DRC Reports Third Quarter 2012 Results

DRC Reports Third Quarter 2012 Results        --- Adjusted EBITDA of 11.6 Percent on Revenue of $77 Million ---           --- $11.7 Million Free Cash Flow, 15 Percent of Revenue ---   --- $125 Million of New Contract Awards and Funded Bookings of $108 Million                                      ---     --- Goodwill Impairment Charge Concluded at $48.6M, $36.6M Third Quarter                                   Charge ---  ANDOVER, Mass., Oct. 31, 2012 (GLOBE NEWSWIRE) -- Dynamics Research Corporation (Nasdaq:DRCO), a leading provider of innovative management consulting, engineering, science and information technology services and solutions to federal and state governments, today announced operating results for the third quarter ended September 30, 2012.  Financial Results  Results for the third quarter of 2012 included a $36.6 million non-cash goodwill impairment charge. Excluding this charge net income for the third quarter of 2012 was $2.8 million, or $0.27 per diluted share, versus $3.3 million, or $0.32 per diluted share, for the third quarter of 2011.Third quarter 2012 results included other income of $2.4 million, or $0.14 per diluted share, as a result of settlement of a contract claim by a company in which DRC has a 40 percent ownership interest.Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) for the third quarter of 2012 was $8.9 million, or 11.6 percent of revenue, compared with $11.3 million, or 11.8 percent of revenue, for the third quarter a year ago.Including the goodwill impairment charge the reported loss was $20.6 million for the third quarter of 2012.Revenue for the third quarter of 2012 was $76.8 million, compared with $96.4 million for the same period in 2011.  Excluding the goodwill impairment charges net income for the nine months ended September 30, 2012 was $6.0 million, or $0.58 per diluted share, compared with $8.7 million, or $0.85 per diluted share, for the same period a year ago, excluding second quarter 2011 transaction costs. Adjusted EBITDA for the nine months ended September 30, 2012 was $23.9 million, or 9.8 percent of revenue, compared with $23.6 million, or 10.1 percent of revenue, for the same period a year ago.Including pre-tax goodwill impairment charges of $48.6 million the net loss was $24.9 million for the nine month period ended September 30, 2012.For the nine months ended September 30, 2012 revenue was $243.5 million compared to $234.4 million for the same period in 2011, which included the results of High Performance Technologies, Inc. subsequent to the merger date of June 30, 2011.  Regarding the non-cash goodwill impairment charges, the Company's decision to evaluate whether goodwill was impaired resulted from a significant decline in the market price of the Company's common stock in the second quarter of 2012.The Company's step one evaluation indicated that goodwill was impaired.As a result a preliminary charge of $12.0 million was taken in the second quarter of 2012.The Company's step two evaluation was completed in the third quarter of 2012, resulting in the determination of a total impairment of $48.6 million and an additional charge in the third quarter of $36.6 million.  Business Highlights  "Highlights for the quarter included $125 million in new business contract awards, a quarterly record for DRC, and a third quarter book-to-bill ratio of 1.4-to-one. DRC is executing on a plan to identify and capture its share of opportunities in this highly competitive and challenging environment," said Jim Regan, DRC's chairman and chief executive officer."Clearly, our business concentration in federal growth market sectors and differentiated capabilities is a source of strength – evidenced by the fact that $76 million of the contract wins were in the healthcare market, with the largest of these being a $50 million contract to support the Food and Drug Administration's scientific computing environment.  "We are continuing to identify additional opportunities, despite market challenges.Notwithstanding the significant number of award decisions made in the quarter just ended, our qualified pipeline remains at $1.0 billion, about the same as three months ago.We also reported another strong quarter from a cash flow perspective, generating $11.7 million of free cash flow and ending the quarter with a $9.5 million cash balance.As we turn the corner into 2013, we will continue focusing on new business development initiatives, de-levering the balance sheet, and delivering bottom line results for our shareholders."  Company Guidance  The Company's estimate for 2012 full year revenue is in the range of $317 to $321 million.The Company estimates 2012 full year earnings, excluding impairment charges, to be in the range of $0.76 to $0.78 per diluted share. For the fourth quarter of 2012, the Company anticipates revenue in the range of $74 to $77 million and earnings of $0.18 to $0.20 per diluted share.  Conference Call  The Company will conduct a third quarter 2012 conference call tomorrow, November 1, 2012 at 10:00 a.m. ET.The call will be available via telephone at 877-303-4382 and accessible via Web cast at www.drc.com.Recorded replays of the conference call will be available on Dynamics Research Corporation's investor relations home page at www.drc.com and by telephone at 800-585-8367, replay passcode # 45264471, beginning at 1:00 p.m. ET on November 1, 2012.  About Dynamics Research Corporation  Dynamics Research Corporation (DRC) is a leading provider of mission-critical technology management services and solutions for government programs.DRC offers the capabilities of a large company and the responsiveness of a small company, backed by a history of excellence and customer satisfaction.Founded in 1955, DRC is a publicly held corporation (Nasdaq:DRCO) and maintains more than 25 offices nationwide with major offices in Andover, Massachusetts and the Washington, D.C. area.For more information please visit our website at www.drc.com.  Safe Harbor  Safe harbor statements under the Private Securities Litigation Reform Act of 1995: Some statements contained or implied in this news release, may be considered forward-looking statements, which by their nature are uncertain. Consequently, actual results could materially and adversely differ and readers are cautioned not to place undue reliance on forward-looking statements. For more detailed information concerning how risks and uncertainties could affect the Company's financial results, please refer to DRC's most recent filings with the SEC. The Company assumes no obligation to update any forward-looking information.  Non-GAAP Financial Information  DRC discloses earnings before interest, taxes, depreciation and amortization and free cash flow, which are not recognized measures under GAAP.We have provided a reconciliation of EBITDA, adjusted to conform to the definition used in our loan agreements and free cash flow in Attachment V of this announcement.When evaluating DRC's financial results investors should evaluate each adjustment to reported GAAP financial measures in the reconciliation as additional information and not use this non-GAAP financial measure as alternatives to reported GAAP financial measures.DRC presents these financial measures because the Company believes they provide investors with important supplemental information to assist them in assessing DRC's financial results.  ATTACHMENT I  DYNAMICS RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) (In thousands, except share and per share data)                                                         Three Months Ended                                                       September 30,                                                       2012        2011 Revenue                                                $76,767   $96,379 Cost of revenue                                        65,544     78,941 Gross profit                                           11,223     17,438                                                                   Selling, general and administrative expenses           5,684      7,041 Amortization of intangible assets                      1,031      1,553 Impairment of goodwill                                 36,600     -- Operating income (loss)                                (32,092)   8,844 Interest expense, net                                  (2,579)    (3,027) Other income (expense), net                            2,414      (157) Income (loss) before provision (benefit) for income    (32,257)   5,660 taxes Provision (benefit) for income taxes                   (11,663)   2,382 Net income (loss)                                      $(20,594) $3,278                                                                   Earnings (loss) per share:                                         Basic                                                  $(1.99)   $0.32 Diluted                                                $(1.99)   $0.32                                                                   Weighted average shares outstanding:                               Basic                                                  10,360,203 10,244,868 Diluted                                                10,360,203 10,314,413  ATTACHMENT II                                                               DYNAMICS RESEARCH CORPORATION CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) (In thousands, except share and per share data)                                                                                                                                                                               Nine Months Ended                                                   September 30,                                                   2012        2011 Revenue                                            $243,470  $234,375 Cost of revenue                                    206,124    195,746 Gross profit                                       37,346     38,629                                                               Selling, general and administrative expenses       18,985     19,519 Amortization of intangible assets                  3,093      2,301 Impairment of goodwill                             48,600     -- Operating income (loss)                            (33,332)   16,809 Interest expense, net                              (7,979)    (4,047) Other income, net                                  2,478      6 Income before provision (benefit) for income taxes (38,833)   12,768 Provision (benefit) for income taxes               (13,951)   5,345 Net income (loss)                                  $(24,882) $7,423                                                               Earnings (loss) per share:                                     Basic                                              $(2.40)   $0.74 Diluted                                            $(2.40)   $0.73                                                               Weighted average shares outstanding:                           Basic                                              10,356,334 10,060,585 Diluted                                            10,356,334 10,205,603  ATTACHMENT III                                                         DYNAMICS RESEARCH CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (Dollars in thousands)                                                                                                                                                           September 30, December 31,                                           2012          2011 Assets                                                   Current assets                                           Cash and cash equivalents                  $9,457      $3,908 Contract receivables, net                  51,418       66,466 Prepaid expenses and other current assets  3,630        2,566 Total current assets                       64,505       72,940 Noncurrent assets                                        Property and equipment, net                13,205       15,265 Goodwill                                   163,205      211,805 Intangible assets, net                     15,648       18,741 Deferred tax asset                         13,254       497 Other noncurrent assets                    4,309        4,312 Total noncurrent assets                    209,621      250,620 Total assets                               $274,126    $323,560                                                         Liabilities and stockholders' equity                     Current liabilities                                      Current portion of long-term debt          $14,438     $12,375 Accounts payable                           22,220       24,504 Accrued compensation and employee benefits 19,573       24,902 Deferred tax liability                     3,245        3,383 Other accrued expenses                     5,611        8,556 Total current liabilities                  65,087       73,720 Long-term liabilities                                    Long-term debt                             91,630       102,453 Other long-term liabilities                26,883       33,066 Total stockholders' equity                 90,526       114,321 Total liabilities and stockholders' equity $274,126    $323,560  ATTACHMENT IV                                                                  DYNAMICS RESEARCH CORPORATION SUPPLEMENTAL INFORMATION (unaudited) (Dollars in thousands)                                                                                                                                   Contract revenues were earned from the following                    sectors:                                                                                             Three Months Ended           Nine Months Ended                            September 30,              September 30,                            2012            2011         2012       2011 National defense and        $45,468       $59,479    $142,540 $154,761 intelligence agencies Homeland security           11,799         12,963      34,307    36,573 Federal civilian agencies   15,401         20,148      54,592    31,738 Total revenue from federal  72,668         92,590      231,439   223,072 agencies State and local government  3,995          3,774       11,910    11,274 agencies Other                       104            15          121       29 Total revenue               $76,767       $96,379    $243,470 $234,375                                                                  Revenues by contract type as a percentage of contract               revenue were as follows:                                                                                             Three Months Ended           Nine Months Ended                            September 30,              September 30,                            2012            2011         2012       2011 Fixed price, including      45%             46%          46%        48% service-type contracts Time and materials          37             33          34        31 Cost reimbursable           18             21          20        21                            100%            100%         100%       100%                                                                  Prime contract              83%             82%          84%        78% Sub-contract                17             18          16        22                            100%            100%         100%       100%                                                                                                                                                              Three Months Ended           Nine Months Ended                            September 30,              September 30,                            2012            2011         2012       2011 Net cash provided by        $12,188       $14,277    $16,306  $14,278 operating activities Capital expenditures        $535          $663       $750     $1,525 Depreciation                $981          $1,067     $2,999   $2,774 Bookings                    $107,956      $160,881   $251,637 $274,634                                                                                                                                                              September 30, December 31,                                       2012            2011                    Total backlog               $757,334      $801,932              Funded backlog              $182,431      $183,336              Employees                   1,265          1,534                   ATTACHMENT V                                                                   DYNAMICS RESEARCH CORPORATION RECONCILIATION OF NON-GAAP FINANCIAL MEASURES ADJUSTED EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION (ADJUSTED EBITDA) (unaudited) AND FREE CASH FLOW (unaudited) (Dollars in thousands)                                                                   As presented, adjusted EBITDA is defined as                                               follows:                                                                                               Three Months Ended        Nine Months Ended                             September 30,           September 30,                             2012          2011        2012          2011 Net income (loss)            $(20,594)   $3,278    $(24,882)   $7,423 Add:                                                               Interest expense, net        2,579        3,027      7,979        4,047 Provision (benefit) for      (11,663)     2,382      (13,951)     5,345 income taxes Depreciation expense         981          1,067      2,999        2,774 Amortization expense         1,031        1,553      3,093        2,301 Share-based compensation     171          192        522          521 Impairment of goodwill       36,600       --         48,600       -- Transaction costs, net of amounts included in net      --           --         --           1,703 interest expense Less:amortization of deferred gain on sale of     (169)        (169)      (507)        (507) building Adjusted EBITDA^(1)          $8,936      $11,330   $23,853     $23,607 Adjusted EBITDA, as a        11.6%         11.8%       9.8%          10.1% percent of revenue                                                                                               Three Months Ended        Nine Months Ended                             September 30,           September 30,                             2012          2011        2012          2011 Net cash provided by         $12,188     $14,277   $16,306     $14,278 operating activities Less:Additions to property  (535)        (663)      (750)        (1,525) and equipment Free cash flow               $11,653     $13,614   $15,556     $12,753 Free cash flow, as a percent 15.2%         14.1%       6.4%          5.4% of revenue                                                                                                                                     (1)We have calculated adjusted EBITDA to conform with the definition of EBITDA provided in our loan agreements to help investors understand that component of our debt covenant calculations. We may have calculated EBITDA differently than it is calculated by other companies.  ATTACHMENT VI                                                                 DYNAMICS RESEARCH CORPORATION NON-GAAP CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited) (in thousands, except share and per share data)                                                                                                                                                               Three Months Ended      Nine Months Ended                               September 30,         September 30,                               2012        2011        2012        2011 Revenue                        $76,767   $96,379   $243,470  $234,375 Cost of revenue                65,544     78,941     206,124    195,746 Gross profit                   11,223     17,438     37,346     38,629                                                                 Non-GAAP selling, general and  5,684      7,041      18,985     17,816 administrative expenses Amortization of intangible     1,031      1,553      3,093      2,301 assets Non-GAAP operating income     4,508      8,844      15,268     18,512 Non-GAAP interest expense, net (2,579)    (3,027)    (7,979)    (3,514) Other income (loss), net       2,414      (157)      2,478      6 Non-GAAP income before         4,343      5,660      9,767      15,004 provision for income taxes Non-GAAP provision for income  1,537      2,382      3,749      6,285 taxes Non-GAAP net income            $2,806    $3,278    $6,018    $8,719                                                                 Non-GAAP earnings per share:                                     Non-GAAP Basic                 $0.27     $0.32     $0.58     $0.87 Non-GAAP Diluted               $0.27     $0.32     $0.58     $0.85                                                                 Weighted average shares                                          outstanding: Basic                          10,360,203 10,244,868 10,356,334 10,060,585 Diluted                        10,384,518 10,314,413 10,394,775 10,205,603  ATTACHMENT VII                                                                 DYNAMICS RESEARCH CORPORATION RECONCILIATION OF NON-GAAP MEASURES (in thousands, except share and per share data)                                                                                               Three Months Ended      Nine Months Ended                               September 30,         September 30,                               2012        2011        2012        2011 Selling, general and           $5,684    $7,041    $18,985   $19,519 administrative expenses Operating transaction costs    --         --         --         (1,703) Non-GAAP selling, general and  $5,684    $7,041    $18,985   $17,816 administrative                                                                 Operating income (loss)        $(32,092) $8,844    $(33,332) $16,809 Impairment of goodwill         36,600     --         48,600     -- Operating transaction costs    --         --         --         1,703 Non-GAAP operating income      $4,508    $8,844    $15,268   $18,512                                                                 Interest expense, net          $(2,579)  $(3,027)  $(7,979)  $(4,047) Non operating transaction      --         --         --         533 costs Non-GAAP interest expense, net $(2,579)  $(3,027)  $(7,979)  $(3,514)                                                                 Income (loss) before provision $(32,257) $5,660    $(38,833) $12,768 (benefit) for income taxes Impairment of goodwill         36,600     --         48,600     -- Total transaction costs        --         --         --         2,236 Non-GAAP income before         $4,343    $5,660    $9,767    $15,004 provision for income taxes                                                                 Provision (benefit) for income $(11,663) $2,382    $(13,951) $5,345 taxes Tax benefit for impairment of  13,200     --         17,700     -- goodwill Tax benefit for transaction    --         --         --         940 costs Non-GAAP provision for income  $1,537    $2,382    $3,749    $6,285 taxes                                                                 Net income (loss)              $(20,594) $3,278    $(24,882) $7,423 Impairment of goodwill, net of 23,400     --         30,900     -- taxes Total transaction costs, net   --         --         --         1,296 of taxes Non-GAAP net income            $2,806    $3,278    $6,018    $8,719                                                                 Earnings (loss) per share:                                       GAAP Basic                     $(1.99)   $0.32     $(2.40)   $0.74 Per share effect of goodwill   2.26       --        2.98       -- impairment Per share effect of            --        --        --        0.13 transaction costs Non-GAAP Basic                 $0.27     $0.32     $0.58     $0.87                                                                 GAAP Diluted                   $(1.98)   $0.32     $(2.39)   $0.73 Per share effect of goodwill   2.25       --        2.97       -- impairment Per share effect of            --        --        --        0.13 transaction costs Non-GAAP Diluted               $0.27     $0.32     $0.58     $0.85                                                                 Weighted average shares                                          outstanding: Basic                          10,360,203 10,244,868 10,356,334 10,060,585 Diluted                        10,384,518 10,314,413 10,394,775 10,205,603  CONTACT: Investors:          Chris Witty          Darrow Associates, Inc.          646.438.9385          cwitty@darrowir.com                   Media:          Duyen "Jen" Truong          Sage Communications (for DRC)          703.584.5645          duyent@aboutsage.com