United Defense Industries, Inc. Business Information, Profile, and History

Company Perspectives:

Our vision is to protect freedom worldwide by supporting U.S. and Allied security needs. To make this vision a reality, United Defense will provide soldiers, sailors, and marines with the finest combat capacity in the world. We will focus on serving eight major markets: Combat Vehicle Systems, Fire Support, Combat Support Vehicle Systems, Weapons Delivery Systems, Amphibious Assault Vehicles, Logistics and Training Support, Intelligent Munitions, and Marine Repair.

History of United Defense Industries, Inc.

United Defense Industries, Inc., designs, develops, and produces combat vehicles, artillery, naval guns, missile launchers, and precision munitions used by the U.S. Department and worldwide allies. United Defense is the sole-source prime contractor and systems integrator for many of its key U.S. Department of Defense Programs. The company's 5,300 employees conduct research and development efforts in key technologies, develop combat system operating software, and create efficient manufacturing processes. United Defense went public on the New York Stock Exchange in December 2001. The following year, the company acquired United States Marine Repair, the country's largest ship repair, modernization, and conversion service. With the additional acquisition of Bofors Weapon Systems, United Defense provides the U.S. armed services with a complete and diverse range of equipment.

Origins

One of the antecedents of United Defense L.P., Food Machinery Corporation (FMC), was a maker of agricultural equipment that began defense work in 1941, when it built the first amphibious landing craft for the U.S. Marines.

Over the years FMC produced some of the most enduring military equipment, such as the M113 Armored Personnel Carrier, used by the Army since the 1960s. The Navy became a client, purchasing the Mk45 naval gun system, which would be in use for another 40 years.

The M109 Self-Propelled Howitzer, the most widely used field artillery vehicle, was introduced in 1974. During the 1970s the company began developing the Bradley Fighting Vehicle, a troop carrier/fighting vehicle, which began production in 1981.

FMC's rival BMY Combat Systems, a unit of Harsco Corp., began upgrading the Army's Paladin howitzers in 1991. After the cost for each vehicle tripled, the Army awarded a new production contract to FMC Corporation.

Consolidation in the 1990s

A wave of consolidation swept through the defense industry in the 1990s. Between 1993 and 1997, there were 20 mergers among large defense contractors. The Pentagon encouraged this trend as a means of saving costs.

FMC's flagship product, the Bradley, was not well received overseas, which left the company vulnerable when the U.S. Department of Defense halved its annual orders to 200 vehicles per year, which it had been buying at a cost of $1 million each. FMC began planning its exit from the business. Defense sales accounted for a quarter of FMC's 1993 sales and 43 percent of income.

Harsco Corp., based in Camp Hill, Pennsylvania, also wanted to rely less on defense. It subsequently made a major metals acquisition. FMC and Harsco began discussing the possibility of merging their defense businesses in 1992. Their joint venture, United Defense, L.P., was formed in January 1994 out of FMC's Defense Systems Group and Harsco's BMY Combat Systems Division. FMC held a 60 percent stake in the new company; Harsco, 40 percent.

The deal reduced the number of combat vehicle makers to two: United Defense, maker of aluminum troop carriers, and General Dynamics, which specialized in tanks made of steel. Harsco brought lean and flexible manufacturing capabilities to FMC's technical expertise. Not included in the joint venture was a separate Harsco division which made trucks for the Army.

United Defense was based in Arlington, Virginia, and started with about 6,000 employees. It had annual sales of $1.6 billion in 1996, of which its armament systems division contributed $400 million a year. Parent FMC Corporation employed 17,000 people worldwide in its Performance Chemicals, Industrial Chemicals, and Machinery and Equipment divisions.

Besides pushing for consolidation, the Pentagon encouraged cooperation among competing firms. United Defense began producing missile launchers in cooperation with Lockheed Martin. United Defense provided the mechanical systems while Lockheed Martin created the electronics. In 1997, United was granted a $1 billion contract to develop the Crusader field artillery system in collaboration with General Dynamics. The project originally involved another two contractors.

Iraq's Russian and French artillery outperformed that of the U.S. Army during the Persian Gulf War, although the United States had more advanced missiles, tanks, and helicopters. The Crusader was designed to fire faster and farther than existing U.S. artillery pieces--ten rounds per minute to 25 miles. Crusader was fully automated, not dependent on the numerous manual tasks traditionally associated with firing artillery. Like the M109A6 Paladin, the Crusader used two vehicles--one carrying the gun plus an ammunition carrier.

Business was scarce for surviving defense firms. The Wall Street Journal reported that in the ten years since 1987, a quarter of the country's four million defense jobs were eliminated. United Defense employed 5,700 at ten sites in 1997. Its Minnesota plant employed 1,600 in 1997, half its mid-1980s level. Union manufacturing jobs were cut by 75 percent, to under 500. The Crusader program brought 250 mostly engineering jobs.

United Defense lost a multibillion-dollar contract to produce amphibious assault vehicles for the Marine Corps, a longtime client for whom FMC had developed the concept between the wars. The setback signaled to FMC executives it was time to leave the business entirely and concentrate on its core strengths of herbicides, insecticides, and food additives.

New Owners in 1997

FMC and Harsco began looking for bids in May 1997. By the summer of 1997, defense contractor General Dynamics and investors The Carlyle Group were vying to purchase United Defense from FMC and Harsco. General Dynamics offered $1 billion but raised antitrust flags since this deal would have left it the only armored vehicle manufacturer in the country. General Dynamics officials countered that the market was so small this was allowable, and the company could save taxpayers money by consolidating operations. In addition, despite its calls for cooperation and consolidation, the Pentagon preferred to have at least two sources for military equipment to ensure supplies in wartime.

FMC and Harsco ultimately accepted a lower offer from Carlyle, indicating their unease with the prospect of an antitrust fight from Republican Senator Arlen Specter, whose home state of Pennsylvania would have lost jobs in the event of a United Defense/General Dynamics merger. In October 1997, through its Iron Horse subsidiary, Carlyle acquired United Defense, L.P. from FMC and Harsco for $880 million, later adjusted to $863.9 million.

Carlyle intended to grow the business, then either sell it or hold a public offering, typical of its modus operandi. (Interestingly, it had already bought and sold the electronics division of rival bidder General Dynamics.) Carlyle was an investment trust formed in 1987. It owned a dozen other companies at the time of the acquisition, including several defense firms. (Holdings included waste recycler GTS Duratek Inc. and Baker & Taylor, a major book distributor.) Its properties had combined annual sales of $5 billion.

Carlyle's chairman, Frank C. Carlucci, had been Secretary of Defense under Ronald Reagan and was also a director at General Dynamics. The firm stated Carlucci had separated himself from involvement in the bidding process to avoid a conflict of interest. Carlyle specialized in undervalued companies affected by changes in government policy. According to the Washington Post, between 1990 and 1996, Carlyle averaged annual returns of more than 32 percent.

After the acquisition, sales and profits fell at United Defense due to fewer domestic and foreign shipments. Some aspects of United Defense's business, such as U.S. government contract work and the Crusader program, showed improvement. Gross profits were $59.2 million on sales of $1.22 billion in 1998. Exports accounted for $230.3 million of sales in 1998, up from $89.1 million in 1997.

The Future of Defense: 2000 and Beyond

After experiencing some quality problems in the late 1980s, United Defense set out to systematically improve its communications with suppliers. By the late 1990s, this resulted in more dependable and better quality deliveries and made the company's own receiving and inspection operations more efficient. On the design side, Electronic Product Definition software allowed United Defense to link its engineers around the world. Only the newest software could handle the complexity of the company's products, whose parts numbered in the tens of thousands.

Simulation-based acquisition took communications between Army purchasers and defense contractors to a new level. Simulation Modeling for Acquisition, Requirements and Training (SMART) was a joint Army/industry plan for reducing development costs. This concept integrated industry and government product development teams (IPTs). The new level of cooperation introduced soldiers into the development process and allowed trainers to be trained before systems were deployed. United Defense president and CEO Tom Rabaut pressed for more commonality among systems in various projects and more reuse and interoperability of components.

Rabaut warned of two obstacles to advancement in military technology. He complained the low burden of proof of the new Civil False Claims Act (a new law to encourage whistleblowers) scared technology entrepreneurs away from defense contracts, ultimately denying the Army the opportunity to benefit from the latest innovations. Rabaut also found it alarming that the U.S. Department of Defense seemed to be moving in a socialistic direction, while other industries across the world were becoming more privatized. He was referring to depots in particular, where the Defense Department maintained its own equipment. He argued this work should be in the private sector, since so little new equipment was being purchased.

The Bradley Fighting Vehicle was no longer in production at the end of the century, but BFV derivatives were, and United Defense was upgrading existing vehicles. The company was also busy developing the next generation Crusader Field Artillery System, designed to replace the M109A6 Paladin, and was hoping to land a $20 billion Crusader production contract in 2000. The company was also developing a Composite Armor Vehicle and a Grizzly minefield-breaching vehicle.

After the September 11, 2001, terrorist attacks on U.S. soil, President George Bush and his administration launched immense military initiatives in Afghanistan, Iraq, and other areas, and these initiatives greatly impacted the U.S. defense industry. In December of that year, United Defense went public on the New York Stock Exchange and was awarded many new contracts.

In July 2002, United Defense acquired United States Marine Repair, the country's largest non-nuclear ship repair, modernization, conversion, and overhaul company. United Defense's work with the U.S. Army was bolstered as well when, in 2003, the company was awarded a $2 billion contract by Boeing Co. to develop five types of manned ground vehicles (MGVs) for the Army.

In 2004, United Defense acquired Cercom Inc., which specialized in developing armor protection for soldiers as well as for defense vehicles. Also that year, in a strategic move to strengthen design and fabrication capabilities for navel and ground combat systems, United Defense purchased Kaiser Compositek, which provided custom designs for aircraft, missiles, engines, spacecraft, marine vehicles, and mass transportation. Through Kaiser, United Defense planned to incorporate technology to develop lighter-weight weapons systems to replace traditional metal components.

As the country's war efforts continued, United Defense's first quarter revenues in 2004 increased 17 percent, with sales from the Defense System division generating the bulk of the first quarter growth in 2004. These were attributed, in particular, to Bradley Fighting Vehicle upgrades, spare parts, and ramped-up development programs including the Army's Future Combat Systems and the Navy's new destroyer program, DD(X).

Principal Subsidiaries: United States Marine Repair; Cercom Inc.; FNSS Savunma Sistemleri A.S. (Turkey; 50%); Kaiser Compositek Inc.

Principal Divisions: Armament Systems; Ground Systems; Steel Products; Bofors; CTC; International; Homeland Security.

Principal Competitors: General Dynamics Company; Lockheed Martin Corporation.

Chronology

• Key Dates:
• 1994: United Defense L.P. is formed as a joint venture between Harsco Corporation and the defense division of Food Machinery Corporation (FMC).
• 1997: The Carlyle Group acquires United Defense.
• 2001: United Defense goes public on the New York Stock Exchange.