DRCO Dynamics Research Corp. (MM)

- Record Bookings, Rising Organic Growth, Strong Cash Flow and Improving Earnings Create Positive Outlook - ANDOVER, Mass., Nov. 3 /PRNewswire-FirstCall/ -- Dynamics Research Corporation (NASDAQ:DRCO), a leading provider of innovative management consulting, engineering, technical and information technology services and solutions to federal and state governments, today announced operating results for the third quarter ended September 30, 2008. Financial Results The Company reported revenue of $63.5 million for the third quarter of 2008 as compared with $58.3 million for the same period in 2007. Reported revenue rose 8.9%, which included organic revenue growth of 1.5%. The reported net loss for the quarter of $0.2 million, or $0.02 per diluted share, included an incremental pre-tax provision for litigation of $6.0 million, which reduced diluted earnings per share by $0.24 per diluted share. Excluding the litigation provision, net income was $2.1 million, or $0.22 per diluted share, for the third quarter of 2008 compared with $1.9 million, or $0.20 per diluted share, for the third quarter of 2007. For the nine months ended September 30, 2008 revenue was $175.3 million compared with $173.1 million for the same period in 2007. The year-to-date net loss was $3.9 million, or $0.41 per diluted share, which included first and third quarter after-tax provisions for litigation totaling $9.1 million, or $0.94 per diluted share, net of $5.8 million in tax benefits related to these provisions. Excluding the litigation provisions in 2008 and 2007, net income would have been $5.2 million, or $0.53 per diluted share, for the nine months ended September 30, 2008, compared with $4.7 million, or $0.48 per diluted share, for the same period in 2007. Business Highlights "Leading indicators for top-line growth continued to be very positive this quarter," said Jim Regan, DRC's chairman and chief executive officer. "Our book-to-bill ratio was 1.2-to-1 for the period and 1.1-to-1 for 2008 year-to-date. As previously reported, we booked record new business contracts of $103 million during the third quarter, bringing the year-to-date total to $176 million - far surpassing all previous comparable periods. These reliable positive indicators support our expectations that the Company's improving trend in organic growth will continue into 2009. "The acquisition of Kadix Systems on August 1, 2008 further strengthens our position heading into 2009. Kadix, a rapidly growing, high-end management consulting firm, maintains practice specialties in organizational change, human capital, information technology, public and environmental health, and organizational development and is focused on the U.S. Department of Homeland Security (DHS), Marine Corps information technology, military medical health, and federal civilian markets. These growth markets are not expected to be materially impacted by current economic conditions - no matter who wins the presidential election. "Cash flow was also very strong this quarter. Cash generated from operating activities was $14.6 million, as receivable days sales outstanding dropped by fifteen days during the period; we ended the quarter with nearly $11 million in cash and cash equivalents. "In addition, I am able to report that we are nearing finalization of a settlement agreement with the U.S. Attorney regarding the outstanding civil suit previously reported. Accordingly, in the third quarter we recorded an additional provision for this matter of $2.4 million, net of estimated tax benefits. This provision brings the pre-tax total to $15 million which, subject to finalization of terms and conditions, we anticipate will be the all-encompassing settlement amount. We expect the final settlement agreement to be executed in the fourth quarter of this year and will be pleased to have this matter behind us going forward. "With another strong quarter of operating performance and record order levels, the company is very well positioned for continued revenue growth and margin expansion in 2009." Company Guidance The Company's estimate for revenue for 2008 is in the range of $242 to $245 million. Regarding earnings for the year, excluding the $0.94 per diluted share in litigation provisions taken in the first and third quarters, the Company anticipates results to be in the range of $0.76 to $0.78 per diluted share. For the fourth quarter of 2008 the Company anticipates revenue in the range of $67 to $70 million and earnings per diluted share of $0.23 to $0.25. Conference Call The Company will conduct a third quarter 2008 conference call on Tuesday, November 4, 2008 at 10:30 a.m. ET. The call will be available via telephone at (877) 856-1964, and accessible via Web cast at http://www.drc.com/. Recorded replays of the conference call will be available on Dynamics Research Corporation's investor relations home page at http://www.drc.com/ and by telephone at (888) 203-1112, passcode #8708647, beginning at 1:30 p.m. ET November 4, 2008 through 11:59 p.m. ET November 11, 2008. About Dynamics Research Corporation Dynamics Research Corporation (DRC) is a leading provider of mission-critical technology management services and solutions for government programs. DRC offers the capabilities of a large company and the responsiveness of a small company, backed by a history of excellence and customer satisfaction. Founded in 1955, DRC is a publicly held corporation (NASDAQ:DRCO) and maintains more than 25 offices nationwide with major offices in Andover, Massachusetts; Reston, Virginia; and Fairborn, Ohio. For more information please visit our website at http://www.drc.com/. Safe Harbor Safe harbor statements under the Private Securities Litigation Reform Act of 1995: Some statements contained or implied in this news release, may be considered forward-looking statements, which by their nature are uncertain. Consequently, actual results could materially differ. For more detailed information concerning how risks and uncertainties could affect the Company's financial results, please refer to DRC's most recent filings with the SEC. The Company assumes no obligation to update any forward-looking information. The non-GAAP measures used by the Company exclude the provision for litigation charges and related effect for income taxes. The required reconciliations and other disclosures for the non-GAAP measures used by the Company are set forth later in this press release and/or the Current Report on Form 8-K to be filed with the SEC on November 4, 2008. CONTACTS: Investors: Chris Witty Media: Marisa Hagerman Darrow Associates, Inc. Sage Communications 646.438.9385 703.584.5637 ATTACHMENT I DYNAMICS RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) (in thousands, except share and per share data) Three Months Ended September 30, 2008 2007 Contract revenue $62,300 $57,180 Product sales 1,191 1,148 Total revenue 63,491 58,328 Cost of contract revenue 52,256 47,808 Cost of product sales 1,271 1,212 Total cost of revenue 53,527 49,020 Gross profit on contract revenue 10,044 9,372 Gross profit (loss) on product sales (80) (64) Total gross profit 9,964 9,308 Selling, general and administrative expenses 5,529 5,262 Provision for litigation 6,000 - Amortization of intangible assets 718 650 Operating income (loss) (2,283) 3,396 Interest expense, net (424) (373) Other income 39 323 Income (loss) before provision for income taxes (2,668) 3,346 Provision (benefit) for income taxes (2,436) 1,427 Net income (loss) $(232) $1,919 Earnings (loss) per common share Basic $(0.02) $0.21 Diluted $(0.02) $0.20 Weighted average shares outstanding Basic 9,487,155 9,354,332 Diluted 9,487,155 9,702,910 ATTACHMENT II DYNAMICS RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) (in thousands, except share and per share data) Nine Months Ended September 30, 2008 2007 Contract revenue $170,781 $170,122 Product sales 4,481 2,996 Total revenue 175,262 173,118 Cost of contract revenue 144,067 142,201 Cost of product sales 4,269 3,560 Total cost of revenue 148,336 145,761 Gross profit on contract revenue 26,714 27,921 Gross profit (loss) on product sales 212 (564) Total gross profit 26,926 27,357 Selling, general and administrative expenses 16,077 16,623 Provision for litigation 14,819 181 Amortization of intangible assets 1,737 1,951 Operating income (loss) (5,707) 8,602 Interest expense, net (705) (1,302) Other income 207 578 Income (loss) before provision for income taxes (6,205) 7,878 Provision (benefit) for income taxes (2,346) 3,322 Net income (loss) $(3,859) $4,556 Earnings (loss) per common share Basic $(0.41) $0.49 Diluted $(0.41) $0.47 Weighted average shares outstanding Basic 9,471,420 9,326,367 Diluted 9,471,420 9,644,760 ATTACHMENT III DYNAMICS RESEARCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (in thousands) September 30, December 31, 2008 2007 Assets Current assets Cash and cash equivalents $10,818 $2,006 Contract receivables, net 67,649 63,570 Prepaid expenses and other current assets 6,332 2,508 Total current assets 84,799 68,084 Noncurrent assets Property and equipment, net 9,818 10,182 Goodwill 94,826 63,055 Intangible assets, net 6,232 3,069 Deferred tax asset 1,182 1,484 Other noncurrent assets 4,915 4,079 Total noncurrent assets 116,973 81,869 Total assets $201,772 $149,953 Liabilities and stockholders' equity Current liabilities Current portion of long-term debt $8,000 $- Accounts payable 18,472 12,163 Accrued compensation and employee benefits 15,932 13,409 Deferred taxes 7,605 8,486 Other accrued expenses 18,408 3,078 Total current liabilities 68,417 37,136 Long-term liabilities Long-term debt 32,000 7,737 Other long-term liabilities 7,615 8,576 Total stockholders' equity 93,740 96,504 Total liabilities and stockholders' equity $201,772 $149,953 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, 2008 2007 2008 2007 National defense and intelligence agencies $39,878 $45,288 $117,982 $134,831 Federal civilian agencies 9,592 7,231 23,025 21,437 Homeland security 6,106 932 9,054 2,520 State and local government agencies 6,215 3,522 18,824 10,837 Other 509 207 1,896 497 $62,300 $57,180 $170,781 $170,122 Revenues by contract type as a percentage of contract revenue were as follows: Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Time and materials 49% 59% 50% 57% Cost reimbursable 18 21 19 22 Fixed price, including service- type contracts 33 20 31 21 100% 100% 100% 100% Prime contract 68% 51% 61% 52% Sub-contract 32 49 39 48 100% 100% 100% 100% Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Net cash provided by (used in) operating activities $14,564 $2,526 $20,061 $(3,227) Capital expenditures $696 $445 $1,509 $1,185 Depreciation $768 $718 $2,187 $2,294 Bookings $73,505 $43,705 $201,755 $178,824 September 30, December 31, 2008 2007 Funded backlog $148,423 $116,471 Employees 1,514 1,414 ATTACHMENT V DYNAMICS RESEARCH CORPORATION NON-GAAP CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) (in thousands, except share and per share data) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 Contract revenue $62,300 $57,180 $170,781 $170,122 Product sales 1,191 1,148 4,481 2,996 Total revenue 63,491 58,328 175,262 173,118 Cost of contract revenue 52,256 47,808 144,067 142,201 Cost of product sales 1,271 1,212 4,269 3,560 Total cost of revenue 53,527 49,020 148,336 145,761 Gross profit on contract revenue 10,044 9,372 26,714 27,921 Gross profit (loss) on product sales (80) (64) 212 (564) Total gross profit 9,964 9,308 26,926 27,357 Selling, general and administrative expenses 5,529 5,262 16,077 16,623 Provision for litigation - - - - Amortization of intangible assets 718 650 1,737 1,951 Non-GAAP operating income 3,717 3,396 9,112 8,783 Interest expense, net (424) (373) (705) (1,302) Other income, net 39 323 207 578 Non-GAAP income before provision for income taxes 3,332 3,346 8,614 8,059 Non-GAAP provision for income taxes 1,197 1,427 3,411 3,394 Non-GAAP net income $2,135 $1,919 $5,203 $4,665 Earnings per common share Basic $0.23 $0.21 $0.55 $0.50 Diluted $0.22 $0.20 $0.53 $0.48 Weighted average shares outstanding Basic 9,487,155 9,354,332 9,471,420 9,326,367 Diluted 9,683,035 9,702,910 9,728,707 9,644,760 ATTACHMENT VI DYNAMICS RESEARCH CORPORATION RECONCILIATION OF NON-GAAP MEASURES (in thousands, except share and per share data) Three Months Ended Nine Months Ended September 30, September 30, 2008 2007 2008 2007 GAAP operating income (loss) $(2,283) $3,396 $(5,707) $8,602 Provision for litigation 6,000 - 14,819 181 Non-GAAP operating income $3,717 $3,396 $9,112 $8,783 GAAP income (loss) before provision for income taxes $(2,668) $3,346 $(6,205) $7,878 Provision for litigation 6,000 - 14,819 181 Non-GAAP income before provision for income taxes $3,332 $3,346 $8,614 $8,059 GAAP provision (benefit) for income taxes $(2,436) $1,427 $(2,346) $3,322 Tax benefit for provision for litigation 3,633 - 5,757 72 Non-GAAP provision for income taxes $1,197 $1,427 $3,411 $3,394 GAAP net income (loss) $(232) $1,919 $(3,859) $4,556 Provision for litigation, net of tax benefit 2,367 - 9,062 109 Non-GAAP net income $2,135 $1,919 $5,203 $4,665 Earnings (loss) per common share GAAP Basic $(0.02) $0.21 $(0.41) $0.49 Per share effect of provision for litigation 0.25 - 0.96 0.01 Non-GAAP Basic $0.23 $0.21 $0.55 $0.50 GAAP Diluted $(0.02) $0.20 $(0.41) $0.47 Per share effect of provision for litigation 0.24 - 0.94 0.01 Non-GAAP Diluted $0.22 $0.20 $0.53 $0.48 Weighted average shares outstanding Basic (GAAP diluted for 2008) 9,487,155 9,354,332 9,471,420 9,326,367 Diluted (Non-GAAP for 2008) 9,683,035 9,702,910 9,728,707 9,644,760 DATASOURCE: Dynamics Research Corporation CONTACT: Investors, Chris Witty of Darrow Associates, Inc., +1-646-438-9385, ; or Media, Marisa Hagerman of Sage Communications, +1-703-584-5637, , both for Dynamics Research Corporation Web site: http://www.drc.com/

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