UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
R
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
|
|
|
|
FOR
THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2009
|
|
|
|
OR
|
|
|
£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF
1934
|
|
|
|
FOR
THE TRANSITION PERIOD
FROM
TO
|
Commission
file number 001-34135
DYNAMICS
RESEARCH CORPORATION
(Exact
name of registrant as specified in its charter)
MASSACHUSETTS
|
04-2211809
|
(State
or other jurisdiction of Incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
60
FRONTAGE ROAD, ANDOVER, MASSACHUSETTS 01810-5498
(Address
of principal executive offices) (Zip Code)
978-289-1500
(Registrant’s
telephone number, including area code)
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
R
No
£
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes
¨
No
¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
|
£
|
Accelerated
filer
R
|
Non-accelerated
filer
|
£
(Do not
check if a smaller reporting company)
|
Smaller
reporting company
£
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
£
No
R
As of
October 31, 2009, there were 9,918,747 shares of the registrant’s common stock
outstanding.
FORM
10-Q
For
the Quarterly Period Ended September 30, 2009
Table
of Contents
|
|
|
Page
|
Part
I. Financial Information
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
7
|
|
|
|
8
|
|
Item
2.
|
|
19
|
|
Item
3.
|
|
27
|
|
Item
4.
|
|
28
|
|
|
Part
II. Other Information
|
|
|
Item
1.
|
|
28
|
|
Item
1A.
|
|
28
|
|
Item
2.
|
|
29
|
|
Item
6.
|
|
29
|
FORWARD-LOOKING
STATEMENTS
Some of
the statements under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, and elsewhere in this Quarterly Report on
Form 10-Q (“Form 10-Q”), contain “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995, regarding future events
and the future results of Dynamics Research Corporation (“DRC”) that are based
on current expectations, estimates, forecasts, and projections about the
industries in which DRC operates and the beliefs and assumptions of the
management of DRC. Words such as “anticipates”, “believes”,
“estimates”, “expects”, “intends”, “plans”, “projects”, “may”, “will”, “should”,
and other similar expressions are intended to identify these forward-looking
statements. These forward-looking statements are predictions of
future events or trends and are not statements of historical
matters. These statements are based on current expectations and
beliefs of DRC and involve a number of risks, uncertainties, and assumptions
that are difficult to predict. Therefore, actual results may differ
materially and adversely from those expressed in any forward-looking
statements. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this
document or in the case of the statements incorporated by reference, the date of
those statements. Factors that might cause or contribute to any
differences include, but are not limited to, those discussed in DRC’s Annual
Report on Form 10-K for the year ended December 31, 2008 under the section
entitled “Risk Factors”. Except to the extent required by applicable
law or regulation, DRC undertakes no obligation to revise or update publicly any
forward-looking statements for any reason.
PART I. FINANCIAL
INFORMATION
Item
1. Financial Statements
CONDENSED
CONSOLIDATED BALANCE SHEETS
(dollars
in thousands, except share data)
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
Assets
|
|
(unaudited)
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
213
|
|
|
$
|
7,111
|
|
Contract
receivables, net
|
|
|
71,925
|
|
|
|
71,438
|
|
Prepaid
expenses and other current assets
|
|
|
4,622
|
|
|
|
2,491
|
|
Total
current assets
|
|
|
76,760
|
|
|
|
81,040
|
|
Noncurrent
assets
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
9,238
|
|
|
|
9,349
|
|
Goodwill
|
|
|
97,641
|
|
|
|
97,641
|
|
Intangible
assets, net
|
|
|
4,625
|
|
|
|
7,379
|
|
Deferred
tax asset
|
|
|
10,314
|
|
|
|
10,396
|
|
Other
noncurrent assets
|
|
|
3,146
|
|
|
|
3,125
|
|
Total
noncurrent assets
|
|
|
124,964
|
|
|
|
127,890
|
|
Total
assets
|
|
$
|
201,724
|
|
|
$
|
208,930
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders' equity
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt
|
|
$
|
8,000
|
|
|
$
|
8,000
|
|
Accounts
payable
|
|
|
15,659
|
|
|
|
18,095
|
|
Accrued
compensation and employee benefits
|
|
|
17,121
|
|
|
|
13,644
|
|
Deferred
taxes
|
|
|
9,670
|
|
|
|
2,670
|
|
Other
accrued expenses
|
|
|
2,720
|
|
|
|
24,760
|
|
Total
current liabilities
|
|
|
53,170
|
|
|
|
67,169
|
|
Long-term
liabilities
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
28,298
|
|
|
|
30,000
|
|
Other
long-term liabilities
|
|
|
30,611
|
|
|
|
30,286
|
|
Total
long-term liabilities
|
|
|
58,909
|
|
|
|
60,286
|
|
Total
liabilities
|
|
|
112,079
|
|
|
|
127,455
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
Stockholders'
equity
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.10 par value; 5,000,000 shares authorized; no shares issued and
outstanding
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $0.10 par value; 30,000,000 shares authorized; 9,837,566 and
9,674,512 shares issued and outstanding at September 30, 2009 and December
31, 2008, respectively
|
|
|
984
|
|
|
|
967
|
|
Capital
in excess of par value
|
|
|
53,171
|
|
|
|
51,919
|
|
Accumulated
other comprehensive loss, net of taxes
|
|
|
(22,143
|
)
|
|
|
(22,268
|
)
|
Retained
earnings
|
|
|
57,633
|
|
|
|
50,857
|
|
Total
stockholders' equity
|
|
|
89,645
|
|
|
|
81,475
|
|
Total
liabilities and stockholders' equity
|
|
$
|
201,724
|
|
|
$
|
208,930
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
(dollars
in thousands, except share data)
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Contract
revenue
|
|
$
|
67,504
|
|
|
$
|
62,300
|
|
|
$
|
202,835
|
|
|
$
|
170,781
|
|
Product
sales
|
|
|
1,733
|
|
|
|
1,191
|
|
|
|
4,589
|
|
|
|
4,481
|
|
Total
revenue
|
|
|
69,237
|
|
|
|
63,491
|
|
|
|
207,424
|
|
|
|
175,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of contract revenue
|
|
|
56,882
|
|
|
|
52,256
|
|
|
|
169,840
|
|
|
|
144,067
|
|
Cost
of product sales
|
|
|
1,491
|
|
|
|
1,271
|
|
|
|
4,581
|
|
|
|
4,269
|
|
Total
cost of revenue
|
|
|
58,373
|
|
|
|
53,527
|
|
|
|
174,421
|
|
|
|
148,336
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit on contract revenue
|
|
|
10,622
|
|
|
|
10,044
|
|
|
|
32,995
|
|
|
|
26,714
|
|
Gross
profit (loss) on product sales
|
|
|
242
|
|
|
|
(80
|
)
|
|
|
8
|
|
|
|
212
|
|
Total
gross profit
|
|
|
10,864
|
|
|
|
9,964
|
|
|
|
33,003
|
|
|
|
26,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
5,911
|
|
|
|
5,529
|
|
|
|
18,756
|
|
|
|
16,077
|
|
Provision
for litigation
|
|
|
-
|
|
|
|
6,000
|
|
|
|
-
|
|
|
|
14,819
|
|
Amortization
of intangible assets
|
|
|
809
|
|
|
|
718
|
|
|
|
2,754
|
|
|
|
1,737
|
|
Operating
income (loss)
|
|
|
4,144
|
|
|
|
(2,283
|
)
|
|
|
11,493
|
|
|
|
(5,707
|
)
|
Interest
expense, net
|
|
|
(434
|
)
|
|
|
(424
|
)
|
|
|
(1,530
|
)
|
|
|
(705
|
)
|
Other
income, net
|
|
|
264
|
|
|
|
39
|
|
|
|
585
|
|
|
|
207
|
|
Income
(loss) before provision for income taxes
|
|
|
3,974
|
|
|
|
(2,668
|
)
|
|
|
10,548
|
|
|
|
(6,205
|
)
|
Provision
(benefit) for income taxes
|
|
|
1,019
|
|
|
|
(2,436
|
)
|
|
|
3,772
|
|
|
|
(2,346
|
)
|
Net
income (loss)
|
|
$
|
2,955
|
|
|
$
|
(232
|
)
|
|
$
|
6,776
|
|
|
$
|
(3,859
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.31
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.70
|
|
|
$
|
(0.41
|
)
|
Diluted
|
|
$
|
0.30
|
|
|
$
|
(0.02
|
)
|
|
$
|
0.69
|
|
|
$
|
(0.41
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,678,983
|
|
|
|
9,487,155
|
|
|
|
9,631,659
|
|
|
|
9,471,420
|
|
Diluted
|
|
|
9,983,825
|
|
|
|
9,487,155
|
|
|
|
9,840,605
|
|
|
|
9,471,420
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME (LOSS)
FOR
THE THREE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (unaudited)
(in
thousands)
|
|
|
|
|
|
|
|
Capital
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
in
Excess
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
of
Par
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Par
value
|
|
|
Value
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
Balance
at June 30, 2009
|
|
|
9,762
|
|
|
$
|
976
|
|
|
$
|
52,433
|
|
|
$
|
(22,118
|
)
|
|
$
|
54,678
|
|
|
$
|
85,969
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,955
|
|
|
|
2,955
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in unrealized loss on derivative instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
(25
|
)
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,930
|
|
Issuance
of common stock through stock plan transactions
|
|
|
60
|
|
|
|
7
|
|
|
|
549
|
|
|
|
-
|
|
|
|
-
|
|
|
|
556
|
|
Issuance
of restricted stock
|
|
|
23
|
|
|
|
2
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeiture
of restricted stock
|
|
|
(3
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Release
of restricted stock
|
|
|
(4
|
)
|
|
|
(1
|
)
|
|
|
(48
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(49
|
)
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
193
|
|
|
|
-
|
|
|
|
-
|
|
|
|
193
|
|
Tax
benefit from stock plan transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
|
|
-
|
|
|
|
-
|
|
|
|
46
|
|
Balance
at September 30, 2009
|
|
|
9,838
|
|
|
$
|
984
|
|
|
$
|
53,171
|
|
|
$
|
(22,143
|
)
|
|
$
|
57,633
|
|
|
$
|
89,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
in
Excess
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
of
Par
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
value
|
|
|
Value
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
Balance
at June 30, 2008
|
|
|
9,562
|
|
|
$
|
956
|
|
|
$
|
50,995
|
|
|
$
|
(6,853
|
)
|
|
$
|
48,420
|
|
|
$
|
93,518
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(232
|
)
|
|
|
(232
|
)
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in unrealized loss on derivative instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(54
|
)
|
|
|
-
|
|
|
|
(54
|
)
|
Comprehensive
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(286
|
)
|
Issuance
of common stock through stock plan transactions
|
|
|
41
|
|
|
|
4
|
|
|
|
243
|
|
|
|
-
|
|
|
|
-
|
|
|
|
247
|
|
Issuance
of restricted stock
|
|
|
38
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeiture
of restricted stock
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Release
of restricted stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(2
|
)
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
219
|
|
|
|
-
|
|
|
|
-
|
|
|
|
219
|
|
Tax
benefit from stock plan transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
44
|
|
|
|
-
|
|
|
|
-
|
|
|
|
44
|
|
Balance
at September 30, 2008
|
|
|
9,636
|
|
|
$
|
964
|
|
|
$
|
51,495
|
|
|
$
|
(6,907
|
)
|
|
$
|
48,188
|
|
|
$
|
93,740
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME (LOSS)
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (unaudited)
(in
thousands)
|
|
|
|
|
|
|
|
Capital
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
in
Excess
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
of
Par
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Par
value
|
|
|
Value
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
Balance
at December 31, 2008
|
|
|
9,675
|
|
|
$
|
967
|
|
|
$
|
51,919
|
|
|
$
|
(22,268
|
)
|
|
$
|
50,857
|
|
|
$
|
81,475
|
|
Comprehensive
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,776
|
|
|
|
6,776
|
|
Other
comprehensive income, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes
in unrealized loss on derivative instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
125
|
|
|
|
-
|
|
|
|
125
|
|
Comprehensive
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,901
|
|
Issuance
of common stock through stock plan transactions
|
|
|
96
|
|
|
|
10
|
|
|
|
811
|
|
|
|
-
|
|
|
|
-
|
|
|
|
821
|
|
Issuance
of restricted stock
|
|
|
100
|
|
|
|
10
|
|
|
|
(10
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeiture
of restricted stock
|
|
|
(15
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Release
of restricted stock
|
|
|
(18
|
)
|
|
|
(2
|
)
|
|
|
(152
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(154
|
)
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
547
|
|
|
|
-
|
|
|
|
-
|
|
|
|
547
|
|
Tax
benefit from stock plan transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55
|
|
Balance
at September 30, 2009
|
|
|
9,838
|
|
|
$
|
984
|
|
|
$
|
53,171
|
|
|
$
|
(22,143
|
)
|
|
$
|
57,633
|
|
|
$
|
89,645
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
|
in
Excess
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
of
Par
|
|
|
Comprehensive
|
|
|
Retained
|
|
|
|
|
|
|
|
Shares
|
|
|
Par
value
|
|
|
Value
|
|
|
Loss
|
|
|
Earnings
|
|
|
Total
|
|
Balance
at December 31, 2007
|
|
|
9,510
|
|
|
$
|
951
|
|
|
$
|
50,251
|
|
|
$
|
(6,745
|
)
|
|
$
|
52,047
|
|
|
$
|
96,504
|
|
Comprehensive
loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,859
|
)
|
|
|
(3,859
|
)
|
Other
comprehensive loss, net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification
adjustment for realized gain on sale of investments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(108
|
)
|
|
|
-
|
|
|
|
(108
|
)
|
Changes
in unrealized loss on derivative instruments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(54
|
)
|
|
|
-
|
|
|
|
(54
|
)
|
Comprehensive
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,021
|
)
|
Issuance
of common stock through stock plan transactions
|
|
|
91
|
|
|
|
9
|
|
|
|
652
|
|
|
|
-
|
|
|
|
-
|
|
|
|
661
|
|
Issuance
of restricted stock
|
|
|
86
|
|
|
|
9
|
|
|
|
(9
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeiture
of restricted stock
|
|
|
(10
|
)
|
|
|
(1
|
)
|
|
|
1
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Release
of restricted stock
|
|
|
(41
|
)
|
|
|
(4
|
)
|
|
|
(412
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(416
|
)
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
943
|
|
|
|
-
|
|
|
|
-
|
|
|
|
943
|
|
Tax
benefit from stock plan transactions
|
|
|
-
|
|
|
|
-
|
|
|
|
69
|
|
|
|
-
|
|
|
|
-
|
|
|
|
69
|
|
Balance
at September 30, 2008
|
|
|
9,636
|
|
|
$
|
964
|
|
|
$
|
51,495
|
|
|
$
|
(6,907
|
)
|
|
$
|
48,188
|
|
|
$
|
93,740
|
|
The
accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(dollars
in thousands)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
6,776
|
|
|
$
|
(3,859
|
)
|
Adjustments
to reconcile net cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
2,326
|
|
|
|
2,187
|
|
Amortization
of intangible assets
|
|
|
2,754
|
|
|
|
1,737
|
|
Share-based
compensation
|
|
|
547
|
|
|
|
943
|
|
Investment
income from equity interest
|
|
|
(316
|
)
|
|
|
(411
|
)
|
Tax
benefit from stock plan transactions
|
|
|
(55
|
)
|
|
|
(69
|
)
|
Provision
(payment) for litigation
|
|
|
(15,000
|
)
|
|
|
14,819
|
|
Deferred
income taxes
|
|
|
7,000
|
|
|
|
(473
|
)
|
Other
|
|
|
(512
|
)
|
|
|
(516
|
)
|
Change
in operating assets and liabilities:
|
|
|
|
|
|
|
-
|
|
Contract
receivables, net
|
|
|
(487
|
)
|
|
|
4,950
|
|
Prepaid
expenses and other current assets
|
|
|
(2,131
|
)
|
|
|
(3,867
|
)
|
Accounts
payable
|
|
|
(2,436
|
)
|
|
|
4,189
|
|
Accrued
compensation and employee benefits
|
|
|
3,477
|
|
|
|
783
|
|
Other
accrued expenses
|
|
|
(2,889
|
)
|
|
|
192
|
|
Other
long-term liabilities
|
|
|
835
|
|
|
|
(544
|
)
|
Net
cash provided by (used in) operating activities
|
|
|
(111
|
)
|
|
|
20,061
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase
of business
|
|
|
(4,250
|
)
|
|
|
(42,436
|
)
|
Additions
to property and equipment
|
|
|
(2,283
|
)
|
|
|
(1,509
|
)
|
Proceeds
from sale of investments and long-lived assets
|
|
|
230
|
|
|
|
280
|
|
Dividends
from equity investment
|
|
|
456
|
|
|
|
411
|
|
Payments
related to the sale of building
|
|
|
-
|
|
|
|
(35
|
)
|
Increase
in other assets
|
|
|
(114
|
)
|
|
|
(489
|
)
|
Net
cash used in investing activities
|
|
|
(5,961
|
)
|
|
|
(43,778
|
)
|
Cash
flow from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings
under term loan
|
|
|
-
|
|
|
|
40,000
|
|
Repayments
under term loan
|
|
|
(6,000
|
)
|
|
|
-
|
|
Borrowings
under revolving credit agreement
|
|
|
50,121
|
|
|
|
69,225
|
|
Repayments
under revolving credit agreement
|
|
|
(45,823
|
)
|
|
|
(76,962
|
)
|
Proceeds
from the exercise of stock plan transactions
|
|
|
821
|
|
|
|
661
|
|
Tax
benefit from stock plan transactions
|
|
|
55
|
|
|
|
69
|
|
Payments
of deferred financing costs
|
|
|
-
|
|
|
|
(464
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
(826
|
)
|
|
|
32,529
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(6,898
|
)
|
|
|
8,812
|
|
Cash
and cash equivalents, beginning of period
|
|
|
7,111
|
|
|
|
2,006
|
|
Cash
and cash equivalents, end of period
|
|
$
|
213
|
|
|
$
|
10,818
|
|
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
The
unaudited condensed consolidated financial statements of Dynamics Research
Corporation (the “Company”) and its subsidiaries included herein have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The year-end condensed balance sheet data
was derived from audited financial statements, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America. Dollars are in thousands, except per share
amounts, unless otherwise noted.
In the
opinion of management, all material adjustments that are of a normal and
recurring nature necessary for a fair presentation of the results for the
periods presented have been reflected. All material intercompany transactions
and balances have been eliminated in consolidation. The results for the three
and nine months ended September 30, 2009 may not be indicative of the results
that may be expected for the year ending December 31, 2009. The accompanying
financial information should be read in conjunction with the consolidated
financial statements and notes contained in the Company’s Form 10-K, filed with
the United States Securities and Exchange Commission (“SEC”) for the year ended
December 31, 2008. The Company has reclassified certain prior period
amounts to conform with the current period presentation.
NOTE 2. RECENT ACCOUNTING
PRONOUNCEMENTS
In
October 2009, the Financial Accounting Standard Board (“FASB”) issued guidance
updating current principles related to revenue recognition when there are
multiple-element arrangements. This revised guidance relates to the
determination of when the individual deliverables included in a multiple-element
arrangement may be treated as separate units of accounting and modifies the
manner in which the transaction consideration is allocated across the separately
identifiable deliverables. The guidance also expands the disclosures required
for multiple-element revenue arrangements. This new approach is effective
prospectively for revenue arrangements entered into or materially modified in
fiscal years beginning on or after June 15, 2010, although earlier adoption
is permitted. The Company is currently evaluating the potential impact of this
standard on its financial position and results of operations.
In
August 2009, the FASB issued additional guidance on determining the fair
value of liabilities when a quoted price in an active market for an identical
liability is not available. The guidance became effective for the Company on
October 1, 2009 and is not expected to have a significant impact on the
measurement of the Company’s liabilities as of that date.
In June
2009, the FASB issued the Accounting Standards Codification (the
“Codification”). The Codification is the source of authoritative U.S.
GAAP recognized by the FASB to be applied by nongovernmental entities. The
Codification, which changed the referencing of financial standards, was
effective for interim or annual financial periods ending after
September 15, 2009. The implementation of this standard had no impact on
the Company’s financial position and results of operations.
In June
2009, the FASB issued guidance updating changes to consolidation applicable to a
variable interest entity (“VIE”). It also amends the guidance governing the
determination of whether an entity is the VIE’s primary beneficiary (the
reporting entity that must consolidate the VIE) by requiring a qualitative
analysis rather than a quantitative analysis. This guidance also requires
continuous reassessment of whether an enterprise is the primary beneficiary of a
VIE. This guidance is effective for fiscal and interim reporting periods
beginning after November 15, 2009. The Company currently is evaluating the
provisions of this guidance to determine the impact of adoption on its
consolidated financial statements.
In May
2009, the FASB issued new guidance on subsequent events. The standard
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. The standard was effective for interim and annual
financial periods ending after June 15, 2009. The implementation of this
standard did not have a material impact on the Company’s consolidated financial
position and results of operations. The Company evaluated subsequent events
through November 9, 2009, the date of issuance of its financial
statements. The Company is not aware of any subsequent events which
would require recognition or disclosure in the financial
statements.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
In April
2009, the FASB issued a staff position to require disclosures about fair value
of financial instruments for interim reporting periods of publicly traded
companies as well as in annual financial statements. This guidance
was effective for interim reporting periods ending after June 15,
2009. The implementation of this standard had no impact on the
Company’s financial position and results of operations.
In
April 2009, the FASB issued a staff position which addresses application
issues on initial recognition and measurement, subsequent measurement and
accounting, and disclosure of assets and liabilities arising from contingencies
in a business combination. The guidance is applied prospectively to assets or
liabilities arising from contingencies in business combinations for which the
acquisition date occurs after January 1, 2009. The
implementation of this standard did not have a material impact on the Company’s
financial position and results of operations.
In
December 2008, the FASB issued a staff position which requires more
detailed disclosures about plan assets of a defined benefit pension or other
postretirement plan, including investment strategies; major categories of plan
assets; concentrations of risk within plan assets; inputs and valuation
techniques used to measure the fair value of plan assets; and the effect of
fair-value measurements using significant unobservable inputs on changes in plan
assets for the period. The guidance is effective for fiscal years ending after
December 15, 2009, with earlier application permitted. The adoption of this
standard will have no effect on the Company’s financial position or results of
operations.
In June
2008, the FASB issued a staff position which gives guidance as to the
circumstances when unvested share-based payment awards should be included in the
computation of earnings per share. The guidance was effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those years. The implementation of this guidance had
no impact on the Company’s computation of earnings per share.
In April
2008, the FASB issued a staff position which amends the factors to be considered
in renewal or extension assumptions used to determine the useful life of a
recognized intangible asset. The guidance was effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years. The implementation of this
standard had no impact on the Company’s consolidated financial
statements.
In March
2008, the FASB issued new guidance which expands the disclosure requirements
about an entity's derivative instruments and hedging activities. The new
guidance was effective for the Company on January 1, 2009. The implementation of
this standard did not have a material impact on the Company’s consolidated
financial statements.
NOTE
3. BUSINESS ACQUISITION
On August
1, 2008, the Company completed the acquisition of Kadix Systems, LLC for
$42.3 million in cash including acquisition costs of $408, plus additional
consideration of $5 million based on migration to the Company of services
provided by Kadix under 8(a) contracts, which are stipulated for performance by
minority/women owned contracts having an unrestricted status, and the
achievement of anticipated 2009 gross margin targets. During 2008,
additional consideration of $5.0 million was earned and accrued as additional
purchase price. Of the additional purchase price, $750 was paid in
2008 and the remaining $4.3 million was paid in the first quarter of
2009.
Kadix
maintains practice specialties in organizational change, human capital,
information technology and public and environmental health. As a part
of the Company’s System and Services segment, Kadix is focused on the U.S.
Department of Homeland Security (“DHS”), Marine Corps information technology,
military medical health, and federal civilian markets. The
acquisition strengthened and expanded the Company’s growth as a provider of
high-end services and solutions in the DHS and other federal civilian
markets.
The
following unaudited pro forma results of operations have been prepared as though
the acquisition of Kadix had occurred on January 1, 2008. These pro forma
results include adjustments for interest expense and amortization
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
of
deferred financing costs on the acquisition term loan used to finance the
transaction, amortization expense for the identifiable intangible asset and the
effect of income taxes. These unaudited pro forma results do not include certain
nonrecurring costs Kadix paid at the closing of the sale, including the payout
for Kadix’s Phantom Unit Plan and Ownership Appreciations Rights, professional
fees related to the acquisition and discretionary bonuses. Unaudited
pro forma information does not purport to be indicative of the results of
operations that would have been attained had the acquisition been made as of
January 1, 2008, or of results of operations that may occur in the
future.
|
|
Three
|
|
|
Nine
|
|
|
|
Months
|
|
|
Months
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
September
30, 2008
|
|
|
September
30, 2008
|
|
Revenue
|
|
$
|
67,626
|
|
|
$
|
200,006
|
|
Gross
profit
|
|
$
|
11,377
|
|
|
$
|
36,050
|
|
Operating
loss
|
|
$
|
(1,761
|
)
|
|
$
|
(1,329
|
)
|
Net
loss
|
|
$
|
(117
|
)
|
|
$
|
(2,800
|
)
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.01
|
)
|
|
$
|
(0.30
|
)
|
Diluted
|
|
$
|
(0.01
|
)
|
|
$
|
(0.30
|
)
|
NOTE 4. SUPPLEMENTAL BALANCE SHEET
INFORMATION
The
composition of selected balance sheet accounts is as follows:
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Contract
receivables, net
|
|
|
|
|
|
|
Billed
receivables
|
|
$
|
28,214
|
|
|
$
|
35,423
|
|
Unbilled
receivables
(1)
:
|
|
|
|
|
|
|
|
|
Revenues
recorded in excess of milestone billings on fixed price contracts with the
States of Ohio and Tennessee
|
|
|
17,611
|
|
|
|
8,907
|
|
Retainages
and fee withholdings
|
|
|
829
|
|
|
|
1,179
|
|
Other
unbilled receivables
|
|
|
25,924
|
|
|
|
26,858
|
|
Total
unbilled receivables
|
|
|
44,364
|
|
|
|
36,944
|
|
Allowance
for doubtful accounts
|
|
|
(653
|
)
|
|
|
(929
|
)
|
Contract
receivables, net
|
|
$
|
71,925
|
|
|
$
|
71,438
|
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets:
|
|
|
|
|
|
|
|
|
Refundable
income taxes
|
|
$
|
1,484
|
|
|
$
|
-
|
|
Inventory
|
|
|
1,131
|
|
|
|
766
|
|
Restricted
cash
|
|
|
70
|
|
|
|
150
|
|
Other
|
|
|
1,937
|
|
|
|
1,575
|
|
Prepaid
expenses and other current assets
|
|
$
|
4,622
|
|
|
$
|
2,491
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net:
|
|
|
|
|
|
|
|
|
Production
equipment
|
|
$
|
11,596
|
|
|
$
|
11,530
|
|
Software
|
|
|
12,107
|
|
|
|
11,602
|
|
Furniture
and other equipment
|
|
|
8,697
|
|
|
|
7,644
|
|
Leasehold
improvements
|
|
|
3,412
|
|
|
|
2,949
|
|
Property
and equipment
|
|
|
35,812
|
|
|
|
33,725
|
|
Less
accumulated depreciation
|
|
|
(26,574
|
)
|
|
|
(24,376
|
)
|
Property
and equipment, net
|
|
$
|
9,238
|
|
|
$
|
9,349
|
|
|
|
|
|
|
|
|
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
|
|
September
30,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
Other
noncurrent assets:
|
|
|
|
|
|
|
Deferred
compensation plan investments
|
|
$
|
1,311
|
|
|
$
|
1,107
|
|
Equity
investments
|
|
|
1,039
|
|
|
|
1,180
|
|
Other
|
|
|
796
|
|
|
|
838
|
|
Other
noncurrent assets
|
|
$
|
3,146
|
|
|
$
|
3,125
|
|
|
|
|
|
|
|
|
|
|
Accrued
compensation and employee benefits:
|
|
|
|
|
|
|
|
|
Accrued
compensation and related taxes
|
|
$
|
8,060
|
|
|
$
|
7,504
|
|
Accrued
vacation
|
|
|
5,313
|
|
|
|
4,391
|
|
Accrued
pension liability
|
|
|
500
|
|
|
|
-
|
|
Other
|
|
|
3,248
|
|
|
|
1,749
|
|
Accrued
compensation and employee benefits
|
|
$
|
17,121
|
|
|
$
|
13,644
|
|
|
|
|
|
|
|
|
|
|
Other
accrued expenses:
|
|
|
|
|
|
|
|
|
Accrued
litigation reserve
|
|
$
|
-
|
|
|
$
|
15,000
|
|
Accrued
acquisition costs
|
|
|
-
|
|
|
|
4,265
|
|
Accrued
income taxes
|
|
|
-
|
|
|
|
2,042
|
|
Deferred
gain on sale of building
|
|
|
676
|
|
|
|
676
|
|
Other
|
|
|
2,044
|
|
|
|
2,777
|
|
Other
accrued expenses
|
|
$
|
2,720
|
|
|
$
|
24,760
|
|
|
|
|
|
|
|
|
|
|
Other
long-term liabilities:
|
|
|
|
|
|
|
|
|
Accrued
pension liability
|
|
$
|
23,232
|
|
|
$
|
22,570
|
|
Deferred
gain on sale of building
|
|
|
3,550
|
|
|
|
4,057
|
|
Deferred
compensation plan liability
|
|
|
1,311
|
|
|
|
1,107
|
|
Other
|
|
|
2,518
|
|
|
|
2,552
|
|
Other
long-term liabilities
|
|
$
|
30,611
|
|
|
$
|
30,286
|
|
(1)
|
At
September 30, 2009 and December 31, 2008, $487 and $495, respectively, of
unbilled retainages and fee withholdings are not anticipated to be billed
within one year. Additionally, at December 31, 2008, $4,557 of
the unbilled balance under the Company’s contract with the State of
Tennessee is not scheduled to be invoiced within one
year.
|
NOTE 5. GOODWILL AND INTANGIBLE
ASSETS
Components
of the Company’s identifiable intangible assets are as follows:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
|
Cost
|
|
|
Amortization
|
|
|
Net
|
|
Customer
relationships
|
|
$
|
13,400
|
|
|
$
|
(11,608
|
)
|
|
$
|
1,792
|
|
|
$
|
14,700
|
|
|
$
|
(11,769
|
)
|
|
$
|
2,931
|
|
Customer
contracts
|
|
|
3,500
|
|
|
|
(1,806
|
)
|
|
|
1,694
|
|
|
|
3,500
|
|
|
|
(522
|
)
|
|
|
2,978
|
|
Non-competition
agreements
|
|
|
1,400
|
|
|
|
(261
|
)
|
|
|
1,139
|
|
|
|
1,400
|
|
|
|
-
|
|
|
|
1,400
|
|
8(a)
contract transition
|
|
|
130
|
|
|
|
(130
|
)
|
|
|
-
|
|
|
|
130
|
|
|
|
(60
|
)
|
|
|
70
|
|
Total
|
|
$
|
18,430
|
|
|
$
|
(13,805
|
)
|
|
$
|
4,625
|
|
|
$
|
19,730
|
|
|
$
|
(12,351
|
)
|
|
$
|
7,379
|
|
During
the second quarter of 2009, the Company reduced the cost basis and related
accumulated amortization of fully amortized intangible assets by $1,300. The
Company recorded amortization expense for its identifiable intangible assets of
$809 and $718 for the three months ended September 30, 2009 and 2008,
respectively, and $2,754 and $1,737 for the nine months then
ended. At September 30, 2009, estimated future amortization expense
for the identifiable intangible assets to be recorded in subsequent fiscal years
was as follows:
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
Remainder
of 2009
|
|
$
|
551
|
|
2010
|
|
$
|
1,542
|
|
2011
|
|
$
|
1,188
|
|
2012
|
|
$
|
492
|
|
2013
|
|
$
|
349
|
|
2014
and thereafter
|
|
$
|
503
|
|
There
were no changes in the carrying amount of goodwill for the nine months ended
September 30, 2009. The carrying amount of goodwill of $97,641 at September 30,
2009 and December 31, 2008 was included in the Systems and Services
segment.
NOTE
6. INCOME TAXES
The
Company recorded income tax provisions of $3.8 million in the nine months ended
September 30, 2009 compared to an income tax benefit of $2.3 million in the same
period in 2008. The effective income tax rate was 35.8% for the nine
months ended September 30, 2009 and 39.6% for the nine months ended September
30, 2008, excluding the tax effect of the $14.8 million litigation provision
recorded in 2008 for which the Company recorded a $5.8 million dollar tax
benefit. The 2009 effective rate has been favorably affected by an
adjustment to the Company’s unrecognized tax benefits and a reduction of state
tax expense associated with the filing of the 2008 tax returns.
As of
September 30, 2009 the Company had $346 of unrecognized tax benefits, of which
$151 would affect its effective tax rate if recognized. Accrued penalties and
interest were $150 at September 30, 2009.
During the three months
ended September 30, 2009, the Company reduced the unrecognized tax benefit by
$153 which had a favorable impact on the effective tax rate for
2009.
The
Internal Revenue Service (“IRS”) had challenged the deferral of income for tax
reporting purposes related to unbilled receivables including the applicability
of a Letter Ruling issued by the IRS to the Company in January 1976 which
granted to the Company deferred tax treatment of the unbilled
receivables. This issue was elevated to the IRS National Office for
determination. On October 23, 2008, the Company received a
notification of ruling from the IRS National Office. This ruling
provided clarification regarding the IRS position relating to revenue
recognition for tax purposes regarding its unbilled
receivables. During September 2009, the IRS completed its examination
of the Company’s tax returns for 2004 through 2007 and issued a
Revenue Agent Report (“RAR”), which reduced the deferral of income
for tax reporting purposes. As a result the Company has transferred
$900 of taxes from deferred to current taxes payable. The RAR also
included an assessment of interest of $500. The Company has filed a protest
letter with the IRS to appeal the assessment. The Company believes
the appeal will be successful and has made no provision for the interest
associated with the assessment.
The
Company files income tax returns in the U.S. federal jurisdiction and numerous
state jurisdictions. State tax returns for all years after 2005 are
subject to future examination. Although the IRS has completed its
examination of tax years 2004 through 2007 the statutes are still open for those
years until the appeals process is finalized.
NOTE 7. FINANCING
ARRANGEMENTS
The
Company’s outstanding debt at September 30, 2009 and December 31, 2008 was $36.3
million and $38.0 million, respectively. At September 30, 2009
borrowings consisted of $32 million under the Company’s term loan and $4.3
million under the revolver. The interest rate on the term loan
outstanding balance at September 30, 2009 and December 31, 2008 was 2.60% and
4.21%, respectively, based on the 90-day LIBOR rate option that was in effect on
September 30, 2009 and December 4, 2008, respectively. The repayment
of borrowings under the revolver is contractually due on August 1, 2013 and
therefore amounts outstanding are classified as long-term; however, the Company
may repay at any time prior to that date.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
During
August 2009, the Company entered into a $353 letter of credit used as a security
deposit in connection with the lease agreement which is more fully described in
Note 14. At September 30, 2009, the remaining available balance to borrow
against the revolver was $20.3 million.
At
September 30, 2009, the Company was in compliance with its loan
covenants.
NOTE
8. FAIR VALUE MEASUREMENTS
The
following tables present our assets and liabilities that are measured at fair
value on a recurring basis:
|
|
|
Fair
Value Measurements
|
|
|
|
|
|
|
|
At
September 30, 2009 Using
|
|
|
|
|
|
Balance
Sheet Location
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
held in Rabbi Trusts
|
Other
noncurrent assets
|
|
$
|
1,311
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,311
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
|
Other
long-term liabilities
|
|
$
|
-
|
|
|
$
|
653
|
|
|
$
|
-
|
|
|
$
|
653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Measurements
|
|
|
|
|
|
|
|
|
At
December 31, 2008 Using
|
|
|
|
|
|
|
Balance
Sheet Location
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments
held in Rabbi Trusts
|
Other
noncurrent assets
|
|
$
|
1,107
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
1,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap
|
Other
long-term liabilities
|
|
$
|
-
|
|
|
$
|
860
|
|
|
$
|
-
|
|
|
$
|
860
|
|
The
following is a description of the valuation methodologies used for these items,
as well as the general classification of such items:
Investments held in Rabbi Trusts —
The investments include exchange-traded equity securities and mutual
funds. Fair values for these investments were based on quoted prices in active
markets and were therefore classified within Level 1 of the fair value
hierarchy.
Interest rate swap
— The
derivative is a receive-variable, pay-fixed interest rate swap based on the
LIBOR rate and is designated as a fair value hedge. Fair value was based on a
model-driven valuation using the LIBOR rate, which was observable at commonly
quoted intervals for the full term of the swap. Therefore, our interest rate
swap was classified within Level 2 of the fair value hierarchy.
The
carrying values of cash and cash equivalents, contract receivables and accounts
payable approximate fair value because of the short-term nature of these
instruments. The carrying value of debt also approximates fair
value because the interest rate is variable.
NOTE
9. DERIVATIVE FINANCIAL INSTRUMENTS
The
Company has entered into an interest rate swap agreement to manage its exposure
to interest rate changes. The swap effectively converts a portion of
the Company’s variable rate debt under the term loan to a fixed rate, without
exchanging the notional principal amounts. If, at any time, the swap
is determined to be ineffective, in whole or in part, due to changes in the
interest rate swap or underlying debt agreements, the fair value of the portion
of the swap determined to be ineffective will be recognized as a gain or loss in
the statement of operations for the applicable period.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
In
September 2008, the Company entered into an interest rate swap agreement with an
initial notional amount of $20.0 million of the term loan principal which
matures on August 1, 2013. Under this agreement, the Company receives
a floating rate based on the 90-day LIBOR rate and pays a fixed rate of 3.60%
(both excluding the applicable margin of 2.00%) on the outstanding notional
amount. The swap fixed rate was based on a 90-day LIBOR rate and is structured
to mirror the payment terms of the term loan. The fair value of the
swap at inception was zero. It is not expected that any gains or
losses will be reported in the statement of operations during the term of the
agreement as the swap is assumed to be highly effective through its maturity
based on the matching terms of the swap and facility agreements.
As of
September 30, 2009, the total notional amount committed to the Company’s swap
agreement was $16.0 million. On that date, the floating rate of a loan based on
a 90-day LIBOR rate was 0.29%. The Company recorded a liability to recognize the
fair value of the swap which has been accounted for as a component of other
comprehensive income.
The fair
value effect on the financial statements from the interest rate swap designated
as a cash flow hedge is as follows:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
Three
Months Ended September 30, 2009
|
|
|
Nine Months
Ended September 30, 2009
|
|
Other
long-term liabilities
|
|
$
|
653
|
|
|
$
|
860
|
|
|
|
|
|
|
|
Gain
(loss) recognized in other comprehensive income, net of
tax
|
|
|
|
|
|
|
|
|
|
$
|
(25
|
)
|
|
$
|
125
|
|
NOTE 10. DEFINED BENEFIT PENSION
PLAN
The
components of net periodic pension expense (income) for the Company’s defined
benefit pension plan are as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Interest
cost on projected benefit obligation
|
|
$
|
1,067
|
|
|
$
|
959
|
|
|
$
|
3,200
|
|
|
$
|
2,877
|
|
Expected
return on plan assets
|
|
|
(964
|
)
|
|
|
(1,396
|
)
|
|
|
(2,892
|
)
|
|
|
(4,188
|
)
|
Recognized
actuarial loss
|
|
|
303
|
|
|
|
137
|
|
|
|
909
|
|
|
|
411
|
|
Net
periodic pension expense (income)
|
|
$
|
406
|
|
|
$
|
(300
|
)
|
|
$
|
1,217
|
|
|
$
|
(900
|
)
|
Effective
January 1, 2009, the Company changed the method used to recognize actuarial
gains and losses from the average expected remaining service approach to the
average remaining life expectancy approach. During September 2009,
the IRS issued new funding rules for pension plans, pursuant to which the
Company has elected the full yield curve interest rate methodology.
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
NOTE 11. SHARE-BASED
COMPENSATION
Share-Based
Compensation Costs
Total
share-based compensation recorded in the Condensed Consolidated Statements of
Operations was as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Cost
of products and services
|
|
$
|
87
|
|
|
$
|
102
|
|
|
$
|
234
|
|
|
$
|
398
|
|
Selling,
general and administrative
|
|
|
106
|
|
|
|
117
|
|
|
|
313
|
|
|
|
545
|
|
Total
share-based compensation expense
|
|
$
|
193
|
|
|
$
|
219
|
|
|
$
|
547
|
|
|
$
|
943
|
|
Stock
Option Award Activity
The
following table summarizes stock option activity under all plans:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
Aggregate
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
(in
years)
|
|
|
Value
|
|
Outstanding
and exercisable at December 31, 2008
|
|
|
889,108
|
|
|
$
|
8.42
|
|
|
|
2.1
|
|
|
$
|
729
|
|
Granted
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(65,381
|
)
|
|
$
|
8.62
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(6,784
|
)
|
|
$
|
13.21
|
|
|
|
|
|
|
|
|
|
Outstanding
and exercisable at September 30, 2009
|
|
|
816,943
|
|
|
$
|
8.36
|
|
|
|
1.4
|
|
|
$
|
4,056
|
|
Cash
proceeds received, the intrinsic value and the total tax benefits realized
resulting from stock option exercises were as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Amounts
realized or received from stock option exercises:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
proceeds received
|
|
$
|
465
|
|
|
$
|
152
|
|
|
$
|
564
|
|
|
$
|
338
|
|
Intrinsic
value realized
|
|
$
|
114
|
|
|
$
|
112
|
|
|
$
|
137
|
|
|
$
|
182
|
|
Income
tax benefit realized
|
|
$
|
45
|
|
|
$
|
44
|
|
|
$
|
53
|
|
|
$
|
68
|
|
Restricted
Stock Award Activity
The
following table summarizes restricted stock activity under the Company’s
Incentive Plans:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Number
of
|
|
|
Grant-Date
|
|
|
|
Shares
|
|
|
Fair
Value
|
|
Nonvested
at December 31, 2008
|
|
|
158,476
|
|
|
$
|
10.61
|
|
Granted
|
|
|
99,548
|
|
|
$
|
8.92
|
|
Vested
|
|
|
(65,068
|
)
|
|
$
|
11.53
|
|
Cancelled
|
|
|
(14,700
|
)
|
|
$
|
9.59
|
|
Nonvested
at September 30, 2009
|
|
|
178,256
|
|
|
$
|
9.41
|
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
The total
fair value of restricted shares vested during the three months ended September
30, 2009 and 2008 was $111 and $65, respectively and $750 and $1,549,
respectively, during the nine months then ended. As of September 30, 2009, the
total unrecognized compensation cost related to restricted stock awards was $1.3
million, which is expected to be amortized over a weighted-average period of 2.1
years.
NOTE 12. EARNINGS (LOSS) PER
SHARE
For the
three and nine months ended September 30, 2009 and 2008, basic earnings (loss)
per share are computed by dividing net income (loss) by the weighted average
number of shares of common stock outstanding during the period. Unexercised
stock options and unvested restricted shares are excluded from this calculation
but are included in the diluted earnings per share calculation using the
treasury stock method so long as their effect is not anti-dilutive.
For the
three and nine months ended September 30, 2009, diluted earnings per share are
determined by using the weighted average number of common and dilutive common
equivalent shares outstanding during the period. For the three and
nine months ended September 30, 2008, the diluted effect of stock options and
restricted stock grants of approximately 269,400 and 330,800 shares,
respectively, were not included in the computation of diluted loss per share as
the net loss would have made their effect anti-dilutive.
Due to
the anti-dilutive effect, approximately 55,800 and 64,800 options to purchase
common stock were excluded from the calculation of diluted earnings per share
for the three and nine months ended September 30, 2009,
respectively.
The
following table illustrates the reconciliation of the weighted average shares
outstanding:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Weighted
average shares outstanding - Basic
|
|
|
9,678,983
|
|
|
|
9,487,155
|
|
|
|
9,631,659
|
|
|
|
9,471,420
|
|
Dilutive
effect of stock options and restricted stock grants
|
|
|
304,842
|
|
|
|
-
|
|
|
|
208,946
|
|
|
|
-
|
|
Weighted
average shares outstanding - Diluted
|
|
|
9,983,825
|
|
|
|
9,487,155
|
|
|
|
9,840,605
|
|
|
|
9,471,420
|
|
NOTE 13. BUSINESS SEGMENTS, MAJOR
CUSTOMERS AND RELATED PARTY INFORMATION
Business
Segments
Results
of operations information for the Company’s two reportable business segments are
as follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Revenues
from external customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
67,504
|
|
|
$
|
62,300
|
|
|
$
|
202,835
|
|
|
$
|
170,781
|
|
Metrigraphics
|
|
|
1,733
|
|
|
|
1,191
|
|
|
|
4,589
|
|
|
|
4,481
|
|
|
|
$
|
69,237
|
|
|
$
|
63,491
|
|
|
$
|
207,424
|
|
|
$
|
175,262
|
|
Gross
profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
10,622
|
|
|
$
|
10,044
|
|
|
$
|
32,995
|
|
|
$
|
26,714
|
|
Metrigraphics
|
|
|
242
|
|
|
|
(80
|
)
|
|
|
8
|
|
|
|
212
|
|
|
|
$
|
10,864
|
|
|
$
|
9,964
|
|
|
$
|
33,003
|
|
|
$
|
26,926
|
|
Operating
income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services
|
|
$
|
4,185
|
|
|
$
|
(1,963
|
)
|
|
$
|
12,375
|
|
|
$
|
(5,049
|
)
|
Metrigraphics
|
|
|
(41
|
)
|
|
|
(320
|
)
|
|
|
(882
|
)
|
|
|
(658
|
)
|
|
|
$
|
4,144
|
|
|
$
|
(2,283
|
)
|
|
$
|
11,493
|
|
|
$
|
(5,707
|
)
|
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
Sales
between segments represent less than 1% of total revenue and are accounted for
at cost.
Major
Customers
Revenues
from U.S. Government agency customers in aggregate ranged between 86% and 88% of
total revenues in each of the three and nine months ended September 30, 2009 and
2008. No individual customers in the three or nine months ended
September 30, 2009 and 2008 accounted for more than 10% of total
revenue.
In
February 2008, the Company was awarded a $25.5 million fixed price contract from
the State of Tennessee, which began in the second quarter of 2008 with
deployment scheduled to occur in the third quarter of 2010. The
outstanding contract receivable balance of the State of Tennessee contract at
September 30, 2009 was $17.7 million. At September 30, 2009 and
December 31, 2008, no other customers accounted for more than 10% of the
outstanding contract receivable balance.
Related
Party
Through
its wholly owned subsidiary, HJ Ford, the Company has a 40% interest in
HMR
Tech
which is accounted for using the equity method. Revenues from
HMR
Tech
included in contract revenues for the three and nine months ended September 30,
2008 were $210 and $4,711, respectively. The amounts due from
HMR
Tech
included in contract receivables at September 30, 2009 and December 31, 2008
were $51 and $779, respectively. In addition,
HMR
Tech
charged the Company $375 and $346 in the three months ended September 30, 2009
and 2008, respectively, and $1,015 and $1,100, respectively, for the nine months
then ended relating to contract work. At September 30, 2009 and
December 31, 2008, the Company had a related payable of $133 and $238,
respectively.
NOTE 14. COMMITMENTS AND
CONTINGENCIES
On April
24, 2009, the Company entered into a use and occupancy agreement to sublease
approximately 50,000 square feet of the Company’s 131,000 square feet corporate
headquarters building in Andover, MA, which commenced on May 22,
2009.
On August
17, 2009, the Company entered into an assignment and assumption agreement to
assign all of the Company’s right, title, and interest in, to and under the
corporate headquarters building. The effective date of the agreement is based on
the date the Company vacates the building and is determined by certain deadline
dates.
The terms
of the agreement assign the sublessee all of the rights and obligations of the
original lease signed by the Company in 2005. The original lease
includes two consecutive five year renewal options. If these options
are exercised by the sublessee under agreement, the Company will be released
from the lease for the option periods by the landlord. The Company
will continue to amortize the deferred gain over the original ten year lease
period. The agreement also provides the sublessee the use of certain
Company owned furniture in connection with their use and occupancy of the
building.
On August
14, 2009, the Company entered into a lease agreement for 69,000 square feet of
space in a building located at Two Technology Drive in Andover,
MA. The Company will use the building as its new corporate
headquarters. The commencement date is February 11, 2010 or such
earlier date the Company begins to use any portion of the building to conduct
business. The term of the lease is approximately seven years and four
months beginning on the commencement date and terminating the last day of the
eighty-eighth full calendar month from the commencement date. The
Company has the option to extend the term of the lease by two consecutive
periods of five years each on the same terms and conditions set forth in the
original lease and at current fair market rental values of comparable space at
that time.
The
Company will pay annual rent based on $17.50 per square foot, subject to
adjustment for final leasehold improvements, for eight months beginning four
months after the commencement date. The annual rent escalates $1.00
per square foot in each of the next full twelve month periods to the termination
of the lease. The fixed rental
DYNAMICS
RESEARCH CORPORATION
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(dollars
in thousands, except per share amounts)
cost over
the term of the lease is approximately $10 million. The agreement also requires
the Company to pay $7 per month for the cost of tenant’s electricity for lights
and plugs.
The
Company will be reimbursed an allowance of leasehold improvements of
approximately $3.0 million by the landlord for all costs incurred by the Company
for improvements made prior to December 31, 2010, as long as such costs are
performed by agreed upon general contractors as stated in the lease
agreement. The Company also entered into a letter of credit with its
bank group for $353 to satisfy the required security deposit.
The
Company expects to be fully moved out of its current corporate headquarters at
60 Frontage Road and into Two Technology Drive by the end of this
year.
As a
defense contractor, the Company is subject to many levels of audit and review
from various government agencies, including the Defense Contract Audit Agency,
various inspectors general, the Defense Criminal Investigation Service, the
Government Accountability Office, the Department of Justice and Congressional
Committees. Both related to and unrelated to its defense industry involvement,
the Company is, from time to time, involved in audits, lawsuits, claims,
administrative proceedings and investigations. The Company accrues for
liabilities associated with these activities when it becomes probable that
future expenditures will be made and such expenditures can be reasonably
estimated. Except as noted below, the Company does not presently believe it is
reasonably likely that any of these matters would have a material adverse effect
on the Company’s business, financial position, results of operations or cash
flows. The Company’s evaluation of the likelihood of expenditures related to
these matters is subject to change in future periods, depending on then current
events and circumstances, which could have material adverse effects on the
Company’s business, financial position, results of operations and cash
flows.
On June
28, 2005, a class action employee suit was filed in the U.S. District Court for
the District of Massachusetts alleging violations of the Fair Labor Standards
Act and certain provisions of Massachusetts General Laws. The plaintiff’s claim
was for $8 million. On April 10, 2006, the U.S. District Court for
the District of Massachusetts entered an order granting in part the Company’s
motion to dismiss the suit and to compel compliance with the Company’s
mandatory dispute resolution program, directing that the parties arbitrate the
claims, and striking the class action waiver which was part of the dispute
resolution program. In the arbitration, the Company filed a Motion to Dismiss
and/or for Summary Disposition. The motion was denied and the
arbitrator has requested the parties to proceed to discovery. The
Company believes it has substantive legal and factual defenses to this matter
and intends to vigorously defend against the action. Nevertheless,
the outcome remains uncertain, and an adverse outcome could have a material
adverse effect on the Company’s results of operations, financial position or
cash flows.
In August
2009, the Company, the Department of Justice and the United States Attorney
Office, Boston, MA, executed a settlement agreement involving the Company's
admission of liability solely for breach of contract, payment of $15 million to
the government and dismissal with prejudice of all other claims against the
Company.
The
following discussion should be read in conjunction with our condensed
consolidated financial statements and the related notes. Unless the
context otherwise requires, references in this Form 10-Q to “DRC”, “we”, “us” or
“our” refer to Dynamics Research Corporation and its
subsidiaries.
The
following discussion also contains non-GAAP financial measures. In evaluating
our operating performance, management uses certain non-GAAP financial measures
to supplement the consolidated financial statements prepared under generally
accepted accounting principles in the United States (“GAAP”).
More
specifically, we use the following non-GAAP financial measures: non-GAAP
operating profit, non-GAAP income before income taxes, non-GAAP provision for
income taxes, non-GAAP net income and non-GAAP earnings per
share.
Management
believes these non-GAAP measures help indicate our operating performance before
charges that are considered by management to be outside our ongoing operating
results. Accordingly, management uses these non-GAAP measures to gain a better
understanding of our comparative operating performance from period-to-period and
as a basis for planning and forecasting future periods. Management believes
these non-GAAP measures, when read in conjunction with our GAAP financials,
provide useful information to investors by offering:
|
•
|
|
the
ability to make more meaningful period-to-period comparisons of our
ongoing operating results;
|
|
|
|
|
|
•
|
|
the
ability to better identify trends in our underlying business and perform
related trend analysis;
|
|
|
|
|
|
•
|
|
a
higher degree of transparency for certain expenses (particularly when a
specific charge impacts multiple line items);
|
|
|
|
|
|
•
|
|
a
better understanding of how management plans and measures our underlying
business; and
|
|
|
|
|
|
•
|
|
an
easier way to compare our most recent results of operations against
investor and analyst financial
models.
|
The
non-GAAP measures we use exclude the provision for litigation charge and its
related tax effect that management believes is unusual and outside of our
ongoing operations for the period presented.
These
non-GAAP measures have limitations, however, because they do not include all
items of expense that impact our operations. Management compensates for these
limitations by also considering our GAAP results. The non-GAAP financial
measures we use are not prepared in accordance with, and should not be
considered an alternative to, measurements required by GAAP, such as operating
loss, net loss and loss per share, and should not be considered measures of our
liquidity. The presentation of this additional information is not meant to be
considered in isolation or as a substitute for the most directly comparable GAAP
measures. In addition, these non-GAAP financial measures may not be comparable
to similar measures reported by other companies.
RECONCILIATION
OF NON-GAAP MEASURES
|
|
Three
Months Ended
|
|
|
|
Nine
Months Ended
|
|
|
|
|
September,
30 2008
|
|
|
|
September,
30 2008
|
|
|
(in
millions)
|
|
$
(1)
|
|
|
%
(2)
|
|
|
|
$
(1)
|
|
|
%
(2)
|
|
|
GAAP
operating loss
|
|
$
|
(2.3
|
)
|
|
|
(3.6
|
)%
|
|
|
$
|
(5.7
|
)
|
|
|
(3.3
|
)%
|
|
Provision
for litigation
|
|
|
6.0
|
|
|
|
9.5
|
%
|
|
|
|
14.8
|
|
|
|
8.5
|
%
|
|
Non-GAAP
operating income
|
|
$
|
3.7
|
|
|
|
5.9
|
%
|
|
|
$
|
9.1
|
|
|
|
5.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
loss before provision for income taxes
|
|
$
|
(2.7
|
)
|
|
|
(4.2
|
)%
|
|
|
$
|
(6.2
|
)
|
|
|
(3.5
|
)%
|
|
Provision
for litigation
|
|
|
6.0
|
|
|
|
9.5
|
%
|
|
|
|
14.8
|
|
|
|
8.5
|
%
|
|
Non-GAAP
income before provision for income taxes
|
|
$
|
3.3
|
|
|
|
5.2
|
%
|
|
|
$
|
8.6
|
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
benefit for income taxes
|
|
$
|
(2.4
|
)
|
|
|
91.3
|
%
|
(3)
|
|
$
|
(2.3
|
)
|
|
|
37.8
|
%
|
(3)
|
Tax
provision for litigation
|
|
|
3.6
|
|
|
|
60.6
|
%
|
(3)
|
|
|
5.8
|
|
|
|
38.8
|
%
|
(3)
|
Non-GAAP
provision for income taxes
|
|
$
|
1.2
|
|
|
|
35.9
|
%
|
(3)
|
|
$
|
3.4
|
|
|
|
39.6
|
%
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP
net loss
|
|
$
|
(0.2
|
)
|
|
|
(0.4
|
)%
|
|
|
$
|
(3.9
|
)
|
|
|
(2.2
|
)%
|
|
Provision
for litigation, net of tax benefit
|
|
|
2.4
|
|
|
|
3.7
|
%
|
|
|
|
9.1
|
|
|
|
5.2
|
%
|
|
Non-GAAP
net income
|
|
$
|
2.1
|
|
|
|
3.4
|
%
|
|
|
$
|
5.2
|
|
|
|
3.0
|
%
|
|
(1)
|
Totals
may not add due to rounding.
|
(2)
|
Represents
a percentage of total revenue of $63.5 million and $175.3 million for the
three and nine months ended September 30, 2008, respectively, excluding
the percentages for provision (benefit) for income taxes and the tax
benefit for provision for litigation.
|
(3)
|
These
amounts represent a percentage of GAAP income (loss) before provision for
income taxes, provision for litigation and non-GAAP income before
provision for income taxes,
respectively.
|
OVERVIEW
Dynamics
Research Corporation, headquartered in Andover, Massachusetts, is a leading
provider of innovative engineering, technical, information technology and
management consulting services and solutions to federal and state
governments. We provide support to our customers in the primary
mission areas of IT, Logistics and Readiness, Systems Integration and Technical
Services, Command, Control, Computers, Communications, Intelligence,
Surveillance and Reconnaissance, Homeland Security, Health and Human Services,
Intelligence/Space, Cyber Security, and Public and Environmental
Health.
On August
1, 2008, we completed the acquisition of Kadix Systems, LLC. The
acquisition has strengthened and expanded our growth as a provider of high-end
services and solutions in the homeland security and other federal civilian
markets. The operating results of Kadix are included in DRC’s results
of operations within the Systems and Services segment for the period subsequent
to the acquisition date.
We have
two reportable business segments: Systems and Services, and Metrigraphics. The
Systems and Services segment accounted for approximately 98% of total revenue
and the Metrigraphics segment accounted for approximately 2% of total revenue in
the nine months ended September 30, 2009.
We are
cognizant of changing priorities of the federal government. Federal
agencies are focusing their procurement activities on execution of President
Obama’s administration’s broad array of policy
initiatives: Cyber-
security
and information assurance, a shift in defense acquisition priorities and
processes, financial stabilization, investment in health care IT and military
health care programs and energy independence stand out as top federal priority
areas for increased funding.
Over the
past two years, we have carefully selected for strategic focus several target
growth markets that are today within the scope of the new priorities that have
been set by President Obama’s administration. We are now seeing
strong growth in revenues in these markets. Homeland security and
certain civilian agencies, primarily those with a financially-oriented mission,
now represent nearly 40% of our revenue. We also are seeing growth in
cyber security and information assurance work, which currently represents about
10% of our business. We currently are providing management,
operational and technical services to clients across the federal sector –
Defense, Homeland Security, Intelligence Agencies, and Civilian
Agencies. Our distinguishing strength is in the management area,
where we are providing an array of solutions, such as business transformation,
information assurance assessment and compliance, training, and human capital
solutions, helping customers achieve their missions.
In
addition to changing federal spending priorities, both President Obama and
Defense Secretary Gates have spoken to two specific reform initiatives –
procurement reform and “in-sourcing” or strengthening of the federal civilian
workforce, both of which are areas served by our training and human capital
solutions.
Regarding
federal acquisition reform, we have already experienced and are successfully
dealing with these changes. Over the past three years, we have seen a
marked change in the mix of contract types that reflect the recent trends in the
nature of federal procurement. In the third quarter of 2009, 40
percent of our revenues were from fixed price contracts, compared with 33
percent in the third quarter of 2008. In addition, nearly all of our
contracts have been awarded through a competitive procurement
process.
On the
subject of in-sourcing, or the growth in the federal civilian workforce, we see,
as do industry analysts and experts, that this growth is likely to come in the
form of added acquisition support staff, as well as procurement and contract
support specialists, and less likely to be in the type of high-value solutions
and services that DRC provides. With the shift in our business mix
over the past several years, nearly 90 percent of our revenue now comes from
providing solutions and services other than acquisition management, which
increasingly has been and continues to be set aside for small
businesses. Consequently, we anticipate no significant long-term
impact from this federal hiring initiative.
Outlook
Our
business is conducted primarily with U.S. Government customers under both
short-term and long-term contracts. We have aligned our service
offerings to current economic conditions and customer needs. The
U.S. Government’s budgetary processes give us good visibility regarding
future spending and the threat areas that are being addressed. Management
believes that our current contracts and backlog of previously awarded contracts
are well aligned with the direction of our customers’ future needs, and this
provides us with good insight regarding future cash flows. In 2008, we recorded
improved operating results absent the effect of the provision for litigation
which, when included, resulted in a net loss. Nonetheless, management
recognizes that the current economic situation and significant changes in
priorities under the new administration likely will result in significant
changes in federal spending with increases in some areas and decreases in
others. While we may benefit from the increases, certain programs in
which we participate may be subject to reductions.
CRITICAL
ACCOUNTING POLICIES
There are
business risks specific to the industries in which we operate. These risks
include: estimates of costs to complete contract obligations, changes in
government policies and procedures, government contracting issues and risks
associated with technological development. The preparation of financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements. Estimates and
assumptions also affect the amount of revenue and expenses during the reported
period. Actual results could differ from those estimates.
The use
of alternative estimates and assumptions and changes in business strategy or
market conditions may significantly impact our assets or liabilities, and
potentially result in a different impact to our results of
operations.
For
information regarding our critical accounting policies, refer to the section
titled “Critical Accounting Policies” in Part II, Item 7 of our 2008 Form 10-K.
There have been no material changes from the critical accounting policies
previously disclosed in our most recent Form 10-K.
RESULTS
OF OPERATIONS
Operating
results expressed as a percentage of segment and total revenue are as
follows:
|
|
Three
Months Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
(in
millions)
|
|
$
(1)
|
|
|
%
|
|
|
|
$
(1)
|
|
|
%
|
|
|
Contract
revenue
|
|
$
|
67.5
|
|
|
|
97.5
|
%
|
|
|
$
|
62.3
|
|
|
|
98.1
|
%
|
|
Product
sales
|
|
|
1.7
|
|
|
|
2.5
|
|
|
|
|
1.2
|
|
|
|
1.9
|
|
|
Total
revenue
|
|
$
|
69.2
|
|
|
|
100.0
|
%
|
|
|
$
|
63.5
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit on contract revenue
(3)
|
|
$
|
10.6
|
|
|
|
15.7
|
%
|
|
|
$
|
10.0
|
|
|
|
16.1
|
%
|
|
Gross
profit (loss) on product sales
(3)
|
|
|
0.2
|
|
|
|
14.0
|
%
|
|
|
|
(0.1
|
)
|
|
|
(6.7
|
)%
|
|
Total
gross profit
(3)
|
|
|
10.9
|
|
|
|
15.7
|
%
|
|
|
|
10.0
|
|
|
|
15.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
5.9
|
|
|
|
8.5
|
%
|
|
|
|
5.5
|
|
|
|
8.7
|
%
|
|
Provision
for litigation
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
|
6.0
|
|
|
|
9.5
|
%
|
|
Amortization
of intangible assets
|
|
|
0.8
|
|
|
|
1.2
|
%
|
|
|
|
0.7
|
|
|
|
1.1
|
%
|
|
Operating
income (loss)
|
|
|
4.1
|
|
|
|
6.0
|
%
|
|
|
|
(2.3
|
)
|
|
|
(3.6
|
)%
|
|
Interest
expense, net
|
|
|
(0.4
|
)
|
|
|
(0.6
|
)%
|
|
|
|
(0.4
|
)
|
|
|
(0.7
|
)%
|
|
Other
income, net
|
|
|
0.3
|
|
|
|
0.4
|
%
|
|
|
|
0.0
|
|
|
|
0.1
|
%
|
|
Provision
(benefit) for income taxes
|
|
|
1.0
|
|
|
|
25.6
|
%
|
(2)
|
|
|
(2.4
|
)
|
|
|
91.3
|
%
|
(2)
|
Net
income (loss)
|
|
$
|
3.0
|
|
|
|
4.3
|
%
|
|
|
$
|
(0.2
|
)
|
|
|
(0.4
|
)%
|
|
|
|
Nine
months Ended September 30,
|
|
|
|
|
2009
|
|
|
|
2008
|
|
|
(in
millions)
|
|
$
(1)
|
|
|
%
|
|
|
|
$
(1)
|
|
|
%
|
|
|
Contract
revenue
|
|
$
|
202.8
|
|
|
|
97.8
|
%
|
|
|
|
170.8
|
|
|
|
97.4
|
%
|
|
Product
sales
|
|
|
4.6
|
|
|
|
2.2
|
|
|
|
|
4.5
|
|
|
|
2.6
|
|
|
Total
revenue
|
|
$
|
207.4
|
|
|
|
100.0
|
%
|
|
|
$
|
175.3
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit on contract revenue
(3)
|
|
$
|
33.0
|
|
|
|
16.3
|
%
|
|
|
$
|
26.7
|
|
|
|
15.6
|
%
|
|
Gross
profit on product sales
(3)
|
|
|
0.0
|
|
|
|
0.2
|
%
|
|
|
|
0.2
|
|
|
|
4.7
|
%
|
|
Total
gross profit
(3)
|
|
|
33.0
|
|
|
|
15.9
|
%
|
|
|
|
26.9
|
|
|
|
15.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
18.8
|
|
|
|
9.0
|
%
|
|
|
|
16.1
|
|
|
|
9.2
|
%
|
|
Provision
for litigation
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
|
14.8
|
|
|
|
8.5
|
%
|
|
Amortization
of intangible assets
|
|
|
2.8
|
|
|
|
1.3
|
%
|
|
|
|
1.7
|
|
|
|
1.0
|
%
|
|
Operating
income (loss)
|
|
|
11.5
|
|
|
|
5.5
|
%
|
|
|
|
(5.7
|
)
|
|
|
(3.3
|
)%
|
|
Interest
expense, net
|
|
|
(1.5
|
)
|
|
|
(0.7
|
)%
|
|
|
|
(0.7
|
)
|
|
|
(0.4
|
)%
|
|
Other
income, net
|
|
|
0.6
|
|
|
|
0.3
|
%
|
|
|
|
0.2
|
|
|
|
0.1
|
%
|
|
Provision
(benefit) for income taxes
|
|
|
3.8
|
|
|
|
35.8
|
%
|
(2)
|
|
|
(2.3
|
)
|
|
|
37.8
|
%
|
(2)
|
Net
income (loss)
|
|
$
|
6.8
|
|
|
|
3.3
|
%
|
|
|
$
|
(3.9
|
)
|
|
|
(2.2
|
)%
|
|
(1)
|
Totals
may not add due to rounding.
|
(2)
|
The
percentage of provision (benefit) for income taxes relates to a percentage
of income (loss) before income taxes.
|
(3)
|
These
amounts represent a percentage of contract revenues, product sales and
total revenues, respectively.
|
Revenues
We
reported total revenues of $69.2 million and $63.5 million in the
three months ended September 30, 2009 and 2008, respectively. Total revenues for
the third quarter of 2009 represent an increase of $5.7 million, or 9.1% of
total revenue, from the same period in 2008. Our revenues for the
nine months ended September 30, 2009 and 2008 were $207.4 million and $175.3
million, respectively, representing an increase of $32.1 million, or 18.4% of
total revenue, from the same period in 2008. The organic growth rate for the
three and nine months ended September 30, 2009 was 2.4% and 3.7%,
respectively. Our computation of organic growth adds Kadix’s July and
seven months of 2008 revenue of $4.1 and $24.7 million, respectively, to the
Company’s reported revenues for such periods.
Contract
Revenues
Contract
revenues in our Systems and Services segment were earned from the following
sectors:
|
|
Three
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
(in
millions)
|
|
$
(1)
|
|
|
%
(1)
|
|
|
$
(1)
|
|
|
%
(1)
|
|
National
defense and intelligence agencies
|
|
$
|
36.9
|
|
|
|
54.6
|
%
|
|
$
|
39.9
|
|
|
|
64.0
|
%
|
Federal
civilian agencies
|
|
|
10.7
|
|
|
|
15.9
|
|
|
|
9.6
|
|
|
|
15.4
|
|
Homeland
Security
|
|
|
13.5
|
|
|
|
20.1
|
|
|
|
6.1
|
|
|
|
9.8
|
|
State
and local government agencies
|
|
|
5.9
|
|
|
|
8.8
|
|
|
|
6.2
|
|
|
|
10.0
|
|
Other
|
|
|
0.4
|
|
|
|
0.6
|
|
|
|
0.5
|
|
|
|
0.8
|
|
Total
contract revenue
|
|
$
|
67.5
|
|
|
|
100.0
|
%
|
|
$
|
62.3
|
|
|
|
100.0
|
%
|
|
|
Nine
Months Ended September 30,
|
|
|
|
2009
|
|
|
2008
|
|
(in
millions)
|
|
$
(1)
|
|
|
%
(1)
|
|
|
$
(1)
|
|
|
%
(1)
|
|
National
defense and intelligence agencies
|
|
$
|
110.6
|
|
|
|
54.5
|
%
|
|
$
|
118.0
|
|
|
|
69.1
|
%
|
Federal
civilian agencies
|
|
|
32.6
|
|
|
|
16.1
|
|
|
|
23.0
|
|
|
|
13.5
|
|
Homeland
Security
|
|
|
40.3
|
|
|
|
19.9
|
|
|
|
9.1
|
|
|
|
5.3
|
|
State
and local government agencies
|
|
|
18.3
|
|
|
|
9.0
|
|
|
|
18.8
|
|
|
|
11.0
|
|
Other
|
|
|
1.1
|
|
|
|
0.5
|
|
|
|
1.9
|
|
|
|
1.1
|
|
Total
contract revenue
|
|
$
|
202.8
|
|
|
|
100.0
|
%
|
|
$
|
170.8
|
|
|
|
100.0
|
%
|
(1)
|
Totals
may not add due to rounding.
|
The
decrease in revenues from national defense and intelligence agencies in the
three and nine months ended September 30, 2009 compared to the same period in
2008 was due to lower revenues from the transition of the U.S. Air Force
Electronic Systems Center Information Technology Services Program II contract to
the small business set-aside Professional Acquisition Support Services contract,
the wind down of the U.S. Navy Trident Missile program and the expiration of
8(a) set-aside contracts received through the Kadix acquisition, for which the
period of performance has now expired.
The
increase in revenues from federal civilian agencies and homeland security in the
three and nine months ended September 30, 2009 compared to the same period in
2008 was primarily due to added revenues related to the Kadix acquisition,
supplemented by new contract and task order awards received in the second half
of 2008 and in 2009.
The
decrease in revenues from state and local government agencies in the three and
nine months ended September 30, 2009 compared to the same period in 2008 was
primarily due to lower revenues from the State of Ohio contract, which is now
completed, partially offset by revenues from the new child welfare system
development project with the State of Tennessee which began in the second
quarter of 2008. Revenues from the State of Tennessee contract are
currently projected at an estimated $14 million for 2009, compared with $7.0
million for
2008. Revenues
from the State of Ohio contract, which is now completed, were $0.5 million in
2009 (all in the first half of the year) compared with $12.1 million for all of
2008.
Revenues
by contract type as a percentage of Systems and Services revenues were as
follows:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
Time
and materials
|
|
|
41
|
%
|
|
|
49
|
%
|
|
|
43
|
%
|
|
|
50
|
%
|
Fixed
price, including service type contracts
|
|
|
40
|
|
|
|
33
|
|
|
|
38
|
|
|
|
31
|
|
Cost
reimbursable
|
|
|
19
|
|
|
|
18
|
|
|
|
19
|
|
|
|
19
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prime
contract
|
|
|
70
|
%
|
|
|
68
|
%
|
|
|
71
|
%
|
|
|
61
|
%
|
Sub-contract
|
|
|
30
|
|
|
|
32
|
|
|
|
29
|
|
|
|
39
|
|
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
|
|
100
|
%
|
Prime
contract revenues increased in the three and nine months ended September 30,
2009 compared to the same periods in 2008 as a result of an increasing portion
of contracts awarded under DRC’s agency-wide multiple award schedule indefinite
delivery-indefinite quantity contracts, including contracts received through the
Kadix acquisition.
Product
Sales
Product
sales for our Metrigraphics segment were $1.7 million and $1.2 million in the
three months ended September 30, 2009 and 2008, respectively, and $4.6 and $4.5
million, respectively, in the first nine months then ended.
Funded
Backlog
Our
funded backlog was $153.7 million at September 30, 2009 and $149.2 million at
December 31, 2008. We expect that substantially all of our backlog will generate
revenue during the subsequent twelve month period.
Total
gross profit was $10.9 million and $10.0 million for the three months ended
September 30, 2009 and 2008, respectively, resulting in a gross margin of 15.7%
in each period. For the nine months ended September 30, 2009 and
2008, the total gross profit was $33.0 million and $26.9 million, respectively,
resulting in a gross margin of 15.9% and 15.4%, respectively.
Our gross
profit and gross margin on contract revenue increased to $10.6 million and 15.7%
in the third quarter of 2009 from $10.0 million and 16.1% in the third quarter
of 2008. For the nine months ended September 30, 2009 and 2008, the gross profit
on contract revenue was $33.0 million and $26.7 million, respectively, resulting
in a gross margin of 16.3% and 15.6%, respectively. The improvement
was due to the addition of higher margin services provided by the acquired Kadix
operations, improved labor utilization and a shift from subcontract work to
prime contract work, partially offset by an increase in pension expense due to
the decline in plan asset performance in 2008.
Our gross
profit on product sales was $0.2 million in the third quarter of 2009 compared
to a gross loss of $0.1 million for the third quarter of 2008, and a gross loss
of $0.2 million in the nine months ended September 30, 2008.
Selling,
general and administrative expenses
Selling,
general and administrative expenses were $5.9 million and $5.5 million in the
three months ended September 30, 2009 and 2008, respectively, and $18.8 million
and $16.1 million for the respective nine months then ended.
Selling,
general and administrative expenses as a percent of total revenue in the third
quarter of 2009 and 2008 was 8.5% and 8.7%, respectively, and 9.0% and 9.2% for
the respective nine months then ended. Selling, general
and
administrative expenses in 2009 were higher compared to 2008 as a result of
added costs to support the acquired Kadix operations and higher legal
fees.
Provision
for litigation
During
the third quarter of 2008, we increased the accrual for litigation to $15.0
million. In August 2009, DRC, the Department of Justice and the
United States Attorney Office, Boston, MA, executed a settlement agreement
involving DRC's admission of liability solely for breach of contract, payment of
$15 million to the government and dismissal with prejudice of all other claims
against DRC.
Amortization
of intangible assets
Amortization
expense was $0.8 million and $0.7 million in the three months ended September
30, 2009 and 2008, respectively, and $2.8 million and $1.7 million for the
respective nine months then ended. The increase in amortization
expense primarily relates to intangible assets acquired as the result of our
2008 acquisition of Kadix and is included in the Systems and Services segment.
The remaining amortization expense for the current fiscal year is expected to be
approximately $0.6 million for the fourth quarter of 2009.
Interest
expense, net
We
incurred interest expense of $0.4 million in each of the three months ended
September 30, 2009 and 2008, and $1.5 million and $0.7 million for the
respective nine months then ended. The increase in interest expense was due to
the addition of the term loan used to finance the Kadix
acquisition.
Other
income (expense), net
Other
income (expense) consists of our portion of earnings and losses in
HMR
Tech,
gains and losses realized from our deferred compensation plan and results from
other non-operating transactions, all of which were immaterial to our
results.
Income
tax provision (benefit)
We
recorded an income tax provision of $3.8 million in the nine months ended
September 30, 2009 compared to an income tax benefit of $2.3 million in the same
period in 2008. The effective income tax rate was 35.8% for the nine
months ended September 30, 2009 and 39.6% for the nine months ended September
30, 2008, excluding the tax effect of the $14.8 million litigation provision
recorded in 2008 for which we recorded a $5.8 million tax
benefit. The 2009 effective rate has been favorably affected by an
adjustment to our unrecognized tax benefits and a reduction of state tax expense
associated with the filing of the 2008 tax returns.
LIQUIDITY
AND CAPITAL RESOURCES
The
following discussion analyzes liquidity and capital resources by operating,
investing and financing activities as presented in our Consolidated Statements
of Cash Flows. Our principal sources of liquidity are cash flows from operations
and borrowings from our revolving credit facility. At September 30, 2009, the
borrowing capacity available under our revolver was $20.3
million.
Our
results of operations, cash flows and financial condition are subject to trends,
events and uncertainties, including demands for capital to support growth,
economic conditions, government payment practices and contractual matters. Our
need for access to funds is dependent on future operating results, our growth
and acquisition activity and external conditions.
In light
of the current economic situation, we have also evaluated our future liquidity
needs, both from a short-term and long-term basis. We believe we have
sufficient funds to meet our working capital and capital
expenditure
needs for
the short term. Cash on hand plus cash generated from operations along with cash
available under credit lines are expected to be sufficient in 2009 to service
debt, finance capital expenditures, pay the anticipated settlement of
litigation, pay federal and state income taxes and fund the pension plan, if
necessary. To provide for long-term liquidity, we believe we can generate
substantial positive cash flow, as well as obtain additional capital, if
necessary, from the use of subordinated debt or equity. In the event that our
current capital resources are not sufficient to fund requirements, we believe
our access to additional capital resources would be sufficient to meet our
needs.
During
the third quarter of 2009, we paid the $15.0 million litigation settlement due
to the U.S. Government. We used available cash on hand and borrowed
the remaining portion from our revolver.
We
believe that selective acquisitions are an important component of our growth
strategy. We may acquire, from time to time, firms or properties that are
aligned with our core capabilities and which complement our customer base. We
will continue to consider acquisition opportunities that align with our
strategic objectives, along with the possibility of utilizing the credit
facility as a source of financing.
At
September 30, 2009 and December 31, 2008, we had cash and cash equivalents
aggregating $0.2 million and $7.1 million, respectively. Our operating
practice is to apply cash received against any outstanding revolving credit
facility balances. When a revolver balance exists, cash balances at
the end of the period generally reflect the timing and size of cash receipts at
the end of the period.
Operating
activities
Net cash
used in operating activities totaled $0.1 million in the first nine months of
2009 compared to net cash provided by operating activities of $20.1 million in
the first nine months of 2008. The cash used and provided by operating
activities in the first nine months of 2009 and 2008 was primarily attributable
to net earnings realized during the quarter.
Contract
receivables were $71.9 million at September 30, 2009, or 93 days sales
outstanding (DSO), compared to $71.4 million, or 95 days at December 31, 2008.
Billed receivables decreased $6.9 million during the first nine months of 2009,
while unbilled receivables increased $7.4 million. Federal business
DSO was 72 days at September 30, 2009 compared to 86 days at December 31,
2008. The difference between consolidated DSO and federal DSO was
primarily due to our contracts with the States of Ohio and Tennessee which had
aggregate contract receivable balances outstanding of $18.8 million and $12.7
million at September 30, 2009 and December 31, 2008, respectively.
In
February 2008, we were awarded a $25.5 million fixed price contract from the
State of Tennessee, which began in the second quarter of 2008 with deployment
scheduled to occur in the third quarter of 2010. The outstanding
contract receivable balance of the State of Tennessee contract at September 30,
2009 was $17.7 million and is currently projected to be approximately $19
million at the end of 2009. We currently expect to collect payment of
$1.8 million in the first half of 2010 and $19.6 million in the second half of
2010 on this contract.
Our net
deferred tax asset was $0.6 million and $7.7 million at September 30, 2009 and
December 31, 2008, respectively. The decrease in our deferred tax
asset was principally related to the current tax benefit associated with the
payment of the litigation settlement. We paid $0.3 million in income
taxes in the first nine months of 2009 and currently anticipate additional
income tax payments of $0.4 million in the fourth quarter of 2009.
The
Internal Revenue Service (“IRS”) had challenged the deferral of income for tax
reporting purposes related to unbilled receivables including the applicability
of a Letter Ruling issued by the IRS to DRC in January 1976 which granted us
deferred tax treatment of the unbilled receivables. This issue was
elevated to the IRS National Office for determination. On October 23,
2008, we received a notification of ruling from the IRS National
Office. This ruling provided clarification regarding the IRS position
relating to revenue recognition for tax purposes regarding our unbilled
receivables. During September 2009, the IRS completed its examination
of the our tax returns for 2004 through 2007 and issued a Revenue Agent Report
(“RAR”), which reduced the deferral of income for tax reporting
purposes. As a result we transferred $0.9 million of taxes from
deferred to current taxes payable. The RAR also
included
an assessment of interest of $0.5 million. We have filed a protest with the IRS
to appeal the assessment. We believe the appeal will be successful
and have made no provision for the interest associated with the
assessment.
Share-based
compensation was $0.5 million in the first nine months of 2009, compared to $0.9
million in the same period in 2008. As of September 30, 2009 the
total unrecognized compensation related to restricted stock awards was $1.3
million to be recognized over 2.1 years.
Non-cash
amortization expense of our acquired intangible assets was $2.8 million and $1.7
million in the first nine months of 2009 and 2008, respectively. We
anticipate that non-cash expense for the amortization of intangible assets will
be approximately $0.6 million in the fourth quarter of 2009.
Pension
expense was $1.2 million for the first nine months of 2009 compared to pension
income of $0.9 million in the same period in 2008. The increase in
expense was due to the decline in plan asset performance in 2008. We
will be required to make contributions totaling $0.5 million by September 15,
2010.
Investing
activities
Net cash
used in investing activities was $6.0 million and $43.8 million in the first
nine months of 2009 and 2008, respectively. The net cash used in 2009 was
primarily comprised of additional consideration paid as part of the Kadix
acquisition. Net cash used in investing activities in the first nine
months of 2008 consisted of our purchase of Kadix for $42.4 million, partially
offset by proceeds from the sale of investments and dividends received from
HMR
Tech. Net
cash used also consisted of capital expenditures of $2.3 million and $1.5
million in the first nine months of 2009 and 2008, respectively. We expect
capital expenditures in the range of $3 million to $4 million in
2009.
Financing
activities
Net cash
used in financing activities was $0.8 million in the first nine months of 2009
compared to net cash provided of $32.5 million in the first nine months of 2008.
The amount of cash used in 2009 primarily represents payments under our term
loan of $6.0 million, partially offset by net borrowings under our revolver of
$4.3 million. The amount of cash provided in 2008 represents proceeds from our
term loan of $40.0 million, partially offset by net payments under our revolving
credit agreement of $7.7 million.
The
average daily borrowing on our revolver for the first nine months of 2009 was
$2.0 million at an interest rate of 3.25%, compared to an average daily
borrowing of $4.3 million at a weighted average interest rate of 5.83% in the
first nine months of 2008. The average interest rate of our combined
term loan interest rate and swap agreement interest rate was 4.37% for the first
nine months of 2009, compared to 5.21% from August 1, 2008 through September 30,
2008.
RECENT
ACCOUNTING PRONOUNCEMENTS
A
description of recent accounting pronouncements are referenced in Note 2 of our
Condensed Consolidated Financial Statements of this Form 10-Q.
We are
subject to interest rate risk associated with our term loan and revolver, where
interest payments are tied to either the LIBOR or prime rate. The
interest rate at September 30, 2009 on our $32 million term loan was 2.60%.
The interest rate on our swap agreement effectively fixes the interest rate on
half of our outstanding term loan at 3.60% (excluding the applicable margin of
2.00%). At any time, a sharp rise in interest rates could have an adverse effect
on net interest expense as reported in our Consolidated Statements of
Operations. Our potential loss over one year that would result in a hypothetical
and instantaneous increase of one full percentage point in the interest rate on
half of our term loan would increase annual interest expense by approximately
$0.3 million.
In
addition, historically our investment positions have been relatively small and
short-term in nature. We typically invest excess cash in money market
accounts with original maturities of three months or less with no
exposure
to market interest rates. We have no significant exposure to foreign currency
fluctuations. Foreign sales, which are nominal, are primarily denominated in
U.S. dollars.
The
Company’s principal executive officer (“CEO”) and principal financial officer
(“CFO”) evaluated, together with other members of senior management, the
effectiveness of the Company’s disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) as of September 30, 2009; and, based
on this review, the Company’s CEO and CFO concluded that, as of September 30,
2009, the Company’s disclosure controls and procedures were effective to ensure
that information required to be disclosed by it in the reports that it files or
submits under the Securities Exchange Act of 1934 (i) is recorded, processed,
summarized and reported within the time periods specified in the SEC’s rules and
forms and (ii) is accumulated and communicated to the Company’s management,
including the Company’s CEO and CFO, as appropriate, to allow timely decisions
regarding required disclosure.
There has
been no change in the Company’s internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the quarterly
period ended September 30, 2009 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting. During the quarter ended September 30, 2009, the Company
completed integration activities related to the acquired Kadix operations, and
as a result management’s assessment of internal control for the year ended
December 31, 2009 will include the acquired operations.
PART II. OTHER
INFORMATION
As a
defense contractor, we are subject to many levels of audit and review from
various government agencies, including the Defense Contract Audit Agency,
various inspectors general, the Defense Criminal Investigation Service, the
Government Accountability Office, the Department of Justice and Congressional
Committees. Both related to and unrelated to our defense industry involvement,
we are, from time to time, involved in audits, lawsuits, claims, administrative
proceedings and investigations. We accrue for liabilities associated with these
activities when it becomes probable that future expenditures will be made and
such expenditures can be reasonably estimated. We are a party to or have
property subject to litigation and other proceedings referenced in Note 14 of
the Notes to Condensed Consolidated Financial Statements included in this Form
10-Q and in Note 13 of our Form 10-K for the year ended December 31, 2008. Our
evaluation of the likelihood of expenditures related to these matters is subject
to change in future periods, depending on then current events and circumstances,
which could have a material adverse effect on our business, financial position,
results of operations and cash flows.
For
information regarding factors that could affect our results of operations,
financial condition and liquidity, refer to the section titled “Risk Factors” in
Part I, Item 1A of our 2008 Form 10-K. There have been no material changes from
the risk factors previously disclosed in our most recent Form 10-K.
|
|
|
|
|
|
|
|
Total Number
|
|
|
Approximate
|
|
|
|
|
|
|
|
|
|
of
Shares
|
|
|
Dollar
Value
|
|
|
|
|
|
|
|
|
|
Purchased
as
|
|
|
of Shares that
|
|
|
|
|
|
|
Average
|
|
|
Part
of
|
|
|
May
Yet Be
|
|
|
|
Total Number
|
|
|
Price
|
|
|
Publicly
|
|
|
Purchased
|
|
|
|
of
Shares
|
|
|
Paid
Per
|
|
|
Announced
|
|
|
Under
the
|
|
|
|
Purchased
|
|
|
Share
|
|
|
Programs
|
|
|
Programs
|
|
July
1, 2009 to July 31, 2009
|
|
|
193
|
|
|
$
|
11.60
|
|
|
|
-
|
|
|
$
|
-
|
|
August
1, 2009 to August 31, 2009
|
|
|
2,523
|
|
|
$
|
12.68
|
|
|
|
-
|
|
|
|
-
|
|
September
1, 2009 to September 30, 2009
|
|
|
1,017
|
|
|
$
|
13.55
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
3,733
|
|
|
$
|
12.86
|
|
|
|
-
|
|
|
$
|
-
|
|
The
following Exhibits are filed or furnished, as applicable, herewith:
31.1
|
Certification
of the Chief Executive Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Rule 13a-14(a) under the
Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification
of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
32.2
|
Certification
of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURE
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.
|
DYNAMICS
RESEARCH CORPORATION
|
|
(Registrant)
|
|
|
|
|
Date: November
9, 2009
|
/s/
David Keleher
|
|
Senior
Vice President, Chief Financial Officer and Treasurer
|
|
(Principal
Financial Officer)
|
|
|
Date: November
9, 2009
|
/s/
Shaun N. McCarthy
|
|
Vice
President, Corporate Controller and Chief Accounting
Officer
|
|
(Principal
Accounting Officer)
|
|
|
|
|
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