GRC Balances Acquisition Goals, Investor Demands

By Richard McCaffery, Staff WriterGRC International Inc. has stormed back from two years of losses with a strong contract backlog, an aggressive plan to chase larger contracts and an ambitious acquisition strategy to break into new government markets.Gary Denman, GRC's president and chief executive officer, said he expects to buy about four systems integration companies in the next few years to position his company as a major prime contractor. "I would be surprised if we don't do a transaction in the next 12 months," said Denman, who took over as chief executive of the Vienna, Va., government contractor when former GRC boss Jim Roth retired in July.Denman is looking for systems integration companies in the $50 million to $80 million range with specialized skills to help GRC expand into new government markets, such as the civilian agencies. Currently, 95 percent of the company's business is with the federal government, primarily with the Department of Defense.But the 1,200-employee company, which designs and integrates information systems, is reaching for larger contract wins, such as the Army's Global Combat Support System contract. GRC won the first tier of the contract last April. The deal is worth $11.9 million and could grow in value to $30 million next year, becoming the company's biggest win to date. Still, it hasn't all been smooth sailing lately. Individual shareholders at the company's Nov. 5 annual meeting introduced two proposals that passed despite strong opposition from management. The first involved declassifying the board of directors, which means the seven-member board would be up for election every year. The second proposal involved eliminating a poison-pill measure, which would make it easier for an outsider to take over the company.Thomas Meagher, an analyst at Boles Knop & Co. LLC, Middleburg, Va., said the vote is a reflection of shareholder frustration, especially from institutional investors. But Meagher pointed out that institutional investors in general don't like classified boards and poison pills. "My personal feeling is GRC is on the right track," he said.Denman said he has talked to many of GRC's main shareholders, and that the vote doesn't represent a groundswell against management. "My conversations with them are very positive," he said. "There aren't any big shareholders out there saying 'You have to sell this company.' "In addition, the votes were advisory in nature. In other words, management is not required to act on the passed proposals. For the measures to be implemented, a second vote would have to be held and a higher voter turnout would be required, Denman said.But the company is examining the proposals. "Let me be very clear," Denman said. "We take these two votes very seriously. We will deal with them in depth at the January shareholder meeting."In the meantime, GRC will focus on its plan to get bigger in order to chase larger government contracts. "We want to grow the company to be a strong, independent services contractor," said Denman, the former director of the Department of Defense's Advanced Research Projects Agency. GRC also must get bigger to compete in a tough market. Rivals include Computer Sciences Corp., El Segundo, Calif.; CACI International Inc., Arlington, Va.; and Nichols Research Corp., Huntsville, Ala.Profitability and an aggressive growth plan mark a sharp turnaround for GRC, once loaded with debt, losses and a lack of focus. Founded in 1961, GRC was an established information technology firm with a strong customer base at the Department of Defense. The company provided IT integration, consulting services and software development to customers such as the Air Force, Army, Joint Chiefs of Staff and Arms Control Office.But in the mid-1990s, when defense spending slowed and the telecommunications business took off, GRC tried to move into the commercial sector to break into a higher margin business. By 1996, GRC was in full transition, developing telecommunications software, electronic security systems and materials testing equipment for sale to the private sector.In the summer of 1996, the company's stock was trading at nearly $40 a share on the New York Stock Exchange on hopes its technological expertise could propel it to commercial success.But without significant commercial partners to enter new markets and defray sales and development costs, GRC was forced to borrow millions of dollars to fund its commercial enterprises. Long-term debt soared from nothing in 1995 to $28 million by June 1997. Commercial sales were slow, and GRC posted losses totaling $35.5 million for 1996 and 1997. Its stock plunged to a low of $4.25 in the spring of 1997.In the second half of that year, GRC turned back to its strengths. The company divested its commercial business line, cut expenses and refocused on information technology and the Defense Department. So far, the move has paid off.GRC ended its 1998 fiscal year in the black, with revenue of $130 million and income of $11.4 million. Its debt is just under $20 million, and Denman expects to reduce it to $15 million by June. The company recently announced a record backlog of more than $500 million, including part of a new, $48.5 million contract to provide technical engineering services in support of the Air Force's information warfare and command and control programs. That award was announced Nov. 4.GRC's stock has rallied in the last month, up 60 percent and closing Nov. 16 at $6.18 a share.Denman's goals for the company include achieving revenue of $260 million in three years through internal growth and acquisitions, and increasing operating margins by 10 percent annually, giving the company a 5 percent to 6 percent operating margin by June 2001.Farley Shiner, an IT analyst at Scott & Stringfellow Financial Inc., Richmond, Va., likes the company's recent moves. "From what I can see, they're taking the steps necessary to ensure long term growth," he said. "They've gotten back to their knitting. They just need to keep posting good numbers quarter to quarter. I think they know where their strengths are."