DynCorp is bouncing back and sounds ready to buy

DynCorp International was not the only government services contractor to feel the pinch from defense spending declines and hence fewer opportunities in the earlier part of this decade, far from it in fact.

But it was among the hardest hit. Revenue for DynCorp hit a high of $4 billion in 2012 and then shrunk in half over the next four years amid the end of major U.S. combat operations in Iraq and force drawdowns from Afghanistan, plus sequestration cuts from the Budget Control Act of 2011 that were an industry-wide headwind to navigate.

Last year saw the McLean, Virginia-based company break that streak of sales declines with a 9-percent revenue increase from $1.8 billion to $2 billion on growth in its core defense services business lines. Earnings climbed almost 50 percent from $101 million to $152.5 million.

So are we seeing a resurgence of the seven-decade-old DynCorp? After all defense budgets growing again -- in the short term at least -- and have created a more bullish services market than in years past.

“We've had six consecutive quarters where we’ve beaten and raised our forecast,” DynCorp CEO George Krivo told me in an interview at headquarters. “And I’ll say it’s highly likely we'll have a seventh. So right now the company is doing very well.”

Krivo's optimism for the company's return to growth in its core aviation and logistics lines of business in particular also extends to the government services environment as a whole. Constraints from sequestration and other reductions from the Budget Control Act led agencies to obligate funds on a shorter-term basis than in years past.

The current two-year budget framework with defense spending increases is a return to the way military customers previously operated and gives companies more visibility into where to place investments and prioritize in areas like hiring, Krivo told me.

"Our hope is that was a temporary situation and we've all learned our lessons," Krivo said. "That in the short term it was more expensive not less, and it also not only hurt the readiness of our armed forces and government agencies but it also didn't help the defense industrial base either."

"I do feel a lot more optimistic than 18 months ago."

That positve market outlook has also emboldened DynCorp to focus more energy on growing an IT and intelligence business tied to its core of worldwide defense services. DynCorp has targeted this area since 2014 and it is the "fastest growing part of our company right now," Krivo said.

DynCorp has two large, notable IT jobs in tow: a $165 million State Department contract to manage IT systems inside consulates and embassies, and a $320 million task order with the Army's Intelligence and Security Command.

Government IT services opportunities were not spared from the budget downturns and are also seeing an upturn in the current environment as agencies move back to best-value decisions in contracts, Krivo said.

In our conversation, Krivo characterized the market for government IT services inside the U.S. as crowded and likely not where DynCorp sees itself gaining market share. Outside the U.S. is a different story, he said, with the company's 13,000 employees based in 26 countries.

Those differences crop up "when you're bidding on opportunities outside the U.S. in many places that have complex requirements for host nation laws, SOFA agreements, tax matters, business licenses, registrations and all sorts of things," Krivo said.

"You've got to have big companies that have those footprints and those global infrastructures in order to compete, so there's a little different dynamic there and a much smaller number of competitors."

Formerly chief operating officer, Krivo took the helm at DynCorp one year ago this month and has worked to carry forward the groundwork he and his predecessor Lou Von Thaer laid in the latter's two years as CEO to restructure the company and position it for a turnaround.

"Prior to Lou, the company... had a structure that was not appropriate for the size of the company," Krivo told me. "There had been some evolutionary restructures but really what needed to occur was revolution, not just a restructure but a reorganization of the company."

That effort has borne fruit for DynCorp. The company now has three segments instead of two and is much flatter across-the-board, Krivo said.

In addition to last year's top- and bottom-line growth, DynCorp has made significant headway in taking down its debt load and its net leverage ratio today is around 2 times earnings on a trailing 12-month basis, Krivo said.

That creates more room for both investments in DynCorp itself and as a buyer on the merger-and-acquisition scene for the first time in nine years since the company was taken private in 2010 by current owners Cerberus Capital Management.

DynCorp has a short list of between 12 and 15 companies it is looking at a possible acquisition targets, Krivo told me. Those are divided into deals that would cast DynCorp into new markets or add new offerings, or additions that further bolster the already core businesses, he said.

Under the second deal strategy Krivo termed "concentration," DynCorp would buy a company or companies similar to itself. That scenario is "probably the more attractive right now because are core markets are so strong," he said.

"If we can create scale, what that allows us to do is to create synergy to our customers to provide them our services for a lower price (with) economies of scale," Krivo told me. "Which then makes us more competitive, which means we win more, which means our scale increases and thus the virtuous cycle as opposed to the unvirtuous cycle which is the one we had during (the Budget Control Act)."

The opportunity is there for DynCorp to be a consolidator because the company views its core markets as not being consolidated yet. "There's a pretty good high population of companies out there to be bought, so it's a very positive market for M&A right now," Krivo said.

DynCorp is also looking ahead to the expected award later this year of the Army's massive LOGCAP V contract vehicle, the branch's primary mechanism for acquiring logistics services worldwide. DynCorp is a prime on the current LOGCAP IV iteration, which was extended in April.

LOGCAP IV was closely tied to combat operations in Iraq and Afghanistan, so when those force drawdowns took place much of DynCorp's services revenue also went down with it.

The new LOGCAP V contract is designed to be a more enduring vehicle less tied to support of combat operations, Krivo said. Some task orders being issued under the current "IV" contract are of that more enduring nature, he added.

"We think that makes great sense for the customer because they're getting best for their dollars and they're keeping an industrial base," Krivo said.

So what would constitute DynCorp in a perfect world? Breaking through the $3 billion-revenue barrier in DynCorp's current three-pronged strategy, in Krivo's eyes.

"I'd like three billion-dollar segments: one in aviation, one in logistics and my third segment would be IT and intell," Krivo said. "I'd like to break out the IT and intell from these two segments, form a third segment and get it up to $1 billion as well.

"I think that would diversify the company and it would give not only added capability because there would be synergy between them, that global footprint would help all three of the segments' profitability and with our discriminators across the board."