Market Overview

DRC Reports Fourth Quarter and Year-End 2012 Results

--- 2012 Adjusted EBITDA of 9.9 Percent on Revenue of $317 Million ---

--- 2012 Free Cash Flow of $23 Million, 7.3 Percent of Revenue ---

--- 2012 Debt Repayments of $28 Million Drop Leverage to 3.0 Times EBITDA ---

--- Qualified New Business Pipeline of $1.1 Billion, Up 15 Percent In Past 3 Months ---

ANDOVER, Mass., Feb. 20, 2013 (GLOBE NEWSWIRE) -- Dynamics Research Corporation (Nasdaq: DRCO), a leading technology and management consulting company focused on driving performance, process and results for government clients, today announced operating results for the fourth quarter and year ended December 31, 2012.

Financial Results

Results for the fourth quarter of 2012 included $2.0 million in charges related to accelerated debt repayment. Excluding these charges net income for the fourth quarter was $1.9 million, or $0.18 per diluted share. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) for the fourth quarter of 2012 was $7.7 million, or 10.4 percent of revenue. Including the accelerated debt repayment charge of $2.0 million, reported net income for the fourth quarter of 2012 was $0.6 million, or $0.06 per diluted share. Revenue for the fourth quarter of 2012 was $73.5 million, compared with $88.2 million for the same period in 2011.

Excluding accelerated debt repayment and goodwill impairment charges in 2012, as well as transaction expenses in 2011, adjusted net income was $7.9 million, or $0.76 per diluted share, for the year ended December 31, 2012 compared with $12.8 million, or $1.25 per diluted share, for the full year 2011. Adjusted EBITDA for the year ended December 31, 2012 was $31.5 million, or 9.9 percent of revenue, compared with $35.8 million, or 11.1 percent of revenue, for 2011. Including pre-tax accelerated debt repayment and goodwill impairment charges of $50.6 million, the net loss was $24.2 million for the year ended December 31, 2012. For the year ended December 31, 2012 revenue was $317.0 million compared to $322.6 million for 2011, including the results of High Performance Technologies, Inc. subsequent to the merger date June 30, 2011.

Business Highlights

"Fiscal 2012 was a challenging year but one that saw its share of accomplishments, as we booked $156 million of new contract wins and ended the year with a solid contract backlog, while at the same time significantly de-levering our balance sheet," said Jim Regan, DRC's chairman and chief executive officer. "No doubt the federal market continues to present uncertainties and challenging conditions. Nevertheless, we see increasing opportunities going forward, as evidenced by the growth in our qualified new business pipeline – which now stands at $1.1 billion, up 15 percent in the past three months. We are making the necessary investments needed to capitalize on these opportunities, while concurrently managing costs to maintain our competitiveness and improve shareholder value.

"We reported another strong quarter and year from a cash generation perspective, enabling us to prepay $15 million of subordinated debt at the end of 2012. In the past 18 months we have paid off a total of $58 million of the $150 million in debt put in place for the High Performance Technologies merger completed June 30, 2011. We generated $23 million in free cash flow in 2012, equivalent to a yield of 7.3 percent on revenue; our free cash flow yield and federal receivables of 50 days sales outstanding remain among the strongest in our industry.

"Longer term, as federal priorities are clarified and budget decisions made, we anticipate improved market visibility. We are confident the Company is well positioned in the most vital market sectors, which will remain well funded – with more than 70 percent of our business base concentrated in the areas of healthcare, research and development, homeland security, intelligence, surveillance and reconnaissance, and financial and regulatory reform."

Company Guidance

For the first quarter 2013 the Company anticipates revenue in the range of $73 to $75 million and earnings of $0.12 to $0.14 per diluted share. Considering current uncertainties regarding federal government expenditure decisions, the Company is at this time refraining from providing financial guidance for the balance of the calendar year 2013.

Conference Call

The Company will conduct a fourth quarter and year end 2012 conference call tomorrow, February 21, 2013 at 10:00 a.m. ET. The call will be available via telephone at 877-303-4382 and accessible via Web cast at www.drc.com. Recorded replays of the conference call will be available on Dynamics Research Corporation's investor relations home page at www.drc.com and by telephone at 800-585-8367, replay passcode # 91757014, beginning at 1:00 p.m. ET on February 21, 2013.

About Dynamics Research Corporation

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

Safe Harbor

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

Non-GAAP Financial Information

DRC discloses earnings before interest, taxes, depreciation and amortization and free cash flow, which are not recognized measures under GAAP. We have provided a reconciliation of adjusted 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 
  December 31,
  2012 2011
Revenue  $ 73,504  $ 88,222
Cost of revenue  60,973  70,221
Gross profit  12,531  18,001
     
Selling, general and administrative expenses  5,869  6,950
Amortization of intangible assets  1,031  1,491
Operating income  5,631  9,560
Interest expense, net  (4,676)  (2,881)
Other income, net  131  116
Income before provision for income taxes  1,086  6,795
Provision for income taxes  439  2,761
Net income  $ 647  $ 4,034
     
Earnings per share:    
Basic  $ 0.06  $ 0.39
Diluted  $ 0.06  $ 0.39
     
Weighted average shares outstanding:    
Basic  10,388,743  10,263,300
Diluted  10,415,276  10,318,477
     
 
ATTACHMENT II
     
DYNAMICS RESEARCH CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)
(in thousands, except share and per share data)
     
     
   Twelve Months Ended 
  December 31,
  2012 2011
Revenue  $ 316,974  $ 322,597
Cost of revenue  267,097  265,967
Gross profit  49,877  56,630
     
Selling, general and administrative expenses  24,854  26,469
Amortization of intangible assets  4,124  3,792
Impairment of goodwill  48,600  --
Operating income (loss)  (27,701)  26,369
Interest expense, net  (12,655)  (6,928)
Other income, net  2,609  122
Income before provision (benefit) for income taxes  (37,747)  19,563
Provision (benefit) for income taxes  (13,512)  8,106
Net income (loss)  $ (24,235)  $ 11,457
     
Earnings (loss) per share:    
Basic  $ (2.34)  $ 1.13
Diluted  $ (2.34)  $ 1.12
     
Weighted average shares outstanding:    
Basic  10,369,228  10,108,907
Diluted  10,369,228  10,219,408
     
 
ATTACHMENT III
     
DYNAMICS RESEARCH CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands)
     
     
  December 31, December 31,
  2012 2011
Assets    
Current assets    
Cash and cash equivalents  $ 2  $ 3,908
Contract receivables, net  48,112  66,466
Prepaid expenses and other current assets  2,538  2,566
Total current assets  50,652  72,940
Noncurrent assets    
Property and equipment, net  12,511  15,265
Goodwill  163,205  211,805
Intangible assets, net  14,617  18,741
Deferred tax asset  14,678  497
Other noncurrent assets  4,388  4,312
Total noncurrent assets  209,399  250,620
Total assets  $ 260,051  $ 323,560
     
Liabilities and stockholders' equity    
Current liabilities    
Current portion of long-term debt  $ 15,125  $ 12,375
Accounts payable  24,847  24,504
Accrued compensation and employee benefits  14,933  24,902
Deferred taxes  3,009  3,383
Other accrued expenses  5,307  8,556
Total current liabilities  63,221  73,720
Long-term liabilities    
Long-term debt  74,018  102,453
Other long-term liabilities  34,941  33,066
Total stockholders' equity  87,871  114,321
Total liabilities and stockholders' equity  $ 260,051  $ 323,560
     
 
ATTACHMENT IV
         
DYNAMICS RESEARCH CORPORATION
SUPPLEMENTAL INFORMATION (unaudited)
(dollars in thousands)
         
         
Contract revenues were earned from the following sectors:    
         
  Three Months Ended Twelve Months Ended
   December 31,   December 31, 
  2012 2011 2012 2011
National defense and intelligence agencies  $ 41,217  $ 50,969  $ 183,197  $ 205,730
Homeland security  11,270  12,082  47,429  48,655
Federal civilian agencies  16,679  21,698  69,967  53,436
Total revenue from federal agencies  69,166  84,749  300,593  307,821
State and local government agencies and other  4,338  3,473  16,381  14,776
Total revenue  $ 73,504  $ 88,222  $ 316,974  $ 322,597
         
Revenues by contract type as a percentage of contract revenue were as follows:    
         
  Three Months Ended Twelve Months Ended
   December 31,   December 31, 
  2012 2011 2012 2011
Fixed price, including service-type contracts 44% 48% 45% 48%
Time and materials  37  34  35  32
Cost reimbursable  19  18  20  20
  100% 100% 100% 100%
         
Prime contract 81% 84% 83% 79%
Sub-contract  19  16  17  21
  100% 100% 100% 100%
         
         
  Three Months Ended Twelve Months Ended
   December 31,   December 31, 
  2012 2011 2012 2011
Net cash provided by operating activities  $ 7,734  $ 11,694  $ 24,040  $ 25,972
Capital expenditures  $ 291  $ 189  $ 1,041  $ 1,714
Depreciation  $ 884  $ 1,049  $ 3,883  $ 3,823
Bookings  $ 54,358  $ 61,506  $ 305,995  $ 336,140
         
         
  December 31, December 31,    
  2012 2011    
Total backlog  $ 731,676  $ 801,932    
Funded backlog  $ 163,645  $ 183,336    
Employees  1,255  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 Twelve Months Ended
   December 31,   December 31, 
  2012 2011 2012 2011
Net income (loss)  $ 647  $ 4,034  $ (24,235)  $ 11,457
Add:        
Interest expense, net  4,676  2,881  12,655  6,928
Provision (benefit) for income taxes  439  2,761  (13,512)  8,106
Depreciation expense  884  1,049  3,883  3,823
Amortization expense  1,031  1,491  4,124  3,792
Share-based compensation  155  165  677  686
Impairment of goodwill  --  --  48,600  --
Transaction costs, net of amounts included in net interest expense  --  --  --  1,703
Less: amortization of deferred gain on sale of building  (169)  (169)  (676)  (676)
Adjusted EBITDA(1)  $ 7,663  $ 12,212  $ 31,516  $ 35,819
Adjusted EBITDA, as a percent of revenue 10.4% 13.8% 9.9% 11.1%
         
  Three Months Ended Twelve Months Ended
   December 31,   December 31, 
  2012 2011 2012 2011
Net cash provided by operating activities  $ 7,734  $ 11,694  $ 24,040  $ 25,972
Less: Additions to property and equipment  (291)  (189)  (1,041)  (1,714)
Free cash flow  $ 7,443  $ 11,505  $ 22,999  $ 24,258
Free cash flow, as a percent of revenue 10.1% 13.0% 7.3% 7.5%
         
         
(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  Year Ended December 31, 
  December 31, 2012 2012 2011
Revenue  $ 73,504  $ 316,974  $ 322,597
Cost of revenue  60,973  267,097  265,967
Gross profit  12,531  49,877  56,630
       
Non-GAAP selling, general and administrative expenses  5,869  24,854  24,766
Amortization of intangible assets  1,031  4,124  3,792
Non-GAAP operating income  5,631  20,899  28,072
Non-GAAP interest expense, net  (2,636)  (10,615)  (6,395)
Other income, net  131  2,609  122
Income before provision for income taxes  3,126  12,893  21,799
Provision for income taxes  1,255  5,004  9,046
Non-GAAP net income  $ 1,871  $ 7,889  $ 12,753
       
Non-GAAP earnings per share:      
Non-GAAP Basic  $ 0.18  $ 0.76  $ 1.26
Non-GAAP Diluted  $ 0.18  $ 0.76  $ 1.25
       
Weighted average shares outstanding:      
Basic  10,388,743  10,369,228  10,108,907
Diluted  10,415,276  10,410,698  10,219,408
       
 
ATTACHMENT VII
       
DYNAMICS RESEARCH CORPORATION
RECONCILIATION OF NON-GAAP MEASURES
(in thousands, except share and per share data)
       
       
  Three Months Ended Year Ended December 31,
  December 31, 2012 2012 2011
Selling, general and administrative expenses  $ 5,869  $ 24,854  $ 26,469
Operating transaction costs  --  --  (1,703)
Non-GAAP selling, general and administrative expenses  $ 5,869  $ 24,854  $ 24,766
       
Operating income (loss)  $ 5,631  $ (27,701)  $ 26,369
Impairment of goodwill  --  48,600  --
Operating transaction costs  --  --  1,703
Non-GAAP operating income  $ 5,631  $ 20,899  $ 28,072
       
Interest expense, net  $ (4,676)  $ (12,655)  $ (6,928)
Charges related to accelerated debt repayment  2,040  2,040  --
Non operating transaction costs  --  --  533
Non-GAAP interest expense, net  $ (2,636)  $ (10,615)  $ (6,395)
       
Income (loss) before provision (benefit) for income taxes  $ 1,086  $ (37,747)  $ 19,563
Impairment of goodwill  --  48,600  --
Charges related to accelerated debt repayment  2,040  2,040  --
Total transaction costs  --  --  2,236
Non-GAAP income before provision for income taxes  $ 3,126  $ 12,893  $ 21,799
       
Provision (benefit) for income taxes  $ 439  $ (13,512)  $ 8,106
Tax benefit for impairment of goodwill  --  17,700  --
Tax benefit for charges related to accelerated debt repayment  816  816  --
Tax benefit for transaction costs  --  --  940
Non-GAAP provision for income taxes  $ 1,255  $ 5,004  $ 9,046
       
Net income (loss)  $ 647  $ (24,235)  $ 11,457
Impairment of goodwill, net of income taxes  --  30,900  --
Charges related to accelerated debt repayment, net of income taxes  1,224  1,224  --
Total transaction costs, net of taxes  --  --  1,296
Non-GAAP net income  $ 1,871  $ 7,889  $ 12,753
       
Earnings (loss) per share:      
Basic  $ 0.06  $ (2.34)  $ 1.13
Per share effect of goodwill impairment  --   2.98  -- 
Per share effect of charges related to accelerated debt repayment  0.12  0.12  -- 
Per share effect of transaction costs  --   --   0.13
Non-GAAP Basic  $ 0.18  $ 0.76  $ 1.26
       
Diluted  $ 0.06  $ (2.33)  $ 1.12
Per share effect of goodwill impairment  --   2.97  -- 
Per share effect of charges related to accelerated debt repayment  0.12  0.12  -- 
Per share effect of transaction costs  --   --   0.13
Non-GAAP Diluted  $ 0.18  $ 0.76  $ 1.25
       
Weighted average shares outstanding:      
Basic  10,388,743  10,369,228  10,108,907
Diluted  10,415,276  10,410,698  10,219,408
       
CONTACT: Chris Witty Darrow Associates, Inc. 646.438.9385 cwitty@darrowir.com Ilina Dimitrova Sage Communications (for DRC) 703.531.8256 ilinad@aboutsage.com
 

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