DRC eyes Kadix buy to help growth

Deal brings D.C. presence and more homeland security customers

Founded: 1955

Headquarters: Andover, Mass.

Major offices: Reston, Va.; Fairborn, Ohio; Lexington, Mass.; Columbia, Md.; and Orlando, Fla.

2007 revenue: $229.6 million

2007 net income: $7.1 million

2006 revenue: $259 million

2006 net income: $4.1 million

Ticker: DRCO on Nasdaq

Leadership:

James Regan, chairman, president and chief executive officer
David Keleher, senior vice president and chief financial officer
Steven Wentzell, senior vice president and general manager of human resources
Lawrence O'Brien Jr., senior vice president and general manager of business development and business solutions

Lines of business:

  • Business intelligence
  • Business transformation
  • Engineering services
  • Acquisition management services
  • Automated case management
  • Training and performance support
  • Information technology infrastructure services


Major customers:

Defense Department customers include the Army, Air Force, Navy, Marines Corps and Joint Staff. Civilian customers include the Federal Deposit Insurance Corp., Treasury Department, U.S. Coast Guard, Citizenship and Immigration Services, and Customs and Border Protection. DRC also provides solutions to state health and human-services organizations.

Dynamics Research Corp., a 53-year-old engineering and government information technology services provider based in Andover, Mass., is aggressively expanding its Washington presence.

When DRC acquired Kadix Systems LLC, of Arlington, Va., and its 270 employees in August, the company nearly doubled its presence in the Washington area and gained a solid foothold in the homeland security market, said James Regan, DRC's chairman, president and chief executive officer.

DRC paid $42 million in cash for Kadix with the possibility of another $5 million if certain conditions are met.

Kadix specializes in organizational change, human capital, IT, and learning and organizational development. Its clients include the Homeland Security Department, the Marine Corps, military medical health systems and some federal civilian agencies.

"Kadix Systems' customer presence significantly increases the percentage of our business mix focused on high-growth markets, a key strategic focus for DRC," Regan said.

Task orders for Kadix this year include a five-year, $22 million award for IT strategic planning at Immigration and Customs Enforcement's Strategic Development Division and a $9.9 million, four-year order to provide financial systems services for the Transportation Security Administration.

"They're right smack in the middle of target growth markets for us. So the fit is excellent," Regan said. "About half their business is with DHS, and it is higher-end consulting."

At the time of its acquisition, Kadix had 109 government bids awaiting award with an estimated total value of $233 million, according to DRC.

In addition to the complementary cultures and solutions, DRC gains increased market access and Kadix gets the chance to further increase its annual revenue numbers, Regan said.

"There is a significant revenue ramp occurring at the company, and DRC is projecting as much as $40 million in revenue [from] this business for this year," said Michael Lewis, senior vice president at BB&T Capital Markets, a marketer of DRC securities.

Lewis said Kadix brought in $23 million in revenue in 2007. "In other words, it's a very, very fast grower," and that should be beneficial to DRC once it is fully integrated into the company.

Regan said DRC's expansion plans started about 20 years ago, about the time the government began increasing its outsourcing of technology services. "DRC took some shots at some of that work and won some significant services business," he said.

At the time, DRC relied heavily on Air Force contracts, mostly for advisory and systems integration and software services at air bases in New England in addition to some large global logistics systems.

But the Air Force "has been a real tough place to do business," Lewis said. "Because of that concentration of business with the Air Force, it's been a difficult last few years of growth" for DRC.

Purchase of Andrulis

In 2002, DRC purchased Andrulis, a Navy contractor whose clients included the Missile Defense Agency and the National Science Foundation. Two years later, DRC acquired the Government Systems Division of Impact Innovations Group, which brought with it National Security Agency contracts. The acquisitions strengthened the company's presence in the Defense Department and civilian federal agencies, Regan said.

"It's hard to chip your way into some of those markets where you don't have any presence," he said. "So part of our strategy was to acquire presence, to penetrate those markets by acquiring companies that had complementary capabilities and cultures that were compatible. And that made sense at a reasonable price."

Also, about five years ago, DRC's workforce outgrew its small-business classification for advisory assistance services and technology management.

"DRC was no longer qualified to re-compete for its own work," Regan said. "So we've been busy redirecting the company's business base toward an expanded market, which provides us an opportunity to pursue higher-margin, higher-end services work."

DRC has contracts with the Treasury and Veterans Affairs departments, the U.S. Postal Service, the National Archives and Records Administration, and several presidential libraries, where company employees work on-site, said Lawrence O'Brien, DRC's senior vice president and general manager of business development and business solutions. "Each one of them has its own little IT things that we have to deal with."

DRC's acquisition strategy is broader than just merger and acquisition activities, Regan said. "The other segment of our strategy was to acquire the vehicles of choice that DRC's customers were turning to in favor of [General Services Administration] schedules," he said. "One of them was the Air Force Design Engineering Services Program contract. DRC is doing technology-related services work under the $2 billion DESP-2 indefinite-delivery, indefinite-quantity award."

DRC has won a DHS Enterprise Acquisition Gateway for Leading Edge Solutions Category 5 award for management support services and Tricare military health care awards. The company also won a spot on the Alliant contract, which is still under review.

"We have the vehicles, we have the capabilities, now we need to penetrate the customers," Regan said. "We're working the organic route: We're partnering, we're planning our way in."

Regan said DRC was so confident of its decision to buy Kadix that it went from being debt-free to a bank borrower to purchase the private company, which was founded in 2001 as an 8(a) small business.

But Lewis classified DRC as "one of our slower-growing [companies] over the past few years" because of government spending on the wars in Iraq and Afghanistan.

"We'll be interested to see how this tracks in Dynamics' business over the next few quarters as it integrates the company," he said. "We are anticipating that the organic growth at Dynamics Research starts to accelerate moving into 2009," he said, and added that he is somewhat optimistic that Kadix will turn out to be a strong strategic acquisition.

David Hubler is associate editor at Washington Technology.

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