===============================================================================
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 September 27, 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.
-----------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-4027646
--------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110 Wynn Drive, Huntsville, Alabama 35805
---------------------------------------- -----------
(Address of principal executive offices) (Zip Code)
(256) 895-2000
----------------------
(Telephone Number)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO ___
Common stock, par value $.01 per share: 21,327,931 shares
outstanding as of November 7, 2002
===============================================================================
INTEGRATED DEFENSE TECHNOLOGIES, INC.
FORM 10-Q
September 27, 2002
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Balance Sheets as of September 27, 2002 and
December 31, 2001 (unaudited) 2
Consolidated Statements of Operations for the quarters
and nine months ended September 27, 2002 and
September 28, 2001 (unaudited) 3
Consolidated Statements of Cash Flows for the nine
months ended September 27, 2002 and
September 28, 2001 (unaudited) 4
Notes to Condensed Financial Statements 5 - 12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13 - 24
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 24
Item 4. Controls and Procedures 24
PART II. OTHER INFORMATION
Item 5: Other information 25
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
CERTIFICATIONS 27
PART I. FINANCIAL INFORMATION
ITEM 1.
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
--------------------------------------------------------------------------------
September 27, December 31,
2002 2001
--------------------------------------------------------------------------------
(In thousands except share and per share amounts)
ASSETS
Current assets:
Cash $ 17,038 $ 3,893
Restricted cash 463 769
Accounts receivable, net 127,262 113,863
Inventories, net 12,700 13,567
Prepaid expenses and other current assets 3,358 2,028
Deferred income taxes 6,377 7,068
Total current assets 167,198 141,188
Property and equipment, net 43,662 45,548
Goodwill, net 83,734 83,734
Other assets 7,676 7,828
--------------------------------------------------------------------------------
Total Assets $302,270 $278,298
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Revolving credit loan $ --- $ 8,500
Current portion of long-term debt 4,950 9,164
Accounts payable 19,013 14,802
Accrued compensation 8,425 8,317
Other accrued expenses 10,827 11,030
Derivative liabilities --- 7,326
Billings in excess of costs and earnings 4,413 8,743
--------------------------------------------------------------------------------
Total current liabilities 47,628 67,882
Long-term debt 78,813 153,561
Pension and other postretirement employee benefits 6,583 6,675
--------------------------------------------------------------------------------
Total liabilities 133,024 228,118
--------------------------------------------------------------------------------
Contingencies (Note 11) --- ---
--------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, $.01 par value per share,
20,000,000 shares authorized, none issued
Common stock, $.01 par value per share,
200,000,000 shares authorized, 21,327,931
issued at September 27, 2002 and 13,565,243
issued at December 31, 2001 213 136
Additional paid-in capital 170,955 54,434
Accumulated other comprehensive loss (2,267) (6,703)
Retained earnings 345 2,313
--------------------------------------------------------------------------------
Total stockholders' equity 169,246 50,180
--------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $302,270 $278,298
================================================================================
The accompanying notes are an integral part of these consolidated
financial statements.
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
----------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
----------------------------------------------------------------------------------------------------------------------
(In thousands except per share amounts)
Revenue $75,723 $67,868 $216,215 $189,261
Cost of revenue 55,599 48,996 153,645 134,306
----------------------------------------------------------------------------------------------------------------------
Gross profit 20,124 18,872 62,570 54,955
Selling, general and administrative expenses 8,022 7,693 27,762 25,543
Research and development and bid and proposal expenses 3,294 3,620 11,362 9,786
Amortization of debt issuance costs 192 203 591 646
Amortization of patents and goodwill 9 1,774 28 4,833
----------------------------------------------------------------------------------------------------------------------
Income from operations 8,607 5,582 22,827 14,147
Interest expense (958) (5,224) (5,808) (14,883)
Refinancing costs --- --- (7,571) ---
Other income (expense) - net (383) 277 ( 139) 277
----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and extraordinary loss 7,266 635 9,309 (459)
Income tax expense (2,652) (506) (3,271) (1,294)
----------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary loss 4,614 129 6,038 (1,753)
Extraordinary loss on early extinguishment of debt
(net of income tax benefit of $5,119) --- --- (8,006) ---
----------------------------------------------------------------------------------------------------------------------
Net income (loss) $4,614 $129 $(1,968) $(1,753)
======================================================================================================================
Basic income (loss) per share:
Income (loss) before extraordinary loss $.23 $.01 $ .32 $(.13)
Extraordinary loss --- --- (.43) ---
----------------------------------------------------------------------------------------------------------------------
Net income (loss) $.23 $.01 $(.11) $(.13)
======================================================================================================================
Diluted income (loss) per share:
Income (loss) before extraordinary loss $.22 $.01 $ .30 $(.13)
Extraordinary loss --- --- (.41) ---
----------------------------------------------------------------------------------------------------------------------
Net income (loss) $.22 $.01 $(.11) $(.13)
======================================================================================================================
Weighted-average shares outstanding - Basic 20,216 13,565 18,639 13,565
Diluted 21,328 15,328 20,075 13,565
======================================================================================================================
The accompanying notes are an integral part of these
consolidated financial statements.
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine months ended September 27, September 28,
2002 2001
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(In thousands)
OPERATING ACTIVITIES:
Net loss $( 1,968) $(1,753)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation expense 8,004 7,957
Amortization of debt issuance costs 591 646
Amortization of goodwill and other intangible assets 171 4,833
Extraordinary loss on early extinguishment of debt, net 8,006 ---
Other refinancing costs 7,571 ---
Deferred income taxes 3,026 1,012
Changes in current assets and liabilities:
Restricted cash 305 2,821
Accounts receivable, net (13,558) (15,018)
Inventories, net ( 56) 201
Other current assets ( 1,204) 3,881
Accounts payable 4,757 3,013
Billings in excess of costs and earnings ( 4,330) 4,425
Other current liabilities 440 (9,174)
---------------------------------------------------------------------------------------------------
Net cash provided by operating activities 11,755 2,844
---------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchases of property and equipment ( 6,136) ( 3,492)
Capitalization of internally developed software ( 865) ---
Other ( 253) ( 57)
---------------------------------------------------------------------------------------------------
Net cash used in investing activities ( 7,254) ( 3,549)
---------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of issuance costs 116,688 ---
Issuance of long-term debt 85,000 ---
Repayment of long-term debt (169,823) ( 5,592)
Payment of debt issuance and other refinancing costs ( 14,721) ---
Net borrowings (repayments) under revolving credit loans ( 8,500) 2,450
---------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 8,644 ( 3,142)
---------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 13,145 ( 3,847)
Cash at beginning of period 3,893 4,938
---------------------------------------------------------------------------------------------------
Cash at end of period $17,038 $ 1,091
===================================================================================================
Supplemental disclosure of noncash financing activities:
Unrealized loss on derivative financial instrument $(2,833) $(9,274)
The accompanying notes are an integral part of these consolidated
financial statements.
INTEGRATED DEFENSE TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial
statements of Integrated Defense Technologies, Inc. and
subsidiaries (the "Company") have been prepared on
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 period amounts
have been reclassified to provide comparability with the
current presentation.
NOTE 2: REFINANCING
On February 27, 2002, the Company completed an initial public
offering of 6,000,000 shares of common stock at $22 per share,
generating net cash proceeds of $116,688,000. 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 notes
($125,836,000 and $51,250,000, respectively) and replaced the
previous revolving credit and term loan facility with a new
facility provided by a syndicate of financial institutions.
This new facility provided 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 September 27, 2002, the Company had
outstanding borrowings of $83,763,000 under the facility,
consisting of $38,875,000 under the five-year term loan and
$44,888,000 under the six-year term loan. The current
interest rates on these loans are 4.007% and 4.257%,
respectively.
On November 1, 2002, in connection with its acquisition of BAE
SYSTEMS Advanced Systems Gaithersburg, Maryland operation (see
Note 12), the Company amended and restated its revolving
credit and term loan facility. The amendment increased the six-
year term loan by $135,000,000, increased availability under
the revolving credit facility by $5,000,000, and updated the
financial covenants to reflect the integration of the
Gaithersburg operation into the Company. As of the date of
this Form 10-Q filing, the Company had outstanding borrowings
of $225,025,000 under the facility, consisting of $37,750,000
under the five-year term loan, $179,775,000 under the six-year
term loan, and $7,500,000 borrowed under the revolving credit
facility. The current interest rates on the additional term
loan borrowing and on the revolving credit facility are 5.39%
and 4.39%, respectively.
Borrowings under the amended facility are secured by a pledge
of substantially all of the Company's assets and bear interest
at a base rate or LIBOR plus an applicable margin ranging from
2% to 4%. 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 amended 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 as of the date of this Form 10-Q filing.
In connection with the early retirement and refinancing of its
prior credit facility in February 2002, the Company 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 notes, 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 nine months ended September 27, 2002. The
remaining charges 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.
In February 2002, the Company capitalized $4,629,000 of debt
issuance costs associated with the 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 September 27, 2002
of $4,182,000 is included in "Other assets" in the Company's
consolidated balance sheet as of that date.
NOTE 3: INVENTORIES
Inventories consist of the following:
----------------------------------------------------------------------
September 27, December 31,
2002 2001
----------------------------------------------------------------------
(In thousands)
Stock materials $10,029 $15,034
Work-in-process 10,014 5,523
Finished goods 9 458
----------------------------------------------------------------------
20,052 21,015
Less reserve for excess and obsolescence 7,352 7,448
----------------------------------------------------------------------
Inventories, net $12,700 $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 electronic components for use in fulfilling current and
future contracts.
NOTE 4: PROPERTY AND EQUIPMENT
Property and equipment, net includes allowances for
depreciation of $64,024,000 and $59,832,000 at September 27,
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 swap agreements increased
interest expense by $939,000 and $830,000 in the first nine
months of 2001 and 2002, respectively.
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 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 nine months ended September
27, 2001 (see Note 7). At September 28, 2001, the swap
agreements had a fair value of $8,335,000 ($5,171,000 net of
tax benefit), resulting in a component of other comprehensive
loss for the first nine months of 2001 of $5,472,000
($3,396,000 net of income tax benefit). The approximate cost
to terminate the swaps at December 31, 2001 of $7,326,000
($4,542,000 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 retirement 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
nine months ended September 27, 2002.
There was no impact to earnings due to hedge ineffectiveness
during the nine month periods ended September 27, 2002 or
September 28, 2001. The Company does not use derivative
financial instruments for speculative or trading purposes.
NOTE 6: INCOME (LOSS) PER SHARE
Basic income or loss per share is computed using the weighted
average number of common shares outstanding. Diluted income
or 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 and nine months ended September 28,
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 warrant holders converted outstanding
warrants into 235,749 shares of Company common stock. On
September 6, 2002, warrant holders converted the remaining
outstanding warrants into 1,526,939 shares of restricted
common stock. The Company no longer has any common stock
warrants outstanding.
The computations of basic and diluted weighted-average shares
outstanding for the quarters and nine month periods ended
September 27, 2002 and September 28, 2001 are as follows.
--------------------------------------------------------------------------------
Quarter ended, Nine months ended,
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
--------------------------------------------------------------------------------
Weighted-average shares
outstanding -- basic 20,215,921 13,565,243 18,638,852 13,565,243
Dilutive effect
of warrants 1,112,015 1,762,695 1,436,338 ---
--------------------------------------------------------------------------------
Weighted-average shares
outstanding -- diluted 21,327,936 15,327,938 20,075,190 13,565,243
================================================================================
Anti-dilutive shares were 1,762,695 for the nine months ended
September 28, 2001.
NOTE 7: COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss) as well
as all other nonowner changes in equity. The components of the
Company's comprehensive income (loss) for the quarters and
nine month periods ended September 27, 2002 and September 28,
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, Nine months ended,
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
---------------------------------------------------------------------------------------------------------------
(In thousands)
Net income (loss) $4,614 $129 $(1,968) $(1,753)
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 --- (2,620) (582) (3,978)
Realized loss on derivative financial instruments
charged to net income (loss) --- 274 5,124 582
Minimum pension liability adjustment (81) --- (106) ---
---------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $4,533 $(2,217) $2,468 $(6,924)
===============================================================================================================
NOTE 8: SEGMENT INFORMATION
The Company's business 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 among the operating segments are
insignificant. With the exception of debt issuance cost
amortization related to the Company's new revolving credit and
term loan facility, the Company's corporate expenses are
allocated in full to the segments on the basis of relative
employment, revenue, and selected assets. Corporate assets
and expenses are included in "All other" in the following
tables.
The following table sets forth revenue and EBITDA by operating
segment for the quarters and nine month periods ended
September 27, 2002 and September 28, 2001.
--------------------------------------------------------------------------------------------------------
Quarter ended, Nine months ended,
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------
(In thousands)
REVENUES FROM UNAFFILIATED CUSTOMERS:
Electronic Combat Systems $37,165 $30,199 $105,290 $ 91,860
Diagnostics & Power Systems 23,012 22,448 64,599 52,162
Communications & Surveillance Systems 15,585 15,090 46,070 44,655
All other (39) 131 256 584
--------------------------------------------------------------------------------------------------------
Total $75,723 $67,868 $216,215 $189,261
========================================================================================================
OTHER FINANCIAL INFORMATION:
--------------------------------------------------------------------------------------------------------
EBITDA:
Electronic Combat Systems $ 6,811 $ 5,399 $18,441 $18,627
Diagnostics & Power Systems 3,179 3,474 7,466 5,769
Communications & Surveillance Systems 1,457 1,401 5,981 3,165
All other 23 (1) (295) 22
--------------------------------------------------------------------------------------------------------
Total $11,470 $10,273 $31,593 $27,583
========================================================================================================
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 income (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 expenditures 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 income (loss) before
income taxes and extraordinary loss is presented in the table
below.
RECONCILIATION OF EBITDA TO INCOME (LOSS)BEFORE INCOME TAXES AND
EXTRAORDINARY LOSS:
--------------------------------------------------------------------------------------------------------
Quarter ended, Nine months ended,
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------
(In thousands)
EBITDA $11,470 $10,273 $31,593 $27,583
Less:Depreciation and amortization
expense 2,863 4,691 8,766 13,436
Interest expense 958 5,224 5,808 14,883
Refinancing costs --- --- 7,571 ---
Other expense (income) - net 383 (277) 139 (277)
--------------------------------------------------------------------------------------------------------
Income (loss) before income taxes and
extraordinary loss $ 7,266 $ 635 $ 9,309 $ (459)
========================================================================================================
The following table presents total assets for each of the
Company's operating segments as of September 27, 2002 and
December 31, 2001. The December 31, 2001 asset balances
have been reclassified to reflect the reallocation of
goodwill in accordance with SFAS 142.
----------------------------------------------------------------------
September 27, December 31,
2002 2001
----------------------------------------------------------------------
(In thousands)
Total assets:
Electronic Combat Systems $152,236 $151,748
Diagnostics & Power Systems 57,644 51,373
Communications & Surveillance Systems 58,575 58,452
All other 33,815 16,725
----------------------------------------------------------------------
Total $302,270 $278,298
======================================================================
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 have been
increased by the net cash generated from the Company's public
offering, by cash generated from the Company's operations
during the first nine months of 2002, by capitalized debt
issuance costs, 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.
The increase in Diagnostics & Power Systems assets is due
primarily to a $5,630,000 increase in the segment's accounts
receivable, reflecting the growth in the segment's revenues.
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 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 pro forma results of the Company for the
quarters and nine month periods ended September 27, 2002 and
September 28, 2001 on a comparable basis:
-----------------------------------------------------------------------------------------------------------------
Quarter ended, Nine months ended,
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
-----------------------------------------------------------------------------------------------------------------
(In thousands except per share amounts)
Reported income (loss) before extraordinary loss $4,614 $ 129 $6,038 $(1,753)
Add back: Goodwill amortization, net of tax --- 1,448 --- 3,962
-----------------------------------------------------------------------------------------------------------------
Adjusted income before extraordinary loss $4,614 $1,577 $6,038 $ 2,209
=================================================================================================================
Reported net income (loss) $4,614 $ 129 $(1,968) $(1,753)
Add back: Goodwill amortization, net of tax --- 1,448 --- 3,962
-----------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $4,614 $1,577 $(1,968) $ 2,209
=================================================================================================================
Basic income (loss) per share:
Reported income (loss) before extraordinary loss $.23 $.01 $ .32 $(.13)
Goodwill amortization, net of tax --- .11 --- .29
-----------------------------------------------------------------------------------------------------------------
Adjusted income before extraordinary loss $.23 $.12 $ .32 $ .16
=================================================================================================================
Reported net income (loss) $.23 $.01 $(.11) $(.13)
Goodwill amortization, net of tax --- .11 --- .29
-----------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $.23 $.12 $(.11) $ .16
=================================================================================================================
Diluted income (loss) per share:
Reported income (loss) before extraordinary loss $.22 $.01 $ .30 $(.13)
Goodwill amortization, net of tax --- .09 --- .27
-----------------------------------------------------------------------------------------------------------------
Adjusted income before extraordinary loss $.22 $.10 $ .30 $ .14
=================================================================================================================
Reported net income (loss) $.22 $.01 $(.11) $(.13)
Goodwill amortization, net of tax --- .09 --- .27
-----------------------------------------------------------------------------------------------------------------
Adjusted net income (loss) $.22 $.10 $(.11) $ .14
=================================================================================================================
For impairment testing purposes, the Company determined the
value of its individual business units using a discounted cash
flow model, a guideline company model, and a transaction
model, and by observation of demonstrable fair values of
comparable entities. The Company has determined that there is
no impairment of its goodwill as of the January 1, 2002
implementation date of SFAS 142.
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").
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.
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 costs 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 the first nine months of 2002.
NOTE 12: SUBSEQUENT EVENT
On November 1, 2002, Signia-IDT, Inc. (formerly known as IDT
Acquisition Co.), a wholly-owned subsidiary of the Company,
acquired substantially all of the assets and assumed certain
of the liabilities of BAE SYSTEMS Advanced Systems
Gaithersburg, Maryland operation for $146,000,000 in cash,
$11,000,000 of which was taken from the Company's cash
reserves and the remainder of which was financed through an
add-on to the Company's revolving credit and term loan
facility. See Note 2 of Notes to Financial Statements
contained in this Form 10-Q for details of the Company's
credit facility and a summary of the November 1, 2002
amendment.
The acquisition will be accounted for using the purchase
method and accordingly, the purchase price, including direct
acquisition costs, will be allocated to the assets acquired,
including identifiable intangible assets, and liabilities
assumed based on their estimated fair values at the date of
acquisition. Independent appraisals will be used to determine
the estimated fair values of the assets acquired and the
liabilities assumed, and any excess of cost over the fair
value of the acquired net assets will be recorded as goodwill.
The BAE SYSTEMS Gaithersburg operation (now known as "Signia-
IDT") employs over 300 people and designs and manufactures
high performance radio frequency surveillance equipment used
in communications intelligence and signals intelligence
applications. The operation will be integrated into the
Company's Communications & Surveillance Systems segment in the
fourth quarter of 2002.
ITEM 2.
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, and repair and maintenance 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 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's results of operations, particularly its revenue
and gross profits, and its cash flows may vary significantly from
period to period depending upon the timing of delivery of finished
products, the terms of contracts and the level of export sales. As a
result, period-to-period comparisons may show substantial changes
disproportionate to the Company's underlying business activity.
Accordingly, the Company does not believe that its quarterly results
of operations are necessarily indicative of results for future
periods.
FORWARD LOOKING STATEMENTS
The information contained in this report, 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 of the
Company and of Signia-IDT based, in part, on assumptions made by
management or other persons believed by management to be reliable.
Actual results could differ materially from those projected in the
forward-looking statements. You should also refer to those factors
disclosed under "Risk Factors" in the Company's Prospectus, dated
February 26, 2002, filed with the Securities and Exchange Commission
on February 27, 2002 pursuant to Rule 242(b)(1) of the Securities
Act of 1933.
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
o difficulties encountered in the integration of acquired
businesses; 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.
RECENT DEVELOPMENTS
On September 23, 2002, the Company announced the appointment of
John J. Sciuto as Chief Operating Officer of the corporation. In
this newly-created position, Mr. Sciuto will have direct
responsibility for the operations of all of the Company's operating
segments. Mr. Sciuto was formerly the Chairman, President and Chief
Executive Officer of Comptek Research Inc., a niche supplier of
highly specialized electronic defense systems and services. He is a
retired Naval Officer, with Bachelors degrees in Aviation
Electronics and Corporate Finance.
RESULTS OF OPERATIONS
The following tables summarize the Company's operating
information as a percentage of revenue and its segment data for the
quarters and nine month periods ended September 27, 2002 and
September 28, 2001:
-------------------------------------------------------------------------------------------------------------------
Quarter ended Nine months ended
September 27, September 28, September 27, September 28,
2002 2001 2002 2001
-------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS AND OTHER FINANCIAL INFORMATION:
Revenue 100.0% 100.0% 100.0% 100.0%
Cost of revenue 73.4 72.2 71.1 71.0
-------------------------------------------------------------------------------------------------------------------
Gross profit 26.6 27.8 28.9 29.0
Selling, general and administrative expenses 10.6 11.4 12.8 13.5
Research and development and bid and proposal expenses 4.3 5.3 5.2 5.1
Amortization of patents, debt issuance costs and goodwill .3 2.9 .3 2.9
-------------------------------------------------------------------------------------------------------------------
Income from operations 11.4% 8.2% 10.6% 7.5%
===================================================================================================================
EBITDA (1) 15.1% 15.1% 14.6% 14.6%
===================================================================================================================
OPERATIONS INFORMATION BY SEGMENT AND OTHER FINANCIAL INFORMATION:
(In millions)
Revenue:
Electronic Combat Systems $37.1 $30.2 $105.3 $ 91.9
Diagnostics & Power Systems 23.0 22.5 64.6 52.2
Communications & Surveillance Systems 15.6 15.1 46.1 44.6
Other --- .1 .2 .6
------------------------------------------------------------------------------------------------------------------
Total revenue $75.7 $67.9 $216.2 $189.3
==================================================================================================================
Gross profit:
Electronic Combat Systems $10.6 $ 9.6 $32.8 $29.7
Diagnostics & Power Systems 5.3 5.2 14.5 11.2
Communications & Surveillance Systems 4.2 3.8 15.2 13.6
Other --- .3 .1 .5
------------------------------------------------------------------------------------------------------------------
Total gross profit $20.1 $18.9 $62.6 $55.0
==================================================================================================================
EBITDA (1) :
Electronic Combat Systems $ 6.8 $ 5.4 $18.4 $18.6
Diagnostics & Power Systems 3.2 3.5 7.5 5.8
Communications & Surveillance Systems 1.5 1.4 6.0 3.2
Other --- --- (.3) ---
------------------------------------------------------------------------------------------------------------------
Total EBITDA $11.5 $10.3 $31.6 $27.6
==================================================================================================================
(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 income (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.
RESULTS OF OPERATIONS. In third quarter 2002, the Company
earned net income of $4.6 million on revenues of $75.7 million,
compared to a second quarter 2002 net income of $4.5 million on
revenues of $72.1 million and third quarter 2001 net income of $.1
million on revenues of $67.9 million. For the first nine months of
2002, the Company incurred a net loss of $2.0 million on revenues of
$216.2 million, compared to a comparable prior year period net loss
of $1.8 million on revenues of $189.3 million.
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 $116.7 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 notes, 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 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 unamortized discount on its senior subordinated
notes, 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 the first nine months of 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 same period. The
Company's net losses for the first quarter and first nine months of
2002 were primarily the result of these charges, which totaled
approximately $12.6 million net of the associated tax benefits.
PRO FORMA RESULTS OF OPERATIONS. Excluding the impact on
earnings of these debt retirement and refinancing charges, the
Company earned a pro forma net income in the first nine months of
2002 of $10.7 million ($.53 per share), compared to a net loss of
$1.8 million ($.13 per share) in the same prior year period.
Approximately $4.8 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 14%
revenue increase and a $9.1 million decline in interest expense as
the result of the Company's debt refinancing, partially offset by an
11% increase in operating expenses.
REVENUE. Revenue for third quarter 2002 was $75.7 million,
up 5% from the second quarter 2002 level and 12% from the same prior
year period. Year to date revenues are $216.2 million, up 14% from
the comparable prior year period.
The Company's Electronic Combat Systems segment earned revenues
of $37.2 million in third quarter 2002, up 4% and 23%, respectively,
from the second quarter 2002 and third quarter 2001 levels. Year to
date revenues were $105.3 million, up 15% from the same prior year
period. The increase in revenue from the prior year periods was
primarily the result of strong bookings in fourth quarter 2001 and
in the first half of 2002, including a large fourth quarter 2001
order from the U.S. Navy Fiber Optics Data Management System program
and several orders for the segment's airborne instrumentation pods
under the Air Force P4 Refurbishment Contract (P4RC). Activity on
the P4RC program began to accelerate in the third quarter as the
planning and engineering phases were completed and production
efforts were increased to meet the 2003 delivery schedule.
Revenues for the Company's Diagnostics & Power Systems segment
were $23.0 million for the quarter, up 16% and 3%, respectively,
from the second quarter 2002 and the same prior year period levels.
Year to date revenues were $64.6 million, up 24% from the comparable
prior year period. Current year revenues for the Diagnostics & Power
Systems segment have been strong due to strong fourth quarter 2001
orders for embedded diagnostics, additions to the scope of the
Abrams Systems Technical Support program, earlier than expected
booking of the Common Support Function Module program, and an early
contract award for the 10th Year Power Supplies and Displays
program. First quarter 2002 revenues were high due to accelerated
production on the embedded diagnostics orders received in fourth
quarter 2001. Embedded diagnostics revenues declined consecutively
in the second and third quarters as these projects began nearing
completion. However, in the third quarter, this negative revenue
impact was more than offset by revenues earned on the 10th Year
Power Supplies and Displays program and on the hybrid electric High
Mobility Multipurpose Wheeled Vehicle program.
Revenues for the Company's Communications & Surveillance
Systems segment were $15.6 million, down 4% from the second quarter
2002 level, but up 3% from the same prior year period. Year to date
revenues were $46.1 million, up 3% from the comparable prior year
period. Though up from the prior year level, current year revenues
have been less than expected due to the first quarter loss of a
weather radar system booking in Turkey. Second quarter revenues were
strong due to the completion and shipment of the first phase of the
segment's largest program.
GROSS PROFIT. The Company's gross profit for third quarter
was $20.1 million, down from $22.3 million in second quarter 2002,
but up from $18.9 million in third quarter 2001. The dollar increase
in gross profit against the same prior year period resulted
primarily from the Company's increased revenues, primarily in its
Electronic Combat Systems segment. As a percentage of revenue,
gross profit for the quarter was 26.6%, down from 31% in second
quarter 2002 and 27.8% in the same prior year period. Third quarter
2002 margin was negatively impacted by the volume decline in the
Company's Communications & Surveillance Systems segment and by low
margin earned on start-up programs in the Diagnostics & Power
Systems segment.
The Company's gross profit for the first nine months of 2002
was $62.6 million, up from $55 million in the first nine months of
2001, due to across the board revenue increases in the Company's
operating segments. As a percentage of revenue, gross profit was
flat with the prior year level at approximately 29%. One of the
largest revenue increases from the prior year occurred in the
Company's Diagnostics & Power Systems segment, which has a higher
proportion of cost-plus business than the other segments. As such,
its margins will generally be lower, and may limit improvement in
the consolidated margin percentage in periods of increased
Diagnostics revenue relative to total revenue. Other factors
impacting 2002 margins include start-up production costs resulting
from continued investment in the hybrid electric business and in the
Sidecar program by Diagnostics & Power Systems, and cost and volume
issues in a portion of the Electronic Combat Systems segment.
However, these negative factors were offset by the benefits
resulting from the Company's periodic downsizing and continuing cost
control efforts, primarily in its Communications & Surveillance
Systems segment.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. The Company's
selling, general and administrative expenses for third quarter 2002
were $8.0 million, down 18% from the second quarter 2002 level and
up 4% from the same prior year period. Expenses for the first nine
months of 2002 were $27.8 million, up 9% from the prior year to date
level. The expense increases from the prior year levels have
resulted primarily from additional administrative expenses
associated with operating as a publicly-held company. These
expenses may continue to increase, particularly in 2003, as the
result of new corporate governance legislation and the increasing
costs of compliance with new regulations, including but not limited
to, increased legal and accounting fees and increasing costs of
obtaining directors and officers liability insurance.
In comparison to the second of quarter 2002, expenses have
declined in all of the Company's operating segments as the result of
ongoing cost reduction efforts and the timing of various selling
efforts from quarter to quarter. The Company has an aggressive cost-
cutting plan which was put into effect during second quarter 2002,
primarily related to its general and administrative expenses. The
most significant expense decline has occurred in the Electronic
Combat Systems segment, where selling, general, and administrative
expenses declined by $1.2 million, or 24%, from the second quarter
level. This decline was primarily the result of second quarter
reductions in force in a portion of the segment, the benefits of
which began to accrue in the third quarter. Second quarter expenses
for this segment were also inflated by the severance costs
associated with these staff reductions.
Selling, general, and administrative expenses also continue to
decline as a percentage of the Company's revenue. Third quarter
2002 expenses were 10.6% of revenue, down from 13.6% in second
quarter 2002 and 11.4% in third quarter 2001. Year to date expenses
have declined from 13.5% of revenue in first nine months of 2001 to
12.8% in the current year period.
RESEARCH AND DEVELOPMENT AND BID AND PROPOSAL EXPENSES. The
Company's research and development and bid and proposal expenses
were $3.3 million for third quarter 2002, down 27% from the second
quarter 2002 level and 9% from the same prior year period. As a
percentage of revenue, research and development and bid and proposal
expenses were 4.3% for the quarter, down from 6.2% in second quarter
2002 and 5.3% in third quarter 2001. Second quarter 2002 expenses
were inflated by an acceleration of bid and proposal expenses of
approximately $.6 million in an effort to win bookings on several
large forthcoming projects. These expenses have declined to more
normal levels in the third quarter as many of the major proposals
have now been submitted. Research and development efforts also
increased in the second quarter as programs were accelerated to
support potential new products.
Year to date research and development and bid and proposal
expenses were $11.4 million, up 16% from the same prior year period.
However, as a percentage of revenue, research and development and
bid and proposal expenses remain relatively flat with the prior
period at 5.2%. Electronic Combat Systems' and Diagnostics & Power
Systems' expenses increased by $1.9 million and $.6 million,
respectively, due primarily to growth in these business segments and
pursuit of some large project awards. Communications & Surveillance
Systems' expenses declined by $.8 million from the prior year
period. Cost containment achieved in this segment has served to
offset the additional expenses associated with its increased
research and development and program proposal efforts.
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 and $.6 million, respectively, in the
third quarter and first nine months of 2002, down significantly
from the prior year levels. 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 results of operations excluding goodwill amortization
for the third quarter and first nine months of 2001.
INCOME FROM OPERATIONS. The Company's income from operations
was $8.6 million or 11.4% of revenue for third quarter 2002, up from
$7.9 million or 10.9% of revenue in second quarter 2002 and
$5.6 million or 8.2% of revenue in third quarter 2001. Year to date,
the Company's income from operations was $22.8 million or 10.6% of
revenue, up from $14.1 million or 7.5% of revenue for the same prior
year period.
Communications & Surveillance Systems had an operating income
for the quarter of $1 million, down from $2 million in the second
quarter, but up from $.4 million in the third quarter of 2001. Year
to date, the segment's income from operations was $4.5 million,
compared to $.4 million in the first nine months of 2001. The
improvement from the prior year levels is due primarily to the
positive results of the segment's downsizing and cost control
efforts as well as to the lack of goodwill amortization expense in
2002. However, the segment's third quarter operating income was
reduced versus second quarter 2002 as declining volume levels
continue to pressure its gross margin.
Diagnostics & Power Systems' operating income for the third
quarter and first nine months of 2002 was $2.8 million and $6.2
million, respectively, up by approximately $.2 million and $3.0
million, respectively, over the comparable prior year levels.
Electronic Combat Systems' operating income for the third quarter
and first nine months of 2002 was $5.1 million and $13 million,
respectively, up by approximately $2.7 million and $3.3 million,
respectively, from the same prior year periods. The current year
improvement in both segments' operating results was primarily the
result of increased volumes and lack of goodwill amortization in
2002, partially offset by the increased operating expenses described
previously. In comparison to the second quarter of 2002, third
quarter operating income for Diagnostics & Power Systems and
Electronic Combat Systems increased by $1.1 million and $.5 million,
respectively. These increases were due primarily to the operating
expense reductions achieved by these segments in the third quarter,
as well as to their increased revenue levels.
INTEREST EXPENSE. The Company's interest expense for the
third quarter and first nine months of 2002 was $1 million and $5.8
million, respectively, down $4.3 million and $9.1 million,
respectively, from the comparable prior year levels. The interest
expense decline is 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 2.1 points from
the comparable prior year level. The Company's interest expense can
be expected to increase in the fourth quarter as the result of the
additional debt incurred under its amended credit facility. (See
"Liquidity and Capital Resources" following.) The Company estimates
that the additional borrowings under the facility will increase its
annual interest expense by approximately $9 million.
INCOME TAX EXPENSE. The Company recorded income tax expense
of $2.7 million, or 36.5% of pretax income, in third quarter 2002
and an income tax benefit of $1.8 million (including the income tax
benefit related to its extraordinary loss), or 48.4% of pretax loss,
year to date. In the third quarter and first nine months of 2001,
the Company recorded income tax expense of $.5 million and $1.3
million, respectively, on pretax income (losses) of $.6 million and
($.5 million), respectively. The Company's effective income tax
rates exceeded the U.S. federal statutory rates in all periods due
primarily to non-deductible expenses, including goodwill
amortization in 2001.
EBITDA. The Company's EBITDA was $11.5 million for third
quarter 2002, up from $10.8 million in second quarter 2002 and
$10.3 million in third quarter 2001. As a percentage of revenue,
third quarter EBITDA was basically flat with the second quarter 2002
and third quarter 2001 levels at 15.1%. Year to date, the Company's
EBITDA was $31.6 million, up from $27.6 million in the comparable
prior year period. However, as a percentage of revenue, year to date
EBITDA also was flat with the prior year period at 14.6%.
Communications & Surveillance Systems' EBITDA for the third
quarter and first nine months of 2002 was $1.5 million and $6.0
million, respectively, compared to $1.4 million and $3.2 million,
respectively, for the same prior year periods. As a percentage of
revenue, the segment's year to date EBITDA has improved to 13%, up
from 7.1% for the first nine months of 2001. This improvement is
primarily the result of the segment's downsizing and cost control
efforts.
Diagnostics & Power Systems' EBITDA for the third quarter and
first nine months of 2002 was $3.2 million and $7.5 million,
respectively, compared to $3.5 million and $5.8 million,
respectively, for the same prior year periods. As a percentage of
revenue, the segment's year to date EBITDA is up slightly to 11.6%,
compared to 11.1% for the first nine months of 2001. This
improvement was primarily the result of increased volume, partially
offset by increased operating expenses.
Electronic Combat Systems' EBITDA for the third quarter and
first nine months of 2002 was $6.8 million and $18.4 million,
respectively, compared to $5.4 million and $18.6 million,
respectively, for the comparable prior year periods. The segment's
year to date EBITDA has also declined to 17.5% of revenue, down from
20.3% for the first nine months of 2001, as the negative effects of
the segment's increased operating expenses have only been partially
offset by its improved revenues.
SUBSEQUENT EVENT. On November 1, 2002, Signia-IDT, Inc.
(formerly known as IDT Acquisition Co.), a wholly-owned subsidiary
of the Company, acquired substantially all of the assets and assumed
certain of the liabilities of BAE SYSTEMS Advanced Systems
Gaithersburg, Maryland operation for $146 million in cash, $11
million of which was taken from the Company's cash reserves and the
remainder of which was financed through an add-on to the Company's
revolving credit and term loan facility. See "Liquidity and Capital
Resources" following for details of the Company's credit facility
and a summary of the November 1, 2002 amendment.
The acquisition will be accounted for using the purchase method
and accordingly, the purchase price, including direct acquisition
costs, will be allocated to the assets acquired, including
identifiable intangible assets, and liabilities assumed based on
their estimated fair values at the date of acquisition. Independent
appraisals will be used to determine the estimated fair values of
the assets acquired and the liabilities assumed, and any excess of
cost over the fair value of the acquired net assets will be recorded
as goodwill.
The BAE SYSTEMS Gaithersburg operation (now known as "Signia-
IDT") employs over 300 people and designs and manufactures high
performance radio frequency surveillance equipment used in
communications intelligence and signals intelligence applications.
The operation will be integrated into the Company's Communications &
Surveillance Systems segment in the fourth quarter of 2002.
LIQUIDITY AND CAPITAL RESOURCES
In the first nine months of 2002 the Company generated cash of
$13.1 million, primarily from its operations and from the net
proceeds of its initial public offering and debt refinancing,
compared to a net cash use of $3.8 million in first nine months of
2001. Cash provided by operations totaled $11.8 million in the first
nine months of 2002, compared to $2.8 million generated in the same
prior year period.
Capital expenditures in the first nine months of 2002 were
$6.1 million, up $2.6 million from the comparable prior year period.
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, excluding
those of Signia-IDT from the acquisition date forward, will be
within the range of $7 to $8 million.
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 $116.7 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 notes ($125.8 million and $51.3 million,
respectively) and replaced the previous revolving credit and term
loan facility with a new facility provided by a syndicate of
financial institutions. This new facility provided financing of up
to $125 million, consisting of a $40 million five-year revolving
credit facility, a $40 million five-year term loan, and a $45
million six-year term loan. Borrowings under the facility were
secured by a pledge of substantially all of the Company's assets and
bore interest at a base rate or LIBOR plus an applicable margin
ranging from 2% to 2.75%. Available borrowings under the revolving
credit facility were determined by the Company's borrowing base, as
defined in the agreement, which was calculated based upon eligible
accounts receivable and inventories. At September 27, 2002, the
Company had outstanding borrowings of $83.8 million under the
facility, consisting of $38.9 million under the five-year term loan
and $44.9 million under the six-year term loan. The current
interest rates on these loans are 4.007% and 4.257%, respectively.
On November 1, 2002, in connection with its acquisition of
Signia-IDT (see "Subsequent Event" preceding), the Company amended
and restated its revolving credit and term loan facility. The
amendment increased the six-year term loan by $135 million,
increased availability under the revolving credit facility by $5
million, and updated the financial covenants in the agreement to
reflect the integration of Signia-IDT into the Company's
Communications & Surveillance Systems segment. As of the date of
this Form 10-Q filing, the Company had outstanding borrowings of
$225 million under the facility, consisting of $37.7 million under
the five-year term loan, $179.8 million under the six-year term
loan, and $7.5 million under the revolving credit facility. The
current interest rates on the additional term loan borrowing and on
the revolving credit facility are 5.39% and 4.39%, respectively.
Borrowings under the amended facility are secured by a pledge
of substantially all of the Company's assets and bear interest at a
base rate or LIBOR plus an applicable margin ranging from 2% to 4%.
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 as of the date of this Form 10-Q
filing.
In connection with the refinancing of its debt in February
2002, 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.
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.
The Company's liquidity and ability to generate cash has
improved during 2002, and the Company anticipates continued
improvement in its operating cash flows as the receivables built up
in the first nine months of the year are collected and as the
Company continues to focus on reducing its investment in unbilled
receivables. Based on its current level of operations and
anticipated growth, including that of the newly acquired Signia-IDT,
the Company believes that cash proceeds from the initial public
offering and cash from operations and other available sources of
liquidity, including borrowings under the amended 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 amended term loan agreement and under long-term
noncancelable lease agreements. The following table sets forth
these contractual obligations as of the date of this Form 10-Q
filing. These numbers do not include any contractual obligations
under operating leases which may be assumed by Signia-IDT.
----------------------------------------------------------------------------
Payments due by period
----------------------------------------------------------------------------
Contractual Obligation 2002 2003-2006 2007 and beyond Total
----------------------------------------------------------------------------
(In millions)
Term loans $1.6 $41.0 $182.4 $225.0
Operating leases 1.3 16.4 2.5 20.2
----------------------------------------------------------------------------
Total $2.9 $57.4 $184.9 $245.2
============================================================================
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.
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 September 27, 2002, funded backlog was $233.1 million and
total backlog was $383.8 million.
The following depicts the Company's backlog of orders by
business segment at September 27, 2002 and December 31, 2001:
--------------------------------------------------------------------------------------------------------
FUNDED UNFUNDED
September 27, December 31, September 27, December 31,
2002 2001 2002 2001
--------------------------------------------------------------------------------------------------------
(In millions)
Electronic Combat Systems $135.9 $125.8 $131.1 $160.6
Diagnostics & Power Systems 57.6 51.7 17.6 1.5
Communications & Surveillance Systems 39.6 43.9 2.0 8.8
--------------------------------------------------------------------------------------------------------
Total Backlog $233.1 $221.4 $150.7 $170.9
========================================================================================================
While it is expected that a substantial portion of funded
backlog will be converted to revenue during the next twelve months,
the Company cannot provide assurance that the backlog, both funded
and unfunded, will become revenue in any particular period, if at
all. Uncertain timing of bookings and revenue recognition is
typical in the industry in which the Company conducts business.
RELATED PARTY TRANSACTIONS
The Company pays Veritas Capital Management, L.L.C. ("Veritas")
an annual management fee. Veritas controls the Company's principal
stockholder, IDT Holding, L.L.C. The Company paid $675 thousand in
management fees to Veritas in the first nine months of both 2001 and
2002. The Company was not indebted to its principal stockholder or
to Veritas at September 27, 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 $1.5 million, and anticipates
payment of a similar fee in the amount of $2.5 million in connection
with the November 1st acquisition of Signia-IDT and related
refinancing described previously in this Form 10-Q. Robert McKeon
and Thomas Campbell, the Chairman and a member of the Board of
Directors, respectively, are managing members of Veritas.
William G. Tobin, a member of the Board of Directors and audit
committee, is a Managing Director and Chairman of the Defense and
Aerospace practice of Korn/Ferry International, an executive search
firm. The Company contracted with Korn/Ferry to conduct its search
for a Chief Operating Officer. During the nine months ended
September 27, 2002, the Company made installment payments to
Korn/Ferry totaling approximately $177 thousand.
Edward N. Ney, a member of the 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 of Young & Rubicam, to manage its investor relations
functions. During the nine months ended September 27, 2002, the
Company made payments to Burson-Marsteller totaling approximately
$210 thousand.
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 in its September 27, 2002
consolidated balance sheet a goodwill asset in the amount of $83.7
million. In connection with the adoption of SFAS 142, the Company
performs periodic impairment tests of its goodwill. The process of
evaluating goodwill for impairment involves the determination of the
fair value of the Company's business units. Inherent in such fair
value determinations are certain judgments and estimates, including
the interpretation of current economic indicators and market
valuations, and assumptions about the Company's strategic plans with
regard to its operations. To the extent additional information
arises or the Company's strategies change, it is possible that the
Company's conclusions regarding goodwill impairment could change and
result in a material effect on its 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 its 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 cost estimates for certain
health and welfare and workers' compensation and casualty insurance
plans that are partially self-insured by the Company. 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 its business, including a National
Park Service investigation regarding the presence of residual
radioactive materials and contamination at a uranium mine previously
owned by a predecessor of one of the Company's subsidiaries. The
outcomes of such legal actions are not expected, either individually
or in the aggregate, to result in a material adverse effect on the
Company's business, results of operations, or financial condition.
It is possible, however, that future results of operations for any
particular quarterly or annual period could be materially affected
by changes in the Company's assumptions related to these
proceedings. The Company accrues its best estimate of the probable
cost for the resolution of legal claims. Such estimates are
developed in consultation with outside counsel handling these
matters and are based upon a combination of litigation and
settlement strategies. To the extent additional information arises
or the Company's strategies change, it is possible that the
Company's best estimate of its liability in these matters, if any,
may change.
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 judgment 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.
For impairment testing purposes, the Company determined the
value of its reporting units using a discounted cash flow model, a
guideline company model, and a transaction model, and by observation
of demonstrable fair values of comparable entities. The Company has
determined that there is no impairment of its goodwill as of the
January 1, 2002 implementation date of SFAS 142.
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"). 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.
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 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 $250,000 for the remainder of the
year ended December 31, 2002. Likewise, a 66% decline in LIBOR
rates would reduce its interest expense by approximately $150,000.
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 September 27, 2002 level. The Company is currently
evaluating the risk of potential increases in interest rates on the
additional variable rate debt assumed under its amended revolving
credit and term loan agreement and is considering alternatives to
mitigate this risk.
Item 4: Controls and Procedures
Under the supervision and with the participation of the Company's
management, including its Chief Executive Officer and Chief
Financial Officer, the Company has evaluated the effectiveness of
the design and operation of its disclosure controls and procedures
within 90 days prior to the filing date of this quarterly report.
Based upon this evaluation, the Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure
controls and procedures are adequate and effective to ensure that
material information relating to the Company and its consolidated
subsidiaries is made known to them by others within those entities,
particularly during the period in which this quarterly report was
prepared. There were no significant changes in the Company's
internal controls or in other factors that could significantly
affect these controls subsequent to the date of their evaluation.
INTEGRATED DEFENSE TECHNOLOGIES, INC.
PART II. OTHER INFORMATION
Item 5: Other information
On November 1, 2002, Signia-IDT, Inc. (formerly known as IDT
Acquisition Co.), a wholly-owned subsidiary of the Company, acquired
substantially all of the assets and assumed certain of the
liabilities of BAE SYSTEMS Advanced Systems Gaithersburg, Maryland
operation for $146,000,000 in cash, $11,000,000 of which was taken
from the Company's cash reserves and the remainder of which was
financed through an add-on to the Company's revolving credit and
term loan facility. See Note 2 of Notes to Financial Statements
contained in this Form 10-Q for details of the Company's credit
facility and a summary of the November 1, 2002 amendment.
The acquisition will be accounted for using the purchase method and
accordingly, the purchase price, including direct acquisition costs,
will be allocated to the assets acquired, including identifiable
intangible assets, and liabilities assumed based on their estimated
fair values at the date of acquisition. Independent appraisals will
be used to determine the estimated fair values of the assets
acquired and the liabilities assumed, and any excess of cost over
the fair value of the acquired net assets will be recorded as
goodwill.
The BAE SYSTEMS Gaithersburg operation (now known as "Signia-IDT")
employs over 300 people and designs and manufactures high
performance radio frequency surveillance equipment used in
communications intelligence and signals intelligence applications.
The operation will be integrated into the Company's Communications &
Surveillance Systems segment in the fourth quarter of 2002.
The Company has engaged its independent accountants to perform an
audit of Signia-IDT's financial statements for the years ended
December 31, 2000 and 2001 and for the nine month period ended
September 27, 2002. Once the audit is complete, the Company will
file these audited financial statements, along with unaudited
interim financial statements for the first nine months of 2001, pro
forma income statements reflecting the impact of the acquisition as
of the beginning of 2002, and a pro forma balance sheet reflecting
the impact of the acquisition as of September 27, 2002, in a report
on Form 8-K. This Form 8-K will be filed with the Securities and
Exchange Commission no later than January 6, 2003.
Item 6: Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 10.1 Asset Purchase Agreement by and among BAE SYSTEMS
Aerospace Electronics Inc. as seller, IDT Acquisition
Co. as buyer and Integrated Defense Technologies, Inc.
as guarantor dated as of September 12, 2002 and
amendment letter dated November 1, 2002
Exhibit 10.2 Integrated Defense Technologies, Inc. Amended and
Restated Credit Agreement dated as of October 31, 2002,
among Integrated Defense Technologies, Inc. and Canadian
Imperial Bank of Commerce, as administrative agent for
itself and the lenders and other lenders named therein
(b) Reports on Form 8-K
1. On September 13, 2002, the Company filed a report on Form 8-K
dated September 12, 2002 to report under Item 5 an agreement to
purchase the Gaithersburg, Maryland operations of BAE SYSTEMS
Aerospace Electronics Inc.
2. On October 15, 2002, the Company filed a report on Form 8-K
dated October 15, 2002 to report under Item 5 a revised outlook for
the third and fourth quarters of 2002.
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
(Principal Executive Officer) and Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: November 7, 2002 Date: November 7, 2002
CERTIFICATIONS
CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER
I, Thomas J. Keenan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Integrated Defense Technologies, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: November 7, 2002 /s/ Thomas J. Keenan
--------------------------------
Thomas J. Keenan
President and Chief
Executive Officer
CERTIFICATION OF THE CHIEF FINANCIAL OFFICER
I, John W. Wilhoite, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Integrated Defense Technologies, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly
present in all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this quarterly report;
4. The registrant's other certifying officers and I are
responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have
disclosed, based on our most recent evaluation, to the registrant's
auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated
in this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our
most recent evaluation, including any corrective actions with regard
to significant deficiencies and material weaknesses.
Date: November 7, 2002 /s/ John W. Wilhoite
------------------------------
John W. Wilhoite
Vice President of Finance and
Chief Financial Officer