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 28, 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
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 6, 2001
_____ ________________________________
Common Stock, $0.10 par value 10,447,561
DYNCORP AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 28, 2001
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
June 28, 2001 and December 28, 2000 3-4
Consolidated Condensed Statements of Operations for
Three and Six Months Ended June 28, 2001 and June 29, 2000 5
Consolidated Condensed Statements of Cash Flows for
Six Months Ended June 28, 2001 and June 29, 2000 6
Consolidated Statement of Stockholders' Equity 7
Notes to Consolidated Condensed Financial Statements 8-12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
PART I. FINANCIAL INFORMATION
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 28, 2001 AND DECEMBER 28, 2000
(In thousands)
June 28,
2001 December 28,
Unaudited 2000
_________ ____
Assets
Current Assets:
Cash and cash equivalents $ 6,228 $ 12,954
Accounts receivable (net of allowance for doubtful accounts
of $3,805 in 2001 and $4,071 in 2000) 321,643 334,354
Other current assets 37,356 36,570
_________ _________
Total current assets 365,227 383,878
Property and Equipment (net of accumulated depreciation
and amortization of $25,297 in 2001 and $23,833 in 2000) 24,653 27,766
Intangible Assets (net of accumulated amortization of
$62,017 in 2001 and $66,193 in 2000) 175,548 181,677
Other Assets 46,804 51,020
_________ _________
Total Assets $ 612,232 $ 644,341
_________ _________
_________ _________
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JUNE 28, 2001 AND DECEMBER 28, 2000
(In thousands, except share amounts)
June 28,
2001 December 28,
Unaudited 2000
_________ ____
Liabilities and Stockholders' Equity
Current Liabilities:
Notes payable and current portion of long-term debt $ 7,624 $ 124
Accounts payable 36,460 67,761
Deferred revenue and customer advances 6,818 7,631
Accrued liabilities 159,807 165,723
_________ _________
Total current liabilities 210,709 241,239
Long-Term Debt 276,700 283,889
Other Liabilities and Deferred Credits 88,897 90,283
Contingencies and Litigation
Temporary Equity:
Redeemable common stock at redemption value -
ESOP shares, 7,525,443 and 7,504,653
shares issued and outstanding in 2001 and 2000,
respectively, subject to restrictions 260,248 238,346
Other redeemable common stock, 426,217 shares issued
and outstanding in 2001 and 2000, respectively 9,104 7,984
Stockholders' Equity:
Common stock, par value ten cents per share, authorized 20,000,000 shares;
issued 4,744,260 and 4,758,897 shares
in 2001 and 2000, respectively 474 476
Paid-in surplus 135,755 134,638
Accumulated other comprehensive (loss) income (750) 3
Reclassification to temporary equity for redemption value
greater than par value (268,556) (245,540)
Deficit (58,352) (64,835)
Common stock held in treasury, at cost; 2,248,751 and
2,264,625 shares in 2001 and 2000, respectively (41,997) (42,142)
__________ __________
Total Liabilities and Stockholders' Equity $ 612,232 $ 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 Six Months Ended
__________________ ________________
June 28, June 29, June 28, June 29,
2001 2000 2001 2000
____ ____ ____ ____
Revenues $476,900 $445,302 $916,973 $873,802
Costs and expenses:
Costs of services 451,064 420,278 867,731 827,628
Corporate general and administrative 7,199 8,046 14,026 14,655
Interest income (159) (641) (453) (1,469)
Interest expense 8,032 10,526 16,409 20,695
Amortization of intangibles of acquired companies 2,128 3,463 4,429 7,090
Other 6 (680) (51) (506)
_________ _________ _________ _________
Total costs and expenses 468,270 440,992 902,091 868,093
Earnings before income taxes and minority interest 8,630 4,310 14,882 5,709
Provision for income taxes 3,309 1,544 5,735 1,888
_________ _________ _________ _________
Earnings before minority interest 5,321 2,766 9,147 3,821
Minority interest 934 635 1,545 1,213
_________ _________ _________ _________
Net earnings $ 4,387 $ 2,131 $ 7,602 $ 2,608
_________ _________ _________ _________
_________ _________ _________ _________
Accretion of other redeemable common stock to
Redemption value 568 437 1,119 861
Common stockholders' share of net earnings $ 3,819 $ 1,694 $ 6,483 $ 1,747
_________ _________ _________ _________
_________ _________ _________ _________
Basic earnings per share $ 0.36 $ 0.16 $ 0.61 $ 0.17
Diluted earnings per share $ 0.34 $ 0.16 $ 0.59 $ 0.16
Weighted average number of shares
outstanding for basic earnings per share 10,559 10,495 10,552 10,448
Weighted average number of shares
outstanding for diluted earnings per share 11,106 10,693 11,061 10,663
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
Six Months Ended
________________
June 28, June 29,
2001 2000
____ ____
Cash Flows from Operating Activities:
Common stockholders' share of net earnings $ 6,483 $ 1,747
Adjustments to reconcile net earnings from operations to net cash
(used in) provided by operating activities:
Depreciation and amortization 11,105 12,038
Accretion of other redeemable common stock to redemption value 1,119 861
Pay-in-kind interest on Subordinated Notes - 3,397
Other 440 181
Changes in current assets and liabilities, net of acquisitions:
Decrease in current assets except cash and cash equivalents 11,925 10,760
Decrease in current liabilities excluding notes payable and current
portion of long-term debt (38,030) (13,714)
_________ _________
Cash (used in) provided by operating activities (6,958) 15,270
Cash Flows from Investing Activities:
Sale of property and equipment 2,942 10,890
Purchase of property and equipment (3,348) (9,893)
Decrease (increase) in investments in unconsolidated affiliates 556 (1,631)
Other (60) (368)
_________ _________
Cash provided by (used in) investing activities 90 (1,002)
Cash Flows from Financing Activities:
Payments on indebtedness (159,250) (191,981)
Proceeds from debt issuance 159,250 175,568
Payment received on Employee Stock Ownership Trust note - 2,958
Loan to Employee Stock Ownership Trust - (300)
Other 142 (240)
_________ _________
Cash provided by (used in) financing activities 142 (13,995)
Net (Decrease) Increase in Cash and Cash Equivalents (6,726) 273
Cash and Cash Equivalents at Beginning of the Period 12,954 5,657
_________ _________
Cash and Cash Equivalents at End of the Period $ 6,228 $ 5,930
_________ _________
_________ _________
Supplemental Cash Flow Information:
Cash paid for income taxes $ 7,270 $ 3,977
_________ _________
_________ _________
Cash paid for interest $ 17,618 $ 12,137
_________ _________
_________ _________
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 Other
Redemption Comprehensive
Common Paid-in Value Greater Treasury Income
Stock Surplus than Par Value Deficit Stock (Loss)
_____ _______ ______________ _______ _____ ____
Balance, December 28, 2000 $ 476 $134,638 $(245,540) $(64,835) $(42,142) $3
Employee compensation plans
(option exercises, restricted
stock plan, incentive bonus) 1 (2) 145
Reclassification to redeemable
common stock (3) (21,897)
Accretion of other redeemable
common stock to redemption
value 1,119 (1,119) (1,119)
Adjustment to fair value of
derivative financial instrument (500)
Cumulative effect of change in
accounting principle (100)
Translation adjustment and other (153)
Net earnings 7,602
_______________________________________________________________________________________________
Balance, June 28, 2001 $ 474 $135,755 $(268,556) $ (58,352) $(41,997) $(750)
_____ ________ __________ __________ _________ ______
_____ ________ __________ __________ _________ ______
The accompanying notes are an integral part of these consolidated condensed
financial statements.
DYNCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JUNE 28, 2001
(Dollars in thousands, except per share amounts)
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 accor-
dance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations. It is recommended that
these condensed financial statements be 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 un-
audited consolidated condensed financial statements included herein re-
flect all adjustments (consisting of normal recurring adjustments) nec-
essary 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 reclas-
sified to conform to the 2001 presentation.
Note 2. Redeemable Common Stock
Common stock which is redeemable has been reflected as Temporary Equity at
redemption value at each balance sheet date and consists of the following:
Balance at Balance at
Redeemable June 28, Redeemable December 28,
Shares Value 2001 Shares Value 2000
______ _____ ____ ______ _____ ____
ESOP Shares 3,313,729 $38.50 $127,579 3,313,729 $35.25 $116,809
4,211,714 $31.50 132,669 4,190,924 $29.00 121,537
_________ ______ ________ _________ ______ ________
7,525,443 $260,248 7,504,653 $238,346
________ ________
________ ________
Other Shares 426,217 $21.36 $ 9,104 426,217 $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 certain
distributed 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
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. 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 3. Income Taxes
The provisions for income taxes in 2001 and 2000 are based upon estimated
effective tax rates. These rates include the impact of permanent differ-
ences between the book basis of assets and liabilities recognized for
financial reporting purposes and the basis recognized for tax purposes.
Note 4. Earnings Per Share
The following table sets forth (in thousands) 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 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 treasury stock method.
Three Months Ended Six Months Ended
__________________ ________________
June 28, June 29, June 28, June 29,
2001 2000 2001 2000
____ ____ ____ ____
Weighted average shares outstanding for basic EPS 10,559 10,495 10,552 10,448
Effect of dilutive securities:
Stock options 547 198 509 215
______ ______ ______ ______
Weighted average shares outstanding for diluted EPS 11,106 10,693 11,061 10,663
______ ______ ______ ______
______ ______ ______ ______
Note 5. 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
current earnings or other comprehensive income based on the guidelines
stipulated in FAS 133. The adoption of the standard did not have a material
impact 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
described below during the first six months of 2001 resulted in a decrease
in accumulated other comprehensive income of $0.5 million.
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
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 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.
Note 6. Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued FAS No. 141,
"Business Combinations" and FAS No. 142, "Goodwill and Other Intangible
Assets." FAS 141 requires all business combinations initiated after June
30, 2001 to be accounted for using the purchase method. The provisions of
FAS 142 eliminate amortization of goodwill and identifiable intangible
assets with indefinite lives and require an impairment assessment at least
annually by applying a fair-value based test. The Company is required to
adopt FAS 142 January 1, 2002. The Company anticipates an annual increase
to common stockholders' share of net earnings of approximately $3.2
million, or $0.29 per diluted share, from the elimination of goodwill
amortization. Management does not expect the other provisions of the
statements to have a material impact on the Company's results of
operations or financial condition.
Note 7. Business Segments
Effective January 1, 2001, the Company realigned its three Strategic
Business 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
technology solutions, and will continue to provide maintenance worldwide to
support U.S. military aircraft. DTS provides a myriad of specialized
technical services including aviation services, range technical services,
base operations, and logistics support. DynCorp Information and Enterprise
Technology ("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 solutions, and information technology operations and sup-
port.
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 infor-
mation 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
presented below:
Three Months Ended Six Months Ended
__________________ ________________
June 28, June 29, June 28, June 29,
2001 2000 2001 2000
____ ____ ____ ____
Revenues
________
DI&ET $146,863 $154,224 $287,293 $305,184
DI 131,316 108,391 249,884 216,609
DTS 125,960 108,068 241,761 209,184
DIS 56,699 58,085 107,085 110,878
ADVMED 16,062 16,534 30,950 31,947
________ ________ ________ ________
$476,900 $445,302 $916,973 $873,802
________ ________ ________ ________
________ ________ ________ ________
Operating Profit (a)
____________________
DI&ET $ 8,041 $ 8,321 $ 15,646 $ 15,647
DI 8,454 5,364 15,871 10,609
DTS 2,841 4,751 6,720 8,373
DIS 4,133 5,124 7,727 8,514
ADVMED 1,399 920 1,696 1,906
________ ________ ________ ________
24,868 24,480 47,660 45,049
Corporate general and administrative 7,199 8,046 14,026 14,655
Interest income (159) (641) (453) (1,469)
Interest expense 8,032 10,526 16,409 20,695
Goodwill amortization 1,349 937 2,630 1,827
Amortization of other intangibles of acquired companies 779 2,526 1,799 5,263
Minority interest included in operating profit (934) (635) (1,545) (1,213)
Other miscellaneous (28) (589) (88) (418)
_________ _________ _________ _________
Earnings before income taxes and minority interest $ 8,630 $ 4,310 $ 14,882 $ 5,709
________ _________ _________ ________
________ _________ _________ ________
June 28, December 28,
2001 2000
____ ____
Identifiable Assets
___________________
DI&ET $ 135,993 $ 145,733
DI 68,914 83,040
DTS 116,891 111,849
DIS 223,995 230,544
ADVMED 28,329 26,815
Corporate 38,110 46,360
_________ _________
$ 612,232 $ 644,341
_________ _________
_________ _________
(a) Defined as the excess of revenues over operating expenses and certain non-
operating expenses.
Note 8. Recent Developments
On April 25, 2001, the Company and its wholly owned subsidiary, DynCorp
Management 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 $14.4
million and $13.7 million for the six months ended June 28, 2001 and June
29, 2000, respectively, and operating (loss)/profit of ($0.6) million and
$0.7 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 ability 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 before year-end. As
merger consideration, the Company would receive approximately 40% of the
common equity of TekInsight, which will be renamed DynTek, Inc.
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
internationally. The Company's customers include various branches of the U.S.
Departments of Defense, Energy, State, and Justice, the Drug Enforcement Agency,
the National Institutes of Health, the National Aeronautics and Space Admin-
istration 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
28, 2001 and the comparable periods for 2000.
Revenues and Operating Profit
_____________________________
For the three and six months ended June 28, 2001 revenue increased 7.1% and 4.9%
to $476.9 million and $917.0 million, respectively, compared to $445.3 million
and $873.8 million for the comparable periods in 2000. Operating profit, defined
as the excess of revenues over operating expenses and certain non-operating
expenses , increased 1.6% and 5.8% to $24.9 million and $47.7 million,
respectively, compared to $24.5 million and $45.0 million for the comparable
periods in 2000.
DynCorp Information and Enterprise Technology ( "DI&ET" ) reported revenue
decreases of 4.7% and 5.9% to $146.9 million and $287.3 million, respectively,
compared to $154.2 million and $305.2 million for the comparable periods in
2000. The decrease in revenues in the second quarter and first half of 2001
compared to the same periods in 2000 resulted primarily from the successful
completion of a subcontract for the Department of Commerce for the 2000 Census.
This contract had revenues of $16.3 million and $25.8 million in the three and
six months ended June 29, 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, a new contract that provides battlefield
simulation system support services and maintenance for the U.S. Army, and a new
contract with the Department of Defense which provides security background
investigations that was awarded in the second quarter of 2000 and is fully
operational in 2001.
For the three months ended June 28, 2001, operating profit for DI&ET decreased
3.4% to $8.0 million compared to $8.3 million for the same prior year period and
remained constant at $15.7 million for the six months ended June 28, 2001 and
June 29, 2000. The decrease in operating profit resulted primarily from the
completion of the subcontract for the Department of Commerce for the 2000 Census
and the reduction in work scope on the DoE Hanford location subcontract as noted
above. In addition, operating profit was negatively impacted by start-up costs
on a contract providing workstation support for the Commonwealth of Virginia and
by higher costs associated with a contract that provides transportation to
Medicare patients in the State of Connecticut. Offsetting these decreases were
improved profitability from the conversion of certain contracts to higher margin
IDIQ contracts, profit on the new battlefield simulation and Department of
Defense contracts that are noted above, and increased tasking on the vaccine
technology services contract that is also noted above.
In the second quarter of 2001, management was advised that the subcontract
providing operations management to the DoE Hanford location will end effective
September 30, 2001. Revenues for this subcontract totaled $48.3 million and
$54.5 million for the six months ended June 28, 2001 and June 29, 2000,
respectively. Operating profits for this subcontract for the six months ended
June 28 , 2001 and June 29 , 2000 totaled $1.4 million and $3.3 million,
respectively.
DynCorp International's ("DI") second quarter and six month 2001 revenues grew
by 21.2% and 15.4% to $131.3 million and $249.9 million, respectively, as
compared to the same prior year periods of $108.4 million and $216.6 million.
The increases over the prior year comparable periods were primarily attributable
to the phase-in of two new contracts: one which provides maintenance and
logistical support to the U.S. Army and the other which provides maintenance,
storage, and security support to the United States Central Command Air Forces,
which supports apportioned combat forces deployed to Southwest Asia. These
contracts reported combined revenues of $26.8 million and $44.2 million for the
three and six months ended June 28, 2001. Other increases in revenues resulted
from increased services on a contract in support of the government's drug
eradication program.
DI's operating profit increased to $8.5 million and $15.9 million for the three
and six months ended June 28, 2001, respectively, from $5.4 million and $10.6
million for the comparable periods in 2000, an increase of 57.6% and 49.6%,
respectively. DI's profit increases resulted from the higher revenues as noted
above. In addition, operating profit 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 six months of 2000
that did not continue in 2001.
DynCorp Technology Services' ("DTS") revenues for the three and six months ended
June 28, 2001, grew 16.6% and 15.6%, respectively, to $126.0 million and $241.8
million, respectively, compared to $108.1 million and $209.2 million for the
comparable periods in 2000. The increase in the three and six month revenues
compared to the same periods in 2000 resulted from continued growth in its
logistics support and aviation services businesses, primarily from new military
aircraft maintenance and base operations support contracts at two domestic U.S.
Air Force bases. These two new U.S. Air Force base contracts provided combined
revenues of $20.0 million and $35.3 million for the three and six months ended
June 28, 2001. Slightly offsetting the increases in revenue was the sale of
certain aerospace research and development contracts in the third quarter of
2000. Revenues for the six months ended June 29, 2000 for the aerospace
contracts were $3.6 million. DTS expects future revenue increases from the
completion of a phase-in of another new contract with the U.S. Air Force later
this year. This contract provided revenues of $5.3 million for the three and six
months ended June 28, 2001.
Operating profit for DTS decreased 40.2% and 19.7% to $2.8 million and $6.7
million for the three and six months ended June 28, 2001, compared to $4.8
million and $8.4 million for the comparable prior year periods. The decreases in
the operating profits were due primarily to higher marketing costs in the first
half of 2001 compared to the same prior year periods and the sale of certain
aerospace research and development contracts as noted above. The marketing costs
are expected to be lower in the second half of 2001. Partially offsetting these
decreases were increases from the new military aircraft maintenance and base
operations support contracts and losses on certain aerospace contracts in 2000
that did not continue in 2001.
DynCorp Information Systems LLC's ("DIS") revenues decreased by 2.4% and 3.4% to
$56.7 million and $107.1 million, respectively, for the second quarter and first
half of 2001 as compared to $58.1 million and $110.9 million the same prior year
periods in 2000. DIS' operating profit decreased by 19.3% and 9.2% to $4.1
million and $7.7 million, respectively, in the second quarter and first half of
2001 from $5.1 million and $8.5 million in the same periods of 2000. The
decrease in revenue and operating profits 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 and operating profits.
AdvanceMed ("ADVMED") reported revenues of $16.1 million and $31.0 million in
the three and six months ended June 28, 2001, respectively, as compared to $16.5
million and $31.9 million in the same prior year periods. ADVMED's operating
profits were $1.4 million and $1.7 million in the three and six months ended
June 28, 2001, respectively, as compared to $0.9 million and $1.9 million in the
comparable periods of 2000. The slight decreases of $0.5 million, or 2.9%, and
$1.0 million , or 3.1%, respectively, in revenues for the three and six
months ended June 28, 2001 and the slight decrease in operating profits of $0.2
million, or 11.0%, for the six months ended June 28, 2001 over the same periods
in 2000 were primarily due to the loss of a contract that provided review and
analysis of military health care facilities' 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 several task orders for a contract that provides review and
analysis of Medicare reimbursement for healthcare providers and also the collec-
tion of an account receivable that was written off in a prior year. The increase
in operating profit of $0.5 million, or 52.1%, for the three months ended June
28, 2001 compared to the same period a year ago resulted from the accounts re-
ceivable collection noted above. Management expects that the new Medicare task
orders will offset the lost revenue and operating profit from the loss of th
contract in 2001 that provided review and analysis of military health care
facilities' performance.
Cost of Services
________________
For the three and six months ended June 28, 2001, cost of services was $451.1
million and $867.7 million, respectively, compared to $420.3 million and $827.6
million for the comparable periods in 2000. Cost of services for the second
quarter and first six months of 2001 was 94.6% of revenue and was relatively
unchanged compared to 94.4% and 94.7% for the comparable periods in 2000.
Corporate General and Administrative Expense
____________________________________________
Corporate general and administrative expense for the second quarter and first
six months of 2001 was $7.2 million and $14.0 million, respectively, as compared
to $8.0 million and $14.7 million for the comparable periods in 2000. Corporate
general and administrative expense as a percentage of revenue was 1.5% for the
three and six months ended June 28, 2001 and 1.8% and 1.7% for the same periods
in 2000. The expense decrease relates primarily to higher costs incurred in 2000
for converting DIS to the Company's financial systems, which was completed in
the fourth quarter of 2000. Management expects that corporate general and
administrative expense will continue to be slightly less than the prior year as
a result of the completion of the conversion of DIS to the Company's financial
systems in 2000.
Interest Expense
________________
For the three and six months ended June 28, 2001, interest expense was $8.0
million and $16.4 million, respectively, compared to $10.5 million and $20.7
million for the comparable periods in 2000. Interest expense as a percentage of
revenue was 1.7% and 1.8% for the three and six months ended June 28, 2001, as
compared to 2.4% for both of the comparable periods in 2000. The decrease in
interest expense was attributable to lower average debt levels and lower average
interest rates in the three and six months of 2001 as compared to the same
periods in 2000. The average levels of indebtedness were approximately $285.7
million and $351.3 million in the six months ended June 28, 2001 and June 29,
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 $2.1 million and $4.4
million for the second quarter and first six months of 2001, respectively, as
compared to $3.5 million and $7.1 million for the comparable period of 2000. The
decreases from 2000 of $1.3 million, or 38.6%, and $2.7 million, or 37.5%, for
the three and six month periods, respectively, resulted from intangibles related
to DIS contracts acquired, which became fully amortized early in the first
quarter of 2001.
Income Taxes
____________
The provisions for income taxes in 2001 and 2000 are based upon estimated
effective tax rates, 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 $1.8 million and
$3.8 million for the three and six months ended June 28, 2001, respectively,
from the comparable periods in 2000. The increases were due to higher pretax
income and higher effective tax rates in the second quarter and first six months
of 2001, compared to the same periods in 2000. The Company's effective tax rate
approximated 43.0% for the three and six months ended June 28, 2001, compared to
42.0% in the comparable periods 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 $6.5 billion at June 28, 2001 compared to $6.1 billion
at December 28, 2000, a net increase of $0.4 billion. The backlog at June 28,
2001 consisted of $1.8 billion for DI&ET, $2.1 billion for DI, $1.8 billion for
DTS, $0.6 billion for DIS, and $0.2 billion for ADVMED compared to December 28,
2000 backlog of $1.7 billion for DI&ET, $2.2 billion for DI, $1.7 billion for
DTS, $0.4 billion for DIS and $0.1 billion for ADVMED.
Working Capital and Cash Flow
_____________________________
Working capital, defined as current assets less current liabilities, was $154.5
million at June 28, 2001 compared to $142.6 million at December 28, 2000, an
increase of $11.9 million, or 8.3%. The ratio of current assets to current
liabilities at June 28, 2001 was 1.7 as compared to 1.6 at December 28, 2000.
The increase in working capital was primarily due to decreases in accounts
payable and certain accrued expenses offset partially by a lower accounts
receivable balance and $7.5 million of the Senior Secured Credit Agreement Term
A loans becoming current as of June 28, 2001. During the first half of 2001,
management continued to place emphasis on its receivable collections and cash
management.
Cash used in operations was $7.0 million in the first six months of 2001, as
compared to cash provided by operations of $15.3 million in the first six months
of 2000, a decrease in cash provided of $22.2 million. The decrease resulted
primarily from a decrease in accounts payable, partially offset by a decrease in
accounts receivable. The decrease in accounts receivable resulted from higher
customer collections.
Investing activities provided funds of $0.1 million in the six months ended June
28, 2001, as compared to cash used in investing activities 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 for 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 the
first six months of 2000. Management expects purchases of property and equipment
to be lower in 2001 as compared to 2000.
Financing activities provided funds of $0.1 million during the six months ended
June 28, 2001, as compared to cash used in financing activities of $14.0 million
for the comparable period in 2000. Financing activities in the first six months
of 2001 included several short-term borrowing and subsequent payments of a
cumulated sum of $159.3 million under the Senior Secured Credit Agreement
Revolving Credit Facility maturing December 9, 2004. In the first six months of
2000, the Company's financing activities 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.
Recent Developments
___________________
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 were $14.4 million and
$13.7 million for the six months ended June 28, 2001 and June 29, 2000,
respectively, and operating (loss)/profit of ($0.6) million and $0.7 million,
respectively, for those same periods.
The merger is contingent upon approval of the transaction by TekInsight's
stockholders and other conditions, including the ability of TekInsight to obtain
at least $20 million of third-party financing, on terms and conditions accept-
able to the Company to support the operations of the combined organization.
Closing is expected to occur before year-end. As merger consideration, the
Company would receive approximately 40% of the common equity of TekInsight,
which will be renamed DynTek, Inc.
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 calcula-
tion.
The following represents the Company's computation of EBITDA (in thousands):
Three Months Ended Six Months Ended
__________________ ________________
June 28, June 29, June 28, June 29,
2001 2000 2001 2000
____ ____ ____ ____
Net earnings $ 4,387 $ 2,131 $ 7,602 $ 2,608
Depreciation and amortization 5,926 6,025 11,105 12,038
Interest expense, net 7,873 9,885 15,956 19,226
Income taxes 3,309 1,544 5,735 1,888
Amortization of deferred debt expense (887) (432) (1,359) (703)
Debt issue discount (12) (11) (23) (21)
________ ________ ________ ________
EBITDA $ 20,596 $19,142 $39,016 $35,036
________ ________ ________ ________
________ ________ ________ ________
EBITDA (as defined above) increased by $1.5 million, or 7.6%, to $20.6 million
for the second quarter of 2001 as compared to the comparable period in 2000. For
the first six months of 2001, EBITDA grew by $4.0 million, or 11.4%, to $39.0
million as compared to the first six months of 2000. The increases in EBITDA in
the three and six month periods in 2001, as compared to the similar periods in
2000, 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 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 alterna-
tives 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 4. Submission of Matters to a Vote of Security Holders
____________________________________________________________
At the annual meeting of stockholders, held on June 18, 2001, at the Company's
headquarters in Reston, Virginia, the stockholders of the Company:
(a) Elected the following individuals to the Board of Directors for the terms
set forth:
Director Term Votes Cast For Votes Withheld/Against
________ ____ ______________ ______________________
Dan R. Bannister Three Years 9,538,532 422,699
Paul G. Kaminski Three Years 9,533,137 428,094
David L. Reichardt Three Years 9,549,744 411,488
(b) Ratified the appointment of Arthur Andersen LLP, public accountants, to
audit the consolidated financial statements of the Company as of and for the
fiscal year ending December 27, 2001. There were 9,482,762 votes for the
appointment, 260,847 votes against, and 217,644 abstentions.
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: August 10, 2001
/S/ P.C. FitzPatrick
__________________________________
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: August 10, 2001
/S/ J.J. Fitzgerald
__________________________________
J.J. Fitzgerald
Vice President
and Corporate Controller