DRS Pursues Aggressive Growth Strategy

By Richard McCaffery, Staff WriterDRS Technologies Inc.'s top executive is not letting a lagging stock price stop him from growing the Parsippany, N.J.-based company into a major supplier to government customers.Mark Newman, DRS Technologies president, chairman and chief executive officer, wants to boost revenues at his information technology manufacturing company from $273 million in 1998 to $500 million in the next year and a half."To gain the confidence of the kinds of customers we're dealing with, we believe you have to have a certain critical mass," said Newman, whose company made two acquisitions last year. DRS may pick up two more companies this year, he said."What is very key is that we are not looking to grow just to be big. We are looking for companies that fit with our culture and expertise," said Newman. That means companies with $25 million to $100 million in revenue that make computers, peripherals and complementary electronics equipment.Newman, who also wants to bolster DRS' software and services business, which accounts for less than 10 percent of revenue, expects to fund acquisitions with a mixture of equity, debt and bank. Late last year, DRS increased its line of credit at Mellon Bank Corp. of Pittsburgh from $60 million to $150 million.The 2,100-employee company designs and manufactures IT and defense electronics products ranging from computers and servers to radar systems and targeting devices. Newman, whose father and a business partner founded DRS in 1969, joined the company in 1973. DRS got its start building defense electronics products such as signal processors for the Navy. It embraced IT in the late 1980s and incorporated commercially available systems and technology into its product line.About 80 percent of its revenue comes from the federal government, mostly the Defense Department and intelligence agencies. Customers include the Air Force, Army and Navy. On May 25, the federal government, under a classified contract, awarded DRS a $3 million contract for computer workstations, servers and related equipment. Over the last four years, DRS has delivered more than 2,000 similar systems.The company is not as far from the $500 million mark as it might look. DRS finished its fiscal year March 31 with a record $366 million backlog. Newman, who took over as chief executive in 1994 when sales stood at $60 million, expects sales from internal operations to hit $400 million this year.Acquisitions could push the company to the next level. "We're constantly looking for new companies," he said. "There are many, many companies available, also parts of larger companies."But analysts said DRS has limited financing options while its stock price lags. Shares of DRS are trading around $8.50, down from $14.25 last summer. DRS shares tumbled with other small cap issues during last fall's market correction, made a partial recovery and slipped again on news of weak earnings.A soft international disk drive market chipped away at the company's bottom line. DRS reported net income of $2.9 million, minus a one-time charge, down from $6.3 million the year before. "We would like to see that business turn around this year," Newman said. "A couple years ago, we were making a lot of money there."Thomas Meagher, an associate at Boles, Knop & Co., a Middleburg, Va., investment bank, is not a believer in DRS' disk drive business. "That's the millstone hanging around their neck," he said, noting that the disk drive market is cyclical, therefore risky, and the components are commodity products.But Meagher and another analyst praised the company's fundamentals and overall business model.Jon Kutler, president of Quarterdeck Investment Partners in Los Angeles, said DRS "understands the dynamics of the marketplace in terms of where consolidation is headed" and has been very aggressive.In August 1998, DRS acquired NAI Technologies Inc. of Huntington, N.Y., for 3.7 million shares of stock or about $30 million. NAI makes ruggedized computers, peripherals and systems for military customers. The acquisition strengthened DRS' product line and provided new customers in the Army and intelligence community, Newman said.And in October, DRS paid $45 million in cash for a major portion of Raytheon Co.'s electrical optics business."What it did was get us one step higher on the food chain where we could be a system supplier, not just a subcontractor," Newman said.In a nutshell, that is the DRS strategy: to differentiate itself from myriad defense contractors in the sub-$100 million range by expanding through specialized acquisitions.The challenge, Kutler said, is for the company to find ways to creatively finance its acquisition and growth strategy. "There's no shortage of acquisitions DRS can do," he said. "The challenge is to continue doing what they've been doing without being disturbed by the stock price."That is not an easy trick for a small cap company in a big cap world. DRS has a market value of $54 million.What is required to turn Wall Street on to a small cap firm? One of two things, Kutler said: a sexy Internet Product or a star-quality chief executive.What DRS has going for itself a good business plan, Kutler said, "In the long run, fundamentals win."