Government services contractor Engility Corp. [EGL] on Monday said it has agree to acquire Dynamics Research Corp. [DRCO] for more than $120 million in cash in a deal that diversifies and expands its federal customer base and service offerings.

Engility said it would pay $11.50 in cash for each outstanding share of DRC’s stock, resulting in an equity investment of about $121 million. DRC’s debt is $79.2 million, bringing the enterprise value of the deal to about $200 million.

Engility President and CEO Tony Smeraglinolo. Photo: Engility
Engility President and CEO Tony Smeraglinolo. Photo: Engility

The acquisition is expected to close in late January or early February 2014 pending regulatory approval and has been approved by the boards of directors of both companies. Engility said the acquisition would be slightly accretive to its earnings in 2014 and significantly accretive to earnings in 2015 and beyond. Company officials said they are being conservative in their estimates.

The deal includes about $35 million in tax benefits for Engility.

Engility said the acquisition will accelerate its move toward high-end, high-value technical and consulting services and help fill in work lost due to the Army’s withdrawal of forces from Iraq and Afghanistan. More than 50 percent of DRC’s sales are from non-Defense Department customers whereas about 75 percent of Engility’s sales are from DoD customers, so the deal will expand Engility’s customer and revenue base away from defense, Tony Smeraglinolo, the company’s president and CEO, said on investor call.

DRC, which is expected to generate between $274 million and $277 million in sales this year, will provide Engility with new customers and expand its position with customers where it is currently underrepresented. DRC, which is based in Massachusetts, does business with the Air Force, it’s largest customer, Navy, Health and Human Services, Veterans Affairs,  the Department of Homeland Security, the Intelligence Community, Treasury Department, and other federal civilian and DoD customers.

DRC’s largest contract is for Veteran’s Relations Management with the Department of Veterans Affairs and accounts for 9 percent of the company’s sales. DRC has more than 300 contracts and provides Engility with new work on several indefinite delivery, indefinite quantity awards including the EAGLE II information technology (IT) services for DHS, the Army’s STOC II, the CIO-SP3 with the National Institutes of Health, which also is for government wide services, the TIPSS-4 with Treasury, and the Government Services Administration’s ALLIANT vehicle.

About 80 percent of DRC’s work is as a prime contractor.

Smeraglinolo said the new capabilities that DRC brings for Engility include high end technical and consulting expertise around high performance computing, cyber security, financial and regulatory reform, as well as program, engineering and life-cycle support, and IT modernization and sustainment.

The pending acquisition represents a “doubling-down” on Engility’s strategy of pursuing high value, higher margin work, which has been its focus since being spun from L-3 Communications [LLL] in July 2012, Smeraglinolo said. This past July the company also decided that acquisitions would become part of its growth strategy, with the focus being on access to new markets, new capabilities and scale. There is very little overlap between the two companies and Engility isn’t planning to divest any of DRC’s businesses, he said.

With scale comes the ability to further leverage existing infrastructure and provide existing and new customers with lower cost, high-value services, Smeraglinolo said. DRC is Engility’s first acquisition. The company doesn’t have additional deals in its pipeline at the moment, he said.

Engility expects to do about $1.4 billion in sales this year, which will be down from nearly $1.7 billion in 2012. The DRC acquisition will bring its revenues closer to 2012 levels. DRC, which has about 1,100 employees, is expected to have between $24.3 million and $24.7 million in earnings before interest, taxes, depreciation and amortization this year.

Engility is financing the acquisition with an existing credit facility and cash on hand.

DRC’s financial advisor on the deal is SunTrust Robinson Humphrey, Inc.  Engility said that it will retain most of DRC’s senior leadership.