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 July 1, 1999 Commission file number 1-3879
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DynCorp
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(Exact name of registrant as specified in its charter)
Delaware 36-2408747
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2000 Edmund Halley Drive, Reston, VA 20191-3436
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(Address of principal executive offices) (Zip Code)
(703) 264-0330
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
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 10, 1999
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Common Stock, $0.10 Par Value 10,015,000
DYNCORP AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JULY 1, 1999
INDEX
Page
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Consolidated Condensed Balance Sheets at
July 1, 1999 and December 31, 1998 3-4
Consolidated Condensed Statements of Operations for
Three and Six Months Ended July 1, 1999 and July 2, 1998 5
Consolidated Condensed Statements of Cash Flows for
Six Months Ended July 1, 1999 and July 2, 1998 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 12-17
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
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Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
PART I. FINANCIAL INFORMATION
-----------------------------
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JULY 1, 1999 AND DECEMBER 31, 1998
(In thousands)
July 1,
1999 December 31,
Unaudited 1998
--------- ------------
Assets
- ------
Current Assets:
Cash and cash equivalents $ 26,606 $ 4,088
Accounts receivable, net 250,134 257,670
Inventories of purchased products and supplies,
at lower of cost (first-in, first-out) or market 806 769
Other current assets 20,792 15,775
-------- --------
Total current assets 298,338 278,302
Property and Equipment (net of accumulated depreciation
and amortization of $30,430 in 1999 and $27,538 in 1998) 18,807 18,544
Intangible Assets (net of accumulated amortization of
$51,034 in 1999 and $50,030 in 1998) 61,354 58,796
Other Assets 34,950 23,596
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Total Assets $413,449 $379,238
======== ========
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
JULY 1, 1999 AND DECEMBER 31, 1998
(In thousands, except share amounts)
July 1,
1999 December 31,
Unaudited 1998
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Liabilities and Stockholders' Equity
- ------------------------------------
Current Liabilities:
Notes payable and current portion of long-term debt $ 26,252 $ 8,145
Accounts payable 54,040 66,885
Deferred revenue and customer advances 3,217 2,542
Accrued liabilities 133,821 110,051
-------- ---------
Total current liabilities 217,330 187,623
Long-Term Debt 152,098 152,121
Other Liabilities and Deferred Credits 34,976 27,644
Contingencies and Litigation - -
Temporary Equity:
Redeemable common stock -
ESOP shares, 7,239,642 and 7,082,422
shares issued and outstanding in 1999 and 1998,
respectively, subject to restrictions 193,272 180,812
Other, 125,714 shares issued and outstanding in 1998 - 3,049
Stockholders' Equity:
Common stock, par value ten cents per share, authorized 20,000,000 shares;
issued 5,019,503 and 4,976,423 shares in 1999 and 1998, respectively 502 498
Paid-in surplus 127,195 127,216
Accumulated other comprehensive income (7) (10)
Reclassification to temporary equity for redemption value
greater than par value (192,549) (183,140)
Deficit (71,579) ( 78,782)
Common stock held in treasury, at cost; 2,244,146 and
2,005,728 shares in 1999 and 1998, respectively (41,555) (35,640)
Unearned ESOP shares (6,234) (2,153)
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Total Liabilities and Stockholders' Equity $413,449 $379,238
======== ========
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
UNAUDITED
Three Months Ended Six Months Ended
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July 1, July 2, July 1, July 2,
1999 1998 1999 1998
------- ------- ------- -------
Revenues $321,262 $303,602 $633,148 $601,475
Costs and expenses:
Costs of services 303,820 287,927 599,188 571,863
Corporate general and administrative 5,674 4,793 11,091 10,061
Interest income (261) (328) (1,038) (677)
Interest expense 4,489 3,855 8,544 7,648
Other 2,050 1,502 2,285 1,868
------- ------- ------- -------
Total costs and expenses 315,772 297,749 620,070 590,763
Earnings before income taxes and minority interest 5,490 5,853 13,078 10,712
Provision for income taxes 1,973 2,130 4,566 3,906
------- ------- ------- -------
Earnings before minority interest 3,517 3,723 8,512 6,806
Minority interest 205 528 1,309 947
------- ------- ------- -------
Net earnings $ 3,312 $ 3,195 $ 7,203 $ 5,859
======== ======== ======== ========
Basic earnings per share $ 0.33 $ 0.31 $ 0.71 $ 0.58
Diluted earnings per share $ 0.32 $ 0.30 $ 0.70 $ 0.56
Weighted average number of shares
outstanding for basic earnings per share 10,062 10,255 10,127 10,135
Weighted average number of shares
outstanding for diluted earnings per share 10,317 10,609 10,324 10,537
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
UNAUDITED
Six Months Ended
----------------
July 1, July 2,
1999 1998
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Cash Flows from Operating Activities:
Net earnings $ 7,203 $ 5,859
Adjustments to reconcile net earnings from operations to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,587 4,142
Increase in reserves for divested businesses 2,000 383
Proceeds from insurance settlement for asbestos claims - 1,463
Other (848) (58)
Changes in current assets and liabilities, net of acquisitions:
Decrease (increase) in current assets except cash and cash equivalents 2,483 (18,895)
Increase in current liabilities excluding notes payable
and current portion of long-term debt 9,237 4,881
------ -------
Cash provided by (used in) operating activities 24,662 (2,225)
Cash Flows from Investing Activities:
Sale of property and equipment 34 299
Purchase of property and equipment (2,699) (2,498)
Assets and liabilities of acquired business - (10,241)
Increases in investment in unconsolidated affiliates (2,415) (1,054)
Capitalized cost of new financial and human resource systems (5,101) (3,100)
Other (32) (131)
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Cash used in investing activities (10,213) (16,725)
Cash Flows from Financing Activities:
Treasury stock purchased (6,237) (1,033)
Payment on indebtedness (97,656) (18,265)
Proceeds from debt issuance 115,726 20,000
Payment received on Employee Stock Ownership Plan note 3,665 3,318
Loan to Employee Stock Ownership Plan (7,746) -
Exercise of stock options 308 11
Other 9 12
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Cash provided by financing activities 8,069 4,043
Net Increase (Decrease) in Cash and Cash Equivalents 22,518 (14,907)
Cash and Cash Equivalents at Beginning of the Period 4,088 24,602
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Cash and Cash Equivalents at End of the Period $26,606 $ 9,695
======= =======
Supplemental Cash Flow Information:
Cash paid for income taxes $ 2,179 $ 4,253
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Cash paid for interest $ 7,144 $ 7,311
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See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
UNAUDITED
Adjustment for Accumulated
Redemption Value Unearned Other
Common Paid-in Greater than Treasury ESOP Comprehensive
Stock Surplus Par Value Deficit Stock Shares Income
------ ------- ----------------- ------- -------- -------- -------------
Balance, December 31, 1998 $498 $127,216 $(183,140) $(78,782) $(35,640) $(2,153) $(10)
Employee compensation plans
(option exercises, restrited
stock plan, incentive bonus) 7 (21) 322
Treasury stock purchased (6,237)
Loans to the Employee Stock Ownership Trust (7,746)
Payment received on Employee Stock
Ownership Trust note 3,665
Reclassification to redeemable common stock (3) (9,409)
Translation adjustment 3
Net earnings 7,203
---- -------- ---------- --------- --------- -------- ----
Balance, July 1, 1999 $502 $127,195 $(192,549) $(71,579) $(41,555) $(6,234) $(7)
==== ======== ========== ========= ========= ======== ====
See accompanying notes to consolidated condensed financial statements.
DYNCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
JULY 1, 1999
UNAUDITED
Note 1. Basis of Presentation
The Company has prepared the unaudited consolidated condensed financial
statements included herein pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although the
Company believes that the disclosures are adequate to make the information
presented not misleading. It is recommended that these condensed financial
statements are read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report on Form 10-K.
In the opinion of the Company, the unaudited consolidated condensed
financial statements included herein reflect all adjustments (consisting
of normal recurring adjustments) necessary to present fairly the financial
position, the results of operations and the cash flows for such interim
periods. The results of operations for such interim periods are not
necessarily indicative of the results for the full year. Certain amounts
presented for prior periods have been reclassified to conform to the 1999
presentation.
Note 2. Accounts Receivable and Contracts in Process
At July 1, 1999 and December 31, 1998, $107.0 million and $87.9 million,
respectively, of accounts receivable were restricted as collateral for the
7.486% Contract Receivable Collateralized Notes ("Notes"). Additionally,
$1.5 million of cash was restricted as collateral for the Notes and has
been included in Other Assets on the accompanying Consolidated Condensed
Balance Sheets at July 1, 1999 and December 31, 1998.
Accounts receivable are net of an allowance for doubtful accounts of
$1.4 million at July 1, 1999 and $1.1 million at December 31, 1998.
Note 3. Redeemable Common Stock
Common stock which is redeemable upon the exercise of puts under the
Company's Employee Stock Ownership Plan ("ESOP") has been reflected as
Temporary Equity at each balance sheet date and consists of the following:
Balance at Balance at
Redeemable July 1, Redeemable December 31,
Shares Value 1999 Shares Value 1998
------ ----------- ----------- ------ ----------- ------------
ESOP Shares 3,347,519 $29.25 $ 97,915 3,382,340 $27.75 $ 93,860
3,892,123 $24.50 95,357 3,700,082 $23.50 86,952
--------- ---------- --------- ---------
7,239,642 $ 193,272 7,082,422 $ 180,812
========= ========== ========= =========
Other Shares 125,714 $24.25 $ 3,049
========= =========
In accordance with the Employee Retirement Income Security Act regulations
and the ESOP documents, the Company is obligated, unless the ESOP Trust
purchases the shares, to purchase distributed common stock shares from
ESOP participants on retirement or termination at fair value as long as
the Company's common stock is not publicly traded. However, under the
Subscription Agreement with the ESOP dated September 9, 1988, the Company
is permitted to defer put options if, under Delaware law, the capital of
the Company would be impaired as a result of such repurchase.
In conjunction with the acquisition of Technology Applications, Inc. in
1993, the Company issued put options on 125,714 shares of common stock. On
January 12, 1999, the holder exercised the put option on these 125,714
shares of common stock at the applicable price of $24.25 per share.
Note 4. Employee Stock Ownership Plan
From time to time, the Company makes collateralized loans to the Employee
Stock Ownership Trust ("ESOT") to purchase shares and pay off expiring
loans. During the first half of 1999, the Company loaned the ESOT
$7.7 million and the ESOT paid back to the Company $3.7 million of the
outstanding loan balance. The unpaid loan balance, reflected as a
reduction of stockholders' equity, was $6.2 million and $2.2 million
at July 1, 1999 and December 31, 1998, respectively. The unpaid loan
balances represented 257,849 and 99,309 shares at July 1, 1999, and
December 31, 1998, respectively.
Note 5. Income Taxes
The provision for income taxes in 1999 and 1998 is based upon an estimated
annual effective tax rate. This rate includes the impact of differences
between the book value of assets and liabilities recognized for financial
reporting purposes and the basis recognized for tax purposes.
Note 6. Earnings Per Share
The following table sets forth the reconciliation of shares for basic EPS
to shares for diluted EPS. Basic EPS is computed by dividing net earnings
by the weighted average number of common shares outstanding and
contingently issuable shares. The weighted average number of common shares
outstanding includes issued shares less shares held in treasury and any
unallocated ESOP shares. Shares earned and vested but unissued under the
Restricted Stock Plan are contingently issuable shares whose conditions
for issuance have been satisfied and as such have been included in the
calculation of basic EPS. Diluted EPS is computed similarly except the
denominator is increased to include the weighted average number of stock
warrants and options outstanding, assuming the treasury stock method.
Three Months Ended Six Months Ended
------------------ ----------------
July 1, July 2, July 1, July 2,
1999 1998 1999 1998
------- ------- ------- -------
Weighted average shares outstanding for basic EPS 10,062 10,255 10,127 10,135
Effect of dilutive securities:
Warrants - 169 - 244
Stock options 255 185 197 158
------ ------ ------ ------
Weighted average shares outstanding for diluted EPS 10,317 10,609 10,324 10,537
====== ====== ====== ======
Note 7. Recently Issued Accounting Pronouncements
In April 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 98-5, "Reporting on the
Costs of Start-up Activities," which became effective for fiscal years
beginning after December 15, 1998. The statement provides guidance on the
financial reporting of start-up costs and organization costs and requires
costs of start-up activities to be expensed as incurred. The adoption of
this statement, effective January 1, 1999, did not have a material impact
on the Company's financial statements.
AICPA SOP No. 98-9, "Software Revenue Recognition," was issued in December
1998. SOP No. 98-9 amends SOP No. 97-2 to require recognition for
multiple-element arrangements by means of the "residual method" in certain
circumstances. The provisions of SOP No. 98-9 that extend the deferral of
certain passages of SOP No. 97-2 became effective December 15, 1998. All
provisions are effective for transactions entered into in fiscal years
beginning after March 15, 1999. Earlier application for financial
statements or information that has not been issued is permitted and
retroactive application is prohibited. SOP No. 98-9 is not expected to have
a material impact on the Company's consolidated results of operations or
financial position.
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, which
deferred the effective date of SFAS 133. In June 1998, FASB issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities. Because of the Company's minimal use of derivatives,
the Company does not expect that the adoption of this new standard
will have a material impact on its results of operations or financial
condition.
Note 8. Business Segments
Effective January 1, 1999, the Company realigned its three Strategic
Business Segments into two focused sectors. The Company's Information and
Engineering Technology Unit and most of its Enterprise Management Unit were
combined to become DynCorp Information and Enterprise Technology. Aerospace
Technology and the remaining parts of Enterprise Management were combined
to become DynCorp Technical Services. The purpose of this realignment was
to provide focus and clarity to the Company's businesses and enable the
Company to better serve its customers by concentrating technical services
and information technology competencies in individual single business unit
structures. Business segment information for 1998 has been restated to give
effect to this change.
Revenues, operating profit and identifiable assets for the Company's two
business segments for 1999 and the comparable periods for 1998 are
presented below:
Three Months Ended Six Months Ended
------------------ ----------------
July 1, July 2, July 1, July 2,
1999 1998 1999 1998
------- ------- ------- -------
Revenues
--------
DynCorp Information and Enterprise Technology $162,287 $155,714 $317,743 $ 307,513
DynCorp Technical Services 158,975 147,888 315,405 293,962
-------- -------- -------- --------
$321,262 $303,602 $633,148 $601,475
========= ======== ======== ========
Operating Profit (a)
----------------
DynCorp Information and Enterprise Technology $9,429 $7,082 $ 18,398 $ 15,020
DynCorp Technical Services 7,649 7,117 14,609 12,678
-------- -------- --------- --------
17,078 14,199 33,007 27,698
Corporate general and administrative 5,674 4,793 11,091 10,061
Interest income (261) (328) (1,038) (677)
Interest expense 4,489 3,855 8,544 7,648
Goodwill amortization 393 394 786 784
Minority interest included in operating profit (205) (528) (1,309) (947)
Amortization of intangibles of acquired companies 365 184 749 512
Other miscellaneous 1,133 (24) 1,106 (395)
------ ------- -------- ---------
Earnings before income taxes and minority interest $5,490 $5,853 $ 13,078 $ 10,712
====== ====== ======== =========
July 1, December 31,
1999 1998
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Identifiable Assets
-------------------
DynCorp Information and Enterprise Technology $187,445 $193,094
DynCorp Technical Services 149,011 141,514
Corporate 76,993 44,630
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$413,449 $379,238
======== ========
(a) Defined as the excess of revenues over operating expenses and certain
nonoperating expenses.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
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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 31, 1998.
Results of Operations
- ---------------------
The Company provides diversified management, technical and professional services
primarily to U.S. Government customers throughout the United States and
internationally. The Company's customers include various branches of the
Department of Defense, the Department of Energy, NASA, the Department of State,
the Department of Justice 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 July 1, 1999 and the comparable periods for 1998.
Revenues and Operating Profit
- -----------------------------
For the three and six months ended July 1, 1999, revenue increased 5.8% and 5.3%
to $321.3 million and $633.1 million, respectively, compared to $303.6 million
and $601.5 million for the comparable periods in 1998. Operating profit, defined
as the excess of revenues over operating expenses and certain non-operating
expenses, increased 20.3% and 19.2% to $17.1 million and $33.0 million,
respectively, compared to $14.2 million and $27.7 million for the comparable
periods in 1998.
DynCorp Information and Enterprise Technology reported revenue growth of 4.2%
and 3.3% to $162.3 million and $317.7 million, respectively, compared to $155.7
million and $307.5 million for the comparable periods in 1998. The revenue
increases were primarily due to the start-up of a contract with the U.S. Postal
Service, which was awarded in 1998 but became operational in 1999, increased
tasking on indefinite delivery/indefinite quantity ("IDIQ") contracts, and
growth in a contract with the Department of Justice. Also contributing to the
revenue increases were higher volume of state and local contract business, two
award fees received which were greater than accrued (expected), growth in health
information technology services, and new business with the customer at the Norco
location. Partially offsetting these increases in revenue was the loss in
recompetition of significant portions of the work scope of an enterprise
contract at the DoE Rocky Flats location. In the second quarter and first half
of 1998, Rocky Flats' revenue was $20.8 million and $46.1 million, respectively.
DynCorp Information and Enterprise Technology had a contract with the Federal
Occupational Health terminated in the second quarter for convenience of the
customer. Revenue for this contract for the three and six months ended July 1,
1999, was $1.7 million and $3.3 million, respectively, compared to $1.6 million
and $3.3 million for the same periods in 1998. Currently management is
negotiating a possible extension of this contract for one year.
DynCorp Information and Enterprise Technology has two contracts that will end in
the third quarter of 1999. Option years on a subcontract for the U.S. Postal
Service were not exercised due to the lack of funding. A contract with the
Department of Justice was lost in recompetition. Revenue for these two contracts
was $16.9 million and $40.8 million for the three and six months ended July 1,
1999, respectively, compared to $16.7 and $29.3 for the comparable periods in
1998.
For the three and six months ended July 1, 1999, operating profit for DynCorp
Information and Enterprise Technology increased 33.1% and 22.5% to $9.4 million
and $18.4 million, respectively, compared to $7.1 million and $15.0 million for
the comparable prior year periods. The increase in operating profit resulted
from the start-up of the contract with the U.S. Postal Service, volume increases
on contracts with the Department of Justice, and improved profitability on
previously awarded IDIQ contracts. Also contributing to the increase in
operating profit were the receipts of award fees on two contracts that were
greater than accrued (expected), and the fact that 1998 operating profit
reflected losses on several contracts that did not continue in 1999. These
increased profits more than offset the decrease in profits from the loss of the
enterprise contract at the Rocky Flats location.
DynCorp Technology Services' revenues for the three and six months ended July 1,
1999, grew 7.5% and 7.3%, respectively, to $159.0 million and $315.4 million,
respectively, compared to $147.9 million and $294.0 million for the comparable
periods in 1998. The revenue increase was primarily due to a contract providing
technical and support services for the United States Air Force at Columbus AFB,
which became fully operational in the fourth quarter of 1998. Increased tasking
on a State Department contract providing support services related to the Kosovo
conflict, increased services at Qatar, and increases in the purchase of
reimbursable materials for the customer at Fort Rucker also contributed to the
second quarter and first half revenue growth. Slightly offsetting these revenue
increases were lower tasking on certain base operations support contracts.
Operating profit for DynCorp Technology Services increased 7.5% and 15.2% to
$7.6 million and $14.6 million for the three and six months ended July 1, 1999,
compared to $7.1 million and $12.7 million for the comparable prior year
periods. The increase in operating profit for the second quarter 1999 compared
to the second quarter 1998 was due mostly to the absence of bid and proposal
costs related to the Fort Rucker recompetition, which was awarded to the Company
in December 1998, and other one-time expenses. The increase in six month
operating profit, compared to the same period in 1998, resulted from the
aforementioned increased tasking on the State Department contract, more
favorable pricing included in a new contract awarded in the fourth quarter of
1998 with the customer at Fort Rucker, the contract with the United States Air
Force at Columbus AFB, and lower bid and proposal costs. Slightly offsetting
these increases were operating losses on certain residual security contracts.
Cost of Services
- ----------------
Cost of services for the second quarter and six months of 1999 was 94.6% of
revenue as compared to 94.8% and 95.1% for the comparable periods in 1998.
Improved pricing on several contracts, the shift to more profitable businesses,
and higher profit margins on some existing contracts all contributed to the
improvement in cost of services percentage.
Corporate General and Administrative Expense
- --------------------------------------------
Corporate general and administrative expense for the second quarter and six
months of 1999 were $5.7 million and $11.1 million, respectively, as compared to
$4.8 million and $10.1 million for the comparable periods in 1998, an increase
of $.9 million and $1.0 million, respectively. The increase in second quarter
and six months corporate general and administrative expense primarily resulted
from the Company's implementation of new financial and human resource software
packages, as described below under Year 2000.
Interest Expense
- ----------------
For the three and six months ended July 1, 1999, interest expense was $4.5
million and $8.5 million, respectively, compared to $3.9 million and $7.6
million for the comparable periods in 1998. The increase in interest expense
resulted from an increase in debt borrowings. Also contributing to the three and
six months increase in interest expense was an arbitration award to a plaintiff
on a contract dispute related to a discontinued operation.
Other Expense
- -------------
Other expense was $2.1 million and $2.3 million, respectively, for the three and
six months ended July 1, 1999 compared to $1.5 million and $1.9 million for the
comparable periods of 1998. The increase in three and six months other expense
compared to the comparable periods in 1998 resulted mostly from expenses
associated with an arbitration award to a plaintiff on a contract dispute
related to a discontinued operation.
Income Taxes
- ------------
The provision for income taxes in 1999 and 1998 is based upon an estimated
annual effective tax rate, including the impact of differences between the book
value of assets and liabilities recognized for financial reporting purposes and
the basis recognized for tax purposes. The provision for income taxes decreased
by $0.1 million to $2.0 million for the three months ended July 1, 1999 compared
to $2.1 million in the comparable period in 1998. The decrease was due to lower
pretax income in 1999 offset by a slightly lower effective tax rate in 1998. For
the six months ended July1, 1999, the provision for income taxes increased by
$0.7 million to $4.6 million compared to $3.9 million in the comparable period
in 1998. The increase was due to higher pretax earnings in 1999 and by a
slightly lower effective tax rate in 1998. The Company's effective tax rate
approximated 38.8% for the three and six months ended July 1, 1999.
Backlog
- ------
The Company's backlog of business, which includes awards under both prime
contracts and subcontracts as well as the estimated value of option years on
government contracts, was $3.9 billion at July 1, 1999 compared to $4.1 billion
at December 31, 1998, a net decrease of $0.2 billion. The backlog at July 1,
1999 consisted of $2.0 billion for DynCorp Technical Services and $1.9 billion
for DynCorp Information and Enterprise Technology compared to December 31, 1998
backlog of $2.0 billion for DynCorp Technical Services and $2.1 billion for
DynCorp Information and Enterprise Technology. The Company has been awarded
significant IDIQ contracts with GSA and NASA to provide comprehensive desktop
computer, server and intra-center communication support. The Company's backlog
at July 1, 1999 does not include any significant value for these contracts
because the Company cannot reasonably estimate the future revenues from these
contracts.
Working Capital and Cash Flow
- -----------------------------
Working capital, defined as current assets less current liabilities, was $81.0
million at July 1, 1999 compared to $90.7 million at December 31, 1998, a
decrease of $9.7 million. This decrease was primarily the result of the
additional borrowings against the Contract Receivable Collateralized Class B
Variable Rate Note.
Cash provided by operations was $24.7 million in the six months of 1999, as
compared to $2.2 million cash used in operations in the six months of 1998, an
increase in cash provided of $26.9 million. The increase resulted mostly from
the absence of an increase in accounts receivable similar to that of 1998, which
was caused by increased revenues and start-up of new contracts, and higher net
earnings and payable balances in 1999.
Investing activities used funds of $10.2 million in the six months ended July 1,
1999, principally for the purchase of property and equipment and the capitalized
cost of new software for internal use as part of the Company's Year 2000 plan.
The Company has capitalized $10.8 million of internal use software, of which
$5.1 million was capitalized during the first half of 1999, and anticipates
capitalizing another $0.5 million over the next six months. During the first six
months of 1998, investing activities used funds of $16.7 million principally for
the acquisition of FMAS, a medical outcome measurement and data abstraction
services company acquired in February 1998, the purchase of property and
equipment, and the purchase of new software for internal use as part of the
Company's Year 2000 plan.
Financing activities provided funds of $8.1 million in the six months of 1999
which consisted primarily of additional borrowing against the Contract
Receivable Collateralized Class B Variable Rate Note as described above. The
proceeds were used to make a loan to the Employee Stock Ownership Trust, to fund
the Company's purchase of common stock from ESOP participants and other
investors, and to finance working capital needs. During the six months of 1998,
financing activities provided funds of $4.0 million. The Company borrowed $20.0
million and repaid $18.3 million of the Contract Receivable Collateralized Class
B Variable Rate Notes, which was used primarily to finance working capital
needs.
The Company expects to acquire additional shares of its stock from ESOP
participants' stock puts and other investors during the remainder of the year.
The level of stock purchases will be dependent on the number of puts exercised,
the amount of excess sellers versus buyers, if any, in the Company's internal
market, and limitations on stock repurchases in the Company's debt agreements.
Earnings before Interest, Taxes, Depreciation, and Amortization
- ---------------------------------------------------------------
Earnings before Interest, Taxes, Depreciation, and Amortization ("EBITDA") as
defined by management, consists of net earnings before income tax provision, net
interest expense, and depreciation and amortization. EBITDA represents a measure
of the Company's ability to generate cash flow and does not represent net income
or cash flow from operating, investing and financing activities as defined by
generally accepted accounting principles ("GAAP"). EBITDA is not a measure of
performance or financial condition under GAAP, but is presented to provide
additional information about the Company to the reader. EBITDA should be
considered in addition to, but not as a substitute for, or superior to, measures
of financial performance reported in accordance with GAAP. EBITDA has been
adjusted for the amortization of deferred debt expense and debt issue discount
which are included in "interest expense" in the Consolidated Statements of
Operations and included in "amortization and depreciation" in the Consolidated
Statements of Cash Flows. Readers are cautioned that the Company's definition of
EBITDA may not necessarily be comparable to similarly titled captions used by
other companies due to the potential inconsistencies in the method of
calculation. The following presentation represents the Company's computation of
EBITDA (in thousands):
Three Months Ended Six Months Ended
------------------ ----------------
July 1, July 2, July 1, July 2,
1999 1998 1999 1998
------- ------- ------- -------
Net earnings $3,312 $3,195 $7,203 $5,859
Depreciation and amortization 2,277 2,054 4,587 4,142
Interest expense, net 4,228 3,527 7,506 6,971
Income taxes 1,973 2,130 4,566 3,906
Amortization of deferred debt expense (180) (180) (366) (357)
Debt issue discount (9) (9) (18) (18)
------- ------- ------- -------
EBITDA $11,601 $10,717 $23,478 $20,503
======= ======= ======= =======
Year 2000 Readiness Disclosure
- ------------------------------
The "Year 2000" issue ("Y2K") concerns the inability of some computer software
and hardware to accommodate "00" appropriately in the two digit data field used
to identify the year. The principal Y2K risk to the Company would come from an
extended failure of one or more of its core systems (financial, payroll, and
human resources).
Replacement of the Company's core financial, human resources and payroll systems
software was initiated following a Year 2000 analysis conducted in 1997 that
found these programs to be non-compliant for the millennium date rollover.
Deployment of a new human resources and payroll system was launched and has been
completed. Due to the large number of conversions and the demands on field
organizations, the financial systems implementation is now scheduled for
completion in the second quarter of 2000. A contingency plan was activated to
install an updated compliant version of the Company's current financial software
package in all locations where conversion to the new Enterprise Resource
Planning package is not assured prior to 2000. This contingency effort is now
53% complete with full completion expected in October 1999. Total expenditures
for the Y2K effort were $15.8 million as of July 1, 1999, of which $10.8 million
represented capitalized software costs. The Company anticipates additional
capitalized software costs of $0.5 million for the remainder of 1999.
The core systems assessment included contact in 1998 with third-party
telecommunications, employee benefits, insurance, and other providers. The
initial letters obtained from these providers generally stated that they were
working the Y2K problem. In June 1999, follow-up contact was initiated to
ascertain progress by these providers.
A Year 2000 Program Management Plan was developed and a Y2K Project Office
launched in mid-1998 to address other Y2K compliance issues. A multifunctional
task group is overseeing assessment and remediation or replacement efforts in
the areas of core systems, network and office automation, and field information
and non-information systems. No problems have been identified that would
materially affect the Company's ability to perform on its significant contracts.
These assessments include third-party service providers and other vendors on
whom a given contract might depend.
One area of possible vulnerability is the payment capability of the various
government payment offices receiving and processing invoices from a given
contract site. A letter received in December 1998 from the Defense Finance and
Accounting Service ("DFAS") office in Arlington, Virginia stated that 77% of the
payment offices are Y2K compliant, with 100% compliance expected by March 31,
1999. A recent check of the DFAS web site indicated that September 25, 1999 is
the target date for full compliance for all DoD payment systems and contingency
plans are being developed to assure that Y2K does not adversely affect DFAS'
ability to make payments.
Another assessment being pursued by contract sites is on government-furnished
equipment ("GFE"). If GFE is critical to performance on a contract and is not
compliant, a failure could affect contract performance. While this may not be
material to the Company as a whole, individual contracts are addressing these
potential areas of risk with customers. No problems have been identified that
would materially affect the Company's ability to perform on its significant
contracts. By way of prudence, contract managers are considering alternative
work methods in the event of a short-term interruption of GFE service,
facilities or contracted vendor operations.
An employee awareness program was initiated in mid-1998 to inform employees and
managers of the potential for Y2K problems. In addition to creating general
awareness, this program is intended to address "home grown" office automation
systems and stand-alone PCs. None of these types of systems is considered
mission critical to the Company as a whole.
Infrastructure items that may have Y2K compliance problems such as desktop
workstations, network components, and servers, are being systematically tested,
repaired or replaced. The annual expenditures for these components are not
significantly above levels that can be expected in the normal course of
business, given our normal infrastructure replacement plan and budget.
Depreciation and amortization expenses for the resystemization and for these
infrastructure components are allowable costs under government contracts.
Recommended clauses for contracts and purchases have been adopted and are being
used to protect the Company from inappropriate litigation.
In summary, the primary Y2K vulnerability for the Company is possible failure of
core systems. The resystemization effort is a top priority within the Company,
with dedicated teams and incentive plans for retaining these employees
throughout the project. Contingency plans are being executed where delays have
been experienced. Millennium Coordinators are overseeing the Y2K effort in each
business area, and a multi-functional team of executives, headed by the Y2K
Program Manager and chaired by the Corporate Chief Information Officer, acts as
a Y2K steering committee. Assessments at the contract level are largely
complete, and preliminary impact analyses results indicate little cause for
concern for the Company overall. Nevertheless, appropriate "what-if" scenarios
are being considered, information systems staff readiness for the millennium
rollover is being evaluated, and contingency planning has been launched.
Forward Looking Statements
- --------------------------
This Form 10-Q contains statements which, to the extent that they are not
recitations of historical fact, constitute "forward-looking statements" that are
based on management's expectations, estimates, projections and assumptions.
Words such as "expects," "anticipates," "plans," "believes," "estimates,"
variations of such words and similar expressions are intended to identify such
forward-looking statements that include, but are not limited to, projections of
future performance, assessment of contingent liabilities and expectations
concerning liquidity, cash flow and contract awards. Such forward-looking
statements are made pursuant to the safe harbor provision of the Private
Securities Litigation Reform Act of 1995. These statements are not guarantees of
future performance and involve certain risks and uncertainties that are
difficult to predict. Therefore, actual future results and trends may differ
materially from what is forecast in forward-looking statements due to a variety
of factors, including the Company's successful execution of internal performance
plans; the outcome of litigation in process; labor negotiations; changing
priorities or reductions in the U.S. Government defense budget; and termination
of government contracts due to unilateral government action.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
The Company has limited exposure to market risk due to the nature of its
financial instruments. The Company's only use of derivative financial
instruments is to manage its exposure to fluctuations in interest rates and
foreign exchange rates. The Company does not hold or issue derivative financial
instruments for trading or other speculative purposes. There have been no
material changes in market risk to which the Company is exposed since the end of
the Company's preceding fiscal year.
PART II - OTHER INFORMATION
- ---------------------------
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
At the annual meeting of stockholders, held on July 28, 1999, 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
-------- ---- -------------- ----------------------
Russell E. Dougherty One year 8,990,408 664,379
H. Brian Thompson Three year 9,037,627 617,120
Herbert S. Winokur, Jr. Three year 9,007,893 646,894
(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 30, 1999. There were 9,099,570 votes for the
appointment, 265,399 votes against, and 289,819 abstentions.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
10.2 Management Incentive Plan, as amended (filed herewith)
10.3 Executive Incentive Plan, as amended (filed herewith)
10.10 1999 Long-Term Incentive Stock Plan (filed herewith)
(b) Reports on Form 8-K
None filed.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DYNCORP
/s/ P. C. FitzPatrick
Date: August 13, 1999 --------------------
P.C. FitzPatrick
Senior Vice President
and Chief Financial Officer
Date: August 13, 1999
/s/ J. J. Fitzgerald
--------------------
J. J. Fitzgerald
Vice President
and Corporate Controller