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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission file number 001-31235
INTEGRATED DEFENSE TECHNOLOGIES, INC.
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(Exact name of registrant as specified in its charter)
Delaware 13-4027646
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 Wynn Drive, Huntsville, Alabama 35807
---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(256) 895-2000
------------------------------
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES ___ NO X
Common stock, par value $.01 per share: 19,800,992 shares outstanding
as of May 14, 2002
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INTEGRATED DEFENSE TECHNOLOGIES, INC.
FORM 10-Q
March 31, 2002
INDEX
PART I. FINANCIAL INFORMATION
---------------------
Item 1. Condensed Financial Statements
Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001 (unaudited) 2
Consolidated Statements of Operations for the quarters ended March 31, 2002 and 2001 (unaudited) 3
Consolidated Statements of Cash Flows for the quarters ended March 31, 2002 and 2001 (unaudited) 4
Notes to Consolidated Financial Statements 5-11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-21
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
-----------------
Item 2. Changes in Securities and Use of Proceeds 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
PART I. FINANCIAL INFORMATION
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
(IN THOUSANDS EXCEPT SHARE AND PER SHARE AMOUNTS)
ASSETS
Current assets:
Cash $ 10,317 $ 3,893
Restricted cash 475 769
Accounts receivable, net 116,427 113,863
Income tax receivable 647 --
Inventories, net 13,721 13,567
Prepaid expenses and other current assets 3,384 2,028
Deferred income taxes 6,612 6,645
--------- ---------
Total current assets 151,583 140,765
Property and equipment, net 44,387 45,548
Goodwill, net 83,734 83,734
Other assets 7,375 7,828
Deferred income taxes 4,104 --
--------- ---------
Total Assets $ 291,183 $ 277,875
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit loan $ -- $ 8,500
Current portion of long-term debt 4,950 9,164
Accounts payable 12,997 14,802
Accrued compensation 7,866 8,317
Other accrued expenses 10,314 10,386
Derivative liabilities -- 5,568
Income taxes payable 660 644
Billings in excess of costs and earnings 7,495 8,743
--------- ---------
Total current liabilities 44,282 66,124
Long-term debt 80,050 153,561
Deferred income taxes -- 245
Pension and other postretirement employee benefits 6,547 6,675
--------- ---------
Total liabilities 130,879 226,605
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value per share, 20,000,000 shares
authorized, none issued
Common stock, $.01 par value per share, 200,000,000
shares authorized, 19,800,992 issued at March 31,
2002 and 13,565,243 issued at December 31, 2001 198 136
Additional paid-in capital 171,005 54,434
Accumulated other comprehensive loss (2,140) (5,613)
Retained earnings (deficit) (8,759) 2,313
--------- ---------
Total stockholders' equity 160,304 51,270
--------- ---------
Total Liabilities and Stockholders' Equity $ 291,183 $ 277,875
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
2
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
QUARTER ENDED MARCH 31, 2002 2001
----------------------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Revenue $ 68,393 $ 58,775
Cost of revenue 48,278 40,597
-------- --------
Gross profit 20,115 18,178
Selling, general and administrative expenses 9,968 8,625
Research and development and bid and proposal expenses 3,575 3,036
Amortization of debt issuance costs 208 237
Amortization of patents and goodwill 9 1,527
-------- --------
Income from operations 6,355 4,753
Interest expense (3,831) (4,834)
Refinancing costs (7,571) --
Other income (expense), net 21 --
-------- --------
Loss before income taxes and extraordinary loss (5,026) (81)
Income tax benefit (expense) 1,960 (559)
-------- --------
Loss before extraordinary loss (3,066) (640)
Extraordinary loss on early extinguishment of debt (net of income
tax benefit of $5,119) (8,006) --
-------- --------
Net loss $(11,072) $ (640)
======== ========
Loss per share - basic and diluted:
Loss before extraordinary loss $ (.19) $ (.05)
Extraordinary loss (.51) --
-------- --------
Net loss $ (.70) $ (.05)
======== ========
Basic weighted-average shares outstanding 15,762 13,565
======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
3
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
QUARTER ENDED MARCH 31, 2002 2001
----------------------- --------- ----------
(IN THOUSANDS)
OPERATING ACTIVITIES:
Net loss $ (11,072) $ (640)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation expense 2,666 2,645
Amortization of debt issuance costs 208 237
Amortization of goodwill and other intangible assets 55 1,527
Extraordinary loss on early extinguishment of debt, net 8,006 --
Other refinancing costs 7,571 --
Changes in current assets and liabilities:
Restricted cash 293 2,807
Accounts receivable, net (2,564) (561)
Inventories, net (233) (788)
Other current assets (3,498) 2,388
Accounts payable (1,804) (4,293)
Billings in excess of costs and earnings (1,248) (4,076)
Other current liabilities (1,276) (2,135)
--------- ---------
Net cash used in operating activities (2,896) (2,889)
--------- ---------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,425) (793)
--------- ---------
Net cash used in investing activities (1,425) (793)
--------- ---------
FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of issuance costs 117,337 --
Issuance of long-term debt 85,000 --
Repayment of long-term debt (168,586) (1,864)
Payment of debt issuance and other refinancing costs (14,506) --
Net borrowings (repayments) under revolving credit loans (8,500) 1,450
--------- ---------
Net cash provided by (used in) financing activities 10,745 (414)
--------- ---------
Net increase (decrease) in cash 6,424 (4,096)
Cash at beginning of period 3,893 4,938
--------- ---------
Cash at end of period $ 10,317 $ 842
========= =========
Supplemental disclosure of noncash financing activities:
Unrealized loss on derivative financial instrument $ (2,833) $ (5,310)
Accrued expenses associated with issuance of common stock $ (606) --
Accrued debt issuance costs $ (187) --
The accompanying notes are an integral part of these
consolidated financial statements.
4
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
of Integrated Defense Technologies, Inc. (the "Company") have been
prepared on substantially the same basis as the Company's annual
consolidated financial statements and should be read in conjunction
with the Company's Prospectus dated February 26, 2002 filed with the
Securities and Exchange Commission on February 27, 2002 pursuant to
Rule 424(b)(1) of the Securities Act of 1933. In the opinion of
management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal
recurring items) necessary for a fair presentation of results for the
interim periods presented. The consolidated results for interim periods
are not necessarily indicative of the results that may be expected for
the full year. Certain prior year amounts have been reclassified
to provide comparability with the current year presentation.
NOTE 2: REFINANCING
On February 27, 2002, the Company completed an initial public offering
of 6,000,000 shares of common stock at $22 per share, generating net
cash proceeds of $117,337,000. The majority of these proceeds were used
for debt retirement and refinancing. Concurrent with the closing of the
offering, the Company repaid the outstanding balances on its revolving
credit and term loan agreement and its senior subordinated note
($125,836,000 and $51,250,000, respectively) and replaced the previous
revolving credit and term loan facility with a new facility provided by
a syndicate of financial institutions. This new facility provides
financing of up to $125,000,000, consisting of a $40,000,000 five-year
revolving credit facility, a $40,000,000 five-year term loan, and a
$45,000,000 six-year term loan. At March 31, 2002, the Company had
outstanding borrowings of $85,000,000 under the facility, consisting of
the five- and six-year term loans, bearing interest at rates of 4.25%
and 4.5%, respectively. As of the date of this Form 10-Q filing, the
Company has not utilized the revolving credit facility.
Borrowings under the facility are secured by a pledge of substantially
all of the Company's assets and bear interest at a base rate or LIBOR
plus an applicable margin ranging from 2% to 2.75%. Available
borrowings under the revolving credit facility are determined by the
Company's borrowing base, as defined in the agreement, which is
calculated based upon eligible accounts receivable and inventories.
The revolving credit and term loan agreement contains certain financial
covenants of the Company, including, among other things, limitations on
capital expenditures, investments, and asset sales, and maintenance of
certain financial ratios. The Company was in compliance with these
covenants at March 31, 2002.
In connection with the Company's early retirement and refinancing of
its prior credit facility, it incurred one-time charges totaling
$20,696,000, including prepayment penalties, write-offs of capitalized
debt issuance costs, a write-off of the unamortized discount on the
senior subordinated note, and payments to terminate interest rate swap
agreements associated with the debt. The swap termination payments
totaled $7,571,000 and are reflected as "Refinancing costs" in the
Company's consolidated statement of operations for the quarter ended
March 31, 2002. The remaining costs are reflected, net of the
associated tax benefit of $5,119,000, as an "Extraordinary loss on
early extinguishment of debt" in that statement of operations.
The Company capitalized $4,557,000 of debt issuance costs associated
with the new revolving credit and term loan agreement, consisting
primarily of legal fees and a facility fee paid to the new lenders.
These costs are being amortized on a straight-line basis over the
six-year term of the agreement. The unamortized balance at March 31,
2002 of $4,494,000 is included in "Other assets" in the Company's
consolidated balance sheet as of that date.
5
NOTE 3: INVENTORIES
Inventories consist of the following:
MARCH 31, DECEMBER 31,
2002 2001
--------- ------------
(IN THOUSANDS)
Stock materials $12,086 $15,034
Work-in-process 3,693 2,397
Finished goods 502 458
Contracts-in-progress 5,067 3,126
------- -------
21,348 21,015
Less reserve for excess and
obsolescense 7,627 7,448
------- -------
Inventories, net $13,721 $13,567
======= =======
Stock materials, work-in-process and finished goods are stated
primarily at the lower of first-in, first-out ("FIFO") cost or market.
Work-in-process and finished goods inventory consist primarily of
standard electronic components for use in fulfilling future contracts.
Contracts-in-progress inventory relates to work in process under
fixed-price contracts, primarily certain contracts that were entered
into prior to August 6, 1999 for which revenue and costs have been
recognized as units have been delivered. Accumulated contract costs
include direct production and engineering costs, factory and material
handling overhead, research and development, and general and
administrative expenses estimated to be recoverable, less the estimated
portion of such costs allocated to delivered units.
To the extent total contract costs are expected to exceed the total
estimated contract price, charges are made to current operations to
reduce contracts-in-progress inventory to estimated realizable value.
In accordance with industry practice, contracts-in-progress inventory
includes amounts relating to programs and contracts with long
production cycles, a portion of which is not expected to be realized
within one year.
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment - net includes allowances for depreciation of
$62,188,000 and $59,832,000 at March 31, 2002 and December 31, 2001,
respectively.
NOTE 5: DERIVATIVE FINANCIAL INSTRUMENTS
The Company has from time to time used interest rate swap agreements to
manage the risk associated with interest rate fluctuations on its
variable rate debt. In October 2000, the Company entered into three
such agreements with notional amounts of $25,000,000, $10,000,000, and
$60,000,000, under which the Company paid fixed interest rates ranging
from 6.39% to 6.75% and received a variable LIBOR-based rate of
interest from the holders of the agreements. The difference in the pay
and receive rates of interest was charged or credited to interest
expense as incurred. These swaps agreements reduced interest expense by
$5,000 in the first quarter of 2001 and increased interest expense by
$830,000 in the first quarter of 2002.
On January 1, 2001, the Company adopted Financial Accounting Standards
Board ("FASB") Statement of Financial Accounting Standards No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as
amended, ("SFAS 133") which establishes accounting and reporting
6
standards for derivative financial instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. Upon adoption of SFAS 133, the Company's interest rate
swaps were designated as highly effective cash flow hedges.
Accordingly, the Company recognized a one-time transition adjustment to
increase other comprehensive loss by $2,863,000 ($1,775,000 net of
income tax benefit), the fair value of the interest rate swaps at
January 1, 2001, representing the approximate cost to the Company of
terminating the agreements as of that date. In accordance with SFAS
133, this transition adjustment was reflected as the cumulative effect
of a change in accounting principle, net of income taxes, in the
Company's other comprehensive loss for the quarter ended March 31, 2001
(See Note 7). At March 31, 2001, the swap agreements had a fair value
of $5,310,000 ($3,292,000 net of tax benefit), resulting in a
comprehensive loss for the first quarter of 2001 of $2,447,000
($1,517,000 net of income tax benefit). The approximate cost to
terminate the swaps at December 31, 2001 of $5,568,000 ($3,452,000 net
of tax benefit) is reflected as "Derivative liabilities" in the
Company's consolidated balance sheet as of that date.
On March 4, 2002, in connection with its debt repayment and refinancing
(see Note 2), the Company paid $7,571,000 to terminate its interest
rate swaps. The after tax expense for the swap termination of
$4,618,000, along with the after tax expense of $506,000 associated
with payments made during the first quarter of 2002 prior to the
termination, is reflected in the Company's consolidated statement of
operations for the quarter ended March 31, 2002.
The Company has not entered into interest rate swap agreements in
conjunction with its new revolving credit and term loan facility.
There was no impact to earnings due to hedge ineffectiveness during the
quarters ended March 31, 2002 or 2001. The Company does not use
derivative financial instruments for speculative or trading purposes.
NOTE 6: LOSS PER SHARE
Basic loss per share is computed using the weighted average number of
common shares outstanding. Diluted loss per share is computed using the
weighted average number of common and equivalent common shares
outstanding. Common stock warrants are the Company's only common stock
equivalent and are included in the calculation only if dilutive.
On February 5, 2002, the Company's Board of Directors approved a
198.6359 to 1 common stock split. All share and per share amounts for
the quarter ended March 31, 2001 have been restated to reflect this
stock split.
On February 27, 2002, in connection with its initial public stock
offering, the Company issued 6,000,000 additional shares of common
stock and converted 235,749 of its outstanding common stock warrants
into shares of common stock.
The computations of basic and diluted weighted-average shares
outstanding for the quarters ended March 31, 2002 and 2001 are as
follows. In both periods, the Company incurred a net loss, and as
such, no dilution was considered in the Company's computations of
loss per share for the respective quarters.
QUARTER ENDED MARCH 31, 2002 2001
----------------------- ---------- ----------
Weighted-average shares outstanding -- basic 15,761,927 13,565,243
Dilutive effect of warrants 1,679,647 1,762,695
---------- ----------
Weighted-average shares outstanding -- diluted 17,441,574 15,327,938
========== ===========
7
NOTE 7: COMPREHENSIVE LOSS
Comprehensive loss includes net loss as well as all other nonowner changes
in equity. The components of the Company's comprehensive losses for the
quarters ended March 31, 2002 and 2001 are presented below, net of related
income tax effects. See Note 5 for further information regarding the
derivative financial instruments used by the Company and the impact of
those derivatives on the Company's consolidated financial position and
results of operations.
QUARTER ENDED MARCH 31, 2002 2001
----------------------- -------- -------
(IN THOUSANDS)
Net loss $(11,072) $ (640)
Other comprehensive income (loss):
Cumulative effect of change in accounting principle
with respect to derivative financial instruments -- (1,775)
Unrealized loss on derivative financial instruments (1,672) (1,514)
Realized (gain) loss on derivative financial
instruments charged to net loss 5,124 (3)
Minimum pension liability adjustment 21 --
------- -------
Comprehensive loss $(7,599) $(3,932)
======= =======
NOTE 8: SEGMENT INFORMATION
The Company's business presently consists of three operating segments:
Electronic Combat Systems, Diagnostics & Power Systems, and
Communications & Surveillance Systems. These reportable segments are
defined primarily by their economic characteristics, the nature of
their products and services, and by their class of customer.
The Electronic Combat Systems segment designs, integrates,
manufactures, and sells electronics and avionics equipment primarily to
the U.S. Government for military, civil and governmental uses, and
designs, manufactures and supports advanced test and evaluation
systems, rangeless air combat training systems, threat simulation
equipment, high power transmitters, and control subsystems for both
guided bombs and missile launching systems for the U.S. Department of
Defense, major defense prime contractors and foreign government defense
agencies.
The Diagnostics & Power Systems segment is a contractor primarily to
the U.S. government and foreign governments, and designs, manufactures
and supports test equipment, vehicle electronics systems and energy
management systems primarily for military combat vehicle applications.
The Communications & Surveillance Systems segment designs and
manufactures meteorological surveillance and analysis systems, more
commonly known as Doppler weather radar systems, and designs and
produces advanced electronics systems, subsystems, components and radio
transmission products for the defense, aerospace and communications
industries for U.S. and foreign government agencies and commercial
customers.
The Company evaluates performance of the operating segments based on
revenue and earnings before interest, taxes, depreciation, and
amortization ("EBITDA"), calculated as income from operations plus
depreciation and amortization. The accounting policies of the operating
segments are consistent across segments and are the same as those used
in preparation of the consolidated financial statements of the Company.
(See Note 2 of Notes to Consolidated Financial Statements included in
the Company's Prospectus dated February 26, 2002 filed with the
Securities and Exchange Commission on February 27, 2002 pursuant to
Rule 424(b)(1) of the Securities Act of 1933.) Sales between the
operating segments are insignificant. The Company's corporate expenses
are allocated in full to the segments on the basis of relative
employment, revenue, and selected assets. Corporate assets are included
in "All other" in the following table.
8
The following table sets forth revenue and EBITDA by operating segment
for the quarters ended March 31, 2002 and 2001.
QUARTER ENDED MARCH 31, 2002 2001
----------------------- ------- -------
(IN THOUSANDS)
REVENUES FROM UNAFFILIATED CUSTOMERS:
Electronic Combat Systems $32,221 $30,750
Diagnostics & Power Systems 21,685 14,464
Communications & Surveillance Systems 14,232 13,347
All other 255 214
------- -------
Total $68,393 $58,775
======= =======
OTHER FINANCIAL INFORMATION:
----------------------------
EBITDA:
Electronic Combat Systems $5,223 $6,837
Diagnostics & Power Systems 2,177 1,055
Communications & Surveillance Systems 2,069 1,259
All other (185) (31)
------- -------
Total $9,284 $9,162
====== ======
EBITDA is not a presentation made in accordance with accounting
principles generally accepted in the United States, and as such, it
should not be considered in isolation or as a substitute for net loss,
cash flows from operating activities or other income or cash flow
statement data prepared in accordance with accounting principles
generally accepted in the United States or as a measure of
profitability or liquidity. The Company monitors EBITDA by segment to
determine each segment's ability to satisfy its debt service, capital
expenditure and working capital requirements and because certain
covenants in the Company's revolving credit and term loan facility are
based upon similar measures. The Company's EBITDA is not necessarily
comparable to other similarly titled captions used by other companies.
A reconciliation of the Company's EBITDA to loss before income taxes
and extraordinary loss is presented in the table below.
RECONCILIATION OF EBITDA TO LOSS BEFORE INCOME TAXES AND EXTRAORDINARY
LOSS:
QUARTER ENDED MARCH 31, 2002 2001
----------------------- ------- -------
(IN THOUSANDS)
EBITDA $9,284 $9,162
Less: Depreciation and amortization expense 2,929 4,409
Interest expense 3,831 4,834
Refinancing costs 7,571 --
Add back other income 21 --
------- ------
Loss before income taxes and extraordinary loss $(5,026) $(81)
======= ======
The following table presents total assets for each of the Company's
operating segments as of March 31, 2002 and December 31, 2001.
MARCH 31, DECEMBER 31,
2002 2001
-------- -----------
(IN THOUSANDS)
Total assets:
Electronic Combat Systems $146,082 $156,896
Diagnostics & Power Systems 51,528 52,056
Communications & Surveillance Systems 71,535 70,497
All other 22,038 (1,574)
-------- --------
Total $291,183 $277,875
======== ========
9
The increase in "All other" assets (essentially Corporate) is due
primarily to the Company's first quarter 2002 refinancing activities
(See Note 2). Corporate assets were increased by the net cash generated
from the Company's public offering of approximately $11,000,000, by
capitalized debt issuance costs of approximately $4,500,000, and by an
increase in deferred tax assets associated with the extraordinary loss
and other refinancing costs incurred in first quarter 2002. Prior to
the first quarter 2002 refinancing, capitalized debt issuance costs had
been allocated to the segments on a similar basis as corporate
expenses. The write-off of capitalized debt issuance costs associated
with the debt that was retired in first quarter 2002 reduced the assets
of Electronic Combat Systems, Diagnostics & Power Systems, and
Communications & Surveillance Systems by $3,100,000, $600,000, and
$1,300,000, respectively.
NOTE 9: GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted the provisions of FASB
Statement of Financial Accounting Standards No. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS ("SFAS 142"), under which the Company's goodwill is
no longer being amortized and is instead subject to annual impairment
tests using a new fair value based approach. The Company's other
recorded intangible assets, which are immaterial with respect to its
consolidated financial position and results of operations, continue to
be amortized over their estimated useful lives.
With the adoption of SFAS 142, on January 1, 2002, the Company ceased
amortization of its goodwill. The following table presents the results
of the Company for the quarters ended March 31, 2002 and 2001 on a
comparable basis:
QUARTER ENDED MARCH 31, 2002 2001
----------------------- -------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Reported loss before extraordinary loss $ (3,066) $ (640)
Add back: Goodwill amortization, net of tax -- 1,256
-------- ------
Adjusted income (loss) before extraordinary loss $ (3,066) $ 616
======== ======
Reported net loss $(11,072) $ (640)
Add back: Goodwill amortization, net of tax -- 1,256
-------- ------
Adjusted net income (loss) $(11,072) $ 616
======== ======
INCOME (LOSS) PER SHARE: BASIC AND DILUTED BASIC DILUTED
------------------------ ----------------- ----- -------
Reported loss before extraordinary loss $(.19) $(.05) $(.05)
Goodwill amortization, net of tax -- .10 .09
----- ----- -----
Adjusted income (loss) before extraordinary loss $(.19) $ .05 $ .04
===== ===== =====
Reported net loss $(.70) $(.05) $(.05)
Goodwill amortization, net of tax -- .10 .09
----- ----- -----
Adjusted net income (loss) $(.70) $ .05 $ .04
===== ===== =====
The Company is currently finalizing the allocation of its goodwill to
its business units and evaluating the goodwill for any impairment. For
impairment testing purposes, the Company is determining the value of
its individual business units using a discounted cash flow model, a
guideline company model, and a transaction model. If impairment is
indicated, such impairment will be recorded as the cumulative effect of
a change in accounting principle with effect from January 1, 2002. The
Company has not yet determined the effects of this evaluation, if any,
on its consolidated earnings and financial position.
10
NOTE 10: RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted FASB Statement of
Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT
OR DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"), which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. SFAS 144 establishes a single accounting model for
long-lived assets to be disposed of by sale. The adoption of SFAS
144 did not have a material effect on the Company's consolidated
operating results or financial position.
In June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS ("SFAS
143"), which addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs and requires that the
fair value of a liability for an asset retirement obligation be
recorded in the period in which it is incurred. SFAS 143 will become
effective for the Company in 2003, and management is currently
evaluating the impact that SFAS 143 will have on its consolidated
financial statements.
NOTE 11: CONTINGENCIES
As further described in the Company's Prospectus dated February 26,
2002 filed with the Securities and Exchange Commission on February
27, 2002 pursuant to Rule 424(b)(1) of the Securities Act of 1933,
the Company is involved in various legal actions arising in the
normal course of its business, including a National Park Service
investigation regarding the presence of residual radioactive
materials and contamination at a uranium mine previously owned by a
predecessor of one of the Company's subsidiaries. Although the
ultimate cost of these matters cannot be predicted with certainty,
the outcomes of such legal actions are not expected, either
individually or in the aggregate, to result in a material adverse
effect on the Company's business, results of operations, or
financial condition. There were no material developments with
respect to these matters during first quarter 2002.
11
INTEGRATED DEFENSE TECHNOLOGIES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
Integrated Defense Technologies, Inc. (the "Company") is a designer and
developer of advanced electronics and technology products to the defense and
intelligence industries. The Company's products are installed on or used in
support of a broad array of military platforms in order to enhance their
operational performance or extend their useful life. The Company's customers
include all branches of the military services, major domestic prime defense
contractors such as The Boeing Company, General Dynamics Corporation, Lockheed
Martin Corporation, Northrop Grumman Corporation, Raytheon Company and United
Defense Industries, Inc., foreign defense contractors, foreign governments and
U.S. Government agencies.
The Company's contracts typically fall into two categories: cost-plus and
fixed-price contracts. Contracts for research, engineering, prototypes, repair
and maintenance and similar are typically cost-plus arrangements.
Customer-funded research and development costs are typically included in the
Company's contracts and booked as revenue and cost of revenue.
In a fixed-price contract, the price is not subject to adjustment based on
cost incurred to perform the required work under the contract. In a cost-plus
contract, the Company is reimbursed for allowable incurred costs plus a fee,
which may be fixed or variable. The price on a cost-plus contract is based on
allowable cost incurred, but generally is subject to contract funding
limitations. Under fixed-price contracts the Company agrees to perform for a
predetermined contract price. Although fixed-price contracts generally permit
the Company to keep profits if costs are less than projected, the Company bears
the risk that increased or unexpected costs may reduce profit or cause the
Company to sustain losses on the contracts. Generally, fixed-price contracts
offer higher margins than cost-plus type contracts.
All of the Company's domestic U.S. Government contracts and subcontracts
are subject to audit and various cost controls and include standard provisions
for termination at the convenience of the U.S. Government. The Department of
Defense generally has the right to object to the costs as not allowable or as
unreasonable, which can increase the level of costs the Company bears.
Multi-year U.S. Government contracts and related orders are subject to
cancellation if funds for contract performance for any subsequent year are not
available. Foreign government contracts generally include comparable provisions
relating to termination at the convenience of the foreign government.
The Company uses the percentage-of-completion method of accounting for
fixed-price and cost-plus contracts and, therefore, matches revenue with the
cost incurred on each unit produced at the time the Company recognizes its sale
based on the estimate of the gross profit margin the Company expects to receive
over the life of the contract. The Company currently evaluates its estimates of
gross margin on a monthly basis. In addition, the Company uses the cumulative
catch-up method to recognize its changes in estimates of sales and gross margins
during the period in which those changes are determined. The Company charges any
anticipated losses on a contract to operations as soon as those losses are
determined. The principal components of the Company's contract cost of revenue
are materials, subcontractor costs, labor and overhead. The Company charges all
of these costs to the respective contracts as incurred.
The Company expenses operating costs such as selling, general and
administrative, independent research and development costs and bid and proposal
costs in the period incurred. The major components of these costs are
compensation and overhead. Capitalized debt issuance costs, software development
costs and patents are amortized over their useful lives, with the amortization
of capitalized software development costs included as a component of the
Company's cost of revenue. Since January 1, 2002, the Company has been subject
to a new accounting standard under which it no longer amortizes goodwill,
although it must test its goodwill periodically for impairment. The Company is
in the process of evaluating the impact of adopting this new standard.
12
The Company's results of operations, particularly revenue, gross profits
and cash flows, vary significantly from period to period depending largely upon
the timing of delivery of finished products, the terms of contracts and the
level of export sales. As a result, period-to-period comparisons may show
substantial changes disproportionate to the Company's underlying business
activity. Accordingly, the Company does not believe that its quarterly results
of operations are necessarily indicative of results for future periods.
FORWARD LOOKING STATEMENTS
The information contained in this report, other than historical
information, includes forward-looking statements including, in particular
statements about plans, strategies and prospects under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations." Words
such as "may," "will," "expect," "anticipate," "believe," "estimate," "plan,"
"intend" and similar expressions in this report identify forward-looking
statements. These forward-looking statements are based on current views with
respect to future events and financial performance. Actual results could differ
materially from those projected in the forward-looking statements.
The Company's forward-looking statements are subject to risks and
uncertainties, including:
o the Company's dependence on the defense industry and the business
risks peculiar to that industry, including changing priorities or
reductions in the U.S. Government defense budget;
o the Company's ability to obtain future government contracts on a
timely basis;
o the availability of government funding and customer requirements;
o the potential development of new and competing technologies and
the Company's ability to compete technologically; and
o general economic conditions, the competitive environment of the
defense industry, international business and political conditions
and timing of awards and contracts.
As for the forward-looking statements that relate to future financial
results and other projections, actual results could be different due to the
inherent uncertainty of estimates, forecasts and projections and may be better
or worse than anticipated. Given these uncertainties, you should not place any
reliance on forward-looking statements. Forward-looking statements represent the
Company's estimates and assumptions only as of the date they were made. The
Company expressly disclaims any duty to provide updates to forward-looking
statements and the estimates and assumptions associated with them, except to the
extent required by applicable securities laws.
13
RESULTS OF OPERATIONS
The following tables summarize the Company's operating information as a
percentage of revenue and its segment data for the quarters ended March 31, 2001
and 2002:
QUARTER ENDED MARCH 31
----------------------
2002 2001
------ ------
STATEMENT OF OPERATIONS AND OTHER FINANCIAL INFORMATION:
Revenue 100.0% 100.0%
Cost of revenue 70.6 69.1
------ ------
Gross Profit 29.4 30.9
Selling, general and administrative expenses 14.6 14.6
Research and development and bid and proposal expenses 5.2 5.2
Amortization of patents, debt issuance costs and goodwill .3 3.0
------ ------
Income from operations 9.3% 8.1%
====== ======
EBITDA (1) 13.6% 15.6%
====== ======
OPERATIONS INFORMATION BY SEGMENT AND OTHER FINANCIAL INFORMATION:
(IN MILLIONS)
Revenue:
Electronic Combat Systems $ 32.2 $ 30.8
Diagnostics & Power Systems 21.7 14.5
Communications & Surveillance Systems 14.2 13.3
Other .3 .2
------ ------
Total revenue $ 68.4 $ 58.8
====== ======
Gross profit:
Electronic Combat Systems $ 10.1 $ 10.6
Diagnostics & Power Systems 4.4 2.9
Communications & Surveillance Systems 5.5 4.7
Other .1 --
------ ------
Total gross profit $ 20.1 $ 18.2
====== ======
EBITDA (1):
Electronic Combat Systems $ 5.2 $ 6.8
Diagnostics & Power Systems 2.2 1.1
Communications & Surveillance Systems 2.1 1.3
Other (.2) --
------ ------
Total EBITDA $ 9.3 $ 9.2
====== ======
(1) The Company's EBITDA represents income from operations plus depreciation
and amortization. EBITDA is not a presentation made in accordance with
accounting principles generally accepted in the United States, and as such,
it should not be considered in isolation or as a substitute for net loss,
cash flows from operating activities or other income or cash flow statement
data prepared in accordance with accounting principles generally accepted
in the United States or as a measure of profitability or liquidity. The
Company monitors EBITDA by segment to determine each segment's ability to
satisfy its debt service, capital expenditure and working capital
requirements and because certain covenants in the Company's revolving
credit and term loan facility are based upon similar measures. The
Company's EBITDA is not necessarily comparable to other similarly titled
captions used by other companies.
14
COMPARISON OF FIRST QUARTER 2002 TO FIRST QUARTER 2001.
RESULTS OF OPERATIONS. On February 27, 2002, the Company completed an
initial public offering of 6 million shares of common stock at $22 per share,
generating net cash proceeds of approximately $117.3 million. The majority of
these proceeds were used for debt retirement and refinancing. Concurrent with
the closing of the offering, the Company repaid the outstanding balances on its
revolving credit and term loan agreement and its senior subordinated note and
replaced the previous revolving credit and term loan facility with a new
facility provided by a syndicate of financial institutions. See "Liquidity and
Capital Resources" following for further discussion of the debt refinancing, as
well as of terms and covenants associated with the new revolving credit and term
loan facility.
The Company incurred one-time charges related to its early debt retirement
and refinancing totaling $20.7 million, including prepayment penalties,
write-offs of capitalized debt issuance costs, a write-off of the unamortized
discount on its senior subordinated note, and payments to terminate interest
rate swaps associated with its revolving credit and term loan facility. The swap
termination payments totaled approximately $7.6 million and are reflected as
"Refinancing costs" in the Company's consolidated statement of operations for
first quarter 2002. The remaining costs are reflected, net of the associated tax
benefit of $5.1 million, as an "Extraordinary loss on early extinguishment of
debt" in the consolidated statement of operations for that period. As a result
of the foregoing charges, which totaled approximately $12.6 million net of the
associated tax benefits, the Company incurred a net loss in first quarter 2002
of $11.1 million.
PRO FORMA RESULTS OF OPERATIONS. Excluding the impact on earnings of these
one-time debt retirement and refinancing charges, the Company earned a pro forma
net income in first quarter 2002 of $1.6 million, compared to a net loss of $.6
million in first quarter 2001. Approximately $1.2 million of the improvement
from the prior year period was the result of adoption of the goodwill
amortization provisions of SFAS 142 effective January 1, 2002. (See Note 9 of
Notes to Consolidated Financial Statements contained in this Form 10-Q.) The
remainder of the improvement was due primarily to a 16% revenue increase,
partially offset by increased operating expenses and a decline in gross profit
percentage.
REVENUE. Revenue for first quarter 2002 was $68.4 million, representing an
increase of $9.6 million, or 16%, compared to revenue of $58.8 million for first
quarter 2001. The increase in revenue resulted primarily from a $7.2 million, or
50%, increase in revenues of the Company's Diagnostics & Power Systems segment.
The Diagnostics & Power Systems segment had a very strong revenue quarter due to
strong fourth quarter 2001 orders for embedded diagnostics, additions to the
scope of the Abrams Systems Technical Support program, and earlier than expected
booking of the Common Support Function Module program. Revenues for the
Company's Electronic Combat Systems segment increased by $1.5 million, or 5%,
primarily the result of a fourth quarter 2001 order from the U.S. Navy Fiber
Optics Data Management System program, partially offset by a delay in an order
from the Air Force P4RC program. Revenues for the Company's Communications &
Surveillance Systems segment increased by $.9 million, or 7%. Though up slightly
from the prior year period, Communications & Surveillance revenues were less
than expected due to the loss of a weather radar system program in Turkey.
Bookings for this segment improved toward the end of first quarter.
GROSS PROFIT. The Company's gross profit for first quarter 2002 was $20.1
million, representing an increase of $1.9 million, or 11%, compared to gross
profit of $18.2 million for first quarter 2001. The dollar increase in gross
profit resulted primarily from increased business in the Diagnostics & Power
Systems segment. However, as a percentage of revenue, gross profit declined from
30.9% in first quarter 2001 to 29.4% in the current quarter. As the Diagnostics
& Power Systems Segment has a higher proportion of cost-plus business than the
other segments, its margins will generally be lower, driving down the
consolidated margin percentage in periods of increased Diagnostics revenue
relative to total revenue. Other factors negatively impacting first quarter 2002
margin included start-up production costs resulting from continued investment in
the hybrid electric business and in the Sidecar program by Diagnostics & Power
Systems, and temporary cost and volume issues in the Electronic Combat Systems
segment. Partially offsetting these negative factors was a 2.3 point gross
profit improvement in the Communications & Surveillance Systems segment,
resulting from its prior year downsizing and cost control efforts.
15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's selling,
general and administrative expenses for first quarter 2002 were $10.0 million,
representing an increase of $1.3 million, or 16%, compared to $8.6 million for
first quarter 2001. As a percentage of revenue, selling, general and
administrative expenses remained flat with the first quarter 2001 level at
14.6%. The dollar increase in selling, general and administrative expenses
resulted primarily from additional administrative expenses associated with being
a publicly-held company. Electronic Combat Systems' and Diagnostics & Power
Systems' expenses increased by $.5 million and $.4 million, respectively, while
Communications & Surveillance Systems' expenses remained flat with the prior
year period. The expense decline resulting from the segment's fourth quarter
2001 staff reductions and facility relocation served to offset additional
corporate expenses allocated to the segment.
RESEARCH AND DEVELOPMENT AND BID AND PROPOSAL EXPENSES. The Company's
research and development and bid and proposal expenses were $3.6 million for
first quarter 2002, representing an increase of $.5 million, or 18%, compared to
$3.0 million for first quarter 2001. As a percentage of revenue, research and
development and bid and proposal expenses remained flat with the first quarter
2001 level at 5.2%. The dollar increase resulted primarily from increased bid
and proposal expenses resulting from major program proposal efforts in the
Company's Electronic Combat Systems segment, partially offset by cost
containment achieved in its Communications & Surveillance Systems segment.
Expenses of the Diagnostics & Power Systems segment remained relatively flat
with the prior year period.
AMORTIZATION OF PATENTS, DEBT ISSUANCE COSTS AND GOODWILL. The Company's
amortization expense, excluding amounts included in cost of revenue for
amortization of its internally developed software, was $.2 million for first
quarter 2002, representing a decline of $1.5 million, or 88%, compared to
amortization expense of $1.8 million for first quarter 2001. The Company ceased
amortization of its goodwill on January 1, 2002 in accordance with the
provisions of SFAS 142. See Note 9 of Notes to Consolidated Financial Statements
contained in this Form 10-Q for a pro forma presentation of first quarter 2001
results of operations excluding goodwill amortization.
INCOME FROM OPERATIONS. The Company's income from operations was $6.4
million, or 9.3% of revenue, for first quarter 2002, representing an increase of
$1.6 million compared to $4.8 million, or 8.1% of revenue, for first quarter
2001. Diagnostics & Power Systems' operating income increased by approximately
$1.5 million to a total of $1.7 million for first quarter 2002 due primarily to
the increased volume described previously. The segment's increased general and
administrative expenses were offset by the decline in goodwill amortization as
the result of the adoption of SFAS 142. Communications & Surveillance Systems'
operating income increased by $1.2 million to a total of $1.6 million due
primarily to increased volume and the positive results of cost control measures
taken in fourth quarter 2001, as well as to the lack of goodwill amortization
expense in first quarter 2002. Electronic Combat Systems' operating income
declined by $.6 million to a total of $3.3 million, primarily as the result of
margin declines, combined with increased general and administrative and bid and
proposal expenses as noted previously, partially offset by the lack of goodwill
amortization in first quarter 2002.
INTEREST EXPENSE. The Company's interest expense for first quarter 2002 was
$3.8 million, representing a decline of $1.0 million compared to interest
expense of $4.8 million for first quarter 2001. The interest expense decline
from the prior year period was due primarily to the reduction in debt achieved
through the Company's first quarter 2002 refinancing. In addition, average LIBOR
rates have declined by approximately 3 points from the first quarter 2001 level.
However, the positive impact of the interest rate decline on the Company's
floating rate debt was partially offset by the adverse effect of its LIBOR-based
interest rate swap agreements.
INCOME TAX EXPENSE. The income tax benefit for first quarter 2002 was $7.1
million or 39% of pretax losses, compared to income tax expense of $.6 million
on a pretax loss of $.1 million for first quarter 2001. The effective income tax
rate in both periods exceeded the U.S. federal statutory rate in those periods
due primarily to non-deductible expenses, including goodwill amortization in the
first quarter of 2001.
16
EBITDA. The Company's EBITDA was $9.3 million, or 13.6% of revenue, in
first quarter 2002, versus EBITDA of $9.2 million, or 15.6% of revenue, in first
quarter 2001. Diagnostics & Power Systems' EBITDA increased by approximately
$1.1 million to a total of $2.2 million for first quarter 2002 due primarily to
the increased volume described previously, partially offset by increased general
and administrative expenses resulting from the Company's initial public
offering. Communications & Surveillance Systems' EBITDA increased by $.8 million
to a total of $2.1 million due to increased volume and the positive results of
cost control measures taken in fourth quarter 2001. Electronic Combat Systems'
EBITDA declined by $1.6 million to a total of $5.2 million, primarily due to
margin declines as well as to increased general and administrative and bid and
proposal expenses.
LIQUIDITY AND CAPITAL RESOURCES
In first quarter 2002, the Company generated cash of $6.4 million primarily
from the net proceeds of its initial public offering and debt refinancing,
compared to a net cash usage of $4.1 million in first quarter 2001.
Cash used in operations totaled $2.9 million for both first quarter 2002
and first quarter 2001 due primarily to working capital usage in both quarters.
In first quarter 2002, working capital was used to reduce payables built up in
the traditionally heavy fourth quarter, to prepay insurance premiums for the
year, which have increased as a result of the Company's public offering, and to
finance a short-term build-up in receivables generated by the higher revenues
for the quarter. The first quarter 2001 working capital usage was primarily to
reduce payables and other accrued expenses and to finance billed accounts
receivable for the quarter, which were substantially in excess of revenues
recognized on the percentage-of-completion method.
Capital expenditures in first quarter 2002 were $1.4 million, representing
a $.6 million increase compared to capital expenditures of $.8 million in first
quarter 2001. The Company's capital expenditures consist primarily of purchases
of test equipment, office equipment and building and leasehold improvements. Due
to the nature of the Company's business, capital expenditures have historically
not been substantial. The Company expects that its total capital expenditures
for 2002 will be within the range of $5 to $7 million.
In first quarter 2002, the Company completed an initial public offering of
6 million shares of common stock at $22 per share, generating net cash proceeds
of approximately $117.3 million. Concurrent with the closing of the offering,
the Company repaid the outstanding balances on its revolving credit and term
loan agreement and its senior subordinated note ($125.8 million and $51.3
million, respectively) and replaced the previous revolving credit and term loan
facility with a new facility provided by a syndicate of financial institutions.
This new facility provides financing of up to $125 million, consisting of a $40
million five-year revolving credit facility, a $40 million five-year term loan,
and a $45 million six-year term loan. Borrowings under the facility are secured
by a pledge of substantially all of the Company's assets and bear interest at a
base rate or LIBOR plus an applicable margin ranging from 2% to 2.75%. Available
borrowings under the revolving credit facility are determined by the Company's
borrowing base, as defined in the agreement, which is calculated based upon
eligible accounts receivable and inventories. At March 31, 2002, the Company had
outstanding borrowings of $85 million under the facility, consisting of the
five- and six-year term loans, bearing interest at rates of 4.25% and 4.5%,
respectively. As of the date of this Form 10-Q filing, the Company has not
utilized the revolving credit facility.
In connection with the refinancing of its debt, the Company paid
approximately $10.1 million in refinancing costs, primarily for prepayment
penalties and swap termination costs (see "Results of Operations" above) and
capitalized $4.6 million of debt issuance costs associated with the new
revolving credit and term loan agreement, consisting primarily of legal fees
and a facility fee paid to the new lenders.
The revolving credit and term loan agreement contains certain financial
covenants of the Company including, among other things, limitations on capital
expenditures, investments, and asset sales, and maintenance of certain financial
ratios. The Company was in compliance with these covenants at March 31, 2002.
17
Historically, the Company's primary source of liquidity has been cash
provided by operations, derived from net income plus depreciation and
amortization and plus or minus net investments in working capital from period to
period. The Company's liquidity position is dependent on a number of factors,
including the timing of production and delivery on sales contracts and the
timing of billing and collection activity. Purchase of materials for production
and payment for labor and overhead expenses can represent significant advance
expenditures, and billing to and collection from customers can lag those
expenditures significantly on some longer-term customer contracts. The Company's
billing arrangements include (a) monthly progress payments (typically on
fixed-price contracts) in which customers are billed 80% of incurred cost plus
general and administrative expenses but without profit, (b) monthly billing in
full at cost incurred plus profit (typically on cost-plus contracts), (c)
periodic milestone achievement-based billing at cost incurred plus profit, and
(d) billing at final delivery at cost incurred plus profit. Fixed price
contracts, some milestone-based billing contracts and bill-at-delivery contracts
represent a significant required use of working capital for the Company that
must be funded by operations or through external sources.
Though investments in working capital consumed a significant amount of
the Company's cash during first quarter 2002, the Company anticipates that
its operating cash flows will improve throughout the remainder of the year as
the receivables built up in the first quarter are collected and as the
Company continues to focus on reducing its investment in unbilled
receivables. Based on the Company's current level of operations and
anticipated growth, the Company believes that the cash proceeds from the
initial public offering, cash from operations and other available sources of
liquidity, including borrowings under the new revolving credit and term loan
facility, will be sufficient to fund its operations for at least the next two
years. The Company does not anticipate any significant nonoperating events
that will require the use of cash, other than potential acquisitions of
companies which are a match for existing and potential products and business.
Though the Company is continuously evaluating such opportunities, as of the
date of this Form 10-Q filing, it does not have any definitive acquisition
negotiations in process.
The Company has contractual obligations to make future payments under its
term loan agreement and under long-term noncancelable lease agreements. The
following table sets forth these contractual obligations as of March 31, 2002.
Payments due by period
----------------------
Contractual Obligation 2002 2003-2006 2007 and beyond Total
---------------------- ---- --------- --------------- -----
(IN MILLIONS)
Term loans $3.7 $35.6 $45.7 $ 85.0
Operating leases 4.3 16.2 2.1 22.6
---- ----- ----- ------
Total $8.0 $51.8 $47.8 $107.6
==== ===== ===== ======
The Company's term loan obligations for 2007 and beyond relate primarily to
its six year term loan, which must be paid in full by March 4, 2008. The Company
may prepay any obligations under its revolving credit and term loan facility
without penalty. In addition, the lenders under the facility may require
prepayments from the proceeds of certain transactions, including sales of net
assets, issuance of equity securities, insurance/condemnation settlements, and
the reversion of surplus assets from pension plans, as well as from any excess
cash flows, as defined in the agreement, generated by the Company during a
fiscal year.
The Company's noncancelable operating leases are primarily for office space
and manufacturing equipment. Certain of these agreements are subject to periodic
escalation provisions for increases in real estate taxes and other charges.
18
BACKLOG
The Company defines backlog as the value of contract awards received from
customers which have not been recognized as sales. Funded backlog refers to
contract awards for which the Company has received orders and the customer has
obligated funds. Unfunded backlog consists of potential product orders relating
to existing customer contracts that are the subject of customer options for
additional products or potential orders under existing contracts that receive
annual or incremental funding. A significant portion of sales are to prime
contractors, the Department of Defense and foreign governments pursuant to
long-term contracts. Accordingly, the backlog consists in large part of orders
under these contracts. As of March 31, 2002 the funded backlog was $223.0
million, and the total backlog was $396.4 million. At any given point in time,
the Company can generally expect to ship approximately 90% of its funded backlog
contracts within the next twelve months. The Company expects to complete in 2002
approximately 75% of its funded backlog contracts in place as of March 31, 2002.
The following depicts the Company's backlog of orders by business segment
at March 31, 2002 and December 31, 2001:
FUNDED UNFUNDED
------ --------
MARCH 31, December 31, MARCH 31, December 31,
2002 2001 2002 2001
--------- ------------ --------- ------------
(IN MILLIONS)
Electronic Combat Systems $110.3 $125.8 $168.1 $160.6
Diagnostics & Power Systems 67.5 51.7 2.6 1.5
Communications & Surveillance Systems 45.2 43.9 2.7 8.8
------ ------ ------ ------
Total Backlog $223.0 $221.4 $173.4 $170.9
====== ====== ====== ======
While it is expected that a substantial portion of funded backlog will
be converted to revenue during 2002, the Company cannot provide assurance
that the backlog, both funded and unfunded, will become revenue in any
particular period, if at all.
RELATED PARTY TRANSACTIONS
The Company pays its controlling stockholder, Veritas Capital Management,
L.L.C., an annual management fee. The Company paid $225,000 in management fees
to Veritas in both first quarter 2001 and 2002. The Company was not indebted to
its controlling stockholder at March 31, 2002 or December 31, 2001. In addition,
in connection with the Company's initial public offering on February 27, 2002,
the Company paid a transaction advisory fee to The Veritas Capital Fund, L.P. in
the amount of $1,500,000.
William G. Tobin, a member of our board of directors and audit
committee, is a Managing Director and Chairman of the Defense and Aerospace
practice of Korn/Ferry International, an executive search firm. The Company
has contracted with Korn/Ferry to handle its search for a Chief Operations
Officer. As of the date of this Form 10-Q filing, the Company has made
installment payments to Korn/Ferry totaling approximately $146,000, including
$94,000 paid in first quarter 2002.
Edward N. Ney, a member of our board of directors and audit
committee, is Chairman Emeritus of Young & Rubicam, an advertising firm for
which he previously served as President and Chief Executive Officer. The
Company has contracted with Burson-Marsteller, an affiliate company of Young
& Rubicam, to manage its investor relations and public relations functions.
As of the date of this Form 10-Q filing, the Company has made payments to
Burson-Marsteller totaling approximately $145,000, including $82,000 paid in
first quarter 2002.
Frank A. Tasco, CEO, Marsh & McLennan Companies, serves on the
Executive Investor Group of Veritas Capital Management, L.L.C. In fourth
quarter 2001, the Company contracted with Marsh & McLennan to provide the
majority of its insurance needs. The Company's annual premiums to be paid to
Marsh & McLennan are expected to approximate $2 million. As of the date of
this Form 10-Q filing, the Company has paid Marsh & McLennan approximately
$1.5 million, including $1.3 million paid in first quarter 2002.
19
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
management to make estimates and assumptions which affect the amounts reported
in the financial statements and determine whether contingent assets and
liabilities, if any, are disclosed in the financial statements. On an ongoing
basis, the Company evaluates its estimates and assumptions, including those
related to long-term contracts, product returns and warranty obligations, bad
debts, inventories, the recoverability of goodwill and other intangible assets,
fixed asset lives, income taxes, self-insurance reserves, pensions and other
post-retirement benefits, environmental matters, litigation and other
contingencies. The Company bases its estimates and assumptions on historical
experience and on various other factors that are believed to be reasonable under
the circumstances, including current and expected economic conditions, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ materially from the Company's estimates under
different assumptions or conditions.
The Company believes the following critical accounting policies, among
others, affect its more significant estimates and assumptions used in the
preparation of its consolidated financial statements:
REVENUE RECOGNITION. The Company recognizes revenue and profit on
substantially all of its contracts using the percentage-of-completion method of
accounting, which relies on estimates of total expected contract revenues and
costs. The Company follows this method since reasonably dependable estimates of
the revenues and costs applicable to various stages of the contracts can be
made. Recognized revenues and profit are subject to revisions as the projects
progress to completion. Revisions to the Company's profit estimates are charged
to income in the period in which the facts that give rise to the revisions
become known. Although the Company makes provisions for losses on its contracts
in its financial statements, it cannot provide assurance that such contract loss
provisions, which are based on estimates, will be adequate to cover all future
losses or that it will not be required to restate prior period quarterly or
annual financial statements as the result of errors in its estimates.
GOODWILL. The Company has a goodwill asset in the amount of $83.7 million
at March 31, 2002 in its consolidated balance sheet. In connection with the
adoption of SFAS 142, the Company is in the process of performing an impairment
test of goodwill as of January 1, 2002. The process of evaluating goodwill for
impairment involves the determination of the fair value of the Company's
business units. Inherent in such fair value determinations are certain judgments
and estimates, including the interpretation of current economic indicators and
market valuations, and assumptions about the Company's strategic plans with
regard to its operations. To the extent additional information arises or the
Company's strategies change, it is possible that the Company's conclusions
regarding goodwill impairment could change and result in a material effect on
its financial position or results of operations.
INVENTORY. The Company writes down its inventory for estimated obsolescence
or unmarketable items in an amount equal to the difference between the cost of
inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual future demand or market conditions are
less favorable than those projected by management, additional inventory
write-downs may be required.
INSURANCE. The Company records estimates for certain health and welfare and
workers' compensation and casualty insurance costs that are partially
self-insured programs. Should actual claims exceed the estimates or should
medical costs in general increase beyond the estimates, reserves recorded may
not be sufficient, and adverse effects on the consolidated financial statements
could occur.
CONTINGENCIES. As discussed in the Company's Prospectus dated February 26,
2002 filed with the Securities and Exchange Commission on February 27, 2002
pursuant to Rule 424(b)(1) of the Securities Act of 1933, the Company is
involved in various legal actions arising in the normal course of
20
its business, including a National Park Service investigation regarding the
presence of residual radioactive materials and contamination at a uranium mine
previously owned by a predecessor of one of the Company's subsidiaries. The
outcomes of such legal actions are not expected, either individually or in the
aggregate, to result in a material adverse effect on the Company's business,
results of operations, or financial condition. It is possible, however, that
future results of operations for any particular quarterly or annual period could
be materially affected by changes in the Company's assumptions related to these
proceedings. The Company accrues its best estimate of the probable cost for the
resolution of legal claims. Such estimates are developed in consultation with
outside counsel handling these matters and are based upon a combination of
litigation and settlement strategies. To the extent additional information
arises or the Company's strategies change, it is possible that the Company's
best estimate of its probable liability in these matters, if any, may change.
The above listing is not intended to be a comprehensive list of all of the
Company's accounting policies. In many cases, the accounting treatment of a
particular transaction is specifically dictated by accounting principles
generally accepted in the United States, with no need for management's judgement
of their application. There are also areas in which management's judgment in
selecting an available alternative would not produce a materially different
result. See the Company's audited financial statements and notes thereto
contained in its Prospectus dated February 26, 2002 filed with the Securities
and Exchange Commission on February 27, 2002 pursuant to Rule 424(b)(1) of the
Securities Act of 1933 for a discussion of the Company's accounting policies and
other disclosures required by accounting principles generally accepted in the
United States.
RECENT ACCOUNTING PRONOUNCEMENTS
Effective January 1, 2002, the Company adopted the goodwill amortization
provisions of FASB Statement of Financial Accounting Standards No. 142, GOODWILL
AND OTHER INTANGIBLE ASSETS ("SFAS 142"), under which the Company's goodwill is
no longer being amortized and is instead subject to annual impairment tests
using a new fair value based approach. The Company's other recorded intangible
assets, which are immaterial with respect to its financial position and results
of operations, continue to be amortized over their estimated useful lives.
The Company is currently finalizing the allocation of its goodwill to
its business units and evaluating the goodwill for any impairment. For
impairment testing purposes, the Company is determining the value of its
reporting units using a discounted cash flow model, a guideline company
model, and a transaction model. If impairment is indicated, such impairment
will be recorded as the cumulative effect of a change in accounting principle
with effect from January 1, 2002. The Company has not yet determined the
effects of this evaluation, if any, on its earnings and financial position.
Effective January 1, 2002, the Company adopted FASB Statement of
Financial Accounting Standards No. 144, ACCOUNTING FOR THE IMPAIRMENT OR
DISPOSAL OF LONG-LIVED ASSETS ("SFAS 144"), which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 establishes a single accounting model for long-lived assets to be
disposed of by sale. The adoption of SFAS 144 did not have a material effect
on the Company's consolidated operating results or financial position.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS ("SFAS 143"), which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and associated asset retirement costs
and requires that the fair value of a liability for an asset retirement
obligation be recorded in the period in which it is incurred. SFAS 143 will
become effective for the Company in 2003, and management is currently evaluating
the impact, if any, that SFAS 143 will have on its consolidated financial
statements.
21
Item 3: Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to potential increases in interest rates on its
variable rate debt under its new revolving credit and term loan agreement. The
Company does not currently have interest rate swap agreements in place to
mitigate this interest rate risk as it did with its previous variable rate debt.
To illustrate the sensitivity of the Company's results of operations to
changes in interest rates on its debt, the Company estimates that a 66% increase
in LIBOR rates would increase its interest expense by approximately $1,000,000
for the year ended December 31, 2002. Likewise, a 66% decline in LIBOR rates
would reduce its interest expense by approximately $600,000. This hypothetical
change in LIBOR rates was calculated based on the fluctuation in LIBOR during
2001, which was the maximum LIBOR fluctuation in the last ten years, and as
such, is not necessarily indicative of LIBOR fluctuations that may occur during
the remainder of 2002. These estimates also assume a level of debt consistent
with the March 31, 2002 level.
22
INTEGRATED DEFENSE TECHNOLOGIES, INC.
PART II. OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds
Pursuant to the Company's Registration Statement on Form S-1, as amended,
filed with the Securities and Exchange Commission on December 19, 2001 and
declared effective February 27, 2002, (Registration No. 333-75476), the Company
commenced the initial public offering of 6,000,000 registered shares of common
stock, par value per share $0.01, on February 27, 2002, at a price of $22.00 per
share. In addition, selling stockholders sold an aggregate of 2,050,000 shares
of the Company's common stock (which sale, together with the Company's sale of
6,000,000 shares, is referred to herein as the "Offering"). The Offering was
completed on March 4, 2002, and all of the 8,050,000 shares were sold,
generating net cash proceeds for the Company during first quarter 2002 of
approximately $117,337,000 (net of underwriting commissions of $9,240,000 and
other transaction fees totaling $5,423,000) and net proceeds to the selling
shareholders of approximately $41,943,000. The managing underwriters for the
Offering were Credit Suisse First Boston, Merrill Lynch & Co., CIBC World
Markets Corp. and Credit Lyonnais Securities (USA) Inc.
In connection with the Offering, the Company incurred approximately
$9,240,000 in underwriting discounts and commissions, and approximately
$6,127,000 in other related expenses, including $98,000 paid during fourth
quarter 2001 and $606,000 to be paid in second quarter 2002. The Company
received no proceeds from the sale of 2,050,000 shares by the selling
stockholders.
Included in the expenses of the offering were transaction advisory fees of
$1,275,000 paid to affiliates of CIBC World Markets Corp. and Credit Lyonnais
Securities (USA) Inc. and $1,500,000 paid to The Veritas Capital Fund, L.P. The
Veritas Capital Fund, L.P. owns 86.4% of the membership interests in IDT
Holding, L.L.C., owner of approximately 59.3% of the Company's issued and
outstanding common stock.
The Company used approximately $106,592,000 of its net proceeds from the
Offering to repay all of its senior subordinated notes, its indebtedness then
outstanding under a senior secured credit facility, and transaction fees
associated with these repayments. As of the date of this Form 10-Q filing, the
balance of the net proceeds from the Offering, approximately $8,000,000, has
been retained by the Company to be used for working capital purposes. See
"Liquidity and Capital Resources" in Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in this Form 10-Q for
further discussion.
Item 6: Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
On March 7, 2002, the Company filed a report on Form 8-K dated March 4,
2002 to report under Item 5 its initial public offering, its consummation of a
new senior secured credit facility, and a further amendment of the Amended and
Restated Limited Liability Company Operating Agreement of IDT Holding, L.L.C.
On March 12, 2002, the Company filed an amendment to the March 7, 2002 Form
8-K filing to correct a typographical error.
23
INTEGRATED DEFENSE TECHNOLOGIES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTEGRATED DEFENSE TECHNOLOGIES, INC.
-------------------------------------
(Registrant)
By: /s/ Thomas J. Keenan By: /s/ John W. Wilhoite
------------------------------------- -----------------------------
Thomas J. Keenan John W. Wilhoite
President and Chief Executive Officer Vice President of Finance and
(Principal Executive Officer) Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: May 14, 2002 Date: May 14, 2002
24