Best of Luck to You Ms. Burke

May 14, 2010 • Commentary
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On May 11 it was announced that DynCorp International has appointed Ashley Vanarsdall Burke as Senior Director, Media Communications. Based in its Falls Church, VA, headquarters she will develop media communications strategy, manage the company’s external media relations, and serve as DynCorp’s corporate spokesperson.

Before joining DynCorp, Burke was the Executive Vice President of Prism Public Affairs, which was occasionally paid by the hour by DynCorp to do work for it.

Among its services Prism offers strategic positioning, crisis and issue management, litigation communications, and congressional investigations and hearings. Given DynCorp’s sometimes controversial work history it is easy to see why it would use Prism.

Good luck to Ms. Burke. She is going to need it. To paraphrase Charles Dickens’ A Tale of Two Cities this is not the best of times, albeit more in terms of perception than reality, for DynCorp.

To explain why, a little history is necessary. Burke is the permanent replacement for Doug Ebner who was Senior Director, Media and Marketing Communications. He left DynCorp International on April 1 “to take on new professional challenges and opportunities.” During his tenure DynCorp actually had a very good reputation in terms of media relations. While DynCorp might come in for criticism for its activities in Iraq or Afghanistan it had a well deserved reputation for openness and transparency, especially in terms of dealing with the media. Any reporter could call and be confident their call would be returned and, assuming it did not violate client rules about releasing information that was considered confidential, would have their questions answered. That may not sound like much but compared to many other similar contractors, dealing with DynCorp during Ebner’s time was like dealing with the people who support the Freedom of Information Act. If DynCorp could answer a question it would.

After he left an interim replacement was Jason Rossbach, Senior. Director of Government Affairs. He was only temporary; he was never expected to take on the spokesman role for the long term.

But shortly before Ebner left, Newsweek and ProPublica published a story on alleged serious problems with DynCorp’s contract to train the Afghan National Police.

Regardless of the ultimate truth of the story, which is still being investigated it caused lots of consternation at DynCorp. Rossbach, for example, took exception to a post I wrote about it.

CEO Bill Ballhaus sent a March 23 statement to DynCorp employees, writing “Over the last week we have all seen a number of articles about DynCorp International’s police training and mentoring contract in Afghanistan. Most of the coverage, including this week’s Newsweek cover story, fails to reflect the good work we are performing for our customer.” He went on to say, “We will actively challenge mischaracterizations of our performance in the media.” although he did not specifically challenge any assertions in the Newsweek story.

DynCorp shares were weighed down in the past year. Some within the company think it is due to critical headlines stemming from some of its work for the military, and by contract renewal fears.

In fact, while DynCorp may have problems, recent critical press is not the reason. As academics say correlation is not proof of causation.

True, DynCorp shares declined substantially since the secondarily public offering last fall ($18.50 a share, and was trading in the $11–12 range when the Cerberus offer was announced. But since then, it’s been in the $16.75–17.50 range, mostly due to people doing short‐​term speculation. In February, when it reported its third quarter FY 2010 financial results it reported that revenue for the first nine months of fiscal year 2010 increased by 10.2% to $2,521.5 million from $2,288.3 million for the first nine months of fiscal year 2009.

A more accurate read is that the results are mixed and a bit confusing. There’s both good and bad news.

Revenue is on target compared to guidance, but EBITDA (i.e., margin) is way down and so are earnings per share. So they are making less money on more business and aren’t earning what they told investors they would earn. Most of the increased business is from its LOGCAP work.

DynCorp’s financial statements require careful reading because like any company it always tries to put the best foot forward on such statements. When you compare the year to date with last year, it shows increases; revenue, earnings per share and EBITDA are all up over last year. But when you compare it to what it forecast for FY2010, it has problems. Notice that when it lowers the forecast, it says they are adjusting or revising, but when it increases, it says increase. However, the failure to meet guidance and the continual revision of guidance raises eyebrows. And the revision of guidance upward just before the public offering, and after only one quarter of the fiscal year, only to reduce it later, also raised eyebrows. People will say it shows at best a lack of competence, or worse, deception.

To illustrate the above consider the following taken from past quarterly earning statements. After the first quarter, DyCorp said:

DynCorp International is revising the previously provided guidance for its fiscal year ending April 2, 2010. Revenue has been increased to a range of $3,300 — $3,500 million from $3,250 — $3,450 million; EBITDA has been increased to a range of $242 — $252 million from $230 — $240 million; and diluted EPS has also been increased to a range of $1.46 — $1.58 from $1.42 — $1.54. The increase in fiscal year 2010 guidance is a result of key program wins under the WPPS and LOGCAP IV contracts combined with solid first quarter performance.

FY 2010
Revenue $3,300 — $3,500 million
EBITDA $242 — $252 million
Diluted earnings per share $1.46 — $1.58

The third quarter statement says:

Guidance is tightened to a range of $3,440 to $3,500 million primarily as a result of the continued ramp‐​up and expansion of work under the LOGCAP IV contract and slower than anticipated reductions under the INSCOM program. The diluted earnings per share guidance has been revised to a range of $1.33 to $1.45 driven by LOGCAP IV Afghanistan award fee recognition being delayed until fiscal year 2011, lower than expected revenue on CIVPOL, and severance and acquisition related expenses. Correspondingly, EBITDA guidance has been adjusted to $220 million to $230 million.

FY 2010
Revenue $3,440 — $3,500 million
Diluted earnings per share $1.33 — $1.45
EBITDA $220 — $230 million

Third quarter statement also says:

Revenue for the first nine months of fiscal year 2010 increased by 10.2% to $2,521.5 million from $2,288.3 million for the first nine months of fiscal year 2009. Revenue growth was driven by higher fill rate and award fee performance on GLS and the ramp‐​up of the LOGCAP IV program, partially offset by the wind down of our Afghanistan construction projects and the completion of certain task orders under our CFT program.

Operating income for the first nine months of fiscal year 2010 was $154.4 million or 6.1% of revenue as compared to $138.2 million or 6.0% of revenue in the same period last year. The increase in operating income resulted from growth on the LOGCAP IV program, 100% award fee score on the INSCOM program and the wind down of construction projects in our Infrastructure SBA for which losses were recognized in fiscal year 2009. Also contributing to the comparative increase in operating income was severance related costs incurred in the first quarter of fiscal year 2009.

Diluted earnings per share increased for the first nine months of fiscal year 2010 to $1.09, up $0.21, or 23.9%. The increase was driven by improved operational results and lower debt related costs, offset by an increase in noncontrolling interests. Diluted earnings per share also benefited from fewer weighted average shares outstanding, in the current period, as compared to the first nine months of fiscal year 2009.

Any bad publicity, no matter how minor, is especially worrisome to DynCorp now because last month Cerberus Capital Management LP signed an agreement to acquire DynCorp International in a transaction with a total value of approximately $1.5 billion. Under the terms of the merger agreement, DynCorp shareholders will receive $17.55 in cash in exchange for each share of DynCorp common stock that they hold.

Business Week reports that the agreement requires Cerberus to pay a fee as high as 20 percent of the deal’s value if it walks away, according to regulatory filings.

However, in regard to Cerberus’s obligation to pay a penalty if it pulls out of the deal: such agreements carry a provision covering unforeseen events, so Cerberus would only be on the hook for the penalty if it pull out for no good reason. If it cites a situation that arose after the offer was made, or something that didn’t turn up in due diligence, it can claim it doesn’t have to pay. That might cause some litigation and a settlement, but the main point is that bad news is not good for DynCorp at this time if it wants the deal to go through.

The pending acquisition has not overjoyed all. The law firm Bull & Lifshitz, LLP announced an investigation into possible breaches of fiduciary duty in connection with the proposed sale of DynCorp to Cerberus Capital. Their investigation is focused on whether the proposed deal provides adequate value to the Company’s shareholders.

Also around this time, another law firm, Holzer Holzer & Fistel, LLC announced it was investigating whether the directors of DynCorp International, Inc. complied with their fiduciary duties in approving the proposed buyout Cerberus Capital

About the same time an investor filed a lawsuit in Delaware State Court on behalf of current investors of DynCorp who purchased DynCorp shares before April 12, 2010, alleging breaches of fiduciary duty by members of the DynCorp. board of directors for selling itself too cheaply to Cerberus Capital Management.

The plaintiff alleges, among other things, that the offer is unfair and grossly inadequate to DynCorp shareholder because the offer represents a “significant discount to the ompany’s $21.49 per share high during the past year” and while the merger agreement provides for a brief “go shop” period there is a $30 million termination fee plus an additional $300 million due under certain circumstances.

According to a source with close ties to DynCorp “DynCorp is all confused about how to handle the press because they feel besieged by bad news and don’t know how to control it. She [Burke] is not coming into a good situation. Her access and authority will be very limited, and she will have to build it up. Right now DI is scared shitless about a 60 Minutes segment that is in the works and how it might affect their business and, most importantly, the sale to Cerberus. they won’t expect her to resolve that; they have two other PR firms on retainer, and they and senior management are all running into each other like the Keystone Kops trying to figure out what to do.”

A 60 Minutes story may or may not amount to enough to cause Cerberus to pull out. Although it seems doubtful, especially since Cerberus owns IAP Worldwide Services, whose director is former U.S. senator and Vice President Dan Quayle, which competes with Dyncorp for the logistics work. Conceivably Cerberus might combine the companies.

It is unclear what 60 Minutes is working on. When I called their spokesman he gave the usual “we don’t comment on stories we are working on” response. Possibly it will be on the police training contract, or perhaps it will deal more broadly with the war in Afghanistan with DynCorp only being mentioned in passing. Or perhaps something else altogether different. Whatever it is, it is enought to have made Ballhaus, accompanied by Donald Ryder, Vice President and Program Manager for the Civilian Police Program (CIVPOL) and Gregory S. Nixon, who serves as Senior Vice President, General Counsel and Corporate Secretary, to go to Manhattan earlier this year to have an off the record talk with 60 Minutes.

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