DRC Reports Third Quarter 2013 Results

Adjusted EBITDA of 9.2 Percent on Revenue of $68 Million

Major Homeland Security Contract Wins Highlight Quarter Results

18 Percent Growth in Healthcare

Operating Cash Generation at 10.5 Percent of Revenue

ANDOVER, Mass., Oct. 30, 2013 (GLOBE NEWSWIRE) -- Dynamics Research Corporation (Nasdaq:DRCO), a leading technology and management consulting company focused on driving performance and process improvement for government clients, today announced operating results for the third quarter ended September 30, 2013.

Financial Results

Net income for the quarter ended September 30, 2013 was $1.4 million, or $0.13 per diluted share, as compared with $1.4 million, or $0.13 per diluted share, for the third quarter of 2012, excluding a goodwill impairment charge of $36.6 million (pre-tax), or $2.25 per diluted share, and a legal settlement gain of $2.4 million, or $0.14 per diluted share, both in the prior-year period. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the third quarter of 2013 was $6.2 million, or 9.2 percent of revenue, as compared with $8.9 million, or 11.6 percent of revenue, as reported for the same period a year ago. Revenue for the third quarter of 2013 was $67.5 million compared with $76.8 million for the third quarter of 2012.

For the nine month period ended September 30, 2013 net income was $3.8 million, or $0.36 per diluted share, compared with $4.6 million, or $0.44 per diluted share, for the same period in 2012, excluding the third quarter 2012 goodwill impairment charge of $36.6 million and legal settlement gain of $2.4 million. Adjusted EBITDA for the first nine months of 2013 was $18.0 million, or 8.5 percent of revenue, as compared to $23.9 million, or 9.8 percent of revenue, for the same period a year ago. For the nine months ended September 30, 2013 revenue was $213.2 million compared with $243.5 million for the first nine months of 2012.

During the third quarter, the Company generated $7.1 million of cash from operations as compared with $12.2 million in last year's third quarter.

Business Highlights

"The third quarter once again highlighted our strong healthcare business, our focus on improving bottom line results, and our ability to generate significant amounts of cash," said Jim Regan, DRC's chairman and chief executive officer. "Our healthcare revenue rose 18.3 percent year-over-year as we continued to benefit from several key contracts and our acknowledged depth in the field. In addition, while our homeland security revenue was down this quarter, we announced two significant awards expected to drive growth next year – the EAGLE II functional category 2 contract and the $6 billion, multi-agency Continuous Monitoring as a Service (CMaaS) program. We look forward to further strengthening our position as a leading provider in technology and management consulting services on both of these contracts.

"Overall, our qualified pipeline stands at $855 million, up from last quarter's $775 million, and includes $117 million of bids submitted and awaiting award. In addition, we have won 96 percent of re-competes thus far in 2013. While a number of awards have been delayed and we saw a temporary impact, we were pleased that the federal government was able to stave off a more-protracted government shutdown. Going forward, we believe DRC is well positioned in key priority areas that will benefit from funding priorities.

"We have also kept a focus on the bottom line – as our gross profit margin rose to 15.3 percent from 14.6 percent year-over-year, and our operating margin increased to 6.4 percent from 5.9 percent, excluding the goodwill impairment charges taken in 2012. Our cash flow also was strong this quarter, and we anticipate a solid fourth quarter as well. Heading into 2014, we will remain aggressive in managing costs, continue to invest in new business development, reduce our debt and strengthen our operations – so that DRC is poised for greater returns to our shareholders in the quarters to come."

Company Guidance

For the fourth quarter of 2013 the Company anticipates revenue in the range of $61 to $64 million and earnings of $0.14 to $0.16 per diluted share. Guidance reflects an estimated negative impact from the 16 day federal government shutdown of $2.3 million in revenue, and $0.03 per diluted share. Anticipated adjusted EBITDA of $6.3 to $6.7 million for the fourth quarter and $24.3 to $24.7 million for the full year 2013 reflects a negative impact of $0.6 million related to the government shutdown. The Company continues to consider refinancing its credit facilities. Company guidance for the fourth quarter does not include any transaction costs or charges.

Conference Call

The Company will conduct a third quarter 2013 conference call tomorrow, October 31, 2013 at 10:00 a.m. ET. The call will be available via telephone at 877-303-4382 and accessible via Web cast at www.drc.com. Recorded replays of the conference call will be available on Dynamics Research Corporation's investor relations home page at www.drc.com and by telephone at 800-585-8367, replay passcode # 75634365, beginning at 1:00 p.m. ET on October 31, 2013.

About Dynamics Research Corporation

Dynamics Research Corporation (DRC) provides technology and management consulting solutions focused on driving performance, process and results for government clients. DRC offers innovative solutions and delivers rock solid results. DRC has large company capabilities and small company agility. Founded in 1955, DRC is a publicly held corporation (Nasdaq:DRCO) and maintains more than 25 offices nationwide with major offices in Andover, Massachusetts and the Washington, D.C. region. For more information please visit our website at www.drc.com.

Safe Harbor

Certain statements contained in this news release, which are not historical facts or are related to future plans, events, revenues and earnings expectations, objectives and outlooks are forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and, by their nature, are uncertain and subject to a number of risks and uncertainties that could adversely affect the Company's results. We can provide no assurance that these statements will prove to be correct. Consequently, actual results could materially differ from these statements. For more detailed information concerning how these risks and uncertainties could affect the Company's financial results, please refer to DRC's most recent forms 10-K and 10-Q and other documents filed with the Securities and Exchange Commission. Further, the Company is under no duty or obligation to update or revise any forward looking statements as a result of events or new information.

Non-GAAP Financial Information

DRC discloses adjusted earnings before interest, taxes, depreciation and amortization, as well as earnings per diluted share net of impairment charges and legal settlement gains, neither of which is a recognized measure under GAAP. We have provided a reconciliation of adjusted EBITDA, adjusted to conform to the definition used in our loan agreements, to net income in Attachment V of this announcement. We have provided a reconciliation of non-GAAP earnings per diluted share in Attachments VI and VII of this announcement. When evaluating DRC's financial results investors should evaluate each adjustment to reported GAAP financial measures in the reconciliation as additional information and not use this non-GAAP financial measure as alternatives to reported GAAP financial measures. DRC presents these financial measures because the Company believes they provide investors with important supplemental information to assist them in assessing DRC's financial results.
 
 
ATTACHMENT I
     
DYNAMICS RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)
(in thousands, except share and per share data)
     
   Three Months Ended 
  September 30,
  2013 2012
Revenue  $ 67,528  $ 76,767
Cost of revenue  57,199  65,544
Gross profit on revenue  10,329  11,223
     
Selling, general and administrative expenses  5,102  5,684
Amortization of intangible assets  931  1,031
Impairment of goodwill  --  36,600
Operating income (loss)  4,296  (32,092)
Interest expense, net  (2,090)  (2,579)
Other income, net  116  2,414
Income (loss) before provision (benefit) for income taxes  2,322  (32,257)
Provision (benefit) for income taxes  962  (11,663)
Net income (loss)  $ 1,360  $ (20,594)
     
Earnings (loss) per common share    
Basic  $ 0.13  $ (1.99)
Diluted  $ 0.13  $ (1.99)
     
Weighted average shares outstanding    
Basic  10,510,218  10,360,203
Diluted  10,528,382  10,360,203
 
 
 
ATTACHMENT II
     
DYNAMICS RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)
(in thousands, except share and per share data)
     
   Nine Months Ended 
  September 30,
  2013 2012
Revenue  $ 213,201  $ 243,470
Cost of revenue  181,846  206,124
Gross profit on revenue  31,355  37,346
     
Selling, general and administrative expenses  16,189  18,985
Amortization of intangible assets  2,792  3,093
Impairment of goodwill  --  48,600
Operating income (loss)  12,374  (33,332)
Interest expense, net  (6,201)  (7,979)
Other income, net  215  2,478
Income (loss) before provision (benefit) for income taxes  6,388  (38,833)
Provision (benefit) for income taxes  2,618  (13,951)
Net income (loss)  $ 3,770  $ (24,882)
     
Earnings (loss) per common share    
Basic  $ 0.36  $ (2.40)
Diluted  $ 0.36  $ (2.40)
     
Weighted average shares outstanding    
Basic  10,503,919  10,356,334
Diluted  10,522,083  10,356,334
 
 
 
ATTACHMENT III
     
DYNAMICS RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands)
     
  September 30, December 31,
  2013 2012
Assets    
Current assets    
Cash and cash equivalents  $ 924  $ 2
Contract receivables, net  46,723  48,112
Prepaid expenses and other current assets  3,173  2,538
Total current assets  50,820  50,652
Noncurrent assets    
Property and equipment, net  12,402  12,511
Goodwill  163,205  163,205
Intangible assets, net  11,825  14,617
Deferred tax asset  10,602  14,678
Other noncurrent assets  4,113  4,388
Total noncurrent assets  202,147  209,399
Total assets  $ 252,967  $ 260,051
     
Liabilities and stockholders' equity    
Current liabilities    
Current portion of long-term debt  $ 16,500  $ 15,125
Accounts payable  21,538  24,847
Accrued compensation and employee benefits  15,931  14,933
Deferred tax liability  2,817  3,009
Other accrued expenses  3,936  5,307
Total current liabilities  60,722  63,221
Long-term liabilities    
Long-term debt  66,633  74,018
Other long-term liabilities  33,094  34,941
Total stockholders' equity  92,518  87,871
Total liabilities and stockholders' equity  $ 252,967  $ 260,051
 
 
 
ATTACHMENT IV
         
DYNAMICS RESEARCH CORPORATION
SUPPLEMENTAL INFORMATION (unaudited)
(dollars in thousands)
         
Contract revenues were earned from the following sectors:        
         
  Three Months Ended  Nine Months Ended 
  September 30, September 30,
  2013 2012 2013 2012
Healthcare  $ 15,610  $ 13,190  $ 46,847  $ 42,661
Homeland Security  8,484  11,816  27,958  36,218
Research and Development  9,990  11,822  32,194  34,397
Intelligence, Surveillance and Reconnaissance  9,695  10,284  30,285  29,408
Federal Regulation and Reform  5,758  6,003  18,096  18,150
Priority Markets  49,537  53,115  155,380  160,834
Defense Readiness, Logistics, and Command, Control and Communication  13,414  19,659  42,630  70,688
State Government and Other  4,577  3,993  15,191  11,948
Total Markets  $ 67,528  $ 76,767  $ 213,201  $ 243,470
         
Revenues by contract type as a percentage of contract revenue were as follows:      
         
  Three Months Ended  Nine Months Ended 
  September 30, September 30,
  2013 2012 2013 2012
Fixed price, including service-type contracts 42% 45% 42% 46%
Time and materials  40  37  40  34
Cost reimbursable  18  18  18  20
  100% 100% 100% 100%
         
Prime contract 79% 83% 79% 84%
Sub-contract  21  17  21  16
  100% 100% 100% 100%
         
         
  Three Months Ended  Nine Months Ended 
  September 30, September 30,
  2013 2012 2013 2012
Net cash provided by operating activities  $ 7,082  $ 12,188  $ 9,276  $ 16,306
Capital expenditures  $ 651  $ 535  $ 1,272  $ 750
Depreciation  $ 929  $ 981  $ 2,749  $ 2,999
Bookings  $ 104,823  $ 107,956  $ 198,201  $ 251,637
         
         
  September 30, December 31,    
  2013 2012    
Total backlog  $ 498,728  $ 731,676    
Funded backlog  $ 137,015  $ 163,645    
Employees  1,130  1,255    
 
 
 
ATTACHMENT V
         
DYNAMICS RESEARCH CORPORATION
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
ADJUSTED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (ADJUSTED EBITDA) (unaudited)
(Dollars in thousands)
         
As presented, adjusted EBITDA is defined as follows:         
  Three Months Ended Nine Months Ended
  September 30, September 30,
  2013 2012 2013 2012
Net income (loss)  $ 1,360  $ (20,594)  $ 3,770  $ (24,882)
Add:        
Interest expense, net  2,090  2,579  6,201  7,979
Provision (benefit) for income taxes  962  (11,663)  2,618  (13,951)
Depreciation expense  929  981  2,749  2,999
Amortization expense  931  1,031  2,792  3,093
Share-based compensation  133  171  397  522
Impairment of goodwill  --  36,600  --  48,600
Less: amortization of deferred gain on sale of building  (169)  (169)  (507)  (507)
Adjusted EBITDA(1)  $ 6,236  $ 8,936  $ 18,020  $ 23,853
Adjusted EBITDA, as a percent of revenue 9.2% 11.6% 8.5% 9.8%
         
(1) We have calculated adjusted EBITDA to conform with the definition of EBITDA provided in our loan agreements to help investors understand that component of our debt covenant calculations.  We may have calculated adjusted EBITDA differently than it is calculated by other companies. 
 
 
 
ATTACHMENT VI
     
DYNAMICS RESEARCH CORPORATION
NON-GAAP CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)
(in thousands, except share and per share data)
     
  Three Months Nine Months
  Ended Ended
  September 30, 2012 September 30, 2012
Revenue  $ 76,767  $ 243,470
Cost of revenue  65,544  206,124
Gross profit  11,223  37,346
     
Selling, general and administrative expenses  5,684  18,985
Amortization of intangible assets  1,031  3,093
Non-GAAP operating income  4,508  15,268
Interest expense, net  (2,579)  (7,979)
Other income, net  14  78
Non-GAAP income before provision for income taxes  1,943  7,367
Non-GAAP provision for income taxes  557  2,769
Non-GAAP net income  $ 1,386  $ 4,598
     
Non-GAAP earnings per share:    
Non-GAAP Basic  $ 0.13  $ 0.44
Non-GAAP Diluted  $ 0.13  $ 0.44
     
Weighted average shares outstanding:    
Basic  10,360,203  10,356,334
Diluted  10,384,518  10,394,775
 
 
 
ATTACHMENT VII
     
DYNAMICS RESEARCH CORPORATION
RECONCILIATION OF NON-GAAP MEASURES
(in thousands, except share and per share data)
     
  Three Months Nine Months
  Ended Ended
  September 30, 2012 September 30, 2012
Operating income (loss)  $ (32,092)  $ (33,332)
Impairment of goodwill  36,600  48,600
Non-GAAP operating income  $ 4,508  $ 15,268
     
Other income, net  $ 2,414  $ 2,478
Legal settlement gain  (2,400)  (2,400)
Non-GAAP other income, net  $ 14  $ 78
     
Income (loss) before provision (benefit) for income taxes  $ (32,257)  $ (38,833)
Impairment of goodwill  36,600  48,600
Legal settlement gain  (2,400)  (2,400)
Non-GAAP income before provision for income taxes  $ 1,943  $ 7,367
     
Provision (benefit) for income taxes  $ (11,663)  $ (13,951)
Tax benefit for impairment of goodwill  13,200  17,700
Tax provision for legal settlement gain  (980)  (980)
Non-GAAP provision for income taxes  $ 557  $ 2,769
     
Net income (loss)  $ (20,594)  $ (24,882)
Impairment of goodwill, net of taxes  23,400  30,900
Legal settlement gain, net of taxes  (1,420)  (1,420)
Non-GAAP net income  $ 1,386  $ 4,598
     
Earnings (loss) per share:    
GAAP Basic  $ (1.99)  $ (2.40)
Per share effect of goodwill impairment  2.26  2.98
Per share effect of legal settlement gain  (0.14)  (0.14)
Non-GAAP Basic(1)  $ 0.13  $ 0.44
     
GAAP Diluted  $ (1.98)  $ (2.39)
Per share effect of goodwill impairment  2.25  2.97
Per share effect of legal settlement gain  (0.14)  (0.14)
Non-GAAP Diluted(1)  $ 0.13  $ 0.44
     
Weighted average shares outstanding:    
Basic  10,360,203  10,356,334
Diluted  10,384,518  10,394,775
     
(1) May not add due to rounding.    
CONTACT: Investors:                  Chris Witty         Darrow Associates, Inc.         646.438.9385         cwitty@darrowir.com                  Media:                  Ilina Dimitrova         Sage Communications (for DRC)         703.531.8256         ilinad@aboutsage.com

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