General Dynamics Corp. is on the Business Week 50 list largely because of a string of acquisitions in the last few years that have produced soaring sales and profits. That's a sharp contrast with other defense contractors, whose lackluster results have hammered their stocks. Unfortunately for GD, the $9 billion-in-sales company has been caught in the downdraft. Indeed, on Mar. 7, the Falls Church (Va.) maker of ships, tanks, and commercial jets announced that it would buy back 5% of its stock to prop up its price. While the move gave the stock a bounce, it's still trading at only about half its 52-week high of $75. GD Chairman and Chief Executive Nicholas D. Chabraja recently talked to BW Senior Staff Writer Stan Crock, who covers the defense industry. Edited excerpts follow:
Q: Much of your performance stems from your acquisitions, but how much have your continuing operations grown? A: Over the last five-year period, it was in the neighborhood of 5% to 6% on sales and on earnings, it was running 7% to 8% growth.
Q: Will you be able to avoid the pitfalls of other defense contractors as they grew through acquisitions? A: It's always difficult to disprove the negative. If you look at the metrics on the things that we bought, we didn't pay as much for these businesses as our colleagues. We're pretty careful buyers. Consolidation savings was never the issue with us. Think about the naval group: Bath [Iron Works] and NASSCO [National Steel & Shipbuilding Co.] are broadening the product line and not consolidating. The same is true for acquisitions on the armor side.
On the information-systems technology side, we were building capabilities. In each instance, we weren't looking to consolidation savings, although on occasion we enjoyed some. Generally, we bought businesses at reasonable prices and improved them when we became the owners of them.
Q: Are more acquisitions in the offing? A: On a net basis, we have $750 billion in debt. That's quite a modest and underleveraged balance sheet. If we didn't do anything, by the third or fourth quarter of 2001, we'd have positive cash. We have a rich balance sheet.
Our targets will remain the same: directly or indirectly related to our four core business areas. Three-quarters of those business units are Old Economy. The fourth business, information systems and technology, looks much more like the new guys than it does the old world. We are looking in both areas.
Q: Do you intend to be a major player in systems integration? A: The first two acquisitions I made in that area were embedded systems with capabilities in major platforms. We are very much into systems integration. We're there. We acquired those businesses largely to protect and expand our positions in our platforms. We're now going about turning them into a cohesive force so that we can bid on larger and larger programs. To that end, we've recently bid on the Navy-Marine Corps intranet program, a $10 billion program.
Q: What is the outlook, given that it will take years for the Pentagon procurement budget to return to its level of the late 1980s? A: Over the last three years, the procurement portion of the defense budget bottomed out and has begun to grow. We've benefited. We've also benefited from enlarging our share in some of the submarkets and benefited from being able to latch on to portions of the defense market place that aren't in the procurement line of the budget. All of those things have enabled us to enjoy some increased growth.
When we acquired Bath Iron Works in August of 1995, we finished out that year [with] $700 million to $735 million in sales. Today, we're over a billion. That's about $300 million in sales growth over the time frame we've owned them, about a 40% growth rate in less than 5 years. NASSCO when we bought it was at about $400 million to $425 million in sales. Last year it had $500 million. We've had some built-in organic growth right in some of our good platforms.
We do more repair work. We can obtain more R&D money. In the current budget, research, development, testing, and evaluation are enjoying wholesome increases. We managed to do a little better in some of the other lines of the defense budget. We also managed to have...quite rapid growth in the information systems and technology side in commercial markets. That's a couple hundred million a year, maybe more from the time we acquired ATS [Lucent Technologies' Advanced Technology Systems, bought in 1997] until today. When we acquired ATS, it had about $300 million or less in sales, evenly divided among classic defense work, principally for the Navy, classified work, and commercial work. Now commercial work has been the rapidly growing part of the company.
Q: How does Gulfstream fit in? A: Gulfstream is a wonderful brand name. It's the dominant brand in its marketplace. Trident submarine, Seawolf, Abrams main battle tank -- when you think about GD, you think about dominant brands. Gulfstream is a growth story. It may not be as rapid over the next several years, but as an earnings engine, it is growing very handsomely. We're introducing management and operating efficiencies into a large fixed backlog. That's something we do very well. We expect wonderful things.
If you view the strategy too narrowly, you never can buy anything, can you? We ask a few questions: Is the business intriguing from the point of view, can you make money out of it? Is it a strategic fit? Will it directly help achieve critical mass in our core business? With Gulfstream, the answer is no. But the inquiry doesn't stop.
Given our core competencies, do we have the ability to add value to this business? Does it in turn have the skill set and ability to contribute to our others businesses. The answer with Gulfstream was an emphatic yes. Managers participate in the best practices council, the manufacturers council, and the technology council. We use them to pollinate best practices across the company. We have these councils instead of a corporate vice-president who imposes things.
Q: What are you going to do about the stock price? A: You have any tips? We can attribute [the stock's performance] to two things. First is some of the performance in our sector. The second thing has been the phenomenon of a massive rotation of investment funds out of what you call the Old Economy, certainly out of industrials and value-oriented stocks into technology, communications, growth, and momentum issues. Until we achieve some reasonable balance in that area, it's going to be tough.
At bottom, what we're looking at is a demand question. We'll have to work the demand side of the equation by getting out and telling our story to the investment community. It's a handsome story. I suspect I'll find some listeners. One survey shows about 75% of analysts who cover us rate us either a buy or strong buy.
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