Disclosures

Dynamics Research Corporation

I, Mike Crawford , certify that this report reflects my personal beliefs about this company and that no portion of my compensation was, is or will be directly or indirectly related to the specific recommendations or views discussed in this report.

Disclosure

• B. Riley & Co., LLC does and seeks to do business with companies covered in its research reports.
• A portion of this analyst’s compensation is based on the sales, trading and investment banking activities of B. Riley & Co., LLC.
• B. Riley & Co., LLC makes a market in the securities of the company covered in this report.
• This analyst, or a member of this analyst's household who is financially dependent on this analyst or vice versa, holds a long stock position in the security covered in this report.
• This company currently is, or within the past 12 months was, a client of B. Riley & Co., LLC. The services provided were Investment Banking Services.
• B. Riley & Co., LLC, or any of its affiliates, has received compensation for investment banking services from this company in the past 12 months.

Explanation of B. Riley & Co. LLC's Rating System

• Buy: We generally expect "Buy" rated stocks to materially outperform both the S&P 500 and Russell 2000 as well as other stocks in their sector. Further, we believe that the potential reward relative to the potential risk is particularly attractive.
• Neutral: We generally believe "Neutral" rated stocks will perform roughly in line with the S&P 500 and Russell 2000 over the intermediate and long term.
• Sell: We generally expect "Sell" rated stocks to materially underperform both the S&P 500 and Russell 2000 as well as other stocks in their sector. Further, we believe that the potential reward relative to the potential risk is particularly unattractive.

Risks and Considerations

• Litigation - The industry is litigious and the Company is likely to be involved in lawsuits, whether future or current. Negative results in these cases could result in significant cash payments by the Company.
• General Industry - The Company could miss our estimates and/or their financial guidance.

Additional Risks and Considerations

 

 

 

 

 

• Customer Concentration - DRCO has a mixed range of customers, typical to the defense IT industry, proven by the fact that out of revenues earned from U.S. Government agency customers, which accounted for 92% of total in Q1'10 with only 1 customer - U.S. Air Force Aeronautical Systems Center, accounting for more than 10% of total revenues.

 

 

 

 

 

 

• Unfunded Backlog - There is no certainty that the unfunded backlog currently held by DRCO will ultimately result in revenue realized by the company.
• Recompetes - The nature of the defense IT beast is for contract vehicles to last three to five years, with a three to five year option at the tail end.  The flip side to the cycle is that every year incumbent service providers must recompete to retain a portion of their existing business.  While the past rule of thumb has been that a contractor would have to have really messed something up not to keep the business on the recompete, there remains pressure to perform, and each new RFP must be treated as a competitive process. 
• Performance Qualifications - To compete effectively on a decreasing number of increasing-size contract vehicles, DRCO must be able to show it has the prior performance qualifications to be viable.  Companies that can not adapt to the current competitive environment will slip in relevance and see contract backlogs begin to erode.  DRCO needs to demonstrate a strong track record on its current contracts not only to win recompetes on its existing business but also to demonstrate it possesses the necessary skills to compete on new business development initiatives coming up for bid. 
• See the Company's SEC filings, particularly its 10-K filing, for a discussion of further potential risks.