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 September 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 October 28, 1997 was 6,284,957 shares.
DYNAMICS RESEARCH CORPORATION
INDEX
Page
Part I Financial Information Number
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1997 and December 28, 1996 . . . . . . . . 3
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1997 and
September 7, 1996 . . . . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1997 and
September 7, 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 September 30, 1997 December 28, 1996
CURRENT ASSETS:
Cash and cash equivalents $ 93 $ 234
Receivables, less allowances of
$324 in 1997 and $340 in 1996 25,353 19,436
Unbilled expenditures and fees
on contracts in process 27,506 22,690
Inventories 3,121 3,211
Refundable income taxes 1,281 1,436
Prepaid expenses and other current assets 1,093 1,247
Total current assets 58,447 48,254
Property, plant and equipment, at cost
Land 1,126 1,126
Building 7,774 7,774
Machinery and equipment 44,615 40,970
Less accumulated depreciation
and amortization (30,696) (28,266)
Net property, plant and equipment 22,819 21,604
Excess of purchase price over net assets
of business acquired, net 716 1,244
Total assets $ 81,982 $ 71,102
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Notes payable $ 16,225 $ 10,600
Accounts and drafts payable 7,190 8,925
Accrued payroll and employee benefits 8,921 6,998
Other accrued expenses 2,922 894
Accrued and current deferred income taxes 8,032 6,091
Current portion of long-term debt - 1,201
Total current liabilities 43,290 34,709
Long-term debt - 300
Deferred income taxes 668 854
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 - 7,340,212 shares in 1997
and 6,689,767 in 1996 734 669
Less: Treasury stock - 1,055,255 in 1997
and 996,108 in 1996, at par value (105) (100)
Capital in excess of par value 14,639 9,516
Retained earnings 22,756 25,154
Total shareholders' investment 38,024 35,239
Total liabilities and
shareholders' investment $ 81,982 $ 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 Nine Months Thirty-Six
Ended Ended Ended Weeks Ended
Sept. 30, 1997 Sept. 7, 1996 Sept. 30, 1997 Sept. 7, 1996
Product sales
and contract revenue:
Contract revenue $ 36,206 $ 23,441 $ 96,402 $ 65,405
Product sales 7,063 6,488 20,021 19,524
Total revenue 43,269 29,929 116,423 84,929
Cost and expenses:
Cost of contract
revenue 33,310 21,109 87,125 59,062
Cost of product sales 4,940 4,451 15,319 13,741
Selling, engineering
and administrative
expenses 3,548 2,904 10,135 9,354
Total operating costs
and expenses 41,798 28,464 112,579 82,157
Operating income 1,471 1,465 3,844 2,772
Interest expense
(income), net (470) 114 (72) 283
Income before provision
for income taxes 1,941 1,351 3,916 2,489
Provision for
income taxes 218 520 1,043 951
Net income $ 1,723 $ 831 $ 2,873 $ 1,538
Net income per
common share: * $ .27 $ .13 $ .46 $ .25
Weighted average common
shares outstanding* 6,278,757 6,254,523 6,272,025 6,236,986
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)
Nine Thirty-Six
Months Ended Weeks Ended
September 30, 1997 September 7, 1996
Cash provided by operations:
Net income $ 2,873 $ 1,538
Depreciation and amortization 3,781 3,657
Deferred Income Taxes (186) -
Provision for receivable reserves (16) 33
6,452 5,228
Cash provided by (used for) working capital:
Receivables (5,901) (4,101)
Unbilled expenditures and
fees on contracts in process (4,816) (687)
Inventories 90 (892)
Refundable income taxes 155 4
Prepaid expenses and other
current assets 154 390
Accounts and drafts payable (1,735) 673
Accrued payroll and employee benefits 1,923 1,154
Other accrued expenses 2,028 (853)
Accrued and current deferred
income taxes 1,941 333
(6,161) (3,979)
Net cash generated (used) in operations 291 1,249
Cash provided by (used for) investing activities:
Additions to property, plant
and equipment, net (4,343) (7,139)
Excess of purchase price over net assets
of business acquired, net (125) (1,990)
Net cash used for investing activities: (4,468) (9,129)
Cash provided by (used for) financing activities:
Net borrowings (repayments) under
line of credit agreements 5,625 11,650
Principal payments under
long-term borrowings (1,501) (912)
Proceeds from the exercise
of stock options 430 277
Purchase of treasury shares (518) --
Net cash generated (used) in
financing activities 4,036 11,015
Net increase (decrease) in cash
and cash equivalents (141) 3,135
Cash and cash equivalents at
the beginning of the year 234 777
Cash and cash equivalents at
the end of the period $ 93 $ 3,912
Supplemental disclosures of cash flow information:
Cash paid during the thirty-six week period for:
Interest $ 612 $ 309
Income taxes $ 339 $ 678
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 and nine months ended
September 30, 1997 may not be indicative of the results that may be
expected for the year ending December 31, 1997.
Note 2.
Inventories are comprised of the following (in thousands of dollars):
September 30, 1997 December 28, 1996
Work in process $ 1,138 $ 1,411
Raw materials and subassemblies 1,983 1,800
Total inventories $ 3,121 $ 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.
Note 4.
Subsequent Event - On October 2, 1997, the Company entered into a credit
agreement that provides a revolving term loan and credit facility replacing
its existing bank lines of credit. The new facility provides for unsecured
borrowings up to $45 million, consisting of $30 million for working capital
and $15 million for acquisitions. Borrowings under the working capital
facility are required to be repaid at the facility maturity date. The
facility has a term of three years and may be extended for two additional
years by agreement of the parties. Accordingly, balances outstanding under
this facility are expected to be classified as non-current on the Company's
balance sheet.
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 third quarter, the Company is not aware of any factors that would
materially affect the comparability of financial information.
Revenue
Total revenue increased $13.3 million or 45% for the third quarter
of 1997 compared to the third fiscal quarter of 1996 primarily as a
result of growth in the Company's Systems and Services business segment.
Revenue for the systems and services segment increased by $12.8
million, or 54%, for the third quarter of 1997 compared to the third
fiscal quarter of 1996. This growth was attributable to $8.8 million of
revenue generated under the February 1997 contract with the State of
Ohio for the installation of a computer network to support the State's
child welfare enforcement system, reflecting peak installation activity.
The revenue increase also reflected growth of the Company's technical
and management services programs with the U.S. Air Force and Navy, and
on the Company's long running core Navy program. 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 increased 9% for the third quarter of 1997 compared
to the third fiscal quarter of 1996. The increase represented higher
shipment levels of our Encoder product line while sales of electroformed
components were flat in the third quarter. Electroform component sales
have increased sequentially during the first three quarters of 1997
reflecting improving orders from our ink-jet printer cartridge customer
as well as increased business from other customers, including a medical
equipment manufacturer.
Cost of Contract Revenue and Goods
Cost of contract revenue as a percentage of contract revenue
increased slightly to 92% for the third quarter of 1997 from 90% for the
third fiscal quarter of 1996. Cost of goods as a percentage of product
sales for the third quarter of 1997 was 70%, up from 69% in 1996.
Selling, Engineering and Administrative Expenses
Selling, engineering and administrative expenses increased 22% from
1996 while decreasing as a percentage of total revenue from 9.7% in 1996
to 8.2% in 1997. Increased spending was the result of increases in the
Company's level of selling and general and administrative expenses to
support the substantial increase in revenue during the third quarter of
1997, partially offset by an decrease in research and development
spending. The Company is incurring expense to install new management
and accounting systems supporting the growing and increasingly complex
mix of customers.
Interest Expense, Net
Net interest income was $470,000 for the third quarter of 1997
compared to $114,000 of interest expense for the third fiscal quarter of
1996. The change was due to interest income of $688,000 related to a
research and development tax credit which was received during the third
quarter of 1997, partially offset by increased interest expense
resulting from an increase in the average level of the Company's
borrowings as a result of working capital requirements associated with
the substantial increase in revenue.
Provision (Benefit) for Income Taxes
The effective tax rate for the third quarter of 1997 was 41.4% compared
to 38.5% in 1996. The Company's tax provision for the third quarter of
1997 reflects a one-time benefit of $586,000 resulting from a refund of
income taxes due to the Company's prior years research and development
expenses. The Company accounts for income taxes in accordance with the
Statement of Financial Accounting Standards No. 109 - Accounting for
Income Taxes (SFAS 109).
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 business, and capital
expenditures. The sum of billed and unbilled receivables increased by
25% or $10,733,000, to $52,859,000 during the first nine months of 1997,
principally as of result of the 37% increase in revenue. 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 third quarter and continuing for the
fourth quarter of 1997, significant expenditures are being made to
acquire and install computer hardware under this contract. Capital
spending during the first nine months of 1997 was $4,343,000 consisting
principally of manufacturing production equipment and office computer
equipment. The Company announced on October 2, 1997 that it had signed a
credit agreement that provides unsecured loans in an aggregate principal
amount of up to $45 million. This credit facility consists of a
revolving loan of up to $30 million for working capital purposes and up
to $15 million for acquisitions. This facility provides the Company
with greater flexibility to finance the growth of our business and to
pursue new opportunities. The Company does not have any significant
capital commitments at September 30, 1997 outside the ordinary course of
business. 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.
Forward Looking Information
This report includes certain forward-looking statements about the
Company's business including the effect of the federal budget on the
Company's sales, anticipated capital spending and research and
development spending. 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 federal 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 on 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: November 13, 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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