WASHINGTON ― When Chris Kubasik took the helm of L3 Technologies, you might say it was a corporation from a traditional and perhaps fading era of defense contractors: buttoned up, decentralized, even a bit bureaucratic. But as defense customers shift how they buy, so must companies shift how they sell.
Defense News sat down with Kubasik in June to speak about the transition underway, and his grand plans to become the industry’s sixth prime.
You’ve been on the job about six months. What did you realize needed to change at the company as you took on this opportunity?
The main thing that I wanted to change was to evolve from more of a holding company to an operating company. The first 20 years we were quite successful growing mainly as a result of over 130 acquisitions. But as our strategy became to be a nontraditional sixth prime, we needed to be better integrated, more collaborative and more innovative. And that’s the plan that we laid out internally and externally. It’s really a transformation of the company. [The year] 2018 is the focus on integration, common systems, policies and procedures ― and ultimately a more cost-effective organizational structure.
You have been at various companies including Lockheed Martin. What did you take from those and bring into this position to infuse into the company?
I take a little bit from everyone, all the leaders that I’ve either worked with or worked for. First and foremost, you set up a strategy, which we’ve done. I talk a lot about differentiation. What’s going to be different about L3 compared to the market we’re in? We’re in a market where you hear things like “too big to be small” and “too small to be big.” Whatever. We are what we are. How do we advance this company?
Then you try to tell that story, you try to build the company that aligns with those values and beliefs. I want fewer layers of management — I want more accountability and I encourage people to make decisions. I try to be accessible 24/7 and to make quick decisions, and I think that’s appreciated.
Change can make some people uncomfortable.
Absolutely. But it’s not that big of a deal because it’s a 20-year-old company. It’s time for the next generation. Lay it out and more people than not have stepped up and said: “I’ve always wanted this.”
We decided to do our first corporatewide employee survey in 20 years. Over 80 percent of our employees responded to the survey. One of the most significant finding is the employee engagement. Our employee engagement score was above industry average. The employees have a sense of purpose, they like their job, they work extra hours. They refer a friend, they believe in the mission and the strategy.
How does the structure of the company then shift how you deliver solutions?
That goes to collaboration. We [offer] incredible technologies, incredible capabilities. And the biggest challenge for anyone within L3 was knowing what all the different capabilities were. We’ve made a concerted effort to bundle our capabilities and take them to the customers internationally and domestically as L3. In many cases our customers are the five primes, but a fair amount of our work is directed to the end user. The recent example is the Canadian surface combatant [that L3 is pursuing with five other companies], where we had ultimately eight different divisions of L3 come together, with one taking the lead and presenting an all-inclusive solution.
So was the company positioned in such a way to really be able to fully take advantage of that type of opportunity before?
It used to be each of the divisions would have their own strategy and pursue their own growth. And many times one or two would sign an exclusive agreement with an [original equipment manufacturer]. By changing that strategy and talking about collaboration up the food chain, everybody embraced the idea of working together. So I think it was change of leadership, change of strategy and change of expectations.
In terms of that kind of a bundling tactic — you succeed together, but does it not introduce risk that you collectively could miss out on opportunities entirely? Fail together, so to speak?
The first part of growing is identifying all the opportunities, so I think we’re doing a better job of opening the aperture and seeing what’s out there. And then we work collaboratively to see what makes the most sense. In the Canadian example, we actually had nine different divisions working together, all or nothing. Then we compromised it to eight out of nine in that example, which is still better than one or two.
It’s working. I’m equally looking at how we’re organized and if we have all the right pieces in the right buckets. Again, the goal in this case is for top-line synergies. And I’m pleased with the way people are working collaboratively. But it’s even easier if they’re in the same organization. So there may be some minor movements in portfolio to make them better aligned.
Anything you could talk about ― next steps of the changes that we might see?
I don’t want to get ahead of things. But as the markets change and capabilities change, it would be unusual to not naturally move some things around.
I know you’ve had an eye on buying. What is the merger and acquisition strategy for L3 right now?
I believe we’ve differentiated ourselves from the industry by being one of the first to say that we’re going to use our free cash flow to grow inorganically, to make acquisitions. There seems to be a preference by most companies to do share repurchases. And while we must do a minimal amount of those to absorb share creep, every day we wake up thinking we’re going to grow, and in 2017 we made acquisitions of varying sizes and varying markets in varying parts of the world.
As of today in June, we haven’t made any [acquisitions in 2018]. But it’s not for a lack of looking. I’m confident by the second half of the year we’ll have a couple transactions that we’ll close. We look at them on a variety of fronts. In several cases after discussions with our customers and looking at the National Defense Strategy, we’re looking for different technologies and capabilities.
The best example of that were three acquisitions made to basically stand up from scratch an unmanned undersea vehicle capability. It aligns with the customers’ needs in the U.S. and around the world. And instead of spending our own R&D taking several years to develop all these, we thought to acquire these three relatively new startups.
What was the total value?
I have not said. But I’m happy to say in aggregate they were about $100 million. Clearly our strategy would be analogous to the UAV market 20 years ago. And we think it will accelerate more quickly because the customer and the world is accepting of autonomous air vehicles. I don’t think it’s going to take 20 years for the UUV market to get to where the UAV market is. We’re at the forefront. And the nice thing is that it aligns with customers — it aligns with some of the threats and customer desires. This is an example of being the prime, dealing directly in this case with the U.S. Navy, but [also] other navies around the world. And it complements larger platforms from others.
So through these acquisitions you will be able to put together complete undersea, unmanned platforms for the Navy, correct?
Correct. One acquisition was to get the actual vehicle itself — a commercial vehicle knowns as the Ivers, which they had sold several hundred of commercially. We had an MIT spinoff that has the power systems — a unique power system that replaces the [lithium] batteries, [which bring high] risk of fire and [low] duration.
So our solution is nonflammable, and equally, or maybe more importantly, can extend the duration of the mission significantly depending on the depth and the size of the vehicle Ivers, anywhere from five to 10 times, which is incredibly significant. The third one adds some sensors and system engineering capabilities.
We’re very close to bidding on opportunities here in the U.S. and to start to generate some significant revenues.
Which programs? I know DARPA does quite a bit on the R&D side in terms of undersea unmanned, but what kind of programs are you targeting with this for now?
The Marines have an opportunity now that we’re currently evaluating, and on my international travels we’ve had discussions with Japan, Singapore and Taiwan for the early stages [of programs]. And then there’s variations and investments we’ll continue to make for these to be launched from torpedo tubes. So we’re early in the process, but it’s exciting. Clearly they are not accretive in year one or two, but they have the potential to be significant needle movers.
But most of the [focus for] acquisitions has been on electronics and sensors. Those are our high-growth segments with good margins. And we talk internally about earning the right to grow. So as entities are well-run and fixed and generating cash we try to give them priority over other segments, which still have organic challenges.
You’ve been quoted as saying you are looking for a big buy. Is that true?
We want for the foreseeable future to protect our investment-grade credit rating. And given the cash on hand, which is soon to include at least $400 million after taxes from the Vertex sale, and the cash we generate, we can easily do $1 billion a year of acquisition without impacting the credit rating.
We seem to be doing $100-$200 million [deals]. I’m fine doing five $200 million deals, and equally as happy to do two $500 million deals. And if there was a $1 billion deal, I would not be adverse because it takes the same amount of time and effort to do each deal. We don’t have a limitation. We look at our strategy, we go out and find things to fill the gaps. If there was one for a billion and it made sense financially, we would absolutely do it.
All of this I imagine contributes to that goal of becoming the sixth prime. How do you define the sixth prime? Is it purely revenue-based or does it factor into how you sell?
Great question. Historically when we were first formed we were a merchant supplier. What we’re looking for [today] is dealing directly — selling directly to the customer, which doesn’t necessarily equate to large platform. So that is the relationship, intimacy with the customer.
I do not envision a scenario where we’re building multibillion-dollar satellites, airplanes and ships. But we can better connect those, we can have smaller offerings or platforms like a UUV, UAV, maybe a small satellite that works and complements the larger system. So that’s my definition of prime.
For example, take the Enhanced Night Vision Goggles for the Army. We’re a prime. We deal directly with the Army. These are obviously enhanced, lighter-weight, better capability. We have made significant investments over the years. It’s white phosphor, which means when you turn out the lights and put them on it’s the same as what we see sitting here, compared to the green that you see from the older technology.
So as a team, thanks to Army leadership and our commitment, we were able to sit side by side in an alpha contracting-type environment and negotiate this in a fraction of the time that a traditional acquisition would have taken. We negotiated a fair deal, and we’re now under contract for 10,000 ENVGs. And in that process the Marines joined in and got 3,000. A $391 million contract — that’s an example where we’re a prime.
Can you give me an update on where Compass Call stands?
Compass Call is going well. The proposed language in [the fiscal 2019 National Defense Authorization Act] requires a relook at the acquisition strategy, [while also] accelerating the aircraft purchase, so we’re pleased. We were never asked to stop work. We’re progressing. And again, consistent with the customer desires to have business jets as an alternative platform, we were able to adapt technologies.
We got through the protest process, and now it’s in everyone’s best interest to buy more airplanes quicker. Get the capability that you need and cheaper; so far so good.
Looking internationally, what kind of opportunities do you see and how does that play into your strategy for L3 and for growth?
Given our size, we have to monitor our resources, but we’ve identified 10 countries [to focus on] — a couple have been in the Middle East, also in the Far East. And a lot of what we are doing in Europe is partnerships. We work in a complementary manner, and we are not direct competitors with many or most of the European industry. In the U.K., specifically with BAE [Systems], the Canadian surface combatant is an example. We [will provide] various systems, predominantly communications.
Are you getting any apprehension, skepticism globally considering some tensions between the Trump administration and NATO, the threat of tariffs, and so forth?
I think in the Middle East we’re very welcome; they view the current administration in a positive light. When I was in Japan it was at the same time President Trump happened to be in Japan. I think they appreciate the president and the administration and our presence. So I haven’t really seen anything other than positives.
And do you think there should be a space corps?
I don’t know the answer to that one.