TOP 100: GD confident market poised for growth

Officials at General Dynamics are maintaining a confident outlook--and with good reason. While earnings have been flat, margins are up appreciably, and the company has collected some major contract awards in the last year.

Moreover, its long-term contracts provide a solid cornerstone of programs and General Dynamics is well-positioned for growth in areas such as intelligence and cyber security. The company ranks No. 5 on the Top 100 with $4.1 billion in prime contracts.

Dan Johnson, the company’s executive vice president of the Information Technology and Systems Group and president of GD Information Technology, attributed improved margins to a change in product and services mix. “In the first the quarter, we were a little stronger in our higher-margin product sales as compared to our lower-margin services, so that had an impact,” he said. In addition, the defense contractor is “still reaping some efficiency benefits” within the IT group from unit consolidation a year ago and further “fine tuning” to that initiative, he said.

On the services side, the company has tried to avoid programs that don’t offer margins within its objectives.

“For last several years, for whatever reasons, it seems like on many of the large services jobs, even IT jobs, they issue cost-reimbursable solicitations and the material and equipment component is non-fee bearing,” he said. “When they do that, it really hurts your margins, especially on some of the large enterprise jobs, where they’re buying hundreds of millions of dollars of material.”

Among awards, General Dynamics recently won a contract from the Army to provide a range of enterprise IT services to U.S. Army Europe, work on which will take place in multiple locations across Germany, Italy and the Balkans. The single-award task order has a potential value of about $184 million for five years, if all the options are exercised. The company also was awarded a five-year contract valued at $75 million to supply and maintain software in support the Centers for Medicare and Medicaid Services’ durable medical-equipment program.

While its “flagship” contracts such as those with the National Geospatial Intelligence Agency, the State Department and the Centers for Medicare and Medicaid Services act as long-term anchors for General Dynamics’ portfolio, the company is well-positioned for new business on both the product and services sides, Johnson said.

“We think that the space market has been neglected over the last several years,” he said. “It’s going to get back on track. Also, our board thinks that General Dynamics should be without question the unmanned undersea vehicle leader in the marketplace, being a prior submarine manufacturer, so that’s a focus of ours as well.”

Opportunities also loom in the international market, largely in avionics and command and control systems for the Canadian and the United Kingdom governments, he added.

The company is gearing up for prospects in the growing intelligence and cyber-security market as well.  “Cyber is typically embedded in every kind of IT opportunity out there,” Johnson said. “We’re focusing on that from both an offensive and defensive perspective.”

One of General Dynamics’ principal challenges ahead involves its Army business. “The Army has much more to do than it has soldiers and funding to do it with, so something is going to have give,” Johnson said. “Of course, the Army is a large customer of ours, so we will do all we can to try to support their mission as they work their way through this. I was just [overseas] a month or so ago and visited with a number of the combatant commanders and they’re just shaking their heads about how they’re going to deal with what they need to do.”

Overall, Johnson believes the government market has “bottomed out.” In the services area, it’s getting better, he said.

“Most of the analysts seem to think that we’re entering into at least low, single-digit growth in the services market,” he said. “So that’s encouraging. We do have a relatively stable [federal] budget so that’s encouraging as well. I always say in the services business, it’s not very sexy, but you can count on it. I’m hoping that will continue.”

Johnson also is optimistic about the military market for products. “We think there’s going to have to be some investment in the country’s strategic programs, which we’re well-positioned for—the space program, the nuclear triad program, some of new large-scale aircraft and submarine programs. We feel like they’ve been neglected as we’ve been fighting all these wars for the last 10 years.”

Any potential demand for reinvestment in defense products and services is likely to transcend the coming change in administrations, according to Johnson. “Whoever is elected, we’re going to have to invest in the defense business going forward,” he said. “The Russians and the Chinese are catching us. I think everybody realizes that.”