SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
EXCHANGE ACT OF 1934
For the quarter Commission File
ended: September 30, 1996 Number: 000-23966
BDM International, Inc.
(Exact name of registrant as specified in its charter)
Delaware 54-1561881
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1501 BDM Way, McLean, Virginia 22102-3204
(Address of principal executive office) (Zip Code)
Registrant's telephone number
including area code: 703-848-5000
Not Applicable
(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
As of the close of business on October 31, 1996, the registrant had outstanding
14,331,193 shares of Common Stock, par value $.01 per share.
<PAGE>
CONTENTS
Part I. Financial Information
Item 1. Financial Statements.......................................2
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................8
Part II. Other Information
Item 4. Submission of Matters to a Vote of Securities Holders.....15
Item 6. Exhibits and Reports on Form 8-K..........................15
<PAGE>
PART I
Item 1. Financial Statements.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
BDM International, Inc.:
Consolidated Balance Sheets as of
September 30, 1996 (Unaudited) and December 31, 1995.........3
Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1996
and 1995 (Unaudited) ........................................4
Condensed Consolidated Statements of Cash Flow for the
Nine Months Ended September 30, 1996 and 1995 (Unaudited) ...5
Notes to Consolidated Financial Statements (Unaudited) ...............6
<PAGE>
<TABLE>
<CAPTION>
BDM INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30, December 31,
1996 1995
----------------- ----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 71,240 $ 69,143
Accounts receivable, net 211,730 219,354
Prepaid expenses and other 4,305 6,157
----------------- ----------------
Total current assets 287,275 294,654
Property and equipment, net 47,245 45,722
Intangible assets, net 22,613 9,615
Deposits and other 6,206 8,580
Equity in and advances to affiliates 6,373 5,222
----------------- ----------------
Total assets $ 369,712 $ 363,793
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 138,148 $ 168,253
Debt currently payable 2,826 449
Income taxes payable 421 3,465
Deferred tax liability 8,779 6,363
----------------- ----------------
Total current liabilities 150,174 178,530
Deferred tax liability 4,369 3,638
Long term debt 6,918 25,900
Severance and other 15,903 12,099
Minority interest 28,195 28,157
----------------- ----------------
Total liabilities 205,559 248,324
----------------- ----------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value;
500,000 shares authorized, none issued
- -
Common stock, $.01 par value; 14,283,366 and 12,962,342 shares
issued and outstanding at June 30, 1996 and December 31, 1995,
respectively 143 130
Additional paid in capital 101,833 68,535
Retained earnings 62,751 46,790
Deferred compensation (1,728) (395)
Cumulative translation adjustment 1,154 409
----------------- ----------------
Total stockholders' equity 164,153 115,469
----------------- ----------------
Total liabilities and stockholders' equity $ 369,712 $ 363,793
================= ================
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BDM INTERNATIONAL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except earnings per share data)
(unaudited)
For the three months For the nine months
ended September 30, ended September 30,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 246,766 $ 215,900 $ 723,727 $ 620,864
----------- ------------ ---------- ------------
Cost of sales 205,133 83,272 605,359 519,007
Selling, general and administrative 23,454 19,577 67,223 59,814
Depreciation, amortization and other 4,474 3,712 13,068 14,011
Provision for restructuring 5,760 -- 5,760 --
------------- ------------ ---------- ------------
Operating profit 7,945 9,339 32,317 28,032
Interest (income) expense, net (452) (360) (1,465) 2,125
Equity in earnings of affiliates (374) (436) (1,290) (1,271)
Minority interest 1,818 973 6,997 3,986
-------------- ------------- ------------- -------------
Income before income taxes 6,953 9,162 28,075 23,192
Provision for income taxes 3,053 3,871 12,114 10,698
-------------- ------------- ------------ --------------
Net income $ 3,900 $ 5,291 $ 15,961 $ 12,494
============== ============= ============= ==============
Earnings per common and
common equivalent share:
Net income per common share $ 0.26 $ 0.40 $ 1.10 $ 1.11
=============== ============= =========== ==============
Weighted average common
shares outstanding 15,096 13,376 14,495 11,226
============== ============= =========== =============
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
BDM INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
For the nine months ended September 30, 1996 and 1995
(unaudited, in thousands)
For the nine months ended
September 30,
1996 1995
-------------- -----------------
<S> <C> <C>
Cash flow from operating activities:
Net cash provided by operating activities $ 27,569 $ 38,663
-------------- -----------------
Cash flow from investing activities:
Additions to property and equipment (12,218) (12,724)
Purchase of businesses, net of cash acquired (8,695) --
Reimbursement of acquisition costs -- 1,143
Contributions from minority owners -- 1,862
Distributions from unconsolidated affiliates 1,886 1,050
Investment in unconsolidated affiliates (2,358) (1,576)
------------- -----------------
Net cash used in investing activities (21,385) (10,245)
------------- -----------------
Cash flow from financing activities:
Net repayments of revolving borrowings (26,203) (76,341)
Repayment of acquisition debt -- --
Repayment of debt (1,954) (3,700)
Proceeds from issuance of common stock 28,363 52,677
Payment of dividend (2,013) --
Acquisition of treasury stock -- (1,097)
------------- -----------------
Net cash used in financing activities (1,807) (28,461)
------------- -----------------
Effect of exchange rate changes on cash and cash equivalents (2,280) 3,458
------------- -----------------
Net increase in cash and cash equivalents 2,097 3,415
Cash and cash equivalents, beginning of period 69,143 45,314
------------- -----------------
Cash and cash equivalents, end of period $ 71,240 $ 48,729
============= =================
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
<PAGE>
BDM INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) General
-------
The accompanying financial statements of BDM International, Inc. and
subsidiaries (BDM or the Company) as of September 30, 1996 and for interim
periods ended September 30, 1996 and 1995, are unaudited and have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission
and does not include all disclosures required by generally accepted accounting
principles. The balance sheet as of December 31, 1995, was derived from the
Company's audited consolidated financial statements. Certain other information
and disclosures included in the Company's annual consolidated financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to the above referenced rules and
regulations. It is suggested that these financial statements be read in
conjunction with the consolidated financial statements and the notes thereto
included in the Company's latest annual report to the Securities and Exchange
Commission on Form 10-K.
The accompanying consolidated financial statements reflect all
adjustments and reclassifications that, in the opinion of management, are
necessary for a fair presentation. All such adjustments and reclassifications
have been deemed to be of a recurring nature, except for the provision for
restructuring in the third quarter of 1996.
The Company announced a new alignment of its business operations in the
third quarter of 1996, described in management's discussion and analysis. The
new business alignment resulted in a one-time, pre-tax restructuring charge of
$5.8 million to third quarter earnings, which included a write-down of $3.1
million of the net investment in the Company's environmental subsidiary,
severance costs totaling $1.8 million for approximately 40 employees across the
Company, and the accrual of approximately $0.9 million for certain facility
expenses. The write-down at the Company's environmental subsidiary affected
primarily goodwill and fixed assets, and was determined based on analyses of
future cash flows expected from that area of business after changes in strategic
direction resulting from the business realignment. Anticipated future cost
savings from the changes are expected to be reinvested in human capital and a
research and development program to support future growth.
(2) Income Taxes
------------
The Company uses the estimated annual effective rate method for interim
income tax purposes. The Company also recognizes an expense for U.S. income
taxes on undistributed earnings of its foreign subsidiaries as though the
earnings had been distributed.
Excluding the effect of the restructuring charge, the Company's
effective income tax rate for the three months ended September 30, 1996 was 43%.
The difference between the combined statutory federal and state income tax rate
of 42% and the Company's pro forma effective income tax rate of 43% for the nine
months ended September 30, 1996, is primarily attributable to goodwill
amortization which is not deductible for federal income tax purposes. The
acquisitions in February contributed to an increase in the effective income tax
rate. The difference between the combined statutory federal and state income tax
rate of 41% and the Company's actual effective income tax rate of 46% for the
nine months ended September 30, 1995, is primarily attributable to a charge of
$1.6 million recognized in the first quarter of 1995 to reflect management's
estimate of the recoverability of unamortized goodwill generated in an earlier
business acquisition. This charge, as well as the majority of the Company's
other goodwill, is not deductible for federal income tax purposes, thus
resulting in the higher effective tax rate.
(3) Earnings Per Share
------------------
Net income per common share is net income divided by the weighted
average number of common shares and common share equivalents outstanding during
the period. The Company's common share equivalents consist entirely of stock
options.
<PAGE>
BDM INTERNATIONAL, INC.
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(4) Capital stock transactions
--------------------------
On March 27, 1996, the Company completed a secondary offering of common
stock to the public in which 3,220,000 shares of Common Stock were sold at
$36.50 per share. Of the total 3,220,000 shares sold, 450,000 were primary
shares and the remaining 2,770,000 shares were sold by certain of the Company's
shareholders, including 400,000 of Class B shares, which were converted to
Common Stock immediately prior to the offering. The net proceeds of $15.3
million were used for general corporate purposes and to finance future
acquisitions.
The remaining shares of stock available under the 1995 Employee Stock
Purchase Program were purchased by employees during the months January to April
1996. In May a successor plan (the 1996 Plan) was established which made
available 1,000,000 shares of BDM common stock, with a maximum of 500,000 shares
available for purchase in any 12-month period. During the offering period of May
1, 1996 to October 31, 1996, the purchase price is 85% of the closing price of
BDM common stock on May 1, 1996 (the base price), or 85% of the closing price at
the end of each month, whichever is less. The base price will be reset every six
months to 85% of the closing price on the first trading day of the next offering
period. The new 1996 Plan includes a 90-day holding period during which
employees may not sell shares purchased under the 1996 Plan. During the nine
months ended September 30, 1996, the Company received $10 million from stock
purchased under these two plans.
(5) Acquisitions
------------
On February 20, 1996, the Company completed the acquisition of three
affiliated companies - CW Systems, Inc., IG Systems, Inc. and Melco Systems,
Inc. - for $18.5 million. The acquired companies specialize in providing
information technology systems and services to large commercial organizations in
various industries, as well as to various state government agencies. The
acquisition of these companies has been accounted for as a purchase, and the
results of their operations have been included in the Company's consolidated
statements of operations since the date of acquisition. Of the total purchase
price, $8.8 million was paid out of existing cash balances and $9.7 million was
financed through the issuance of term notes payable to the previous owners. The
notes are payable over two years and bear an interest rate equal to the
prevailing yield rate on twenty-six week United States Treasury Bills,
determined every six months (5.3% as of September 30, 1996). Interest is payable
on a quarterly basis. Resulting goodwill totaled $16 million and will be
amortized on a straight-line basis over 15 years. Other intangible assets,
relating to non-compete agreements, totaled $1.4 million and will be amortized
over two years.
As discussed in the Other Matters section of Managements' Discussion
and Analysis, the Company announced subsequent to quarter end the acquisition of
RGTI Systems Software (RGTI), a company specializing in warehouse management
systems.
(6) Legal Matters
-------------
As discussed in the Other Matters section of Managements' Discussion
and Analysis, the Company has been informed that a civil "qui tam" lawsuit has
been filed against the Company. The Company does not possess sufficient
information to determine the amount of any loss as a consequence of the
litigation. Accordingly, the Company has not been able to identify the amount of
any loss contingency.
<PAGE>
Item 2. Managements' Discussion and Analysis
- ------- ------------------------------------
OVERVIEW
The Company announced a new alignment of its business operations during
the third quarter of 1996, consisting of strategic business and development
units designed to position the Company for long-term expansion and growth. The
new alignment resulted in a one-time pre-tax restructuring charge of $5.8
million ($0.22 per share after tax) to third quarter earnings.
The Company continued to report significant growth in revenue and
profitability, excluding the restructuring charge, for the third quarter and
nine months of 1996. For the three months ended September 30, 1996, revenue grew
14%, pro forma net income grew 37%, and pro forma earnings per share increased
20% (to $0.48 per share), compared to the same period in 1995. For the nine
months ended September 30, 1996, the Company experienced growth in revenue of
17%, pro forma net income of 54%, and pro forma earnings per share of 18% (to
$1.32 per share), compared to the same period in 1995. This growth was despite
the impact of exchange rate changes which masked real growth in the Company's
European subsidiary, as the dollar strengthened roughly 4% against the German
mark in the third quarter of 1996 compared to the same period in 1995. Including
the restructuring charge, the Company reported net income of $3.9 million and
$16.0 million for the three and nine month periods ended September 30, 1996,
respectively. Reported earnings per share for the three and nine month periods
were $0.26 and $1.09, respectively.
Contract backlog increased to an all-time high of $2.3 billion as of
September 30, 1996, reflecting the large volume of proposal activity and
subsequent awards experienced this year. As a result of awards of almost $1
billion in the third quarter of 1996, proposal backlog decreased to $1.2 billion
as of September 30, 1996.
REVENUE
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
(in millions, except percentages) (in millions, except percentages)
1996 % 1995 % 1996 % 1995 %
---- - ---- - ---- - ---- -
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Client Category
- ---------------
U.S. Department of Defense $91.9 37% $76.9 36% $ 278.3 38% $221.0 36%
International Defense 61.2 25% 50.5 23% 177.6 26% 152.1 24%
Civil Government 53.8 22% 56.3 26% 154.8 20% 155.3 25%
Commercial 39.9 16% 32.2 15% 113.0 16% 92.5 15%
---- --- ---- --- ----- --- ---- ---
Total $ 246.8 100% $215.9 100% $ 723.7 100% $ 620.9 100%
======= ==== ======= ==== ======= ==== ======= ====
Services Provided
- -----------------
Systems & Software Integration $92.7 38% $76.8 36% $262.1 36% $ 200.6 32%
Computer & Technical Services 120.9 49% 108.5 50% 370.8 51% 339.7 55%
Enterprise Management & Operations 33.2 14% 30.6 14% 90.8 13% 80.6 13%
---- --- ---- --- ---- --- ---- ---
Total $ 246.8 100% $ 215.9 100% $ 723.7 100% $ 620.9 100%
======= ==== ======= ==== ======= ==== ======= ====
Subsidiary
- ----------
BDM Federal $132.7 54% $115.9 53% $390.8 54% $329.6 53%
BDM Technologies 24.0 10% 14.5 7% 62.7 8% 41.3 7%
BDM Europe 49.8 20% 53.5 25% 150.1 21% 149.0 24%
Vinnell Corporation 40.3 16% 32.0 15% 120.1 17% 101.0 16%
---- --- ---- --- ----- --- ----- ---
Total $ 246.8 100% $ 215.9 100% $723.7 100% $ 620.9 100%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
<PAGE>
Revenue by Client Category
--------------------------
U.S. Department of Defense (DOD): Revenue derived from the U.S.
Department of Defense (DOD) increased 20% and 26% for the three and
nine month periods ended September 30, 1996, compared to the same
periods in 1995. The primary contributor to this growth was the
Company's systems and software integration work (primarily DEIS), as
well as growth in defense test and evaluation and technical support for
ballistic missile defense and other military programs. This was
partially offset by lower hardware revenue earned from a computer
consolidation and modernization contract. This trend toward lower
material sales is expected to continue in future periods.
International Defense: Revenue from international defense business
increased 21% and 17% for the three and nine month periods ended
September 30, 1996, compared to the same periods in 1995, due to higher
revenue earned on BDM Federal's contract with the Royal Saudi Air Force
and on Vinnell's contract with the Royal Saudi Land Forces. Vinnell's
contract with the Saudi Arabian National Guard also contributed to
revenue growth in the third quarter of 1996. Revenue on this contract
for the nine month period in 1996, however, was lower compared to the
same period in 1995, partially offsetting the increases discussed
above. Exchange rate fluctuations impacted the growth of the Company's
European activities as a result of a stronger U.S. dollar. Excluding
the impact of changes in the exchange rate, international defense
business would have increased by 23% and 19% for the three and nine
month periods ended September 30, 1996, compared to the same periods in
1995.
Civil Government: Revenue from civil government contracts was
essentially flat for the three and nine months ended September 30,
1996, compared to the same periods in 1995, but decreased as a
percentage of total revenue due to the growth in other sectors of the
Company's business. There are several factors driving these results.
Revenue would have increased modestly for the nine months ended
September 30, 1996, excluding the impact of changes in the German mark
in relation to the U.S. dollar, compared to the same periods in 1995.
The Company has experienced a decline in revenue generated from BDM's
environmental restoration and waste management programs for the
Department of Energy as a result of budget reductions. There was also a
decline in revenue generated from state government contracts. This
reflects the impact of the recently enacted Federal Welfare reform law
and the new block grant programs, as well as the Federal government's
decision to delay by two years the deadline by which states must have
federally certified information systems in place to manage and track
their child support enforcement programs. In addition, the Company has
experienced implementation difficulties on one of its state contracts.
The Company is currently in discussions with the client and a
resolution is expected in 1997. Until a resolution is reached, however,
the Company is not recognizing profit on the contract. Partially
offsetting the declines described above was an increase in revenue on
Vinnell's Job Corps contracts.
Commercial: The increase of 24% and 22% in commercial revenue for the
three and nine month periods ended September 30, 1996, reflects growth
of information technology services for various clients, including
clients obtained as a result of the acquisitions completed in late
February. This growth was also fueled by increases in revenue from
semiconductor integration, warehouse automation, reengineering, and
other consulting services. The international commercial business was
impacted by the aforementioned fluctuations in the German mark to U.S.
dollar exchange rate. Excluding the impact of the currency
fluctuations, commercial revenue would have increased by 27% and 25%
for the three and nine months ended September 30, 1996, compared to the
same periods in 1995.
<PAGE>
Revenue by Services Provided
----------------------------
Systems and Software Integration revenue increased 21% and 31%
for the three and nine months ended September 30, 1996, compared to the
same periods in 1995. This increase was driven by growth in BDM
Federal's DEIS contract with the Defense Information Systems Agency, as
well as work for a variety of commercial clients. The increase in
Computer and Technical Services revenue of 11% and 9% for the three and
nine month periods is a result of growth in a number of contracts
including the expansion of work for the Royal Saudi Land Forces, test
and evaluation programs, and technical support for ballistic missile
defense and other military programs. Vinnell's Job Corps contracts were
a major driver of the increase in Enterprise Management and Operations
revenue.
Revenue by Subsidiary
---------------------
Revenue at BDM Federal grew 12% and 18% for the three and nine
months ended September 30, 1996, compared to the same periods in 1995.
This increase reflects expanded work for a wide variety of clients,
most notably involving information technology services on the DEIS
contract, and also increased services and support in defense test and
evaluation, ballistic missile defense, and other military program
areas. This was offset somewhat by decreases in hardware revenue from a
contract with the U.S. Air Force and a decline in work for the U.S.
Department of Energy. The 66% and 52% revenue increases at BDM
Technologies for the three and nine month periods were due to growth in
its existing commercial information technology work and to the
acquisitions completed in February 1996. The modest increase in BDM
Europe's local currency revenue was masked by fluctuations in the
exchange rate of German mark to U.S. dollar. This real growth in local
currency reflected additional work performed for the German Ministry of
Defense and a variety of German civil government agencies. Vinnell's
revenue increased 26% and 19% for the three and nine month periods.
This increase was driven by its work for the Royal Saudi Land Forces
and additional Job Corps Center business. Vinnell's contract with the
Saudi Arabian National Guard also contributed to revenue growth in the
third quarter of 1996, although revenue on this contract has decreased
year-to-date.
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth selected financial data. The 1996
periods are presented using pro forma amounts which exclude the impact of the
restructuring charge:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
Pro Pro Pro Pro
Forma Forma Forma Forma
($ in millions) 1996 1996 1995 1996 1996 1995
--------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenue $246.9 100.0% 100.0% $723.7 100.0% 100.0%
Cost of Sales 205.1 83.1 84.9 605.4 83.7 83.6
Selling, general and administrative 23.3 9.5 9.1 67.0 9.3 9.6
Depreciation, amortization and other 4.5 1.8 1.7 13.1 1.8 2.3
--- --- --- ---- --- ---
Operating profit 13.9 5.6 4.3 38.2 5.3 4.5
Interest (income) expense, net (0.4) (0.2) (0.2) (1.5) (0.2) 0.4
Equity in earnings of affiliates (0.3) (0.1) (0.2) (1.3) (0.2) (0.2)
Minority interest 1.8 0.7 0.5 7.0 1.0 0.6
--- --- --- --- --- ---
Income before taxes 12.8 5.2 4.2 34.0 4.7 3.7
Provision for income taxes 5.6 2.3 1.8 14.7 2.0 1.7
--- --- --- ---- --- ---
Net income $ 7.2 2.9% 2.4% $ 19.3 2.7% 2.0%
Earnings per share $ 0.48 --- $ 0.40 $ 1.32 --- $ 1.11
</TABLE>
COST OF SALES
Cost of sales, which includes salaries, benefits, subcontractor
expenses, materials and overhead costs, decreased as a percentage of revenue for
the third quarter of 1996 compared to the same period in 1995, due to a higher
than expected recovery of indirect costs through contract revenue. Cost of sales
as a percentage of revenue remained stable for the nine month period as improved
indirect cost recovery was experienced in the third quarter of 1996, while the
1995 amount was offset by a one-time profit recognition from a Vinnell contract,
which was applicable to services provided since the inception of the contract in
1994, which lowered the 1995 cost of sales percentage.
SELLING, GENERAL AND ADMINISTRATIVE
The increase in selling, general and administrative (SG&A) expense as a
percentage of revenue for the three months ended September 30, 1996, compared to
the third quarter of 1995 reflects an increase in research and development costs
related to software development expenditures and marketing endeavors. These
investments are associated with the Company's Year 2000 efforts, computer
network security, customer care software, state child support and welfare
systems, and the enhancement of the MARC(TM) product. The increase also reflects
the inclusion of administrative expenses of the companies acquired in February
1996, as well as an increase at several subsidiaries in expenditures for
recruiting and training. SG&A decreased as a percentage of revenue for the nine
months ended September 30, 1996, compared to the same period in 1995, primarily
due to revenue growth which has outpaced the dollar increase in SG&A costs, as
the Company continues to reduce its overall administrative costs.
<PAGE>
DEPRECIATION, AMORTIZATION AND OTHER
Depreciation, amortization and other costs increased slightly as a
percentage of revenue for the three months ended September 30, 1996, compared to
the same period in 1995. This increase is primarily the result of amortization
expense related to the acquisitions completed in 1996, offset by a decrease from
other intangibles that have become fully amortized. For the nine months ended
September 30, 1996, these costs decreased as a percentage of revenue largely due
to a $1.6 million write-off of goodwill in the first quarter of 1995 related to
the FACE acquisition.
INTEREST (INCOME) EXPENSE, NET
The Company had net interest income of $0.5 million and $1.5 million
for the three and nine months ended September 30, 1996, compared to net interest
income of $0.4 million for the third quarter of 1995, and net interest expense
of $2.1 million for the nine months ended September 30, 1995. This resulted from
applying $49.4 million of net proceeds in July 1995 from the initial public
stock offering and $15.3 million of net proceeds from the March 1996 stock
offering to reduce outstanding borrowings. In addition, the Company's cash flow
from operations of $28 million for the nine months ended September 30, 1996,
contributed to this strong cash position.
EQUITY IN EARNINGS OF AFFILIATES
Equity in earnings of affiliates represents the Company's share of
earnings from Vinnell's unconsolidated joint ventures. These amounts have
remained fairly stable compared to the prior year periods.
MINORITY INTEREST
The minority interest share of earnings increased as a percentage of
revenue for the three and nine months ended September 30, 1996, compared to the
same periods in 1995. This increase reflects improved profitability of BDM
Europe and the expansion of Vinnell's joint ventures in the Middle East.
Vinnell's contract with the Saudi Arabian National Guard was performed under a
joint venture beginning in July 1995, in which Vinnell is a 51% partner. The
results of this operation are included in the Company's consolidated financial
statements, with the other partner's 49% ownership interest reflected as
minority interest. This contract was performed solely by Vinnell in the first
half of 1995, and thus, reported no minority interest at that time. These
increases were partially offset by a reduction in minority interest from 1995 to
1996 due to a one-time profit recognition in 1995 from a Vinnell joint venture
in Saudi Arabia.
PROVISION FOR INCOME TAXES
The provision for income taxes increased as a percentage of income
before income taxes for the three months ended September 30, 1996, over the same
period in 1995. This resulted due to an increase in the Company's statutory tax
rate from 41% in 1995 to 42% in 1996, reflecting the impact of the Company's
international expansion into countries with higher income tax rates than the
United States. This higher income tax rate considers foreign tax credits which
may expire prior to their use. The effective income tax rate decrease for the
nine month period in 1996 compared to 1995 was related to the write-off of $1.6
million in goodwill from the FACE acquisition in the first quarter of 1995. This
write-off was not deductible for income tax purposes.
<PAGE>
LIQUIDITY AND FINANCIAL CONDITION
- ---------------------------------
The Company's principal sources of liquidity continue to be cash from
operations, as well as available credit under the Company's $150 million
revolving credit agreement. For the nine months ended September 30, 1996, the
Company had cash flow of $28 million from operating activities, and working
capital of $135 million at the end of the third quarter, up 16% since year end.
As of September 30, 1996, the Company had no borrowings outstanding and $28.3
million in letters of credit outstanding, resulting in approximately $121.7
million available for borrowing under the revolving credit agreement at the end
of the quarter.
Cash flow related to investing activities primarily consists of the
investment made for the acquisition of three affiliated companies. On February
20, 1996, the Company completed the acquisition of CW Systems, Inc., IG Systems,
Inc., and Melco Systems, Inc. for $18.5 million, $8.8 million of which was paid
out of existing cash balances and $9.7 million was financed through notes
payable to the previous owners. The acquired companies specialize in providing
information technology systems and services to large commercial organizations in
several industries, as well as to certain state government agencies. Goodwill
totaled $16 million, and will be amortized on a straight-line basis over 15
years. Other intangible assets, relating to non-compete agreements, totaled $1.4
million and will be amortized over two years.
Other investing activities included capital expenditures, which have
increased due to the implementation of a new enterprise reporting system (SAP)
at BDM Federal, and working capital infusions to and earnings distributions from
Vinnell's unconsolidated joint ventures.
Financing activities included the net proceeds from the secondary stock
offering of $15.3 million completed in the March of this year and the reduction
of the Company's working capital facility by $25 million. In addition, the
Company continued to provide a benefit to its employees by enabling them to
purchase shares of common stock through stock option exercises and the employee
stock purchase plan. Also included in financing activities is a dividend payment
of $2.0 million made by the Company's German subsidiary, IABG, to its non-BDM
shareholders.
General
Management believes the Company has sufficient liquidity and working
capital resources necessary to conduct planned business operations, debt service
requirements, planned investments, capital expenditures, and to ensure
compliance with restrictive bank covenants for the foreseeable future.
OTHER MATTERS
- -------------
Restructuring: The Company announced a new alignment of its business
operations during the third quarter of 1996. This new organization consists of
five strategic business units -- Federal Systems, State and Local Systems,
Integrated Supply Chain Solutions, BDM Europe/IABG and Enterprise Management
Services. In addition, the new BDM Technologies will be comprised of development
units focused on promising IT areas, including Internet/Intranet technology,
computer network security, Year 2000+ solutions and services, IT support
services and others. A horizontally-focused effort directed by "Practice
Leaders" is also being implemented to facilitate cross-company synergy in such
areas as software process improvement, business process reengineering, and Year
2000+ solutions and services. These practice leaders will be responsible for
developing and implementing repeatable solutions and processes across the
Company, using common tool sets and standard methodologies. This new operational
alignment is being phased in starting October 1, 1996, with full implementation
targeted by January 1997.
The new organizational alignment resulted in a one-time,
pre-tax restructuring charge of $5.8 million to third quarter earnings, which
included a write-down of $3.1 million of the net investment in the Company's
environmental subsidiary, severance costs totaling $1.8 million for
approximately 40 employees across the Company, and the accrual of approximately
$0.9 million for certain facility expenses. Anticipated future savings from
these changes are expected to be reinvested in human capital and the research
and development program to support future growth.
Legal Matters. The Company has been informed that a civil "qui tam"
lawsuit has been filed against the Company and has received a copy of the
Complaint in that action. The matter is currently under Court seal. Under a qui
tam suit, often referred to as a "whistle blower" suit, a private plaintiff
generally alleges that false claims have been made to the U. S. Government and
receives a portion of the recovery, if any, achieved by the Government. The
Government has an opportunity to investigate the Complaint and make a
determination whether to join the case. The private plaintiff can pursue the
action against the Company in the name of the U. S. Government at his own
expense if the Government declines to join the case. The Complaint alleges
violation under the federal False Claims Act in connection with certain
mischarging under overseas government contracts administered by the U. S. Air
Force, related to certain housing rented in connection with overseas operations,
alleged improper hiring of and payments to certain employees, alleged improper
payments to a subcontractor, and alleged improper purchases and payments made in
support of client activities. Aggregate revenue from these contracts in calendar
year 1996 is expected to be about $33 million. In connection with this case, BDM
has received a subpoena for information in a civil investigation underway by the
Office of Inspector General of the Department of Defense and an Assistant U. S.
Attorney for the Eastern District of Virginia with respect to the matters
alleged in the Complaint. BDM will cooperate fully with the Government and
expects to make extensive document production in response to the subpoena.
The Company is engaged in providing services and products under
contracts with the U. S. Government and, to a lesser degree, under foreign
government contracts, some of which are administered by the U. S. Government.
All such contracts are subject to extensive legal and regulatory requirements,
and the above mentioned investigation apparently focuses on whether the
Company's overseas operations in connection with the subject contracts were
conducted in accordance with such requirements. The lawsuit and related
investigation could result in administrative, civil or criminal liabilities,
including reimbursements, fines or penalties being imposed. Under the provisions
of the False Claims Act, a civil penalty of between $5,000 and $10,000 can be
assessed for each claim, plus three times the amount of any damages sustained by
the Government. The Complaint seeks such relief but does not specify the amount
of damages. In addition to damages, a finding of civil or criminal liability
could lead to suspension or debarment of the contractor if it is found to be not
currently responsible, which would make some or all of the contractor's
operations ineligible to be awarded U. S. Government contracts for a period of
time. Such civil or criminal liability or suspension or debarment could have a
material adverse effect on the Company. Based on an ongoing internal review and
preliminary review by counsel, the Company does not possess sufficient
information to determine the amount of any loss the Company may sustain, or to
reasonably estimate the amount of any loss as a consequence of the litigation.
Accordingly, the Company has not been able to identify the amount of any loss
contingency.
Subsequent Event: On November 4, 1996, the Company acquired the
operations of RGTI Systems Software (RGTI), a company specializing in warehouse
management solutions. The price of $16.4 million included covenants not to
compete of $750,000 for a period of 4 years and retention payments to certain
key management team members totaling $1.6 million to be paid in annual
installments through December 1999. The remaining purchase price consisted of
$9.4 million cash at settlement and $4.6 of assumed net liabilities. In
addition, the agreement provides an additional $6.35 million purchase price
contingent upon the achievement of targeted earnings through the year 2000. The
transaction was accounted for as a purchase, and the results of RGTI's
operations will be included in the Company's consolidated statements of
operations since the effective date of the acquisition. Resulting goodwill
totaled approximately $3 million and will be amortized over 7 years.
New Headquarters: BDM signed a letter of intent to move its corporate
headquarters to a new facility in Reston, Virginia. The Company expects the move
to take place when the lease on the current building expires in January 1999.
<PAGE>
PART II
Item 4. Submission of Matters to a Vote of Security Holders
- ------- ---------------------------------------------------
None.
Item 6. Exhibits and Reports on Form 8-K.
- ------- ---------------------------------
(a) Exhibits:
11.1 Statement of Computation of Earnings Per Share
(b) Reports on Form 8-K:
The Company filed a Form 8-K dated February 20, 1996 related
to the acquisition of three affiliated companies: CW Systems,
Inc., IG Systems, Inc., and Melco Systems, Inc.
<PAGE>
BDM INTERNATIONAL, INC.
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.
November 13, 1996 BDM INTERNATIONAL, INC.
C. Thomas Faulders, III
----------------------
C. Thomas Faulders, III
Executive Vice President, Treasurer and
Chief Financial Officer
<PAGE>
BDM INTERNATIONAL, INC.
INDEX TO EXHIBITS
Exhibit No.
11.1 Statement of Computation of Earnings Per Share
<TABLE>
<CAPTION>
EXHIBIT 11.1
BDM INTERNATIONAL, INC.
COMPUTATION OF EARNINGS PER SHARE
(Amounts in Thousands, Except Per Share Data)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
------ ------ ------ - ----
<S> <C> <C> <C> <C>
Net Income $3,900 $5,291 $15,961 $12,494
====== ====== ======= =======
Shares used for primary earnings per share:
Weighted averaged shares
outstanding 14,199 12,579 13,638 10,572
------ ------ ------ ------
Dilutive effect of common stock
equivalents-noncontingent stock options 897 797 857 654
--- --- --- ---
Total shares used for primary
earnings per share 15,096 13,376 14,495 11,226
Additional shares used for fully diluted earnings per share:
Increase for dilutive effect of
contingent stock options 57 54 147 221
-- -- --- ---
Total shares used for
fully diluted earnings per share 15,153 13,430 14,642 11,447
====== ====== ====== ======
Earnings per share:
Primary $0.26 $0.40 $1.10 $1.11
===== ===== ===== =====
Fully diluted $0.26 $0.39 $1.09 $1.09
===== ===== ===== =====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-mos
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 71,240
<SECURITIES> 0
<RECEIVABLES> 211,730
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 287,275
<PP&E> 47,245
<DEPRECIATION> 0
<TOTAL-ASSETS> 369,712
<CURRENT-LIABILITIES> 150,174
<BONDS> 0
0
0
<COMMON> 143
<OTHER-SE> 164,010
<TOTAL-LIABILITY-AND-EQUITY> 369,712
<SALES> 723,727
<TOTAL-REVENUES> 723,727
<CGS> 605,359
<TOTAL-COSTS> 691,410
<OTHER-EXPENSES> 5,707
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (1,465)
<INCOME-PRETAX> 28,075
<INCOME-TAX> 12,114
<INCOME-CONTINUING> 15,961
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,961
<EPS-PRIMARY> 1.10
<EPS-DILUTED> 1.09
</TABLE>
