FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999 Commission file number 1-3879
------------------ ------
DynCorp
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-2408747
------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2000 Edmund Halley Drive, Reston, VA 20191-3436
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(703) 264-0330
----------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of November 9, 1999
----- ----------------------------------
Common Stock, $0.10 Par Value 10,025,352
<PAGE>
DYNCORP AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
INDEX
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
September 30, 1999 and December 31, 1998 3-4
Consolidated Condensed Statements of Operations for
Three and Nine Months Ended September 30, 1999 and October 1, 1998 5
Consolidated Condensed Statements of Cash Flows for
Nine Months Ended September 30, 1999 and October 1, 1998 6
Consolidated Statement of Stockholders' Equity 7
Notes to Consolidated Condensed Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12-18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
<PAGE>
PART I. FINANCIAL INFORMATION
-----------------------------
<TABLE>
<CAPTION>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(In thousands)
September 30,
1999 December 31,
Unaudited 1998
------------- ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 11,537 $ 4,088
Accounts receivable, net 254,581 257,670
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 647 769
Other current assets 22,095 15,775
--------- ---------
Total current assets 288,860 278,302
Property and Equipment (net of accumulated depreciation
and amortization of $31,146 in 1999 and $27,538 in 1998) 24,258 18,544
Intangible Assets (net of accumulated amortization of
$52,362 in 1999 and $50,030 in 1998) 60,734 58,796
Other Assets 36,537 23,596
-------- --------
Total Assets $410,389 $379,238
======== ========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(In thousands, except share amounts)
September 30,
1999 December 31,
Unaudited 1998
------------- ------------
<S> <C> <C>
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current portion of long-term debt $ 28,262 $ 8,145
Accounts payable 54,355 66,885
Deferred revenue and customer advances 2,646 2,542
Accrued liabilities 125,444 110,051
-------- ---------
Total current liabilities 210,707 187,623
Long-Term Debt 152,025 152,121
Other Liabilities and Deferred Credits 35,350 27,644
Contingencies and Litigation - -
Temporary Equity:
Redeemable common stock -
ESOP shares, 7,256,919 and 7,082,422
shares issued and outstanding in 1999 and 1998,
respectively, subject to restrictions 190,067 180,812
Other, 125,714 shares issued and outstanding in 1998 - 3,049
Stockholders' Equity:
Common stock, par value ten cents per share, authorized 20,000,000 shares;
issued 5,002,465 and 4,976,423 shares in 1999 and 1998, respectively 500 498
Paid-in surplus 127,195 127,216
Accumulated other comprehensive income (5) (10)
Reclassification to temporary equity for redemption value
greater than par value (189,341) (183,140)
Deficit (67,943) ( 78,782)
Common stock held in treasury, at cost; 2,259,522 and
2,005,728 shares in 1999 and 1998, respectively (41,923) (35,640)
Unearned ESOP shares (6,243) (2,153)
--------- ---------
Total Liabilities and Stockholders' Equity $410,389 $379,238
======== ========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
UNAUDITED
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, October 1, September 30, October 1,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $334,635 $316,358 $967,782 $917,833
Costs and expenses:
Costs of services 318,521 300,061 917,709 871,924
Corporate general and administrative 4,291 5,015 15,381 15,076
Interest income (338) (291) (1,375) (968)
Interest expense 4,466 3,676 13,010 11,325
Other 1,163 701 3,447 2,569
-------- -------- -------- --------
Total costs and expenses 328,103 309,162 948,172 899,926
Earnings before income taxes and minority interest 6,532 7,196 19,610 17,907
Provision for income taxes 2,306 2,685 6,872 6,590
-------- -------- --------- --------
Earnings before minority interest 4,226 4,511 12,738 11,317
Minority interest 590 485 1,899 1,432
-------- -------- --------- --------
Net earnings $ 3,636 $ 4,026 $ 10,839 $ 9,885
======== ======== ======== ========
Basic earnings per share $ 0.37 $ 0.39 $ 1.08 $ 0.97
Diluted earnings per share $ 0.36 $ 0.38 $ 1.06 $ 0.94
Weighted average number of shares
outstanding for basic earnings per share 9,859 10,436 10,047 10,224
Weighted average number of shares
outstanding for diluted earnings per share 10,137 10,579 10,268 10,541
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Nine Months Ended
September 30, October 1,
1999 1998
---- ----
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings $ 10,839 $ 9,885
Adjustments to reconcile net earnings from operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 8,318 6,517
Increase in reserves for divested businesses - 1,000
Proceeds from insurance settlement for asbestos claims - 1,463
Capitalized phase-in costs on long-term contracts (2,473) -
Other (561) 94
Changes in current assets and liabilities, net of acquisitions:
Increase in current assets except cash and cash equivalents (3,109) (34,221)
Increase in current liabilities excluding notes payable
and current portion of long-term debt 2,605 13,422
---------- ---------
Cash provided by (used in) operating activities 15,619 (1,840)
Cash Flows from Investing Activities:
Sale of property and equipment 216 187
Purchase of property and equipment (9,812) (3,583)
Assets and liabilities of acquired business - (10,241)
Increase in investments in unconsolidated affiliates (2,570) (971)
Capitalized cost of new financial and human resource systems (5,817) (3,380)
Other 196 (139)
---------- ---------
Cash used in investing activities (17,787) (18,127)
Cash Flows from Financing Activities:
Treasury stock purchased (6,605) (1,479)
Payment on indebtedness (146,733) (43,347)
Proceeds from debt issuance 166,729 43,210
Payment received on Employee Stock Ownership Plan note 6,992 3,318
Loan to Employee Stock Ownership Plan (11,082) -
Other 316 56
--------- ----------
Cash provided by financing activities 9,617 1,758
Net Increase (Decrease) in Cash and Cash Equivalents 7,449 (18,209)
Cash and Cash Equivalents at Beginning of the Period 4,088 24,602
---------- ----------
Cash and Cash Equivalents at End of the Period $ 11,537 $ 6,393
========== ==========
Supplemental Cash Flow Information:
Cash paid for income taxes $ 4,585 $ 7,060
========== ==========
Cash paid for interest $ 13,542 $ 10,796
========== ==========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DYNCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
UNAUDITED
Adjustment for Accumulated
Redemption Value Unearned Other
Common Paid-in Greater than Treasury ESOP Comprehensive
Stock Surplus Par Value Deficit Stock Shares Income
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $498 $127,216 $(183,140) $(78,782) $(35,640) $(2,153) $(10)
Employee compensation plans
(option exercises, restricted
stock plan, incentive bonus) 7 (21) 322
Treasury stock purchased (6,605)
Loans to the Employee Stock
Ownership Trust (11,082)
Payment received on
Employee Stock Ownership
Trust note 6,992
Reclassification to redeemable
common stock (5) (6,201)
Translation adjustment 5
Net earnings 10,839
----- -------- ---------- --------- --------- -------- ----
Balance, September 30, 1999 $500 $127,195 $(189,341) $(67,943) $(41,923) $(6,243) $(5)
===== ======== ========== ========= ========= ======== ====
See accompanying notes to consolidated condensed financial statements.
</TABLE>
<PAGE>
DYNCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999
UNAUDITED
Note 1. Basis of Presentation
The Company has prepared the unaudited consolidated condensed financial
statements included herein pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is recommended that these condensed financial
statements are read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, the unaudited consolidated condensed
financial statements included herein reflect all adjustments (consisting of
normal recurring adjustments) necessary to present fairly the financial
position, the results of operations and the cash flows for such interim
periods. The results of operations for such interim periods are not
necessarily indicative of the results for the full year. Certain amounts
presented for prior periods have been reclassified to conform to the 1999
presentation.
Note 2. Accounts Receivable, Net
At September 30, 1999 and December 31, 1998, $116.5 million and $87.9
million, respectively, of accounts receivable were restricted as
collateral for the 7.486% Contract Receivable Collateralized Notes
("Notes"). Additionally, $1.5 million of cash was restricted as collateral
for the Notes and has been included in Other Assets on the accompanying
Consolidated Condensed Balance Sheets at September 30, 1999 and December
31, 1998.
Accounts receivable are net of an allowance for doubtful accounts of
$2.6 million at September 30, 1999 and $1.1 million at December 31, 1998.
Note 3. Redeemable Common Stock
Common stock which is redeemable upon the exercise of puts under the
Company's Employee Stock Ownership Plan ("ESOP") has been reflected as
Temporary Equity at each balance sheet date and consists of the following:
<TABLE>
<CAPTION>
Balance at Balance at
Redeemable September 30, Redeemable December 31,
Shares Value 1999 Shares Value 1998
------ ---------- ------------- ------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
ESOP Shares 3,347,519 $28.75 $ 96,241 3,382,340 $27.75 $ 93,860
3,909,400 $24.00 93,826 3,700,082 $23.50 86,952
--------- --------- --------- ---------
7,256,919 $ 190,067 7,082,422 $ 180,812
========= ========= ========= =========
Other Shares 125,714 $24.25 $ 3,049
========== ==========
</TABLE>
In accordance with the Employee Retirement Income Security Act regulations
and the ESOP documents, the Company is obligated, unless the ESOP Trust
purchases the shares, to purchase distributed common stock shares from
ESOP participants on retirement or termination at fair value as long as
the Company's common stock is not publicly traded. However, under the
Subscription Agreement with the ESOP dated September 9, 1988, the Company
is permitted to defer put options if, under Delaware law, the capital of
the Company would be impaired as a result of such repurchase.
In conjunction with the acquisition of Technology Applications, Inc. in
1993, the Company issued put options on 125,714 shares of common stock. On
January 12, 1999, the holder exercised the put option on these 125,714
shares of common stock at the applicable price of $24.25 per share.
Note 4. Employee Stock Ownership Plan
From time to time, the Company makes collateralized loans to the Employee
Stock Ownership Trust ("ESOT") to purchase shares and pay off expiring
loans. During the nine months of 1999, the Company loaned the ESOT $11.1
million and the ESOT paid back to the Company $7.0 million of the
outstanding loan balance. The unpaid loan balance, reflected as a
reduction of stockholders' equity, was $6.2 million and $2.2 million at
September 30, 1999 and December 31, 1998, respectively. The unpaid loan
balances represented 239,371 and 99,309 unallocated shares at September
30, 1999, and December 31, 1998, respectively.
Note 5. Income Taxes
The provision for income taxes in 1999 and 1998 is based upon an estimated
annual effective tax rate. This rate includes the impact of differences
between the book value of assets and liabilities recognized for financial
reporting purposes and the basis recognized for tax purposes.
Note 6. Earnings Per Share
The following table sets forth the reconciliation of shares for basic EPS
to shares for diluted EPS. Basic EPS is computed by dividing net earnings
by the weighted average number of common shares outstanding and
contingently issuable shares. The weighted average number of common shares
outstanding includes issued shares less shares held in treasury and any
unallocated ESOP shares. Shares earned and vested but unissued under the
Restricted Stock Plan are contingently issuable shares whose conditions
for issuance have been satisfied and as such have been included in the
calculation of basic EPS. Diluted EPS is computed similarly except the
denominator is increased to include the weighted average number of stock
warrants and options outstanding, assuming the treasury stock method.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, October 1, September 30, October 1,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average shares outstanding for basic EPS 9,859 10,436 10,047 10,224
Effect of dilutive securities:
Warrants - 1 - 170
Stock options 278 142 221 147
------ ----- ------ ------
Weighted average shares outstanding for diluted EPS 10,137 10,579 10,268 10,541
====== ====== ====== ======
</TABLE>
Note 7. Recently Issued Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-5, "Reporting on the
Costs of Start-up Activities," which became effective for fiscal years
beginning after December 15, 1998. The statement provides guidance on the
financial reporting of start-up costs and organization costs and requires
costs of start-up activities to be expensed as incurred, except for
long-term contracts. The adoption of this statement, effective January 1,
1999, did not have a material impact on the Company's financial
statements.
AICPA SOP No. 98-9, "Software Revenue Recognition," was issued in December
1998. SOP No. 98-9 amends SOP No. 97-2 to require recognition for
multiple-element arrangements by means of the "residual method" in
certain circumstances. The provisions of SOP No. 98-9 that extend the
deferral of certain passages of SOP No. 97-2 became effective December
15, 1998. All provisions are effective for transactions entered into
in fiscal years beginning after March 15, 1999. Earlier application
for financial statements or information that has not been issued is
permitted and retroactive application is prohibited. SOP No. 98-9 is
not expected to have a material impact on the Company's consolidated
results of operations or financial position.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, which
deferred the effective date of SFAS 133. In June 1998, FASB issued SFAS
No. 133 "Accounting for Derivative Instruments and Hedging Activities,"
which is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
Because of the Company's minimal use of derivatives, the Company does
not expect that the adoption of this new standard will have a material
impact on its results of operations or financial condition.
Note 8. Subsequent Event - Acquisition of GTE Information Systems, LLC
On October 29, 1999, the Company signed a definitive purchase agreement to
acquire GTE Information Systems, LLC ("GTEIS") which the Company expects to
close prior to year-end. GTEIS, headquartered in Chantilly, Virginia, is in
the government communications and information solutions and services
business, providing electronics systems, products, and integration/support
services to U.S. and foreign governments, state and local governments and
commercial customers. GTEIS had revenues of $233.6 million for year-end
1998 and $159.2 million for the nine months ended September 30, 1999. GTEIS
has over 900 employees. The Company anticipates that GTEIS will strengthen
and expand the reach and the content of its current information technology
practice. The Company is purchasing the unit for approximately $170.0
million including direct transaction costs. The acquisition will be
accounted for under the purchase method of accounting.
In connection with the acquisition, several financial institutions have
agreed to underwrite additional senior secured and subordinated credit
facilities to finance the acquisition and related transaction expenses, to
refinance certain existing indebtedness and to provide funding for ongoing
working capital, and general corporate purposes. The facilities will be
generally guaranteed by all of the Company's material subsidiaries and will
be secured by a first priority, perfected security interest on
substantially all of the Company's assets.
Note 9. Business Segments
Effective January 1, 1999, the Company realigned its three Strategic
Business Segments into two focused sectors. The Company's Information and
Engineering Technology Unit and most of its Enterprise Management Unit were
combined to become DynCorp Information and Enterprise Technology. Aerospace
Technology and the remaining parts of Enterprise Management were combined
to become DynCorp Technical Services. The purpose of this realignment was
to provide focus and clarity to the Company's businesses and enable the
Company to better serve its customers by concentrating technical services
and information technology competencies in individual single business unit
structures. Business segment information for 1998 has been restated to give
effect to this change.
Revenues, operating profit and identifiable assets for the Company's two
business segments for 1999 and the comparable periods for 1998 are
presented below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, October 1, September 30, October 1,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues
--------
DynCorp Information and Enterprise Technology $162,448 $171,460 $480,189 $ 478,973
DynCorp Technical Services 172,187 144,898 487,593 438,860
-------- -------- -------- --------
$334,635 $316,358 $967,782 $917,833
======== ======== ======== ========
Operating Profit (a)
--------------------
DynCorp Information and Enterprise Technology $ 8,587 $ 9,293 $ 26,984 $ 24,312
DynCorp Technical Services 7,591 6,485 22,201 19,163
-------- -------- -------- --------
16,178 15,778 49,185 43,475
Corporate general and administrative 4,291 5,015 15,381 15,076
Interest income (338) (291) (1,375) (968)
Interest expense 4,466 3,676 13,010 11,325
Goodwill amortization 1,405 393 2,191 1,179
Minority interest included in operating profit (590) (485) (1,899) (1,432)
Amortization of intangibles of acquired companies 365 495 1,115 1,004
Other miscellaneous 47 (221) 1,152 (616)
-------- --------- --------- ---------
Earnings before income taxes and minority interest $ 6,532 $ 7,196 $ 19,610 $ 17,907
======== ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Identifiable Assets
-------------------
DynCorp Information and Enterprise Technology $196,163 $193,094
DynCorp Technical Services 152,076 141,514
Corporate 62,150 44,630
-------- --------
$410,389 $379,238
======== ========
(a) Defined as the excess of revenues over operating expenses and certain
nonoperating expenses.
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
- -------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition of DynCorp and its subsidiaries
(collectively, the "Company"). The discussion should be read in conjunction with
the interim condensed consolidated financial statements and notes thereto and
the Company's annual report on Form 10-K for the year ended December 31, 1998.
Results of Operations
- --------------------
The Company provides diversified management, technical and professional services
primarily to U.S. Government customers throughout the United States and
internationally. The Company's customers include various branches of the
Department of Defense, the Department of Energy, the Department of State, the
Department of Justice, National Aeronautics and Space Administration and various
other U.S., state and local government agencies, commercial clients and foreign
governments. The following discusses the Company's results of operations and
financial condition for the three and nine months ended September 30, 1999 and
the comparable periods for 1998.
Revenues and Operating Profit
- -----------------------------
For the three and nine months ended September 30, 1999, revenue increased 5.8%
and 5.4% to $334.6 million and $967.8 million, respectively, compared to $316.4
million and $917.8 million for the comparable periods in 1998. Operating profit,
defined as the excess of revenues over operating expenses and certain
non-operating expenses, increased 2.5% and 13.1% to $16.2 million and $49.2
million, respectively, compared to $15.8 million and $43.5 million for the
comparable periods in 1998.
DynCorp Information and Enterprise Technology reported revenue growth of 0.3% to
$480.2 million for the nine months ended September 30, 1999, compared to $479.0
million for the comparable period in 1998. The revenue increase was primarily
due to the start-up of a contract with the U.S. Postal Service, which was
awarded in 1998 but became operational in 1999, increased tasking on indefinite
delivery/indefinite quantity ("IDIQ") contracts, and growth in a contract with
the Department of Justice. Also contributing to the revenue increases were
higher volume of state and local contract business, two award fees received
which were greater than accrued (expected), growth in health information
technology services, and new business with the customer at the Norco location.
Partially offsetting these increases in revenue was the loss in recompetition of
significant portions of the work scope of an enterprise contract at the
Department of Energy Rocky Flats location. In the nine months of 1998, Rocky
Flats' revenue was $67.7 million.
For the three months ended September 30, 1999, DynCorp Information and
Enterprise Technology reported revenues of $162.4 million, compared to $171.5
million for the comparable period in 1998. The decrease in revenue resulted from
the loss in recompetition of significant portions of an enterprise contract at
the DoE Rocky Flats location. In the third quarter of 1998, Rocky Flats' revenue
was $21.5 million. Partially offsetting this decrease in revenue was the
start-up of a contract with the U.S. Postal Service, growth in health
information technology services, and growth in a contract with the Department of
Justice, as noted above.
DynCorp Information and Enterprise Technology had a contract with the Federal
Occupational Health Administration that had a termination for convenience notice
issued in the second quarter for convenience of the customer. The customer
rescinded the termination for convenience notice in the third quarter and
requested that DynCorp Information and Enterprise Technology continue to provide
service under the contract. As a result, management renegotiated the contract to
more favorable terms and the customer has exercised the final option year on the
contract. Revenue from this contract for the three and nine months ended
September 30, 1999 was $1.9 million and $5.1 million, respectively, compared to
$1.9 million and $5.3 million for the same periods in 1998.
DynCorp Information and Enterprise Technology had two contracts that ended in
the third quarter of 1999. Option years on a subcontract for the U.S. Postal
Service were not exercised due to the lack of funding. A contract with the
Department of Justice was lost in recompetition. Revenue for these two contracts
was $14.5 million and $55.3 million for the three and nine months ended
September 30, 1999, respectively, compared to $14.1 million and $26.8 million
for the comparable periods in 1998. The Company anticipates that these contract
losses will decrease DynCorp Information and Enterprise Technology's revenue and
operating profit in the fourth quarter of 1999. DynCorp Information and
Enterprise Technology expects to win new business next year to offset this loss
of business.
For the nine months ended September 30, 1999, operating profit for DynCorp
Information and Enterprise Technology increased 11.0% to $27.0 million compared
to $24.3 million for the comparable prior year period. The increase in operating
profit resulted from the start-up of the contract with the U.S. Postal Service,
volume increases on contracts with the Department of Justice, increase in state
and local contract business, and improved profitability on previously awarded
IDIQ contracts. Also contributing to the increase in operating profit were the
receipts of award fees on two contracts that were greater than accrued
(expected), and the fact that 1998 operating profit reflected losses on several
contracts that did not continue in 1999. These increased profits more than
offset the decrease in profits from the loss of the enterprise contract at the
Rocky Flats location.
DynCorp Information and Enterprise Technology's operating profit for the three
months ended September 30, 1999 decreased $0.7 million or 7.6% to $8.6 million
compared to $9.3 million for third quarter of 1998. The decrease resulted mostly
from the aforementioned contract lost in recompetition at the Rocky Flats
locations and charges on a contract with the Department of Justice, which ended
in the third quarter of 1999. In the third quarter of 1998, Rocky Flats'
operating profit was $1.2 million.
DynCorp Technical Services' revenues year-over-year showed continued growth for
the three and nine months ended September 30, 1999. Revenues grew 18.8% and
11.1%, respectively, to $172.2 million and $487.6 million, respectively, for the
three and nine months of 1999 compared to $144.9 million and $438.9 million for
the comparable periods in 1998. These revenue increases resulted in part from a
contract providing technical and support services for the United States Air
Force at Columbus AFB, which became fully operational in the fourth quarter of
1998, and increased tasking on State Department contracts providing support
services related to the conflicts in Kosovo and East Timor. Increased services
in Qatar, and increases in the purchase of reimbursable materials for the
customer at Fort Rucker also contributed to the third quarter and nine-month
revenue growth. Slightly offsetting these revenue increases were lower tasking
on certain base operations support contracts.
Operating profit for DynCorp Technical Services increased 17.1% and 15.9% to
$7.6 million and $22.2 million for the three and nine months ended September 30,
1999, compared to $6.5 million and $19.2 million for the comparable prior year
periods. The increase in third quarter and nine month operating profit, compared
to the same period in 1998, resulted from the aforementioned increased tasking
on the State Department contracts, more favorable pricing included in a new
contract awarded in the fourth quarter of 1998 with the customer at Fort Rucker,
the contract with the United States Air Force at Columbus AFB, and lower bid and
proposal costs. Slightly offsetting these increases were operating losses on
certain residual security contracts.
Cost of Services
- ----------------
Cost of services for the third quarter and nine months of 1999 was 95.2% and
94.8% of revenue, respectively, as compared to 94.9% and 95.0% for the
comparable periods in 1998. The increase in the third quarter cost of services'
percentage compared to the comparable period of 1998 was due to charges on a
contract with the Department of Justice which ended in the third quarter of 1999
and a negative experience on employee medical costs. The decrease in nine-month
cost of services' percentage was due to improved pricing on several contracts,
the shift to more profitable businesses, and higher profit margins on some
existing contracts offset by the charges on the Department of Justice contract
and the negative experience on employee medical costs, as previously mentioned.
Corporate General and Administrative Expense
- --------------------------------------------
Corporate general and administrative expense for the third quarter and nine
months of 1999 was $4.3 million and $15.4 million, respectively, as compared to
$5.0 million and $15.1 million for the comparable periods in 1998. The decrease
in third quarter corporate general and administrative expense compared to the
third quarter of 1998 was due to reversal of $2.0 million of reserves due to
favorable resolution of contract compliance issues. This was partially offset by
increases primarily from the Company's implementation of new financial and human
resource software packages, as described below under Year 2000. The slight
increase in the nine-month corporate general and administrative expense was due
to the Company's implementation of the new software packages offset by the
reserve reversal.
Interest Expense
- ----------------
For the three and nine months ended September 30, 1999, interest expense was
$4.5 million and $13.0 million, respectively, compared to $3.7 million and $11.3
million for the comparable periods in 1998. The increase in interest expense
resulted from an increase in debt borrowings. Also contributing to the
nine-month increase in interest expense was an arbitration award to a plaintiff
on a contract dispute related to a discontinued operation.
Other Expense
- -------------
Other expense was $1.2 million and $3.4 million, respectively, for the three and
nine months ended September 30, 1999 compared to $0.7 million and $2.6 million
for the comparable periods of 1998. The increase in the three and nine months'
other expense compared to the comparable periods in 1998 resulted from the
write-off of cost in excess of net assets acquired of a consolidated subsidiary.
Also contributing to the nine month other expense increase was expenses
associated with an arbitration award to a plaintiff on a contract dispute
related to a discontinued operation.
Income Taxes
- ------------
The provision for income taxes in 1999 and 1998 is based upon an estimated
annual effective tax rate, including the impact of differences between the book
value of assets and liabilities recognized for financial reporting purposes and
the basis recognized for tax purposes. The provision for income taxes decreased
by $0.4 million to $2.3 million for the three months ended September 30, 1999
compared to $2.7 million in the comparable period in 1998. The decrease was due
to lower pretax income in the third quarter of 1999 and a slightly higher
effective tax rate in the third quarter of 1998. The provision for income taxes
increased by $0.3 million to $6.8 million for the nine months ended September
30, 1999 compared to $6.6 million in the comparable period in 1998. The increase
resulted from higher pretax income in the nine months ended September 30, 1999
offset by the higher effective tax rate in 1998. The Company's effective tax
rate approximated 38.8% for the three and nine months ended September 30, 1999
compared to 40.0% in the comparable periods in 1998.
Backlog
- -------
The Company's backlog of business, which includes awards under both prime
contracts and subcontracts as well as the estimated value of option years on
government contracts, was $3.8 billion at September 30, 1999 compared to $4.1
billion at December 31, 1998, a net decrease of $0.3 billion. The backlog at
September 30, 1999 consisted of $2.1 billion for DynCorp Technical Services and
$1.7 billion for DynCorp Information and Enterprise Technology compared to
December 31, 1998 backlog of $2.0 billion for DynCorp Technical Services and
$2.1 billion for DynCorp Information and Enterprise Technology. The Company has
been awarded significant IDIQ contracts with GSA and NASA to provide
comprehensive desktop computer, server and intra-center communication support.
The Company's backlog at September 30, 1999 does not include any significant
value for these contracts because the Company cannot reasonably estimate the
future revenues from these contracts.
Working Capital and Cash Flow
- -----------------------------
Working capital, defined as current assets less current liabilities, was $78.2
million at September 30, 1999 compared to $90.7 million at December 31, 1998, a
decrease of $12.5 million. This decrease was primarily the result of the
additional borrowings against the Contract Receivable Collateralized Class B
Variable Rate Note.
Cash provided by operations was $15.6 million in the nine months of 1999, as
compared to $1.8 million cash used in operations in the nine months of 1998, an
increase in cash provided of $17.4 million. The increase resulted mostly from
the absence of an increase in accounts receivable similar to that of 1998, which
was caused by increased revenues and start-up of new contracts, and from higher
net earnings and payable balances in 1999. Investing activities used funds of
$17.8 million in the nine months ended September 30, 1999, principally for the
purchase of property and equipment, and the capitalized cost of new software for
internal use as part of the Company's Year 2000 plan. The Company has
capitalized $11.1 million of costs related to internal use software, of which
$5.8 million was capitalized during the nine months of 1999, and anticipates
capitalizing another $0.2 million over the next three months. During the nine
months of 1998, investing activities used funds of $18.1 million principally for
the acquisition of FMAS, a medical outcome measurement and data abstraction
services company acquired in February 1998, the purchase of property and
equipment, and the purchase of new software for internal use as part of the
Company's Year 2000 plan.
Financing activities provided funds of $9.6 million in the nine months of 1999
which consisted primarily of additional borrowing against the Contract
Receivable Collateralized Class B Variable Rate Note as described above. The
proceeds were used to make a loan to the Employee Stock Ownership Trust, to fund
the Company's purchase of common stock from ESOP participants and other
investors, and to finance working capital needs. During the nine months of 1998,
financing activities provided funds of $1.8 million. The Company borrowed $43.2
million and repaid $43.3 million of the Contract Receivable Collateralized Class
B Variable Rate Notes, which was used primarily to finance working capital
needs.
The Company may purchase additional shares of its common stock from ESOP
participants whose puts are not honored by the ESOP and from other stockholders
through the Company's internal market. The level of such stock purchases will
depend on the number of puts that the ESOP is unable to honor, the number of
common shares offered for sale in excess of buy orders in each trade under the
internal market, internal cash flow considerations, and limitations on stock
repurchases under the terms of the Company's debt agreements.
Earnings before Interest, Taxes, Depreciation, and Amortization
- ---------------------------------------------------------------
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA") as
defined by management, consists of net earnings before income tax provision, net
interest expense, and depreciation and amortization. EBITDA represents a measure
of the Company's ability to generate cash flow and does not represent net income
or cash flow from operating, investing and financing activities as defined by
generally accepted accounting principles ("GAAP"). EBITDA is not a measure of
performance or financial condition under GAAP, but is presented to provide
additional information about the Company to the reader. EBITDA should be
considered in addition to, but not as a substitute for, or superior to, measures
of financial performance reported in accordance with GAAP. EBITDA has been
adjusted for the amortization of deferred debt expense and debt issue discount
which are included in "interest expense" in the Consolidated Statements of
Operations and included in "amortization and depreciation" in the Consolidated
Statements of Cash Flows. Readers are cautioned that the Company's definition of
EBITDA may not necessarily be comparable to similarly titled captions used by
other companies due to the potential inconsistencies in the method of
calculation. The following presentation represents the Company's computation of
EBITDA (in thousands):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ -----------------
September 30, October 1, September 30, October 1,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings $ 3,636 $ 4,026 $ 10,839 $ 9,885
Depreciation and amortization 3,731 2,375 8,318 6,517
Interest expense, net 4,128 3,385 11,635 10,357
Income taxes 2,306 2,685 6,872 6,590
Amortization of deferred debt expense (201) (170) (567) (538)
Debt issue discount (10) (9) (28) (26)
------- -------- ------- -------
EBITDA $13,590 $12,292 $37,069 $32,785
======= ======= ======= =======
</TABLE>
Year 2000 Readiness Disclosure
- ------------------------------
The principal "Year 2000" issue ("Y2K") risk to the Company would come from an
extended failure of one or more of its core systems (financial, payroll, and
human resources). Replacement of the Company's core financial, human resources
and payroll systems software was initiated following a Year 2000 analysis
conducted in 1997 that found these programs to be non-compliant for the
millennium date rollover. Deployment of a new human resources and payroll system
was launched and has been completed. Due to the large number of conversions and
the demands on field organizations, the financial systems implementation is now
scheduled for completion in the third quarter of 2000. A contingency plan was
activated to install an updated compliant version of the Company's current
financial software package in all locations where conversion to the new
Enterprise Resource Planning package is not assured prior to 2000. The plan is
now substantially implemented with full completion anticipated before the end of
the year. Total expenditures for the Y2K effort were $17.1 million as of
September 30, 1999, of which $11.1 million represented capitalized software
costs. The Company anticipates additional capitalized software costs of $0.2
million for the remainder of 1999.
A Year 2000 Program Management Plan was developed and a Y2K Project Office
launched in mid-1998 to address other Y2K compliance issues. A multifunctional
task group is overseeing assessment and remediation or replacement efforts in
the areas of core systems, network and office automation, and field information
and non-information systems. No problems have been identified that would
materially affect the Company's ability to perform on its significant contracts.
These assessments include third-party service providers and other vendors on
whom a given contract might depend.
The core systems' assessment included initial contact in 1998 with third-party
telecommunications, employee benefits, insurance, and other providers.
Information obtained from these providers generally stated that they were
addressing the Y2K problem. Follow-up contacts to ascertain the progress of
these providers was just completed and all have reported solid progress if not
completion of their internal Y2K efforts. However, while the Company is taking
appropriate steps to obtain assurances from these service providers, this does
not guarantee the performance of such providers or assure that these assurances
are accurate.
One area of possible vulnerability is the payment capability of the various
government payment offices receiving and processing invoices from a contract
site. The Defense Finance and Accounting Service (DFAS) web site still indicates
September 25, 1999 was the target date for full compliance. A recent DFAS
briefing strongly emphasized significant preparation if not readiness. DFAS also
reports the development of contingency plans. The Department of Energy payment
office has also indicated full readiness. DoD and DoE contracts represent a
large portion of the Company's work. Government payment systems are considered
mission critical by the government, and, in general, such systems have received
considerable attention to ensure Y2K compliance.
The Company has conducted assessments on government furnished equipment ("GFE")
at contract sites. If GFE is critical to performance on a contract and is not
compliant, a failure could affect contract performance. While this may not be
material to the Company as a whole, individual contracts are addressing these
potential areas of risk with customers. No problems have been identified that
would materially affect the Company's ability to perform on its significant
contracts. By way of prudence, contract managers are considering alternative
work methods in the event of a short-term interruption of GFE service,
facilities or contracted vendor operations. In select situations, due to the
nature of the work, no contingencies/alternative work methods exist.
An employee awareness program was initiated in mid-1998 to inform employees and
managers of the potential for Y2K problems. In addition to creating general
awareness, this program is intended to address "home grown" office automation
systems and stand-alone PCs. By themselves, none of these types of systems is
considered mission critical to the Company as a whole.
Infrastructure items that may have Y2K compliance problems such as desktop
workstations, network components, and servers, are being systematically tested,
repaired or replaced. The annual expenditures for these components are not
significantly above levels that can be expected in the normal course of
business, given the Company's infrastructure replacement plan and budget.
Depreciation and amortization expenses for the resystemization and for these
infrastructure components are allowable costs under government contracts. The
internal infrastructure testing, repair, or replacement effort is 88% complete,
and infrastructure testing, monitoring and staffing plans for the New Year's
holiday weekend have been completed.
Clauses for contracts and purchases have been adopted and are being used to
protect the Company from Y2K-related claims and liabilities.
In summary, the primary Y2K vulnerability for the Company is possible failure of
core systems. The resystemization effort is a top priority within the Company,
with dedicated teams and incentive plans for retaining key employees throughout
the project. Contingency plans are being executed where delays have been
experienced.
Assessments at the contract level are largely complete. These assessments have
included analysis of the readiness of hardware, software, prime and
subcontractors, customers, suppliers and vendors, data dependencies, and
facilities. Given the information provided to date there is little cause for
concern for the Company overall. However, it is impossible to predict with
certainty the actual state of Y2K compliance that will exist in these third
party businesses and organizations at various contract locations. Moreover,
management is not in a position to accurately predict the potential impact, if
any, of international Y2K compliance issues that may effect the country's supply
chain and hence have a disruptive impact on the Company or such third party
customers, vendors and suppliers.
At this time, the Company's contingency planning relating to potential Year 2000
issues include (1) alternative work methods by contract and headquarters
personnel, along with appropriate policies and procedures, and (2) additional
weekend staffing and availability should the need arise during the January 1-3
time period, to include at a minimum testing and monitoring of the IT
infrastructure.
Millennium coordinators are overseeing the Y2K effort in each business area, and
a multi-functional team of executives, headed by the Y2K Program Manager and
chaired by the Corporate Chief Information Officer, acts as a Y2K steering
committee. Year 2000 readiness activities across the Company will continue for
the remainder of 1999.
Recent Developments
- -------------------
On October 29, 1999, the Company signed a definitive purchase agreement to
acquire GTE Information Systems, LLC ("GTEIS") which the Company expects to
close prior to year-end. GTEIS, headquartered in Chantilly, Virginia, is in the
government communications and information solutions and services business,
providing electronic systems, products, and integration/support services to
U.S. and foreign governments, state and local governments and commercial
customers. GTEIS had revenues of $233.6 million for year-end 1998 and $159.2
million for the nine months ended September 30, 1999. GTEIS has over 900
employees. The Company anticipates that GTEIS will strengthen and expand the
reach and the content of its current information technology practice. The
Company is purchasing the unit for approximately $170.0 million including direct
transaction costs. The acquisition will be accounted for under the purchase
method of accounting.
In connection with the acquisition, several financial institutions have agreed
to underwrite additional senior secured and subordinated credit facilities to
finance the acquisition and related transaction expenses, to refinance certain
existing indebtedness and to provide funding for ongoing working capital, and
general corporate purposes. The facilities will be generally guaranteed by all
of the Company's material subsidiaries and will be secured by a first priority,
perfected security interest on substantially all of the Company's assets.
Forward Looking Statements
- --------------------------
This Form 10-Q contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward-looking statements" that are
based on management's expectations, estimates, projections and assumptions.
Words such as "expects," "anticipates," "plans," "believes," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements that include, but are not limited to, projections of
future performance, assessment of contingent liabilities and expectations
concerning liquidity, cash flow and contract awards. Such forward-looking
statements are made pursuant to the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. These statements are not guarantees of
future performance and involve certain risks and uncertainties that are
difficult to predict. Therefore, actual future results and trends may differ
materially from what is forecast in forward-looking statements due to a variety
of factors, including the Company's successful execution of internal performance
plans; the outcome of litigation in process; labor negotiations; changing
priorities or reductions in the U.S. Government defense budget; and termination
of government contracts due to unilateral government action.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company has limited exposure to market risk due to the nature of its
financial instruments. The Company's only use of derivative financial
instruments is to manage its exposure to fluctuations in interest rates and
foreign exchange rates. The Company does not hold or issue derivative financial
instruments for trading or other speculative purposes. There have been no
material changes in market risk to which the Company is exposed since the end of
the Company's preceding fiscal year.
PART II - OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
None filed.
(b) Reports on Form 8-K
None filed.
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.
DYNCORP
Date: November 10, 1999 /s/ P.C. FitzPatrick
--------------------
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: November 10, 1999 /s/ J.J. Fitzgerald
-------------------
J.J. Fitzgerald
Vice President
and Corporate Controller
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
THIRD QUARTER 10 - Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH 10 - Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-30-1999
<PERIOD-END> SEP-30-1999
<CASH> 11,537
<SECURITIES> 0
<RECEIVABLES> 257,212
<ALLOWANCES> 2,631
<INVENTORY> 647
<CURRENT-ASSETS> 288,860
<PP&E> 55,404
<DEPRECIATION> 31,146
<TOTAL-ASSETS> 410,389
<CURRENT-LIABILITIES> 210,707
<BONDS> 0
0
0
<COMMON> 500
<OTHER-SE> 11,807
<TOTAL-LIABILITY-AND-EQUITY> 410,389
<SALES> 967,782
<TOTAL-REVENUES> 967,782
<CGS> 0
<TOTAL-COSTS> 917,709
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 13,010
<INCOME-PRETAX> 19,610
<INCOME-TAX> 6,872
<INCOME-CONTINUING> 10,839
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<NET-INCOME> 10,839
<EPS-BASIC> 1.08
<EPS-DILUTED> 1.06
</TABLE>
