FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 29, 2000 Commission file number 1-3879
DynCorp
(Exact name of registrant as specified in its charter)
Delaware 36-2408747
(State of incorporation or organization) (I.R.S. Employer Identification No.)
11710 Plaza America Drive, Reston, Virginia 20190
(Address of principal executive offices) (Zip Code)
(703) 261-5000
(Registrant's telephone number, including area code)
(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. |X| Yes |_| No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding as of August 9, 2000
----- -------------------------------
Common Stock, $0.10 par value 10,405,280
DYNCORP AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 29, 2000
INDEX
Page
----
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
June 29, 2000 and December 30, 1999 3-4
Consolidated Condensed Statements of Operations for
Three and Six Months Ended June 29, 2000 and July 1, 1999 5
Consolidated Condensed Statements of Cash Flows for
Six Months Ended June 29, 2000 and July 1, 1999 6
Consolidated Statement of Stockholders' Equity 7
Notes to Consolidated Condensed Financial Statements 8-10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11-15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
PART I. FINANCIAL INFORMATION
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 29, 2000 AND DECEMBER 30, 1999
(In thousands)
June 29,
2000 December 30,
Unaudited 1999
--------- ---------
Assets
- ------
Current Assets:
Cash and cash equivalents $ 5,930 $ 5,657
Accounts receivable (net of allowance for doubtful accounts
of $4,480 in 2000 and $3,156 in 1999) 338,850 357,411
Other current assets 42,948 35,140
--------- ---------
Total current assets 387,728 398,208
Property and Equipment (net of accumulated depreciation
and amortization of $23,980 in 2000 and $21,583 in 1999) 40,407 40,795
Intangible Assets (net of accumulated amortization of
$63,637 in 2000 and $55,755 in 1999) 143,480 149,159
Other Assets 44,725 51,511
--------- ---------
Total Assets $ 616,340 $ 639,673
========= =========
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 29, 2000 AND DECEMBER 30, 1999
(In thousands, except share amounts)
June 29,
2000 December 30,
Unaudited 1999
--------- ---------
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Notes payable and current portion of long-term debt $ 14,317 $ 8,242
Accounts payable 61,392 85,357
Deferred revenue and customer advances 8,221 6,048
Accrued liabilities 148,393 133,374
--------- ---------
Total current liabilities 232,323 233,021
Long-Term Debt 315,873 334,944
Other Liabilities and Deferred Credits 46,857 55,718
Contingencies and Litigation - -
Temporary Equity:
Redeemable common stock -
ESOP shares, 7,451,988 and 7,350,937
shares issued and outstanding in 2000 and 1999,
respectively, subject to restrictions 191,690 182,974
Other, 426,217 shares issued and outstanding in
2000 and 1999, respectively 7,003 6,142
Stockholders' Equity:
Common stock, par value ten cents per share, authorized
20,000,000 shares; issued 4,809,771 and 4,908,447 shares
in 2000 and 1999, respectively 481 491
Paid-in surplus 133,799 133,338
Accumulated other comprehensive income (4) (9)
Reclassification to temporary equity for redemption value
greater than par value (197,905) (188,339)
Deficit (71,140) (72,887)
Common stock held in treasury, at cost; 2,282,696 and
2,301,262 shares in 2000 and 1999, respectively (42,637) (43,062)
Unearned ESOP shares - (2,658)
--------- ---------
Total Liabilities and Stockholders' Equity $ 616,340 $ 639,673
========= =========
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
UNAUDITED
Three Months End Six Months Ended
---------------- ----------------
June 29, July 1, June 29, July 1,
2000 1999 2000 1999
-------- -------- -------- --------
Revenues $445,302 $321,262 $873,802 $633,148
Costs and expenses:
Costs of services 420,278 303,820 827,628 599,188
Corporate general and administrative 8,046 5,674 14,655 11,091
Interest income (641) (261) (1,469) (1,038)
Interest expense 10,526 4,489 20,695 8,544
Other 2,783 2,050 6,584 2,285
-------- -------- -------- --------
Total costs and expenses 440,992 315,772 868,093 620,070
Earnings before income taxes and minority interest 4,310 5,490 5,709 13,078
Provision for income taxes 1,544 1,973 1,888 4,566
-------- -------- -------- --------
Earnings before minority interest 2,766 3,517 3,821 8,512
Minority interest 635 205 1,213 1,309
-------- -------- -------- --------
Net earnings $ 2,131 $ 3,312 $ 2,608 $ 7,203
======== ======== ======== ========
Accretion of mezzanine shares to redeemable value 437 - 861 -
Common stockholders' share of net earnings $ 1,694 $ 3,312 $ 1,747 $ 7,203
======== ======== ======== ========
Basic earnings per share $ 0.16 $ 0.33 $ 0.17 $ 0.71
Diluted earnings per share $ 0.16 $ 0.32 $ 0.16 $ 0.70
Weighted average number of shares
outstanding for basic earnings per share 10,495 10,062 10,448 10,127
Weighted average number of shares
outstanding for diluted earnings per share 10,693 10,317 10,663 10,324
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Six Months Ended
----------------
June 29, July 1,
2000 1999
------- -------
Cash Flows from Operating Activities:
Common stockholders' share of net earnings $ 1,747 $ 7,203
Adjustments to reconcile net earnings from operations to net cash
provided by operating activities:
Depreciation and amortization 12,038 4,587
Accretion of mezzanine shares to redeemable value 861 -
Increase in reserves for divested businesses - 2,000
Other 181 (848)
Changes in current assets and liabilities, net of acquisitions:
Decrease in current assets except cash and cash equivalents 10,760 2,483
(Decrease) increase in current liabilities excluding notes payable
and current portion of long-term debt (13,714) 9,237
------- -------
Cash provided by operating activities 11,873 24,662
Cash Flows from Investing Activities:
Sale of property and equipment 10,890 34
Purchase of property and equipment (9,893) (2,699)
Increases in investment in unconsolidated affiliates (1,631) (2,415)
Capitalized cost of new financial and human resource systems (240) (5,101)
Other (128) (32)
------- -------
Cash used in investing activities (1,002) (10,213)
Cash Flows from Financing Activities:
Treasury stock purchased - (6,237)
Payment on indebtedness (191,981) (97,656)
Proceeds from debt issuance 175,568 115,726
Payment received on Employee Stock Ownership Trust note 2,958 3,665
Loan to Employee Stock Ownership Trust (300) (7,746)
Pay-in kind interest on Subordinated Notes 3,397 -
Other (240) 317
------- -------
Cash (used in) provided by financing activities (10,598) 8,069
Net Increase in Cash and Cash Equivalents 273 22,518
Cash and Cash Equivalents at Beginning of the Period 5,657 4,088
------- -------
Cash and Cash Equivalents at End of the Period $ 5,930 $26,606
======= =======
Supplemental Cash Flow Information:
Cash paid for income taxes $ 3,977 $ 2,179
======= =======
Cash paid for interest $12,137 $ 7,144
======= =======
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
UNAUDITED
Adjustment for Accumulated
Redemption Unearned Other
Common Paid-in Value Greater Treasury ESOP Comprehensive
Stock Surplus than Par Value Deficit Stock Shares Income
---- -------- ---------- ---------- --------- ------- ----
Balance, December 30, 1999 $491 $133,338 $(188,339) $ (72,887) $(43,062) $(2,658) $(9)
Employee compensation plans
(option exercises, restricted
stock plan, incentive bonus) (400) 425
Loans to the Employee Stock
Ownership Trust (300)
Payment received on
Employee Stock Ownership
Trust note 2,958
Reclassification to redeemable
common stock (10) (8,705)
Accretion of mezzanine shares
to redeemable value 861 (861)
(861)
Translation adjustment 5
Net earnings 2,608
---- -------- ---------- ---------- --------- ------- ----
Balance, June 29, 2000 $481 $133,799 $(197,905) $ (71,140) $(42,637) $ - $(4)
==== ======== ========== ========== ========= ======= ====
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 29, 2000
UNAUDITED
Note 1. Basis of Presentation
The Company has prepared the unaudited consolidated condensed financial
statements included herein pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is recommended that these condensed financial
statements are read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, the unaudited consolidated condensed
financial statements included herein reflect all adjustments (consisting
of normal recurring adjustments) necessary to present fairly the financial
position, the results of operations and the cash flows for such interim
periods. The results of operations for such interim periods are not
necessarily indicative of the results for the full year. Certain amounts
presented for prior periods have been reclassified to conform to the 2000
presentation.
Note 2. Accrued Liabilities
Accrued liabilities as of June 29, 2000 and July 1, 1999 included accrued
salaries of $66.4 million and $73.0 million, respectively.
Note 3. Redeemable Common Stock
Common stock which is redeemable upon the exercise of puts under the
Company's Employee Stock Ownership Plan ("ESOP") and under the
registration rights agreement noted below has been reflected as Temporary
Equity at each balance sheet date and consists of the following:
Balance at Balance at
Redeemable June 29, Redeemable December 30,
Shares Value 2000 Shares Value 1999
--------- ------ --------- --------- ------ ---------
ESOP Shares 3,313,729 $28.50 $ 94,441 3,313,729 $27.50 $ 91,128
4,138,259 $23.50 97,249 4,037,208 $22.75 91,846
--------- --------- --------- ---------
7,451,988 $ 191,690 7,350,937 $ 182,974
========= ========= =========
Other Shares 426,217 $16.43 $ 7,003 426,217 $14.41 $ 6,142
========= ========= ========= =========
In accordance with the Employee Retirement Income Security Act regulations
and the ESOP documents, the Company is obligated, unless the ESOP Trust
purchases the shares, to purchase distributed common stock shares from
ESOP participants on retirement or termination at fair value as long as
the Company's common stock is not publicly traded. However, under the
Subscription Agreement with the ESOP dated September 9, 1988, the Company
is permitted to defer put options if, under Delaware law, the capital of
the Company would be impaired as a result of such repurchase.
On December 10, 1999, the Company entered into an agreement with various
financial institutions for the sale of 426,217 shares of the Company's
stock and Subordinated Notes. Under a contemporaneous registration rights
agreement, the holders of these shares of stock will have a put right to
the Company commencing on December 10, 2003, at a price of $40.53 per
share, unless one of the following events has occurred prior to such date
or the exercise of the put right: (1) an initial public offering of the
Company's common stock has been consummated; (2) all the Company's common
stock has been sold; (3) all the Company's assets have been sold in such a
manner that the holders have received cash payments; or (4) the Company's
common stock has been listed on a national securities exchange or
authorized for quotation on the Nasdaq National Market System for which
there is a public market of at least $100 million for the Company's common
stock. If, at the time of the holders' exercise of the put right the
Company is unable to pay the put price because of financial covenants in
loan agreements or other provisions of law, the Company will not honor the
put at that time, and the put price will escalate for a period of up to
four years, at which time the put must be honored. The escalation rate
increases during such period until the put is honored, and the rate varies
from an annualized factor of 22% for the first quarter after the put is
not honored up to 52% during the sixteenth quarter.
Note 4. Employee Stock Ownership Trust
From time to time, the Company makes collateralized loans to the Employee
Stock Ownership Trust ("ESOT") to purchase shares and pay off expiring
loans. During the first half of 2000, the Company loaned the ESOT $0.3
million and the ESOT paid back to the Company $3.0 million of the
outstanding loan balance. Unpaid loan balances are reflected as a
reduction of stockholders' equity. There were no outstanding loan balances
as of June 29, 2000 and $2.7 million outstanding as of December 30, 1999.
The unpaid loan balances represented 101,052 shares at December 30, 1999.
Note 5. Income Taxes
The provision for income taxes in 2000 and 1999 is based upon an estimated
annual effective tax rate. This rate includes the impact of permanent
differences between the book value of assets and liabilities recognized
for financial reporting purposes and the basis recognized for tax
purposes.
Note 6. Earnings Per Share
The following table sets forth the reconciliation of shares for basic EPS
to shares for diluted EPS. Basic EPS is computed by dividing common
stockholders' share of net earnings by the weighted average number of
common shares outstanding and contingently issuable shares. The weighted
average number of common shares outstanding includes issued shares less
shares held in treasury and any unallocated ESOP shares. Shares earned and
vested but unissued under the Restricted Stock Plan are contingently
issuable shares whose conditions for issuance have been satisfied and as
such have been included in the calculation of basic EPS. Diluted EPS is
computed similarly except the denominator is increased to include the
weighted average number of stock options outstanding, assuming the
treasury stock method.
Three Months Ended Six Months Ended
------------------ ----------------
June 29, July 1, June 29, July 1,
2000 1999 2000 1999
------ ------ ------ ------
Weighted average shares outstanding for basic EPS 10,495 10,062 10,448 10,127
Effect of dilutive securities:
Stock options 198 255 215 197
------ ------ ------ ------
Weighted average shares outstanding for diluted EPS 10,693 10,317 10,663 10,324
====== ====== ====== ======
Note 7. Recently Issued Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, which amends
certain accounting and reporting standards of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for
hedging activities. SFAS 138 is to be adopted concurrently with SFAS 133,
which is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. Because of the Company's minimal use of derivatives, the
Company does not expect that the adoption of this new standard will have a
material impact on its results of operations, financial condition or cash
flows.
Note 8. Business Segments
The Company has three reportable segments, DynCorp Information and
Enterprise Technology ("DI&ET"), DynCorp Technical Services ("DTS") and
DynCorp Information Systems LLC ("DIS"). DI&ET designs, develops, supports
and integrates software and hardware systems to provide customers with
comprehensive solutions for information management and engineering needs.
DTS provides services ranging from aviation maintenance to multifaceted
aerospace sciences, technology and avionics engineering. DIS offers a full
range of integrated telecommunications services and information technology
solutions in the area of professional services, business systems
integration, information infrastructure solutions and information
technology operations and support.
Revenues, operating profit and identifiable assets for the Company's three
business segments for 2000 and the comparable periods for 1999 are
presented below:
Three Months Ended Six Months Ended
------------------ ----------------
June 29, July 1, June 29, July 1,
2000 1999 2000 1999
--------- --------- --------- ---------
Revenues
--------
DTS $ 216,597 $ 158,975 $ 425,782 $ 315,405
DI&ET 170,621 162,287 337,142 317,743
DIS 58,084 - 110,878 -
--------- --------- --------- ---------
$ 445,302 $ 321,262 $ 873,802 $ 633,148
========= ========= ========= =========
Operating Profit (a)
----------------
DTS $ 9,211 $ 7,649 $ 17,687 $ 14,609
DI&ET 10,145 9,429 18,848 18,398
DIS 5,124 - 8,514 -
--------- --------- --------- ---------
24,480 17,078 45,049 33,007
Corporate general and administrative 8,046 5,674 14,655 11,091
Interest income (641) (261) (1,469) (1,038)
Interest expense 10,526 4,489 20,695 8,544
Goodwill amortization 937 393 1,827 786
Minority interest included in operating profit (635) (205) (1,213) (1,309)
Amortization of intangibles of acquired companies 2,526 365 5,263 749
Other miscellaneous (589) 1,133 (418) 1,106
--------- --------- --------- ---------
Earnings before income taxes and minority interest $ 4,310 $ 5,490 $ 5,709 $ 13,078
========= ========= ========= =========
June 29, December 30,
2000 1999
--------- --------
Identifiable Assets
-------------------
DTS $ 179,745 $173,629
DI&ET 184,932 205,798
DIS 203,976 206,083
Corporate 47,687 54,163
--------- --------
$ 616,340 $639,673
========= ========
<FN>
(a) Defined as the excess of revenues over operating expenses and certain nonoperating expenses.
</FN>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
- -------
The following discussion and analysis provides information that management
believes is relevant to an assessment and understanding of the consolidated
results of operations and financial condition of DynCorp and its subsidiaries
(collectively, the "Company"). The discussion should be read in conjunction with
the interim condensed consolidated financial statements and notes thereto and
the Company's annual report on Form 10-K for the year ended December 30, 1999.
Results of Operations
- ---------------------
The Company provides diversified management, technical and professional services
primarily to U.S. Government customers throughout the United States and
internationally. The Company's customers include various branches of the
Department of Defense, the Department of Energy, the Department of State, the
Department of Justice, National Aeronautics and Space Administration and various
other U.S., state and local government agencies, commercial clients and foreign
governments. The following discusses the Company's results of operations and
financial condition for the three and six months ended June 29, 2000 and the
comparable periods for 1999.
Revenues and Operating Profit
- -----------------------------
For the three and six months ended June 29, 2000, revenue increased 38.6% and
38.0% to $445.3 million and $873.8 million, respectively, compared to $321.3
million and $633.1 million for the comparable periods in 1999. DynCorp
Information Systems LLC ("DIS"), which was acquired on December 10, 1999 from
GTE Corporation, accounted for approximately 46.8% and 46.1%, respectively, of
the revenue increases. Operating profit, defined as the excess of revenues over
operating expenses and certain non-operating expenses, increased 43.3% and 36.5%
to $24.5 million and $45.1 million, respectively, compared to $17.1 million and
$33.0 million for the comparable periods in 1999. DIS accounted for
approximately 69.2% and 70.7%, respectively, of the operating profit increases.
For the three and six months ended June 29, 2000, DIS had revenues of $58.1
million and $110.9 million and operating profit of $5.1 million and $8.5
million, respectively. The Company's actual results for the three and six month
periods ending July 1, 1999 do not include DIS results.
DynCorp Technology Services' ("DTS") revenues for the three and six months ended
June 29, 2000, grew 36.2% and 35.0%, respectively, to $216.6 million and $425.8
million, respectively, compared to $159.0 million and $315.4 million for the
comparable periods in 1999. The increase in revenues in the first and second
quarters compared to the same periods in 1999 resulted from increased tasking on
State Department contracts providing protective support services in several
countries, increased services on a contract in support of the government's drug
eradication program, and increases in the level of effort on contracts providing
repair and maintenance on military aircraft. Also contributing to the increase
in revenue were increases in the purchase of reimbursable materials for the
customer at Fort Rucker and increased services on certain base operations
support contracts.
Operating profit for DTS increased 20.4% and 21.1% to $9.2 million and $17.7
million for the three and six months ended June 29, 2000, compared to $7.6
million and $14.6 million for the comparable prior year periods. The increase in
operating profit for the second quarter 2000 compared to the second quarter 1999
was due mostly to the growth in the State Department contracts providing
protective services and the increases in services providing repair and
maintenance on military aircraft. Operating profits did not grow as signifi-
cantly as revenue due to not receiving profit on the sale of materials for
certain contracts and the start-up costs for several new contracts.
DynCorp Information and Enterprise Technology ("DI&ET") reported revenue growth
of 5.1% and 6.1% to $170.6 million and $337.1 million, respectively, compared to
$162.3 million and $317.7 million for the comparable periods in 1999. The
revenue increases were primarily due to increases on a subcontract from the
Department of Commerce Bureau of the Census, which began generating revenue in
the second half of 1999, and growth in a contract with the U.S. Postal Service,
which became operational in 1999. Also contributing to DI&ET's higher revenue
was growth in a joint venture for vaccine technology services for the Department
of Defense, which was just staring up in the first six months of 1999, increased
tasking on several General Service Administration IDIQ contracts, new contracts
in health information technology services, and a contract awarded in late 1999
with the Department of Housing and Urban Development which became operational in
2000. Partially offsetting these increases in revenue were the loss of a
subcontract with the U.S. Postal Service and of a contract with the Immigration
and Naturalization Service. Prior year six month revenues on these two contracts
totaled $40.8 million.
For the three and six months ended June 29, 2000, operating profit for DI&ET
increased 7.6% and 2.5% to $10.1 million and $18.9 million, respectively,
compared to $9.4 million and $18.4 million for the comparable prior year
periods. The increase in operating profit resulted from the Department of
Commerce Bureau of the Census contract and growth in a contract with the U.S.
Postal Service. Offsetting this increase to operating profit was the loss of the
Immigration and Naturalization Service contract.
Cost of Services
- ----------------
Cost of services for the second quarter and first six months of 2000 was 94.4%
and 94.7%, respectively, of revenue as compared to 94.6% for both of the
comparable periods in 1999. The increase in the first six months cost of
services' percentage compared to the comparable period of 1999 was due to higher
phase-in costs for new contracts at DTS. The increase in the cost of service
percentage of revenue in the first six months of 2000 was slightly offset by a
lower percentage of approximately 92.5% for DIS. For the six months ended June
29, 2000, cost of services increased by $228.4 million, or 38.1% over the
comparable period in 1999. DIS cost of services comprised $102.5 million of the
increase.
Corporate General and Administrative Expense
- --------------------------------------------
Corporate general and administrative expense for the second quarter and first
six months of 2000 was $8.0 million and $14.7 million, respectively, as compared
to $5.7 million and $11.1 million for the comparable periods in 1999, an
increase of $2.4 million and $3.6 million, respectively. Corporate general and
administrative expense as a percentage of revenue was 1.7% and 1.8% for the six
months ended June 29, 2000 and July 1, 1999, respectively. The expense increase
relates primarily to the Company's implementation of the new financial and human
resource software packages. The Company has moved from the design and
development phase of this resystemization into the implementation phase and is
now expensing versus capitalizing the associated costs. The Company also
experienced smaller increases in consulting, recruitment, and advertisement
expenses, along with higher costs related to the new corporate headquarters
building.
Interest Expense
- ----------------
For the three and six months ended June 29, 2000, interest expense was $10.5
million and $20.7 million, respectively, compared to $4.5 million and $8.5
million for the comparable periods in 1999. The increase in interest expense was
attributable to higher average debt levels as a result of borrowings to fund the
DIS acquisition in December 1999 and higher weighted average interest rates in
the first six months of 2000 compared to the first six months of 1999. The
weighted average levels of indebtedness were approximately $351.3 million and
$183.9 million in the six months ended June 29, 2000 and July 1, 1999,
respectively.
Other Expense
- -------------
Other expense was $2.8 million and $6.6 million, respectively, for the three and
six months ended June 29, 2000 compared to $2.1 million and $2.3 million for the
comparable periods of 1999. The increase in three and six months other expense
compared to the comparable periods in 1999 resulted mostly from the amortization
of intangible assets recorded in connection with the acquisition of DIS in 1999,
offset by a gain of $0.5 million on the sale of the Company's majority ownership
interest in a limited liability company in the second quarter of 2000.
Amortization costs related to DIS at June 29, 2000 totaled $6.3 million.
Income Taxes
- ------------
The provision for income taxes in 2000 and 1999 is based upon an estimated
annual effective tax rate, including the impact of permanent differences between
the book value of assets and liabilities recognized for financial reporting
purposes and the basis recognized for tax purposes. The provision for income
taxes decreased by $0.4 million to $1.5 million for the three months ended June
29, 2000 compared to $2.0 million in the comparable period in 1999. The decrease
was due to lower pretax income partially offset by a higher effective tax rate
in 2000, compared to the same period in 1999. For the six months ended June 29,
2000, the provision for income taxes decreased by $2.7 million to $1.9 million
compared to $4.6 million in the comparable period in 1999. The decrease was due
to higher pretax earnings in the first half of 1999, partially offset by a
slightly lower effective tax rate in the same period. The Company's effective
tax rate approximated 42.0% for the three and six months ended June 29, 2000
compared to 38.8% in the comparable periods in 1999.
Backlog
- -------
The Company's backlog of business, which includes awards under both prime
contracts and subcontracts as well as the estimated value of option years on
government contracts, was $4.6 billion at June 29, 2000 compared to $4.4 billion
at December 30, 1999, a net increase of $0.2 billion. The backlog at June 29,
2000 consisted of $2.3 billion for DTS, $1.9 billion for DI&ET, and $0.4 billion
for DIS compared to December 30, 1999 backlog of $2.2 billion for DTS, $1.7
billion DI&ET and $0.5 billion for DIS. Subsequent to the second quarter, the
Company was awarded two significant contracts in the military aircraft mainten-
ance and base operations area. These two contracts, $0.9 billion for ten years
and $0.3 billion for seven years,are anticipated to increase the Company's back-
log by approximately $1.2 billion. The $0.3 billion contract is under protest.
Working Capital and Cash Flow
- -----------------------------
Working capital, defined as current assets less current liabilities, was $155.4
million at June 29, 2000 compared to $165.2 million at December 30, 1999, a
decrease of $9.8 million. The ratio of current assets to current liabilities at
June 29, 2000 and December 30, 1999 was 1.7. The decrease was primarily the re-
sult of the higher current portion of notes payable and long-term debt and lower
accounts receivable balance, offset slightly by lower accounts payable and
higher other current assets balances. The higher current portion of debt is due
to a higher portion of the Senior Secured Credit Agreement Term B loans becoming
current as of June 29, 2000. The decrease in accounts payable is due to
seasonality in the account.
Cash provided by operations was $11.9 million in the six months of 2000, as
compared to $24.7 million in the six months of 1999, a decrease in cash provided
of $12.8 million. The decrease resulted primarily from lower net earnings due to
higher interest expense and a decrease in accounts payable, partially offset
by a decrease in accounts receivable. The decrease in accounts receivable re-
sulted from higher customer collections, which were used for payment of accounts
payable.
Investing activities used funds of $1.0 million in the six months ended June 29,
2000. In March 2000, the Company sold an office building located in Alexandria,
Virginia to a third party for $10.5 million, and simultaneously closed on a
lease of that property from the new owner. The Company used a portion of the net
proceeds to pay off the mortgage on the property. Partially offsetting the cash
provided from the sale of the office building was cash used for the purchase of
other property and equipment of approximately $10.3 million. During the first
six months of 1999, investing activities used funds of $10.2 million principally
for the purchase of property and equipment and the capitalized cost of new
software for internal use.
Financing activities used funds of $10.6 million during the six months ended
June 29, 2000, which consisted primarily of the payoff of the mortgage on the
Alexandria office building that the Company sold in the first quarter of 2000.
The Company also reduced its outstanding borrowings under the Senior Secured
Credit Agreement Term B loans maturing December 9, 2006 by $7.6 million and the
Senior Secured Credit Agreement Revolving Credit Facility by a net of $6.3
million. Offsetting these reductions in cash flows were the funds provided of
$3.4 million related to the pay-in kind interest on Subordinated Notes. During
the first six months of 1999, financing activities provided net funds of $8.1
million, which consisted primarily of additional borrowing against the Contract
Receivable Collateralized Class B Variable Rate Note. The proceeds were used to
make a loan to the ESOT, to fund the Company's purchase of common stock from
ESOP participants and other investors, and to finance working capital needs.
The Company anticipates selling non-strategic assets from time to time in the
future.
Earnings before Interest, Taxes, Depreciation, and Amortization
- ---------------------------------------------------------------
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA") as
defined by management, consists of net earnings before income tax provision, net
interest expense, and depreciation and amortization. EBITDA represents a measure
of the Company's ability to generate cash flow and does not represent net income
or cash flow from operating, investing and financing activities as defined by
generally accepted accounting principles ("GAAP"). EBITDA is not a measure of
performance or financial condition under GAAP, but is presented to provide
additional information about the Company to the reader. EBITDA should be
considered in addition to, but not as a substitute for, or superior to, measures
of financial performance reported in accordance with GAAP. EBITDA has been
adjusted for the amortization of deferred debt expense and debt issue discount
which are included in "interest expense" in the Consolidated Statements of
Operations and included in "amortization and depreciation" in the Consolidated
Statements of Cash Flows. Readers are cautioned that the Company's definition of
EBITDA may not necessarily be comparable to similarly titled captions used by
other companies due to the potential inconsistencies in the method of
calculation.
The following presentation represents the Company's computation of EBITDA (in
thousands):
Three Months Ended Six Months Ended
------------------ ----------------
June 29, July 1, June 29, July 1,
2000 1999 2000 1999
------- ------- ------- -------
Net earnings $ 2,131 $ 3,312 $ 2,608 $ 7,203
Depreciation and amortization 6,025 2,277 12,038 4,587
Interest expense, net 9,885 4,228 19,226 7,506
Income taxes 1,544 1,973 1,888 4,566
Amortization of deferred debt expense (432) (180) (703) (366)
Debt issue discount (11) (9) (21) (18)
------- ------- ------- -------
EBITDA $19,142 $11,601 $35,036 $23,478
======= ======= ======= =======
EBITDA (as defined above) increased by $7.5 million, or 65.0%, to $19.1 million
for the second quarter of 2000 as compared to the comparable period in 1999. For
the first six months of 2000, EBITDA grew by $11.6 million, or 49.2%, to $35.0
million as compared to the first six months of 1999. The increases in EBITDA in
the three and six month periods in 2000, as compared to the similar periods in
1999, are primarily attributable to higher operating profits as discussed above.
Forward Looking Statements
- --------------------------
Certain matters discussed or incorporated by reference in this report are
forward-looking statements within the meaning of the federal securities laws.
Although the Company believes that the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, there can be
no assurance that its expectations will be achieved. Factors that could cause
actual results to differ materially from the Company's current expectations
include the early termination of, or failure of a customer to exercise option
periods under, a significant contract; the inability of the Company to generate
actual customer orders under indefinite delivery, indefinite quantity contracts;
technological change; the inability of the Company to manage its growth or to
execute its internal performance plan; the inability of the Company to integrate
the operations of acquisitions; the inability of the Company to attract and
retain the technical and other personnel required to perform its various
contracts; general economic conditions; and other risks discussed elsewhere in
this report and in other filings of the Company with the Securities and Exchange
Commission.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company is exposed to market risk from changes in interest rates on its
floating rate debt. The Company manages its exposure to this market risk through
the monitoring of its available financing alternatives including, in certain
circumstances, the use of derivative financial instruments. The Company has
managed its exposure to changes in interest rates by effectively capping at 7.5%
the base interest rate on $100.0 million of its LIBOR indexed debt until
February 2002. The Company's use of derivative financial instruments is to man-
age its exposures to fluctuations in interest rates and foreign exchange rates.
The Company does not hold or issue derivative financial instruments for trading
purposes. For more information related to the Company's floating rate debt, see
Long-term Debt in the Notes to the Consolidated Financial Statements in the Form
10-K.
PART II - OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At the annual meeting of stockholders, held on July 18, 2000, at the Company's
headquarters in Reston, Virginia, the stockholders of the Company elected the
following individuals to the Board of Directors for the terms set forth:
Director Term Votes Cast For Votes Withheld/Against
-------- ---- -------------- ----------------------
Russell E. Dougherty One year 9,232,979 540,873
T. Eugene Blanchard Three years 9,272,194 501,656
Paul V. Lombardi Three years 9,233,937 539,913
Dudley C. Mecum II Three years 9,267,442 506,408
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
10.3 Executive Incentive Plan, as amended (filed herewith)
(b) Reports on Form 8-K
None filed.
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.
DYNCORP
Date: August 11, 2000 /S/ P.C. FitzPatrick
--------------------
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: August 11, 2000 /S/ J.J. Fitzgerald
-------------------
J.J. Fitzgerald
Vice President
and Corporate Controller