For defense firm with big Fort Worth presence, DynCorp, 2014 is worth forgetting

Amrita Jayakumar (c) 2014, The Washington Post.

For DynCorp International, 2014 has been a struggle.

The McLean, Virginia-based defense contractor has been cited for labor violations by the Defense Department inspector general, seen sales drop by more than 30 percent and replaced its chief executive twice in one month.

Most contractors have had to reset their operations as federal spending has slowed. But DynCorp has been hit especially hard because it is one of the largest U.S. contractors in Afghanistan, where a military drawdown is in full swing.

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DynCorp helped the U.S. government in training Afghan law enforcement officials and providing logistical support on the ground. Last quarter, its logistics unit posted the largest drop in sales at the company — a 42 percent falloff. Jim Geisler, DynCorp’s interim chief executive, told investors in a conference call that the “aggressive pace” of the U.S. pullout from Afghanistan was hurting the Virginia company’s programs.

Some industry observers say the company might have done more to anticipate the drawdown. Only last year did it consolidate itself into three units — DynAviation, DynLogistics and DynGlobal, a new unit specifically targeting international work.

Steven Gaffney, the chief executive who led the company through that transition, was blunt about DynCorp’s need to focus on expansion outside the United States. At an industry event in May, Gaffney said that relying on federal programs was “not a truly viable growth strategy.”

It did not help that the company found itself accused of improperly charging the government more than $100 million when it was a subcontractor for Northrop Grumman. The company has denied wrongdoing.

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As sales dropped, the company cut costs. DynCorp said it expects it will save $11 million this year because of the cuts it has already made, and more reductions may follow. Much of that saving is being realized by eliminating jobs; the company has paid $2 million in severance since January.

Still, DynCorp’s fortunes have been slow to improve.

Unlike a Boeing or General Dynamics, DynCorp does not make planes or tanks or produce a specialized product or technology. The company provides people to support the government’s work.

That’s one reason it “doesn’t have the kind of unique competencies that would insulate it from market trends,” said Loren Thompson, a defense analyst and consultant to Lockheed Martin. The company, for instance, lost bids on two major contracts last quarter because executives said competitors offered lower prices.

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“The fundamental problem DynCorp faces is that its market is shrinking and its competitors are willing to accept razor-thin margins,” Thompson said.

DynCorp’s need to pivot follows a change in ownership that took it from being a public company to a private one when it was acquired by private-equity firm Cerberus Capital Management in 2010. Going private took some pressure off the company in answering to shareholders. But its changed ownership structure can be a double-edged sword, according to Thompson.

Private-equity buyers are not always thinking about the long term. Instead, they buy companies with the notion that they can be reshaped in some way to be sold at a profit some time later. Sometimes that means cutting costs to boost the bottom line. Other times, it could mean combining a company with another. Depending on the strategy, such engineering can sometimes limit a company’s ability to “invest in opportunities,” Thompson said.

The transition has been complicated by changes in leadership. Gaffney was brought on in 2010, guiding the company through the acquisition and subsequent shuffling of its business units.

But he did not stick around to see how his reorganization would play out. The company did not offer a specific reason for Gaffney’s departure. But last month, Gaffney was replaced by S. Gordon Walsh, an industry veteran who worked for 16 years at L-3 Communications — a firm now under investigation for accounting issues.

Then, three weeks into the job, DynCorp let go of Walsh, saying his departure was “not related in any way to the company’s operational or financial performance.”

Jim Geisler, who served on the company’s board for two years and used to work at United Technologies, was named interim chief executive. He said the company did not have a specific timeline to find a new leader.

One path forward for DynCorp in this business environment is merging with another contractor, analysts say. That trend is already playing out among smaller services companies.

DynCorp executives say they’re open to acquiring other businesses but haven’t yet found a match. The company recently completed its purchase of Heliworks, an aircraft maintenance company, to boost the DynAviation segment.

“If there was an opportunity for us to acquire a company that would supercharge our current set of businesses, that would be interesting to us,” William Kansky, DynCorp’s chief financial officer, told investors.