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, 1999.
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 May 7, 1999 was 7,353,590 shares.
DYNAMICS RESEARCH CORPORATION
INDEX
Page
Part I Financial Information Number
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1999 and December 31, 1998 . . . . . . 3
Consolidated Statements of Income -
Three Months Ended March 31, 1999 and
March 31, 1998 . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 1999 and
March 31, 1998 . . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . 6
Item 2. Management's Discussion and Analysis
Financial Condition and Results of Operations . . 8
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K . . . . . . . 12
Signature . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
PART I. FINANCIAL INFORMATION
DYNAMICS RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars except share data)
(unaudited)
ASSETS March 31, 1999 December 31, 1998
CURRENT ASSETS:
Cash and cash equivalents $ 178 $ 97
Receivables, less allowances of $318
in 1999 and $316 in 1998 29,865 33,016
Unbilled expenditures and fees
on contracts in process 35,138 32,169
Inventories 2,471 2,647
Refundable income taxes 9 9
Prepaid expenses and
other current assets 1,099 958
Total current assets 68,760 68,896
Property, plant and equipment, at cost
Land 1,126 1,126
Building 7,774 7,774
Machinery and equipment 42,900 42,271
Less accumulated depreciation
and amortization (34,294) (32,742)
Net property, plant and equipment 17,506 18,429
Other non-current assets 1,111 742
Total assets $ 87,377 $ 88,067
LIABILITIES AND SHAREHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts and drafts payable $ 9,673 $ 10,300
Accrued payroll and employee benefits 9,631 7,782
Other accrued expenses 2,736 2,630
Accrued and current deferred
income taxes 7,481 7,189
Net liabilities of
discontinued operations 2,292 1,772
Total current liabilities 31,813 29,673
Long-term debt 22,850 26,800
Deferred income taxes 345 348
SHAREHOLDERS' INVESTMENT:
Preferred stock, par value $.10 per share
5,000,000 shares authorized, none issued
Common stock, par value $.10 per share -
Authorized - 30,000,000 shares
Issued - 8,733,016 shares in 1999
and 8,733,016 in 1998 873 873
Less: Treasury stock - 1,379,426 in
1999 and 1,363,826 in 1998,
at par value (138) (136)
Capital in excess of par value 27,417 27,474
Retained earnings 4,217 3,035
Total shareholders' investment 32,369 31,246
Total liabilities and
shareholders' investment $ 87,377 $ 88,067
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, 1999 March 31, 1998
Revenue $ 46,549 $ 41,988
Costs and expenses:
Cost of revenue 39,890 35,889
Selling, engineering and
administrative expenses 4,096 3,691
Total costs and expenses 43,986 39,580
Operating income 2,563 2,408
Interest expense, net 526 343
Income from continuing operations before
provision for income taxes 2,037 2,065
Provision for income taxes 855 862
Income from continuing operations 1,182 1,203
Loss from discontinued operations,
net of applicable tax benefit
of $400 in 1998 - 566
Net income $ 1,182 $ 637
Per share data
Per common share - basic
Income from continuing operations* $ .16 $ .16
Net income (loss)* $ .16 $ .08
Per common share - diluted
Income from continuing operations* $ .16 $ .15
Net income (loss)* $ .16 $ .08
Weighted average common
shares outstanding - Basic * 7,365,290 7,558,686
Weighted average common
shares outstanding - Diluted * 7,441,150 7,900,324
The accompanying notes are an integral part of these consolidated financial
statements.
* Retroactively adjusted for 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, 1999 March 31, 1998
Cash provided by operations:
Net income $ 1,182 $ 637
Adjustments to reconcile net income to cash
Provided by operating activities:
Loss from discontinued operations - 566
Depreciation and amortization 1,552 1,762
Deferred income taxes (3) (7)
Provision for receivable reserves 2 6
2,733 2,964
Cash provided by (used for) working capital:
Receivables 3,149 (11,231)
Unbilled expenditures and fees
on contracts in process (2,969) (3,875)
Inventories 176 753
Refundable income taxes - 2
Prepaid expenses and other current assets (141) 26
Accounts and drafts payable (627) 2,696
Accrued payroll and employee benefits 1,849 308
Other accrued expenses 106 (2,452)
Accrued and current deferred income taxes 292 638
1,835 (13,135)
Net cash provided by (used for)
continuing operations 4,568 (10,171)
Net cash provided by (used for)
discontinued operations 528 (375)
Cash provided by (used for)
operating activities 5,096 (10,546)
Cash used for investing activities:
Additions to property and equipment
related to continuing operations, net (629) (888)
Additions to property and equipment
related to discontinued operations, net (8) (73)
Investments (369) -
Net cash used for investing activities: (1,006) (961)
Cash provided by (used for)
financing activities:
Borrowing (payments) under revolving
long-term credit agreement, net (3,950) 13,150
Proceeds from the exercise of stock options - 145
Purchase of treasury shares (59) (222)
Net cash provided by (used for)
financing activities (4,009) 13,073
Net increase (decrease) in cash
and cash equivalents 81 1,566
Cash and cash equivalents at the
beginning of the year 97 542
Cash and cash equivalents at the
end of the period $ 178 $ 2,108
Supplemental disclosures of cash
flow information:
Cash paid during the quarterly period for:
Interest $ 440 $ 235
Income taxes $ 164 $ 62
The accompanying notes are an integral part of these consolidated financial
statements.
DYNAMICS RESEARCH CORPORATION
Notes to Consolidated Financial Statements
Note 1. Basis of Presentation
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.
Note 2. Inventories
Inventories are comprised of the following (in thousands of dollars):
March 31, 1999 December 31, 1998
Work in process $ 512 $ 475
Raw materials and subassemblies 1,959 2,172
Total inventories $ 2,471 $ 2,647
Note 3. Discontinued Operations
In the fourth quarter of 1998, the Company adopted a plan to sell the
telecommunications fraud control business unit. Accordingly, the revenues,
costs, expenses, assets and liabilities and cash flows of the
telecommunications business have been excluded from the respective captions
in the Consolidated Statements of Income, Consolidated Balance Sheets and
Consolidated Statements of Cash Flows and have been reported as "Loss from
discontinued operations, net of applicable income taxes," as "Net
liabilities of discontinued operations," and as "Net cash used for
discontinued operations" for all periods presented. The results of
discontinued operations do not reflect any interest expense or any allocation
of corporate general and administrative expense. Revenues for the
telecommunications business unit for the quarters ended March 31, 1999 and
1998 were $455,000 and $967,000, respectively. Net operating losses of the
telecommunications business were $703,000 and $969,000 for the quarters ended
March 31, 1999 and 1998, respectively. The results for the quarter ended
March 31, 1999 have been charged against the accrual established at the date
the plan of disposal was adopted.
Note 4. Segment Information.
Identifiable assets by business segment include both assets directly
identified with those operations and an allocable share of jointly used
assets.
Summarized financial information by business segment for March 31, 1999 and
March 31, 1998 are as follows:
Identifiable
Systems Continuing
and Metri- Corpor- Operations
Services Encoder graphic Other ate Total
March 31, 1999
Net sales (1) $39,759 $3,490 $3,300 - - $46,549
Operating profit(loss) 1,433 (41) 1,171 - - 2,563
Identifiable assets at
March 31, 1999 65,558 5,560 4,533 - 11,726 87,377
March 31, 1998
Net sales (1) 34,106 4,882 2,999 1 - 41,988
Operating profit(loss) 1,469 306 1,044 (411) - 2,408
Identifiable assets at
March 31, 1998 65,346 6,963 6,063 214 14,054 92,640
(1) Net sales and operating profit are presented after the elimination of
intersegment transactions which are not material.
Item 2. Management Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations
Three Months Ended March 31, 1999 Compared to
Three Months Ended March 31, 1998
Total revenues increased 11% to $46,549,000 in the first quarter of 1999
compared with $41,988,000 in the first quarter of 1998. Contract revenue for
the Systems and Services segment increased 17% to $39,759,000 in the first
quarter of 1999 compared with $34,106,000 in the first quarter of 1998. The
growth was principally attributable to broad-based growth in the Company's
defense business as well as increased revenue from three major state
contracts and other information technology services.
First quarter 1999 Metrigraphic Division sales increased 10% to $3,300,000
compared to $2,999,000 in the same period in 1998. This increase was
primarily related to higher sales of electroformed components across a broad
range of customers, including one in the medical products industry, offset by
reduced sales to a customer in the inkjet printer market. The Company also
had higher sales of prototype electroformed components to a number of
customers in the first quarter of 1999 compared to the same period in 1998.
Encoder Division sales decreased 29% to $3,490,000 in 1999 from $4,882,000
for the same period in 1998. The decrease primarily relates to reductions in
sales of custom encoders to a customer in the automotive industry as well as
decreased sales to certain of the Company's customers who have significant
sales in Asian markets.
Cost of revenue increased 11% to $39,890,000 in the first quarter of 1999,
compared with $35,889,000 in the first quarter of 1998, commensurate with the
increase in revenues. Cost of revenue as a percentage of revenue was 86% and
85% in the first quarters of 1999 and 1998, respectively.
Selling, engineering and administrative expenses increased 11% in the first
quarter of 1999 to $4,096,000 compared to $3,691,000 in the first quarter of
1998. General corporate staffing-related and other administrative support
expenses were increased to support the higher business base.
Operating income of the Systems and Services segment as a percentage of
segment revenue decreased to 3.6% in the first quarter of 1999 compared to
4.3% in the first quarter of 1998. This decrease is attributable to higher
expenses related to technology and business development efforts in the first
quarter of 1999 compared to the same period in 1998.
The Encoder segment reported an operating loss of $41,000 in the first
quarter of 1999 compared to operating income of $306,000 in the first quarter
of 1998. The decrease in operating profit is primarily the result of lower
gross profit contributions attributable to the decrease in sales and the
increase in selling, engineering and administrative expenses, discussed
above.
In the fourth quarter of 1998, the Company adopted a plan to sell the
telecommunications fraud control business unit. Accordingly, 1999 results
from the telecommunications fraud control business unit are charged to the
loss on disposal accrued at the date the plan was adopted. First quarter
1998 results have been restated to conform to this presentation. The results
of discontinued operations do not reflect any interest expense or any
allocation of management expense. Revenues for the telecommunications
business unit for the quarters ended March 31, 1999 and 1998 were $455,000
and $967,000, respectively. Net operating losses of the telecommunications
business were $703,000 and $969,000 for the quarters ended March 31, 1999 and
1998, respectively. These amounts are not included in sales or operating
income as reported in the Consolidated Statements of Income.
In December 1998, DRC entered into an agreement with Empresa, Inc.(Empresa),
formerly Electronic Press Services Group, Inc., to acquire an interest in
Empresa in exchange for a perpetual license to VisualMagic? software
development technology, cash and certain other assets. The terms of the
agreement provide for the Company to make its cash investment in three
installments: one at the closing in December 1998, the second in February
1999, with the third expected to be made in May 1999, subject to certain
performance requirements. First quarter 1999 and 1998 results include $0 and
$411,000 of costs related to VisualMagic development.
Net interest expense increased to $526,000 in the first quarter of 1999
compared with $343,000 in the first quarter of 1998. Revenue growth and
working capital requirements for certain state government customers in the
first quarter of 1999 resulted in higher average borrowings. The weighted
average interest rate on the Company's borrowings was 7.7% and 6.9% in the
first quarter of 1999 and 1998, respectively.
The Company's effective income tax rate for the first quarter of 1999 and
1998 was 42%. The Company accounts for income taxes using the liability
method as set forth in Statement of Financial Accounting Standards No. 109
(SFAS 109).
Liquidity and Capital Resources
During the first three months of 1999, the Company's primary source
of liquidity has been operating cash flow and its revolving credit
facility. Working capital requirements related to the Company's
revenue growth and state government contracts were funded with
borrowings under the Company's credit facility. Cash generated from
operations during the first quarter of 1999 was used to reduce
outstanding debt $3,950,000 to $22,850,000 at March 31, 1999.
Working capital decreased to $36,947,000 at March 31, 1999 from
$39,223,000 at December 31, 1998. This decrease was primarily
attributable to an increase accrued payroll and employee benefits,
and increases in accrued income taxes. Capital spending for
continuing operations during the first three months of 1999 was
$629,000, consisting principally of office computer equipment. The
Company spent $59,000 during the first three months of 1999 for the
purchase of treasury shares compared with $222,000 during the first
three months of 1998.
At March 31, 1999, $17,150,000 was available for working capital purposes
under the Company's revolving credit facility. The Company believes that its
current 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 1999. The Company does not have any significant capital
commitments at March 31, 1999 outside the ordinary course of business.
Year 2000 Disclosure
Many existing computer programs use only two digits, rather than four, to
represent a year. Date-sensitive software or hardware written or developed
in this fashion may not be able to distinguish between 1900 and 2000, and
programs written in this manner that perform arithmetic operations,
comparisons or sorting of date fields may yield incorrect results when
processing a Year 2000 date. This Year 2000 problem could potentially cause
system failures or miscalculations that could disrupt operations.
The Company's State of Readiness
The Company has completed the process of identifying and is now remediating
Year 2000 issues in four areas: (i) information technology ("IT") and
financial systems, (ii) non-IT systems, (iii) third-party vendors and
suppliers and (iv) systems it has implemented and maintains for various
customers. The Company believes its IT and non-IT systems will be Year 2000
compliant by the end of 1999.
The Company has completed a review of its financial and other significant IT
systems and is in the process of remediating identified material Year 2000
problems. The primary required hardware and operating system platform
upgrade was completed in January 1999. Necessary application upgrades or
remediation and testing are expected to be completed by mid-1999. The
Company also conducted a review of all its other computers in 1998 (including
desktops, servers and mainframes) and has addressed all material Year 2000
problems. All of the Company's computer and equipment vendors have been
contacted to verify Year 2000 compliance. Based on their responses, all
products requiring replacement or upgrade are expected to be Year 2000
compliant by the end of 1999. In the case of third party licensed commercial
off-the-shelf products, the Company has determined that they are either Year
2000 compliant or the licensor has released a compliant version that the
Company will migrate to by mid-1999. While the Company expects that all
financial and significant IT-related systems will be Year 2000 compliant by
mid-1999, there can be no assurance that corrective actions will be completed
in a timely manner.
The Company has completed a full review of all process control components,
including safety equipment, in manufacturing and production facilities.
Currently, the Company is in the process of upgrading or replacing certain
components of the phone, security, building access, HVAC and lighting
systems, which is expected to be completed in early 1999. The Company
anticipates that all other process control components will be Year 2000
compliant by mid-1999. However, there can be no assurance that such upgrades
and replacements will occur in a timely manner.
The Company has received Year 2000 compliance information from its employee
benefit service and other critical suppliers. The Company continues to
monitor its major power, energy and communications service suppliers. The
Company has contacted its suppliers of financial services regarding computer
interface changes and has requested the status of their Year 2000 programs,
if this information is not readily available on their web-sites. Any
necessary interface upgrades are expected to be completed by mid-1999,
although the completion of such upgrades in a timely manner depends upon the
readiness and willingness of suppliers to cooperate and provide this
information in a timely manner, and cannot be assured.
The Company completed its Year 2000 remediation, validation testing and
implementation activities for systems it had previously implemented and has
continued to maintain for various customers in early 1999. The Company
previously developed and marketed commercial off-the-shelf products which are
currently Year 2000 compliant.
The Company's Year 2000 Risk
Based on the efforts described above, the Company currently believes that its
systems will be Year 2000 compliant in a timely manner. The Company has
completed the process of identifying Year 2000 issues in its IT and non-IT
systems and expects to complete any remediation efforts by mid-1999.
However, there can be no assurance that all Year 2000 problems will be
successfully identified, or that the necessary corrective actions will be
completed in a timely manner. Failure to successfully identify and remediate
Year 2000 problems in critical systems in a timely manner could have a
material adverse effect on the Company's results of operations, financial
position or cash flow.
In addition, the Company believes that there is risk relating to significant
service suppliers' failure to remediate their Year 2000 issues in a timely
manner. Although the Company is communicating with its suppliers regarding
their Year 2000 compliance, the Company does not know whether these
suppliers' systems will be Year 2000 compliant in a timely manner. If one or
more significant suppliers are not Year 2000 compliant, this could have a
material adverse effect on the Company's results of operations, financial
position or cash flow.
The Company's Contingency Plans
The Company plans by mid-year 1999 to develop contingency plans to be
implemented in the event planned solutions prove ineffective in solving Year
2000 compliance. If it were to become necessary for the Company to implement
a contingency plan, it is uncertain whether such plan would succeed in
avoiding a Year 2000 issue which may otherwise have a material adverse effect
on the Company's results of operations, financial position or cash flow.
The Company's Costs of Year 2000 Remediation
The Company anticipates the total identified cost of its Year 2000 effort
will be between $430,000 and $475,000, of which it has expensed approximately
$237,000 as of April 30, 1999. The estimate excludes labor costs which
predated the formal corporate Year 2000 effort and certain current labor
costs at the divisional level which would be difficult to track. The total
cost estimate includes estimated and actual amounts to remediate or replace
certain software, routers, security chips and any other items or systems
identified in the Year 2000 effort, consulting fees for a Year 2000 review,
and approximately $280,000 of redeployed labor expense. The total estimated
cost of redeployed labor within the corporate information systems department
is equal to approximately 9% of that department's total maintenance labor
budget through the end of the Year 2000 effort. There can be no assurance
that the costs associated with the Year 2000 problem will not be greater than
anticipated. The Company has deferred a financial and project accounting
system upgrade due to its Year 2000 efforts, but does not believe such
deferral will have a material adverse effect on the Company's business.
Forward-Looking Information
This report includes certain forward-looking statements about the Company's
business including developments and intentions relating to strategic
investment programs, cash flow requirements, research and development
spending, cash flow expectations and Year 2000 readiness. 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,
1998, include ability to consummate strategic transactions related to the
Company's commercial business investments, 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, 1999 By: /s/ Douglas R. Potter
Douglas R. Potter
Vice President of Finance
and Chief Financial Officer
(Principal financial and
accounting officer)
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 178
<SECURITIES> 0
<RECEIVABLES> 65,003
<ALLOWANCES> 0
<INVENTORY> 2,471
<CURRENT-ASSETS> 68,760
<PP&E> 51,800
<DEPRECIATION> 34,294
<TOTAL-ASSETS> 87,377
<CURRENT-LIABILITIES> 31,813
<BONDS> 22,850
0
0
<COMMON> 873
<OTHER-SE> 31,496
<TOTAL-LIABILITY-AND-EQUITY> 87,377
<SALES> 46,549
<TOTAL-REVENUES> 46,549
<CGS> 39,890
<TOTAL-COSTS> 39,890
<OTHER-EXPENSES> 4,096
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 526
<INCOME-PRETAX> 2,037
<INCOME-TAX> 855
<INCOME-CONTINUING> 1,182
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,182
<EPS-PRIMARY> .16
<EPS-DILUTED> .16
</TABLE>
