SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1997
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: 0-28942
PRIMEX TECHNOLOGIES, INC.
(Exact name of registrant as specific in its charter)
VIRGINIA 06-1458069
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
10101 NINTH STREET NORTH, ST. PETERSBURG, FLORIDA 33716-3807
(Address of principal executive offices) (Zip Code)
(813) 578-8100
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities 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
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As of October 31, 1997, there were outstanding 5,137,637 shares of the
registrant's common shares, par value $1.00 per share.
PRIMEX TECHNOLOGIES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page No.
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Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
September 30, 1997 and December 31, 1996 3
Condensed Consolidated Statements of Operations -
Three Months Ending September 30, 1997 and 1996;
Nine Months Ending September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flow -
Nine Months Ending September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 11
Item 6. Exhibits and Reports on Form 8K 11
Signatures 12
2
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
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PRIMEX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
($ IN THOUSANDS, EXCEPT SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1997 1996
---- ----
(UNAUDITED)
ASSETS
- ------
Current Assets:
Cash................................................................. $ 842 $ 20,000
Receivables.......................................................... 77,562 123,658
Inventories, Net..................................................... 45,416 57,241
Other Current Assets................................................. 7,971 5,843
-------- --------
Total Current Assets................................................. 131,791 206,742
Property, Plant and Equipment ......................................... 257,166 254,350
Less: Accumulated Depreciation ........................................ (159,666) (149,327)
-------- --------
97,500 105,023
Goodwill............................................................... 45,462 47,385
Other Assets........................................................... 15,261 14,593
-------- --------
Total Assets......................................................... $290,014 $373,743
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities:
Short-Term Borrowings ............................................... $ 19,900 $ -
Accounts Payable..................................................... 22,081 30,147
Contract Advances .................................................. 47,544 -
Accrued Liabilities.................................................. 28,120 28,873
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Total Current Liabilities......................................... 117,645 59,020
Long-Term Debt....................................................... - 145,000
Other Liabilities.................................................... 23,238 24,589
------- --------
Total Liabilities................................................. 140,883 228,609
Shareholders' Equity
Common Stock; $1.00 par value; 60,000,000 shares
authorized; issued and outstanding 5,137,487
shares at September 30, 1997 and 5,220,276 shares
at December 31, 1996, .............................................. 5,137 5,220
Other Shareholders' Equity........................................... 143,994 139,914
-------- --------
Total Shareholders' Equity........................................ 149,131 145,134
-------- --------
Total Liabilities and Shareholders' Equity........................... $290,014 $373,743
======== ========
See accompanying notes to condensed consolidated financial statements.
3
PRIMEX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS ENDING NINE MONTHS ENDING
September 30, SEPTEMBER 30,
------------ -------------
1997 1996 1997 1996
---- ---- ---- ----
Sales.......................................... $118,861 $101,072 $346,581 $328,775
Operating Expenses:
Cost of Goods Sold............................ 96,688 84,064 282,156 277,016
Selling and Administration.................... 14,615 12,858 44,785 37,888
Research and Development...................... 1,824 1,306 4,440 3,926
Other Charges................................. - 3,000 - 10,500
------- -------- -------- --------
Operating Income (Loss)........................ 5,734 (156) 15,200 (555)
Interest Expense............................... 517 2,312 3,405 6,943
Interest and Other Income...................... 167 81 766 657
------- -------- -------- --------
Income (Loss) Before Income Taxes............. 5,384 (2,387) 12,561 (6,841)
Income Tax Provision ......................... 2,357 650 5,799 908
------- -------- -------- --------
Net Income (Loss)............................. $ 3,027 $(3,037) $ 6,762 $ (7,749)
======= ======== ======== ========
Net Income (Loss) Per Share .................. $ .55 $ (.58) $ 1.23 $ (1.48)
======= ======== ======== ========
Dividends Per Share........................... $ .15 $ - $ .45 $ -
======= ======== ======== ========
Average Common and Common
Equivalent Shares Outstanding
(Thousands) ................................. 5,487 5,220 5,516 5,220
======= ======== ======== ========
See accompanying notes to condensed consolidated financial statements.
4
PRIMEX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
($ IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDING
September 30,
-------------
1997 1996
---- ----
OPERATING ACTIVITIES
- --------------------
Net Cash Provided (Used) by Operating Activities .......... $ 114,812 $(4,577)
INVESTING ACTIVITIES
- --------------------
Capital Expenditures ...................................... (4,874) (6,891)
Disposition of Property Plant and Equipment ............... - 4,497
--------- -------
Net Cash Provided (Used) in Investing Activities ........ (4,874) (2,394)
FINANCING ACTIVITIES
- --------------------
Net Short-Term Borrowing .................................. 19,900 -
Net Long-Term Debt Repayment .............................. (145,000) -
Net Transfers from Olin ................................... - 6,971
Repurchases of Common Stock .............................. - (1,666)
Dividends Paid ............................................ (2,330) -
--------- -------
Net Cash Provided (Used) in Financing Activities ........ (129,096) 6,971
--------- -------
Net (Decrease) in Cash .................................... $ (19,158) $ -
========= =======
See accompanying notes to condensed consolidated financial statements.
5
PRIMEX TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
(UNAUDITED)
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements of
Primex Technologies, Inc. (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
The condensed consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant inter-company transactions and
accounts have been eliminated. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included.
Operating results for the three- and nine-month periods ending September
30, 1997 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997. These condensed consolidated financial
statements should be read in conjunction with the consolidated financial
statements, and notes thereto, for the year ending December 31, 1996 as
presented in the Company's Annual Report on Form 10-K.
Prior to December 31, 1996, the Company was a wholly-owned subsidiary of
Olin Corporation ("Olin") comprised of Olin's former Ordnance Division and
Aerospace Division. The accompanying 1996 condensed consolidated financial
statements include the former combined operations of the Ordnance and Aerospace
Divisions, which have been prepared as if the Company had operated as a separate
stand-alone entity and include only those assets and liabilities transferred to
the Company, and revenues and expenses attributable to the Company's operations.
Management believes the method used to allocate costs during 1996 is reasonable;
however, such allocations may not be indicative of operations as an independent
public company.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes standards for segment
reporting and disclosure of additional information on products and services,
geographic areas and major customers. The Company is assessing implementation
of the disclosure requirements of this standard which is effective for periods
beginning after December 15, 1997. The adoption of Statement 131 will have no
financial impact on the Company.
NET INCOME (LOSS) PER SHARE
Net income per share for 1997 is computed using the weighted average number
of common shares and dilutive common equivalent shares outstanding during the
applicable period. The calculation of 1996 net income per share amounts on a
pro forma basis assumes all common shares outstanding immediately after the
December 31, 1996 distribution of Company stock were outstanding for all periods
prior to the distribution.
6
PRIMEX TECHNOLOGIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NET INCOME (LOSS) PER SHARE (CONTINUED)
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share," which
simplifies the calculation of earnings per share and makes it comparable to
international earnings per share standards. The statement will become effective
December 31, 1997, and requires restatement of historical earnings per share.
The adoption of Statement 128 is not expected to have a significant impact on
the Company's earnings per share amounts.
INVENTORIES SEPTEMBER 30, DECEMBER 31,
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1997 1996
---- ----
(in thousands)
Inventories consist of the following:
Raw materials ................................................... $18,617 $18,356
Work-in-progress ................................................ 29,961 39,999
Finished goods................................................... 4,150 7,927
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52,728 66,282
LIFO reserve .................................................... 7,312 9,041
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$45,416 $57,241
======= =======
Inventories valued using the last-in, first-out (LIFO) method are based on
an annual determination of quantities and costs as of year end; therefore,
September 30, 1997 balances reflect certain estimates by management relating to
inventory quantities and costs at December 31, 1997.
SHORT-TERM BORROWINGS
Short-term borrowings under uncommitted lines of credit at September 30,
1997 represent unsecured notes payable to banks at interest rates similar to the
Company's long-term revolving credit agreement.
CONTRACT ADVANCES
Contract advances represent payments received by the Company for costs
which have not yet been incurred and are liquidated as costs on the related
contracts are recognized.
STOCK REPURCHASE
Pursuant to an odd-lot tender which expired on June 6, 1997, the Company
paid approximately $1.7 million in cash for the redemption of 85,446 shares of
common stock which were subsequently retired.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
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The following table sets forth certain data, expressed as a percentage of
sales, from the Company's Condensed Consolidated Statement of Operations for the
three- and nine-month periods ending September 30, 1997 and 1996.
Three Months Ending Nine Months Ending
September 30, September 30,
--------------- ---------------
1997 1996 1997 1996
----- ----- ----- -----
(Unaudited) (Unaudited)
----------- -----------
Sales:
Tank and other large caliber ammunition ....................... 33.6% 39.4% 34.3% 35.5%
Medium caliber ammunition ..................................... 20.4% 22.1% 23.8% 25.7%
BALL POWDER(R) Propellant ..................................... 9.5% 8.7% 10.7% 11.0%
Space products ................................................ 9.2% 8.0% 9.1% 7.1%
Electronic products ........................................... 9.4% 8.6% 8.8% 7.9%
Other products and services ................................... 17.9% 13.2% 13.3% 12.8%
----- ----- ----- -----
100.0% 100.0% 100.0% 100.0%
Cost of goods sold .............................................. 81.4% 83.2% 81.4% 84.3%
----- ----- ----- -----
Gross margin .................................................... 18.6% 16.8% 18.6% 15.7%
Selling and administration expense .............................. 12.3% 12.7% 12.9% 11.5%
Research and development expense ................................ 1.5% 1.3% 1.3% 1.2%
Other charges ................................................... - 3.0% - 3.2%
----- ----- ----- -----
Operating income (loss) ......................................... 4.8% (.2)% 4.4% (.2)%
Interest expense ................................................ .4% 2.3% 1.0% 2.1%
Interest and other income ....................................... .1% .1% .2% .2%
----- ----- ----- -----
Income (loss) before income taxes ............................... 4.5% (2.4)% 3.6% (2.1)%
Income tax provision ............................................ 2.0% .6% 1.7% .3%
----- ----- ----- -----
Net income (loss) ............................................... 2.5% (3.0)% 1.9% (2.4)%
===== ===== ===== =====
RESULTS OF OPERATIONS
The Company's sales of $118.9 million during the third quarter of 1997
increased by $17.8 million, or 17.6%, compared to the third quarter of 1996.
Sales of $346.6 million for the first nine months of 1997 were 5.4%, or $17.8
million higher than the same period in 1996. The third quarter sales increase
reflects higher product demand for, and increased shipments of artillery
propelling charges, BALL POWDER(R) Propellant, electronic systems, and space
products. There were no comparable artillery propelling charge sales in the
third quarter of 1996. During the first nine months of 1997, increased sales of
artillery propelling charges, medium caliber ammunition, and electronic and
space products more than offset the completion of a combined effects munition
contract in 1996 for which there were no comparable sales in 1997. Medium
caliber ammunition sales during the first nine months of 1996 were negatively
impacted by production problems and delays which were not experienced during the
first nine months of 1997.
Gross margin, as a percentage of sales, increased to 18.6% in the third
quarter of 1997, compared to 16.8% in the third quarter of 1996. For the first
nine months of 1997, gross margins as a percentage of sales, increased to 18.6%
from 15.7% during the first nine months of 1996. The gross margin increase in
the third quarter and first nine months of 1997 reflect the relatively higher
margins achieved by Company on the sale of its artillery propelling charges,
improved cost performance in the delivery of medium caliber ammunition and
improved margins associated with the increased volume of BALL POWDER(R)
Propellant sales. These
8
improvements offset reduced margins on the sale of large caliber ammunition
resulting from contractual changes negotiated in exchange for performance-based
payments.
Selling and administration expenses increased by $1.8 million, or 13.7%, in
the third quarter of 1997 and increased by $6.9 million, or 18.2%, in the first
nine months of 1997, compared to corresponding periods in 1996. These increases
reflect continued expenditures associated with the Company's start-up and status
as a new independent public company and management incentive costs associated
with improvements in the Company's operating performance.
Research and development expenses increased by 39.7% during the third quarter
of 1997 and by 13.1% during the first nine months of 1997, compared to
corresponding periods in 1996. These higher expenditures reflect increased
research and development activity in the Company's space products and large
caliber ammunition business units.
Operating income for the third quarter of 1997 increased $5.9 million compared
to the third quarter of 1996. For the first nine months of 1997, operating
profit increased $15.8 million compared to the corresponding period in 1996.
Operations for the third quarter and first nine months of 1996 included charges
of $3.0 and $10.5 million, respectively, associated with the settlement of legal
claims related to the Company's Marion, Illinois facility (the "Marion Claim")
and a contract dispute with the Belgium Ministry of Defense (the "Belgium
Claim").
The Company's effective tax rates differ from statutory tax rates due
principally to expenses associated with goodwill which are not deductible for
federal and state income tax purposes. Additionally, 1996 effective tax rates
reflect expenses associated with fines and penalties arising out of the Marion
Claim which are not deductible for federal and state income tax purposes.
Interest expense declined to $0.5 million and $3.4 million in the third
quarter and first nine months of 1997, respectively, compared to $2.3 million
and $6.9 million for the corresponding periods in 1996, respectively. This
decrease reflects the combination of a lower level of debt and lower interest
rates during 1997 compared to the corresponding periods in 1996.
Net income of $3.0 million for the third quarter of 1997, and $6.8 million for
the first nine months of 1997 compares favorably to the $3.0 million and $7.7
million net losses incurred during corresponding periods in 1996. The losses
reported by the Company for the third quarter and first nine months of 1996
included pre-tax charges of $3.0 and $10.5 million, respectively. These charges
were associated with the settlement of the Marion Claim and Belgium Claim
described above.
LIQUIDITY AND SOURCES OF CAPITAL
Cash flow provided by operations was $114.8 million during the first nine
months of 1997 compared to cash used by operations of $4.6 million during the
first nine months of 1996. The increase is primarily the result of the Company
receiving accelerated performance-based payments under two of the Company's
contracts and the liquidation of receivables and inventory as a result of
increased shipments of medium and large caliber ammunition. These increased
shipments reflect a recovery from production delays the Company experienced
during 1996. Funds from operations were used to reduce borrowings by $125.1
million, from $145.0 to $19.9 million, during the first nine months of 1997.
During the first nine months of 1997, capital expenditures declined to $4.9
million from $6.9 million in the first nine months of 1996. Additionally, funds
from operations were sufficient to pay dividends of $.15 per share in each of
the first, second, and third quarters of 1997.
9
The Company has a revolving credit agreement ("RCA") under the terms of which
participating banks have committed a maximum of $160.0 million for cash
borrowings and letters of credit. The RCA expires on December 31, 2001. The
RCA contains covenants requiring the Company to maintain ratios of (i) minimum
earnings before interest and taxes to interest expense, and (ii) maximum total
debt to earnings before interest, taxes, depreciation and amortization and
contains certain minimum tangible net worth requirements. Management believes
the Company is currently in compliance with all covenants and requirements under
this credit facility. To facilitate short-term borrowing flexibility, certain
RCA participating banks have agreed to provide the Company uncommitted and
unsecured short-term lines of credit at interest rates similar to those under
the RCA. Aggregate borrowings under the RCA and short-term lines are limited to
the committed maximum of $160.0 million. At September 30, 1997, the Company
had unused availability of $140.1 million under the RCA and short-term lines of
credit.
On April 1, 1997, the Company announced a program to purchase lots of less
than 100 shares of the Company's common stock held by any single shareholder
("odd-lot shares"). During the term of the program, which expired on June 6,
1997, the Company purchased and retired 85,446 odd-lot shares of common stock
at an aggregate cost of approximately $1.7 million in cash. The Company
anticipates future administration cost savings as a result of the reduction in
the number of individual shareholders.
The Company believes, based on its expected working capital, fixed capital,
and dividend requirements, that future cash flow from operations and amounts
available under the RCA are adequate to meet the Company's anticipated cash
requirements.
FORWARD-LOOKING STATEMENTS
All forward-looking information in this report constitutes "forward-looking
statements" as defined in the Private Securities Litigation Reform Act of 1995,
and is based on management's current expectations of the Company's near term
results, based on current information available and pertaining to the Company.
Actual results may differ materially from those projected in the forward-looking
statements. These forward-looking statements involve risks and uncertainties,
including those related to demand for commercial powder, international business
opportunities, ammunition lot acceptance, product cost and schedule performance
and continuation of contract funding and payment terms. Other factors that may
also cause actual results to differ from the forward-looking statements include
changing economic and political conditions in the United States and in other
countries; changes in governmental laws and regulations surrounding various
matters, such as environmental remediation, contract pricing, and international
trading restrictions; changes in governmental spending and budgetary policies,
such as reductions in the level of defense spending and redirection of
Department of Defense program funding; production and pricing levels of
important raw materials; lower than anticipated levels of plant utilization
resulting in production inefficiencies and higher costs, which relate to the
delay of new product introductions, improved production processes or equipment,
or labor relation issues; difficulties or delays in the development, production,
testing and marketing of products; product margins and customer product
acceptance; and costs and effects of legal and administrative cases,
proceedings, settlements and investigations involving the Company.
10
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
- --------------------------
The Company is primarily engaged in providing products and services under
contracts with the U.S. Government and, to a lesser degree, under foreign
Government contracts, some of which are funded by the U.S. Government. All such
contracts are subject to extensive legal and regulatory requirements and, from
time to time, agencies of the U.S. Government review, audit or investigate
whether the Company's operations are being conducted in accordance with these
requirements. If such reviews, audits or investigations were to find
inappropriate activity by the Company, such findings could result in contract
repayments or administrative, civil or criminal liabilities including
repayments, fines or penalties being imposed upon the Company, or could lead to
suspension or debarment from future Government contracting by the Company.
The Company has strict policies requiring its employees to comply with all
applicable legal standards relating to contract procurement and administration.
In addition, the Company requires adherence to high ethical standards by its
employees. The Company has an Ethics and Compliance Program in which each major
facility has an ethics officer who acts as a resource for encouraging and
monitoring compliance with these standards. It is the policy of the Company and
its subsidiaries to cooperate fully with all Governmental reviews, audits and
investigations of their affairs.
The Company is a party to a number of pending or threatened routine
investigations, claims and proceedings. While the Company cannot predict the
outcome of the pending or threatened proceedings, it does not believe that the
consequences will be materially adverse to its results of operation or financial
position or that the Company's liability with respect thereto will exceed the
amounts which have previously been charged to operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
11. Statement Re: Computation of Per Share Earnings
27. Financial Data Schedule
(b) There were no reports filed on Form 8-K during this quarter
11
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.
PRIMEX TECHNOLOGIES, INC.
(Registrant)
Date: November 14 , 1997 /s/ George H. Pain
-----------------------------------
Vice President, General Counsel and
Secretary
Date: November 14, 1997 /s/John E. Fischer
---------------------------------------
Vice President, Chief Financial Officer
and Accounting Officer
12