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
September 28, 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 November 8, 2000
----- ----------------------------------
Common Stock, $0.10 par value 10,409,088
DYNCORP AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 28, 2000
INDEX
Page
----
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
September 28, 2000 and December 30, 1999 3-4
Consolidated Condensed Statements of Operations for
Three and Nine Months Ended September 28, 2000
and September 30, 1999 5
Consolidated Condensed Statements of Cash Flows for
Nine Months Ended September 28, 2000
and September 30, 1999 6
Consolidated Statement of Stockholders' Equity 7
Notes to Consolidated Condensed Financial Statements 8-11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
PART I. FINANCIAL INFORMATION
-----------------------------
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 28, 2000 AND DECEMBER 30, 1999
(In thousands)
September 28,
2000 December 30,
Unaudited 1999
--------- ---------
Assets
- ------
Current Assets:
Cash and cash equivalents $ 13,776 $ 5,657
Accounts receivable (net of allowance for doubtful accounts
of $4,009 in 2000 and $3,156 in 1999) 336,712 357,411
Other current assets 33,437 35,140
--------- --------
Total current assets 383,925 398,208
Property and Equipment (net of accumulated depreciation
and amortization of $21,979 in 2000 and $21,583 in 1999) 45,153 40,795
Intangible Assets (net of accumulated amortization of
$68,120 in 2000 and $55,755 in 1999) 186,312 149,159
Other Assets 62,201 51,511
--------- ---------
Total Assets $ 677,591 $ 639,673
========= =========
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
SEPTEMBER 28, 2000 AND DECEMBER 30, 1999
(In thousands, except share amounts)
September 28,
2000 December 30,
Unaudited 1999
--------- ---------
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Notes payable and current portion of long-term debt $ 19,872 $ 8,242
Accounts payable 63,306 85,357
Deferred revenue and customer advances 8,635 6,048
Accrued liabilities 162,928 133,374
----------- -----------
Total current liabilities 254,741 233,021
Long-Term Debt 311,025 334,944
Other Liabilities and Deferred Credits 87,449 55,718
Contingencies and Litigation - -
Temporary Equity:
Redeemable common stock -
ESOP shares, 7,477,163 and 7,350,937
shares issued and outstanding in 2000 and 1999,
respectively, subject to restrictions 186,674 182,974
Other, 426,217 shares issued and outstanding 7,489 6,142
Stockholders' Equity:
Common stock, par value ten cents per share, authorized
20,000,000 shares; issued 4,786,155 and 4,908,447 shares
in 2000 and 1999, respectively 479 491
Paid-in surplus 134,235 133,338
Accumulated other comprehensive income (loss) 12 (9)
Reclassification to temporary equity for redemption value
greater than par value (193,372) (188,339)
Deficit (68,622) (72,887)
Common stock held in treasury, at cost; 2,281,362 and
2,301,262 shares in 2000 and 1999, respectively (42,519) (43,062)
Unearned ESOP shares - (2,658)
----------- -----------
Total Liabilities and Stockholders' Equity $ 677,591 $ 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 Ended Nine Months Ended
------------------ -----------------
September 28, September 30, September 28, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Revenues $ 467,673 $ 334,635 $ 1,341,475 $ 967,782
Costs and expenses:
Costs of services 440,795 318,354 1,268,470 917,190
Corporate general and administrative 7,828 4,291 22,484 15,381
Interest income (830) (338) (2,299) (1,375)
Interest expense 10,281 4,466 30,977 13,010
Amortization of intangibles of acquired companies 4,174 1,770 11,264 3,306
Other expense (379) (440) (931) 660
--------- --------- ----------- ---------
Total costs and expenses 461,869 328,103 1,329,965 948,172
Earnings before income taxes and minority interest 5,804 6,532 11,510 19,610
Provision for income taxes 2,175 2,306 4,062 6,872
--------- --------- ----------- ---------
Earnings before minority interest 3,629 4,226 7,448 12,738
Minority interest 625 590 1,839 1,899
--------- --------- ----------- ---------
Net earnings $ 3,004 $ 3,636 $ 5,609 $ 10,839
========= ========= =========== =========
Accretion of mezzanine shares to redeemable value 483 - 1,344 -
Common stockholders' share of net earnings $ 2,521 $ 3,636 $ 4,265 $ 10,839
========= ========= =========== =========
Basic earnings per share $ 0.24 $ 0.37 $ 0.41 $ 1.08
Diluted earnings per share $ 0.24 $ 0.36 $ 0.40 $ 1.06
Weighted average number of shares
outstanding for basic earnings per share 10,503 9,859 10,464 10,047
Weighted average number of shares
outstanding for diluted earnings per share 10,718 10,137 10,679 10,268
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Nine Months Ended
-----------------
September 28, September 30,
2000 1999
---- ----
Cash Flows from Operating Activities:
Common stockholders' share of net earnings $ 4,265 $ 10,839
Adjustments to reconcile common stockholders' share of net earnings to
net cash provided by operating activities:
Depreciation and amortization 18,646 8,318
Accretion of mezzanine shares to redeemable value 1,344 -
Other 822 (3,034)
Changes in current assets and liabilities, net of acquisitions and
dispositions:
Decrease (increase) in current assets except cash and cash equivalents 12,436 (3,109)
(Decrease) increase in current liabilities excluding notes payable
and current portion of long term-debt (11,960) 2,605
-------- --------
Cash provided by operating activities 25,553 15,619
-------- --------
Cash Flows from Investing Activities:
Sale of property and equipment 10,628 216
Purchase of property and equipment (15,890) (9,812)
Assets and liabilities of acquired business (2,500) -
Assets and liabilities of business sold 2,300 -
Increase in investments in unconsolidated affiliates (1,536) (2,570)
Capitalized cost of new financial and human resource systems (240) (5,817)
Other (347) 196
-------- --------
Cash used in investing activities (7,585) (17,787)
-------- --------
Cash Flows from Financing Activities:
Treasury stock purchased - (6,605)
Payment on indebtedness (196,465) (146,733)
Proceeds from debt issuance 179,101 166,729
Pay-in kind interest on Subordinated Notes 5,042 -
Payment received on Employee Stock Ownership Trust note 2,958 6,992
Loan to Employee Stock Ownership Trust (300) (11,082)
Other (185) 316
-------- --------
Cash (used in) provided by financing activities (9,849) 9,617
-------- --------
Net Increase in Cash and Cash Equivalents 8,119 7,449
Cash and Cash Equivalents at Beginning of the Period 5,657 4,088
-------- --------
Cash and Cash Equivalents at End of the Period $ 13,776 $ 11,537
======== ========
Supplemental Cash Flow Information:
Cash paid for income taxes $ 4,464 $ 4,585
======== ========
Cash paid for interest $ 22,957 $ 13,542
======== ========
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 (Loss)
----- ------- -------------- ------- ----- ------ -------------
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) (447) 543
Loans to the Employee Stock
Ownership Trust (300)
Payment received on
Employee Stock Ownership
Trust note 2,958
Reclassification to redeemable
common stock (12) (3,689)
Accretion of mezzanine shares
to redeemable value 1,344 (1,344) (1,344)
Unrealized gains on securities 29
Translation adjustment (8)
Net earnings 5,609
----- --------- --------- -------- -------- ------- ----
Balance, September 28, 2000 $ 479 $ 134,235 $(193,372) $(68,622) $(42,519) $ - $ 12
===== ========= ========= ======== ======== ======= ====
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 28, 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. 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 September 28, 2000 and December 30, 1999
included accrued salaries of $71.1 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 September 28, Redeemable December 30,
Shares Value 2000 Shares Value 1999
------ ----- ---- ------ ----- ----
ESOP Shares 3,313,729 $27.75 $ 91,956 3,313,729 $27.50 $ 91,128
4,163,434 $22.75 94,718 4,037,208 $22.75 91,846
--------- -------- --------- --------
7,477,163 $186,674 7,350,937 $182,974
========= ======== ========= ========
Other Shares 426,217 $17.57 $ 7,489 426,217 $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, as part of the financing for the GTE Information
Systems, LLC acquisition, the Company sold 426,217 shares of the Company's
stock. 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 put right has been
exercised: (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 nine months 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 September 28, 2000 and $2.7 million outstanding as of December 30,
1999. The unpaid loan balances represented 101,052 unallocated 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 warrants and options outstanding,
assuming the treasury stock method.
Three Months Ended Nine Months Ended
------------------ -----------------
September 28, September 30, September 28, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Weighted average shares outstanding for basic EPS 10,503 9,859 10,464 10,047
Effect of dilutive securities:
Stock options 215 278 215 221
------ ------ ------ ------
Weighted average shares outstanding for diluted EPS 10,718 10,137 10,679 10,268
====== ====== ====== ======
Note 7. Recently Issued Accounting Pronouncements
In June 2000, the FASB issued 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.
In September 2000, the FASB issued SFAS No. 140, which replaces SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" and rescinds SFAS No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS
140 revises SFAS 125's standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but it carries over most of the SFAS 125's provisions without
reconsideration. SFAS 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March
31, 2001 and for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for
fiscal years ending after December 15, 2000. SFAS 140 is to be applied
prospectively with certain exceptions. SFAS 140 is not expected to have a
material impact on the Company's consolidated results of operations or
financial position.
Note 8. Acquisition
In September 2000, the Company purchased for $2.5 million certain assets
and liabilities of a company which develops and markets proprietary
decision-support software and provides related consulting services to
evaluate and profile performance of providers engaged in healthcare. The
purchase price has been allocated to the assets acquired and liabilities
assumed based on preliminary estimated fair value at the date of
acquisition, under the purchase method of accounting.
Note 9. Subsequent Event
The Company received approximately $20.4 million in October 2000 on a sale
and leaseback of various high end communications equipment for a DynCorp
Information Systems LLC contract. The lease term is for forty-four months
and has been classified as an operating lease in accordance with SFAS No.
13, "Accounting for Leases."
Note 10. Accrued and Other Liabilities
At the end of the third quarter of 2000, the Company added approximately
$55.6 million to contract loss and other reserves as a result of finaliz-
ing its evaluation of the estimated future cash flows of contracts and
other assets acquired from GTE Information Systems LLC on December 10,
1999. This amount included $14.1 million in accrued liabilities and the
remainder in other liabilities and deferred credits. The additional re-
serves were primarily related to lower levels of revenue volume on a fixed
price contract with the federal government, which is expected to result in
significant losses over the term of the contract. This contract ends in
2007. The Company is currently reviewing all of its options, both legal
and operational, in order to mitigate these losses. The recording of this
operating loss reserve resulted in an increase in goodwill and the de-
ferred tax asset.
Note 11. 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 provides a wide range of
information technology services and other professional services including
network and communications engineering, government operational
outsourcing, healthcare information and technology services and security
and intelligence programs. DTS provides a myriad of specialized technical
services including aviation services, range technical services, base
operations, and logistics support services. 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 Nine Months Ended
------------------ -----------------
September 28, September 30, September 28, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Revenues
--------
DTS $ 235,363 $ 172,187 $ 661,145 $ 487,593
DI&ET 174,406 162,448 511,550 480,189
DIS 57,904 - 168,780 -
--------- --------- ----------- ---------
$ 467,673 $ 334,635 $ 1,341,475 $ 967,782
========= ========= =========== =========
Operating Profit (a)
----------------
DTS $ 11,372 $ 7,591 $ 29,059 $ 22,201
DI&ET 10,134 8,587 28,983 26,984
DIS 4,935 - 13,449 -
--------- --------- ----------- ---------
26,441 16,178 71,491 49,185
Corporate general and administrative 7,828 4,291 22,484 15,381
Interest income (830) (338) (2,299) (1,375)
Interest expense 10,281 4,466 30,977 13,010
Goodwill amortization 1,369 1,405 3,196 2,191
Amortization of other intangibles of acquired
companies 2,805 365 8,068 1,115
Minority interest included in operating profit (625) (590) (1,839) (1,899)
Other miscellaneous (191) 47 (606) 1,152
--------- --------- ----------- ---------
Earnings before income taxes and minority interest $ 5,804 $ 6,532 $ 11,510 $ 19,610
========= ========= =========== =========
September 28, December 30,
2000 1999
---- ----
Identifiable Assets
-------------------
DTS $ 190,744 $ 173,629
DI&ET 185,088 205,798
DIS 255,663 206,083
Corporate 46,096 54,163
--------- -----------
$ 677,591 $ 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 nine months ended September 28, 2000 and
the comparable periods for 1999.
Revenues and Operating Profit
- -----------------------------
For the three and nine months ended September 28, 2000, revenue increased 39.8%
and 38.6% to $467.7 million and $1,341.5 million, respectively, compared to
$334.6 million and $967.8 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 43.5% and 45.2%, respectively, of
the revenue increases. Operating profit, defined as the excess of revenues over
operating expenses and certain non-operating expenses, increased 63.4% and 45.4%
to $26.4 million and $71.5 million, respectively, compared to $16.2 million and
$49.2 million for the comparable periods in 1999. DIS accounted for
approximately 48.1% and 60.3%, respectively, of the operating profit increases.
DynCorp Technical Services' ("DTS") revenues year-over-year showed continued
growth for the three and nine months ended September 28, 2000. Revenues grew
36.7% and 35.6% to $235.4 million and $661.1 million, respectively, for the
three and nine months of 2000 compared to $172.2 million and $487.6 million for
the comparable periods in 1999. The increase in revenues in the third quarter
and year-to-date 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, increases on an international logistical
support contract and increases in the level of effort on contracts providing
repair and maintenance on military aircraft. DTS' revenues were also increased
by the phase in of a new contract in the military aircraft maintenance and base
operations area in the third quarter and the increased tasking on a first year
contract with the US Army. Also contributing to the increase in revenue was a
$15.8 million increase in year-to-date purchases of reimbursable materials for
the customer at Fort Rucker and increased services on certain base operations
support contracts.
Management expects DTS revenue for the fourth quarter of 2000 to be
approximately the same or slightly higher than the third quarter of 2000. Due to
the recent contract wins by DTS, noted below in backlog, management expects DTS
revenue to continue to grow in 2001, but at a slower rate than experienced in
2000.
Operating profit for DTS increased 49.8% and 30.9% to $11.4 million and $29.1
million, respectively, for the three and nine months ended September 28, 2000,
compared to $7.6 million and $22.2 million for the comparable prior year
periods. The increase in operating profit for the third quarter and nine months
of 2000 compared to the comparable periods in 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 for the nine-month period did not grow as significantly as
revenues due to the lack of profit on reimbursable materials for certain
contracts and start-up costs for several new contracts.
DynCorp Information and Enterprise Technology ("DI&ET") reported revenue growth
of 7.4% and 6.5% to $174.4 million and $511.6 million, respectively, for the
three and nine month periods ended September 28, 2000 compared to $162.4 million
and $480.2 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 began operations in
1999 and was fully operational in 2000. Also contributing to DI&ET's increased
revenues was growth in a joint venture for vaccine technology services for the
Department of Defense, which was just starting up in the first nine months of
1999, increased tasking on several General Service Administration Indefinite
Delivery Indefinite Quantity ("IDIQ") contracts, higher volumes on data
abstraction and analysis 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 a contract with the Immigration and Naturalization Service. Prior year
revenues on these two contracts totaled $55.3 million for the nine months.
The subcontract from the Department of Commerce Bureau of the Census will report
lower revenues in the fourth quarter of 2000 due to the expected wind-down of
the contract. The contract will end in the first quarter of 2001. This
subcontract reported revenues of $40.4 million in the nine months ended
September 28, 2000. Management expects that two new contracts awarded in 2000,
one with the Department of Defense providing end-to-end personnel security
investigation services and the other with the General Service Administration
providing battlefield simulation for the U.S. Army, will partially offset this
lost revenue in 2001.
For the three and nine months ended September 28, 2000, operating profit for
DI&ET increased 18.0% and 7.4% to $10.1 million and $29.0 million, respectively,
compared to $8.6 million and $27.0 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. These two contracts provided $4.7 million of the nine-month
increase in operating profit for DI&ET. DI&ET experienced growth in operating
profits on its health and information technology services contracts and several
General Service Administration IDIQ contracts. Also contributing to the increase
in operating profit were operating losses in 1999 on certain contracts that did
not continue in 2000. Offsetting this increase to operating profit was the loss
of the Immigration and Naturalization Service contract in 1999 which had $3.8
million in operating profit in the nine months ended September 30, 1999.
For the three and nine months ended September 28, 2000, DIS had revenues of
$57.9 million and $168.8 million and operating profit of $4.9 million and $13.5
million, respectively. The Company's reported results for the three and nine
month periods ending September 30, 1999 do not include DIS results.
Cost of Services
- ----------------
Cost of services for the third quarter and first nine months of 2000 was 94.3%
and 94.6%, respectively, of revenue as compared to 95.1% and 94.8% for the
comparable periods in 1999. The decrease in the cost of service percentage of
revenue in the first nine months of 2000 was attributable to the higher margin
DIS business acquired in 1999, partially offset by growth in the lower margin
DTS business. DIS costs of services were 91.7% and 92.2%, respectively, of
revenue for the third quarter and first nine months of 2000. DTS costs of
service were 95.2% and 95.6%, respectively, of revenue for the third quarter and
first nine months of 2000. For the nine months ended September 28, 2000, cost of
services increased by $351.3 million, or 38.3% over the comparable period in
1999. DIS cost of services comprised $155.6 million of the increase.
Corporate General and Administrative Expense
- --------------------------------------------
Corporate general and administrative expense for the third quarter and first
nine months of 2000 was $7.8 million and $22.5 million, respectively, as
compared to $4.3 million and $15.4 million for the comparable periods in 1999,
an increase of $3.5 million and $7.1 million, respectively. Corporate general
and administrative expense as a percentage of revenue was 1.7% for the three and
nine months ended September 28, 2000 as compared to 1.3% and 1.6%, respectively,
for the comparable periods in 1999. The increased expense relates primarily to
the Company's implementation of 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. Resystemization costs totaled $5.1 million
for the nine month period ended September 28, 2000 and accounted for 22.8% of
total corporate general and administrative expenses for the same period. In
addition, in the third quarter of 1999 corporate general and administrative
expense was lower due to a $2.0 million reversal of reserves related to the
favorable resolution of contract compliance issues.
Interest Expense
- ----------------
Interest expense in the third quarter of 2000 was $10.3 million or 2.2% of
revenues, as compared to $4.5 million or 1.3% of revenues reported in the third
quarter of 1999. For the nine months ended September 28, 2000, interest expense
was $31.0 million or 2.3% of revenues as compared to $13.0 million or 1.3% of
revenues for the first nine months of 1999. The increase in interest expense was
attributable to higher average debt levels primarily as a result of borrowings
to fund the DIS acquisition in December 1999 and higher weighted average
interest rates in the first nine months of 2000 compared to the first nine
months of 1999. The average levels of indebtedness were approximately $344.3
million and $186.2 million during the nine months ended September 28, 2000 and
September 30, 1999, respectively.
Amortization of Intangibles of Acquired Companies
- -------------------------------------------------
Amortization of intangibles of acquired companies was $4.2 million and $11.3
million, respectively, for the three and nine months ended September 28, 2000
compared to $1.8 million and $3.3 million for the comparable periods of 1999.
The increase in three and nine months amortization of intangibles of acquired
companies 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. Amortization costs related to the DIS intangibles during the nine
months ended September 28, 2000 totaled $9.9 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 slightly by $0.1 million to $2.2 million for the three months
ended September 28, 2000 compared to $2.3 million in the comparable period in
1999. For the nine months ended September 28, 2000, the provision for income
taxes decreased by $2.8 million to $4.1 million compared to $6.9 million in the
comparable period in 1999. The decrease for the three and nine month periods was
due to higher pretax earnings in the comparable periods in 1999, partially
offset by a slightly lower effective tax rate in the same periods. The Company's
effective tax rate approximated 42.0% for the three and nine months ended
September 28, 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 $5.8 billion at September 28, 2000 compared to $4.4
billion at December 30, 1999, a net increase of $1.4 billion. The backlog at
September 28, 2000 consisted of $3.7 billion for DTS, $1.7 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 for DI&ET, and $0.5 billion for DIS. The net increase in
backlog is attributable primarily to two significant contracts awarded to DTS in
the third quarter of 2000 in the military aircraft maintenance and base
operations area, which totaled $1.3 billion. Subsequent to the third quarter,
the Company was awarded a significant contract to provide aircraft and
helicopter maintenance, fuels management, and other tasks for contingency and
emergency support operations. This contract has a ten-year performance period
and is anticipated to increase the Company's backlog by $0.3 billion.
Working Capital and Cash Flow
- -----------------------------
Working capital, defined as current assets less current liabilities, was $129.2
million at September 28, 2000 compared to $165.2 million at December 30, 1999, a
decrease of $36.0 million. The ratio of current assets to current liabilities at
September 28, 2000 and December 30, 1999 was 1.5 and 1.7, respectively. The
decrease was primarily the result of higher portions of the Senior Secured
Credit Agreement Term A loans becoming current as of September 28, 2000 and
increases in the current portion of the DIS reserves (see Note 10) in the third
quarter of 2000.
Cash provided by operations was $25.6 million in the first nine months of 2000,
as compared to $15.6 million cash provided by operations in the first nine
months of 1999, an increase of $9.9 million. The increase resulted primarily
from higher customer collections, partially offset by payments on accounts
payable.
Investing activities used funds of $7.6 million during the nine months ended
September 28, 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. Offsetting
the cash provided from the sale of the office building was cash used for the
purchase of other property and equipment of approximately $15.9 million. In
September 2000, the Company purchased $2.5 million of certain net assets of a
company which develops and markets proprietary decision-support software and
provides related consulting services to evaluate and profile performance of
providers engaged by healthcare payers. Also in September 2000, the Company sold
$2.3 million of certain net assets of a DTS aerospace research and development
unit. The purchase price in both of these transactions is subject to adjustment.
During the first nine months of 1999, investing activities used funds of $17.8
million principally for the purchase of property and equipment, and the
capitalized cost of new software for internal use as part of the Company's Year
2000 plan.
In October 2000, the Company received approximately $20.4 million related to the
sale and leaseback of various high-end communications equipment on a DIS
contract.
Financing activities used funds of $9.8 million during the nine months ended
September 28, 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 $7.9 million
and the Senior Secured Credit Agreement Revolving Credit Facility by a net of
$7.0 million. Offsetting these reductions in cash flows was the receipt of $2.7
million on loans to the ESOT and the increase of $5.0 million related to the
pay-in kind interest on Subordinated Notes. During the first nine months of
1999, financing activities provided net funds of $9.6 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.
In the third quarter of 2000, management finalized the evaluation of the
estimated future cash flows of contracts and other assets acquired from GTE
Information Systems LLC on December 10, 1999. Due to these evaluations,
management increased certain reserves by $55.6 million at September 28, 2000.
Management also wrote off $11.8 million of assets and expenses during the third
quarter. These changes resulted in increases to goodwill and deferred tax asset
of $43.8 million and $23.6 million, respectively. An additional $0.4 million of
amortization expense was recognized on this increase of goodwill in the third
quarter of 2000.
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 represents the Company's computation of EBITDA (in thousands):
Three Months Ended Nine Months Ended
------------------ -----------------
September 28, September 30, September 28, September 30,
2000 1999 2000 1999
---- ---- ---- ----
Net earnings $ 3,004 $ 3,636 $ 5,609 $ 10,839
Depreciation and amortization 6,608 3,731 18,646 8,318
Interest expense, net 9,451 4,128 28,678 11,635
Income taxes 2,175 2,306 4,062 6,872
Amortization of deferred debt expense (283) (201) (986) (567)
Debt issue discount (11) (10) (32) (28)
-------- -------- -------- --------
EBITDA $ 20,944 $ 13,590 $ 55,977 $ 37,069
======== ======== ======== ========
EBITDA (as defined above) increased by $7.4 million, or 54.1%, to $20.9 million
for the third quarter of 2000 as compared to the comparable period in 1999. For
the first nine months of 2000, EBITDA grew by $18.9 million, or 51.0%, to $56.0
million as compared to the first nine months of 1999. The increases in EBITDA in
the three and nine month periods in 2000, as compared to the similar periods in
1999, are primarily attributable to higher operating profits as discussed above.
The above net earnings amounts include DIS transition expenses of $1.2 million
and $4.9 million, respectively, for the three and nine months ended September
28, 2000. These expenses relate to administrative and accounting support
provided by the former parent corporation and affiliates of DIS, which is
expected to end by the first quarter of 2001. Also included in these expenses
are costs related to transitioning these services to DynCorp. Management expects
future administrative and accounting support services to be significantly less
than the 2000 expenses.
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
manage 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 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
None filed.
(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: November 13, 2000 /S/ P.C. FitzPatrick
---------------------
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: November 13, 2000 /S/ J.J. Fitzgerald
---------------------
J.J. Fitzgerald
Vice President
and Corporate Controller