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 March 31, 1998.
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 (978) 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 April 24, 1998 was 6,314,454 shares.
DYNAMICS RESEARCH CORPORATION
INDEX
Page
Part I Financial Information Number
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1998 and December 31, 1997 . . . 3
Consolidated Statements of Income -
Three Months Ended March 31, 1998 and
March 31, 1997 . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1998 and
March 31, 1997 . . . . . . . . . . . . . . 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 March 31, 1998 December 31, 1997
CURRENT ASSETS:
Cash and cash equivalents $ 2,108 $ 542
Receivables, less allowances
of $223 in 1998 and $217 in 1997 28,937 17,397
Unbilled expenditures and fees
on contracts in process 35,451 32,175
Inventories 2,624 3,377
Refundable income taxes 876 878
Prepaid expenses and other
current assets 1,642 1,668
Total current assets 71,638 56,037
Property, plant and equipment, at cost
Land 1,126 1,126
Building 7,774 7,774
Machinery and equipment 42,387 41,426
Less accumulated depreciation
and amortization (29,662) (28,098)
Net property, plant and equipment 21,625 22,228
Excess of purchase price over net assets
of business acquired, net 332 594
Total assets $ 93,595 $ 78,859
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts and drafts payable 11,085 8,355
Accrued payroll and employee benefits 8,370 8,032
Other accrued expenses 1,810 4,251
Accrued and current deferred
income taxes 9,398 8,999
Total current liabilities 30,663 29,637
Long-term debt 23,150 10,000
Deferred income taxes 75 75
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 - 7,433,728 shares in 1998
and 7,366,484 in 1997 744 737
Less: Treasury stock - 1,115,726 in 1998
and 1,077,612 in 1997, at par value (111) (108)
Capital in excess of par value 14,425 14,506
Retained earnings 24,649 24,012
Total shareholders' investment 39,707 39,147
Total liabilities and
shareholders' investment $ 93,595 $ 78,859
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 Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
Product sales and contract revenue:
Contract revenue $ 35,073 $ 26,874
Product sales 7,882 6,134
Total revenue 42,955 33,008
Costs and expenses:
Cost of contract revenue 31,327 23,771
Cost of goods 5,886 5,169
Selling, engineering and
administrative expenses 4,303 3,304
Total costs and expenses 41,516 32,244
Operating income 1,439 764
Interest expense, net 343 205
Income before provision for income taxes 1,096 559
Provision for income taxes 459 233
Net income $ 637 $ 326
Net income per common share - Basic * $ .08 $ .04
Net income per common share - Diluted * $ .08 $ .04
Weighted average common shares
outstanding - Basic * 7,558,686 7,519,237
Weighted average common shares
outstanding - Diluted * 7,854,074 7,803,799
The accompanying notes are an integral part of these consolidated financial
statements.
Retroactively adjusted for the April 1997 10% stock dividend and the May
1998 20% stock dividend.
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
(unaudited)
Three Three
Months Ended Months Ended
March 31, 1998 March 31, 1997
Cash provided by operations:
Net income $ 637 $ 326
Depreciation and amortization 1,826 1,199
Deferred income taxes - (254)
Provision for receivable reserves 2 (14)
2,465 1,257
Cash provided by (used for) working capital:
Receivables (11,542) (322)
Unbilled expenditures and fees
on contracts in process (3,276) 4,403
Inventories 753 308
Refundable income taxes 2 -
Prepaid expenses and other current assets 26 (7)
Accounts and drafts payable 2,730 (6,166)
Accrued payroll and employee benefits 338 792
Other accrued expenses (2,441) 205
Accrued and current deferred income taxes 399 476
(13,011) (311)
Net cash provided by (used for) operations (10,546) 946
Cash used for investing activities:
Additions to property, plant and
equipment, net (961) (1,197)
Acquisition payment - (125)
Net cash used for investing activities: (961) (1,322)
Cash provided by (used for) financing activities:
Net borrowings under line of credit agreements - 650
Principal payments under long-term borrowings - (300)
Borrowing (payments) under revolving
Long-term credit agreement, net 13,150 -
Proceeds from the exercise of stock options 145 74
Purchase of treasury shares (222) (117)
Net cash provided by (used for)
financing activities 13,073 307
Net increase (decrease) in cash
and cash equivalents 1,566 (69)
Cash and cash equivalents at the
beginning of the year 542 234
Cash and cash equivalents at the
end of the period $ 2,108 $ 165
Supplemental disclosures of cash flow information:
Cash paid during the quarterly period for:
Interest $ 235 $ 173
Income taxes $ 62 $ 16
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 quarterly period ended March 31,
1998 may not be indicative of the results that may be expected for
the fiscal year ending December 31, 1998.
Note 2. Inventories are comprised of the following (in thousands of dollars):
March 31, 1998 December 31, 1997
Work in process $ 349 $ 1,364
Raw materials and subassemblies 2,275 2,013
Total inventories $ 2,624 $ 3,377
Note 3. Subsequent Event - On April 28, 1998, the Company's Board of
Directors declared a 20% stock dividend to be distributed on May 26,
1998 to shareholders of record on May 11, 1998. Shares outstanding
and per share information have been adjusted accordingly.
Also, On April 28, 1998, the shareholders of the Company voted to
increase the authorized shares to 30,000,000 from 15,000,000.
Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Total revenue for the first quarter of 1998 increased $9,947,000 or
30.5% to $42,955,000, compared to $33,008,000 for the first quarter of
1997. Commercial, state and non-defense federal business amounted to
41.3% of the Company's total revenue in the first quarter of 1998,
compared to 24.0% in the first quarter of 1997.
Contract revenue increased $6,199,000 or 30.5% for the first quarter of
1998 compared to the same period in 1997. The growth was principally
attributable to major contracts with the State of Ohio for statewide
infrastructure for Human Services systems and with the State of Colorado
for similar network infrastructure as well as software system
implementation services. The Company's defense revenue related to the
development and operation of computer-based management information and
logistics support systems, as well as other information technology
services, increased $1,500,000, or 4.7% compared to the first quarter
of 1997.
Product sales increased $1,748,000 or 28.5% for the first quarter of
1998 compared to the first quarter of 1997. This growth was the result
of increased sales of electroformed components for a line of ink-jet
printers and of a line of custom encoders for a customer in the
automotive industry.
Cost of contract revenue as a percentage of contract revenue increased
to 89.3% for the first quarter of 1998 from 88.5% for the first quarter
of 1997. The increased contribution from higher revenue was offset by
a higher level of costs arributable to the Company's telecommunication
fraud control market initiative.
Cost of goods as a percentage of product sales for the first quarter of
1998 was 74.7%, down from 84.3% for the first quarter of 1997. The
significant decrease in the cost of goods percentage was principally
the result of the substantial increase in production levels for certain
key customers, as mentioned above, without a corresponding increase in
overhead costs.
Selling, engineering and administrative expenses increased $1,000,000
or 30.2%, from 1997 due to increased selling and marketing costs
associated with the Company's developing telecommunications fraud
control business as well as administrative costs to support overall
revenue growth. These expenses represent 10.0% of revenue for both
years.
Interest expense, net was $343,000 for the first quarter of 1998
compared to $205,000 for the same period in 1997. This increase
resulted from a higher level of borrowing during the first quarter of
1998 which was required to support increased working capital
requirements attributable to the Company's substantial revenue growth
as well as delays in billing of certain government customers. Billing
and collections are expected to improve during the second and third
quarter of 1998.
The Company's effective income tax rate for the first quarter of 1998
was 41.9% compared to 41.7% in 1997. The Company accounts for income
taxes in accordance with 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 government and state
businesses, and capital expenditures. At March 31, 1998, the Company
had $6,850,000 available under its working capital lines of credit as
well as an additional $15,000,000 of credit available for potential
acquisitions. The Company believes that its liquid assets, cash flow
from operations and available bank lines of credit will satisfy its
operating and capital requirements for the foreseeable future.
The Company's cash, and cash equivalents increased by $1,566,000 during
the first quarter of 1998. Receivables increased $11,540,000 to
$28,937,000 at March 31, 1998 from $17,397,000 at December 31, 1997
while unbilled expenditures and fees on contracts in progress increased
$3,276,000 to $35,451,000 from $32,175,000 at December 31, 1997. The
increase in billed receivables was due to the final billing of retained
costs and fees on several large fixed-price contracts as well as
invoicing on various other contracts that had been delayed early in the
quarter. These delays are not an indication of contractual or collection
problems. The March 1998 billed and unbilled receivables balance is
comparable to the December 1997 balance when measured in terms of day's
sales.
The Company's capital expenditures during the first quarter of 1998 were
$961,000, consisting principally of computer equipment.
Year 2000
The Company has established a steering committee to coordinate the
identification, evaluation and implementation of changes to its entire
computer infrastructure necessary to achieve year 2000 data conversion
with no disruption to its business operations or customers. The Company
is also communicating with its suppliers and others with whom it does
business to coordinate year 2000 conversions. These actions are
necessary to ensure that the systems and applications the Company
utilizes will recognize and process year 2000 and beyond data. The cost
of compliance and its effect on the Company's future results of operations
has not yet been determined.
Impact of Inflation and Changing Prices
Overall, inflation has not had a material impact on the Company's
operations. The terms of the Company's Defense contract, which accounted
for approximately 66% of the Company's revenues in 1997, are generally for
one year and include salary increase factors for future years, thus
reducing the potential impact of inflation on the Company.
Forward Looking Information
This report includes certain forward-looking statements about the Company's
business including the effect of federal and state budgets on the Company's
sales, response to the Company's product and services offerings, growth in
revenues, capital spending, research and development spending and customer
mix. 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 31,1997, 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 of obtaining 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 operates 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
quarterly 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: May 13, 1998 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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