Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[x] Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1997.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Transition Period from to .
Commission File No.1-7348
DYNAMICS RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-2211809
(State or other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
60 Frontage Road, Andover, Massachusetts 01810-5498
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (508) 475-9090
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 .
The number of shares outstanding of the Registrant's Common
stock, par value $.10 per share, at July 23, 1997 was 6,275,943
shares.
DYNAMICS RESEARCH CORPORATION
INDEX
Page
Part I Financial Information
Number
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1997 and December 28, 1996. . . 3
Consolidated Statements of Income -
Three and Six Months Ended June 30, 1997 and
Twelve and Twenty-four Weeks Ended June 15, 1996. 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1997 and
Twenty-four Weeks Ended June 15, 1996 . . . . . 5
Notes to Consolidated Financial Statements . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . 7
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . 9
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
PART I. FINANCIAL INFORMATION
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
(unaudited)
ASSETS June 30, 1997 December 28, 1996
CURRENT ASSETS:
Cash and cash equivalents $ 441 $ 234
Receivables, less allowances of $329 in
1997 and $340 in 1996 22,959 19,436
Unbilled expenditures and fees on
contracts in process 20,773 22,690
Inventories 3,517 3,211
Refundable income taxes 1,136 1,436
Prepaid expenses and other current assets 1,104 1,247
Total current assets 49,930 48,254
Property, plant and equipment, at cost
Land 1,126 1,126
Building 7,774 7,774
Machinery and equipment 43,315 40,970
Less accumulated depreciation
and amortization (29,575) (28,266)
Net property, plant and equipment 22,640 21,604
Excess of purchase price over net assets
of business acquired, net 936 1,244
Total assets $ 73,506 $ 71,102
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Notes payable $ 12,100 $ 10,600
Accounts and drafts payable 7,359 8,925
Accrued payroll and employee benefits 8,881 6,998
Other accrued expenses 1,438 894
Accrued and current deferred income taxes 6,851 6,091
Current portion of long-term debt - 1,201
Total current liabilities 36,629 34,709
Long-term debt - 300
Deferred income taxes 600 854
SHAREHOLDERS' INVESTMENT:
Preferred stock, par value $.10 per share -
5,000,000 shares authorized, none issued
Common stock, par value $.10 per share -
Authorized - 15,000,000 shares
Issued - 7,326,256 shares in 1997
and 6,689,767 in 1996 733 669
Less: Treasury stock - 1,050,313 1997
and 996,108 in 1996, at par value (105) (100)
Capital in excess of par value 14,616 9,516
Retained earnings 21,033 25,154
Total shareholders' investment 36,277 35,239
Total liabilities and
shareholders' investment $ 73,506 $ 71,102
The accompanying notes are an integral part of these consolidated
financial statements.
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(in thousands of dollars, except per share data)
(unaudited)
Three Months Twelve Weeks Six Months Twenty-Four
Ended Ended Ended Weeks Ended
June 30, 1997 June 15, 1996 June 30, 1997 June 15, 1996
Product sales and
contract revenue:
Contract revenue $ 33,322 $ 21,490 $ 60,196 $ 41,964
Product sales 6,824 6,883 12,958 13,036
Total revenue 40,146 28,373 73,154 55,000
Costs and expenses:
Cost of
contract revenue 30,044 19,419 53,815 37,953
Cost of goods 5,210 4,731 10,379 9,290
Selling, engineering
and administrative
expenses 3,283 3,350 6,587 6,450
Total costs and expenses 38,537 27,500 70,781 53,693
Operating income 1,609 873 2,373 1,307
Interest expense, net 193 69 398 169
Income before provision
for income taxes 1,416 804 1,975 1,138
Provision for income taxes 592 306 825 431
Net income $ 824 $ 498 $ 1,150 $ 707
Net income per
common share: * $ .13 $ .08 $ .18 $ .11
Weighted average common
shares outstanding* 6,271,188 6,239,974 6,268,737 6,229,091
The accompanying notes are an integral part of these consolidated
financial statements.
* Retroactively adjusted for the April 1997 stock dividend.
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
Six Twenty-Four
Months Ended Weeks Ended
June 30, 1997 June 15, 1996
Cash provided by operations:
Net income $ 1,150 $ 707
Depreciation and amortization 2,440 2,448
Deferred income taxes (254) -
Provision for receivable reserves (11) 11
3,325 3,166
Cash provided by (used for) working capital:
Receivables (3,512) (3,248)
Unbilled expenditures and fees
on contracts in process 1,917 2,497
Inventories (306) (663)
Refundable income taxes 300 2
Prepaid expenses and other current assets 143 229
Accounts and drafts payable (1,566) (288)
Accrued payroll and employee benefits 1,883 1,088
Other accrued expenses 540 (119)
Accrued and current deferred income taxes 760 65
Net cash provided by (used for) operations 3,484 2,729
Cash used for investing activities:
Additions to property,
plant and equipment, net (3,043) (5,215)
Excess of purchase price over net assets
of business acquired, net (125) (1,990)
Net cash used for investing activities: (3,168) (7,205)
Cash provided by (used for) financing activities:
Net borrowings (repayments) under
line of credit agreements 1,500 4,493
Principal payments under long-term borrowings (1,500) (600)
Proceeds from the exercise of stock options 363 260
Purchase of treasury shares (472) 0
Net cash provided by (used for)
financing activities (109) 4,153
Net increase (decrease) in
cash and cash equivalents 207 (323)
Cash and cash equivalents at the
beginning of the year 234 777
Cash and cash equivalents at
the end of the period $ 441 $ 454
Supplemental disclosures of cash flow information:
Cash paid during the twenty-four week period for:
Interest $ 384 $ 196
Income taxes $ 325 $ 676
The accompanying notes are an integral part of these consolidated
financial statements.
DYNAMICS RESEARCH CORPORATION
Notes to Consolidated Financial Statements
Note 1. The unaudited consolidated financial statements
presented herein have been prepared by the registrant
pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information in footnote
disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles has been condensed or omitted pursuant to such
rules and regulations, although the registrant believes that
the disclosures are adequate to make the information
presented not misleading. The accompanying consolidated
financial statements have not been audited by independent
accountants, but in the opinion of the management such
financial statements include all adjustments, consisting
only of normal recurring adjustments, necessary to fairly
present the results of operations.
The results of operations for the three months and six
months ended June 30, 1997 may not be indicative of the
results that may be expected for the fiscal year ending
December 31, 1997.
Note 2. Inventories are comprised of the following (in
thousands of dollars):
June 30, 1997 December 28, 1996
Work in process $ 1,767 $ 1,411
Raw materials and subassemblies 1,750 1,800
Total inventories $ 3,517 $ 3,211
Note 3. Prior to 1997, the Company used a 13-period accounting year with the
first three fiscal quarters containing twelve weeks and the fourth fiscal
quarter containing sixteen weeks. In 1996, the Company's fiscal year ended
on December 28, 1996. The Company now employs a calendar-month accounting
year.
Item 2. Management Discussion and Analysis of Financial
Condition and Results of Operations
Results of Operations
During 1997, comparability of quarterly financial
information is effected by the change in fiscal calendar as
described in Note 3 to the financial statements. Other than the
factors discussed below and the additional length of the 1997
second quarter, the Company is not aware of any factors that
would materially affect the comparability of the financial
information.
Total Revenue
The Company's total revenue increased $11,773,000 or 41% for
the second quarter of 1997 compared to the second fiscal quarter
of 1996 as a result of growth in the Company's systems and
services business segment.
Contract Revenue
Contract revenue for the systems and service segment
increased 55% for the second quarter of 1997 compared to the
second fiscal quarter of 1996. This growth was attributable
primarily to revenue generated under contract awards announced
during 1995 and 1996, including increases in the Company's
technical and management services programs with the U.S. Air
Force and Army, added work under the Company's long running core
Navy program, and the commencement of work on the State of Ohio
information technology products and services contract awarded in
February 1997. Much of the Company's contract revenue relates to
the development and operation of computer-based management
information and logistics support systems, as well as other
information technology services. The Company is continuing to
pursue additional opportunities both within the Department of
Defense, other Federal agencies and state governments.
Product Sales
Product sales decreased 1% for the second quarter of 1997
compared to the second twelve weeks of 1996. Sales of
electroformed components decreased in the second quarter. The
Company's major electroform parts customer, a manufacturer of ink-
jet printers, reduced unit volumes of nozzle plates supplied by
the Company. This reduction was partially offset by increased
business from other customers, including a medical equipment
manufacturer, for whom the Company supplies miniature flex
circuits.
Cost of Contract Revenue
Cost of contract revenue as a percentage of contract revenue
remained the same at 90% for the second quarter of both 1997 and
1996.
Cost of Goods
Cost of goods as a percentage of product sales for the second
quarter of 1997 increased to 76% from 69% in 1996. This
increase was attributed principally to the decreased production
levels of electroformed components for the second quarter of
1997.
Selling, Engineering and Administrative Expenses
Selling, engineering and administrative expenses decreased 2%
from 1996. This decrease was the result of a decrease in the
Company's level of research and development spending during the
second quarter of 1997, partially offset by an increase in
general and administrative spending.
Interest Expense, Net
Interest expense, net increased to $193,000 during the second
quarter of 1997 from $69,000 for the second twelve weeks of 1996,
due to an increase in the average level of the Company's
borrowing as a result of working capital requirements associated
with the substantial increase in revenue as well as capital
spending during 1996.
Provision (Benefit) for Income Taxes
The effective income tax rate for the second quarter of 1997
was 41.8% compared to 38.1% for the second fiscal quarter of
1996. The Company accounts for income taxes using the liability
method as set forth in Statement of Financial Accounting
Standards No. 109 (SFAS 109). The 1996 rate was favorably
affected be a somewhat lower net state tax rate.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been cash
flow from operations and bank credit lines. The principal drivers
of cash flow are earnings, adjusted for depreciation and
amortization, aggregate billed and unbilled receivables in the
Company's government business, and capital expenditures. The sum
of billed and unbilled receivables increased $1,606,000 to
$43,732,000 during the first six months of 1997, principally as a
result of the 41% increase in revenue. Capital spending during
the first six months of 1997 was $3,043,000 consisting
principally of manufacturing production equipment and office
computer equipment.
At June 30, 1997, $6,900,000 was available under the Company's
current lines of credit. The Company believes that its liquid
assets, cash flow from operations and available bank lines of
credit will be sufficient to support its normal operating and
capital requirements for the balance of 1997. In February 1997,
the Company announced that it had been awarded a $36 million,
five-year contract by the State of Ohio to provide information
technology products and services. During the second half of
1997, significant expenditures are expected to be made to acquire
and install computer hardware under this contract, which may
require additional levels of borrowings and the Company is
currently arranging to increase bank credit lines. The Company
does not have any significant capital commitments at June 30,
1997 outside the ordinary course of business.
Forward Looking Information
This report includes certain forward-looking statements about
the Company's business including the anticipated capital
spending, and cash flow requirements. Such forward-looking
statements are subject to risk and uncertainties that could cause
the actual results to vary materially. These risks and
uncertainties, discussed in more detail in the Company's form 10-
k for the year ended December 28, 1996, include possible
reductions in funding for the Company's customers and potential
customers, concentration of customers, risks of sustaining
existing contracts and orders thereunder at the same or
increasing levels and obtaining of new contracts, high levels of
competition and difficulties of entering new markets, government
contracting issues including audit adjustments and costs of
completing fixed price contracts, supply difficulties, warranty
claims, and factors affecting the business segments in which the
Company operated and the economy generally.
PART II. OTHER INFORMATION
Item 6. (a) Exhibits
(27.1) Financial Data Schedule
Item 6. (b) Reports on Form 8-K
The Registrant did not file any reports on Form 8-K
during the three month period for which this report is
filed.
SIGNATURE
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.
DYNAMICS RESEARCH CORPORATION
(Registrant)
Date: August 11, 1997 By: /s/ Douglas R. Potter
Douglas R. Potter
Vice President of Finance
and Chief Financial Officer
(Principal financial and
accounting officer)
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