the EAS3000, known as EAS3000F, for use on fixed-wing aircraft.
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o Deployable Flight Incident Recorders: Designed to withstand the intense
destructive forces associated with an aircraft crash, deployable flight incident
recorders are mounted beneath the airframe skin. Deployment commands provided by
the switch activation trigger release the unit and activate the recorder. These
systems also contain crash locator beacons. They have been installed
successfully on fighter aircraft, such as the German Tornado and the U.S. Navy
F/A-18 Hornet, and are used to record both flight and voice data.
o Aircraft Crash Locator Beacons: Consisting of a composite airfoil which
encloses a radio transmitter and power source, crash locator beacons are
designed to deploy and activate either before or upon impact. Used primarily on
fixed-wing military aircraft, these crash position locators enable the rapid
location of downed aircraft and timely rescue of survivors.
o Integrated Shipboard Communications Systems: Using the latest available
technology and COTS-based designs, FSCG produces integrated digital shipboard
communications systems which provide single-button access to tactical interior,
exterior and secured channels for joint operations. These Shipboard Integrated
Communications (SHINCOM) systems improve communication efficiency by eliminating
the need for multiple single-purpose communications systems, thus providing a
comprehensive system solution. FSCG's SHINCOM systems are capable of handling
shipboard interior communications; communications with other aircraft, surface
and undersea vessels; and UHF/VHF and broadband communications via satellite
with shore stations and cooperating units. These systems are used aboard the
Canadian Iroquois class ships and the U.S.S. George Washington aircraft carrier.
FSCG also provides data link components and systems, modems, digital telephone
and radar surveillance systems.
o Electronic Manufacturing and Systems Integration Services: FSCG operates
an ISO 9001 certified and space qualified electronic manufacturing facility in
Carlton Place, Canada. This facility produces FSCG products and provides
contract manufacturing services for aerospace and military prime contractors and
programs. FSCG's manufacturing expertise and capabilities include:
o surface mount and through-hole multi-layer computer circuit
assemblies (CCAs);
o harness fabrication;
o power supply assembly and testing;
o motherboard assembly and testing; and
o systems integration services.
o WRR-818: This ruggedized airborne video recorder captures various sensor
and video data on the U.S. Navy's F/A-18 and on the U.S. Air Force's A/OA-10A
aircraft. The U.S. Army also has selected it for use in its Kiowa Warrior attack
helicopters. A similar recorder, the WRR-812, has been adapted for use in the
Canadian Army's Light Armored Reconnaissance Vehicles.
o DCMR-24 and 100: These are digital cassette mission recorders that use
high-capacity digital tape formats (DTF) under license by Sony Corporation.
Incorporating DTF technology, FSCG produces the Acoustic Data Recorder for U.S.
Navy P-3C patrol aircraft.
o Framing Cameras: Framing cameras have the ability to take a sequence of
pictures at the same location at very high speeds. These cameras are designed to
produce images at equivalent speeds of several million pictures per second,
although in practice 4-8 frames are taken. Framing cameras are used primarily
for research in the areas of electrical breakdown/discharge, ballistics,
detonics and combustion.
o Electronic Ballistic Range Cameras: These cameras use digital imaging to
capture a single picture of a projectile in flight. Slower than framing cameras
but with better resolution, these cameras are used in the development and proof
testing of ballistics.
9
The products, their applications and platforms or end users of our Flight
Safety and Communications Group are summarized in the table below:
Product Description Platforms/Customers
- --------------------------- ----------------------------------------------- --------------------------------------
EAS 3000 Emergency Deployable systems for helicopters o U.K. Royal Air Force & Navy EH-101
Avionics Systems/Crash incorporating data recorder, cockpit voice Merlin and variants
Locator Beacons recorder and crash locator beacon, designed o Cormorant search/rescue helicopters
to improve flight safety, survivability, o Italian MMI helicopter
future improvements. Aerodynamic design o Tokyo police helicopters
deploys unit from exterior of helicopter
prior to crash. Floats indefinitely on water.
Crash-hardened package allows survival of
unit in land crash.
- --------------------------- ----------------------------------------------- --------------------------------------
Deployable Flight Deployable systems for fixed-wing aircraft o U.S. Navy and international F/A-18
Incident Recorders incorporating data recorder, cockpit voice Hornet strike aircraft
Systems (DFIRS) recorder and crash locator beacon, designed o German Air Force/Navy Tornado
to improve flight safety, survivability, o Air Force One aircraft
future improvements. Aerodynamic design o Canadian CP-140 Aurora patrol aircraft
deploys unit from exterior of aircraft prior o Other international strike fighters
to crash. Floats indefinitely on water.
Crash-hardened package allows survival of
unit in land crash.
- --------------------------- ----------------------------------------------- --------------------------------------
Integrated Ship Tactical and secure interior ship o U.S. George Washington aircraft
Communications Systems communication systems. Advanced carrier
communications capabilities providing single o Canadian Iroquois class ships
button access that support complex C4I o Venezuelan Mariscal Sucre and
operations. other international surface fleets
- --------------------------- ----------------------------------------------- --------------------------------------
Electronic Manufacturing Value-added electronic manufacture of our o Boeing
and Integration Services products. Advanced, state-of-the-art ISO o Smiths Industries
9000 Quality System Standard certified o International Space Station
manufacturing, test, system integration o Canadian and other international
facilities for military and commercial military and space systems
customers. Specializes in tactical,
reconnaissance, training and spaced-based
products.
- --------------------------- ----------------------------------------------- --------------------------------------
Cockpit Video Recording WRR-818, -812 recorders with over 2 hours o U.S. Navy F/A-18 Hornet strike aircraft
Systems recording time for voice, video data, flight o U.S. Air Force A-10 Thunderbolt
data. o U.S. Army OH-58D Kiowa Warrior attack
aircraft
o Canadian Light Armored Reconnaissance
Vehicles
- --------------------------- ----------------------------------------------- --------------------------------------
Mission Recording Systems AN/USH-42 recorders capture mission critical o U.S. Navy P-3C Orion and S-3 Viking
data for target verification, training and patrol aircraft
archiving for aircraft missions across air, o U.S. Navy and international Navies'
land and sea. Acoustic Data Recorders upgrading SH-60F helicopters
existing recorders on P-3C aircraft. AN/AQH-11
Helicopter Mission Recording Systems. DCMR-24
and -100 high-capacity digital cassette
recorders/data storage devices using DTF(TM)
under license by Sony Corporation.
- --------------------------- ----------------------------------------------- --------------------------------------
10
Product Description Platforms/Customers
- --------------------------- ----------------------------------------------- --------------------------------------
Ultra High-Speed Digital In flight controls avoid ailures/re-testing. o International ballistic test ranges
Imaging Systems Imacon(TM), Frame and Streak and other ultra o Engine combustion studies and other
high-speed cameras provide industrial customers scientific and university research
with this capability for a variety of laboratory applications
applications.
- --------------------------- ----------------------------------------------- --------------------------------------
Infrared Search and Track Signal Processing Unit and Optical Lens o Canadian and Dutch ship torpedo
Systems assembly for the SIRIUS Long-Range Infrared detection
Search and Track (LR-IRST) system, an o Canadian Light Armored Vehicle
automatic infrared detection and target target detection
tracking system for anti-ship missiles and
aircraft. An integral part of the ships' local
area defense system. Complements existing radar
surveillance systems under conditions
unfavorable for radar alone.
- --------------------------- ----------------------------------------------- --------------------------------------
Communications Systems Tactical and secure data links, rugged o NATO surface ships and aircraft
telephonic devices, digital voice terminals, o Military communications networks
high-frequency data modems, network devices.
Airborne Link 11 Data Terminal Sets
- --------------------------- ----------------------------------------------- --------------------------------------
Other
Other includes the activities of the parent company, DRS Corporate
Headquarters, DRS Ahead Technology and certain non-operating subsidiaries of the
Company. DRS Ahead Technology produces magnetic head components used in the
manufacturing process of computer disk drives, which burnish and verify the
quality of disk surfaces. DRS Ahead Technology also services and manufactures
video heads used in broadcast television equipment.
Strategy
Our goal is to enhance our position as a leading supplier of defense
electronics products and systems. Our strategy to achieve our objective
includes:
o Expand Existing Relationships. We intend to expand our relationships with
government and industry decision makers by continuing to perform on our
existing contracts at a high level from a quality and timeliness
perspective. Our experience has shown that these factors greatly enhance
our prospects for obtaining additional business. Our strong internal
revenue growth rate over the past five years reflects our ability to
generate repeat business from existing customers.
o Develop and Expand Existing Technologies. We intend to continue to develop
our technology through a combination of customer-funded research and
development and our own internal research and development. Customer-funded
development contracts offer us the opportunity to work with our customers
to design and manufacture new systems and components.
o Pursue Strategic Acquisitions. We intend to actively participate in the
ongoing consolidation of the aerospace and defense supply chain. We intend
to continue to enhance our existing product base and enter into new markets
through selective acquisitions.
o Build Strategic Alliances. Through teaming agreements and industry
alliances and joint ventures, we intend to continue to exploit specific
programs and product opportunities to obtain new contracts and expand our
global reach.
o Continue to React Quickly to Changing Defense Environment. In addition to
being well positioned for conventional warfare roles, our products such as
thermal imaging products, computer ruggedization products and the Mobile
Inshore Undersea Warfare (MIUW) are highly adaptable to address the new
military requirements such as speed of deployment and non-conventional
threats such as terrorism.
11
o Pursue Selective Commercial Opportunities. We seek to identify and exploit
commercial applications for selected products and technologies that we
currently sell to defense customers. An example of this is our profitable
LADARVision program which was generated out of our Electro-Optical Systems
Group.
Recent Acquisitions
On June 14, 2000, we acquired the assets of General Atronics Corporation
for approximately $11.5 million in cash and stock. Located in Wyndmoor,
Pennsylvania, and now operating as DRS Communications Company, LLC, the company
designs, develops and manufactures military data link components and systems,
high-frequency communication modems, tactical and secure digital telephone
components, and radar surveillance systems for U.S. and international
militaries.
Customers
We sell a significant portion of our products to agencies of the U.S.
Government, primarily the Department of Defense, to foreign government agencies
or to prime contractors or their subcontractors. Approximately 78%, 80% and 81%
of total consolidated revenues for fiscal 2001, 2000 and 1999, respectively,
were derived directly or indirectly from defense contracts for end use by the
U.S. Government and its agencies. See "Foreign Operations and Export Sales"
below for information concerning sales to foreign governments.
Backlog
The following table sets forth our backlog by major product group
(including enhancements, modifications and related logistics support) at the
dates indicated.
"Backlog" refers to the aggregate revenues remaining to be earned at a
specified date under contracts held by us, including, for U.S. Government
contracts, the extent of the funded amounts thereunder which have been
appropriated by Congress and allotted to the contract by the procuring
Government agency. Backlog also includes all firm orders for commercial
products. Fluctuations in backlog generally relate to the timing and amount of
defense contract awards.
Government Products: March 31, 2001 March 31, 2000 March 31, 1999
-------------- -------------- --------------
U.S. Government..................... $363,777,000 $303,600,000 $293,400,000
Foreign Government.................. 55,388,000 56,200,000 48,400,000
------------- -------------- --------------
419,165,000 359,800,000 341,800,000
Commercial Products................... 37,339,000 28,300,000 20,900,000
------------- -------------- ----------------
$456,504,000 $388,100,000 $362,700,000
============ ============ ============
Backlog at March 31, 2001 was approximately $456.5 million, as compared
with $388.1 million at March 31, 2000. The Company booked $478.8 million in new
orders in fiscal 2001. The increase in backlog was due primarily to increased
bookings, most notably for combat display workstations and infrared sighting and
targeting systems, offset, in part, by the effect of increased revenues and
$27.2 million in backlog contributed by the Company's fiscal 2001 first quarter
acquisition of DRS Communications Company. Approximately 87% of backlog as of
March 31, 2001 is expected to result in revenues during fiscal 2002.
Research and Development
The defense electronics sector is subject to rapid technological changes,
and our future success will depend in large part upon our ability to improve
existing product lines and to develop new products and technologies in the same
or related fields. Thus, our technological expertise is an important factor
affecting our growth. A portion of our research and development activities take
place in connection with customer-sponsored research and development contracts.
We recorded revenues for customer-sponsored research and development of
approximately $32.9 million, $23.5 million, and $15.4 million for fiscal 2001,
2000 and 1999, respectively. Such customer-sponsored activities are primarily
the result of contracts directly or indirectly with the U.S. Government. We also
invest in internal research and development.
12
Such expenditures were approximately $8.0 million, $9.9 million and $5.2 million
for fiscal 2001, 2000 and 1999, respectively.
Contracts
Our contracts are normally for production, service or development.
Production and service contracts are typically of the fixed-price variety with
development contracts currently of the cost-type variety. Because of their
inherent uncertainties and consequent cost overruns, historically, development
contracts have been less profitable than production contracts.
Fixed-price contracts may provide for a firm fixed price or they may be
fixed-price incentive contracts. Under the firm fixed-price contracts, we agree
to perform services for an agreed-upon price. Accordingly, we derive benefits
from cost savings, but bear the risk of cost overruns. Under the fixed-price
incentive contracts, if actual costs incurred in the performance of the
contracts are less than estimated costs for the contracts, the savings are
apportioned between the customer and us. If actual costs under such a contract
exceed estimated costs, however, excess costs are apportioned between the
customer and us, up to a ceiling. We bear all costs that exceed the ceiling, if
any.
Cost-type contracts typically provide for reimbursement of allowable costs
incurred plus a fee (profit). Unlike fixed-price contracts in which we are
committed to deliver without regard to performance cost, cost-type contracts
normally obligate us to use our best efforts to accomplish the scope of work
within a specified time and a stated contract dollar limitation. In addition,
U.S. Government procurement regulations mandate lower profits for cost-type
contracts because of our reduced risk. Under cost-plus-incentive-fee contracts,
the incentive may be based on cost or performance. When the incentive is based
on cost, the contract specifies that we are reimbursed for allowable incurred
costs plus a fee adjusted by a formula based on the ratio of total allowable
costs to target cost. Target cost, target fee, minimum and maximum fee and
adjustment formulae are agreed upon when the contract is negotiated. In the case
of performance-based incentives, we are reimbursed for allowable incurred costs
plus an incentive, contingent upon meeting or surpassing stated performance
targets. The contract provides for increases in the fee to the extent that such
targets are surpassed and for decreases to the extent that such targets are not
met. In some instances, incentive contracts also may include a combination of
both cost and performance incentives. Under cost-plus-fixed-fee contracts, we
are reimbursed for costs and receive a fixed fee, which is negotiated and
specified in the contract. Such fees have statutory limits.
The percentages of revenues during fiscal 2001, 2000 and 1999 attributable
to our contracts by contract type were as follows:
Fiscal Years Ended March 31,
---------------------------------
2001 2000 1999
---- ---- ----
Firm fixed-price................... 94% 88% 84%
Cost-type.......................... 6% 12% 16%
We negotiate for and generally receive progress payments from our customers
of between 75-90% of allowable costs incurred on the previously described
contracts. Included in our reported revenues are certain amounts which we have
not billed to customers. These amounts, approximately $9.5 million, $13.7
million and $12.8 million as of March 31, 2001, 2000 and 1999, respectively,
consist of costs and related profits, if any, in excess of progress payments for
contracts on which sales are recognized on a percentage-of-completion basis.
Under accounting principles generally accepted in the United States, all
U.S. Government contract costs, including applicable general and administrative
expenses, are charged to work-in-progress inventory and are written off to costs
and expenses as revenues are recognized. The Federal Acquisition Regulations
(FAR), incorporated by reference in U.S. Government contracts, provide that
internal research and development costs are allowable general and administrative
expenses. To the extent that general and administrative expenses are included in
inventory, research and development costs also are included. Unallowable costs,
pursuant to the FAR, are excluded from costs accumulated on U.S. Government
contracts. Work-in-process inventory included general and administrative costs
(which include internal research and development costs) of $14.5 million and
$12.7 million at March 31, 2001 and 2000, respectively.
Our defense contracts and subcontracts are subject to audit, various profit
and cost controls, and standard provisions for termination at the convenience of
the customer. Multiyear U.S. Government contracts and related orders are subject
to cancellation if funds for contract performance for any subsequent year become
unavailable. In addition, if
13
certain technical or other program requirements are not met in the developmental
phases of the contract, then the follow-on production phase may not be realized.
Upon termination other than for a contractor's default, the contractor normally
is entitled to reimbursement for allowable costs, but not necessarily all costs,
and to an allowance for the proportionate share of fees or earnings for the work
completed.
Competition
Our products are sold in markets containing competitors which are
substantially larger than we are, devote substantially greater resources to
research and development and generally have greater financial resources. Certain
competitors are also our customers and suppliers. The extent of competition for
any single project generally varies according to the complexity of the product
and the dollar volume of the anticipated award. We believe that we compete on
the basis of:
o The performance and flexibility of our products;
o Reputation for prompt and responsive contract performance;
o Accumulated technical knowledge and expertise; and
o Breadth of our product lines.
Our future success will depend in large part upon our ability to improve
existing product lines and to develop new products and technologies in the same
or related fields.
In the military sector, we compete with large and mid-tier defense
contractors on the basis of product performance, cost, overall value, delivery
and reputation. As the size of the overall defense industry has decreased in
recent years, the number of consolidations and mergers of defense suppliers has
increased. We expect this consolidation trend to continue. As the industry
consolidates, the large defense contractors are narrowing their supplier base
and awarding increasing portions of projects to strategic mid- and lower-tier
suppliers, and, in the process, are becoming oriented more toward system
integration and assembly. We believe that we have benefited from this trend, as
evidenced by the formation of strategic alliances with several large suppliers.
Patents and Licenses
We have patents on certain of our commercial and data recording products,
semi-conductor devices, rugged computer related items, and electro-optical and
focal plane array products. DRS and its subsidiaries have certain registered
trademarks, none of which are considered significant to current operations. We
believe our patent position and intellectual property portfolio, in the
aggregate, is valuable to our operations. We do not believe that the conduct of
our business as a whole is materially dependent on any single patent, trademark
or copyright.
Manufacturing and Suppliers
Our manufacturing processes for our products, excluding certain
electro-optical products, includes the assembly of purchased components and
testing of products at various stages in the assembly process. Purchased
components include integrated circuits, circuit boards, sheet metal fabricated
into cabinets, resistors, capacitors, semiconductors, silicon wafers and other
conductive materials, insulated wire and cables. In addition, many of our
products use machined castings and housings, motors and recording and
reproducing heads. Many of the purchased components are fabricated to our
designs and specifications. The manufacturing process for certain of our optics
products includes the grinding, polishing and coating of various optical
materials and the machining of metal components.
Although materials and purchased components generally are available from a
number of different suppliers, several suppliers are our sole source of certain
components. If a supplier should cease to deliver such components, other sources
probably would be available; however, added cost and manufacturing delays might
result. We have not experienced significant production delays attributable to
supply shortages, but occasionally experience quality and other related problems
with respect to certain components, such as semiconductors and connectors. In
addition, with respect to our optical products, certain exotic materials, such
as germanium, zinc sulfide and cobalt, may not always be readily available.
14
Foreign Operations and Export Sales
We currently sell several of our products and services in the international
marketplace to Canada, Israel, Spain, Australia, Venezuela, and other countries
in Europe and Southeast Asia. Foreign sales are derived under export licenses
granted on a case-by-case basis by the United States Department of State. Our
foreign contracts generally are payable in United States dollars. Export sales
accounted for less than 10% of total revenues in the fiscal years ended March
31, 2001 and 2000.
We operate outside the United States through FSCG in Canada and the United
Kingdom, and through ESG primarily in the United Kingdom. See Note 15 to our
Consolidated Financial Statements in this Form 10-K for information required by
this item with respect to revenues and long-lived assets by geographic area.
The addition of international businesses involves additional risks for us,
such as exposure to currency fluctuations, future investment obligations and
changes in foreign economic and political environments. In addition,
international transactions frequently involve increased financial and legal
risks arising from stringent contractual terms and conditions and widely
different legal systems, customs and practices in foreign countries.
15
EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers
The names of our executive officers, their positions and offices with us,
and their ages are set forth below:
Name Age Position
- ---- --- --------
Mark S. Newman........................ 51 Chairman of the Board, President and Chief Executive Officer
Paul G. Casner, Jr.................... 63 Executive Vice President, Chief Operating Officer
Nina Laserson Dunn.................... 54 Executive Vice President, General Counsel and Secretary
Richard A. Schneider.................. 48 Executive Vice President, Chief Financial Officer and Treasurer
Robert F. Mehmel...................... 38 Executive Vice President, Business Operations and Strategies
Mark S. Newman has been employed by us since 1973. He was named Vice
President, Finance, Chief Financial Officer and Treasurer in 1980 and Executive
Vice President in 1987. Mr. Newman became a Director of DRS in 1988. In May
1994, Mr. Newman became the President and Chief Executive Officer of DRS and in
August 1995 became Chairman of the Board.
Paul G. Casner, Jr. joined us in 1993 as President of Technology
Applications and Service Company, now DRS Electronic Systems, Inc. In 1994, he
became President of the DRS Electronic Systems Group and a Vice President of
DRS. In 1998, he became Executive Vice President, Operations, and in May 2000 he
became our Executive Vice President, Chief Operating Officer. Mr. Casner has
over 30 years of experience in the defense electronics industry and has held
positions in engineering, marketing and general management.
Nina Laserson Dunn joined us as Executive Vice President, General Counsel
and Secretary in July 1997. Prior to joining DRS, Ms. Dunn was a director in the
corporate law department of Hannoch Weisman, a Professional Corporation, where
she served as our outside legal counsel. Ms. Dunn is admitted to practice law in
New York and New Jersey and is a member of the American, New York State and New
Jersey State Bar Associations.
Richard A. Schneider joined us in 1999 as Executive Vice President, Chief
Financial Officer and Treasurer of DRS. He held similar positions at NAI
Technologies, Inc. (NAI) and was a member of its Board of Directors prior to its
acquisition by DRS in February 1999. Mr. Schneider has over 20 years of
experience in corporate financial management, including ten years with NAI.
Robert F. Mehmel joined us as Executive Vice President, Business Operations
and Strategy, in January 2001. Before joining us, he was Director, Corporate
Development, at Jabil Circuit, Inc. Prior to that, he was Vice President,
planning, at L-3 Communications Corporation from its inception in April 1997
until June 2000. Earlier, Mr. Mehmel held various positions in divisional and
corporate financial management with Lockheed Martin Corporation, Loral
Corporation and Lear Siegler, Inc.
Employees
At March 31, 2001, we had approximately 2,200 employees, 1,750 of whom were
located in the United States. None of our employees are represented by labor
unions, and we have experienced no work stoppages. There is a continuing demand
for qualified technical personnel, and we believe that our future growth and
success will depend upon our ability to attract, train and retain such
personnel.
16
Item 2. Properties
We lease the following properties:
Approximate
Square Lease
Division Location Activities Footage Expiration
- ---------------------------------------------------------------------------------------------------------------------
Corporate Parsippany, New Jersey Corporate 18,900 Fiscal 2011
Headquarters
Corporate Arlington, Virginia Administrative 4,300 Fiscal 2007
ESG Gaithersburg, Maryland Administrative, 42,500 Fiscal 2006
Engineering and
Manufacturing
ESG Johnstown, Pennsylvania Administrative and 130,000 Fiscal 2011
Manufacturing
ESG San Diego, California Engineering 7,200 Fiscal 2005
Support Services
ESG Chesapeake, Virginia Field Service and 22,000 Fiscal 2005
Engineering
Support
ESG Columbia, Maryland Administrative, 25,000 Fiscal 2002
Engineering and
Manufacturing
ESG Farnham, Surrey, Administrative, 26,000 Fiscal 2015
United Kingdom Engineering and
Manufacturing
ESG Chippenham, Wiltshire, Administrative, 1,400 Fiscal 2007
United Kingdom Engineering and
Manufacturing
ESG Gaithersburg, Maryland Administrative, 10,700 Fiscal 2008
Engineering and
Product Development
EOSG Oakland, New Jersey Administrative, 61,000 Fiscal 2003
Engineering and
Manufacturing
EOSG Palm Bay, Florida Administrative, 85,200 Fiscal 2011
Engineering and
Manufacturing
EOSG Melbourne, Florida Administrative, 93,500 Fiscal 2011
Engineering and
Manufacturing
17
Approximate
Square Lease
Division Location Activities Footage Expiration
- ---------------------------------------------------------------------------------------------------------------------
EOSG Dallas, Texas Administrative, 117,000 Fiscal 2008
Engineering and
Manufacturing
EOSG Torrance, California Administrative, 33,800 Fiscal 2009
Engineering and
Manufacturing
FSCG Kanata, Ottawa, Administrative 62,000 Fiscal 2012
Canada and Engineering
FSCG Nepean, Ontario, Administrative and 21,200 Fiscal 2004
Canada Engineering
FSCG Santa Clara, California Administrative, 33,200 Fiscal 2006
Engineering and
Manufacturing
FSCG Wyndmoor, Pennsylvania Administrative and 92,200 Fiscal 2002
Manufacturing
Other San Jose, California Administrative, 32,000 Fiscal 2006
Product
Development and
Manufacturing
We own the following properties:
Approximate
Square
Division Location Activities Footage
-----------------------------------------------------------------------------------------------------------------
Carleton Place, Administrative and 128,500
FSCG Ontario, Canada Manufacturing
Tring, Hertfordshire, Administrative, 7,500
FSCG United Kingdom Engineering and
Manufacturing
We believe that all our facilities are in good condition, adequate for our
intended use and sufficient for our immediate needs. It is not certain whether
we will negotiate new leases as existing leases expire. Such determinations will
be made as existing leases approach expiration and will be based on an
assessment of our requirements at that time. Further, we believe that we can
obtain additional space, if necessary, based on prior experience and current
real estate market conditions.
Substantially all of our assets, including those properties identified
above, are pledged as collateral on our borrowings (see Note 10 to our
Consolidated Financial Statements in this Form 10-K).
Environmental Protection
We believe that our manufacturing operations and properties are, in all
material respects, in compliance with existing federal, state and local
provisions enacted or adopted to regulate the discharge of materials into the
environment or otherwise protect the environment. Such compliance has been
achieved without material effect on our earnings or competitive position.
18
Item 3. Legal Proceedings
We are a party to various legal actions and claims arising in the ordinary
course of our business. In our opinion, we have adequate legal defenses for each
of the actions and claims, and we believe that their ultimate disposition will
not have a material adverse effect on our consolidated financial position or
results of operations.
In April and May 1998, subpoenas were issued to the Company by the United
States Attorney for the Eastern District of New York seeking documents related
to a governmental investigation of certain equipment manufactured by DRS
Photronics, Inc. (Photronics). These subpoenas were issued in connection with
United States v. Tress, a case involving a product substitution allegation
against an employee of Photronics. On June 26, 1998, the complaint against the
employee was dismissed without prejudice. Although additional subpoenas were
issued to the Company on August 12, 1999 and May 10, 2000, to date, no claim has
been made against the Company or Photronics. During the Government's
investigation, until October 29, 1999, Photronics was unable to ship certain
equipment related to the case, resulting in delays in the Company's recognition
of revenues. On October 29, 1999, Photronics received authorization to ship such
equipment.
We are presently involved in a dispute in arbitration with Spar Aerospace
Limited (Spar) with respect to the working capital adjustment, if any, provided
for in the purchase agreement between the Company and Spar dated as of September
19, 1997, pursuant to which we acquired, through certain of our subsidiaries,
certain assets of Spar (see Note 3 to our Consolidated Financial Statements in
this Form 10-K). We are also in a dispute with Raytheon Company with respect to
the working capital adjustment, if any, provided for in the purchase agreement
between the Company and Raytheon dated as of July 28, 1998, pursuant to which we
acquired, through certain subsidiaries, certain assets of Raytheon (see Note 3
to our Consolidated Financial Statements in this Form 10-K).
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
19
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
We have not paid any cash dividends since 1976. We intend to retain future
earnings for use in our business and do not expect to declare cash dividends on
our Common Stock in the foreseeable future. The indenture relating to our bank
borrowings restricts our ability to pay dividends or make other distributions on
our Common Stock. See Note 10 to our Consolidated Financial Statements in this
Form 10-K for information concerning restrictions on the declaration or payment
of dividends. Any future declaration of dividends will be subject to the
discretion of our Board of Directors. The timing, amount and form of any future
dividends will depend, among other things, on our results of operations,
financial condition, cash requirements, plans of expansion and other factors
deemed relevant by our Board of Directors.
The common stock of DRS is traded on the American Stock Exchange under the
symbol "DRS." The following table shows the closing high and low sales price of
our common stock for the periods indicated:
Fiscal 2001 Fiscal 2000
------------------------ -----------------------
High Low High Low
----------- ---------- ---------- ---------
First Quarter $ 12.25 $ 9.88 $ 10.94 $ 6.88
Second Quarter $ 16.25 $ 10.25 $ 10.56 $ 8.94
Third Quarter $ 16.50 $ 12.63 $ 10.00 $ 7.00
Fourth Quarter $ 18.90 $ 12.25 $ 10.38 $ 8.25
The closing sale price of the Company's Common Stock as reported by the
American Stock Exchange on June 22, 2001 was $21.16 per share. As of that date
there were 711 holders of record of the Company's Common Stock.
20
Item 6. Selected Financial Data
Years Ended March 31,
-------------------------------------------------------------------------
2001 2000 1999 1998 1997
------------ ------------ ------------ ------------ ------------
(dollars in thousands, except per-share data)
Summary of Earnings
Revenues $427,606 $391,467 $265,849 $180,750 $135,286
Operating income $ 37,531 $ 26,178 $ 15,301 $ 14,419 $ 11,551
Earnings from continuing operations before
income taxes and extraordinary item $ 24,954 $ 12,832 $ 5,780 $ 9,706 $ 8,256
Earnings from continuing operations
before extraordinary item $ 11,978 $ 7,661 $ 3,865 $ 6,634 $ 5,047
Net earnings $ 11,978 $ 4,310 $ 680 $ 6,372 $ 5,663
Per-Share Data From Continuing Operations (1), (2)
Basic earnings per share $ 1.14 $ 0.83 $ 0.58 $ 1.18 $ 0.91
Diluted earnings per share $ 1.01 $ 0.76 $ 0.57 $ 0.96 $ 0.77
Book value per share $ 9.28 $ 8.43 $ 7.96 $ 7.16 $ 5.90
Summary of Financial Position
Working Capital $ 43,686 $ 21,384 $ 13,491 $ 42,126 $ 32,838
Property, plant and equipment, net $ 37,639 $ 29,006 $ 32,124 $ 20,783 $ 17,944
Total assets $334,940 $320,098 $329,639 $162,813 $ 96,408
Long-term debt, excluding current installments $ 75,076 $ 97,695 $102,091 $ 56,532 $ 30,801
Total stockholders' equity $111,947 $ 78,184 $ 73,442 $ 44,335 $ 32,987
Financial Ratios
Pretax return on revenues (1) 5.8% 3.3% 2.2% 5.4% 6.1%
After tax return on revenues (1) 2.8% 2.0% 1.5% 3.7% 3.7%
Return on average stockholders' equity (1) 12.6% 10.1% 6.6% 17.2% 30.6%
Current ratio 1.3 1.2 1.1 1.8 2.2
Long-term debt, excluding current installments,
to total capitalization 40.1% 55.5% 58.2% 56.0% 48.3%
Interest coverage ratio (6) 4.58 x 3.37 x 2.86 x 4.12 x 4.59 x
Supplemental Information
EBIT (3) $ 36,415 $ 25,432 $ 15,137 $ 14,804 $ 11,838
EBITDA (4) $ 52,540 $ 42,502 $ 26,738 $ 20,992 $ 16,450
Free cash flow (5) $ 36,355 $ 36,292 $ 20,184 $ 14,733 $ 11,347
Capital expenditures $ 16,185 $ 6,210 $ 6,554 $ 6,259 $ 5,103
Depreciation and amortization $ 16,245 $ 17,070 $ 11,601 $ 6,188 $ 4,612
Internal research and development $ 8,027 $ 9,867 $ 5,104 $ 3,919 $ 3,852
Employees (7) 2,207 2,001 1,825 1,206 929
Revenues per employee (8) $ 203 $ 196 $ 154 $ 139 $ 147
(1) Earnings per share and financial ratios from continuing operations are
presented and calculated before extraordinary item in fiscal 1999.
(2) No cash dividends have been distributed in any of the years in the five-year
period ended March 31, 2001.
(3) Earnings from continuing operations before extraordinary items, interest and
related expenses, and income taxes.
(4) Earnings from continuing operations before extraordinary items, interest and
related expenses, income taxes, depreciation and amortization.
(5) EBITDA less capital expenditures.
(6) Ratio of EBITDA to interest and related expenses (primarily amortization of
debt issuance costs).
(7) Indicates the number of employees, excluding employees at the Company's
discontinued operations, at March 31 for each of the fiscal years presented.
(8) Based on average number of employees from continuing operations.
21
Item 7. Management's Discussion & Analysis of Financial Condition and Results of
Operations
The following is management's discussion and analysis of our consolidated
financial condition and results of operations as of March 31, 2001 and 2000, and
for each of the fiscal years in the three-year period ended March 31, 2001. This
discussion should be read in conjunction with the audited Consolidated Financial
Statements and related notes in this Form 10-K.
Forward-Looking Statements
The following discussion and analysis contains certain forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933, as
amended and Section 21E of the Securities Exchange Act of 1934. Forward-looking
statements in this report are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Persons reading this report
are cautioned that risks and uncertainties are inherent in forward-looking
statements. Accordingly, our actual results could differ materially from those
suggested by such statements. Risks include, without limitation: the effect of
our acquisition strategy on future operating results; the uncertainty of
acceptance of new products and successful bidding for new contracts; the effect
of technological changes or obsolescence relating to our products and services;
the effects of government regulation or shifts in government policy, as they may
relate to our products and services; competition; and other matters referred to
in this report.
Overview
We are a leading supplier of defense electronics products and systems. We
provide high-technology products and services to all branches of the U.S.
military, major aerospace and defense prime contractors, government intelligence
agencies, international military forces and consumer markets. Incorporated in
1968, we have served the defense industry for over thirty years. We are a
leading provider of thermal imaging devices, combat display workstations,
electronic sensor systems, mission recorders and deployable flight incident
recorders. Our products are deployed on U.S. Navy surface ships, submarines and
surveillance aircraft, U.S. Army battle tanks and other vehicles, and are used
other military and non-military applications.
We have increased our annual revenues and operating income at compound annual
growth rates of approximately 33% and 34% respectively over the last five years.
In addition, from fiscal 2000 to fiscal 2001, operating income increased over
43% and net earnings from continuing operations increased over 56%. For the year
ended March 31, 2001, we generated sales of $427.6 million and operating income
of $37.5 million.
Funded backlog also has increased substantially. At March 31, 2001, our funded
backlog was approximately $456.5 million, an increase of 18% from March 31,
2000. As of March 31, 2001, approximately 41% and 30% of our backlog related to
products and services for the U.S. Army and U.S. Navy, respectively, as compared
with 45% and 28% at March 31, 2000.
22
Company Organization and Products
We operate in three principal business segments on the basis of products and
services offered. Separate and distinct businesses comprise each operating
segment: the Electronic Systems Group (ESG), the Electro-Optical Systems Group
(EOSG) and the Flight Safety and Communications Group (FSCG). All of our other
operations and activities are combined in "Other."
Our Electronic Systems Group is a leader in the development, production and
support of high-performance combat display workstations used by the U.S. Navy.
In addition, we supply the military and intelligence communities with signal
processing systems and computer systems adapted, or "ruggedized," for harsh
environments. We incorporate advanced commercial computing technology to provide
rapidly fielded and cost-effective system solutions for enhancing the military's
ability to attain information dominance in land, sea and air applications. These
systems are deployed on front-line platforms, including Aegis destroyers and
cruisers, aircraft carriers, submarines and surveillance aircraft. Our family of
rugged computer products is also used in the U.S. Army's ongoing battlefield
digitization program.
Our Electronic Systems Group provided $186.5 million, or 44% of total sales, for
the year ended March 31, 2001.
Our Electro-Optical Systems Group is a leading provider of sophisticated thermal
imaging and targeting systems. We have one of the few high-performance focal
plane array foundries that allows us to design and develop these electro-optical
systems for our customers. We design, manufacture and market thermal imaging
systems that allow operators to detect, identify and target objects based upon
their infrared signatures under adverse conditions, such as darkness, fog, smoke
and dust. These systems are used in the U.S. Army's most important battlefield
platforms, including the Abrams Battle Tank, the Bradley Infantry Fighting
Vehicle, the High-Mobility Multi-Purpose Wheeled Vehicle Scout and the Javelin
missile program. We also design and manufacture eye-safe laser range finders and
multiple-platform weapons calibration systems for such diverse air platforms as
the Apache attack helicopter and the AC-130U gunship.
In addition to military applications, we are leveraging our advanced
electro-optical production capability by expanding into related non-defense
markets. For example, we manufacture electro-optical modules for commercial
devices used in corrective laser eye surgery and integrate systems for retinal
scanning.
Our Electro-Optical Systems Group provided $160.6 million, or 38% of total
sales, for the year ended March 31, 2001.
Our Flight Safety and Communications Group supplies airborne deployable
recorders, surveillance and communications systems and electronic manufacturing
services. We are the leading manufacturer of deployable flight voice and data
recording equipment, or "black box" recorders, for U.S. and foreign customers.
Mounted to the airframe, these recorders eject automatically from the aircraft
prior to impact, so that they more easily can be located by search and rescue
teams. We have provided over 4,000 of these deployable recorders for military
and search and rescue aircraft. We also supply integrated naval ship
communications, information management systems, coastal surveillance systems and
ultra high-speed digital imaging systems. In addition, we provide electronic
manufacturing services, often with value-added engineering content, to the
defense and space industries.
Our Flight Safety and Communications Group provided $70.9 million, or 17% of
total sales, for the year ended March 31, 2001.
"Other" includes the activities of DRS Corporate Headquarters and DRS Ahead
Technology. DRS Ahead Technology is a commercial operation that produces
magnetic head components used in the manufacturing process of computer disk
drives, which burnish and verify the quality of disk surfaces. DRS Ahead
Technology also services and manufactures magnetic video recording heads used in
broadcast television equipment.
23
Discontinued Operations
On May 18, 2000, our Board of Directors approved an agreement to sell our
magnetic tape head business units located in St. Croix Falls, Wisconsin, and
Razlog, Bulgaria. These operations produced primarily magnetic tape recording
heads for transaction products that read data from magnetic cards, tapes and
ink. In fiscal 2000, in anticipation of the sale, we recorded a $2.1 million
charge, net of tax, on the disposal of these operations. On August 31, 2000, we
completed the sale of these business units. The sale of the magnetic tape head
business was a strategic decision by us to focus our resources on our core
businesses. All financial information presented in this discussion and analysis
reflects these business units as discontinued operations.
Business Combinations and Disposals
The following summarizes certain business combinations and transactions we
completed which significantly affect the comparability of the period-to-period
results presented in this discussion and analysis.
Fiscal 2001 Transaction
On June 14, 2000, a newly formed subsidiary of ours acquired the assets of
General Atronics Corporation for $7.5 million in cash and $4.0 million in stock
(approximately 355,000 shares of our Common Stock). We funded the cash portion
of this acquisition through borrowings under our revolving line of credit.
Located in Wyndmoor, Pennsylvania, and now operating as DRS Communications
Company, LLC, the company designs, develops and manufactures military data link
components and systems, high-frequency communication modems, tactical and secure
digital telephone components and radar surveillance systems for U.S. and
international militaries. The excess of costs over the estimated fair value of
identifiable net assets acquired and the appraised value of certain identified
intangible assets were approximately $3.5 million and $3.3 million,
respectively, and are being amortized on a straight-line basis over twenty years
and ten years, respectively. In connection with the acquisition, we incurred
approximately $420,000 in transaction costs.
Fiscal 2000 Transaction
On July 21, 1999, our subsidiary, DRS Rugged Systems (Europe) Ltd., acquired
Global Data Systems Ltd. and its wholly-owned subsidiary, European Data Systems
Ltd., for approximately $7.8 million in cash and potential future consideration,
not to exceed a total purchase price of $10.2 million. Located in Chippenham,
Wiltshire, U.K., and now operating as DRS Rugged Systems (Europe) Products Ltd.,
the company designs and develops rugged computers and peripherals primarily for
military applications. The excess of cost over the estimated fair value of net
assets acquired was approximately $8.7 million and is being amortized on a
straight-line basis over twenty years. Any additional consideration paid by us
would be an adjustment to goodwill.
Fiscal 1999 Transactions
On October 20, 1998, we acquired, through certain of our subsidiaries, certain
assets of Raytheon Company's Second Generation Ground-Based Electro-Optical
Systems and Focal Plane Array businesses, which we refer to as the EOS business,
and certain of Raytheon's subsidiaries, pursuant to the Asset Purchase Agreement
dated as of July 28, 1998, between us and Raytheon, as amended (the EOS
Acquisition). We paid approximately $45 million in cash for the acquisition at
closing; the purchase price is subject to a post-closing working capital
adjustment, as provided for in the Asset Purchase Agreement, not to exceed $7
million. The amount of such working capital adjustment, if any, is the subject
of arbitration between us and Raytheon. Although we cannot, at this time,
predict the outcome of such arbitration, we do not expect that the final
adjustment will have a material impact on our consolidated financial position or
results of operations. The excess of cost over the estimated fair value of
identifiable net assets acquired (goodwill) and the appraised value of certain
identified intangible assets were approximately $34.5 million and $30.8 million,
respectively, and are being amortized on a straight-line basis over twenty
years. We incurred professional fees and other costs related to the acquisition
from Raytheon of approximately $2.0 million, which also were capitalized as part
of the total purchase price. We have valued acquired contracts in process at
their remaining contract prices, less estimated costs to complete, and an
allowance for normal profits on our effort to complete such contracts. During
fiscal 2001, we recorded a $9.8 million reduction to goodwill. The reduction to
goodwill was due to accruals for future contract costs that are no longer
required on acquired contracts. The EOS business, operating as DRS Sensor
Systems, Inc. and
24
DRS Infrared Technologies, LP, provides products used in the detection,
identification and acquisition of targets based on infrared data.
On February 19, 1999, one of our wholly-owned subsidiaries merged with and into
NAI Technologies, Inc., a New York corporation, with NAI being the surviving
corporation and continuing as our direct wholly-owned subsidiary, for stock and
other consideration valued at approximately $24.8 million. In connection with
our merger with NAI, we issued 2,858,266 shares of Common Stock. The excess of
cost over the estimated fair value of identifiable net assets acquired was
approximately $26.7 million and is being amortized on a straight-line basis over
twenty years. During fiscal 2001, new tax regulations became effective which
changed the rules for determining how net operating loss carryforwards of an
acquired company could be utilized. As a result of this tax law change, we
recorded a $3.2 million reduction to our deferred tax asset valuation allowance
and goodwill during fiscal 2001. Prior to our merger with NAI, we began to
assess and formulate a plan to close NAI's Longmont, Colorado facility and
transfer engineering and production to our other locations. In January 2000, we
announced our plan, which included relocating/terminating approximately 45
employees. A cost of approximately $1.5 million was recorded as an adjustment to
the acquisition cost during fiscal 2000. We completed our exit plan in the first
quarter of fiscal 2001. The following table reconciles the related liability at
March 31, 2000 to the liability as of March 31, 2001:
Liability at Utilized in Liability at
March 31, 2000 Fiscal 2001 March 31, 2001
-------------- ----------- --------------
(in thousands)
Severance / employee costs $ 1,195 $ 1,195 $ -
Estimated lease commitments
and related facility costs 215 215 -
------- ------- ----
Total $ 1,410 $ 1,410 $ -
======= ======= ====
We also incurred professional fees and other costs related to our merger with
NAI of approximately $2.8 million, which were capitalized as part of the total
purchase price. NAI, now operating as DRS Advanced Programs, Inc. and DRS Rugged
Systems (Europe) Ltd., provides rugged computers, peripherals and integrated
systems primarily for military and special government applications.
The aforementioned acquisitions have been accounted for using the purchase
method of accounting. Accordingly, the results of operations of the acquired
businesses were included in our reported operating results from their respective
effective dates of acquisition. Except for our acquisition from Raytheon and our
merger with NAI, the financial position and results of operations of these
businesses were not significant to ours as of their respective effective dates
of acquisition.
We selectively target acquisition candidates that complement or expand our
product lines, services or technical capabilities. We continue to seek
acquisition opportunities consistent with our overall business strategy.
Restructuring
In addition to the closure of the Longmont, Colorado facility described above,
during the third and fourth quarters of fiscal 2000, we announced plans to
restructure our operations, which resulted in our recording of restructuring
charges totaling approximately $2.2 million. Our restructuring initiatives
impacted our EOSG and FSCG operating segments and DRS Corporate. EOSG recorded a
restructuring charge of approximately $831,000 primarily for costs relating to
consolidating two facilities into one in Oakland, New Jersey. FSCG recorded a
restructuring charge of approximately $669,000 and $143,000 at its DRS Hadland
Ltd. and DRS Precision Echo, Inc. operating units, respectively, for severance
and other employee related costs. The DRS Hadland restructuring charge was
recorded in connection with the transition of the day-to-day management of DRS
Hadland's operations from EOSG to FSCG in the second half of fiscal 2000. In
addition, DRS Corporate recorded a restructuring charge of approximately
$560,000 for severance and other employee-related costs. Severance and other
employee costs were recorded in connection with the termination of 13 employees.
As of March 31, 2000, all terminations had occurred.
25
In the third quarter of fiscal 2001, we revised our estimate relating to our
facility consolidation efforts in Oakland, New Jersey and recorded a charge of
$525,000. At March 31, 2001, the majority of the restructuring liability shown
below represents termination benefits to be paid in accordance with contractual
terms over the next thirteen months and lease commitments over the next fifteen
months. The following table reconciles the restructuring liability at March 31,
2000 to the restructuring liability as of March 31, 2001:
Liability at Fiscal 2001 Utilized in Liability at
March 31, 2000 Charges Fiscal 2001 March 31, 2001
-------------- ----------- ----------- --------------
(in thousands)
Estimated lease commitments
and related facility costs $ 328 $ 525 $ 396 $ 457
Severance/employee costs 690 - 434 256
------- ----- ----- -----
Total $ 1,018 $ 525 $ 830 $ 713
======= ===== ===== =====
The overall reduction in direct and indirect operating expenses resulting from
these management actions has had a positive effect on our fiscal 2001 operating
results and should continue to benefit future periods.
Results of Operations
Our operating cycle is long-term and involves various types of production
contracts and varying production delivery schedules. Accordingly, operating
results of a particular year, or year-to-year comparisons of recorded revenues
and earnings, may not be indicative of future operating results. The following
comparative analysis should be viewed in this context.
Fiscal Year Ended March 31, 2001 Compared To Fiscal Year Ended March 31, 2000
Revenues and operating income for the year ended March 31, 2001 increased
approximately $36.1 million and $11.4 million, respectively, as compared with
the prior fiscal year. The increase in revenues was primarily attributable to
increased shipments of infrared detectors, search and navigation radar systems,
increased volume in electro-optical contract manufacturing and military display
workstation engineering services, as well as to $17.8 million in revenues from
our fiscal 2001 acquisition of DRS Communications Company. These increases in
revenues were partially offset by a decrease in shipments of certain rugged
computers and peripherals in Europe, decreased orders for high-speed cameras and
later-than-anticipated orders received for certain mission data recording
systems. The 43% increase in operating income was driven by the overall increase
in revenues, a $1.6 million operating income contribution from DRS
Communications Company, and the year-over-year net impact of changes in
estimated profitability on certain long-term contracts. Most of our contracts
are long-term in nature, spanning multiple years. We review cost performance and
estimates to complete on these contracts at least quarterly and, in many cases,
more frequently. If the estimated cost to complete a contract changes from the
previous estimate, we will record a favorable or unfavorable adjustment to
earnings in the current period. Partially offsetting the fiscal 2001 increase in
operating income was the impact of certain charges at our operating segments.
See discussion of operating segments below for additional information.
Interest and related expenses decreased approximately $1.1 million for the year
ended March 31, 2001, as compared with the corresponding prior-year period. The
decrease was primarily the result of a 56% decrease in average working capital
borrowings outstanding during the year ended March 31, 2001, as compared with
the corresponding prior year period and the favorable impact of the fiscal 2001
conversion of approximately $19.1 million of our previously outstanding 9%
Senior Subordinated Convertible Debentures into approximately 2.2 million shares
of our Common Stock. Partially offsetting the decrease in interest expense was a
non-cash charge of approximately $305,000 relating to the conversion of $8.7
million of the debentures during the second quarter of fiscal 2001.
Our effective tax rate was 52% and 40% in the fiscal years ended March 31, 2001
and 2000, respectively. The increase in the effective tax rate for fiscal 2001
was primarily due to the following: the continued increase in domestic earnings,
which are taxed at higher overall rates in comparison with our foreign tax
jurisdictions; losses in our U.K. operations for which the full tax benefit has
not yet been recognized; the effects of non-deductible goodwill and lobbying
expenses;
26
and the impact of certain domestic and foreign tax benefits utilized in fiscal
2000. It is anticipated that our effective tax rate will decline moderately in
future years as we continue to grow and our U.K. operations return to
profitability.
Minority interest was approximately $1.4 million and $1.3 million in fiscal 2001
and 2000, respectively. The increase was due to higher operating income
generated by ESG's DRS Laurel Technologies unit, in which we have an 80%
interest.
Fiscal Year Ended March 31, 2000 Compared To Fiscal Year Ended March 31, 1999
Revenues and operating income for the year ended March 31, 2000 increased
approximately $126.0 million and $11.0 million, respectively, as compared with
the prior fiscal year. These increases were primarily attributable to the
inclusion of a full year of operations of our fiscal 1999 third quarter
acquisition from Raytheon and the fiscal 1999 fourth quarter merger with NAI. In
addition to the impact of the fiscal 1999 acquisitions, fiscal 2000 revenues and
operating income were positively impacted by our second quarter acquisition of
DRS Rugged Systems (Europe) Products Ltd. Fiscal 2000 consolidated operating
income also was impacted by the approximately $2.2 million charge recorded in
connection with restructuring certain operations (see Restructuring). See
discussion of operating segments below for additional information.
Interest and related expenses increased approximately $3.2 million for the year
ended March 31, 2000, as compared with the corresponding prior-year period. The
increase was primarily due to higher average borrowings outstanding in fiscal
2000 related to the fiscal 1999 EOS Acquisition and the impact of the fiscal
2000 second quarter acquisition of DRS Rugged Systems (Europe) Products Ltd.
Interest also increased as a result of higher average working capital borrowings
in fiscal 2000, as compared with fiscal 1999.
Our effective tax rate was 40% and 33% in the fiscal years ended March 31, 2000
and 1999, respectively. The effective rate for fiscal 2000 reflected the
continued growth in domestic earnings, which were taxed at higher overall rates
in comparison to our foreign tax jurisdictions. The effective rate also
increased due to the effect of non-deductible goodwill.
Minority interest was approximately $1.3 million and $1.0 million in fiscal 2000
and 1999, respectively. The increase was due to higher operating income
generated by our DRS Laurel Technologies unit, in which we have an 80% interest.
In fiscal 2000, we recorded a $1.3 million loss, net of tax, from discontinued
operations and a $2.1 million loss, net of tax, on the disposal of discontinued
operations relating to the then pending sale of our magnetic tape head business.
In fiscal 1999, we recorded an extraordinary charge of approximately $2.3
million, net of tax, in connection with a modification of our credit facility.
27
Operating Segments
The following tables set forth, by operating segment, revenues, operating
income, operating margin and the percentage increase or decrease of those items
as compared with the prior period:
Years Ended March 31, Percent Changes
--------------------------------------- -------------------------
2001 vs. 2000 vs.
2001 2000 1999 2000 1999
--------- --------- --------- --------- ---------
ESG (dollars in thousands)
--------------------------------------- -------------------------
External revenues $ 186,474 $ 187,794 $ 123,558 (0.7%) 52.0%
Operating income before
amortization of goodwill and
related intangibles $ 17,244 $ 16,370 $ 9,497 5.3% 72.4%
Operating income $ 15,336 $ 14,593 $ 9,292 5.1% 57.0%
Operating margin 8.2% 7.8% 7.5% 5.1% 4.0%
--------------------------------------- -------------------------
EOSG
--------------------------------------- -------------------------
External revenues $ 160,603 $ 141,108 $ 69,972 13.8% 101.7%
Operating income before
amortization of goodwill and
related intangibles $ 26,232 $ 14,804 $ 5,077 77.2% 191.6%
Operating income $ 22,691 $ 11,404 $ 3,581 99.0% 218.5%
Operating margin 14.1% 8.1% 5.1% 74.1% 58.8%
--------------------------------------- -------------------------
FSCG
--------------------------------------- -------------------------
External revenues $ 70,878 $ 54,209 $ 60,438 30.7% (10.3%)
Operating income before
amortization of goodwill and
related intangibles $ 2,125 $ 3,799 $ 5,672 (44.1%) (33.0%)
Operating income $ 208 $ 2,762 $ 4,684 (92.5%) (41.0%)
Operating margin 0.3% 5.1% 7.8% (94.1%) (34.6%)
--------------------------------------- -------------------------
Other
--------------------------------------- -------------------------
External revenues $ 9,651 $ 8,356 $ 11,881 15.5% (29.7%)
Operating (loss) before
amortization of goodwill and
related intangibles $ (450) $ (2,391) $ (2,022) 81.2% (18.2%)
Operating (loss) $ (704) $ (2,581) $ (2,256) 72.7% (14.4%)
Operating margin (7.3%) (30.9%) (19.0%) 76.4% (62.6%)
--------------------------------------- -------------------------
Fiscal Year Ended March 31, 2001 Compared With Fiscal Year Ended March 31, 2000
Electronic Systems Group. Our Electronic Systems Group's revenues decreased $1.3
million, or 1%, in fiscal 2001, as compared with fiscal 2000. Lower revenues for
the year ended March 31, 2001 were due primarily to a decrease in shipments of
certain rugged computers and peripherals in the U.K. This decrease was partially
offset by increases in revenues from shipments of search and navigation radar
systems and military display workstations, in addition to engineering services
for display workstation product lines. Operating income and operating margin
both increased 5% in fiscal 2001, as compared with the prior fiscal year. The
increases in operating income and operating margin were driven by a change in
product mix to higher margin programs, coupled with operating efficiencies and
the cost savings derived from the closure of the Longmont, Colorado production
facility. The Longmont facility ceased operations on March 31, 2000 and
production was moved into our new electronic manufacturing facility in
Johnstown, Pennsylvania in fiscal 2001.
28
Electro-Optical Systems Group. Our Electro-Optical Systems Group's revenues
increased $19.5 million, or 14%, in fiscal 2001, as compared with fiscal 2000.
The increase in revenues was driven by increased volume in commercial
electro-optical contract manufacturing and shipments of infrared detectors and
fire control systems. Operating income increased $11.3 million in fiscal 2001,
as compared with the prior fiscal year. The increase in operating income
reflected the increase in revenues and the impact of $8.3 million in favorable
program adjustments recorded in fiscal 2001 on certain long-term production
programs. Estimates to complete these programs were revised to reflect lower
than anticipated overhead costs and the benefit of certain productivity
improvements. The Company recorded a $2.9 million favorable adjustment on a
long-term production contract in fiscal 2000. Estimates to complete this
contract were revised in the third quarter of fiscal 2000 to reflect the benefit
of management's efforts to reduce overall production costs, primarily by
identifying and procuring certain materials and subassemblies from alternate
suppliers. The benefits of management's cost reduction initiatives began to be
realized in the third quarter of fiscal 2000, as shipments of certain units
commenced, and in fiscal 2001, with increased quantities of units shipped.
Partially offsetting these increases were fiscal 2001 charges of $1.3 million
for changes in estimates on certain long-term production programs and $525,000
for additional costs expected to be incurred in connection with a facility that
was vacated during fiscal 2000. Fiscal 2000 operating income reflected charges
of $1.3 million for certain product warranty reserves and additional development
costs for a commercial product line.
Flight Safety and Communications Group. Our Flight Safety and Communications
Group's revenues increased $16.7 million, or 31%, in fiscal 2001, as compared
with fiscal 2000. The increase in revenues was primarily attributable to the
acquisition of DRS Communications Company at the end of the first quarter of
fiscal 2001, as well as continued growth in FSCG's electronic manufacturing and
shipboard communications systems businesses. In the year ended March 31, 2001,
DRS Communications Company contributed to the FSCG operating segment
approximately $17.9 million in revenues. The increase in revenues was partially
offset by decreased orders for this group's high-speed digital cameras and
temporarily delayed orders for certain mission data recording systems. Operating
income decreased approximately $2.6 million in fiscal 2001, as compared with the
prior fiscal year. The decrease in operating income was attributed to several
factors: a $1.3 million charge in the third quarter of fiscal 2001 for estimated
excess inventories associated with a specific product line for which the
anticipated future sales are less than previously estimated; a $1.0 million
charge for a contract pricing dispute between us and a prime contractor on a
U.S. Navy program; a charge of $1.9 million for additional costs incurred to
complete the development of a new mission data recording system for the U.S.
Navy; less favorable absorption of fixed operating expenses associated with
lower production volumes for certain mission data recording systems and
high-speed digital cameras; and lower overall profit margins in the Flight
Safety and Communication Group's electronic manufacturing business. In an effort
to reduce costs and take advantage of certain manufacturing efficiencies, we
announced in April 2001 that we would be closing our Santa Clara, California
facility and moving production and engineering operations to other DRS
facilities. We anticipate that the cost savings associated with this effort will
offset the cost to implement the plan and that there should not be any adverse
impact to our fiscal 2002 earnings. Partially offsetting the fiscal 2001
decrease in operating income was the positive effect of DRS Communications
Company, which contributed approximately $1.6 million in operating income to
FSCG for the fiscal year ended March 31, 2001.
Other. Revenues increased $1.3 million in fiscal 2001, as compared with fiscal
2000. The increase in revenues was primarily due to increased shipments of
components used to manufacture disk drive media. This revenue growth resulted
from certain improvements and opportunities in the computer disk drive
marketplace and improved marketing of DRS Ahead Technology's products and
services.
The decrease in the operating loss in fiscal 2001, as compared with the prior
fiscal year, was driven by the increase in revenues discussed above, a reduction
in general and administrative expenses at DRS Ahead Technology and the
allocation of certain costs to the operating units which previously had been
recorded at DRS Corporate. This improvement was partially offset by a $1.1
million charge recorded in fiscal 2001 to fully reserve for a note receivable
that may not be collectible.
29
Fiscal Year Ended March 31, 2000 Compared With Fiscal Year Ended March 31, 1999
Electronic Systems Group. Our Electronic Systems Group's increase in revenues
and operating income for the year ended March 31, 2000, as compared with the
prior year, was due primarily to the inclusion of the full-year operating
results of our fiscal 1999 fourth quarter merger with NAI. Revenues and
operating income for the year ended March 31, 2000 attributable to our merger
with NAI increased by $51.8 million and $3.8 million, respectively, as compared
with the prior-year period. Following its acquisition in July 1999, DRS Rugged
Systems (Europe) Products Ltd. contributed approximately $7.4 million and $1.4
million in additional revenues and operating income, resp