Ecc International Corp. Business Information, Profile, and History

Company Perspectives:

ECC International Corp. is a world leader in the design, development and production of simulators and related training for all branches of the U.S. Department of Defense and 25 other countries.

History of Ecc International Corp.

ECC International Corp. produces specialized computer simulators used to train military personnel how to operate and fix military weapons systems, including ships, planes, armored vehicles, and small arms. Its clients include all branches of the U.S. military as well as the armed forces of two dozen other nations. Nearly 90 percent of its sales are to primary contractors for ultimate use by the U.S. Department of Defense. The company also applies its technology to industrial and vocational training.

Origins

Engineers from Martin-Marietta created what would become ECC International Corp. in 1969. First called EDP Technology Inc., the company was renamed Ed Tech Corp. in October 1973, then Educational Computer Corp. in August 1976, and finally ECC International Corp. in February 1988.

The company constructed simulators to train military personnel on how to operate or repair a variety of equipment, including aircraft, ships, armored vehicles, and weapons. It was an obscure specialty in 1988, wrote Barron's, yet it saved armed forces in two dozen countries money by protecting the expensive real equipment from beginner's mishaps and by diverting fewer experienced crew from their duties in the field. Barron's predicted the market would grow as military equipment grew more complex.

ECC's revenues were $38 million in 1988, twice those of 1984, as profits approached $4 million. The company had a backlog of nearly $75 million. Foreign armies accounted for just 10 percent of business, although the company was building a new facility in Great Britain to gain better access to the European market. In fact, ECC (UK) Limited soon won a $7 million contract from Switzerland for tank gunnery and maintenance training simulators. ECC was also upping its employment at its main Florida plant by 20 percent.

In spite of its relatively small size, ECC had some advantages over other defense contractors. For example, it did not have to invest the same exorbitant sums to win orders.

Orders and Losses in 1989

By May 1989 the backlog had grown to $165 million, largely on the strength of the company's biggest order ever: a $133 million contract to build maintenance simulators for the new C-17 transport aircraft. A couple of months later, ECC was subcontracted to provide simulators for the U.S. Army's Advanced Anti-Armor Weapons System-Medium (AAWS-M), an order initially worth $23 million. Unfortunately, problems with both prime contractors and suppliers were delaying completion of other contracts, and forcing the company to post a loss in fiscal 1989, its first in 15 years.

Fortunately, the contracts kept coming, including a $6 million award from McDonnell Aircraft Corp. to produce maintenance simulators for F-18 attack jets sold to Kuwait. For the fiscal year ended June 30, 1990, ECC reported net income of $3.1 million on record sales of $55.9 million.

ECC announced higher than anticipated costs on its C-17 project in the spring of 1992, but these were not enough to make the contract unprofitable. The company did have to restructure its debt after violating certain loan covenants; it was paying more than $3 million a year on interest—a quarter of its total expenses.

A contract awarded in 1989 to supply weapons-training simulators for the Javelin antitank missile system would become ECC's largest program. The company's workforce numbered more than 800 in the early 1990s.

In December 1992, IBM subcontracted ECC to produce simulated weapons systems modules for its Close Combat Tactical Trainer (CCTT) project. The deal was initially worth $58 million, with a potential value of $88 million. Saudi Arabia awarded ECC another lucrative contract six months later, a $31 million agreement to design and manufacture maintenance training simulators for the M1A2 Abrams tank.

Vending Machines in 1992

Seeking some relief from the cyclical nature of defense contracting, ECC entered a more civil business in 1992: vending machines. The company first built frozen food vending machines under license from a German manufacturer, Deutsche Wurlitzer GmbH.

ECC designed a custom glass-front unit for Snapple Beverages Corporation that was unveiled in 1994. About 10,000 units worth $28 million were to be shipped the first year, beginning in April. (The order helped push ECC's backlog past $200 million.) The cases were designed to display up to 54 of Snapple's signature glass bottles. Patrons were treated to the sight of the bottles falling up to 3.5 feet without breaking during the vending. A space age piece of foam cushioned the fall. A subsidiary, ECC Vending Corp., was formed in July 1996 to manage these operations; however, it was to be short-lived.

ECC reported income of $7.3 million on sales of $107.6 million for fiscal 1995, both figures up about 70 percent from the previous year. The next year, sales were up to $117.1 million but profits fell to $2.9 million, the beginning of a long, painful slide.

By the end of 1996, the company was looking for a buyer. In March 1997, at the request of an unidentified major shareholder, ECC canceled a recently adopted provision to raise the level of stock ownership at which shareholder rights were triggered from 22.5 percent to 30 percent. This had been intended as a defense against hostile takeovers. In August 1997, ECC said it was no longer looking for a buyer, although the next month it announced a tentative agreement to sell certain vending machine-related assets to Maytag Corporation, which eventually paid $7.9 million for the money-losing ECC Vending Corp. subsidiary, which had failed to live up to its original parent's expectations after losing its two main clients, Snapple and Häagen Dazs. ECC earmarked the proceeds from the sale to pay down debt.

Layoffs were another part of the formula to restore elusive profits in the face of falling revenues. The company terminated 300 employees and contract laborers between July 1996 and May 1997.

In spite of a new $6.6 million Lockheed Martin contract, ECC continued to lose money in the spring of 1998. Delays among its suppliers were again cited. Sales were also down slightly. As losses continued into the fall, ECC was forced to renegotiate for more time to pay an $8.7 million loan from First Union National Bank.

Florida-Bound in 1998

Dr. James C. Garrett, formerly with Raytheon and Rockwell International, was named president and CEO in June 1998. He immediately set out to cut costs while increasing revenues at successful programs through such means as aggressively vying for follow-up orders.

In July 1998, ECC announced plans to relocate its headquarters from Wayne, Pennsylvania, to Orlando, where it already employed 500 people. The concentration of defense contractors in Florida was one factor making the move attractive. It was also a means to cut administrative expenses. In fiscal 1999, ECC discontinued its U.K. subsidiary, ECC Simulation Limited. It had lost more than $10 million in the preceding two years, contributing inordinately to the parent company's losses.

The late 1990s were not ECC's best years. The company lost $20 million from 1997 to 1999. It laid off half its workforce. As its stock price fell 80 percent (it had peaked at $15 in 1994), ECC was nearly delisted from the New York Stock Exchange, according to the Orlando Sentinel. This delisting ultimately did happen in November 2000, and ECC began trading on the American Stock Exchange (AMEX).

Other indicators were already looking up, however. Gross margins increased from 25 percent to 33 percent in fiscal 2000. The company reported income of $3.4 million on sales of $40.9 million—welcome results after years of agony. Among its newest programs was the small arms Engagement Skills Trainer (EST), which the company was pitching at military conferences. In September, the U.S. Army approved EST for delivery.

ECC laid off one-fifth of its 250 employees in July 2000 after its role in the Javelin antitank field trainer program was reduced. Javelin was headed by a joint venture of Lockheed Martin Corp. and Raytheon Co.; ECC had been involved in the program, its largest, since 1989. ECC officials claimed Lockheed gave most of the upcoming business to the Dutch aerospace firm Fokker N.V. because it wanted the Netherlands to buy the missile system for its military. Lockheed countered that Fokker simply offered a lower bid.

In September 2000, CEO Garrett told the Orlando Sentinel he felt the company had become the right size for the work it expected to be doing. After years of cuts, employment was at 275 and rising (for the moment). The company was especially seeking engineers, programmers, and "systems integration people." The company's simulation work over the years had shifted from hardware manufacturing to systems integration, Garrett stated. At the same time, the increasing capabilities of the PC threatened to reduce the need for high fidelity, dedicated simulators.

In spite of the company's improved fortunes, investors were not snapping up ECC shares. An investment expert interviewed by the Orlando Sentinel blamed the unpredictable nature of the custom simulation business.

In October 2000, ECC won a four-year, $17 million contract to build 392 Javelin basic-skills trainers for Lockheed Martin and Texas Instruments Inc., which had bought Raytheon's defense business. (The contract for Javelin's tactical skills trainer that ECC had earlier lost to Fokker was probably worth twice as much. However, the U.S. Army ordered 21 field tactical trainers worth $1.7 million from ECC in April 2001.)

In November 2000, ECC unleashed its second round of layoffs in a year, dismissing 70 employees. General restructuring and a short-term decline in business were the reasons given. The pattern was all too familiar, yet ECC continued to win contracts, particularly with the U.S. Army and ECC's biggest client, the Navy.

Principal Subsidiaries: Educational Computer International, Inc.; ECC International Inc. (Virgin Islands).

Principal Divisions: Instructional Systems Development Group; Simulation Design and Production Center; Systems Design and Production Center.

Principal Competitors: Groupe Dassault Aviation SA; Evans & Sutherland Computer Corporation; Reflectone Inc.

Chronology

• Key Dates:
• 1969: Former Martin-Marietta engineers create EDP Technology.
• 1989: Under the new name ECC International, company begins the Javelin simulator program.
• 1992: ECC begins making vending machines.
• 1994: Share price peaks at $15.
• 1997: Vending unit is sold to Maytag.
• 1999: U.K. operations are discontinued.
• 2000: A slimmer ECC announces profits, layoffs.