DynCorp Revs Up 'Horsepower' in Gov't Market

Even though DynCorp is more than 50 years old, the veteran government contractor still has some new tricks up its sleeve.The company has launched two subsidiaries to pursue new business opportunities involving transportation and health care. DynCorp of Reston, Va., also completed the integration of its December 1999 acquisition of GTE Information Systems and has positioned itself to pursue huge new government contracts in outsourcing and information technology support.For example, DynCorp is leading one of three teams chasing the 14-year, $2.7 billion Joint Technical Test and Training contract that consolidates operations at several military test ranges, including the Air Force Flight Test Center, the Nevada Test and Training Range, the Utah Test and Training Range and China Lake Electronic Combat Range."We could not have stepped up to priming this without GTE," said Paul Lombardi, president and chief executive officer. "If you don't have the horsepower, you can't do these contracts."The contract award is expected in June. Other bidders include Computer Sciences Corp., El Segundo, Calif., and a joint venture led by Raytheon Co., Lexington, Mass., and EG&G Inc., Gaithersburg, Md.The acquisition of GTE has given DynCorp the capability to pursue larger and higher-end IT contracts, especially work that requires networking, telecommunications and wireless capabilities, Lombardi said. The deal also brought DynCorp about $200 million in revenue and helped push its 2000 revenue to more than $1.8 billion, up from $1.4 billion in 1999.The company has a full plate of other contracts it is chasing, including networking contracts at the FBI and more Defense Department work, Lombardi said.In January, DynCorp established a wholly owned subsidiary, AdvanceMed LLC, to pull together the health care work the company has been doing, Lombardi said.AdvanceMed has about $75 million in annual revenue and provides predictive outcome analysis, a decision-support technology that helps lower the costs and improve the quality of health care by analyzing the records of millions of clinical results of health care procedures.DynCorp customers include the Health Care Finance Administration, the departments of Defense and Health and Human Services, Blue Cross/Blue Shield of Minnesota and many hospitals, Lombardi said."We think this is a gangbuster business, so we took it out of our IT business segment and sent it out on its own," Lombardi said.As the country moves more toward managed care, there is going to be a push for controlling costs while improving the quality of care, said Jerry Grossman, managing director at the investment banking firm Houlihan Lokey Howard & Zukin. "That is a market that is going to grow," he said.Grossman's McLean, Va.-based firm provides the valuation service that sets the internal stock price of DynCorp, which is an employee-owned company. DynCorp's other new subsidiary, DynRide LLC, provides non-emergency transportation services for welfare and Medicare recipients and grew out of work the company won in Connecticut in 1999. The Connecticut contract is worth $15 million.DynRide brokers rides through an online reverse auctioning system that is undergoing testing, Lombardi said. Taxi cab companies, bus lines and private ambulance services bid on providing the rides.The potential is great, Lombardi said. In Connecticut alone there is a need for 1 million rides a year. DynCorp recently won a contract in another state, but details on that win have not been disclosed."We've done a lot of market research, and we're pretty comfortable with this business," Lombardi said.Besides pursuing state contracts, the DynRide subsidiary will be chasing work with large events that require transportation services, he said.As separate subsidiaries, AdvanceMed and DynRide will be able to attract outside capital and will have a market value that is greater than if they were just business units of DynCorp, Lombardi said.The company will continue to look for similar opportunities for spinoffs from within DynCorp. "Being big is good, but sometimes gems or pearls get lost because you have this massive company," Lombardi said.DynCorp is undertaking these new initiatives after coming off a stellar 2000. In addition to integrating its GTE acquisition, DynCorp tallied an impressive list of contract wins, adding $3.5 billion to its contract backlog, which now stands at $6 billion."We had a hell of a year," Lombardi said. In 2001, he is projecting revenue to top $2 billion. About half of DynCorp's revenue is from the Department of Defense, with most of the rest coming from civilian government work. About $55 million in revenue during 2000 came from state and local governments.He describes the government market as a "target-rich environment" that presents more opportunities than the company can afford to bid on. "There is so much new business and so much consolidation of business that we feel that we can continue to grow at 14 percent," he said.With its strong 2000 results, DynCorp saw its internal stock price rise from $22.25 to $31, based on the valuation by Houlihan Lokey Howard & Zukin.The past year has seen the two parts of DynCorp ? its technical services business and its information technology business ? begin to work very well together, Grossman said.The technical services business, which does range and base support, engineering and other outsourcing work, pulled in about $1 billion in 2000 revenue, and the IT business brought about $800 million, Lombardi said."There have been discussions over the years if there is good logic that glues these two businesses together," Grossman said. But with some of DynCorp's contract wins in 2000, the benefit of the IT capabilities to win technical services work paid dividends, he said."The two parts of their business really complement each other, and they will even more so in the future," said Andy Green, an analyst with First Union Securities Inc., Charlotte, N.C.Lombardi said the company's IT capabilities played a major role in DynCorp winning a 10-year, $900 million contract to provide aircraft maintenance and logistics support for the Army's C-12 aircraft. "The way we won that was we put a supply-chain management system in there," he said. "That was the differentiator that allowed us to do it with less bodies and more technology."DynCorp's pure-play IT business also netted some important wins, including an eight-year, $752 million task order under the Answer contract to provide IT support and management to the Naval Air Warfare Center-Training Systems Division.The company also won an extension of the Justice Department contract, Justice Consolidated Office Network, a $500 million networking and infrastructure contract that came to the company with its acquisition of GTE Information Systems in December 1999.In addition to wins as a prime contractor, DynCorp also holds an important spot on the team led by Lockheed Martin Corp. of Bethesda, Md., that won the 15-year, $1.5 billion Air Force Integrated Space Command and Control contract to consolidate various command and control systems. DynCorp's win rate on contracts it bid on during 2000 hit 76 percent, Lombardi said. Besides winning contracts and integrating acquisitions, DynCorp also made strides on its balance sheet. DynCorp had borrowed $200 million of term loans to finance its acquisition of GTE Information Systems, and since then has made $52.1 million in voluntary prepayments, the company announced in January."They reduced their debt burden substantially," said First Union's Green. "They did phenomenally well."