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 March 29, 2001 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 re-
quired to file such reports), and (2) has been subject to such filing require-
ments 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 May 3, 2001
----- -----------------------------
Common Stock, $0.10 par value 10,443,142
DYNCORP AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 29, 2001
INDEX
Page
----
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
March 29, 2001 and December 28, 2000 3-4
Consolidated Condensed Statements of Operations for
Three Months Ended March 29, 2001 and March 30, 2000 5
Consolidated Condensed Statements of Cash Flows for
Three Months Ended March 29, 2001 and March 30, 2000 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. Exhibit and Reports on Form 8-K 16
Signatures 17
PART I. FINANCIAL INFORMATION
-----------------------------
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 29, 2001 AND DECEMBER 28, 2000
(In thousands)
March 29,
2001 December 28,
Unaudited 2000
--------- ------
Assets
- ------
Current Assets:
Cash and cash equivalents $ 11,064 $ 12,954
Accounts receivable (net of allowance for doubtful accounts
of $3,850 in 2001 and $4,071 in 2000) 313,558 334,354
Other current assets 40,788 36,570
------- -------
Total current assets 365,410 383,878
Property and Equipment (net of accumulated depreciation
and amortization of $23,434 in 2001 and $23,833 in 2000) 24,863 27,766
Intangible Assets (net of accumulated amortization of
$68,119 in 2001 and $66,193 in 2000) 178,390 181,677
Other Assets 49,925 51,020
-------- --------
Total Assets $618,588 $644,341
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
MARCH 29, 2001 AND DECEMBER 28, 2000
(In thousands,except share amounts)
March 29,
2001 December 28,
Unaudited 2000
--------- ------------
Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Notes payable and current portion of long-term debt $ 1,374 $ 124
Accounts payable 50,996 67,761
Deferred revenue and customer advances 7,464 7,631
Accrued liabilities 156,342 165,723
------------ ----------
Total current liabilities 216,176 241,239
Long-Term Debt 282,650 283,889
Other Liabilities and Deferred Credits 88,038 90,283
Contingencies and Litigation
Temporary Equity:
Redeemable common stock at redemption value
ESOP shares, 7,533,813 and 7,504,653
shares issued and outstanding in 2001 and 2000,
respectively, subject to restrictions 256,588 238,346
Other redeemable common stock, 426,217 shares issued
and outstanding in 2001 and 2000, respectively 8,537 7,984
Stockholders' Equity:
Common stock, par value ten cents per share, authorized 20,000,000 shares;
issued 4,729,929 and 4,758,897 shares
in 2001 and 2000, respectively 473 476
Paid-in surplus 135,145 134,638
Accumulated other comprehensive (deficit) income (564) 3
Reclassification to temporary equity for redemption value
greater than par value (264,329) (245,540)
Deficit (62,170) ( 64,835)
Common stock held in treasury, at cost; 2,253,027 and
2,264,625 shares in 2001 and 2000, respectively (41,956) ( 42,142)
-------- --------
Total Liabilities and Stockholders' Equity $618,588 $644,341
======== ========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
UNAUDITED
Three Months Ended
------------------
March 29, March 30,
2001 2000
---- ----
Revenues $440,073 $428,500
Costs and expenses:
Costs of services 416,667 407,350
Corporate general and administrative 6,827 6,633
Interest income (293) (827)
Interest expense 8,377 10,168
Amortization of intangibles of acquired companies 2,301 3,758
Other (58) 21
-------- --------
Total costs and expenses 433,821 427,103
Earnings before income taxes and minority interest 6,252 1,397
Provision for income taxes 2,425 344
-------- --------
Earnings before minority interest 3,827 1,053
Minority interest 611 577
-------- --------
Net earnings $ 3,216 $ 476
======== ========
Accretion of other redeemable common stock to
redemption value 551 424
Common stockholders' share of net earnings $ 2,665 $ 52
======== ========
Basic earnings per share $ 0.25 $ 0.01
Diluted earnings per share $ 0.24 $ 0.01
Weighted average number of shares
outstanding for basic earnings per share 10,545 10,411
Weighted average number of shares
outstanding for diluted earnings per share 11,025 10,638
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Three Months Ended
------------------
March 29, March 30,
2001 2000
---- ----
Cash Flows from Operating Activities:
Common stockholders' share of net earnings $ 2,665 $ 52
Adjustments to reconcile net earnings from operations to net cash (used in)
provided by operating activities:
Depreciation and amortization 5,177 6,013
Accretion of other redeemable common stock to redemption value 551 424
Pay-in-kind interest on Subordinated Notes - 1,500
Other 65 (136)
Changes in current assets and liabilities, net of acquisitions:
Decrease in current and certain other assets except cash and cash equivalents 17,026 18,678
Decrease in current and certain other liabilities excluding notes payable
and current portion of long-term debt (28,860) (21,225)
--------- ---------
Cash (used in) provided by operating activities (3,376) 5,306
Cash Flows from Investing Activities:
Sale of property and equipment 2,640 9,715
Purchase of property and equipment (1,487) (3,663)
Decrease (increase) in investments in unconsolidated affiliates 768 (184)
Other (24) (205)
--------- ---------
Cash provided by investing activities 1,897 5,663
Cash Flows from Financing Activities:
Payments on indebtedness (54,400) (84,748)
Proceeds from debt issuance 54,400 74,853
Payment received on Employee Stock Ownership Trust note - 2,658
Loan to Employee Stock Ownership Trust - (300)
Other (411) 24
--------- ---------
Cash used in financing activities (411) (7,513)
Net (Decrease) Increase in Cash and Cash Equivalents (1,890) 3,456
Cash and Cash Equivalents at Beginning of the Period 12,954 5,657
--------- ---------
Cash and Cash Equivalents at End of the Period $ 11,064 $ 9,113
========= =========
Supplemental Cash Flow Information:
Cash paid for income taxes $ 6,735 $ 2,097
========= =========
Cash paid for interest $ 9,435 $ 6,390
========= =========
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
UNAUDITED
Adjustment for Accumulated
Redemption Other
Common Paid-in Value Greater Treasury Comprehensive
Stock Surplus than Par Value Deficit Stock (Deficit) Income
----- ------- -------------- ------- ----- ----------------
Balance, December 28, 2000 $476 $134,638 $(245,540) $(64,835) $(42,142) $3
Employee compensation plans
(option exercises, restricted
stock plan, incentive bonus) (44) 186
Reclassification to redeemable
common stock (3) (18,238)
Accretion of other redeemable
common stock to redemption
value 551 (551) (551)
Adjustment to fair value of
derivative financial instru-
ment (400)
Cumulative effect of change in
accounting principle (100)
Translation adjustment and other (67)
Net earnings 3,216
----------------------------------------------------------------------------------------------------
Balance, March 29, 2001 $473 $135,145 $(264,329) $(62,170) $(41,956) $(64)
==== ======== ========== ========= ======== =====
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
MARCH 29, 2001
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 accord-
ance 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 fin-
ancial 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 pre-
sent 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 con-
form to the 2001 presentation.
Note 2. Accrued Liabilities
Accrued liabilities as of March 29, 2001 and December 28, 2000 included
accrued salaries and fringe benefits of $75.3 million and $79.2 million,
respectively.
Note 3. Redeemable Common Stock
Common stock which is redeemable has been reflected as Temporary Equity at
the redemption value at each balance sheet date and consists of the
following:
Balance at Balance at
Redeemable March 29, Redeemable December 28,
Shares Value 2001 Shares Value 2000
------ ----- ---- ------ ----- ----
ESOP Shares 3,291,332 $38.00 $125,071 3,313,729 $35.25 $116,809
4,242,481 $31.00 $131,517 4,190,924 $29.00 121,537
--------- -------- --------- --------
7,533,813 $256,588 7,504,653 $238,346
========= ======== ========= ========
Other Shares 426,217 $20.03 $ 8,537 426,217 $18.73 $ 7,984
========= ======== ========= ========
Effective January 1, 2001, the Company established two new plans: the
Savings and Retirement Plan and the Capital Accumulation and Retirement
Plan (collectively, the "Savings Plans"). At the same time, the Employee
Stock Ownership Plan ("ESOP") was merged into the two plans. The Company
stock accounts of participants in the ESOP were transferred to one or the
other of the Savings Plans, and the Savings Plans participants have the
same distribution and put rights for these ESOP shares as they had in the
ESOP. All rights and obligations of the ESOP remain intact in the new
plans. In accordance with the Employee Retirement Income Security Act
regulations and the Savings Plans' documents, the Company is obligated,
unless the Savings Plans' Trust purchases the shares, to purchase distri-
buted certain common stock shares transferred from the former ESOP from
former participants in the ESOP on retirement or termination at fair value
as long as the Company's common stock is not publicly traded. However, 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 author-
ized 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 agree-
ments 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 our
years, at which time the put must be honored. The escalation rate increas-
es 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. The annual accretion in
the fair value of these shares is reflected as a reduction of common
stockholders' share of net earnings on the consolidated statements of
operations.
Note 4. Income Taxes
The provision for income taxes in 2001 and 2000 is based upon an estimated
effective tax rate. This rate includes the impact of permanent differences
between the book basis of assets and liabilities recognized for financial
reporting purposes and the basis recognized for tax purposes.
Note 5. 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 stock-
holders' 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 Savings Plans' 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 treas-
ury stock method.
Three Months Ended
------------------
March 29, March 30,
2001 2000
---- ----
Weighted average shares outstanding for basic EPS 10,545 10,411
Effect of dilutive securities:
Stock options 480 227
------ ------
Weighted average shares outstanding for diluted EPS 11,025 10,638
====== ======
Note 6. Derivative Financial Instruments
The Company adopted Statement of Financial Accounting Standards No. 133
("FAS 133"), Accounting for Derivative Instruments and Hedging Activities,
and Statement of Financial Accounting Standards No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an amend-
ment of FASB Statement No. 133, on January 1, 2001. FAS 133 requires the
transition adjustment, net of the tax effect, resulting from adopting these
Statements to be reported in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle.
Changes in the fair value of derivatives are recorded each period in cur-
rent earnings or other comprehensive income based on the guidelines stipu-
lated in FAS 133. The adoption of the standard did not have a material im-
pact on the Company's results of operations, financial condition or cash
flows, but did reduce accumulated other comprehensive income by $0.1
million. The adjustments to fair value of the derivative instruments de-
scribed below during the first three months of 2001 resulted in a decrease
in accumulated other comprehensive income of $0.4 million.
The Company has a policy to use derivative financial instruments to manage
its market risk exposures from fluctuations in interest rates on its float-
ing rate debt and foreign exchange rates as warranted. The Company manages
its exposure to this market risk through the monitoring of its available
financing alternatives including, in certain circumstances, the use of der-
ivative financial instruments. The Company has managed its exposure to
changes in interest rates by effectively capping at 7.5% the base interest
rate on a notional amount of $100.0 million of its LIBOR indexed debt until
February 2002. In December 2000, the Company entered into a two-year-and-28
-day swap agreement, wherein the Company pays approximately 6.2% annualized
interest on a notional amount of $35.0 million on a quarterly basis begin-
ning on January 4, 2001 and ending on January 6, 2003. The objective of
this transaction is to neutralize the cash flow variability for the hedged
debt. The Company does not hold or issue derivative financial instruments
for trading purposes.
Note 7. Business Segments
Effective January 1, 2001, the Company realigned its three Strategic Busi-
ness Segments into five focused sectors in order to further expand its
business in the growing international market and also to segregate out its
health information and technology services. DynCorp Technical Services
("DTS") was divided into DynCorp International LLC ("DI") and DTS. DI will
handle all of the Company's overseas business, including information tech-
nology solutions, and will continue to provide maintenance worldwide to
support U.S. military aircraft. DTS provides myriad specialized technical
services including aviation services, range technical services, base oper-
ations, and logistics support. DynCorp Information and Enterprise Tech-
nology ("DI&ET") was divided into AdvanceMed ("ADVMED") and DI&ET. ADVMED
is structured as a business-to-business, eHealth decision support solution
organization and provides an integrated set of decision support tools to
meet the needs of healthcare payers and providers. DI&ET provides a wide
range of information technology services and other professional services
including network and communications engineering, government operational
outsourcing, and security and intelligence programs. DynCorp Information
Systems LLC ("DIS") offers a full range of integrated telecommunications
services and information technology solutions in the area of professional
services, business systems integration, information infrastructure solut-
ions, and information technology operations and support.
The purpose of these realignments was to provide focus and clarity to the
Company's businesses and enable the Company to better serve its customers
by concentrating and segregating the international and healthcare informa-
tion and technology services. Business segment information for 2000 has
been restated to give effect to this change.
Revenues, operating profit and identifiable assets for the Company's five
business segments for 2001 and the comparable periods for 2000 are present-
ed below:
Three Months Ended
------------------
March 29, March 30,
2001 2000
---- ----
Revenues
- --------
DI&ET $ 140,487 $ 151,110
DI 118,568 108,218
DTS 115,744 100,967
DIS 50,386 52,793
ADVMED 14,888 15,412
--------- ---------
$ 440,073 $ 428,500
========= =========
Operating Profit (a)
- --------------------
DI&ET $ 7,869 $ 7,718
DI 7,417 5,245
DTS 3,615 3,230
DIS 3,594 3,390
ADVMED 297 986
--------- ------
22,792 20,569
Corporate general and administrative 6,827 6,633
Interest income (293) (827)
Interest expense 8,377 10,168
Goodwill amortization 1,304 942
Amortization of other intangibles of acquired companies 997 2,816
Minority interest included in operating profit (611) (577)
Other miscellaneous (61) 17
---------- -------
Earnings before income taxes and minority interest $ 6,252 $ 1,397
========== =========
March 29, December 28,
2001 2000
---- ----
Identifiable Assets
-------------------
DI&ET $ 140,141 $ 145,733
DI 76,348 83,040
DTS 111,263 111,849
DIS 226,403 230,544
ADVMED 26,571 26,815
Corporate 37,862 46,360
-------- ---------
$ 618,588 $ 644,341
========= =========
(a) Defined as the excess of revenues over operating expenses and certain non-
operating expenses.
Note 8: Subsequent Event
On April 25, 2001, the Company and its wholly owned subsidiary, DynCorp
Management Resources, Inc. ("DMR") signed an Agreement and Plan of Reorgan-
ization whereby DMR will merge into a subsidiary of TekInsight.Com, Inc.
("TekInsight"), a publicly held company. DMR, which is included in the
DI&ET business segment, is engaged in the business of providing outsourcing
services to state and local government agencies. DMR revenues of $7.1
million and $6.6 million for the three months ended March 29, 2001 and
March 30, 2000, respectively, and operating (loss)/profit of ($0.04)million
and $0.5 million, respectively, for those same periods. These revenues
and operating (losses)/profits are included in the DI&ET amounts noted
above. The merger is contingent upon approval of the transaction by
TekInsight's stockholders and other conditions, including the availability
of TekInsight to obtain at least $20 million of third-party financing, on
terms and conditions acceptable to the Company to support the operations
of the combined organization. Closing is expected to occur in the third
quarter of 2001. As merger consideration, the Company would become a 40%
owne of TekInsight.
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 28, 2000.
Results of Operations
- ---------------------
The Company provides diversified management, technical and professional services
primarily to U.S. Government customers throughout the United States and inter-
nationally. The Company's customers include various branches of the U.S. Depart-
ments of Defense, Energy, State, and Justice, the Drug Enforcement Agency, the
National Institute of Health, the 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 oper-
ations and financial condition for the three months ended March 29, 2001 and the
comparable period for 2000.
Revenues and Operating Profit
- -----------------------------
Revenues for the first quarter of 2001 were $440.1 million, compared to $428.5
million for the comparable period in 2000, an increase of $11.6 million, or
2.7%. Operating profit, defined as the excess of revenues over operating
expenses and certain non-operating expenses, was $22.8 million for the first
quarter of 2001, compared to $20.6 million for the comparable period in 2000, an
increase of $2.2 million or 10.8%. The increase in both revenues and operating
profit was attributable to the award of several new contracts in 2000 and
increases in services provided on existing contracts. Operating profits grew
faster than revenues due to contract start-up costs in the first quarter of 2000
that did not continue in the first quarter of 2001, losses on several contracts
in the first quarter of 2000 that did not continue in the first quarter of 2001,
and increased profit due to additional funding/revenue in the first quarter of
2001 for contract costs that were recognized in a prior period.
DynCorp Information and Enterprise Technology ("DI&ET") reported revenues of
$140.5 million for the first quarter of 2001, compared to $151.1 million for the
first quarter of 2000, a decrease of $10.6 million or 7.0%. The decrease in
revenues in the first quarter of 2001 compared to the first quarter of 2000
resulted primarily from the loss of a subcontract for the Department of Commerce
for the 2000 Census. This contract had revenues of $9.5 million in the first
quarter of 2000. Also contributing to the decrease in revenues was the reduction
in work scope on a subcontract providing operations management to the Department
of Energy ("DoE") Hanford location and the completion of another DoE contract in
the second half of 2000 that provided management technical and scientific
services. Offsetting these decreases were increased revenues from growth in a
joint venture for vaccine technology services for the Department of Defense,
increased tasking on several Indefinite Delivery Indefinite Quantity ("IDIQ")
contracts, and a new contract that provides battlefield simulation system
support services and maintenance for the U.S. Army.
For the first quarter ended March 29, 2001, operating profit for DI&ET increased
slightly by $0.2 million, or 2.0%, to $7.9 million from $7.7 million in the
first quarter of 2000. DI&ET experienced growth in operating profits on several
IDIQ contracts and its joint venture for vaccine technology services for the
Department of Defense. Also contributing to the increase in operating profit was
additional funding in the first quarter of 2001 on a contract that was closed
out in 2000 which provided management, technical, and scientific services to the
DoE, and losses in the first quarter of 2000 on several contracts that provided
technical advisory services in the national security area that did not continue
in the first quarter of 2001. Offsetting these increases was the loss of the
subcontract with the Department of Commerce for the 2000 Census. Operating
profit on this contract in the first quarter of 2000 was $0.7 million.
DynCorp International's ("DI") first quarter 2001 revenues were $118.6 million
compared to $108.2 million for the first quarter of 2000, an increase of $10.4
million or 9.6%. Operating profit increased by $2.2 million to $7.4 million, or
41.4%, from $5.2 million in the first quarter of 2000. The increase in revenues
resulted primarily from the phase-in of a new contract with the U.S. Army. This
contract had revenue of $11.3 million in the first quarter of 2001. Other
increases in revenues resulted from increased tasking on State Department
contracts which provide protective support and police services in several
countries, increased services on a contract in support of the government's drug
eradication program, and increased tasking on an international logistical
support contract including work in Bosnia and East Timor.
DI's increase in operating profit for the first quarter of 2001 compared to the
first quarter of 2000 resulted from the higher revenues as noted above. In
addition, operating profits grew faster than revenues due to improved profit
margins in some of its service areas. These improved profit margins resulted in
part from contract start-up costs in the first quarter of 2000 that did not
continue in the first quarter of 2001.
DynCorp Technical Services' ("DTS") first quarter 2001 revenues were $115.7
million compared to $101.0 million for the first quarter of 2000, an increase of
$14.8 million or 14.6%. Operating profit increased by $0.4 million to $3.6
million, or 11.9%, from $3.2 million in the first quarter of 2000. The increase
in revenues and operating profit resulted from growth in its logistics support
and aviation services businesses, primarily from new military aircraft mainten-
ance and base operations support contracts at two domestic U.S. Air Force bases.
Also contributing to the increase in revenues were increases in the purchase of
reimbursable materials for the customer at Fort Rucker. DTS expects future rev-
enue and operating profit increases from the phase-in of another new contract
with the U.S. Air Force later this year.
Partially offsetting these DTS increases in revenue and operating profit in the
first quarter of 2001 were decreases that resulted from the sale of certain
aerospace research and development contracts in the third quarter of 2000.
Revenues and operating profit from these contracts were $2.0 million and $0.1
million, respectively, in the first quarter of 2000.
DynCorp Information Systems LLC ("DIS") had revenues of $50.4 million in the
first quarter of 2001 as compared to $52.8 million in the first quarter of 2000,
a decrease of $2.4 million or 4.6%. DIS' operating profit increased slightly by
$0.2 million to $3.6 million in the first quarter of 2001 from $3.4 million in
the same period of 2000. The decrease in revenue resulted from several programs
that are winding down. While DIS has strategies in place to grow existing and
new customers, current wins to date have not been adequate to replace these lost
revenues. The slight increase on operating profit resulted from revenue related
to recovery of contract costs that had been expensed in prior periods.
AdvanceMed ("ADVMED") had revenues of $14.9 million in the first quarter of 2001
as compared to $15.4 million for the comparable period in 2000, a decrease of
$0.5 million or 3.4%. Operating profit decreased by $0.7 million to $0.3 million
from $1.0 million in the same period of 2000. The decrease in revenues and
operating profit resulted from the loss of a contract that provided review and
analysis of military treatment facility health care performance. In addition,
operating profit was negatively impacted by costs associated with the completion
of a software product. Partially offsetting the lost revenue and operating
profit was the start-up of a contract that provides review and analysis of Medi-
care reimbursement for healthcare providers. Management expects that the new
Medicare contract will offset the lost revenue and operating profit from the
lost contract noted above in 2001.
Cost of Services
- ----------------
Cost of services for the first quarter 2001 was 94.7% of revenue as compared to
95.0% for the comparable period in 2000. The improved margins in the first
quarter of 2001 compared to the first quarter of 2000 were primarily due to
improved margins in DTS and DI, which had combined cost of services of 95.3% in
the first three months of 2001 and 96.0% in the same period in 2000. These
improved margins were due to higher contract start-up costs in the first quarter
of 2000 that negatively affected the first quarter of 2000 margins.
Corporate General and Administrative Expense
- --------------------------------------------
Corporate general and administrative expense for the first quarter of 2001 was
$6.8 million, relatively unchanged as compared to $6.6 million for the compar-
able period in 2000. Corporate general and administrative expense as a percent-
age of revenue was 1.6% for the three months ended March 29, 2001 and for the
comparable period in 2000.
Interest Expense
- ----------------
Interest expense was $8.4 million in the first quarter of 2001, down from $10.2
million in the first quarter of 2000. Interest expense as a percentage of
revenue was 1.9% for the three months ended March 29, 2001, as compared to 2.4%
for the comparable period in 2000. The decrease in interest expense was
attributable to lower average debt levels and lower average interest rates in
the first three months of 2001 as compared to the first three months of 2000.
The average levels of indebtedness were approximately $284.6 million and $355.4
million during the three months ended March 29, 2001 and March 30, 2000,
respectively. Also contributing to the decrease in interest expense was a $0.2
million refund of interest expense received in the first quarter of 2001 under
the new Internal Revenue Service "interest netting" principles.
Amortization of Intangibles of Acquired Companies
- -------------------------------------------------
Amortization of intangibles of acquired companies was $2.3 million for the
quarter ended March 29, 2001 as compared to $3.8 million for the first quarter
of 2000, a decrease of $1.5 million. The decrease resulted from intangibles
related to DIS contracts acquired, which became fully amortized early in the
first quarter of 2001.
Income Taxes
- ------------
The provision for income taxes in 2001 and 2000 is based upon an estimated
effective tax rate, including the impact of permanent differences between the
book basis of assets and liabilities recognized for financial reporting purposes
and the basis recognized for tax purposes. The provision for income taxes
increased by $2.1 million for the three months ended March 29, 2001 from the
comparable period in 2000. The increase was due to higher pretax income and a
higher effective tax rate in the first quarter of 2001, compared to the same
period in 2000. The Company's effective tax rate approximated 43.0% for the
three months ended March 29, 2001 compared to 42.0% in the comparable period in
2000.
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 $6.4 billion at March 29, 2001, compared to $6.1
billion at December 28, 2000, a net increase of $0.3 billion. The backlog at
March 29, 2001 consisted of $1.6 billion for DTS, $2.2 billion for DI, $1.9
billion for DI&ET, $0.2 billion for ADVMED, and $0.5 billion for DIS compared to
December 28, 2000 backlog of $1.7 billion for DTS, $2.2 billion for DI, $1.7
billion for DI&ET, $0.1 billion for ADVMED, and $0.4 billion for DIS.
Working Capital and Cash Flow
- -----------------------------
Working capital, defined as current assets less current liabilities, was $149.2
million at March 29, 2001 compared to $142.6 million at December 28, 2000, an
increase of $6.6 million. The ratio of current assets to current liabilities at
March 29, 2001 and December 28, 2000 was 1.7 and 1.6, respectively. The increase
in working capital was primarily due to decreases in certain accrued expenses
partially offset by a lower accounts receivable balance. During the first
quarter of 2001, management continued to place emphasis on its receivable
collections and cash management.
For the three months ended March 29, 2001, the Company's cash flow from
operating activities used $3.4 million, a decrease of $8.7 million as compared
to the same period in 2000 where operating activities provided $5.3 million. The
decrease in cash provided by operations resulted from higher payments on
accounts payable in the first three months of 2001 compared to the same period
in 2000. Partially offsetting this decrease was higher customer collections in
the first three months of 2001 as compared to the first three months of 2000.
Investing activities provided funds of $1.9 million in the three months ended
March 29, 2001, as compared to $5.7 million in the three months ended March 30,
2000. In the first quarter of 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 in 2000. Management expects
purchases of equipment and property to be lower in 2001 as compared to 2000.
Financing activities for the three months ended March 29, 2001 totaled $0.4
million and included several short-term borrowing and subsequent payments of a
cumulated sum of $54.4 million under the Senior Secured Credit Agreement
Revolving Credit Facility maturing December 9, 2004. During the first quarter of
2000, financing activities used funds of $7.5 million, which consisted primarily
of the payoff of the mortgage on the Alexandria office building that the Company
sold. The Company also reduced its outstanding borrowings under the Senior
Secured Credit Agreement - Term B loans by $7.4 million in the first quarter of
2000. Offsetting these reductions in cash flows was the issuance of $1.5 million
of additional 15% Subordinated Notes for pay-in-kind interest.
Subsequent Event
- ----------------
On April 25, 2001, the Company and its wholly owned subsidiary, DynCorp Manage-
ment Resources, Inc. ("DMR") signed an Agreement and Plan of Reorganization
whereby DMR will merge into a subsidiary of TekInsight.Com, Inc. ("TekInsight"),
a publicly held company. DMR, which is included in the DI&ET business segment,
is engaged in the business of providing outsourcing services to state and local
government agencies. DMR revenues were $7.1 million and $6.6 million for the
months ended March 29, 2001 and March 30, 2000, respectively, and operating
(loss)/profit of ($0.04) million and $0.5 million, respectively, for those same
periods. The merger is contingent upon approval of the transaction by Tek-
Insight's stockholders and other conditions, including the availability of Tek-
Insight to obtain at least $20.00 million of third-party financing, on terms and
conditions acceptable to the Company to support the operations of the combined
organization. Closing is expected to occur in the third quarter of 2001. As
merger consideration, the Company would become a 40% owner of TekInsight.
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
U.S. 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 calculat-
ion.
The following represents the Company's computation of EBITDA (in thousands):
Three Months Ended
------------------
March 29, March 30,
2001 2000
---- ----
Net earnings $ 3,216 $ 476
Depreciation and amortization 5,177 6,013
Interest expense, net 8,084 9,341
Income taxes 2,425 344
Amortization of deferred debt expense (472) (271)
Debt issue discount (11) (10)
--------- ---------
EBITDA $ 18,419 $ 15,893
========= =========
EBITDA (as defined above) increased by $2.5 million, or 15.9%, to $18.4 million
for the first quarter of 2001 as compared to the comparable period in 2000. The
increase in EBITDA in the three-month period in 2001 as compared to the similar
period in 2000, is 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 assur-
ance that its expectations will be achieved. Factors that could cause actual re-
sults 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 oper-
ations 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 has a policy to use derivative financial instruments to manage its
market risk exposures from fluctuations in interest rates on its floating rate
debt and foreign exchange rates as warranted. 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 a
notional amount of $100.0 million of its LIBOR indexed debt until February 2002.
In December 2000, the Company entered in a two year and 28-day swap agreement,
wherein the Company pays approximately 6.2% annualized interest on a notional
amount of $35.0 million on a quarterly basis beginning on January 4, 2001 and
ending on January 6, 2003. The objective of this transaction is to neutralize
the cash flow variability for the hedged debt. The Company does not hold or
issue derivative financial instruments for trading purposes.
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: May 11, 2001 /S/P.C. FitzPatrick
-----------------------------
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: May 11, 2001 /S/J.J. Fitzgerald
----------------------------
J.J. Fitzgerald
Vice President
and Corporate Controller