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 October 1, 2000 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 October 31, 2000 there were outstanding 10,401,241 shares of the registrant's common stock, par value $1.00 per share. 1 PRIMEX TECHNOLOGIES, INC. INDEX

~~JULY~~Page 2,No. ~~DECEMBER 31, 2000 1999~~ --------- ~~---------~~Part ~~ASSETS~~I. ~~(UNAUDITED)~~Financial ~~------~~Information ~~Current~~Item ~~Assets:~~1. ~~Receivables~~Financial ~~....................................~~Statements $(Unaudited) ~~118,145~~Condensed $Consolidated ~~120,351~~Balance ~~Inventories,~~Sheets ~~Net~~- ~~...............................~~October 721,~~772~~ ~~57,969~~2000 ~~Deferred~~and ~~Tax~~December ~~Asset~~31, 1999............................. ~~9,150 10,803 Other Current Assets~~ .....~~......................~~ ~~6,925~~ 3~~,106~~ ~~---------~~Condensed Consolidated Statements of Income -~~--------~~ ~~Total~~Three ~~Current~~Months ~~Assets~~Ended ~~........................~~October ~~206~~1,~~992~~ ~~192,229~~2000 ~~Property~~and September 26, ~~Plant~~1999; ~~and~~Nine ~~Equipment~~Months ~~.......................~~Ended ~~291,369~~October ~~288~~1,~~025~~ ~~Less:~~2000 ~~Accumulated~~and ~~Depreciation~~September 26, 1999...............~~.......~~ ~~(178,843)~~4 ~~(171,075)~~Condensed ~~---------~~Consolidated ~~---------~~Statements ~~112,526~~of ~~116,950~~Cash ~~Goodwill,~~Flow ~~Net~~- ~~.......................................~~Nine ~~133,546~~Months ~~113,644~~Ended ~~Deferred~~October ~~Income~~1, ~~Taxes~~2000 ~~...............................~~and ~~8,900~~September 826,~~129~~ ~~Other Assets~~ 1999...............~~.........................~~ ~~19,827~~5 ~~19,477~~Notes ~~---------~~to ~~---------~~Condensed ~~Total~~Consolidated ~~Assets~~Financial Statements...................~~................~~ $6 ~~481,791~~Item $2. ~~450,429 ========= ========= LIABILITIES AND SHAREHOLDERS~~Management's ~~EQUITY~~Discussion ~~Current Liabilities: Short-Term Borrowings~~ and ~~Current~~Analysis ~~Portion~~ of ~~Long~~Financial ~~Term~~Condition ~~Debt~~and ~~............~~Results $of ~~5,300 $ 10,000 Accounts Payable~~ Operations.......................... 11 Item 3.~~....~~ ~~33,311~~Quantitative ~~42,836~~and ~~Contract~~Qualitative ~~Advances~~Disclosure of Market Risk.............................. ~~6,599 524 Accrued Liabilities~~ .............................. ~~45,196~~14 ~~41,620~~Part ~~---------~~II. ~~---------~~Other ~~Total~~Information ~~Current~~Item ~~Liabilities~~1. Legal Proceedings.................. ~~90,406 94,980 Long-Term Debt~~ .................................... 15 Item 6.. ~~170,000~~Exhibits ~~140,000~~and ~~Other~~Reports ~~Liabilities~~on Form 8-K................................... ~~36,059 34,821 --------- --------- Total Liabilities~~ ....~~..........................~~ ~~296,465~~15 ~~269,801 Shareholders' Equity Common Stock; $1~~Signatures.~~00 par value; 60,000,000 shares authorized; issued and outstanding 10,409,907 shares at July 2, 2000 and 9,946,525 shares at December 31, 1999~~ .................. ~~10,410 9,946 Other Shareholders' Equity~~ ..................... ~~174,916 170,682 --------- --------- Total Shareholders' Equity~~ ................. ~~185,326 180,628 --------- --------- Total Liabilities and Shareholders' Equity~~ ..... ~~$ 481,791 $ 450,429 ========= =========~~15

2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS PRIMEX TECHNOLOGIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except share data) October 1, December 31, 2000 1999 ----------- ----------- Assets Current Assets: Receivables .................................... $ 134,521 $ 120,351 Inventories, Net ............................... 69,366 57,969 Deferred Tax Asset ............................. 9,370 10,803 Other Current Assets ........................... 6,168 3,106 --------- --------- Total Current Assets ....................... 219,425 192,229 Property, Plant and Equipment ....................... 295,285 288,025 Less: Accumulated Depreciation ...................... (183,690) (171,075) --------- --------- 111,595 116,950 Goodwill, Net ....................................... 132,239 113,644 Deferred Income Taxes ............................... 9,510 8,129 Other Assets ........................................ 21,314 19,477 --------- --------- Total Assets ................................... $ 494,083 $ 450,429 ========= ========= Liabilities and Shareholders' Equity Current Liabilities: Short-Term Borrowings and Current Portion of Long Tem Debt ............ $ 9,800 $ 10,000 Accounts Payable ............................... 48,118 42,836 Contract Advances .............................. 7,297 524 Accrued Liabilities ............................ 46,446 41,620 --------- --------- Total Current Liabilities .................. 111,661 94,980 Long-Term Debt ...................................... 155,000 140,000 Other Liabilities ................................... 36,225 34,821 --------- --------- Total Liabilities .............................. 302,886 269,801 Shareholders' Equity Common Stock; $1.00 par value; 60,000,000 shares authorized; issued and outstanding 10,399,907 shares at October 1, 2000 and 9,946,525 shares at December 31, 1999 .................. 10,400 9,946 Other Shareholders' Equity ..................... 180,797 170,682 --------- --------- Total Shareholders' Equity ................. 191,197 180,628 --------- --------- Total Liabilities and Shareholders' Equity ..... $ 494,083 $ 450,429 ========= ========= See accompanying notes to condensed consolidated financial statements. 3 PRIMEX TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except share data) (Unaudited)

~~THREE~~Three ~~MONTHS~~Months ~~ENDED~~Ended ~~SIX~~Nine ~~MONTHS~~Months ~~ENDED~~Ended ----------------------------- ---------------------------- ~~JULY~~October 21, ~~JUNE~~September 2726, ~~JULY~~October 21, ~~JUNE~~September 2726, 2000 1999 2000 1999 -------- -------- -------- -------- Sales ............................~~.....~~ $~~123~~131,~~125~~515 $~~133~~129,~~285~~837 $~~233~~365,~~609~~124 $~~250~~380,~~657~~494 Operating Expenses: Cost of Goods Sold ............~~.....~~ 9196,~~280~~817 ~~102~~96,~~063~~982 ~~172~~269,~~831~~648 ~~190~~287,~~783~~765 Selling and Administration ....~~.....~~ 1718,~~154~~135 1718,~~307~~765 3351,~~423~~558 3453,~~598~~363 Research and Development ......~~.....~~ 2,~~766~~381 2,~~927~~535 57,~~095~~476 57,~~036~~571 Restructuring and Other Charges ~~....~~ -- -- 4,052 -- -------- -------- -------- -------- Operating Income .................~~.....~~ 1114,~~925~~182 1011,~~988~~555 1832,~~208~~390 2031,~~240~~795 Interest Expense .................~~.....~~ 23,~~965~~350 23,~~854~~185 59,~~919~~269 58,~~557~~742 Other Income, Net ................~~.....~~ ~~352~~382 ~~329~~292 12,~~864~~246 ~~644~~936 -------- -------- -------- -------- Income Before Income Taxes .......~~.....~~ 911,~~312~~214 8,~~463~~662 1425,~~153~~367 1523,~~327~~989 Income Tax Provision .............~~.....~~ 34,~~632~~377 3,~~321~~319 59,~~520~~897 69,~~131~~450 -------- -------- -------- -------- Net Income .......................~~.....~~ $ 56,~~680~~837 $ 5,~~142~~343 $ 815,~~633~~470 $ 914,~~196~~539 ======== ======== ======== ======== Net Income Per Share: Basic .......................~~.....~~ $ 0.5465 $ 0.5153 $ 01.8348 $ 01.9144 ======== ======== ======== ======== Diluted .....................~~.....~~ $ 0.5464 $ 0.4850 $ 01.8246 $ 01.8636 ======== ======== ======== ======== Dividends Per Share ..............~~.....~~ $ 0.075 $ 0.075 $ 0.15225 $ 0.15225 ======== ======== ======== ========

See accompanying notes to condensed consolidated financial statements. 4 PRIMEX TECHNOLOGIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (in thousands, except share data) (Unaudited)

~~SIX~~Nine ~~MONTHS~~Months ~~ENDED~~Ended -------------------------- ~~JULY~~October 21, ~~JUNE~~September 2726, 2000 1999 -------- -------- ~~OPERATING~~Operating ~~ACTIVITIES~~Activities Net Cash Provided by Operating Activities ......~~.....~~ $ 723,~~903~~574 $ 1727,~~598~~720 ~~INVESTING~~Investing ~~ACTIVITIES~~Activities Capital Expenditures ................................~~.....~~ (59,~~690~~841) (812,~~795~~467) ~~Acquisition~~Acquisitions of Business ............................~~......~~ (22,161) (~~440~~6,940) -------- -------- Net Cash Used in Investing Activities ..........~~.....~~ (2732,~~851~~002) (919,~~235~~407) ~~FINANCING~~Financing ~~ACTIVITIES~~Activities Net Short-Term ~~Borrowing~~Debt (Repayment) ....................... (95,~~700~~200) 3(10,~~400~~800) Net Long-Term Debt Borrowing ~~(Repayment)~~ ........................ 3520,000 ~~(10~~5,000) Repurchases of Common Stock .........................~~.....~~ --(239) (3,501) Restricted Stock Transactions .......................~~.....~~ (3,847) -- Proceeds From Stock Options Exercised ...............~~.....~~ 56 61 Dividends Paid ......................................~~.....~~ (12,~~561~~342) (12,~~516~~266) -------- -------- Net Cash Provided (Used) in Financing Activities ................................ 198,~~948~~428 (11,~~556~~506) -------- -------- Net Increase (Decrease) in Cash .....................~~.....~~ $ -- $ (3,193) ======== ========

See accompanying notes to condensed consolidated financial statements. 5 PRIMEX TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements (in thousands, except share data) (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 ended October 1, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements, and notes thereto, for the year ended December 31, 1999, as presented in the Company's Annual Report on Form 10-K. 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 and nine-month periods ended October 1, 2000 and September 26, 1999.

6 PRIMEX TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements (in thousands, except share data) (Unaudited) Inventories October 1, 2000 December 31, 1999 --------------- ----------------- Inventories consist of the following: Raw materials and work in progress .................... $68,026 $56,726 Finished goods ................... 8,113 8,516 ------- ------- 76,139 65,242 Less revaluation to LIFO ......... 6,773 7,273 ------- ------- $69,366 $57,969 ======= ======= 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, October 1, 2000 balances reflect certain estimates relating to inventory quantities and costs at December 31, 2000. Inventory balances at October 1, 2000 and December 31, 1999 are net of reductions for progress payments in the amount of $6,831 and $5,283 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 $6,837 and $5,343 for the three-month periods and $15,470 and $14,538 for the nine-month periods ended October 1, 2000 and September 26, 1999, respectively. Long-Term Incentive Plan Under the Primex Technologies, Inc. 2000 Long Term Incentive Plan, a total of 527,000 and 107,500 stock options were granted to certain key employees on February 1, and May 2, 2000, respectively, at exercise prices of $20.94 and $22.00 per share, respectively, which was the fair market value of the Company's common stock on the date of the grants. 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. During the first nine months of 2000, a total of 8,250 restricted stock units with an aggregate value of $171 were granted to certain employees of the Company. These restricted stock grants vest 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 nine month period ended October 1, 2000, the Company purchased and retired 10,000 shares of common stock at an aggregate cost of $239. 7 PRIMEX TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements (in thousands, except share data) (Unaudited) Restructuring and Other Charges In January 2000, the Company announced a plan to reduce costs and streamline its operating structure, which resulted in the Company recording a one-time pre-tax restructuring charge of $4,052 during the first quarter of 2000. During the second quarter of 2000, the Company recognized a restructuring credit of $600 to reflect estimated reductions in the ultimate cost of employee termination benefits resulting from such restructuring. The resulting restructuring charge of $3,452 included in operating results for the nine months ended October 1, 2000 includes approximately $3,307 of cash charges, of which $2,528 relates to employee termination benefits and other personnel-related costs. The balance of the charge is generally associated with facility consolidation costs. Total restructuring cash outlays during the nine months ended October 1, 2000 were $2,475 of which $1,736 was related to workforce reductions. The Company anticipates substantial completion of this restructuring during 2000. During the second quarter of 2000, the Company recognized a pre-tax charge of $600 for potential environmental liability at a Superfund site. This estimated costs has been included with "Other Liabilities" on the consolidated balance sheet at October 1, 2000. Stockholder's Equity Restricted stock grants vesting during the first quarter of 2000 resulted in the issuance of 458,421 share of common stock. The value of shares withheld from issuance to satisfy minimum tax withholdings of $3,847 was charged to additional paid-in capital and the tax benefit resulting from the differences between compensation expense for financial statement and corporate income tax purposes of $1,288 was credited to additional paid-in-capital. Acquisition Effective May 27, 2000, the Company acquired certain assets and assumed certain liabilities of the Kaiser Marquardt, Inc. bi-propellant rocket engine and turbo-products business. The purchase price for the acquired business was $22,161 ($21,406 in cash and $755 of transaction costs). The terms of the Asset Purchase Agreement ("APA") provide for the payment of $2,500 in additional consideration (placed in escrow at closing) contingent on certain future events. The APA further provides for additional contingent payments or receipts of up to $900 based on the future activity level of a specific contract. Operations of the acquired business, which has been accounted for using the purchase method of accounting, are included in the Company's results of operations and financial position subsequent to the date of acquisition. The aggregate purchase price, excluding future contingent consideration, has been allocated to the net assets of the acquired business based upon their respective fair market values. Future contingent consideration will be recorded as additional purchase price when paid. Goodwill is being amortized over the period of thirty years. The Company's pro forma operating results, assuming this acquisition has been made at the beginning of the year, would not be materially different from reported operating results. 8 PRIMEX TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements (in thousands, except share data) (Unaudited) Segment Information The Company's operations are classified into two reportable segments, which reflect management's organization of operations around business units that offer different products and services. Each reportable segment is managed separately and requires different technology and marketing strategies. The Ordnance and Tactical Systems segment ("Ordnance") includes the development and production of ammunition, propellant, shaped charged warheads and precision metal assemblies. Additionally, Ordnance provides explosive load assemble and pack services. The Aerospace and Electronics segment ("Aerospace") includes the design, development and manufacturing of space, electronic, and solid propellant products and systems.

~~THREE~~Three ~~MONTHS~~Months ~~ENDED~~Ended ~~SIX~~Nine ~~MONTHS~~Months ~~ENDED~~Ended --------------------------- ---------------------------- ~~JULY~~October 21, ~~JUNE~~September 2726, ~~JULY~~October 21, ~~JUNE~~September 2726, 2000 1999 2000 1999 --------- --------- --------- --------- Sales to external customers: Ordnance ......................~~................~~ $ 99106,~~740~~959 $ ~~106~~104,~~093~~335 $ ~~190~~297,~~751~~710 $ ~~199~~304,~~949~~284 Aerospace .....................~~................~~ 2324,~~385~~556 2725,~~192~~502 4267,~~858~~414 5076,~~708~~210 --------- --------- --------- --------- Total consolidated sales .........~~..................~~ ~~123~~131,~~125~~515 ~~133~~129,~~285~~837 ~~233~~365,~~609~~124 ~~250~~380,~~657~~494 Segment profit: Ordnance ......................~~................~~ 710,~~234~~076 67,~~795~~596 1323,~~195~~271 1220,~~493~~089 Aerospace .....................~~................~~ 21,~~078~~138 1,~~668~~066 56,~~010~~148 23,~~834~~900 --------- --------- --------- --------- Total segment profit .............~~..................~~ 911,~~312~~214 8,~~463~~662 1829,~~205~~419 1523,~~327~~989 Reconciling item: Restructuring and ~~other~~Other ~~charges~~Charges ..................... -- -- (4,052) -- --------- --------- --------- --------- Total consolidated income before income taxes ................ $ 911,~~312~~214 $ 8,~~463~~662 $ 1425,~~153~~367 $ 1523,~~327~~989 ========= ========= ========= =========

9 PRIMEX TECHNOLOGIES, INC. Notes to Condensed Consolidated Financial Statements (in thousands, except share data) (Unaudited) Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting of Derivative Instruments and Hedging Activities ("Statement No. 133"), which as amended, is required to be adopted by the Company effective January 1, 2001. Statement No. 133 will require the Company to recognize all derivatives on the balance sheet at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivatives and whether it qualifies for hedge accounting. Historically, the Company has engaged in limited hedging activities to reduce exposure to exchange risks arising from fluctuations in foreign currency and uses interest rate swap agreements to fix interest rates on a portion of its variable rate debt and reduce certain exposures to interest rate fluctuations. Based on the Company's derivative positions at October 1, 2000, the Company does not anticipate that the adoption of Statement No. 133 will have a significant effect on its results of operations or financial position. In December 1999, the Securities and Exchange Commission ("SEC") issued Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB 101"), which as amended, becomes effective for the Company in the fourth quarter of 2000. SAB 101 summarizes certain of the SEC staff's views in applying generally accepted accounting principles to revenue recognition in financial statements. The Company believes its existing revenue recognition policies and procedures are in compliance with SAB 101 and therefore does not anticipate the adoption of SAB 101 will have a significant effect on its results of operations or financial position. 10 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 Income for the three-month and nine-month periods ended October 1, 2000 and September 26, 1999.

~~THREE~~Three ~~MONTHS~~Months ~~ENDED~~Ended ~~SIX~~Nine ~~MONTHS~~Months ~~ENDED~~Ended ------------------------------ ----------------------------- ~~JULY~~October 21, ~~JUNE~~September 2726, ~~JULY~~October 21, ~~JUNE~~September 2726, 2000 1999 2000 1999 ----~~---~~ ----~~---~~ ----~~---~~ ----~~---~~ Sales: Tank and other large caliber ammunition ......................... 2730.65% 2932.21% 2829.85% 3031.72% Tactical missile and rocket components and services .... 19.~~9% 19~~.~~1% 18~~.~~6% 18~~.~~6% Medium caliber ammunition~~ ............... 17.6% 13.5% 17.0% 15.5% Medium caliber ammunition........... 13.3%... 1514.9% 12.37% 1413.32% 13.7% Ball Powder(R) propellant ...............~~...............~~ 109.35% 98.17% 10.83% 8.98% Electronic products .....................~~...............~~ 87.29% 9.90% 8.42% 109.38% Space products ..........................~~...............~~ 76.59% 5.76% 6.14% 5.45% Other products and services .............~~...............~~ 1312.27% 1118.14% 15.04% 1115.85% ------- ------- ------- ------- 100.0% 100.0% 100.0% 100.0% Cost of goods sold ...........................~~...............~~ 7473.16% 7674.67% 7473.09% 7675.16% ------- ------- ------- ------- Gross profit .................................~~...............~~ 2526.94% 2325.43% 26.01% 2324.94% Selling and administration expense ...........~~...............~~ 13.98% 1314.05% 14.31% 1314.80% Research and development expense .............~~...............~~ 21.38% 21.29% 2.20% 2.0% Restructuring and other charges ..............~~...............~~ -- % -- % 1.71% -- % -------- ------- ------- ------- Operating income .............................~~...............~~ 910.78% 8.29% 7.8.9% 8.14% Interest expense .............................~~...............~~ 2.45% 2.15% 2.5% 2.23% Other income .................................~~...............~~ 0.32% 0.2% 0.85% 0.2% ------- ------- ------- ------- Income before income taxes ...................~~...............~~ 78.65% 6.36% 6.19% 6.13% Income tax provision .........................~~...............~~ 3.03% 2.47% 2.47% 2.45% ------- ------- ------- ------- Net income ...................................~~...............~~ 45.62% 3.9% 34.72% 3.78% ======= ======= ======= =======

Results of Operations The Company's sales of $131.5 million during the third quarter of 2000 increased by $1.7 million or 1% compared to the third quarter of 1999. Sales of $365.1 million for the first nine months of 2000 were 4% or $15.4 million lower than the corresponding period in 1999. Third quarter 2000 Ordnance segment sales increased to $107.0 million compared to $104.3 million in the corresponding period of 1999. This increase reflects higher sales of tactical missile and rocket components and medium caliber ammunition to the U.S. Army. Ordnance segment sales increases in the third quarter of 2000 were partially offset by decreased sales of tactical tank ammunition sold to the U.S. Army. Third quarter Aerospace segment sales decreased to $24.6 million compared to $25.5 million in the corresponding period of 1999. This decrease primarily reflects a lower level of electronic test system sales to the U.S. Air Force under a contract that was completed during 1999, 11 partially offset by bi-propellant rocket engine sales associated with a business that was acquired during the second quarter of 2000. Ordnance segment sales for the first nine months of 2000 decreased to $297.7 million compared to $304.3 million in the corresponding period of 1999. This decrease reflects lower sales of tactical tank and medium caliber ammunition to the U.S. Army, which was offset in part by increases in sales of propellant and tactical missile and rocket components during the first nine months of 2000. Aerospace segment sales for the first nine months of 2000 decreased to $67.4 million compared to $76.2 million in the corresponding period of 1999. This decrease primarily reflects a lower level of electronic test system sales to the U.S. Air Force under a contract that was completed during 1999, partially offset by bi-propellant rocket engine sales associated with a business that was acquired during the second quarter of 2000. Gross margins as a percentage of sales increased to 26% during the third quarter of 2000 from 25% for the corresponding period of 1999. For the first nine months of 2000, gross margins as a percentage of sales increased to 26% compared to 24% during the first nine months of 1999. The gross margin improvement for the first nine months of 2000, compared to 1999, reflects a combination of improved program performance in both the large and medium caliber ammunition business units, the benefit of a higher volume of propellant production and operational improvements associated with the Company's restructuring activities that commenced during the first quarter of 2000. Selling and administration expense as a percentage of sales decreased to 14% during third quarter of 2000 compared to 15% in the corresponding period of 1999. Selling and administration expenses for the first nine months of both 2000 and 1999 were 14% of sales. The overall $1.8 million reduction in selling and administration expense during the first nine months of 2000, compared to the corresponding period of 1999, is directly associated with decreased spending and restructuring activities commenced in the first quarter of 2000, partially offset by increases associated with a business acquired during the second quarter of 2000. Research and development expenses, during both the third quarter and first nine months of 2000, were comparable to the corresponding periods of 1999. In January 2000, the Company announced a plan to reduce costs and streamline its operating structure, which resulted in the Company recording a one-time pre-tax restructuring charge of $4.1 million during the first quarter of 2000. During the second quarter of 2000 the Company recognized a restructuring credit of $0.6 million to reflect estimated reductions in the ultimate cost of employee termination benefits resulting from such restructuring. The resulting restructuring charge of $3.5 million included in operating results for the nine months ended October 1, 2000 includes approximately $3.3 million of cash charges, of which $2.5 million relates to employee termination benefits and other personnel-related costs. The balance of the charge is generally associated with facility consolidation costs. During the second quarter of 2000, the Company recognized a pre-tax charge of $0.6 million for potential environmental liability at a Superfund site. 12 Interest expense of $3.4 million for the third quarter of 2000 and $9.3 million for the first nine months of 2000 compared to $3.2 million and $8.7 million, respectively, for the corresponding periods of 1999 reflect the higher cost of borrowing currently being experienced by the Company. Non-operating income for the first nine months of 2000 includes $1.2 million of non-recurring fees received in connection with the licensing of product technology. There was no comparable income during the first nine months of 1999. 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 $6.8 million for the third quarter and $17.9 million (excluding the $2.4 million after tax effect of restructuring and other non-recurring charges) for the first nine months of 2000 reflect an increase of $1.5 million and $3.4 million, respectively, over the corresponding periods of 1999. This improvement is primarily due to higher gross margins and lower selling and administration expense offset by increased financing costs. Liquidity and Sources of Capital Cash flow provided by operations was $23.6 million during the first nine months of 2000 compared to $27.7 million during the first nine months of 1999. Investing activities during the first nine months of 2000 reflect a decrease in planned capital expenditures to $9.8 million from $12.5 million during the first nine months 1999. Additionally, investing activities during the first nine months of 2000 and 1999 included expenditures of $22.2 and $6.9, respectively, for the acquisition of new product lines. Effective May 27, 2000, the Company acquired certain assets and assumed certain liabilities of the Kaiser Marquardt, Inc. bi-propellant rocket engine and turbo-products business for $21.4 million cash plus additional payments of up to $3.4 million that are contingent on certain future events. Operations of the acquired business, accounted for using the purchase method of accounting, are included in the Company's results of operations and financial position in periods subsequent to the acquisition date. Financing activities during the first nine months of 2000 included the payment of $3.8 million in minimum tax withholdings in connection with the vesting of restricted stock grants. During the first nine months of 2000 and 1999, the Company repurchased and retired 10,000 and 173,858 shares, respectively, of its common stock at an aggregate cost of $0.2 and $3.5 million, respectively. 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 credit lines are limited to the committed RCA maximum. Outstanding borrowings under the RCA and short-term credit lines at October 1, 2000 were $104.8. 13 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 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 $55.2 million available for borrowings at October 1, 2000. Cash dividends of $0.075 per share were paid during the first, second and third quarters of both 2000 and 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. Forward-Looking Statements All statements other than statements of historical fact in this report are "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995, and are based on management's current expectations of the Company's near term results, based on current information available and pertaining to the Company. The Company assumes no obligation to update publicly any forward-looking statement. Actual results may differ materially from those projected in the forward-looking statements. These forward-looking statements involve risks and uncertainties, including, but not limited to, the following: demand for commercial powder; international business opportunities; ammunition lot acceptance; timing of contract funding; 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, whether related 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; unforeseen difficulties associated with the integration of acquired businesses; and costs and effects of legal and administrative cases, proceedings, settlements and investigations involving the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK There have been no material changes in the Company's market risk during the nine months ended October 1, 2000. Refer to page 18 of the Company's Annual Report on Form 10-K for the year ended December 31, 1999, for additional information regarding market risk and risk management policies. 14 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is a party to a number of pending or threatened investigations, claims and proceedings. The Company believes that all such investigations, claims, and proceedings are immaterial to the Company or routine and incidental to the Company's business. While the Company cannot predict the ultimate outcome of the pending or threatened proceedings, including matters arising under provisions relating to the protection of the environment, 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 27. Financial Data Schedule (b) Reports filed on Form 8-K during this quarter During the quarterly period ended October 1, 2000, the Company filed no reports on Form 8-K. 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 2, 2000 /s/ George H. Pain ------------------------------------------ Vice President, General Counsel and Secretary Date: November 2, 2000 /s/ John E. Fischer ------------------------------------------ Vice President, Chief Financial and Accounting Officer 15

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