SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
---------
[ X ] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 28, 1999
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 specified 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)
(727) 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
------
As of April 30, 1999, there were outstanding 10,051,918 shares of the
registrant's common stock, par value $1.00 per share.
PRIMEX TECHNOLOGIES, INC.
INDEX
Part I. Financial Information
Page No.
--------
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets -
March 28, 1999 and December 31, 1998..................................... 3
Condensed Consolidated Statements of Operations -
Three Months Ending March 28, 1999 and
March 29, 1998.. ........................................................ 4
Condensed Consolidated Statements of Cash Flow -
Three Months Ending March 28, 1999 and
March 29, 1998 ......................................................... 5
Notes to Condensed Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................ 9
Item 3. Quantitative and Qualitative Disclosure of
Market Risk ............................................................. 12
Part II. Other Information
Item 1. Legal Proceedings........................................................ 12
Item 6. Exhibits and Reports on Form 8-K......................................... 13
Signatures............................................................... 13
2
PART I. FINANCIAL INFORMATION
- -------------------------------
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
PRIMEX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 28, December 31,
1999 1998
---------- ------------
Assets (Unaudited)
- ------
Current Assets:
Cash ........................................................ $ - $ 3,193
Receivables.................................................. 121,621 131,390
Inventories, Net............................................. 71,650 67,085
Other Current Assets......................................... 10,490 8,449
--------- --------
Total Current Assets...................................... 203,761 210,117
Property, Plant and Equipment .... ............................ 288,638 287,640
Less: Accumulated Depreciation ................................ (171,766) (168,734)
--------- --------
116,872 118,906
Goodwill, Net ................................................. 116,939 117,617
Other Assets................................................... 25,262 24,695
--------- --------
Total Assets................................................. $ 462,834 $471,335
========= ========
Liabilities and Shareholders' Equity
- ------------------------------------
Current Liabilities:
Short-Term Borrowings ....................................... $ 18,700 $ 10,800
Accounts Payable............................................. 42,377 40,624
Contract Advances .......................................... 3,669 18,922
Accrued Liabilities.......................................... 41,182 42,797
--------- --------
Total Current Liabilities................................. 105,928 113,143
Long Term Debt ................................................ 155,000 160,000
Other Liabilities.............................................. 32,794 32,709
--------- ---------
Total Liabilities............................................ 293,722 305,852
Shareholders' Equity
Common Stock; $1.00 par value; 60,000,000 shares
authorized; issued and outstanding 10,157,318
shares at March 28, 1999 and 10,163,952
shares at December 31, 1998 ................................ 10,157 10,164
Other Shareholders' Equity................................... 158,955 155,319
--------- --------
Total Shareholders' Equity................................ 169,112 165,483
--------- --------
Total Liabilities and Shareholders' Equity................... $ 462,834 $471,335
========= ========
See accompanying notes to condensed consolidated financial statements.
3
PRIMEX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
(Unaudited)
Three Months Ended
--------------------
March 28, March 29,
1999 1998
-------- ---------
Sales............................................. $117,372 $112,251
Operating Expenses:
Cost of Goods Sold............................. 88,720 88,789
Selling and Administration..................... 17,291 16,683
Research and Development ...................... 2,109 1,562
-------- --------
Operating Income ................................. 9,252 5,217
Interest Expense.................................. 2,703 476
Other Income, Net................................. 315 386
-------- --------
Income Before Income Taxes........................ 6,864 5,127
Income Tax Provision ............................. 2,810 2,159
-------- --------
Net Income ....................................... $ 4,054 $ 2,968
======== ========
Net Income Per Share:
Basic ......................................... $ 0.40 $ 0.29
======== ========
Diluted ...................................... $ 0.38 $ 0.28
======== ========
Dividends Per Share............................... $ 0.075 $ 0.075
======== ========
See accompanying notes to condensed consolidated financial statements.
4
PRIMEX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
($ in thousands)
(Unaudited)
Three Months Ended
---------------------
March 28, March 29,
1999 1998
--------- ---------
Operating Activities
- --------------------
Net Cash Used by Operating Activities ................................ $(1,671) $(1,831)
Investing Activities
- --------------------
Capital Expenditures ................................................. (3,043) (2,860)
Acquisition .......................................................... (440) -
--------- ---------
Net Investing Activities ........................................... (3,483) (2,860)
Financing Activities
- --------------------
Net Short-Term Borrowing ............................................. 7,900 18,900
Net Long-Term Debt Repayment ......................................... (5,000) -
Repurchases of Common Stock ......................................... (237) -
Proceeds from Stock Options Exercised ................................ 61 -
Dividends Paid ....................................................... (763) (771)
--------- ---------
Net Cash Provided (Used) in Financing Activities.................... 1,961 18,129
--------- ---------
Net Increase (Decrease) in Cash ...................................... $(3,193) $13,438
========= =========
See accompanying notes to condensed consolidated financial statements.
5
PRIMEX TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
($ in thousands, except per share amounts)
(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 month period ended March 28, 1999 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1999. These condensed consolidated financial statements should be
read in conjunction with the consolidated financial statements, and notes
thereto, for the year ended December 31, 1998, as presented in the Company's
Annual Report on Form 10-K.
On March 22, 1999 the Company effected a two-for-one stock split by paying
a 100% stock dividend to shareholders of record as of February 22, 1999. All
share and per share information included in the accompanying condensed
consolidated financial statements and related notes have been adjusted to
reflect the stock split for all periods presented.
Net Income Per Share
The following sets forth the number of shares of common stock included in
the computation of basic and diluted net income per share for the three-month
periods ended March 28, 1999 and March 28, 1998.
Three Months Ended
----------------------
March 28, March 29,
1999 1998
---------- ----------
Denominator for basic net income per share:
Weighted average shares
outstanding and vested ...................... 10,200,204 10,301,808
Effect of dilutive securities:
Employee Stock Options........................ 82,902 46,790
Restricted Stock Unit Grants.................. 482,159 397,706
---------- ----------
Dilutive potential common shares............... 565,061 444,496
---------- ----------
Denominator for diluted
net income per share.......................... 10,765,265 10,746,304
========== ==========
6
PRIMEX TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
($ in thousands, except per share amounts)
(Unaudited)
Inventories
March 28, 1999 December 31, 1998
-------------- -----------------
Inventories consist of the following:
Raw materials and work in progress.... $71,346 $65,909
Finished goods........................ 7,933 8,805
-------------- -----------------
79,279 74,714
Less revaluation to LIFO ............. 7,629 7,629
-------------- -----------------
$71,650 $67,085
============== =================
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, March
28, 1999 balances reflect certain estimates relating to inventory quantities and
costs at December 31, 1999. Inventory balances at March 28, 1999 and December
31, 1998 are net of reductions for progress payments in the amount of $1,700 and
$282 respectively.
Comprehensive Income
Comprehensive income includes net income and all other changes in equity
during a period except those resulting from investments by and distributions to
the Company's shareholders. On this basis, the Company's comprehensive income,
which includes currency translation and minimum pension liability adjustments,
totaled $4,056 and $2,966 for the three-month periods ended March 28, 1999 and
March 29, 1998, respectively.
Lont-Term Incentive Plan
A total of 439,000 stock options were granted to certain key employees on
January 4, 1999, under the 1996 Long-Term Incentive Plan of Primex Technologies,
Inc., as amended. The exercise price of the options is $21.13 per share, which
was the fair market value of the Company's common stock on the date of the
grant. These options generally vest over a three-year period beginning one year
from the date of grant and have a ten-year term from the date of grant.
On February 1, 1999, 13,400 restricted stock units with an aggregate value
of $290 were granted to certain employees of the Company. This restricted stock
grant vests over a two year period.
Stock Repurchase
In August 1998, the board of directors authorized the repurchase, at
management's discretion, of up to 500,000 shares of the Company's common stock.
During the first quarter of 1999, the Company purchased and retired 11,420
shares of common stock at an aggregate cost of $237.
7
PRIMEX TECHNOLOGIES, INC.
Notes to Condensed Consolidated Financial Statements
($ in thousands, except per share amounts)
(Unaudited)
Segment Information
Three Months Ended
--------------------
March 28, March 29,
1999 1998
--------- ---------
Sales to external customers:
Ordnance ........................................ $ 93,856 $ 79,658
Aerospace........................................ 23,516 32,593
-------- --------
Total consolidated sales........................... $117,372 $112,251
======== ========
Segment profit:
Ordnance......................................... $ 5,698 $ 3,258
Aerospace........................................ 1,166 1,869
-------- --------
Total consolidated income before income taxes $ 6,864 $ 5,127
======== ========
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
----------------------
The following table sets forth certain data, expressed as a percentage of
sales, from the Company's Condensed Consolidated Statements of Operations for
the three-month periods ended March 28, 1999 and March 29, 1998.
Three Months Ended
---------------------
March 28, March 29,
1999 1998
---- ----
Sales:
Tank and other large caliber ammunition................. 32.4% 33.5%
Tactical missile and rocket components and services..... 18.1% 4.1%
Medium caliber ammunition............................... 12.5% 9.7%
Electronic products..................................... 10.7% 13.3%
Ball Powder(R) propellant............................... 8.7% 9.6%
Space products.......................................... 5.0% 7.9%
Other products and services............................. 12.6% 21.9%
----- -----
100.0% 100.0%
Cost of goods sold........................................ 75.6% 79.1%
----- -----
Gross profit.............................................. 24.4% 20.9%
Selling and administration expense........................ 14.7% 14.9%
Research and development expense.......................... 1.8% 1.4%
----- -----
Operating income.......................................... 7.9% 4.6%
Interest expense.......................................... 2.3% 0.4%
Other income ............................................. 0.2% 0.3%
----- -----
Income before income taxes................................ 5.8% 4.5%
Income tax provision...................................... 2.4% 1.9%
----- -----
Net income................................................ 3.4% 2.6%
===== =====
Results of Operations
The Company's sales of $117.4 million during the first quarter of 1999
increased by $5.1 million, or 5% compared to the first quarter of 1998. First
quarter 1999 Ordnance segment sales increased to $93.9 million compared to $79.7
million in the corresponding period of 1998. This increase reflects higher
sales of large and medium caliber ammunition and $19.6 million of sales
associated with business units acquired in November of 1998. These sales
increases were offset by declines in the sale of other products and services
resulting from lower shipments of steel pipe joints and artillery propelling
charges. Sales in the Aerospace segment decreased to $23.5 million during the
first quarter of 1999 compared to $32.6 million for the corresponding period of
1998. This decrease reflects a lower level of space product sales for
individual satellites and a reduction in sales of the EmPower(TM) airline in-
seat power supply systems. Additionally, Aerospace segment sales during the
first quarter of 1998 included $3.7 related to a product line which was sold in
April 1998.
Gross margins as a percentage of sales improved to 24% during the first
quarter of 1999 from 21% for the corresponding period of 1998. This increase
reflects a combination of
9
operational improvements, a favorable mix of ammunition and rocket products, and
the recognition of favorable program performance on several contracts in both
segments.
Selling and administration expense as a percentage of sales was 15% for the
first quarter of both 1999 and 1998. Administration expense increased during
the first quarter of 1999 as the result of business units acquired in November
of 1998. These increases were offset, in part, by lower bid and proposal
expenditures which reflect a reduced level of activity in the Ordnance segment,
compared to the corresponding period of 1998.
Research and development expenses increased $0.5 million, or 35%, during the
first quarter of 1999 compared to the corresponding period of 1998. These
higher expenditures reflect increased research and development activity
associated with electronic products .
Interest expense of $2.7 million for the first quarter of 1999 compared to
$0.5 million for the corresponding period of 1998 reflects the higher levels of
debt outstanding during 1999 as compared to 1998. This increased level of debt
is associated with the acquisition completed in November 1998.
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 and from the favorable federal tax
treatment given to certain export sales.
Net income of $4.1 million for the first quarter of 1999 reflects an increase
of $1.1 million over 1998 net income of $3.0 million in the corresponding
period. This improvement is primarily due to higher gross margins offset by
increased financing costs.
Liquidity and Sources of Capital
Cash flow used by operations was $1.7 million during the first quarter of 1999
compared to $1.8 million during the first quarter of 1998.
Investing activities during the first quarter of 1999 reflect planned capital
expenditures of $3.0 million compared to similar expenditures of $2.9 million
during the first quarter of 1998. Additionally, investing activities during the
first quarter of 1999 included an expenditure of $0.4 for the acquisition of a
new product line.
During the first quarter of 1999, the Company purchased and retired 11,420
shares of common stock at an aggregate cost of approximately $0.2 million.
There were no comparable expenditures during the first quarter of 1998.
Cash dividends paid during the first quarter of both 1999 and 1998 were $0.8
million.
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
borrowing and letters of credit. The RCA expires on December 31, 2001. 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 RCA maximum.
Outstanding borrowings under the RCA and short-term credit lines at March 28,
1999 were $113.7 million.
10
The Company's RCA and 7.5% Senior Notes ("Term Notes") both contain a number
of financial covenants including requirements 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
contain certain minimum tangible net worth requirements. Management believes
that the Company is currently in compliance with all covenants and requirements
of the RCA and Term Notes. Under the terms of these financial covenants the
Company has up to an additional $15.0 million available for borrowings at March
28, 1999.
The Company believes, based on its anticipated working capital, fixed capital
requirements, and dividend policy, that future cash flow from operations and
amounts available under the RCA and short term credit lines are adequate to meet
the Company's anticipated cash requirements in the foreseeable future.
Impact of Year 2000
The Company recognizes the need to ensure its operations will not be adversely
impacted by Year 2000 software failures. Software failures due to processing
errors potentially arising from calculations using the Year 2000 date are a
known risk.
A team of internal staff and outside consultants is managing the Company's
processes for evaluating the risks and costs associated with this potential
problem. The Company's approach has involved three stages: (1) inventory and
assessment of hardware, software and embedded systems, (2) remediation or
replacement of those systems that are not year 2000 compliant and (3) testing
the systems.
The Company employs a number of information technology ("IT") systems in its
operations, including computer networking systems, financial systems and other
similar systems. The Company has recently implemented a number of these IT
systems for which it has obtained vendor warranties that these recently
implemented IT systems are Year 2000 compliant. The Company's assessment has
indicated that some of the Company's IT systems which have not recently been
implemented could be affected by the Year 2000 problems and accordingly, the
Company has either modified or converted these systems to make them Year 2000
compliant. The Company believes that systems testing, including future
environment testing will be complete in June 1999.
The Company also employs electronic equipment containing software and embedded
chips in its production and manufacturing process. The Company's assessment has
indicated that this electronic equipment is not likely to be susceptible to a
material system failure resulting from Year 2000 problems. Selective equipment
upgrades have been implemented where warranted and the Company believes that it
will complete any remaining modifications and conversions, deemed necessary,
including testing, without a material impact on the Company.
The Company has completed an assessment of Year 2000 issues associated with
major products that the Company has sold and believes that the Company has no
material exposure related to Year 2000 problems for products it has sold.
The Company has communicated with significant vendors, customers and other
third party service providers to evaluate whether they are making adequate
efforts to achieve Year 2000 compliance and to obtain Year 2000 readiness
statements. To date, the Company is not aware of any third parties with a Year
2000 issue that would materially impact the Company. However, the Company has
no means of ensuring that third parties will be Year 2000 ready, and the effect
11
of non-compliance by third parties is not determinable by the Company. The
Company has material relationships with the U.S. Government. Year 2000 non-
compliance by the U.S. Government, such as the inability to process payments to
the Company, could have a material impact on the Company.
The Company will continue to evaluate the status of its Year 2000 compliance
to determine what level of contingency planning is necessary. Contingency
planning will focus on the consequences of external factors such as disruptions
in the supply chain for critical goods or services that could effect safe
operations or revenue. The Company will seek to develop discrete contingency
plans for such potential failures. The Company has not yet determined what the
nature and timing of any such contingency plans would be.
The total cost of the Company's internal Year 2000 project is presently
estimated to be less than $1.0 million, which includes the purchase of new
software and equipment which will be capitalized.
The cost of the Company becoming Year 2000 compliant and the timing in which
the Company believes it will complete the necessary Year 2000 modifications are
based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third party modification plans, and other factors. However, there
can be no guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the success of
the Company in identifying systems and programs having Year 2000 issues, the
nature and amount of programming required to upgrade or replace the affected
programs, the availability and cost of personnel trained in this area, and the
extent to which the Company might be adversely impacted by vendors, customers
and other third party service provider's failure to remediate their own Year
2000 issues.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
- ---------------------------------------------------------------
There have been no material changes in the Company's market risk during the
three months ended March 28, 1999. Refer to page 23 of the Company's Annual
Report on Form 10-K, for the year ended December 31, 1998, for additional
information regarding market risk and risk management policies.
PART II. OTHER INFORMATION
- ---------------------------
ITEM 1. LEGAL PROCEEDINGS
- --------------------------
The Company is engaged primarily 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 finding could result in contract
repayments or administrative, civil or criminal liabilities including fines or
penalties being imposed upon the Company, or could lead to suspension or
debarment from future U.S. Government contracting by the Company.
12
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 investigations,
claims and proceedings. Management believes that all such investigations,
claims and proceedings are routine and incidental to the Company's business and
will not have a material adverse effect on the Company's results of operations
or financial position.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- -----------------------------------------
(a) Exhibits
27. Financial Data Schedule
(b) Reports filed on Form 8-K during this quarter
The Company filed a form 8-K/A on January 20, 1999 amending the Form 8-
K filed on November 23, 1998 by the Company. The Form 8-K filed on
November 23, 1998 reported the November 6, 1998 acquisition of CMS,
Inc. and Defense Research Incorporated (the "CMS Group"), while the
Form 8-K/A filed on January 20, 1999 amended the earlier Form 8-K to
include the financial statements of the CMS Group companies required to
be filed in accordance with regulation S-X.
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: May 12, 1999 /s/ George H. Pain
--------------------------------------
Vice President, General Counsel and
Secretary
Date: May 12, 1999 /s/John E. Fischer
--------------------------------------
Vice President, Chief Financial and
Accounting Officer
13