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UNITED STATES
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The following is a transcript of a presentation/conference call to analysts and
investors by General Dynamics Corporation discussing the Veridian transaction.
GENERAL DYNAMICS PRESENTATION/CONFERENCE CALL
MODERATOR: NICK CHABRAJA
JUNE 10, 2003
10:30 A.M. EST
RAY LEWIS: Well good morning and welcome to the General Dynamics presentation
and conference call on our proposed acquisition of Veridian. Before I introduce
our speaker's today I would like to take care of a couple of pieces of business.
First you will hear some forward-looking statements today. These represent the
best estimates of the people making those statements. But obviously they are
subject to the normal risks of any business evaluation. And I would recommend
that you look at the 10-Ks and annual reports of both companies for a more
thorough exploration of those risks.
In addition, this presentation is for information only. It is neither a
solicitation of a proxy or an offer to purchase shares of Veridian Corporation.
All of those things will be dealt with with the appropriate materials cleared by
the SEC. And again, if you have access to the news release that we gave
yesterday there is a more full some explanation of that particular point.
With that said, I have the pleasure of introducing the Chairman and Chief
Executive Officer of General Dynamics, Nick Chabraja.
NICK CHABRAJA, CHAIRMAN AND CHIEF EXECUTIVE OFFICER, GENERAL DYNAMICS: Thank
you, Ray (ph) and good morning. I think the format we'll follow here is I'll say
a few words about this transaction, really more prosaic information. And then I
want to introduce Ken Dahlberg to you, our Executive Vice President Information
Systems and Technology group to get in to the fit, the strategic fit. And we're
also pleased to have David Langstaff with us, the CEO of Veridian who will also
talk to you about the same subject matter.
And then I'll pick up some of the economics of the transaction, some of the
transaction metrics. And then we'll get to your questions on the entire array.
This transaction, as you know, from the release is about a billion-and-a-half
dollar transaction, $35 a share in cash. And the assumption of Veridian's bank
line. It's, of course, subject to Veridian shareholder vote and the normal
regulatory approvals. We expect to close late in the quarter, although I must
say to you we have a timeline that if we are successful in all of our pursuits,
could close this transaction in 60 days which would be a happy event for all of
us. It is initially accretive to us, earnings and cash flow right off the get
go.
Just a touch on Veridian. They have quite a handsome backlog. They're prime on
about 80 percent of the contracts in their backlog. In addition, they have some
ID IQ contracts that aren't represented in that backlog that represent for them
really tremendous future opportunity. And give us a high degree of confidence in
the growth forecast and picture that we're purchasing. It's a company with 7,300
very talented employees, highly educated. Seventy-five of whom -- 75 percent of
whom hold security clearances.
With that said, I'd like Ken and then subsequently David to speak with you a
little bit about the fit gear.
KEN DAHLBERG, EXECUTIVE VICE PRESIDENT INFORMATION SYSTEMS AND TECHNOLOGY: Thank
you, Nick. And good morning to all. I must say from the outset, I am personally
delighted with this tremendous opportunity to acquire what I consider an
intellectual powerhouse in intelligence surveillance and reconnaissance with
terrific IT services component. This is a company much like IS&T within GD built
over the use through very critical strategic acquisitions. And they've had a
history of 50 years of addressing their critical information needs of their
customers.
Their core capabilities, right from the outset compliment IS&T. Not a lot -- any
overlap that we can see and really will allow us to provide our customers with
truly more end-to-end solutions to meet their combined needs.
Veridian as it shows on the chart, provides intelligence surveillance and
reconnaissance services and products that enhance information superiority and
contribute to the national security. I'm really excited about their leading edge
ISR technology and systems engineering expertise, which would really add to our
stable capabilities, that give GD really enhanced capabilities in IS
architecture modeling and simulation, synthetic aperture radar systems design as
well as imaging and remote sensing systems design. A lot of work in multi sensor
fusion and data correlation algorithms. Visualization and information extraction
techniques.
Their knowledge and decision support systems are built to aid their customers to
make critical decisions. So they have clever algorithms and data mining and
warehousing information fusion and correlation and other data management
technologies which will allow us to provide a lot more key capabilities within
the GD customer base.
In network security and enterprise protection, Veridian has been a trusted
designer and operator of secure intelligent networks protecting important
elements of our country's communications infrastructure for many, many years.
And one of the only companies that have the accredited level four capabilities
which will help us on competing programs in the future.
Veridian has been engaged for quite some time in the chem bio and nuclear
technology applications. They build chemical detectors. They build biological
sensors. And have made recent inroads in to homeland security which we see as a
burgeoning market for our company. Surrounding all of these capabilities, they
just bring solid modeling and simulation which was a real gap within our IS&T
operations. That's something that we have continued to look to see how we could
growth either organically or through an acquisition. This really gives us a jump
start in that.
And of course, their entire innovative technology base that Nick mentioned is
built around their system engineering and software expertise. So clearly, to me
this acquisition is all about acquiring innovation. Acquiring key technology and
growing markets via excellent presence.
Veridian extends our reach in the DOD intelligence and homeland security
communities as well as some federal security related agencies that we have not
heretofore been involved in like TSA, like the Department of Justice, the
Department of the Interior. In addition, they have just made some modest inroads
in the state and local emergency response areas which we at GD view as a growing
marketplace.
Again, even in the customer base there seems to be virtually no overlap in our
services and products and the base supply vice (ph) - our current GD IS&T
customer base. So it's very mutual, very complimentary.
It should be obvious by now, that my enthusiasm and excitement about this
acquisition is high. We are getting terrific people. Phenomenal technology and
expansive customer base that we can spring board on and truly provide our
customers more end-to-end solutions.
Now I'd like to introduce, David, CEO of -- David Langstaff, the CEO of Veridian
to give his perspective and views on this transaction. David.
DAVID LANGSTAFF, CHIEF EXECUTIVE OFFICE, VERIDIAN: Good. Thank you, Ken and
thank you, Nick.
From Veridian perspective's I think this is about terrific fit. It's about
growth an opportunity and it's about culture. The fit is marvelous. It's not
often you can put companies that serve the national security community as both
GD and Veridian do together without having overlap that could cause issues on
integration. But in fact, we have found that we don't compete with each other in
the market. There's virtually no overlap. And there's a terrific compatibility
of what we do with what GD brings. So the fit is terrific.
Veridian, as I think a number of you who have followed us know, we have seen
over the last number of quarters accelerating growth. We posted 19 percent in Q1
organic growth, 14 percent in Q4. We as a billion one to billion two player are
one of the larger players in the markets we serve, but still not such a larger
player that we could capture the kinds of opportunities that we're facing.
And so when you take Veridian and combine it with Ken's part of General
Dynamics, you've got a five to $6 billion company or business within the company
that is a major player overnight. And I think that they growth opportunities
that we will have together will be substantial. And this is a market that we
know very well. We see it with some long legs. As I've said to analysts before,
national security is not something you do for a little while, check the box and
move on. It's something that is here to stay. And is something which will be a
priority of this country for many, many years.
So from our standpoint, this is a way to rocket launch our vision of being a
major player at a time when new opportunities are beginning to roll out. And we
think this is truly going to be a terrific combination.
Veridian is a people business. It services -- we employee people with
extraordinary skills. Security clearances are a defacto part of our business.
And so the fit from the standpoint of operations was a very important
consideration to me and to our Board. GD is an extremely well run company. It's
a decentralized company. It's one which lets its people do their job. And Nick
and I and Ken have spent a lot of time on how to integrate this. And I can tell
you that I'm very excited about not only the fit that you see from a capability
standpoint, but the fit you see from a cultural standpoint. I think this will
energize our employees. And really enable them to continue to work on the
cutting edge which is really where Veridian works and has worked for the better
part of 50 years.
So I'm thrilled by this. I think it's a great move. I think our customers, the
U.S. government has a new major player to turn in as the transformation that
we're seeing across the national security markets of the country unfold in
defense, in intelligence and homeland security. I think it's going to be a great
story and a great play. Thank you.
NICK CHABRAJA: I thought I'd share with you some of the financial information
that we gleaned during the course of due diligence some of which you may have.
Veridian has twice now in the last 60 days given the public guidance increasing
their guidance each time. This is may be a little deeper look as a result of our
due diligence activity.
The numbers that you are looking at for '03 and '04, do not assume in any
respect revenue synergies between General Dynamics and Veridian. Nor do they
assume any cost curtailment as a result of the transaction. And there are
obviously opportunities in each area.
We can take the EBIT and EBITDA reflected on this chart for '03 and '04 and see
what it looks like from a transaction metric point of view. You can see that
it's 1.14 times estimated 2004 sales, 14.1 times EBIT and 12.2 times EBITDA. The
-- let's spend a moment on these metrics. Certainly, that's not the way you buy
businesses, right. But I've seen some comments in the early press on this as
being pricey. I supposed that's when compared to platform businesses. But if
you're familiar with transactions that have occurred in this space lately, some
of them by our significant colleagues and competitors, they've been at metric
multiples in excess of these. And I'll let you do your own research on that.
Some of the analysts who cover this space had them all ready yesterday.
But let me just say I think it was a full and fair price for the Veridian
shareholders. But it was justified by the quality of the company, the business,
and the technology. The reasonableness of a rather exciting growth forecast and
frankly the low cost of money. After the transaction, we'll have a debt to cap
in the 42 to 43 percent range, but net debt to cap be in the 37 to 38 percent
range still leaving us with an extraordinary high quality balance sheet and
appropriate credit rating.
That having been said, I'm pleased to take your questions. Ray, do we alternate
between those ...
RAY LEWIS: First we'll take a couple from the floor and then a couple from the
phone and alternate.
NICK CHABRAJA: Sam was the first hand up. Sam Pearlstein (ph).
RAY LEWIS: Sam, can you wait for a microphone?
OPERATOR: Ladies and gentlemen, if you do have a question or a comment from the
phone line at this time, please press one followed by four on your touch-tone
phone. If at any point your question is answered, you may remove yourself from
the queue by pressing the pound key. Again, ladies and gentlemen, that's one
followed by four.
UNKNOWN MALE #1: ... It generates 40, $50 million of actual cash every year. You
know, is that -- is it much higher than that?
UNKNOWN MALE #2: Yes.
UNKNOWN MALE #1 (?): I'm trying to figure out how do you justify this
(INAUDIBLE) cash.
NICK CHABRAJA (?): Yes, you're light. You're light. I mean take the -- take the
EBITDA -- I mean take the EBIT and tax affect and you become pretty close.
This, on a cash basis, is going to be an internal rate of return about 10
percent after tax without synergies. So we have a going in 10-percent kind of
feel and some opportunity here to top (ph) it.
UNKNOWN MALE #1 (?): OK. Thank you.
NICK CHABRAJA (?): But I'm talking about cash-on-cash. Myer (ph)? Right there.
MYER (ph) (?): It might be too early to tell. But anything you can say about
both GAAP intangibles that are going to be created here and the cash impact of
any tax deductible goodwill given that the book value is going to be quite low?
NICK CHABRAJA (?): Too early to tell. I mean on the intangibles and goodwill.
We've made some assumptions in crude estimates of accretion here. But I think
that'll get solved in the next 30 days.
UNKNOWN MALE #2: Take one (ph) from the phone, sir.
NICK CHABRAJA (?): OK.
OPERATOR: Thank you. Our first question is coming from Harry Breach of Bank of
America.
NICK FOTIGIL (ph), BANK OF AMERICA: Hello. Good morning. It's Nick Fotigil (ph)
of Bank of America here. A quick question for Nick firstly and then another one
for David, if that's all right.
The first one is, Nick, how do you see the integration process of Veridian
actually panning out over the next, I would say six months to a year, if you
could walk us through that?
And then the second question to David is as you're quite close to it, what's the
homeland security market actually looking like at the moment and when do you
think the government may be making its decision as to how it's going to
apportion its funds?
NICK CHABRAJA: You know what? I'm going to turn both of those over to Ken in the
first instance and then David.
We're -- Nick, on the integration question, we're just going to work on that
together and we have a little time to do that. You have a very nice fit here
between two of our existing businesses and Veridian. I mean it cries out at you.
But how we'll actually go about that process, we fortunately have some time to
work it.
And I can tell you at the outset that David is an extraordinary partner in this
regard. Our initial meetings together on this subject, he's been at pains to
identify talent in his organization and help us with the transition of his work
force.
But, Ken, do you want to speak to that at all? And then, David, comment on...
KEN DAHLBERG: Actually you did a very good job of not (ph) answering.
But we did the last year-and-a-half looked at the marketplace and realigned our
businesses to focus into the C4ISR space. I've said that time and time again to
many of you and also to the burgeoning IT services in homeland security.
So now we have a business that's north of a billion dollars as it's focused
entirely in the ISR arena. So naturally three of the four businesses that report
to David fit very, very nicely in that -- in that unit.
And then the recent acquisition of Signal in the IT services space, we feel adds
a lot of capability to our $1.2 billion network systems IT services and, you
know, different customers but still DOD focused on the whole (ph) OSB (ph)
space.
At homeland security, you know, we're, kind of, dipping our toe. I keep telling
people, you know, we're looking to follow the money. We've got one of the
largest contracts out of homeland security, the Coast Guard, $650 million, we
call it Rescue 21, that is the launch program, the real critical program for GD
to really exploit more of its capabilities into that.
What David and his team bring is a lot of capabilities at the first responder
level with critical knowledge and decision support tools, along with, of course,
the whole Kembaya (ph) and nuclear detection capabilities.
And trying to harness that across all of GD, we think will really create some
leverage and opportunity for us in what is definitely going to be a growing
market but it's quite embryonic at this point.
David?
DAVID LANGSTAFF: To your -- to your question on homeland security, I think you
know Veridian increased its guidance not too long ago, coming off of what was
already a very strong both fourth quarter and first quarter performance.
One of the reasons for that is that is that we are seeing dollars flowing out of
homeland security in the civilian government coming sooner than we expected.
If those -- again, those of you who follow the Veridian break (ph) or business
mix, you'll see that our Fed/Civil (ph) segment grew more rapidly than the rest
of our business. And again, it was fueled by homeland security.
I think the government is still figuring out where the money is going to go.
What you can count on is that it is a priority of the government. It's one which
will see continued dollars. There is an issue as to where the dollars will
stick, whether they'll be at the federal government or state and local. The
needs are there across the board.
And what I'm confident in is that the kind of work that Veridian does is right
at the heart of what needs to be supportive -- supported. It's information,
security, the Kembaya (ph) nuclear work, which is a terrific opportunity for us
and then very importantly, this information sharing.
It's the -- it's the -- providing the ability of the different federal customers
to connect with each other, if you will, connect the dots. And we're seeing
growth there, as well.
So I think it's a strong market. The dollars are flowing sooner. There are still
issues to be worked out, without a doubt. They're clearly trying to merge 22
different agencies into one new department.
And I can tell you that Veridian's presence in this new department of homeland
security, as well as dealing with security issues in the rest of the federal
government is quite significant and I think a great growth opportunity.
NICK FOTIGIL (ph): Great. Thank you very much.
OPERATOR: All right. Thank you. Our next question from the phone line is coming
from Chet Luy of Barclays.
CHET LUY, BARCLAYS CAPITAL: Hi. Good morning. It's Chet Luy from Barclays
Capital. Just had two quick questions. First on the credit ratings front,
Moody's put your ratings (INAUDIBLE) launch. S&P elected (ph) to follow suit.
Can you talk about your capital structure and probably (ph) credit ratings going
forward?
Then my second question is if you could talk a little bit about your plans for
permanent financing for this deal, asset sales, you know, any consideration
regards to equity issuance. Thank you.
NICK CHABRAJA (?): I think Moody's puts us on watch every time we announce a
deal until we can get them some information. It's, I think, their standard
practice.
But we've just concluded an offering, a bond offering that they had rated AA.
And I think S&P similarly rated it. I don't see anything in this transaction
that materially alters our capital structure. And I've given you a little of
that information on the call.
I think we'll pay for this -- you might remember that we had a $3 billion shelf
registration. And we made a $2 billion offering. We didn't draw down the
remainder. We'll probably do that now and then service the remainder out of cash
and commercial paper.
CHET LUY: OK. Any asset sale plan?
NICK CHABRAJA (?): Pardon?
CHET LUY: Any non-core asset sale plan?
NICK CHABRAJA (?): No, nothing out of the ordinary, no, certainly not with
respect to this transaction. This is a property that for us is almost pure. We
have no interest in any divestiture. We don't see any piece of it as non-core.
CHET LUY: OK. And no plans for issuing any equity at all for this deal?
NICK CHABRAJA (?) None whatsoever.
Here in the room, we'll call on Heidi (ph) and then Steve Binder (ph) in the
back.
HEIDI (ph): Can you talk a little bit about the revenue synergies more
explicitly that you are seeing in terms of the two companies combined?
(INAUDIBLE) does it provide programs that you can compete for now that you
couldn't in the past?
NICK CHABRAJA: Heidi (ph), I don't want to be more specific. I think that that's
what Ken and David spoke to. I mean they spoke to the end-on-end capabilities
that enable us to both together participate in larger initiatives and programs.
And I think I'll leave it be at that. We obviously see an opportunity that's
ripe here where, as David put it, together we can get to where his vision would
have taken him longer to go. So I don't want to be specific about it.
And by and large, when we're talking about some of the customers we have here, I
have no ability to discuss those programs with you.
HEIDI (ph): All right. Let's look at this a different way then. Can you -- 40
percent of the sales of Veridian come from time and materials, 37 -- 47 percent
is cost plus (ph) and about 13 percent is fixed price.
Can you walk us through the margins, give us some sense even just through (ph)
general -- through (ph) your IS&T (ph) margins, are they greater than, equal,
then (ph) less? Give us some sense to where the money is made out of those
sales.
NICK CHABRAJA: Sure. Sure. Veridian's margins on average are well below ours.
You know what ours are and you know what theirs are. It's public information.
They've been running at or about eight percent. Ours have been double digit. We
think there's opportunity there, particularly on the cost side.
And, you know, the revenue synergies we've just alluded to bring with them
opportunity and larger programs with a different role for a greater fee.
HEIDI (ph): But does the time and materials have lower margins? Is it fair to
understand that if (ph)...
NICK CHABRAJA: No. Don't go their, Heidi (ph). This is all pretty much running
about steady state.
HEIDI (ph): And one last question, Nick, that's more of a devil's advocate
question for you. But you have shown analysts in the past charts of General
Dynamics P/E rations. And you've said, you know, when I'm trading at, kind of,
10 to 15 times, I'm buying stock when I'm up in the 20 times, I'm making big
acquisitions.
So here you are at the lower valuation. You're making, sort of, a large
acquisition. If you compare this versus share buyback, it doesn't look as
accretive. Can you walk us through a little bit...
NICK CHABRAJA: You missed the message, Heidi (ph).
HEIDI (ph): Well...
NICK CHABRAJA: It's when -- it's when the P/E multiple is low, I repurchase
shares, which I've been doing. When the P/E multiple is beyond historic norms, I
use the security to make acquisitions. You make acquisitions to deploy capital
and also to strengthen your business. And when it's a cash acquisition, it's
insensitive to your P/E multiple. OK.
And, you know, some people will ask me well gee, is the most accretive thing you
can do is to repurchase your on shares? That's true. And they'll say why don't
you do that exclusively?
And there's an absence of balance in that, isn't there? One needs to grow your
business, protect it, enhance it, particularly when you participate in a market
as we do in IS&T (ph) that has
tremendous growth potential and is fragmented and is consolidated. We would be
foolish, absolutely foolish not to deploy capital into this market right now.
HEIDI (ph): OK. Great.
NICK CHABRAJA: Steve (ph) had his hand up earlier. Yes.
STEVE BINDER (ph): Hey, Nick. You've talked about strategical requirements at
IS&T (ph) at the past that you plan to -- you know, that acquisitions are still
important for that business, combat, marine and so forth.
Can you maybe touch on giving the balance sheet now (ph) and give the leverage
of the company and just follow-up on Heidi's (ph) question, you know, given the
fact that you've generally like to, in the past, operate with a relatively
conservative balance sheet.
You know, do you still have strategic needs, strategic meaning, you know,
half-a-billion to a billion dollar acquisition? Do you still have half-a-billion
to a billion dollar acquisition opportunities out there over the next 12 months
or do you think you, kind of, go through a quiet period here?
NICK CHABRAJA: Well, you know, I can't predict that, Steve (ph). But certainly
no one's business is perfect. And we have requirements. There are gaps in our
capabilities that we like to fill that we're always looking at.
But I don't think anything needs to be done in a hurry. This is a perfectly
strong business. And we'll watch the market and make capital deployment
decisions consistent with a very strong balance sheet.
STEVE BINDER (ph): In a follow-up, you know, this is a fairly large deal for
IS&T (ph). Go back in time with Veridian and GTE and Motorola and this deal,
just wondering, if you look at tradeoff between opportunity and valuation --
right -- what you paid versus the upside potential as far as revenues and
margin, how would you rank this acquisition right now of those four?
NICK CHABRAJA: I don't know that I'd want to do that, Steve (ph). I think as --
you know, it's certainly very important and particularly important to our ISR
capabilities as you mature, as your business matures, the fits are increasingly
difficult.
When we acquired GTE, we were writing against an open scoreboard. Right? Take a
pick. We had ATS (ph) in the Veridian businesses and we could have fit most
anything into that. So my objective was to get more and get a good deal.
As it turned out, we got three terrific businesses around which we have grown.
We fit Motorola into the tactical com side of the business. This one is more
driven toward the ISR side and a little piece for our network business.
So we're taking what's been core, that's been developed over a year and doing
what we've always done, broadening it, broadening our capabilities and adding
on. So I don't know that I ought to get drawn into saying which one was more
important. It's always the next one that's most important.
George (ph), right down here.
GEORGE (ph): Nick, you or Dave could maybe just go through -- you said you --
that this business doesn't compete against your current business. What
businesses does it compete? I mean are there bigger players, are there smaller
players that are out there? Just give us some flavor on...
NICK CHABRAJA: Yes.
GEORGE (ph): ... who the competition is.
NICK CHABRAJA: I'm going to have Dave join me with this one because he should
speak to his competitors. But as part of this transaction, you know, we wanted
to be certain that our view was correct, that we didn't have regulatory hurdles
that we didn't anticipate.
And as best we can tell and we've parsed this a little, we're not accustomed to
competing with each other and have, on occasion, have participated together
teamed. But we're not in each other's space directly. But I'll let Dave speak
more to that.
DAVID LANGSTAFF: This is me (ph). It's a remarkable fit in that regard. We both
do some information security work. We know each other there. We team together in
that area. I think we bring certain technologies and capabilities in the ISR
arena, which you don't find with other IT service companies, which we can
leverage to a certain point.
But with now the strength of a GD, this is going to, I think, open up a whole
set of opportunities that perhaps GD couldn't have gone after but also which we
couldn't have gone after to the same extent, so again, a terrific fit there.
The kinds of companies that we will compete with will be divisions of the major
aerospace companies. So in that sense, certainly in the ISR field, our
competitors are the same competitors hat GD would have. But because of the
complimentary skill fit, we haven't really competed with each other there.
We compete on the -- in our IT service business with other straightforward IT
service firms. And again, this is not an area where we've run into GD. We serve
the Coast Guard as they do but again in different areas.
And I think the key thing to remember here is that the federal government is
gigantic. And even within certain customers, we'll each have our roles and
relationships.
And therefore, there's a lot of -- there's a lot of room to share customers
without really competing. I think that gives you a flavor of our competition. We
run into all sorts of other players. But it's, I think, the normal cast of
characters.
UNKNOWN MALE #3: We'll take a question from the phones now.
OPERATOR: Thank you. We do have a question coming from the phone line from Kia
Vonrmohr of SG Cowen.
KIA VONRMOHR, SG COWEN: Yes. Thank you very much and congratulations.
NICK CHABRAJA (?): Kia, did you get the pronunciation of your name?
KIA VONRMOHR: Yes. Yes.
NICK CHABRAJA (?): We know who you are.
KIA VONRMOHR: OK. Terrific. Using the numbers you've put up, a billion two (ph)
and a billion four (ph) -- and this is for David -- those are a little bit more
aggressive than I think you were giving for this year and you haven't provided
guidance for next year, but you're really implying about 17 percent growth,
which implies some acceleration. Could you share with us, David, which sectors
is it coming from? Is it really kind of expansion of your biggest contract with
that customer and is engineering growing a little bit less quickly, you know,
because it looks like the total is 17 percent?
NICK CHABRAJA: Kia, we're going to have David answer that, but to be fair, David
didn't put those numbers up -- I did. And I put them up as a result of our due
diligence. They are somewhat modestly in excess of his most recent guidance, and
as you would expect, he had a little bit in his pocket. I suspect this company
can do even better, but, David?
DAVID LANGSTAFF (?): Yes, Kia, you know us. We've made a point of trying to
provide as open a sense of the state of our business. As a new public company,
we've wanted to always deliver on our -- on the -- on the guidance we've
provided, and we've done that every quarter that we've been public.
We -- when we upgraded our guidance -- again, it's coming off of very strong
organic growth performance. We feel, as we indicated in the last conference
call, there is traction being gained in homeland security. In our -- in our
operation, we're seeing balanced growth. We're having double-digit growth in all
of our four divisions. The guidance we've provided, again for '04, is to
indicate certainly strong mid-teen growth, which we feel very confident about.
As you know, our largest contract is one where the customer has told us they
will extend it on a sole source (ph) basis, and we're still waiting for the
paperwork to follow, but that takes it out of this year and into next year
certainly.
So, there're just -- there're just a lot of little things that are falling in
place that give us continued confidence about the business of Veridian without
consideration of the opportunities that now we can pursue with General Dynamics.
I've been direct with all of you with regard to our strategy, and one of our
strategies is to broaden our addressable market, and we've been doing this in a
couple of ways. One is by leveraging the capabilities within Veridian across the
whole company to go after larger contracts that none of our heritage companies
could have gone after on their own. You now just extend that philosophy, which
fits beautifully into the GD culture and operating philosophy, and we extend the
capability across not just Veridian but the ISNT (ph) activities of GD, and I
think that's going to open up an even bigger market for us.
The other way in which we're looking to expand our market is to play an
increasingly significant role with the major aerospace primes on national
intelligence programs. And again, Veridian has some rather unique, very
attractive technologies that play into that arena, all of which is classified.
But with GD with us and the relationships that not only Veridian has with big
aerospace but that GD has with the other larger aerospace companies, we see this
as only an enhancement of, again, that market opportunity.
So, I'm very bullish on this. I think the opportunities are now. What I feel
very good about is that for Veridian, we felt it would take a few years to get
there from here. Even at a billion dollars as one of the larger players, we're
still not as big as perhaps we would need to be to really capitalize on the
opportunities in this market right now. And I think we can now bring forward a
lot of those opportunities in homeland security and defense and intelligence
with GD leveraging that and I think you'll see it in accelerating growth.
KIA VONRMOHR: Just one last follow-on -- it would look like that, you know, you
have a terrific business fit particularly in terms of intelligence customers.
Without being specific, are there, you know, opportunities available that by
having your joint capabilities, you'll be better positioned, you know,
specifically in the Intel (ph) area over the next year or so?
NICK CHABRAJA: The easiest answer for that one, Kia, is, "Yes," and it really
helped drive the deal, right? That's where we were both focused.
KIA VONRMOHR: OK, excellent. Thanks again and congratulations.
UNKNOWN MALE #3 (?): Take one more from the phone?
NICK CHABRAJA: One more from the phone, and then we're -- Howard (ph), you're
next.
OPERATOR: All right, thank you. Our next question is coming from Lloyd Zeitman
of Bernstein Investments.
LLOYD ZEITMAN, BERNSTEIN INVESTMENTS: Good morning. A question about the backlog
-- at the end of the first quarter, I see Veridian had a backlog of 2.6 billion
-- 519 million
funded. Could you comment on the status of that 2.1 billion that's not as yet
funded and the prospects for that?
NICK CHABRAJA: Sort of the nature of the beast, but I'll have David speak to
that. It's typical of what we see in this space. But David, you go ahead.
DAVID LANGSTAFF (?): I mean Nick is exactly right. We -- you know, again, we had
a -- we had a nice increase in our backlog in Q4. The Q1 backlog, which is
normally a soft time, still increased. We think that's going to be a continued
story of good improvement in backlog. But the split between funded and unfunded
at any point in time we will have between three and five months of our backlog
funded. And as Nick says, that's -- that goes with the territory.
We tend to take a very conservative approach to backlog. We put in backlog only
what we see. We don't make general assumptions about what we might win on IDIQ
(ph) contracts and such. Until we see the work, it doesn't go into backlog.
Another point that I've made to analysts is that the intelligence community
tends to -- well, let me say it this way -- the work that we do in the
intelligence community tends to be understated in our backlog because of their
common practice of simply extending contracts rather than re-competing them on
set timetables. And given the large amount of work that we do have in the
intelligence community, that certainly plays into our backlog numbers, but what
you see there is perfectly normal.
LLOYD ZEITMAN: Thank you very much.
NICK CHABRAJA: Let me add that we were perfectly impressed with the conservative
treatment of the IDIQ (ph) contracts much in the nature of the way General
Dynamics approaches that.
Howard (ph)?
HOWARD (ph): Thank you, Nick. Two things -- first, when one looks at the capital
employed by General Dynamics, you have around 37 or so days outstanding on your
receivables, whereas I think Veridian's are a little over 80. So, one place that
I'm sure there can be a little bit of cash to help with the payment of the deal
is going to be in managing receivables a little bit better.
Could you -- could you address that first? And then I have another ...
NICK CHABRAJA: Howard (ph), what do you want me to say? We appreciate your help
working our return on investment capital, and David accepts in all humility the
admonition that you've just offered on operating working capital. We appreciate
the identification and the opportunity.
HOWARD (ph): Well, I guess the answer to that is, "OK, next?"
Then, can we address the deal just for a moment? Is there a breakup fee and what
motivated Veridian to sell after going public just a short while ago?
DAVID LANGSTAFF (?): I think -- terms of the deal -- the 8-K's been filed. I
think you could find all of that there. There is -- there is a breakup fee.
There are -- you know, language in there, so just check the filing there.
Why did Veridian sell? First, Veridian was never for sale. And, you know, it's
an interesting experience -- we feel that we became public at the right time. We
have been, I think, a very successful public company. We have taken seriously
not only the work we do with our customers, but the relationship we've built
with Wall Street. And we also take seriously the principles of good governance.
And those of you who have followed us, you see we've published in our proxy
statement this just a month ago our principles of governance, but part of good
governance is you do the right thing for all your constituents. And while not
for sale, Veridian is such a unique company given the technologies that we have,
the markets we serve, the clearances we have and such, that we have attracted a
lot of attention.
You all know the macro picture and the transformation going on within the
military and the intelligence community with IT capabilities and technologies
driving a lot of that. That's where we play. Homeland security and now, if you
will, extending national security to the civilian side of the government is a
completely new market. That's where we play. And what we do plays right into
what is needed in these markets. So, it's not -- it's not a surprise that we
attracted attention.
What I can tell you is that we had inquiries. There were -- there were companies
that made it clear they would be interested in acquiring Veridian. It got to the
point where it was the responsible thing to take these to our Board of Directors
for them to consider. They followed the kind of good governance principles that
you'd expect of us. We looked at what made the most sense, and, in fact, staying
independent was very much an option here. But then when GD was part of this and
we looked at the fit, we looked at the advantages that could accrue to a
combined business, GD, of course, makes its own decisions on value, we felt that
it was an important -- certainly an important consideration, certainly fair
value for Veridian shareholders, and that we needed to -- we needed to do this
deal.
What I then felt was my responsibility, not so much as a Director but certainly
as Chief Executive Officer, is to think about our customers and to think about
our employees and to be comfortable that this, frankly, was the right thing to
do for the country, for the customers that we serve, and for the employees that
are part of Veridian. And I can tell you that I'm excited about this
opportunity. It's a great, broad platform for our employees. I think they're
going to have terrific opportunities now as part of General Dynamics. I think
the culture, the operating style are very important parts of this. And I know
that we share the same values of customer service and excellence and we take the
job of participating in this market of national security very, very seriously.
So, it's important to me to feel that we're doing the right thing for our
shareholders, our customers, and employees at the same time -- that we're not
really having to choose between those. But that's the process, and I think it's
played out as it should.
HOWARD (ph): Nick, I was interested in the second half of your answer to Heidi
(ph) referencing the comparable margin between ISNT (ph) and the current
Veridian margin. Is that, indeed, an apples to apples comparison given the
substantial difference in sales mix at ISNT (ph)? And how, indeed, could you get
a 20 or 30 percent increase in Veridian's margin to make that a double-digit
margin going forward?
NICK CHABRAJA: I don't want to talk about that right now. I mean it is a
reasonably accurate comparison. I'd have to go parsing to tell you that it's
deadnuts (ph) on.
But, you know, we've had a great deal of good fortune raising the margins of the
businesses we acquired, and I think here it's going to be a combination of
things -- some cost synergies and the participation on the revenue side in a
little larger mix of programs with higher award fees.
We'll nibble away at this. Don't go looking for us to run Veridian right up to
where some of Ken's businesses are. That took awhile -- a long, long time, as a
matter of fact. And I'm always surprised when people ask me, and I get asked
regularly, "Tell me about the margin improvement opportunity on ISNT (ph) side."
And I'm almost staggered -- I mean I don't know that there are any better
anywhere else around. So, ...
HOWARD (ph): But ISNT (ph) has a lot of non-IT services related business
contained within that. So, I mean, this is all well known. Isn't it sort of fair
to say that the -- that the margin there might benefit from some of the
classified and sensitive businesses within there or even the non-classified
pieces that are -- that are component related?
NICK CHABRAJA: Look, let's take the margin for what it is. I'm not here today
speculating about where we're going to drive margins. Veridian margins are what
they are, and we'll take a good, hard look about what we might do to make it
more profitable - just what you'd expect us to do.
UNKNOWN MALE #3 (?): We'll take a question from the phone?
OPERATOR: Thank you. Our next question from the phone line is coming from Brian
Beargie of Bank One.
BRIAN BEARGIE, BANK ONE: Hi. I was wondering if I could follow up on Jeff's (ph)
comment earlier this -- in the call. If you look at your balance sheet right
now, where's your sweet spot as far as where you want your capital structure to
be? Obviously, the last few acquisitions, you've stretched your leverage
coverage ratios from where they historically were. You know, if we're -- if
we're looking five years out from the - you know, where's your -- where's your
perfect sweet spot? Where do you want to be rated? Where's your leverage goal
(ph) -- things of that nature?
NICK CHABRAJA: We like where we're rated right now, and I wouldn't call this a
stretch. I think we've historically been under-leveraged, frequently been
admonished by the financial community for being under-leveraged, have
under-performing assets. I think that this is a very responsible ratio, given
the cash flow of this company, where we are right now. Could we handle a little
more debt? Probably so and be comfortable. But I'm not going there (INAUDIBLE)
until I have a - until I have a transaction in front of me that I can evaluate.
BRIAN BEARGIE: You're saying that you think you can handle a little more debt at
the current rating?
NICK CHABRAJA: Yes, given a -- given a real world circumstance, I'll look at
that. I don't have one in front of me.
BRIAN BEARGIE: OK. But just as far as, you know, your capital structure, ratings
aside, where -- you know, where's the sweet spot for where your debt to cap if
you're suggesting that you're comfortable at the 40 ...
NICK CHABRAJA: No (ph), ...
BRIAN BEARGIE: ... percentage ...
NICK CHABRAJA: ... we have a net debt to cap below 40 percent right now. I'm
very comfortable. The coverage is extraordinary. I mean it's just not an issue
for me right now. I think the bigger issue is how we're going to phase the debt.
In other words, what will it's duration be? Average duration. As we take down
some, where are we going to fit it into the quilt and we'll deal with that over
the next thirty days or so.
BRIAN BEARGIE: OK. Thank you.
OPERATOR: Thank you. We do have another question from the phone lines coming
from Bill Reed of Deutsche Bank.
BILL REED, DEUTSCHE BANK: I hate to keep beating a dead horse but as a debt
analyst I agree with you. Your credit measures pro forma for this transaction
are very strong but it begs the question of, you know, the debt holders who
borrowed -- who lent money less than a month ago are now faced with a credit
watch listing. Right or wrong? So I guess what I'm trying to get a sense of is
if you're comfortable with where you are now, how far would you stretch for the
next good acquisition or are you in a digestion mode?
NICK CHABRAJA: We're in a digestion mode and I'm not going to speculate about
the next transaction as I have indicated that is not now in front of me. So you
are beating a dead horse.
UNKNOWN MALE #3 (?): We'll take the last -- we'll take the last question for
today's events from the floor. We have a question here.
JOHN (ph) (?): Nick, I guess the Veridian acquisition; you did a MPV (ph)
calculation. What kind of growth assumptions are you using to, you know, for the
next three, five or ten years for Veridian?
NICK CHABRAJA: The growth assumptions in the plan years come right out of their
operating plans and the guidance they gave us during due diligence and
management presentations that were, as far as we were concerned, rooted in the
bedrock of their programmatic activity and technology. So those assumptions
through about 2006 or so are those that have previously been described -- double
digits.
I'm not going to provide you with any guidance about how I did the terminal
value calculation other than to say it was much more modest assumptions going
forward. You can run that yourself, John (ph).
UNKNOWN MALE #3 (?): Thank you very much, Nick.
END