Fitch Revises DRS Technologies' Outlook to Positive; Affirms 'B+' IDR

Wed Apr 23, 2008 9:45am EDT

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NEW YORK--(Business Wire)--
Fitch Ratings has affirmed DRS Technologies, Inc. (DRS) Issuer
Default Rating (IDR) and outstanding credit ratings as follows:

   -- IDR 'B+';

   -- Senior secured revolving credit facility 'BB+/RR1';

   -- Senior secured term loan 'BB+/RR1';

   -- Senior unsecured notes 'BB+/RR1';

   -- Senior unsecured convertible notes 'BB+/RR1';

   -- Senior subordinated notes 'B/RR5'.

   Approximately $1.66 billion of outstanding debt is affected by
these actions. Fitch has also revised DRS' Rating Outlook to Positive
from Stable.

   The Rating Outlook revision is based on positive fundamental
trends and a favorable operating environment. As DRS moves into fiscal
year (FY) 2009, Fitch expects that the company's earnings and cash
flow will likely improve and leverage will likely continue to decline.
Fitch also expects that DRS will likely continue to make modest debt
repayments to move closer to its target leverage ratio of 3.0 times
(x)-3.5x. DRS' ratings and Outlook incorporate expectations for
healthy levels of free cash flow and the assumption that smaller
bolt-on acquisitions will continue to be part of the company's
strategy. In addition, the Outlook is supported by continued strong
U.S. defense budgets and the continuing benefits of supplemental
budgets for the foreseeable future. If DRS maintains commitment to
lower leverage, the ratings could be reviewed for an upgrade in the
coming year. However, the company's financial strategy continues to
incorporate growth through acquisitions and if substantive
acquisitions occur, the ratings and Outlook could be constrained,
depending on deal size and potential financing structure. Reductions
in spending for Iraq and Afghanistan could also constrain the ratings.

   The ratings are supported by continued high levels of defense
spending, strong organic growth, good free cash flow generation,
expected growth in homeland security spending, and good profitability.
The ratings also consider DRS' diversification within the defense and
homeland security arena, and the alignment between DRS' products and
services and expected Department of Defense (DoD) and Homeland
Security needs.

   Concerns relate to future acquisition plans, relatively high
exposure to current operations in Iraq and Afghanistan (and associated
supplemental funding), high debt levels and leverage, modest margin
contraction, and some concern about execution on new programs
(following the Thermal Weapon Systems II program set back in fiscal
first quarter-2007).

   Fitch's Recovery Rating (RR) analysis indicates that, in a
hypothetical distressed scenario, the senior secured revolver and term
debt would obtain full recovery. After paying off bank debt, Fitch
estimates there would be sufficient enterprise value to also fully
cover the $350 million, 6.625% senior unsecured notes and the $345
million, 2% convertible senior notes. The expected full recovery on
these tranches warrants the 'RR1' rating and each issue is notched
three levels above the IDR to 'BB+', in line with the bank facility.
The senior subordinated notes achieve an estimated recovery at the
high end of the 'RR5' category range (11% - 30%), and are therefore
rated one notch below the IDR at 'B'.

   DRS is strategically and competitively well positioned for
sustainable cash flow and earnings generation. Strong organic growth,
a diverse product mix, and product offerings aligned with the
increasingly high-tech needs of the armed forces, all lend to DRS'
strong operating profile and prospects for continued credit support.
DRS achieved organic revenue growth of 17% for the first nine months
of fiscal 2008 as a number of programs converted from development to
production. Organic growth was 14.8% in fiscal 2007, and 13% in FY
2006. As DRS has historically been acquisitive, the healthy growth
rates in existing business is a positive sign of the underlying
strength of its position (as well as a reflection of the favorable
defense environment). Funded backlog grew 18% for the first nine
months of FY 2008 ended Dec. 31, 2007 to $3.6 billion. The book to
bill ratio was 1.23x for the same period.

   Leverage has been declining steadily since early 2006 when ESSI
was acquired, which boosted leverage from 4.0x to 7.6x at FYE March
31, 2006. DRS has been consistently making modest debt repayments
since second fiscal quarter-2007. Total Debt/EBITDA for the LTM period
ended Dec. 31, 2007 was 4.3x. Fitch expects that the company will
continue to make debt repayments on its term loan facility in FY 2009.
Term loan outstanding was $145.2 million at Dec. 31, 2007. In the
absence of significant acquisitions or lower supplemental defense
spending, Fitch expects DRS' leverage will move below 4.0x, while
EBITDA interest coverage should move above 4.0x during the coming

   DRS has benefited from the conflicts in Iraq and Afghanistan,
which continue to appear to be long-term commitments. Revenues related
to these operations could account for nearly 10% of DRS' turnover.
With the prospect of a new US president being elected, there is some
possibility that the commitment to these conflicts will be reduced or
eliminated. The current conflicts have been funded in large measure
through supplemental DoD appropriations, and Fitch believes these
supplemental budgets could be affected as soon as fiscal 2009 under a
new president. If there were an abrupt reduction, DRS would likely
feel limited immediate impact as existing equipment is reset.

   However, a drawdown of operations would eventually have some
impact on DRS, as the majority of revenues are related to the US Army
and several of the company's top revenue generating products are
directly related to active engagement of forces. Fitch views this
exposure as an intermediate term risk that could act as a constraint
on the ratings, depending on the speed of any potential drawdown of
operations, as well as potential offsetting organic or acquired

   As of Dec. 31, 2007, liquidity totaled $416.5 million, comprised
of $48 million in cash and $368.5 million of available revolver.
Scheduled debt maturities of about $5 million per year for the next
several years are modest. The current credit facility expires in 2012
and 2013. Fitch believes that DRS' capital structure is stable and
sustainable as over 90% of total debt is fixed rate with an extended,
laddered maturity profile.

   Fitch's rating definitions and the terms of use of such ratings
are available on the agency's public site,
Published ratings, criteria and methodologies are available from this
site, at all times. Fitch's code of conduct, confidentiality,
conflicts of interest, affiliate firewall, compliance and other
relevant policies and procedures are also available from the 'Code of
Conduct' section of this site. The issuer did not participate in the
rating process other than through the medium of its public disclosure.

Fitch Ratings, New York
Shawn Paydar, +1-212-908-0815
Craig Fraser, +1-212-908-0310
Brian Bertsch, +1-212-908-0549 (Media Relations)

Copyright Business Wire 2008
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