Hadron Inc. Hunts for Small, Niche Players

By Richard McCaffery, Staff WriterIn September 1995, an independent auditor reviewing Hadron Inc. doubted the company could survive much longer. By late last year, the Alexandria, Va., technical services company had wrapped up its first acquisition. Now it's hired a local investment bank to hunt for more.Hadron is looking for companies in the $10 million to $20 million range that offer services in areas like software and hardware development, trusted and secure computer systems and intelligent weapons systems, company officials said. It's part of a strategy to broaden its business base and win more government and commercial customers."We've worked really hard to focus," said George Fowler, Hadron's president and chief operating officer. Fowler, who joined the company in 1993 and became president and chief operating officer in 1994, said it has gone through the four turnaround stages: survival, stability, profitability and growth."As you grow, you create opportunities for the company and employees," he said. "There is such an opportunity for acquisitions in this area."S. Amber Gordon, Hadron's vice president, said Hadron is more interested in finding companies with complimentary skills than companies of any particular size. She declined comment on whether it has any targets in mind or how many acquisitions it expects to make."It has to be the right fit for both companies," she said. Founded in 1964, Hadron offers systems integration, software development and engineering services. Its customers include the Federal Aviation Administration and intelligence agencies as well as Northrop Grumman Corp., Los Angeles, and Johns Hopkins University of Baltimore. Northrop Grumman and Johns Hopkins University's Applied Physics Laboratory are Hadron's largest customers, accounting for more than 50 percent of the company's 1998 revenue of $21 million.Hadron started its buying spree Dec. 21, 1998, with the $1.6 million purchase of Vail Research and Technology Corp. of Annandale, Va. A privately held information technology firm, Vail gives Hadron new technical skills, such as total cost of ownership analysis, and expertise in applying resource allocation models.Overall, Fowler said Hadron's sales are being driven by increased work from existing contracts. For instance, in 1997 Hadron won contracts worth up to $35 million to provide Johns Hopkins with analytical and administrative support along with software and hardware.Fowler said Hadron's long-term relationships with its customers are key to its success. "It bodes well for the future," he said.Picking a niche is one way to survive in today's environment, said Bob Dornan, senior vice president at Federal Sources Inc., a McLean, Va. market research firm. "You've got to focus on what you do, and do it well," said Dornan, noting that companies with good past performance track records have a leg up on competitors. Hadron hit rough water in the late 1980s and early 1990s when it started diversifying, executives said. At one point Hadron had a division that offered clients litigation support services, such as writing legal briefs. In 1993, the company was in the red with losses of $1.4 million. In 1994, losses increased to $4.1 million, debt soared and sales fell.Accounting firm Coopers and Lybrand LLP, which was auditing Hadron in fall 1995, noted that the company had a net capital deficiency and losses from operations so that it doubted whether it could continue as a going concern, according to Hadron's annual report.Meanwhile, a new executive management team led by C.W. Gilluly, chairman and chief executive officer, Fowler and Donald Ziegler, chief financial officer and senior vice president, had been working to save the company.By the end of 1995, Hadron had divested non-core businesses and focused on its computer systems strengths. The legal unit was sold. Sales and administrative costs were brought under control, and the company returned to profitability in its fiscal year 1995. Despite the refocusing and cost controls, sales continued to slip from $20.5 million in 1995 to $16.9 million in 1997.It wasn't until 1998 that sales picked up. For the year that ended June 30, 1998, Hadron posted revenue of $21 million and income of $761,000 ? up from $13,000 the year before."It's on its way back," said Thomas Meagher, an associate at Boles, Knop & Co., a Middleburg, Va., investment bank hired by Hadron to accelerate its acquisition program. "It's been four years for them," said Meagher, who thinks the company will be able to fund acquisitions using a combination of bank debt, cash and stock.For the quarter that ended Sept. 30, 1998, revenue increased just 1 percent to $5 million, and net income fell to $116,000 from $173,000 for the year-earlier period. Hadron executives blamed government budget constraints as well as the cost of keeping technical workers on staff, even when there isn't work for them."We're not trying to manage quarter to quarter," Gordon said. "We really want to hire experts, and once we do, we want to retain them." In early 1998, the company started an employee stock purchase plan that more than 40 percent of Hadron's 210 employees participate in.Hadron must broaden its customer base and pick up a few standard, steady contracts with government agencies to stabilize its revenues, Meagher said. This is part of what the company's acquisition strategy is aimed at achieving, he said.Hadron is traded on the Over The Counter electronic bulletin board. Its stock closed Feb. 9 at $1.56 a share. Over the last year the price has ranged from $1.37 to $2.50.