- The Washington Times - Monday, September 24, 2001

DynCorp Chief Executive Officer Paul Lombardi on Sept. 5 sat at a conference table and chatted lightly about the novels of Tom Clancy.

"He had stuff in there that was classified," says a wide-eyed Mr. Lombardi, referring to Mr. Clancy's first novel, "The Hunt for Red October."

Six days later, Mr. Lombardi and the rest of America watched as a possible scene from one of those books unfolded on television. The World Trade Center and the Pentagon were attacked by terrorists who had hijacked commercial jet airliners. Companies like DynCorp, a Reston firm that provides services and outsourcing for the government including the Department of Defense have been scrambling since the Sept. 11 tragedy. While the tragedy has affected business and numbed the entire nation, the congressional approval of $40 billion in extra defense spending and an inevitable increase down the road could mean increased revenues for at least a handful of companies, including DynCorp.

"From the Korean conflict through Desert Storm, DynCorp's role has been managing logistics support, either nationally or internationally, for every military initiative engaged in by the United States and we do not see that changing," Mr. Lombardi says. "DynCorp will most assuredly support the U.S. government if and when we are asked to do so."

In an interview with The Washington Times before the attacks occurred, Mr. Lombardi said DynCorp's dealing with the Defense Department were decreasing in terms of percentage of overall business, but increasing in terms of dollars, due to the company's overall growth.

The company pulled in $440.1 million in revenues last quarter, and recorded an operating profit of $22.8 million. During the same quarter last year, DynCorp made $428.5 million with an operating profit of $20.6 million.

About 48 percent of DynCorp's business is with the Pentagon, with about half of that attributed to outsourcing and the rest to providing technical services like weapons assessment, network management and systems integration.

Good combination

But while DynCorp appears poised to reap some benefits from increased defense spending, Mr. Lombardi contends that the company was in good financial shape to begin with. Analysts agree that DynCorp's balance between outsourcing and information technology services makes for a logical and profitable combination.

Mr. Lombardi says DynCorp's internal stock price has hovered around $32, nearly three times the price of when Mr. Lombardi joined the company as president of its Governmental Services Group in 1992. The company's growth has come largely due to the acquisition of nearly 20 companies in the past decade.

"We'll always look at acquisitions as a function of growth," Mr. Lombardi says. "It's cyclic. We've always considered ourselves a consolidator."

Mr. Lombardi said DynCorp is not in the position for any massive acquisitions, but would not rule out anything in the $50-75 million range.

Analysts say the company still has significant debts from previous moves. One analyst referred to DynCorp's purchase of GTE Information Systems in 1999 as having "some hair on it." The recently completed integration included DynCorp suing GTE for misinforming them of the profitability of a phone system for prisoners.

"I'm not sure that one's worked out quite as well as they'd hoped," says Tom Meagher, an analyst with BB&T; Capital Markets.

DynCorp's most recent move was the merger of DynCorp Management Resources, its state and local subsidiary, with TekInsight, a public information technology company. DynCorp will hold 40 percent ownership in the new company.

State and local governments offer a unique revenue opportunity, Mr. Lombardi says.

"It's an absolutely fertile market," he says. "Huge. Very disconnected. There are very few dominant players."

The merger should mean that DynCorp's contract base with state and local governments will top $100 million.

"We feel that if you're much lower than that, you're probably not a player," Mr. Lombardi says.

Adding new contracts

While completion of that merger is expected soon, DynCorp continues to rack up significant contracts. The Securities and Exchange Commission recently awarded DynCorp a 7-year contract to provide information technology support; the first year of the contract is estimated to be worth $8.2 million. In May, the company entered into a new contract with the Federal Bureau of Investigation to upgrade the agency's computer system. The first year of the three-year contract is valued at $51 million.

"These were competing against best in class Raytheon, TRW, Lockheed Martin toe-to-toe," Mr. Lombardi says. "And the government, in a best value environment, chose DynCorp."

Mr. Lombardi says the current economic environment makes an initial public offering of DynCorp stock unlikely. And analysts agree that the company has too much debt and must rid itself of certain low-margin legacy businesses.

"I don't think the equity markets are there. In fact, I don't know what capital markets are there," Mr. Lombardi says. "It's not the right time. I don't believe we'd get the value we demand at this point."

DynCorp is looking into the possibility of an IPO for AdvanceMed, its new health care services subsidiary.

"That's down the road," Mr. Lombardi says.

For the time being, Mr. Lombardi says he is happy with DynCorp as an employee-owned firm. The company's structure can remain very decentralized, and its 23,000 employees are much happier as a result, he says.

"We strive to build that kind of culture where this is the preferred place to work," Mr. Lombardi says. "If a stock price goes up, I can go up and down the elevator with my employee owners and they're happy. If the stock price goes down, I take the stairs."

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