Nichols Research Corporation History

Address:

4040 S. Memorial Parkway
P.O. Box 400002
Huntsville, Alabama 35802-1326
U.S.A.

Telephone: (205) 883-1140
Fax: (205) 895-2525

Public Company
Incorporated: 1976
Employees: 2,000
Sales: $242.3 million (1996)
Stock Exchanges: NASDAQ
SICs: 8731 Commercial Physical & Bio Research

Company Perspectives:

To stand the test of time, a structure must rest on a firm foundation and contain the other support structures necessary to withstand stress and accept future changes. The building of Nichols Research Corporation (NRC) has created a financially sound and nationally recognized company with firm and growing business bases in information technology and traditional technology services markets. Our foundation is built on a vision of the future, detailed planning by our management team, and commitment to quality. This foundation provides the solid structure for continued growth and diversification in the government and commercial information technology markets, especially healthcare information services, while maintaining our commitment to, and success in, our traditional government and systems technology services markets.

Company History:

Nichols Research Corporation has diversified beyond its core business of providing technology services to the defense industry and to U.S. military and government agencies, including the Department of Defense (DoD) and intelligence agencies. With the slowdown on defense spending in the 1990s, Nichols has expanded its business to include commercial and civilian clients such as Federal Express, AT&T, and the Centers for Disease Control in Atlanta. Through a series of acquisitions, Nichols has also applied its technology expertise to the burgeoning information technology (I/T) needs of the health care market. Nichols's emphasis on systems technology, however, has enabled the company to continue to improve its defense-related revenues, despite defense-spending slowdowns, and build a more than $1 billion backlog by 1996. In that year, Nichols surprised the defense community by winning two of four DoD High Performance Computing Modernization major shared resource center contracts, together worth more than $300 million over eight years. Nevertheless, increases in Nichols's commercial business has enabled the company to decrease its reliance on defense spending. Of the company's $242 million in 1996 revenues, defense work accounted for some 55 percent, down from more than 90 percent in the mid-1980s. The company's health care business already accounts for seven percent of revenues, with that segment expected to grow by 30 percent before the turn of the century. Founders Chris Horgen and Roy Nichols continue to play active roles in the company's leadership. Horgen is chairman and chief executive officer; Nichols is vice-chairman, senior vice-president, and chief technical officer. Michael Mruz, with a background in computer services, joined the company as president and chief operating officer in 1994.

In keeping with its diversification, Nichols operates under four business units. Nichols Federal oversees the company's defense contracts, including sensor systems and technology; missile and air defense systems and technologies; space surveillance and avionics; army tactical systems and technologies; and intelligence programs. Major clients include the U.S. Army, Air Force, and Navy and NASA, as well as the Australian Defense Force. Nichols guidance systems, for example, could be seen in action during the Persian Gulf War, controlling the Patriot air defense missile system. Nichols is also actively involved in upgrading the Patriot system. The other Nichols units are involved in I/T work. Nichols InfoFed works with nondefense government agencies at the federal and state levels. Nichols InfoTec pursues contracts from commercial telecommunications and transportation firms. Nichols Select specializes in the health care and insurance industries.

Star Wars Success in the 1980s

Nichols Research Corporation was founded by former McDonnel Douglas employees Chris Horgen and Roy Nichols in 1976. The pair set up shop in a 1,200-square-foot office in Huntsville, Alabama, the site of the Army Strategic Defense Command and the Army's Redstone Arsenal, and a city with a history as a defense center going back to World War I. Starting with about $30,000 in capital (most of which went to purchasing a desktop computer), the company's initial focus was on providing research and development of optical technology and sensor systems for the military and for the space program. With the signing of the Anti-Ballistic Missile treaty in the early 1970s, the country's defense initiatives turned toward a greater reliance on surveillance systems. Nichols's optical technology expertise quickly enabled the company to win contracts. In 1976, Nichols won its first DoD contract, as well as subcontracts with six prime defense contractors engaged in the growing strategic defense area. The company's first-year revenues were $300,000.

Nichols's optical expertise positioned the company for steady growth into the 1980s. By then, with the inauguration of President Ronald Reagan, the DoD's thrust turned to the Strategic Defense Initiative (SDI), also known as the Star Wars program. This effort, which called for the deployment of a space-based surveillance and weapons system, was part of an overall acceleration of defense spending designed to secure the United States' lead in the long-standing Cold War. Hundreds of companies, large and small, lined up to participate in the initial development phase of the SDI program, which was budgeted at $19 billion for its first five years, with full deployment eventually expected to be worth more than $1 trillion. Nichols's optical sensor expertise placed it in a prime position to take part in the SDI "gold rush."

In 1983, when SDI funding began, the company won a contract to study the use of optical sensors for tracking missile launchings and for determining whether a missile actually carried an armed warhead or was merely launched as a decoy. SDI helped launch Nichols's revenues into orbit: In 1983, the company posted slightly less than $7 million in sales and a net profit of $315,000. By 1986, the company's revenues had grown to $28 million, and Nichols posted net earnings of $1.34 million. As Roy Nichols told Newsweek, "Our growth would be 10 to 15 percent less without SDI." By then, SDI contracts and subcontracts with other SDI contractors, such as Sparta, Inc., a Huntsville neighbor competing to become principal architect of the SDI system, contributed about 86 percent to Nichols's annual sales.

Nichols went public in 1987 after a year that saw the company's revenues jump by 38 percent. Nominal contract awards reached $38 million, with options worth $55 million, raising the company's backlog to $78 million with options. Three new SDI contracts with the U.S. Army contributed to the company's growth that year. Nichols was awarded prime contractor status for the Defense System Survivability Analysis contract, worth $7.8 million with options; prime contractor for the $6.3 million Wide Field of View Optical Technology Program; and subcontractor for Teledyne Brown Engineering for a Systems Engineering and Technical Assistance contract worth $9 million with options. By then, however, Nichols began to take its first steps to lessen its reliance on SDI, which was coming under increasing attack by a skeptical Congress. Beyond Star Wars, the company was also gaining new customers among the government's defense agencies, with tactical business contracts with White Sands Missile Range in New Mexico and Eglin Air Force Base in Florida. In addition, the company was profiting from the Small Business Innovative Research (SBIR) program, which directed crucial defense dollars to smaller companies while also introducing these companies to new customers among government agencies, winning 15 contract awards in 1987.

The following year, Nichols recorded still stronger growth. Contract awards totaled $118 million, and its backlog reached $136 million with options. By then, the company's staff had grown to 500, and the company had moved to new headquarters in Huntsville. Nichols also made its first acquisition, of Radiometrics, Inc., which added prototype development and measurement capacity to the company's base of expertise, as well as new customers, including the Army Missile Command and NASA. SDI continued to play a major role in the company's growth and included subcontractor awards with Martin Marietta and General Electric worth more than $28 million.

The company's revenues neared $43 million in 1988 and continued the company's unbroken string of profitability, with a net income of $2.3 million. Nichols's growth was also enabling it to bid on, and win, larger contracts, both as prime contractor and as subcontractor. The company expanded its conventional defense business, with the U.S. Army providing four major contracts in tactical and theater weapons. Nichols's contributions included work on the Fiber Optic Guided Missile Program; Foreign Missile Subsystems and Technology Analysis; Guidance and Control Support; and a contract under the Combined Allied Defense Experiment. Three years later the company's work would gain worldwide recognition with the outbreak of the Persian Gulf War, as Patriot missiles, controlled by Nichols's guidance systems, took out Iraqi Scud missiles.

Post-Cold War Growth

The acceleration of U.S. defense spending in the 1980s was responsible, directly or indirectly, for the collapse of the Soviet Union and the Communist Era in 1989. Although SDI itself became a casualty of the ending of the Cold War, its threat or promise, although never actually fulfilled, spurred the Eastern Bloc on its own spending program, bankrupting the Soviet economy and opening the way to demands for greater freedoms and free market systems. The spending spree had also taken its toll on the U.S. economy, pushing the country into the red to the tune of more than $1 trillion. With the collapse of the Cold War, the DoD came under increasing budget pressures and the 1990s presented a picture of massive cuts in defense spending.

By the start of the 1990s, however, Nichols's diversification efforts were well under way. Unlike larger companies such as Rockwell and Martin Marietta, Nichols's emphasis was on software, over hardware, and the company was taking a leading role in setting many technical standards in the defense market. The company had successfully extended its business beyond SDI into the tactical arena, with contracts with the Army, Air Force, Navy, NASA, and the intelligence agencies providing more than one-third of the company's $54 million in 1989 revenues; by 1990, the company's tactical contract awards totaled more than its strategic awards for the first time in Nichols's history. The company was also winning larger awards than ever before, including $63 million in intelligence contracts, an area of DoD spending that was less likely to become a victim of the budget cuts. Nichols also enjoyed success in picking up options on its existing contracts. In 1990, the company placed nearly $500 million in contract bids, and its revenues swelled to $75 million, providing a net income of $3.8 million. Adding to the company's stability as the defense industry faced the uncertainty of the new decade was Nichols's strong backlog of nearly $270 million in contracts in 1990.

That backlog grew to $467 million by 1992, including the company's largest contract award in its history, of $66 million to provide systems engineering and technical support to the SDI Organization's Ground-Based Interceptor program. Defense spending continued to form 95 percent of the company's revenues, which topped $90 million in 1991. Already, however, SDI contracts formed only 50 percent of Nichols's total revenues, which climbed past $117 million in 1992. Net income neared $6 million. The company made a new acquisition that year, of Utah-based Astech, which boosted the company's intelligence software capability. Nichols was poised for even stronger growth. As one analyst told Defense News, "This is one of the few defense companies out there for whom you could say business is booming."

Despite its strong defense performance, boosting revenues to $159 million in 1993, Nichols was already making plans to move the company into the civilian and commercial arena, particularly by leveraging its I/T experience into contracts for commercial computer services. Toward this end, the company eyed the health care industry, which, in terms of information technology, lagged some 20 years behind the banking and finance industries, offering Nichols the opportunity to gain strong market share in what would inevitably become a multibillion dollar business. Information technology was also seen as an important factor in Nichols's defense growth, as I/T was becoming an increasingly significant factor in government defense spending.

The company's diversification moves came at the right time. In 1994, Nichols recorded its first declines in its history, with revenues dropping to $143 million and net income falling to $6.5 million. To step up its I/T growth, Nichols set out to expand the company with a series of acquisitions that would bring additional, and crucial, I/T capacity. In July 1994, the company announced its intention to acquire Communications and Systems Specialists, a $6 million company based in Maryland that specialized in computer simulations and I/T services for NASA and the intelligence agencies. Nichols followed that acquisition with that of Computer Services Corporation, based in Birmingham, Alabama, in 1995, adding that company's base of health care information services. A third acquisition followed soon after, when the company picked up another Alabama firm, Conway Computer Group, which provided software and I/T services to the insurance industry, including workers' compensation cases, risk management, underwriting, and other insurance areas. These acquisitions helped raised Nichols's revenues to $170 million in 1995; they also helped the company secure prime commercial contracts, including a more than $10 million contract with Federal Express for multimedia training services and a $35.8 million contract with the Centers for Disease Control in Atlanta for computer support services.

Entering its 1996 fiscal year, Nichols had already raised its I/T capacity to 35 percent of the company's revenues. Its defense work, however, continued to be strong: In April 1996, the company won the first of four DoD contracts for upgrading the agency's consolidated supercomputing centers. One month later, the company surprised the defense industry by winning the second of the four contracts. Together, the two contracts were worth more than $300 million over eight years. Meanwhile, Nichols was continuing to expand through acquisitions. In June 1996, the company purchased Advanced Marine Enterprises, Inc., a maker of advanced simulation and virtual reality technology for naval and marine applications. The company also picked up 20 percent of TXEN, Inc., a database management provider for the health care, insurance, and third-party administrator markets. Nichols announced its intention to purchase the rest of TXEN in June 1997. Nichols also teamed with Medifinancial Solutions, Inc. of New Jersey to form Healthshares L.L.C, a joint venture engaged in providing integrated information systems and support services to the health care industry.

Nichols's expansion efforts quickly proved profitable. The company ended its 1996 fiscal year with $242.3 million, up 42 percent over the year before, generating $9.4 million in net income. And, with a backlog of $1 billion in contracts and another $500 million in options as well as plans to make more than $1 billion in new bids in its 1997 fiscal year, Nichols's growth seemed certain to continue beyond the turn of the century.

Principal Subsidiaries: Communications & Systems Specialists, Inc.; Conway Computer Group; Computer Services Corporation; TXEN, Inc. (19.9%); Healthshares L.L.C (50%).

Nichols Research Corporation History

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